Over the past four years of recession, we have seen a re-run of the debate that surrounded the Great Depression.
In the 1930s, there were those, like Herbert Hoover, who insisted that austerity – by cutting government spending
– was the way to beat recession. Others, like John Maynard Keynes, were convinced that the remedy
was stimulus and expansion.
In the event, it was a no-contest – and
so it is today. It is now clear that the austerity being inflicted on the benighted Greeks cannot work,
but even the other “PIGS” – Portugal, Ireland and Spain – who have done everything required of them
by the austerity disciplinarians, have found that they are going backwards, deeper into recession and with a rising ratio
of government debt to GDP.
And while the British may have avoided the problems
of euro membership, they chose to impose their own home-grown austerity. The result? They
are mired in a recession that threatens to be worse for them than the 1930s.
the US, by contrast, President Obama’s stimulus programme – bitterly opposed and relatively timid as it was –
is pulling the US economy around. There can now be little doubt that stimulus is the key to beating recession.
The time for austerity policies, after all, is when the economy is booming; in a recession, they are the last thing
As that reality becomes increasingly difficult to deny or ignore,
where do we in New Zealand stand? Sadly, we find ourselves with Herbert Hoover, down an ideological cul-de-sac
with nowhere to go. The proponents of the current orthodoxy now don’t even bother to defend it; they
promise merely a continuation of the long drawn-out stagnation – resorting, like school-kids in the playground, to challenging
their critics to offer something better.
The critics seem increasingly ready
to respond to that challenge. A recent example is Bernard Hickey’s interesting suggestion that we
should consider “quantitative easing” (or, as it used to be called pejoratively, “printing money”).
It may not be the first option to come to mind but it is not as way-out
as it seems. Many governments (including the current UK and US governments) have “printed money”
from time to time – and banks do it all the time, lending money that they do not have, and thereby creating most of
the money in our economy out of nothing. If it’s all right for them to make billions from doing so,
why shouldn’t governments do it in the public interest, and so get the economy moving?
There are, of course, many other proposals that offer an alternative to the failed orthodoxy.
Here, in 400 words, are a few suggestions, which – if implemented – would go to make up a coherent programme.
· Put beating unemployment
centre stage by investing in much-needed infrastructure projects, so as to raise demand and create new jobs –a virtuous
circle which would also help retailing, and private sector investment and productivity.
· Get the exchange rate down to
improve competitiveness so that higher demand is met by New Zealand, and not foreign, industry; do so by ending the use of
high interest rates and over-valuation as counter-inflation tools and focusing instead on the real cause of inflation –
excessive and irresponsible bank lending for non-productive purposes. As soon as foreign speculators are
denied an interest rate premium and an unearned capital gain, the dollar’s value will fall.
· Remove the balance of trade constraint
on expansion by boosting exports through improved competitiveness, so cutting the interest and profits paid to overseas lenders
and owners; this will allow us to expand while paying our own way, so reducing the need to borrow overseas or to sell our
key assets to foreign owners.
Encourage saving and exports rather than consumption and imports by promoting further saving through
tax breaks, and - since imports will become comparatively more expensive than domestic production – reduce the incentive
to spend on cheap imports at the expense of New Zealand jobs and production
Tackle the government’s deficit by collecting a sharply increased tax take as a more buoyant economy
generates much greater tax revenue
Reduce widening inequality by discouraging excessive salaries, introducing a fair tax system (including
a capital gains tax) and stopping the destructive insistence on inflicting the cost of the recession on those least able to
bear it – the low-paid, the unemployed, and beneficiaries.
Expect improved competitiveness, productivity and profitability in the private sector to stimulate increased
investment, especially in skill training, education, and research so as to utilise fully our potential human capital and achieve
an economy that reaches its full productive potential.
Develop a close understanding of and support for Maori aspirations, given that Maori offer an important
potential stimulus to new development and seem to have leaders with a better understanding than pakeha – on issues like
asset sales – of what the country needs.
Ensure that new investment is encouraged to develop advanced – and particularly environmentally
friendly – industries based on green technologies.
This is all just
common sense; none of it is revolutionary. It would rescue us from recession and set us on the right course
for the future. It would optimise the market’s strengths and minimise its weaknesses.
Don’t let anyone tell you there is no alternative.
27 February 2012
This article was published
in the NZ Herald on 29 February.