Tuesday, 11 October 2011

After The Ball Is Over

And Then What?: Only the criminally ill-informed and/or the hopelessly romantic believe that anyone but John Key will be prime-minister after the General Election. The more important question is: What happens then? After the ball is over - and the global recession finally hits New Zealand?

WITH MORE AND MORE voters regarding a National Party election victory as inevitable, the question arises: “What happens after the ball is over?”

When all the hoardings have been taken down, and all the ballot papers counted – what then? What challenges lie in wait for New Zealand’s government a few miles down the track?

While a fitful sun still bathes large parts of New Zealand in a golden light, many communities already lie in the shadow of storm-clouds blown-in from northern climes.

Farmers and their support networks in rural and provincial New Zealand may find it hard to comprehend the difficulties being experienced by metropolitan New Zealand. This is because record export prices have cushioned them from all but the first few recessionary blows.

Even so, the nation’s cockies – being a cautious and responsible breed – are furiously paying down their debt and eliminating all unnecessary expenditure. It seems axiomatic to them that their government should be doing the same. If the National Party was to run the country the same way they run their farms, say the farmers, all would be well.

But, I wonder if they’d still say that if, as many economists now predict, the Chinese economy experiences a sudden contraction? If China’s apparently insatiable appetite for New Zealand milk powder disappeared overnight – along with her equally insatiable appetite for unprocessed Pinus Radiata and Australian minerals – would our farmers still model their economic expectations on a simple set of household accounts?

For the sake of argument, let’s assume they would. What would be the result?

That’s easy. The farming sector’s huge debts to Australia’s banks would very soon precipitate a major financial crisis. If Chinese demand dried up – on both sides of the Tasman – the Australasian banking sector would be in serious trouble. Farmers unable to pay their mortgages would be foreclosed. Rural properties would flood the real-estate market and land prices would collapse. Farming families’ equity in their properties would evaporate, and the ownership of New Zealand farmland would pass into fewer and fewer hands – many of them foreign.

Very rapidly, the farmers’ pain would be transmitted to everyone else in rural and provincial New Zealand. With the demand for agricultural goods and services in free-fall, small to medium businesses throughout the “heartland” would falter and/or fail. Thousands would find themselves without an income. (Being self-employed, these folk would quickly discover the meaning of bureaucratic delay: how much longer it takes to access the unemployment benefit when you’re not a laid-off employee from a major city.)

To make things worse, the Government (still assuming the country is being run according to the household accounts model) would be searching around frantically for ways to reduce ballooning public expenditure.

A collapse in export prices couldn’t help but have a massive impact on the entire economy – sending the indices of unemployment, spousal abandonment, mental illness and sickness through the roof. Welfare spending would soon constitute an insupportable burden on the State. Benefits would have to be cut and eligibility tightened. Working For Families tax credits would be abolished. The age of eligibility for New Zealand Superannuation would be lifted from 65 to 67 and then to 70. The quantum of the pension would fall from two-thirds to half the average wage.

New Zealand’s misery index would rise sharply.

Of course the cutting wouldn’t stop at the Welfare Budget. Spending on health and education would also fall. The interest-free student loan concession would be removed. Major capital projects, such as hospital, school, state-highway and light-rail construction, would be put on hold. Eventually, the wages and salaries of public servants would face the chop – possibly by as much as 10-20 percent.

This is what “austerity” looks like.

What if the Government adopted a different economic model? A model based on something other than a simple set of household accounts? A model which called for the maintenance of a strong and consistent demand for goods and services? A model which held that price deflation, reduced incomes, and the corresponding reduction in the demand for goods and services thus created, only make the economic situation worse – not better. In short, the model put forward by the British economist, John Maynard Keynes, back in the 1930s?

Well, that model would require the Government to do a great many things.

First and foremost it would have to bring the financial sector under strict public control (yes, that does imply a large, state-dominated banking and insurance industry). Then, in order to equip itself with the resources to maintain employment and demand, it would need to institute a radically redistributive fiscal programme. Finally, it would require policies calculated to sustain the viability of New Zealand’s export and import substitution sectors.

Unfortunately, none of these measures are even remotely compatible with the current policy settings of the National Party.

This essay was originally published in The Press of Tuesday, 11 October 2011.

8 comments:

Anonymous said...

