April 19, 2012
Policy Settings Need Seismic Shift
A year ago a series of major earthquakes reduced the heart of Christchurch to rubble and tore at the foundations of New Zealand's precarious fiscal position.
In common with much of the developed world, the tectonic plates of an entrenched sense of entitlement and political unwillingness to test democratic tolerance for change have produced inevitable eruptions.
It need not be a parade of the ugly, but solutions of a sustainable kind are going to call for seismic shifts in politics, public policy and the public sector.
Witness the transformation Steve Jobs wrought in the technological landscape with iPods, iPhones and iPads, all innovations that have revolutionised the way we function.
Absent from this revolution have been politics, policy and public administration.
The relationship between the individual and the state has evolved fitfully and incrementally in developed nations and latterly more violently in nations where citizens struggle to overthrow despotism or escape the tyranny of the elites.
No matter where on that spectrum of the citizen/state divide, a new normal prevails.
On the upside, the i-era means the locus of power is with the individual.
The dynamism of empowered individuals knows no boundaries and the forces of innovation and enterprise are being unleashed to the unambiguous good of society at large.
On the downside, the bankruptcy of big state "solutions" has exposed economies and populations to wrenching change.
So against this backdrop here is my sketch of what the new institutional order might look like for politics, policy and the public sector over the next ten years.
There is a pervasive worry that the politicians are not up to it; that much of political discourse has degenerated into a form of reality TV contest.
The despair that politics is incapable of addressing the real problems and using the platform for generating democratic support for fixing them has led to a proliferation of automatic stabilisers - and backstop rules governing monetary and fiscal policy in particular.
Credit rating downgrades and a succession of financial crises have goaded politicians into grappling with these issues but with a diminished standing as they are seen to be accessories after the fact.
My pick is that, as such systemic failure becomes evident, a new generation of political leader will emerge.
The Generation Z politicians, the so-called digital natives, will instinctively understand the demand to constrain the reach of the state. The style will be one that celebrates diversity, honours personal opportunity and responsibility, and eschews the privileges of insiders. The focus will be on outcomes and a championship of the individual choices that can better lift performance and so promote better outcomes.
The sacred cow of the state as the primary economic driver and social crutch will be well and truly slaughtered and the new generation of politicians will live to tell the tale.
It follows that new normal policy settings will have to be radically different.
Monetary and fiscal disciplines will be de rigueur, a necessary but not sufficient condition of performance.
As the realisation that we cannot credibly inflate our way out of the crisis dawns, more pressure will come on the conduct of monetary policy to confine itself to its only noble and achievable mission which is the maintenance of price stability.
Monetary policy patently needs mates, and the singular failure of fiscal policy to carry the load of its responsibility has exacted a strong price - ask those in the US and European economies.
All this is a known policy quantity.
The big policy reform action yet to come is where the state has traditionally been seen as our "friend"; increasingly that myth is seen as having been busted by the reality of government failure.
The domains of health, education and social welfare have traditionally been effective government monopolies. Power has been in the hand of the state producer in health and education, and the electoral auction has produced welfare regimes as bankrupt morally as they are financially.
These "Berlin Walls" of denial of freedom of choice and accountability in education and health will slowly but surely fall with personal technology aiding the exercise of personal power and control.
The consequences of social welfare without personal responsibility has been cruelly exposed time and again.
Ruinous state dependency has proved to be a social powder keg.
Burke's "little platoons" have much to commend them and efforts to pass the baton from the state to the non-state sector will surely intensify.
The problem is that the private sector has innovated apace, but the public sector has not.
New Zealand, as with many of our radical reforms in the mid-eighties and early nineties, was the exception to the rule by pioneering fundamental reforms in the public sector.
Such reforms have not prevented public service role creep and politically driven expansion, and now like in every other country the public sector is under the hammer to do more with less.
While such a squeeze is a worthy cause, the real reform of the public sector is only going to come when governments knuckle down to the real task of defining first what the state should (and should not) do, before embarking on the crusade for a smarter state. No point in the state doing dumb things in a smarter way.
Tax and spending policies are often debated in the same breath, but no sensible debate can occur about tax systems and their optimum design, without the prior scrutiny of the level and the quality of state expenditure.
Governments determined to make a fist of producing the policies and platforms most consistent with the production of growth and prosperity must take the public sector by the tail. The mandarins are the unelected government with real staying power and have every incentive to entrench a discredited status quo unless reformed root and branch.
The evidence is overwhelming that a large state makes for low growth.
The dynamism waiting to be unleashed over the next ten years drives my optimism that the economic and social ambitions that nations hold dear can be achieved.
However, failure to contemplate radical change in politics, policies and the public sector constitutes a substantial handbrake on the achievement of these ambitions.
Steve Jobs in the first decade of this century rolled out technology that allowed everything to be connected with everything and in so doing transformed the way we live and work.
The second decade screams for leadership that understands this seismic shift and transforms the conduct of politics, the design of policy and the reach of the public sector in a similar fashion.
Ruth Richardson established her reputation as an advocate for change during the remarkable reform era in New Zealand from the mid-1980's to the mid-1990's. As New Zealand's Minister of Finance from 1990–1993, she was the principal architect of New Zealand's second wave of reform, complementing the first wave of reforms initiated in the mid 1980s by New Zealand's other well-known Minister of Finance, Sir Roger Douglas. Her institutional framework for the conduct of fiscal policy, the Fiscal Responsibility Act 1994, is widely regarded as setting international best practice, and is a cornerstone of New Zealand's economic framework. She is a director of the Mont Pelerin Society, an elite group of classical liberal thinkers that was started by Nobel laureate Friedrich Hayek. Ruth has established a substantial private sector practice in corporate governance and holds directorships throughout a wide spectrum of business activity on three continents.