While the pollies are gazing at the stars for guidance, they are letting the economy slip into a huge hole they haven’t filled

Politicians  on  the  campaign  trail  are  offering   plenty  of  big-ticket items in their bid  to be winners  on   October  17.

Among the latest  is  Jacinda  Ardern’s  pledge  to  create a  Matariki   holiday   which  apparently  will not  only  celebrate  the  Maori  New  Year,  but  as  another  MP put it:

“ … gives us time to look up at the night sky and teach our kids about how our tupuna used the stars to give guidance in how we live our lives”.

 So  far,   however,  the  election  policies    of  the   various  parties  appear  to be    no more than a  jumble  sale  of    ideas,  old  and  new.   Critically and dismayingly missing from the policy commitments  –  given  NZ  is confronting a deep  and perhaps protracted recession – is  a constructive,  coherent   plan  to  dig  the  country  out of  the hole  left by the pandemic.

Meanwhile   the issues  of  child  poverty  and  inequality,  far  from  being   resolved  as  Labour promised  in  2017,    are  deepening.

What  the  current  set  of politicians  do not  seem to have grasped  is   just  how  extensive the  damage caused  by  the pandemic  might be.   Perhaps  they are persuaded  by the fact  that  NZX  indices  have been  close to  all-time  peaks,  suggesting listed  companies are flourishing, and  therefore they believe  businesses  will  soon be  recruiting  those  thousands  of workers  who  have lost their jobs.

The hard  fact is that the NZX-50 is has been close to its all-time high  largely because two companies—Fisher & Paykel Healthcare  and A2 Milk, which make up  30% of  the market capitalisation—have set new revenue records for themselves during the pandemic. Many others in the top 50  which last year  were  reporting  record profits  are  fighting for  survival.

So  what if there  is  no  sharp  bounce-back  for  the  rest  of the economy?

The  London  “Economist”  last week  noted how  traumatic economic  episodes  can exert a drag  on  growth simply  by  altering people’s  beliefs  about the future.   It  cited  research   finding  that periods  of  economic  hardship  and spells  of  unemployment   tend to  depress  people’s  consumption  for  some time, even after  controlling for  incomes  and variables.

Consumers  not only spend less:  young  people are especially affected, potentially  prolonging  the  dampening effect  on the  economy.

People’s  investment  decisions   are shaped  by   their  beliefs   about  the  future.  If they revise down  their  expectations  of the returns on  future investment,  the result tends to be less investment and  slower growth.

The  Economist pointed  out  psychological scarring  could seriously complicate  the policy response to Covid-19.

“A  rise in precautionary saving and decline in investment appetites will further depress interest rates, when  their  extremely low level is already constraining the size  of  the economic boost  that monetary  policy can  provide”.

Reserve  Bank  governor  Adrian Orr  is  already  on  the  defensive,  arguing  it is wrong to  lay the blame for  soaring asset  prices and rising social inequality  on  monetary  policy.   Yet  he has been talking  of  interest rates going  negative next year.

He  told  the  NZ  Herald  that in times of  economic  crisis, it is  household income, not  household net worth, which is  the  more pressing issue.

“Have  I  got  a  an  income? Have I got a job?”, he  said.

“This  is where monetary policy is stimulating the economy, actively pumping cash in  to do our best to keep employment  at the  highest level…. I  wish we did  have the tools that could make sure unemployment  was  forever  low or  zero. We don’t. All we  do is make sure  the financial  market is working in a  manner  that  achieves  that  outcome”.

 Clearly  something  more  will be  needed:  the  Reserve  Bank and the  government  can’t keep  shovelling   money  in endlessly.  Debt  is  already  ballooning, leaving the next generation   (and the one after  that)  to pay it  back.

What  NZ  needs  is  a comprehensive  and  detailed  plan for  recovery.  A  former  minister  in the  Key  government,  Steven Joyce, contends   this  should include  growth-enhancing reforms.        

 He is  critical  of both  the  Reserve  Bank  governor   and  the  Treasury Secretary   for  failing  to come up  with  economic  reform  ideas to  inject  alongside  monetary  and fiscal   policy  in  the  drive towards  economic  recovery.

NZ  is  already  close to the  limits of what monetary  and fiscal  policy  can  do.  Joyce  says:

“We need a  serious growth  plan for these unprecedented and serious times—as  yet there  is no sign of one”.

 Declaring a  Matariki  public  holiday  won’t  cut it.    Nor  a  wealth  tax.

And  judging  by  NZ  First’s poll ratings, voters already have a jaundiced  view of  Winston Peters  touring the country  and  scattering  taxpayer money  to  revive  anything from bungy  jumping  to out-of-time rail  lines or  workshops.

Point  of  Order  doesn’t  pretend to have the best remedies for filling the yawning  policy  hole  from  which  politicians  are  resiling — but we can see there is very big hole and in  subsequent  posts we propose musing on some  ideas which we believe  should be  central  to this  particular  debate.