A Fool’s Paradise?
The pre-election, headline-grabbing, so-called “rock-star economy” may be less in evidence today, but there is still a good deal of self-congratulation about an annual GDP growth-rate of over 3%. There is general agreement that the New Zealand economy is doing pretty well, particularly when compared with what is happening elsewhere.
It is only when we look behind the headline figure that doubts begin to emerge. Unpacking the figures and the trends is an important corrective to unjustified optimism.
First, the current growth rate – a welcome relief from an unnecessarily protracted and slow recovery from recession – owes very little to merits of our own or to the way we have managed our economy. We emerged relatively unscathed from the Global Financial Crisis largely because of the stability of our Australian-owned banks and the buoyancy of our major export markets in Australia and China – both powerful and welcome factors but well beyond our control.
The belated post-GFC stimulus to our economy came from another factor beyond our control and one which on other grounds we could well have done without – the Christchurch earthquake. A government that had set its face against using its powers to get the economy moving again – indeed, that had focused on reducing its own spending so that the economy as a whole was smaller than it need have been – found its hand forced by a natural disaster.
No one doubts that the Christchurch re-build has been a major factor in lifting economic activity, particularly in the construction industry. We would not have had that stimulus to spending, employment and investment if the government had been left to its own devices.
And much of our current optimism rests on a 2014 surge in international commodity prices, particularly for dairy products. Again, we are the beneficiaries but can claim little credit for it, and its effect already seems in any case to have been short-lived.
A fourth factor that has lifted our economy and encouraged a spending spree is the asset inflation in the Auckland housing market, something that is a function of the banks’ willingness to go on creating new credit to lend on house purchase rather than of government policy. Indeed, the government professes itself to be unhappy with what is happening – and the Reserve Bank agrees that it is a problem, not a success.
These factors that underpin and explain our relative success do not in any case come without a price. The increased lending by our banks, for example, simply adds to the billions of dollars in bank profits that are repatriated every year to Australia and that accordingly enlarge the burden on our foreign payments balance.
The consumer spending spree makes inevitable a worsening of our perennial trade deficit, as we suck in more imports to meet our insistence on spending five cents in the dollar more than we earn.
The prices people must now pay for Auckland housing must come from somewhere. They are not matched by any increase in real output and therefore reflect new money created by the banks and placed in the hands of existing home-owners at the expense of those who can’t afford to own their own homes, so that the inequality gap is thereby widened.
The rise in dairy prices throws the spotlight on our increasingly dangerous dependence on a single commodity and on the Chinese market, carrying with it the risk that we are gradually being absorbed into a greater Chinese economy.
But it is when we look to the future that the doubts really begin to grow. The government makes great play of its efforts to reduce its own deficit, without apparently concerning itself at all with the deficit that really matters – that of the country as a whole.
How many of those who are inclined to congratulate the government on its prudence in “reducing the deficit” understand that we continue as a country to live well beyond our means and that the current consumer boom can only make that deficit worse?
How many understand that the government deficit is only a small part of a much wider picture – that of an economy that cannot pay its way – and is in any case virtually inevitable for as long as we have a substantial foreign payments deficit?
How many understand that the current emphasis on high interest rates and an overvalued dollar make it impossible for us to earn enough to pay our way? Or that the price we pay for the continued foreign payments deficit is that we must sell more assets and borrow more as a country to make up the gap – that we are quite literally spending away our future?
Do we understand that, despite all the talk about broadening our economic base, we are more dependent than ever on the price of a single commodity and that our power of self-government is being constantly eroded as we become more dependent on just one customer for that commodity and as more and more of our economy passes in to foreign ownership?
Should we not ask – is New Zealand the paradise we think it to be, or is it becoming a paradise for fools?
Bryan Gould
21 March 2015