• Was It All A Mistake?

    As the euro zone’s long drawn-out agony staggers towards its inevitable conclusion, at least one issue is nearing resolution. Just as in the 1930s, it has taken a long time for the ideologues to accept that their nostrums do not counteract recession but make it worse.

    Even the high-priestess of austerity, the German Chancellor Angela Merkel, has begun reluctantly to admit that what Europe now desperately needs is a strategy for growth. Without a change of direction, in other words, not only Greece and Spain and the whole of the euro zone, but the global economy as well, are staring renewed recession in the face.

    We in New Zealand, of course, along with the rest of the world, are directly affected by the mistakes Europe’s leaders have made. But – fascinatingly – we have unexpectedly had our own domestic echo, in the words of our own Prime Minister, of the European debate.

    Our own government is now well into its fourth year of grappling with the recession. Throughout that time, our leaders have relegated issues like growth, full employment, competitiveness, and investment to the back burner. The issue that matters most to them, it seems, is the government’s deficit.

    Their priority has been to cut government expenditure – notwithstanding that, by international standards, the government’s finances (unlike the country’s) are in reasonably good shape, and that cutting spending to get the deficit down has actually, by depressing tax revenues, made matters worse.

    The government has nevertheless preferred ideology over the practical evidence. Our economy continues to languish, and the deficit persists, because they take a Merkel-like view of what is needed to recover from recession.

    They have placed their faith in what the Nobel Prize-winning economist, Paul Krugman, calls the “confidence fairy” – the belief that the money markets will respond positively if governments are seen to cut their spending. The markets are not, however, that easily distracted (and nor are the credit rating agencies).

    As one economy after another looks in vain for the “confidence fairy” to appear, economic reality has a habit of intruding ever more insistently. That realism has now, it seems, even reached New Zealand.

    The Prime Minister has over recent times begun to drop heavy hints that eliminating the deficit by 2014-15, which has up till now been the litmus test of his government’s credibility, may not be achieved. In one of those increasingly frequent moments when he appears to make policy off the cuff, he was even more specific last week on National Radio.

    But it is the reason he gave for this shift in strategy that is really interesting. He would not, he said, stay committed to the 2014 deadline if that meant he had to “drag the economy back into recession”.

    Here, at last, is a recognition that, in New Zealand as in Europe, there is a trade-off in our present situation between cutting the deficit on the one hand and economic recovery on the other. It may be doubted whether the Prime Minister was fully aware of the significance of his remark, but the rest of us should be in no doubt.

    What it means is that we have wasted nearly four years pursuing the wrong strategy. That has unnecessarily cost us lost jobs and national wealth, and has meant we have had to increase our borrowing and make a painful fire-sale of national assets.

    It remains to be seen what the Prime Minister’s Finance Minister, Bill English, and the Treasury Chief, Gabriel Makhlouf, will make of this admission and change of direction. The role of the Treasury Chief is particularly interesting.

    He was recruited from the British Treasury presumably because his background there was seen as guaranteeing his commitment to austerity orthodoxy. He may well be surprised by the Prime Minister’s change of emphasis; or could it be that, having seen the damage done by that orthodoxy in the UK, his was one of the voices that brought about the change?

    In any event, the Prime Minister’s change of heart might discourage the constant repetition, even by those who should know better, of the simple-minded mantras that “you can’t spend what you don’t have” or “if you have to borrow you should be declared bankrupt.”

    These pearls of wisdom are constantly offered as justification for the austerity strategy which has proved so disastrous across time (the 1930s and the present day) and space (Europe and New Zealand). They rest on the false assumption that governments are no different from individuals and businesses – though have those giving this advice never heard of mortgages or bank loans?

    But governments are in truth quite different from individuals and businesses. They have a wider responsibility to the whole economy and accordingly many more options for bringing about recovery, including adjusting fiscal and monetary policy, and – where appropriate – borrowing to invest or even printing money if that makes sense in context.

    Decisions about those issues have to be made carefully and with proper regard for their consequences – there are no options of course without downsides. But that is what government is about. Even the Prime Minister now seems to have realised that continued cuts are not the path to recovery and that a different strategy is needed.

    Bryan Gould

    24 June 2012

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