Monday 13 June 2022

The Recession New Zealand Has To Have?

Going Down? Governments also suffer in recessions and depressions – just like their citizens. Slowing economic activity means fewer companies making profits, fewer people in paid employment, fewer dollars being spent, and much less revenue being collected. With its own “income” shrinking, the instinct of most government’s is to sharply reduce spending. 

CONVENTIONAL ECONOMIC WISDOM insists that the only effective cure for rising inflationary expectations is a short, sharp recession. Easy to say, but much, much harder to accomplish – especially if you are at least nominally a party of the Left. The ghost of John Maynard Keynes is forever whispering in the ears of Labour parties – even those which long ago embraced the precepts of Neoliberalism – and his message is always the same: Spend, spend, spend.

The problem with spending in an inflationary environment is that it does nothing to discourage the notion that the price of basic items in six months’ time will be appreciably higher than they are now. In such circumstances, simple logic dictates that it is better to make a substantial purchase today, than tomorrow. They also encourage the idee fixe that one’s income must be increased to match, at the very least, the rate of inflation. Understanding this expectation, employers budget to recover the cost of increased wages and salaries by increasing the price of their goods and services.

Once stimulated, inflationary expectations, and the upward spiral in wages and prices they set in motion, are very difficult to suppress.

Essentially, a government is required to make it a lot more expensive for people to borrow money. At the macro level, sharply rising interest rates have the effect of slowing economic growth. At the micro level, employers stop hiring and start firing. Those forced onto the dole face a dramatic loss of income and all discretionary spending ceases abruptly. The rest of the workforce, fearful of losing their jobs, stop demanding wage and salary increases. They also stop spending on non-essentials and start saving. Retailers now have the strongest of incentives to keep their prices stable.

Pretty soon, economic growth stalls, and then shifts into reverse. Pessimism reigns supreme. Inflationary expectations, along with inflation itself, come to a shuddering halt.

The trick, of course, is in knowing how long to keep the interest rates going up, when to hold them steady, and when to let them drop. Keep them high for too long and the economy risks transitioning from recession to depression. Those with money, ill disposed to risk it, satisfy themselves with government-guaranteed returns. Unable to borrow, or meet their higher interest payments, businesspeople go bust, and property-owners with mortgages lose their homes. Unemployment rises, spending decreases still further, and retailers are forced to contemplate lowering their prices.

What the economists most fear now is not of inflation but deflation. The prospect of the economy not simply grinding to a halt – but shrinking.

At this point, all eyes turn to the government. Something must be done! But governments also suffer in recessions and depressions – just like their citizens. Slowing economic activity means fewer companies making profits, fewer people in paid employment, fewer dollars being spent, and much less revenue being collected. With its own “income” shrinking, the instinct of most government’s is to sharply reduce spending. Now it is the turn of those businesses, organisations and institutions dependent on government money to feel the pinch. Exactly the same contractionary spiral that wound down the private sector, now grips the state and its hangers-on.

But the trials and tribulations of the state do not stop there. The huge number of unemployed and otherwise impoverished people have nowhere else to turn for assistance but their government. Meeting that need from a dwindling treasury, however, is the stuff of political nightmares. Just keeping the education, health and transportation systems functioning is a huge drain on the state’s resources, feeding and housing the hungry and homeless threatens to render it insolvent.

But you can’t just let people starve – can you? The hungry and the homeless themselves are likely to answer that question, as they did in New Zealand’s hungry winter of 1932, when riots tore the main streets of Auckland, Wellington and Dunedin apart. Terrified, the conservative coalition government postponed the 1934 general election by 12 months and passed the draconian Public Safety Conservation Act. Not that it did them much good. On Tuesday, 26 November 1935, New Zealanders elected their first Labour Government.

And what did that government do? It spent, spent, spent.

So, what should Jacinda and Grant do? Continue to spend, spend, spend? Or allow Reserve Bank Governor, Adrian Orr, to push up the Official Cash Rate (OCR) to 5 percent and watch economic activity nosedive?

From a left-social-democratic perspective, at least part of the answer would be to embark on a massive political education campaign. Explain to Labour’s voters the havoc inflation wreaks upon the lives of ordinary people, and why it must be driven out of the New Zealand economy. Tell them defeating inflationary expectations will require the full co-operation of the whole population. Then announce a two-year wage, price and rent freeze. Further announce the state subsidisation of basic foodstuffs and energy supplies, to be paid for by higher taxes on the wealthy, the restoration of Death Duties and a Capital Gains Tax.