Or Labour.

The Sentinel said...

The farming families of the 1930s quickly forgot how they had been bailed out by the State. Though the mortgage adjustment process was arduous, even previously prosperous Canterbury farmers, such as the Shipleys, found themselves reliant on the State. Meanwhile, the 1930s reflation was largely due to the central bank being created at the right time and printing money (now known as Q.E.). Quantitative easing is being relied on in USA and UK, but isn't even on the agenda here. If the economic situation got worse, would all the pieties of sound finance be put aside to prevent widespread mortgage foreclosures? It would ironic, though tragic, for John Key to have to take such measures.

Anonymous said...

A model from the 1930's eh.

Why stop there?

We're already getting gated communities. Ok.
Stick fields round them, three for each family, one's your own subsistence, one fallow and the other one you grow silverbeet for your local baron.

Makes as much sense as digging Keynes up.

Adolf Fiinkensein said...

Stalin tried it but it didn't work. Obama is trying it and it isn't working.

What else have you got?

Brendan said...

Chris

You proposed: ....In short, the model put forward by the British economist, John Maynard Keynes, back in the 1930s?"

I'm sure there was sovereign debt in the1930's following WWI, however in a world that is currently awash with debt, I'm wondering where the Keynesian politicians are going to find financial backing for their 'public works' and redistributive ventures in the event of a new 'great recession'.

Of course they could resort to printing money as the UK and the USA have already done, however that also comes with its associated risks, especially for a small economy such as ours.

Assuming we could still borrow the money, is that simply not deferring the evil day until (possibly) the next generation of tax payers? Is that a justifiably moral choice?

It seems to me that we can only defy gravity for so long before reality strikes.

I know you are not a great fan of the market, but it is in times like this that it actually works. Property values are 'reset', some businesses go broke, there is hardship and loss. However, debt is washed out of the system, we begin to refocus upon the important, rather than the frivolous, we rediscover the importance of family, friends and community, and most importantly, we get a fresh start.

I'd prefer it not to happen of course, but I'm not sure that even Keynes would be able to rescue a world in its current state.

A good deal of our problems are existential. You cannot maintain a 21st century lifestyle on debt, or someone else's efforts, and yet successive Governments have done their very best to hide this reality from the voting public.

Consequently Western populations are totally unprepared for what may lie ahead. Sadly, many think that sit in's and street protests can make a difference. We are way beyond that.

In the 1930's we were a resilient people accustomed to adversity as a norm in every day life.

That's not the case today.

We think adversity is a slow internet connection.

We are witnessing the terminal decline of the American empire, and along with it, western prosperity. We need to adjust financially and mentally for the changes ahead.

It is preferable to make the changes voluntarily, rather than having them forced upon us. Either way, change is coming.

Chris Trotter said...

No, Adolf, Stalin didn't try it. He dragooned Russia through the "primitive accumulation" stage of capitalist development at the point of a bayonet and shot all the people who complained.

Obama has done the opposite of what a Keynesian would reccommend - using taxpayers' funds to bail out the private banking sector, preserving the Bush tax cuts, and persisting with the China-enriching/USA-impoverishing policy of "free" trade.

Mickey Savage and Peter Fraser, on the other hand, pursued these policies in the late 1930s, brought New Zealand out of the Great Depression, and set us up for the most prolonged period of economic growth in our history.

I would help, you know, Adolf, if you read the occassional history book.

Sanctuary said...

"...I would help, you know, Adolf, if you read the occassional history book..."

Adolf is a retired racist living in Australia on his government pension. He probably thinks the only good use for a history book is to use it to set a fire.

Anonymous said...

@Brendan

You appear not to understand Keynes at all. The main point of his masterwork the "General Theory" is that under certain conditions (like those we have now) the market will not self correct, and the economy will struggle on indefinitely. Hence, your suggestion that the market will "work" in this situation is pointless as a response to a Keynesian, since the whole point of Keynesian economics was to expose that belief as erroneous.

If you don't believe me, look it up yourself. It's not hard to find a decent explanation of the General Theory.

What needs to happen is pretty simple. Governments need to take money off of the people who have lots and are not spending it (by the least coercive means necessary – and there are various ways of doing this) and use it to stimulate demand by employing people on public works projects or something similar.