By Shamubeel Eaqub*
(This article is part of Interest.co.nz's Election Series).
That we are living through unprecedented times is now cliche. But it questions gradualism in our structural economic and other policies. This election should be a test of our values, ambitions, and courageous policy making. We have seen little evidence of that from our major political parties to date.
Biggest economic upheaval
The pandemic recession has been one of the largest and deepest on record. Hours worked, which tracks economic growth closely, fell by 10% in the second quarter of 2020. It was the largest drop in quarterly growth in our data going back to 1934.
The economic upheaval is easy to see in job losses. The number of people accessing welfare (Jobseeker and Covid Income Relief Payment) has increased by 75,000 people since mid-March. We have lost nearly as many jobs in six months, as we did in the entire GFC (80,000 over 18 months).
There is unfortunately more to come. The resurgence of Covid-19 in Auckland, and other parts of the world, will continue to impact our export markets (boosting demand for some products like meat and fruit, but decreasing demand for others) and imports (as supply chains remain volatile, and cautious households and businesses invest less).
Closed borders mean our international tourism sector, which make up nearly half of all tourism spending, has been hit hard. But the overall impact may be less dire than feared. New Zealanders saved a lot during the lockdowns, and they aren't going on overseas holidays. Together this could limit the fall in overall tourism to around 25%. Some regions that are good at regional tourism could even be better off.
The alternative
When thinking about the economic cost of Covid, there is a common misconception that the alternative path is a life back to normal. No country is back to normal. Instead we need to compare ourselves to an alternative that we think would deliver less economic damage, kill less people, and lead to lower lifelong complications from Covid-19 infection. The calculus is not easy.
There are no easy alternatives. Different nations are taking different approaches on health and economic fronts. We can see that the economic shock is real - either because of government imposed restrictions, or because of changes in behaviour (not going out, working from home), or because of economic contagion from trading partners.
My preliminary workings suggest that before the Auckland resurgence New Zealand’s GDP was better off by about $6 billion compared to Sweden and with far fewer deaths (around 2,800, which is worth $1.7 billion on quality adjusted life years basis and $15.8 billion on a statistics value of life basis). Early infections, when the medical and public health responses were not ready, meant higher levels of deaths and infections.
However, the economic impacts do need to be considered in the context of much smaller fiscal stimulus in Sweden, around half of that in New Zealand (11% vs 21% of GDP, according to the IMF).
No playbook
There is no economic, business or policy playbook. Households, businesses and policy makers are doing it all on the fly. There is tentative evidence that we are learning by doing. For example, job ad listings on Trade Me were up nearly 50% under recent restrictions, compared to the first lockdown. Some businesses knew how to navigate the restrictions better. We all need to learn how to adapt, because there is no clear sight of an end to this pandemic.
There have also been some lasting changes. For example, nearly a million people worked from home during the first lockdown - double the usual. Even after the lockdowns ended, Chorus broadband upstream data volumes suggest around 20% have continued, a lot of it people working some days from home. At the margin, this has reduced traffic congestion, reduced spending in city centres, and boosted suburban spending.
Policy response
Initial fiscal policy response had been focussed on boosting health capacity, and preserving jobs and businesses. As wage subsidies have rolled off there hasn’t been a big surge in job losses. Tentatively at least wage subsidies appear to have blunted the recession so far, just as it did following the Canterbury earthquakes a decade ago. We estimate that wage subsidies may have saved or at least delayed the loss of up to 200,000 jobs.
In total, government borrowing is set to rise to over 50% of GDP, from less than 20% before the pandemic, similar to the last peak in the early 1990s. Those with grey hair will not think back to that association fondly. But current very low interest rates and our comparatively low government borrowing among OECD countries suggest we do not have the same urgency to reduce debt through austerity or tax increases.
The Reserve Bank (RBNZ) has also unleashed quantitative easing. Negative interest rates are on the horizon. The price of credit is not really the constraint right now, rather access to credit. In a recession, banks are reluctant to lend and households and businesses reluctant to invest. The solution of course is to provide fiscal stimulus, ideally in public infrastructure that is both job rich and will improve long term economic growth.
What next?
The economic and policy conversations are still largely focussed on the immediate response to the crisis, even with voting to start in early October. There are some lessons from the pandemic so far.
First, risks appear abstract until we are forced to deal with them. The deep and long recession will expose the weaknesses in welfare, education and housing.
