Margaret Thatcher is an icon of the free marketers. It was her Government, in the late 1970s and 1980s, which originally drove many of the reforms that were later copied by other free market governments in the West. In some cases, such as here in New Zealand, we exceeded Thatcher’s economic expectations, implementing ‘reforms’ which she must have only dreamt about. But, while, Thatcher may have left the UK political stage in 1990, with her resignation as a consequence of policies such as the ill fated ‘poll tax’, her economic legacy survives.
Her comments, such as there “being no such thing as society” and that “… any woman who understands the problems of running a home will be nearer to understanding the problems of running a country …“ not only provide a fascinating insight into her mind. They, unfortunately, still carry leverage and act as a basis for some people in the current political and economic sphere.
And, it is this legacy that has found root again in statements made by New Zealand’s Minister of Finance, Bill English over the weekend. For it was that during the weekend, English and John Key addressed a weekend leadership forum. This forum was attended by ‘leaders’ from Australia and New Zealand. Such forums can be dangerous places for politicians and so it proved to be so for English. As, it was during his forum speech that he committed his latest gaffe by criticising Australia’s high wages and conditions before remarking that New Zealand’s low wage economy was actually a selling point for the country by providing it with a competitive advantage.
He then criticised the Australians for having a poorer electoral system and a more complicated and restrictive set of economic and financial regulations.
English’s address was interesting, in that he was telling the truth when he talked about the fallacy of closing the wage gap with Australia. What English has done is openly admit to all that the Government had and has no intention of closing the 30% wage differential with Australia or indeed with any of the country’s other OECD trading partners.
English essentially stated the truth that if you live in New Zealand you will need to accept low wages and salaries as well as poorer conditions.
Rightwing Business Commentators, such as the NZ Herald’s Pattrick Smelliee were quick to endorse English’s comments, while, at the same time, conversely trying to pour oil on potentially troubled waters. Smelliee noted in his opinion piece titled, ‘Hang on, Bill English is Right,’ the following;
“He’s not saying it need be that way forever. That’s just how pessimistic Kiwis hear it. The assumption is either that we could never “catch Australia” – whatever that means – or “who’d want to anyway?”
Unfortunately, for Pattrick, that is exactly what it means. I remember friends of mine who were devotees of the free market cause in the late 1980s espousing much the same line of thought. They particularly emphasised that New Zealand’s economic success lay with it being competitive in terms of wage rates. They consequently argued that low wages were the only way to get high wages. Of course, the absurdity of this argument is very obvious. If you adhere to such a position then you have to consistently maintain a low wage economy otherwise you become uncompetitive. Indeed, you need to be prepared to lower your wages even further if you are to successfully compete in the global marketplace.
This is not a short term approach, but a long term and permanent one. That is exactly, what English has spelt out.
Further, as English and others of his ilk are aware, New Zealand has actively pursued this policy prescription over the past decades. Its wage and salary rates have fallen behind other OECD nations, significantly so in some cases. There is now a considerable divide even within the country as to what the mass of people earn compared with what is received by those in the upper wage and salary brackets. This divide, while slowing during the 2000s, has actually increased since National came to power.
Of course, several decades ago, New Zealand used to be ahead of Australia in its rankings of wages, standards of living and productivity. At that time, there were no complaints or concerns that New Zealand was uncompetitive or unproductive. While, New Zealand slipped in its rankings during the 1970s, its experimentation with monetarism and the free market during the 1980s and 1990’s have effectively ended any hope of this country achieving any of those rankings again. Since the 1980s, New Zealand has consistently had high rates of unemployment, low wages and salaries (as a result of economic reforms and the Employment Contracts Act) and has consistently experienced low productivity in comparison to other OECD states.
