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.

Too Late To Change Capitalism’s Flightpath?

Collision Course? In conditions of ideological white-out, the international bankers’ “Woop-Woop! Pull Up!” warning may have come too late to save global capitalism.

WHAT DOES IT MEAN when international bankers are more willing to embrace radical solutions than our politicians and their electors? At both the International Monetary Fund and the World Bank, Keynesianism is back in fashion. The economic doctrine which underpinned the thirty golden years of rising prosperity and declining inequality between 1950 and 1980 has risen from the grave – much to the horror of its erstwhile undertaker, Monetarism.

The monetarists and their guru, Milton Friedman, insisted that the problem of inflation was always and everywhere a monetary problem. Deficits, they insisted, were evil. Expanding the money supply to kick-start the economy would only produce a further inflationary surge. Moreover, increased government spending, by crowding out the private sector, was inimical to capitalist profit. The inevitable upshot of John Maynard Keynes’ pernicious doctrines, Friedman’s followers predicted, would be an economy forever engaged in chasing its own tail.

Unfortunately for the monetarists, the experience of the past ten years has left their theory in tatters. Since the Global Financial Crisis of 2008-09, the global money supply has undergone an unprecedented expansion. In theory, innovations such as Quantitative Easing and negative interest rates should have generated runaway inflation. In reality, prices have stubbornly refused to spike. Monetarism has been weighed in the balance and found wanting. For the monetarists, the writing should be on the wall.

But it isn’t. At least, not on the walls that matter at Treasury and in the caucus-rooms of our parliamentary parties. In those places monetarism continues to be treated as Holy Writ. Regardless of whether the call for a major, state-led, fiscal stimulus comes from the IMF or New Zealand’s own Reserve Bank Governor, our political class remains unmoved. Deficits are for getting down. Surpluses are for building up. The Government must take great care not to crowd out the private sector by intervening too actively in the economy.

Never mind that it was massive state spending (necessitated by a succession of destructive earthquakes) that pulled New Zealand through the Great Recession with so little in the way of serious economic and social damage; the political class remains unconvinced. In their minds, the superiority of the free market as an allocator of scarce resources is indisputable. Large-scale state intervention is absolutely the wrong way to go.

Nor is it the political class, alone, which responds to social and economic need in this way. Four years ago, a senior lecturer at AUT, Peter Skilling, published an article in which he revealed the extraordinary tenacity of the idea that the “market” is best left to decide who gets what in our society.

In the focus groups he’d convened to study people’s attitudes towards inequality he found that:

“In keeping with survey results, most focus group participants – when asked individually – expressed a preference for a more equal distribution of incomes (better wages for the low-paid; restraint in executive compensation). In the subsequent group discussion, however, these preferences were marginalised by the view that, while a more equal distribution might sound nice, it was likely not feasible given the ‘realities of the market’.”

Even more interestingly, Skilling discovered that: “while this ‘market reality’ trope was typically advanced by only one person in each group, it seemed able to over-ride a majority preference for greater equality.”

Seldom has the Italian communist, Antonio Gramsci’s concept of “hegemony” – formulated in the 1920s – been vindicated so convincingly. Except in extremis, Gramsci argued, ruling classes maintain their position not by physical force, but by the force of ideas which the overwhelming majority of citizens have been persuaded to accept as “common sense”.

This is the extraordinary irony of the present situation. Forty years ago, the ruling classes of Western capitalist societies convinced their citizens that the Keynesianism which had so improved their lives was a flawed and deficient economic doctrine which needed to be abandoned in favour of a new doctrine that elevated and privileged the role of “market forces”. Forty years later, with a substantial portion of those same ruling elites now convinced that monetarism has failed, and that Keynesianism is, indeed, the doctrine which offers the best hope of economic, social and political stability, the political class – and we, the people – remain firmly wedded to our “common sense”.

In conditions of ideological white-out, the bankers’ “Woop-Woop! Pull Up!” warning may have come too late.

This essay was originally published in The Otago Daily Times and The Greymouth Star of Friday, 8 November 2019.

"This Is New."

Game Changer: Labour's finance spokesperson, David Parker, has come up with a credible solution to the many problems associated with New Zealand's Reserve Bank Act mandated monetary policy. Labour now has a more convincing economic story to pitch to the voters than National. Game on!

