The Recession New Zealand Has To Have?

CONVENTIONAL ECONOMIC WISDOM insists that the only effective cure for rising inflationary expectations is a short, sharp recession. Easy to say, but much, much harder to accomplish – especially if you are at least nominally a party of the Left. The ghost of John Maynard Keynes is forever whispering in the ears of Labour parties – even those which long ago embraced the precepts of Neoliberalism – and his message is always the same: Spend, spend, spend.

The problem with spending in an inflationary environment is that it does nothing to discourage the notion that the price of basic items in six months’ time will be appreciably higher than they are now. In such circumstances, simple logic dictates that it is better to make a substantial purchase today, than tomorrow. They also encourage the idee fixe that one’s income must be increased to match, at the very least, the rate of inflation. Understanding this expectation, employers budget to recover the cost of increased wages and salaries by increasing the price of their goods and services.

Once stimulated, inflationary expectations, and the upward spiral in wages and prices they set in motion, are very difficult to supress.

Essentially, a government is required to make it a lot more expensive for people to borrow money. At the macro level, sharply rising interest rates have the effect of slowing economic growth. At the micro level, employers stop hiring and start firing. Those forced onto the dole face a dramatic loss of income and all discretionary spending ceases abruptly. The rest of the workforce, fearful of losing their jobs, stop demanding wage and salary increases. They also stop spending on non-essentials and start saving. Retailers now have the strongest of incentives to keep their prices stable.

Pretty soon, economic growth stalls, and then shifts into reverse. Pessimism reigns supreme. Inflationary expectations, along with inflation itself, comes to a shuddering halt.

The trick, of course, is in knowing how long to keep the interest rates going up, when to hold them steady, and when to let them drop. Keep them high for too long and the economy risks transitioning from recession to depression. Those with money, ill disposed to risk it, satisfy themselves with government-guaranteed returns. Unable to borrow, or meet their higher interest payments, businesspeople go bust, and property-owners with mortgages lose their homes. Unemployment rises, spending decreases still further, and retailers are forced to contemplate lowering their prices.

What the economists most fear now is not of inflation but deflation. The prospect of the economy simply grinding to a halt.

At this point, all eyes turn to the government. Something must be done! But governments also suffer in recessions and depressions – just like their citizens. Slowing economic activity means fewer companies making profits, fewer people in paid employment, fewer dollars being spent, and much less revenue being collected. With its own “income” shrinking, the instinct of most government’s is to sharply reduce spending. Now it is the turn of those businesses, organisations and institutions dependent on government money to feel the pinch. Exactly the same contractionary spiral that wound down the private sector, now grips the state and its hangers-on.

But the trials and tribulations of the state do not stop there. The huge number of unemployed and otherwise impoverished people have nowhere else to turn for assistance but their government. Meeting that need from a dwindling treasury, however, is the stuff of political nightmares. Just keeping the education, health and transportation systems functioning is a huge drain on the state’s resources, feeding and housing the hungry and homeless threatens to render it insolvent.

But you can’t just let people starve – can you? The hungry and the homeless themselves are likely to answer that question, as they did in New Zealand’s hungry winter of 1932, when riots tore the main streets of Auckland, Wellington and Dunedin apart. Terrified, the conservative coalition government postponed the 1934 general election by 12 months and passed the draconian Public Safety Conservation Act. Not that it did them much good. On Tuesday, 26 November 1935, New Zealanders elected their first Labour Government.

And what did that government do? It spent, spent, spent.

So, what should Jacinda and Grant do? Continue to spend, spend, spend? Or allow Reserve bank Governor, Adrian Orr, to push up the Official Cash Rate (OCR) to 5 percent and watch economic activity nosedive?

From a left-social-democratic perspective, at least part of the answer would be to embark on a massive political education campaign. Explain to Labour’s voters the havoc inflation wreaks upon the lives of ordinary people, and why it must be driven out of the New Zealand economy. Tell them defeating inflationary expectations will require the full co-operation of the whole population. Then announce a two-year wage, price and rent freeze. Further announce the state subsidisation of basic foodstuffs and energy supplies, to be paid for by higher taxes on the wealthy, the restoration of Death Duties and a Capital Gains Tax.

A return to the bad old days of Muldoonism? Damn straight! It certainly beats asking the poorest and most vulnerable New Zealanders to carry the full burden of eliminating inflation. Few people appreciate that the whole purpose of destroying Muldoonism – which was simply an eccentric form of Keynesianism – was to free the wealthy from their obligation to contribute their fair share towards the maintenance of a decent society. That was all Rogernomics and Ruthanasia were ever about: making the poor pay more so the rich didn’t have to.

Not that Jacinda and Grant are at all likely to adopt a left-social-democratic economic agenda to deal with the impending crisis. They will make the poor pay, pretend they’re not, fool nobody, and be bundled out of office in 2023.

Ironically, their policy choices may end up decisively reducing inflationary expectations. To the limited degree permitted by Neoliberal economics, the economy will recover, and the National Party will kick-off another nine year term on a thoroughly sunny note. Who knows, by the time the next election rolls around in 2026 they might even be in the mood to: Spend, spend, spend.

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