Why is that? Simply, because this is a deliberate outcome of those market led economic and fiscal policies that New Zealand has pursued since 1984. It is a deliberate outcome of these policies to have a set level of unemployment and it is the deliberate outcome of these policies as to why, New Zealanders must have low wages in comparison with other western nations. The Government could, very easily, increase wage rates and conditions by supporting expansionary policies combined with a more expansive range of economic targets and by imposing economic regulations. But, it chooses not to. It has chosen to deliberately pursue monetary and fiscal policies that deliberately hold down and restrict people’s wages and conditions.
The problem is for Mr English that there is always someone lower down the food chain than you. Most undeveloped nations have people who earn extremely low wages and have poor or no working conditions. Maybe Bill English should approach them and tell their populations had fortunate they really are?
It comes as no surprise that private insurance firms might be feeling the pitch in the light of the recent earthquakes in Christchurch. So it should not have come as a shock when people were greeted with the news this morning that AMI (Allied Mutual Insurance) is facing a financial crisis as a consequence of the Christchurch Earthquakes. TVNZ reported that,
“Christchurch-based AMI Insurance is New Zealand’s second-largest residential insurer with 485,000 policyholders and 1.2 million policies across the country. In Christchurch alone it has more than 85,000 policyholders with 225,000 policies – or about 35 per cent of the residential insurance market in the city”
AMI has stated that although it feels it can meet its existing responsibilities to policy holders who have suffered as a consequence of the recent quakes, it might struggle to meet any future responsibilities.
This issue has arisen also after another, considerably smaller, insurance company, Western Pacific which is (was) based in Queenstown was placed into liquidation after the February Quake. It could not meet its obligations to its 7000 policy holders.
Apparently, AMI informed the Government of its potentially damaging situation in early March. The Government response has been to bail out the insurance company, a move which it announced this morning. The Company will pay the Government $15million and the Government will extend AMI $500 Million to cover its claims and to allow it to keep functioning, if it is asked to do so by the Company and only once it has exhausted its own reserves. Bill English also announced this morning that the real total cost to the taxpayer could be more than $1 Billion dollars.
In the same manner that private banks had to be bailed out by Government (socialism for the rich), Government could now be asked to bail out the private insurance industry (AMI), this means that the taxpayers yet again pick up the tab for private concerns.
Of course, to be fair, the situation is completely different. The Banks were largely responsible for their own troubles. In this case AMI and its policy holders were not responsible for theirs. But, questions needs to be asked. Questions such as, that in the light of these two insurance companies having problems how many others might be in the same situation? And, whether it is a good idea to have private insurance companies carry the sole responsibility for claims? And, lastly, if the taxpayer is going to guarantee insurance payouts for homeowners etc then should not the state play a more active role in the insurance area?
In 1869 the Government was faced with similar issues in relation to the insurance industry. The area was under-capitalised and those private insurance firms which were involved did so under certain conditions and only covered certain people. The Government’s solution was to establish a state owned insurance company, Government Life. In later years, the state came to be more and more involved in insurance and ensuring that the needs of the wider community were met. They met those needs through the establishment in 1898 of the Government Accident Insurance Office and later of the State Fire Insurance. All of which were effective and successful in what they did. Prompting rebel Labour MP John A Lee to note in his 1938 book, ‘Socialism in New Zealand,’
“Undoubtedly judged on state capitalistic lines the State Insurance Department has been a glittering success. It has been generous to policy holders, its security has been undoubted, it has effected Liberal improvements in policies … Next to the State Advances Office, the Government life is one of the cheapest lenders in the country…”
Government Life was renamed and sold off in the 1980s, by that ‘far sighted’ visionary, Roger Douglas. It eventually became Tower Insurance and is one of New Zealand’s leading insurance agencies. At the time, Douglas queried the logic of the state wanting to own an insurance company. Why, indeed? The answer to that question is found in the pages of New Zealand’s political history and economics (never Roger’s strong points) and in the current chaos of the Christchurch streets.
There are two options in this situation. The first is simply having the Government prop up AMI (and possibly other insurance providers) through a capital injection (in this case $500 million) and then allowing it to run as normal (which I suspect is the Government’s preferred option). The Government’s current option does allow for Government control and ownership if AMI calls upon the cash injection, but only if it needs to. I suspect also that such ownership would only be for a short period of time.