A return to the bad old days of Muldoonism? Damn straight! It certainly beats asking the poorest and most vulnerable New Zealanders to carry the full burden of eliminating inflation. Few people appreciate that the whole purpose of destroying Muldoonism – which was simply an eccentric form of Keynesianism – was to free the wealthy from their obligation to contribute their fair share towards the maintenance of a decent society. That was all Rogernomics and Ruthanasia were ever about: making the poor pay more so the rich didn’t have to.

Not that Jacinda and Grant are at all likely to adopt a left-social-democratic economic agenda to deal with the impending crisis. They will make the poor pay, pretend they’re not, fool nobody, and be bundled out of office in 2023.

Ironically, their policy choices may end up decisively reducing inflationary expectations. To the limited degree permitted by Neoliberal economics, the economy will recover, and the National Party will kick-off another nine year term on a thoroughly sunny note. Who knows, by the time the next election rolls around in 2026 they might even be in the mood to: Spend, spend, spend.


This essay was originally posted on The Daily Blog of Friday, 10 June 2022.

10 comments:

Guerilla Surgeon said...

The Labour government of 1935 did not "spend, spend, spend". It invested, invested, invested. There is a difference.

Odysseus said...

A recession is now inevitable. We do not know yet how deep it will be nor how long it will last. But our economy is seriously out of whack. There continues to be too much money creation and too much low quality spending, while nothing has been done to arrest the decline in productivity against international benchmarks like Australia. Mass emigration will once again relieve the government of some of the burden of the unemployed. But for most young, productive kiwis there will be no prospect of any future on these beautiful but increasingly divided islands.

DS said...

>>nothing has been done to arrest the decline in productivity against international benchmarks like Australia.<<

New Zealand's terrible levels of productivity are a function of a tax system that rewards property speculation over anything productive, and of an employer class that for thirty years has grown fat off paying their workers low wages, with absolutely zero incentive to find more efficient means of production beyond "let's lower wages."

Which means your lot would only make things worse.

Anonymous said...

The 35 Labour Government used Social Credit Monetary policy to Create assets at no cost to the taxpayer which went against their normal conservative Monetary agenda.

Wayne Mapp said...

A major difference to the past is that the primary sector is doing remarkably well. Primary exports are at their highest levels ever. So I can't see a recession happening in that circumstance. The primary sector and the downstream industries serving them will be pushing money through the economy.

Yes, the Reserve Bank will tighten up, but the government is doing nothing to dampen demand. In fact the reverse, the 2022 Budget was very expansionary with $6 billion new spending.

Interest rates will dampen down housing demand, at least to some extent. The Building industry will slow a bit, but it is coming off the highest rate of building for 50 years.

So in my view there won't be a recession. More likely a slow down in certain sectors, but not as widespread as you might think. Most people don't have a huge mortgage, probably less than 10% of households.

The difficulty is working out how long inflation will last. I am picking another 18 moths, so sometime until late 2023. Which unfortunately for Labour will coincide with the next election.

.

Anonymous said...

Australia us no international benchmark. I live gere abd the economusts are all lamenting the lack of productivity. Its funny and tragic how Aus is presented in theNZ commentariat ....as some kind of Antipodean Nirvana...and they get away with it because peopleare toolazy to find out for themselves.

John Hurley said...

From a left-social-democratic perspective, at least part of the answer would be to embark on a massive political education campaign. Explain to Labour’s voters the havoc inflation wreaks upon the lives of ordinary people, and why it must be driven out of the New Zealand economy. Tell them defeating inflationary expectations will require the full co-operation of the whole population. Then announce a two-year wage, price and rent freeze. Further announce the state subsidisation of basic foodstuffs and energy supplies, to be paid for by higher taxes on the wealthy, the restoration of Death Duties and a Capital Gains Tax.
........

No Chris, tell them the economy needs the skills of the Chinese and Indian middle classes and if they resist call them racist.
That stimulus as the new breed of skilled migrant buys housing at the top of the ladder will filter down.

Further more sell them density: they will be able to get on public transport and enjoy ethnic foods (don't let on that you don't want yourfamily living in one of those places).

San Francisco, the urban center that gained most from the technological revolution, epitomizes the final stages of the transactional city. It is now the country’s costliest city and anchors a region with the smallest middle class among the 52 Metropolitan Statistical Areas with over a million people. Inequality grew most rapidly there over the last decade, reports the Brookings Institution, as techies moved into tough urban areas like the Tenderloin. A city of enormous wealth has become bifurcated, plagued by mass homelessness and petty crime, while the middle-class family heads toward extinction. San Francisco has lost 31,000 home-owning families in the last decade, a trend that accelerated during the pandemic.
https://quillette.com/2022/06/09/reconsidering-the-city/

Loz said...

