Life on MarsPosted: December 17, 2008
Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone. John Maynard Keynes
I wake up every morning to the birdcalls heralding the 7.00am news and Morning Report on Radio New Zealand National. Last week I caught the latest economic report from the New Zealand Institute of Economic Research, which optimistically reported that the current economic recession would be over by the end of 2009;
“NZIER forecasts positive albeit modest growth for the four quarters of 2009, leading to 1.6% growth in the year to March 2010, before accelerating to 3.3% growth in the year to March 2011. This recovery will be led by an upturn in private consumption from the first half of 2009 and strengthening global economic growth from the second half of 2009.”
NZIER made this remarkable claim on the basis that it thought that the recession in the New Zealand economy would be “relatively shallow.”
How remarkable, I thought over my toast and coffee. I wonder what colour the sky is on their planet?
However, yesterday morning there was more news about the ‘Global Credit Crunch’ or, as commentators have recently taken to calling it, ‘The Global Economic Crisis’ and its increasing impact on the New Zealand economy and the news is grim. The Bank of New Zealand – Business New Zealand performance of manufacturing and services services index fell 1.4 points to 47.3 in November. While Statistics New Zealand reports the volume of manufacturing sales fell 2.3% in the September quarter to an eight year low. Bankruptcy numbers are up by 25% and many businesses in Australia and New Zealand are expected to freeze or reduce staff during 2009.
Internationally, stock markets continue to tumble. Japan has reported its lowest level of business sentiment in 3 decades. And, in a recent media release the IMF notes that China’s growth is expected to halve to 5% down from 9.7% this year. This is after reports that its manufacturing output grew at the slowest pace since 1999.
The NZIER analysis is not shared by an increasing number of other commentators who predict that the recession will be anything but ‘shallow’. One of them, business commentator, Rod Oram writing in the Sunday Star Times of Sunday, 14 December 2008, lamented that people (particularly, politicians and the business community) were still underestimating the scale of the downturn and compared the New Zealand response to the crisis to ‘Wile E Coyote’. As people will know, Wile E Coyote is a particularly loved cartoon character whose pursuit of the Roadrunner causes him to (frequently) run off the top of cliffs and after not bothering to look down and realise he is no longer on firm ground, succumbs to gravity and ends on the canyon floor. This is often accompanied by a loud thud.
Oram pours further scorn on the NZIER appraisal by noting that;
“The OECD tells us the world is plunging into a deep, L-shaped recession. That means the steep fall in activity has a way to go yet. Then the recovery will be long and weak. It hopes a somewhat stronger pick-up might start two years from now.
But the OECD admits that depends on two very bold assumptions: that global credit markets are functioning properly again by early next year; and normal credit conditions return by late next year. There is scant evidence either will happen on so speedy a schedule.”
Oram goes on to note that the scale of the recession could (would) overcome the Government’s inadequate measures to maintain demand by providing economic stimulus via tax cuts and infrastructure spending as well as their pathetic package to compensate people who have lost their jobs as a result of the crisis. Note: The tax cuts were planned while before the current crisis. And, even conservative economists and business groups believe that the number of unemployed will be higher than the incoming Government’s projections eliminating assistance and effect of the newly passed unemployment package.
In economic recessions, Tory inclinations about cutting services and spending are at their most pronounced. The business community (and their ideological right wing acolytes such as the Business Round Table and Business New Zealand) will be urging the Government to cut spending, cut taxes for the rich, slash deficits and balance the budget. (To be fair, that appears to be their only and constant economic prescription). If John Key is smart, he won’t listen.
The last time Governments took such prescriptions seriously, they had the actual effect of worsening and prolonging the crisis or, as it became known, the Great Depression. The pain and anguish they caused, led the economist, John Maynard Keynes to sadly observe that a budget could be balanced even if economies were lying flat on their backs.
Wait for it….THUD!!!
However, the Depression also had the effect of completely discrediting classical economic theories and prescriptions that had led to the crisis (as well as sweeping away the existing political/parliamentary order at that time). Unfortunately for us, these theories were later dusted off and brought out again in the 1980s and have led, as they did in the 1920s, to the present catastrophe.
Neither, the Government or the Opposition appears to have any alternatives or, indeed a coherent plan to combat the recent economic downturn aside from pinning their hopes on the market. Like their predecessors in the 1930s, they are praying and hoping for a miracle. We can only hope that like the 1930s, sanity prevails and the theories so beloved by ACT, Business New Zealand and their ilk can be finally thrown into the ‘waste paper bin of history’.