Another option would be for the nationalisation of the company. Such a policy would allow the Government to directly meet claims, thereby providing policy holders with long term financial security. It allows the Government a direct stake into an industry, which it should never have been removed from in the first instance. AMI has no shareholders due to it being a mutual company – this means that it is directly owned by its policy holders. There would be no buying out of shares, merely a taking over of policy responsibilities.
Given the circumstances and the need to provide people with secure guarantees, I would go with the latter. The Government should be a permanent player in the insurance field.
The Government has announced further cuts to New Zealand’s public sector because of ballooning debt. The public sector, which has been the focus of Government cuts since the election of the National led Government in 2008, is being told to prepare itself for more cuts and even, privatisation in some areas.
As I mentioned previously in this blog, the Government is going to attempt to reduce some of the nation’s debt by reducing the public sector. Key had mentioned this course of action last year, he then trotted it back out in the aftermath of the second Christchurch Earth Quake, muttering that it was the only option. As I said at the time it was rather disingenuous considering he had already proposed this line of action previously.
The fact is that the New Zealand Public Sector is already very compact compared to other Western Democracies. It is not bloated and it is actually, thanks to 25 years of cuts, privatisation and corporatisation, fairly efficient. New Zealand’s public debt as a total of GDP is actually very low and as the CTU’s economist Bill Rosenberg noted in the CTU’s November Economic Bulletin, that Government expenditure as a percentage of GDP in 2007;
“ … are below the small country average, and below higher income countries such as Finland, Denmark, Sweden, Austria, and Norway. On the other hand, Ireland with lower levels of government spending is now suffering economic calamity. Average spending in these smaller countries is higher than the OECD average as a whole. Even so, New Zealand’s expenditure has been below the OECD average for most of the decade (until about 2006).”
Where oh where then is New Zealand’s increase in debt coming from? Firstly, it is from Government borrowing, which the Government needed to do to starve off the worst effects of the recession. But, the vast bulk of the debt is actually private sector debt, (70% of which is owned by the Banks) which has ballooned in this country since the mid 1980s. Simply, the argument that the public sector has to be reduced to lessen debt has been the argument which has existed for as long as the New Right has had the purse strings. It is an ideological argument and nothing more, and an exceptionally weak one at that. Its weakness in this regard is noted by none other than the High Priest of the Free Market, Roger Douglas who in 1993 commented that;
“I am not sure we were right to use the argument that we should privatise to quit debt. We knew it was a poor argument, but we probably felt it was the easiest to use politically.”
The final insult to injury is allowing the very sector that is actually responsible for the majority of New Zealand’s total indebtedness run some public sector agencies and operations after the Government’s razor has been through the public accounts. The Government has announced that the private sector will pick up some of those resources that will be cut. Having the private sector run areas of the public service is akin to asking Dracula to run a blood bank.
Simply, the Government is doing everything it can to cover up for its own appalling and inept policies in the economic area. Having cut taxes for its friends on New Zealand’s rich list and then got everyone else to pay for it, through a hike in GST, it is now resorting to cuts and privatisation (which it always wanted to do anyway). Simply, the Government’s own policies are responsible for the state that the country is in. Instead of opting for policies to boost production and alleviate the recession, it is, instead, going to add to it.
People have to ask how long does it take before this particular baby is thrown out with the bathwater.
Several days ago was the 139th anniversary of the birth of Michael Joseph Savage, the first Labour Prime Minister of New Zealand. Savage’s Labour administration is credited with the creation of the welfare state in New Zealand.
Several days ago a friend of mine was watching ‘Sicko’, Michael Moore’s expose of the American Health system. She commented about the favourable aspects of our health system as a consequence. While, these two events might appear unrelated, it set me thinking about the original intentions of Labour and of Savage in the health sector and how those intentions never came to pass.