The Neoliberal counter-revolution has been so complete that our debate is often framed in simple 1980’s ideas of supply and demand.

One concept advanced by Milton Friedman was that inflation could be controlled by Monetary policy alone. Today, such a simplistic view of the world should be seen as childish and naïve.

Monetary policy is a crude instrument for market management, that was by-design the only lever a government could directly influence “the market”. It was an effective tool against Demand Side Inflation, as increasing interest rates reduced the discretionary income of most families. When prices are determined by supply and demand (another simplistic view of economics), lack of demand should lead to a stabilization of prices at the quality-of-life expense of working families.

The inflation we are starting to experience now is very different. It is primarily Supply-Side inflation. Price increases are reflecting cost increases with production, distribution, and exchange. It doesn’t matter how much disposable cash NZ’s families have, its wont impact those core cost-to-market issues. In fact, lower demand might even increase unit prices as overheads must be covered on smaller volumes of sales. Monetary policy will guarantee that NZ families have less disposable income, which inflation is doing in a spectacular way anyway without the need of government assistance. What is being created is a low demand economy where working families have no disposable income at all.

We seem to have a lot of chickens coming home to roost.

14 years of endless credit creation has caught up with us & the massively expanded money supply has an unavoidable inflationary impact on savings and wages. Almost all of our consumer manufacturing is offshore now and the chaos with shipping means we can’t impact the tripling and quadrupling of distribution costs. Corporations are using inflation as a cover to create massive profits and their monopolistic control of markets is unimpacted by our monetary policy. Climate is also impacting the supply of materials and food.

We also have an explosion in fuel costs due to the sanctions the “Coalition of the Willing” have introduced on Russian oil and gas to create artificial supply shortage that isn’t being felt outside of Europe, North America or Oceania. China is actually benefiting from cheaper Russian oil as a result! Zelensky recently remarked the sanctions “have not really influenced the Russian position” but they have facilitated a massive transfer of wealth from western working families as profits in the fossil fuels industry.

These are the same problems of the 1930’s when Labour accepted the only solution was for direct state involvement in production distribution and supply with a deliberate intent of increasing the disposable income of working families.

At this point, the monetarist playbook from 1985 is more likely to create a Depression than solve any of the problems we currently have.

greywarbler said...

Thanks for that link and excerpt John Hurley. I have read in another respected journal (can't remember could be The Atlantic) about placed like Portugal where people are forced out of their homes by changing economics caused by the peripatetic techies who choose to live in places they would once have saved to holiday in, so they become a permanent Holiday Inn. Housing costs are up, values are up, and the low income families are pushed out. And the newcomers do not have the sense of community, the commonality of people on low incomes raising a family - they have a different mindset.

This is happening in NZ too, Auckland etc. Do we as a broad mass of the people want this? The results are not satisfactory for the people looking for affordable housing and decent living standards in friendly neighbourhoods, and also for those who care about others and expect people to access similar conditions to those of the 1970s. What can we do about it? Are we in the grip of inflexible democracy that no longer works for the people's benefit? If not then who is pulling the levers, and who benefits as a result?

I understand that today's business with ideas to expand has a favourite word which is 'disruption'. And they will do anything if there is a market for their idea. As some tourists remarked about some unsavoury happenings here. "Oh that's how it is these days". We who don't want that have to think up our own peaceful alternatives and think things
out carefully otherwise those with heads full of ideas and antipathy to ordinary human life
will step in to run things better. The Chinese are trying to do this with their own people,
to impose good behaviour according to the laws prevailing, from above so that people can't be spontaneous, must remember they are being monitored, are coerced. Life as reality television.

A song always comes to mind.
This time it's Lou Reed singing 'You're going to reap just what you sow'
in his Perfect Day - https://www.youtube.com/watch?v=rfW4sim0bpI

greywarbler said...

Anonymous 9.07
Productivity is a fuzzy word representing rightness when published. We always have poor productivity and that shows we are failing somehow. Australia used to be regarded as the lucky country where you could get better wages and living conditions than here. It is still used by business interests as an example that we should aspire to.

Not enough people in NZ try to keep up with factual news, or if they do look at the jigsaw of information we get, they either glance quickly, or don't get the full picture. Most don't understand it is a jigsaw cleverly made so that each piece has either two different images or can be placed in numbers of positions. Damnably hard to do those jigsaws. Time and great persistence and attention is required.

A lot of people don't know how to think in analogies like this which can show meaning from a different perspective. So the propaganda sinks in - Australia good, NZ trailing in the race! I call it the dingy dinghy syndrome.