• A Dose of Reality

    As the cheerleaders for economic recovery build up to a Christmas frenzy, it is worth injecting a dose of reality into the optimism. Let us recall that the so-called recovery comes off the back of five years in the doldrums – a period of policy failure that has cost us an immense amount of lost national wealth, thrown thousands on to the scrapheap, relegated thousands more (and not least their children) to poverty, and left public services, including the defence force, in tatters.

    The recovery, such as it is, owes much to the Christchurch re-build, begging the question of why we had to wait for an earthquake before finding the money to get the economy moving again. But the real questions arise in respect of where the recovery is likely to take us and – most importantly – whether it means that we have at last resolved our deep-seated economic problems.

    The key feature of the government’s policy is, after all, – as the Herald identified in its leading article on Monday – short-termism. The government’s apparent strategy has been merely to apply a series of sticking-plasters rather than to find long-term solutions.

    Asset sales, for example, have filled an immediate gap in the government’s finances, even though in the longer term there will be a significant loss of government income; that, apparently, is something for future governments to worry about. The so-called industrial strategy amounts to no more than large taxpayer-funded subsidies to film companies, ill-judged deals with the likes of Sky City, and jeopardising our environment by backing any overseas project to dig up or drill for hoped-for mineral wealth under our land or sea.

    None of these strategies helps in any way to resolve our economic problems – indeed, the opposite is true. Our dangerously narrow productive base? We are more dependent than ever on high dairy prices which won’t necessarily last forever. Turning our backs on investment in new productive capacity in favour of an overheated housing market? Much of the increase in economic activity comes from the greater spending power home-owners imagine they have as a consequence of the rise in house prices.

    Our predilection for consuming and importing? Stronger than ever. The need to borrow from overseas and to sell our remaining assets to foreign owners in order to fund our spending spree? No change there. Our continued use of interest rates to restrain inflation as the sole goal of economic policy, with the consequent overvaluation of the dollar and its damaging impact on our ability to compete in the world? No lessons learnt. All of these familiar problems are about to rear their heads again.

    We are enthusiastically getting back, in other words, on to a money-go-round that means a damaging failure to pay our way and a weakened productive base. It is a safe bet that – after a brief consumer bonanza – there will be (with much wringing of hands) a new outbreak of bewildered concern as to why our powerful new competitors in Asia and elsewhere are doing so much better than we are.

    In the meantime, the government will carry on with the bizarre conviction that our economic future depends essentially on sucking up to overseas corporates whose sole interest is in cherry-picking our assets – actual or potential – and leaving us to pick up the pieces after they leave with the booty. At the same time, it is apparently believed that the plight of an increasingly large proportion of our population – with no jobs, poor prospects, worse education, sub-standard housing, third-world health standards – is irrelevant to our economic prospects and is merely a matter of individual responsibility.

    The government certainly cannot be accused of proceeding by stealth; it has loudly proclaimed its sadly misplaced faith in international finance and overseas corporates coming to our aid; it has been equally clear in its casual dismissal of any thought that our fellow-citizens might be worth consideration, not only as essential elements of a healthy and integrated society but also as important contributors to our economy.

    There will be, quite understandably, those who accept this critique of current strategy but look in vain for an explanation of what an alternative strategy might look like. But we can’t even begin to understand the need for an alternative until we understand why the current strategy is doomed to be self-defeating. And the case for an alternative is inevitably more complex than can accurately or persuasively be described in 800 words; readers might like to look out for my next book!

    The first important step towards a better strategy, though, is to avoid misplaced optimism as the economy recovers from a long period of stagnation. And one point is clear; the best guide to a better economic future is to enable our own people to become economically active and productive, so that everyone can share in economic success – everyone, after all, is entitled to a merry Christmas – rather than accepting the doubtful benefits of the self-interested whims and vagaries of overseas bargain-hunters.

    Bryan Gould

    17 December 2013

  • Recovery? What Recovery?

    It is surely beginning to dawn on us, nearly three years after our recession began, that anything approaching a full recovery is still a long way off.

    It is now clear that unemployment remains stubbornly high, that the housing market is depressed, and that property values have fallen sharply so that most people no longer feel as wealthy as they did. Lower housing values and employment uncertainties explain why domestic demand is sluggish so that – barring an unlikely pre-Christmas boom – we can expect to see increasing numbers of empty retail premises in our high streets in the New Year. Little wonder that confidence in the economy is ebbing and that employment and investment intentions are at low levels.

    As a consequence, the exodus across the Tasman has resumed. Australian living standards continue to rise faster than our own, as both demonstrated and assisted by the growing strength of their dollar against ours.

    Yet a great deal is going right for our economy. Our major export markets in Australia and China are performing strongly and demand for our goods is buoyant. Commodity prices generally and dairy prices in particular are at historically high levels. Our trade figures mean that a trade imbalance is not so much a constraint on expansion as it has been over such a long period.

    Inflation is not an immediate problem and the Reserve Bank governor has signalled his intention to keep interest rates at low levels. Our banks are in good shape (though, sadly, the same cannot be said of our finance companies). The warnings of the “bond vigilantes” that increased government borrowing to fund their deficits will mean rapidly rising long-term interest rates around the world have not materialised. Our own government’s finances are stronger than forecast and are in any case among the healthiest of any advanced country; most European governments can only dream about our relatively and historically low levels of government indebtedness

    In these unusually favourable circumstances, there is something wrong with us if we cannot make a good fist of coming out of recession in good order. So, what is going wrong?

    What we are seeing, I believe, is a simple failure of analysis. An economy in recession is by definition an economy in which there is a deficiency of demand. If we want to recover from recession, we have to see somewhere a lift in demand. The question is, therefore, where is it to come from?

    For once, a partial answer is provided by the export sector. The improvement in export prices is helping to re-balance the economy towards exports and away from domestic consumption –something the government is keen to see and a process that could be made even more beneficial by a more competitive exchange rate.

    But is the relatively strong performance of the export sector enough to counter the impact of lower levels of activity in the other two sectors – the private sector and the government? If the answer to that question is no, then we have our answer as to why our recovery is so sluggish.

    It is of course only too evident that activity and confidence in the private sector have suffered during the recession. Consumers are keeping their wallets closed, and businesses are cutting costs rather than taking on employees and investing in new capacity.

    So, if we are to lift ourselves out of recession, we need the government sector to be playing its part in stimulating the level of demand, so as to offset and eventually reverse the current depressed state of the private sector. Yet, when we look to what the government is doing, we see priority given to the government’s finances rather than the health of the wider economy – to getting the government’s deficit down, rather than on using fiscal policy to stimulate the economy as a whole. The effect is that depressed demand in the private sector is reinforced rather than offset. The government is not, in other words, helping towards a solution but contributing to the problem.

    The government says of course that it must cut back because it has to borrow just to maintain current spending, let alone spending at a higher level. But that is simply to re-state the problem rather than resolve it. The government has a deficit because a depressed economy means that its revenues are down. If the government is not helping but hindering recovery, then it will take longer to reduce the deficit and the recession will drag on for longer. And the longer it takes, the greater the risk that less than optimal levels of employment, investment and output will become permanent features of our economy.

    The government is quite right to insist that it must, like the rest of us, get value for every dollar it spends. But isn’t it time that ministers took a wider and longer view of the role they must play if we are to shake off the shackles of recession?

    Bryan Gould

    2 October 2010

    This article was published in the NZ Herald on 12 October.