For the original intention of the senior members of Labour’s first administration was to actually create a comprehensive, universal and fully publicly funded health service, just like the NHS in Britain. From its earliest years, Labour had consistently promoted a comprehensive and fully state funded health system which was accessible to all people and, likewise, it did so in its 1935 manifesto. This health service would cover all aspects of a person’s health from GP visits to surgery, from dentistry to optometry. It was all to be freely available to people and it would all be funded from the taxpayer’s purse.
Such was the belief that Labour was going to replace the existing medical system upon its election in 1935, that as Janet Frame records in ‘An Angel at My Table’ her father burnt all the family’s doctor’s bills. This was a scene that was repeated elsewhere in New Zealand. People had complete confidence in the new Government’s commitment in this area.
In Government, Labour moved swiftly and appointed one of its new members, but someone with some interest in the area, Arnold Nordmeyer (later Minister of Finance in the 2nd Labour Government), to chair the Select Committee looking at proposals for a National Health Service. Nordmeyer was ably assisted by his friend and later Minister for Health, DG ‘Doc’ McMillan in proposing the new service. McMillan also had the benefit of being a Doctor and having been in private practice before being elected to Parliament. Both McMillan and Nordmeyer were supporters of a comprehensive and state funded health system. Mary Logan in her biography of Arnold Nordmeyer, ‘Nordy‘ notes that Nordmeyer and McMillan had even won support from Walter Nash, Labour’s Minister of Finance for a completely public funded health system.
The other trump card that Nordmeyer and McMillan had was the support of Prime Minister Savage. Along with Labour’s commitment to implementing social security, Savage took an active interest in the organisation and outcomes of this ‘new’ health service. He perceived it as an integral part of Labour’s social security system and another step toward creating a society which catered for all people from ‘the cradle to the grave’.
But, the one person that they could not convince was Deputy Prime Minister, Peter Fraser. Fraser had close contacts within the British Medical Association (BMA) and consistently thwarted attempts to impose a comprehensive system. Fraser’s opposition and that of the BMA finally angered Savage to such an extent that there was, as Gustafson records in ’From the Cradle to the Grave,’ a ‘showdown’ in the Prime Minister’s office between Savage and the Head of the BMA. The BMA told Savage that they would oppose the new system to their utmost. In response, Savage stated that the Government would treat the BMA Doctors as being ‘locked out’ and that the Government was committed to implementing its policies to the betterment of the people and as a result it would hire immigrant Doctors if necessary to ensure its policies were enacted. A furious Savage then walked out of the room leaving an apologetic Fraser.
Of course, Savage died in 1940 of cancer and his desire of a universal state funded health system died with him. As Prime Minister, Fraser struck a deal with the BMA for a more limited scheme which allowed Doctors to be subsidised by the state. It also set the standard for the private sector to operate in cooperation and later, competition with the state sector. In the 1980s and 1990s this commitment to public health service was scaled back even further with funding to the public sector cut, the public sector corporatized and the private sector making great gains in the supply of health services.
Presently, Labour is involved in a debate over its leadership. However, of real importance to me is who picks up the mantle for supporting similar policies such as those that I have detailed. Labour needs people who have the same steely forthright resolve as Savage in this regard and a commitment to implementing policies that benefit all in society. Currently, I don’t see any Labour MPs who are being touted as potential leaders at the moment making that commitment. That is, however, not to say that they will arise.
People expecting a radical change of economic direction from the Government are to be severely disappointed as a consequence of recent comments made by Bill English and John Key. To use a refrain that was popular during the Thatcher era in Britain, to describe its economic direction, ‘the Government is not for turning.’ Indeed, the Government has appeared to have used the Canterbury Earthquake as an excuse to announce further cuts in existing government spending.
