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New Zealand rolled back government, rebuilt economy

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Posted: Tuesday, February 16, 2010 12:00 am

I recently attended a meeting with Maurice McTigue, director of the Mercatus Center at George Mason University, a former member of the New Zealand Parliament, and a man with wide experience in government reform. Attendance at the meeting, arranged by state Sen. Sylvia Allen, should have been required for everyone in our state government.

Prior to comprehensive reforms 20 years ago, New Zealand was an economic mess, suffering from debt, continual deficits and a stagnating economy. Out of desperation, New Zealand’s political leaders reduced government spending and enacted fundamental, wide-ranging reform. Since then, New Zealand’s national government has seen a single deficit; it was this year and due to the worldwide recession.

One instructive example given by McTigue concerned agriculture subsidies, which, among other things, were artificially inflating land prices. Everybody knew land prices would collapse when those subsidies ended. Some estimated 31 percent of farmers and at least seven major banks would go bankrupt. Yet, with no bailout or any other government involvement, only one-half of 1 percent of farmers went bankrupt. And not a single bank went under.

An outbreak of “spontaneous economic order,” as McTigue described it, resulted. Banks re-valued loans to avoid defaults. Farmers renegotiated payment schedules. People figured out how to navigate the changing economy without government intervention.

This example may seem most applicable to federal financial policies in response to the U.S. real estate meltdown; but, the lesson is broader. We commonly hear stories that if Arizona cuts spending on parks or education or health care, our economy will collapse. Yet New Zealand’s experience illustrates that fundamental reform, rethinking and shrinking of government should be welcomed, not feared.

 

Byron Schlomach, Ph.D., is the director of the Goldwater Institute’s Center for Economic Prosperity.

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