Analysis by Keith Rankin.
It’s widely accepted that the four principal macroeconomic performance goals for a country are: sustainable economic growth, low unemployment, low inflation, and current account balance. (Of particular note here is that the government’s Budget balance is not one of these indicators, and that inequality doesn’t easily fit into either of the two major sub-branches of economics – microeconomics and macroeconomics – which partly explains the lack of attention that economists have given to the issue.)
In the 1980s, New Zealand economist Wolfgang Rosenberg wrote a book about the New Zealand macroeconomy called The Magic Square; what every New Zealander should know about Rogernomics and the Alternatives, referring to a way of graphically representing all four performance measures on a single chart.
This month’s chart shows the structure of an ‘ideal’ ‘Magic Square’, with the following currently accepted performance targets:
· economic growth: three percent each year is regarded as the rate that strikes a good balance between unemployment and inflationary pressures
· unemployment: four percent of the labour force is regarded as the best that favourable macroeconomic conditions can achieve
· inflation: two percent has been the inflation target for monetary policy this century
· current account: while long‑run balance (zero) is ideal, upto five percent of GDP is an acceptable surplus or deficit in any given year
On this basis the year to March 2016 would be seen as one of the New Zealand economy’s better years, with the shortfalls (deviations from target values) quite small. The chart shows unemployment as being above target; and growth and inflation as being below target. The current account – at minus three percent – is within acceptable the plus/minus range.
It’s widely believed that settings inside the square are better than those outside, but in reality this only applies to the unemployment measure. Even then, one could easily argue that western norms of unemployment (generally above four percent) with a functioning social welfare system are superior to East Asian norms of lower unemployment and minimal welfare.
The figures shown in the chart are likely to be as good as they get, by conventional macroeconomic performance criteria. In the last three decades the mid-decade years have given results closest to the square. With a global economic cycle of recessions or near-recessions every eight to ten years, it seems likely that the target-shortfalls shown will accentuate over the remainder of the decade. I see little sign that New Zealand’s policy settings – especially government’s fiscal policy – will be able to counter a coming deterioration in economic conditions.