People are being told that the Government needs to find appropriately $800 million as a consequence of the earthquakes and that we can expect nothing in the Budget. However, Key and National’s line would have been more convincing, if they had not been saying it prior to the February earthquake. It was at that point that Key signalled that government cuts and partial asset sales were on the Government agenda. He then used some exceedingly dodgy explanations to justify them, such as comparing New Zealand’s debt to that of Spain and Greece.
Now, the Government and its economist allies in the banks and finance houses are using the earthquake and an IMF report to the Government as ammunition. Apparently the IMF has called for cuts and balanced budgets. Of course, as CTU economist, Bill Rosenberg noted this morning on Morning Report, the IMF would recommend this solution regardless of the circumstances. The IMF’s refrain is comparable to, not as much as a needle stuck in a groove of a record, but a record that simply has one track and one verse.
But, what I found to be the really interesting thing about the discussion this morning between Rosenberg and Westpac’s ‘pet’ resident economist, Dominic Stephens was the belief that Stephens still had in the free market and spending cuts actually delivering the economic and social goods not only for Christchurch, but in the longer term for New Zealand as a whole. The recession and the resulting failure of market economics as a practical solution (not that it ever was) appears to have simply passed him and his colleagues by. Cutting spending and lower personal taxes, Stephens croaked was the only solution. GST had to increase he said. He made some references to the damage that having a ‘high’ 39 cent marginal tax rate had caused.
Further, Stephens was worried about capital gains as this was causing people not to invest in productive areas of the economy but, to speculate in unproductive areas such as land. Yes, quite. I am not disagreeing with him in this respect, but I would observe that this is an issue, mainly because New Zealand is one of the few countries not to have a capital gains tax. This is partially thanks to the efforts of people such as bank economists who have actively campaigned against it.
Labour and the Greens have gone on record as pointing out how damaging such cuts could be at this point. They are correct. As Rosenberg pointed out this morning, cuts at this point, especially since the recession is not over could have the undesired effect of prolonging it. It brings to mind Maynard Keynes’s famous observation during the Great Depression of the 1930s that the Budget could be balanced while lying on your back.
However, despite their comments, both Labour and the Greens are very light on detail. In my opinion, what is needed is an active government policy of investment and actually more government spending, this will mean higher taxes (read more tax bands)on those on higher incomes and, importantly, the imposition of taxes on areas that are not currently taxed, such as capital gains and bank transactions. Bank transactions have become a hot issue in Europe due to the amount of money involved. Taxing transactions especially those on large corporations would raise more money that GST would ever hope to. And, it would be progressive, something that GST is not. The other area in which New Zealand is being short changed is the area of free trade. New Zealand is in the process of negotiating yet another free trade deal, in this case the TPP (Transpacific Partnership). This deal involves a number of nations, including the US and the outcome of such a deal could be very detrimental to New Zealand’s economic, financial and social sovereignty. Every time such a deal passes, it weakens the productive base of the economy and the ability of people and the government to determine their own economic and social outcomes.
New Zealand stands at a cross roads. We can either build an egalitarian social democratic economy and society or continue on with the half baked failed free market economic theories that are the real cause of our present distress and have caused practically every major economic recession and depression since the 1870s. The choice is ours.
The National led Government completed its first 100 days in office recently. And, among all the self trumpeting about its various achievements in this period, it gained an added bonus in the form of several opinion polls that showed National leading Labour by a substantial margin. National, it appeared could do little wrong in the eyes of the voters. It was reacting quickly and decisively to the economic crisis, leaving the Liberals (Labour) to wallow in its wake and claim that they would have done exactly the same, only better.
Frankly, I would have been surprised if the Government had gone down in the polls. It has come freshly elected into office and inherited an economy, which is in a deep recession. It has then suggested various schemes and programmes to promote economic growth and employment. The L(iberals) on the other hand have not really been able to suggest an alternative. Indeed, L(iberal) leader Phil Goff actually stated that he would support government proposals and the suggestions from the Jobs Summit, if the Government dropped its commitment to tax cuts.
The public wanted a political change and fresh ideas and, from their perspective, Key and co are providing them.