 

KEYNESIANISM by other means. That’s what David Parker’s new monetary policy offers voters – and they should take it.

 

The measures announced by Parker on Tuesday morning constitute the long-awaited framework upon which the detail of Labour’s manifesto can now be hung. Indeed, without Parker’s proposed changes to the Reserve Bank Act and the Kiwisaver scheme, Labour’s promise to resuscitate the manufacturing export sector and create thousands of new jobs would’ve been empty. But now that Parker has provided the party with an economic skeleton to articulate its redistributive muscle, well: “Dem bones, dem bones gonna walk around!”

 

And it’s all Parker’s doing. Political observers have long dismissed the man behind Labour’s economic programme as an earnest, rather rumpled provincial lawyer and “policy wonk”. There’ll be a lot less of that now. For the first time in more than 40 years, Labour has developed a joined-up economic policy that is all its own.

 

Parker confirmed this himself when journalists demanded to know which other countries were running their monetary policy in the way he’s suggesting. “No one,” replied the Shadow Finance Minister with obvious pride, “this is new.”

 

That’s true – as far as it goes – but a close study of the way the Singaporean government has manipulated its superannuation and public housing schemes over recent decades might suggest that Parker is not alone in recognising the powerful monetary impact of raising and lowering the level of compulsory contributions to citizens’ savings funds. What really sets Parker’s plan apart is the way in which he has grafted what are, in effect, Keynesian demand management imperatives onto that most monetarist of institutions – the Reserve Bank of New Zealand.

 

“We propose an important new tool – varying the employee contribution rate for work based savings”, Parker informed his breakfasting business audience. “The variable savings rate mechanism – or VSR – would allow the raising or lowering of savings rates, rather than interest rates, to reduce or boost local consumption.”

 

Not only is Parker’s scheme sound economics (a judgement with which even the business community, however grudgingly, was forced to concur) but it is also spectacularly good politics.

 

A lower exchange rate bodes well for manufactured export and import substitution industries alike and that, in turn, points to job growth. Real job growth, that is: the sort that generates full-time, densely unionised, high-skill, high-wage employment.

 

And Parker’s story just gets better with the telling.

 

By utilising the VSR, rather than the Official Cash Rate (OCR) to take the heat out of the economy, the Reserve Bank Governor will be able to protect mortgage-holders from the sort of continuous income-squeeze they are currently undergoing. The VSR is unlikely to be wheeled out every six weeks in the manner of the OCR, and its wider application will almost certainly reduce each individual’s contribution. What’s more, the money being withdrawn from circulation will remain in New Zealand. The average Kiwi’s economic nationalist nerve cannot help but be stimulated by the knowledge that the big Aussie banks’ ability to turn New Zealand’s misery into Australia’s profit will be patriotically curtailed.

 

The question now for Parker and his boss, David Cunliffe, is how to bring the good news from Labour’s “war-room” to the party’s electoral base. Tuesday’s announcement has had the effect of binding Labour’s message into a single, coherent narrative – but it is not a story that can be told in a ten-second sound-bite. Social media can help in this respect, but Facebook and YouTube can only take this sort of story so far. Good news is best delivered in person.

 

The ideal vector for this type of message is the nationwide political tour. Cunliffe painting the picture of a kinder, gentler, more inclusive and economically productive New Zealand, while Parker details precisely how Labour proposes to take us from problem to solution.

 



Today He'd Use PowerPoint: In the election year of 1975 Rob Muldoon took his charts and graphs and tables on a nationwide tour to discredit Labour's economic policies - especially its NZ Superannuation scheme.

 

There would be an additional measure of delicious political irony in such a road-trip. Forty years ago Labour’s original superannuation scheme was systematically undermined by Rob Muldoon’s travelling roadshow. From town to town and on into the main centres the pint-sized “economic wizard” advanced with his charts and graphs and tables, and with every stop on his exhaustive itinerary the crowds grew larger and more convinced that Labour’s scheme (which today would be worth $260 billion!) was a bad idea.

 

How satisfying it would be to reverse the process.

 

This essay was originally published in The Waikato Times, The Taranaki Daily News, The Timaru Herald, The Otago Daily Times and The Greymouth Star of Friday, 2 May 2014.

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.