• It’s The Economy, Stupid

    A week, as Harold Wilson famously said, is a long time in politics, but the day-to-day ups and downs that hog the headlines rarely determine the outcome of elections. Voters’ preferences are usually shaped over longer periods and reflect underlying perceptions about the competence of governments and the preparedness of oppositions to meet the challenges of running the country.

    Recent reports of government policy reversals or of Labour’s disciplinary problems matter less, in other words, than what is happening over the long term to the issues that really matter – and principal among those, as Bill Clinton’s campaigners declared, is “the economy, stupid”. For as long as the economy is seen to be on the right track, the Prime Minister will retain a good deal of political capital in the bank, and the government will not be too worried by the kind of occasional, short-term difficulty that afflicts all administrations.

    But that scenario could change if, over time, the perception should grow that the economy is heading nowhere. A better economic performance, even if the goal of closing the gap with Australia is now said to be only “aspirational”, is after all at the very core of the government’s agenda. Other disappointments might well be accommodated without difficulty, but an economic policy that was seen to take us down a dead-end would be serious for any government, not least this one.

    That is why the faintest of alarm bells might now be audible in John Key’s office. It is bad enough that the steady recovery from recession now looks as though it might have stalled. The current economic news suggests that, whatever the statistics might show, people are now much less confident that their economic circumstances will improve over the next year or so. And that is exactly the kind of perception that can have a big influence over election outcomes.

    What will worry the government even more is that they seem to have few weapons left to try to improve matters. Even our relatively benign experience of recession over the past couple of years is now seen as owing more to the buoyancy of our major export markets in China and Australia than to any initiatives taken by the government. And, as those markets falter, the heat will turn up on the government to find its own way forward.

    The trouble is that they have already fired what seem to be their best shots, to little avail. The jobs summit produced little. The priority to getting the government deficit down is said to preclude any further stimulus to demand and economic activity. The welcome focus on funding for research will take some time to bear fruit.

    In the meantime, almost all of measures they have turned to have failed to carry conviction. They have either been tried before without achieving much or have provoked such opposition that they have been abandoned before they even got started.

    So, removing “labour market rigidities” through amending employment law in favour of employers is a favourite nostrum of neo-liberal ideologues but has stubbornly failed to produce any benefits to productivity or growth when it has been tried before. Pressing on with the free trade agenda looks and sounds good but – in a country which has given it a more extended trial than almost anywhere else – has resulted over a couple of decades in a more rapid growth in imports than in exports.

    The move to attract foreign capital by increasing our willingness to sell even more assets into foreign ownership seems to have stalled in the face of the Prime Minister’s recognition of the political risks involved. The attempt to transform our tiny financial institutions into world players in capital markets seems unlikely to get off the ground. And the latitude planned for international mining companies to prospect in prime conservation land quickly flew in the face of environment sensitivities.

    The danger for the government is that these abortive steps will be seen not just as failures but as having been ideologically driven – reflecting the belief that economic salvation lies in tilting the balance in favour of employers – rather than directed at solving real economic problems. And that problem will be compounded as we seem to be preparing yet another re-run of measures – high interest rates and an over-valued dollar – that have already been seen to make the problems worse rather than better.

    John Key has so far shown a sure political touch. He will know that perceptions about the government’s ability or otherwise to kick-start our economy will be critical to his chances of re-election. Stand by – if we are lucky – for an “agonising re-appraisal” of economic policy.

    Bryan Gould

    1 August 2010

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