Of course, as the old saying goes, ‘the proof of the pudding is in the eating.’ The Government’s economic package is actually not daring or fresh. Like three day old cabbage it is rather stale. As such, the L(iberals) are quite correct in their assertions that they would have done the same or better, simply, because they would have. Indeed, economically there is not that much different between either National of Labour.
A case in point is the recent Jobs Summit. The Job Summit has played a part in stimulating debate about the economy and job creation even if its proposals were laughably weak. The promoted ideas from the summit were policies relating to tax write offs for business, a 9 Day Working Fortnight and the building of a nation wide system of cycle lanes.
The 9 Day Working Fortnight is especially being touted by the Government and its allies in the Business community, as being useful for those in the manufacturing and service sector. It’s implementation, they claim, will allow workers to keep their jobs in this area, even if they do not keep their wages or conditions. As the Prime Minister euphemistically stated on March 4;
“…even if workers are to take a reduction in their pay, we have always made the case that it might be a lot better for workers to hold hands and for all of them to keep their jobs, even if on a slightly reduced pay, than for some of them to lose their jobs.”
Some people have commented about the need to have ‘equality of sacrifice’ during the recession. However, what is emerging is that the sacrifice is going to be very unequal. Nowhere is this more evident than in the 9 Day Working Fortnight and its emphasis on those industries which are largely staffed by low income workers. Of course, these industries are merely a reflection of the low wage status of the New Zealand economy as a whole.
This fact was even touted by the Government in a Question in Reply to National List MP, Michael Woodhouse. In response to Mr Woodhouse, the Minister of ACC, Nick Smith noted that the average household income is $67,000. This amount, which if it was divided between two main bread-earners in a household, would equate to roughtly $33,500. This is hardly a princely amount on which to feed, clothe and provide shelter and provide transport for a family.
Equally, while National, ACT and the Business Community argue that workers taking a 9 Day Working Fortnight and forgoing two days worth of pay is a sacrifice worth making to save their employment, it might very well have the opposite effect. A 10 percent pay cut, which is what the 9 Day Working Fortnight effectively is, will detrimentally affect the living standards of those workers who undertake it and of the wider community. The 9 Day Working Fortnight with its 10 percent less pay for workers will mean 10 percent less to spend in the community. In the 1991 recession, cuts to wages and benefits by the fourth National Government literally bled the economy, by substantually reducing domestic demand and increasing unemployment. Wage cuts in the Great Depression had even worst effects. In short, wage and salary cuts in economic recessions are not good ideas.
As I mentioned previously, the proof of the pudding lies in the eating. And, the day for eating is rapidly approaching. Although, National is currently riding high in the saddle, New Zealand and the two main parties have been largely living in a ‘fool’s paradise’. This country has been largely engaging in a phoney war with the economic recession, with the result that most people have been thinking that it won’t be that bad. Only now are they becoming aware that it very well might.
Weaned on 25 years of neo-liberal economic thought, National and Labour are largely relying on the market and the Business Community to economically revive themselves. Unfortunately for them, the Business community are in the process of bunkering down. Thus, we come to the nub of the problem, as aside from tinkering around the edges, neither party appears to have any coherent long term plan.
The Government needs to provide a strong lead and to do so it needs to work out what its priorities are. At the moment, both major parties appear to be to hoping for a quick return to the economic conditions of the early 2000’s. Therefore, there has been no movement to examine the underlying commitment to the market and policies and legislation like the Reserve Bank Act, Free Trade, Overseas Investment and the like. These cornerstones of the freemarket are to remain in place, even as the edifice crashes around itself.
I would argue that if we want to have an economy that promotes high wages and full employment, then like the first Labour Government we have to be courageous and to commit to those principles as the centre piece of the economy and put in place programmes that promote those goals. Unfortunately, National and their L(iberal) counterparts are shaping up more like George Forbes and his failed United Party than either Harry Holland or ‘Micky’ Savage.