Second, even when there are stark tradeoffs, by trusting the public with the technical details, supported by good communication this can build a broad base of support. So, big and bold policies are possible.
Third, this pandemic will pass. But the legacy of it will live on for much longer. How will we unwind all the debt? Will we fatalistically dump it on our kids? Will we raise taxes or slash public services? Do we need to? Can we just get some money from the money tree? What’s the RBNZ for anymore?
Elections are largely about the nature or makeup of people in parliament, not the principles or policies of government. I have little confidence that our political parties will be able to articulate and deliver a bold and ambitious economic or policy agenda. Instead, in this election we have a small choice. Engage with the local candidates vying to be elected to understand their values and vote for what aligns with yours.
* Shamubeel Eaqub is an economist and partner at Sense Partners.
160 Comments
'This election should be a test of our values, ambitions, and courageous policy making.'
But not about the government's ability to deliver?
The current government has some admirable values, is ambitious, and has policy aplenty, but has a seriously poor record on delivery, e.g. Kiwibuild, encouraging participation in tertiary education, Auckland light rail, shovel ready, PGF, most open and transparent, etc. No wonder the PM is desperately tying to politicise COVID-19 (contrary to what she claims).
Not so sure about the admirable values, myself. Plenty of ambition for power at any cost (the entire national roading budget given to Mr Jones to waste, sorry I mean, spend, as he sees fit). Standard socialist divide and rule claptrap aplenty.
https://www.youtube.com/watch?v=yErKTVdETpw
Only need to look at Christchurch to look at Nationals (in)ability to deliver. Promises made in 2012 are still mostly yet to come to fruition. And this was the party of Key and English. Compare that now to the sad state the National Party is in - three leaders in a year, brain drain of talent.
This all combined meansm they just dont have what it takes to deliver anything promised.
There's the rub: the problem is a complete lack of a viable opposition.
Especially for younger NZers. If the choice is between a well-intentioned but ineffective government vs. one who is eager to actively make the housing affordability problem worse (e.g. through encourage foreign buying of land again) then voting for National is shooting themself in the foot.
How can you possibly describe NZ First as a conservative vote when Peters got into bed with the left and far left?
In truth, I don't think NZ First is either socialist or conservative. It is simply a personality-cult party, led by a demagogue with no clear policies.
Yeah, what's this "far left" talk? I guess to take that seriously we'll also have to take seriously those calling National and ACT "far right".
When in reality there is not too far between their levels of wealth distribution (and even interventionist policy), merely a few differences in favoured recipients.
Seems to me you have the classic national socialism in NZ First and the classic international socialism in Labour. Both seek to divide and rule by polarising debate. Both believe they have the divine right to rule. Both believe they know what is best for you and you do not. They do not want independent citizens, they want obedient drones.
When I read comments like this I still get astounded that people still think in these anachronistic terms. The thought that Labour is classic international socialism and that both "seek to divide and rule by polarising debate" is laughable. Polarising perspectives are what sell advertising on media platforms. It's just click bait. And I hardly see the socialist internationale suddenly pop out in any of the Covid briefings like some classic reds under the beds bogey man.
Working together is called collectivism. It exists in Māori and Pacifica cultures as well as in many Asian cultures. It's only been demonised in Western culture because of some 70 year old historically specific contexts.
Obedient drones?? LMAO.
Collectivism is a threat to authoritarian rule, to oligarchy, to crony-capitalism.
I find it interesting that we have two major parties - one lead by Crusher and one by Cindy. Prior to that we had the Smiling Assassin vs Aunty Helen. There's something in nicknames that stick.
Yes, they are emotive labels. They lead to overly strong images. My point is they are essentially milder (for now) versions of the two classic forms of socialism. Just look at their names, NZ First (kiwis before foreigners) and Labour (ie anti capital). Both adopt old French philosophical stances that emphasise division into groups. Traditionally these were racial characteristics, religion, regional culture, intellectual achievement, income source, wealth. The Western intelligentsia have adopted a particular viewpoint that we should be blind to racial, religious and cultural differences but we should put academic achievement and income from white collar work above ability to do practical work or income from the ability to deploy capital well.
Thus people doing practical jobs suffer from immigration keeping their incomes low, increased crime from people from violent cultures in their neighbourhoods and increased rental costs from more people. Small business owners are loaded with excess regulation as their profits are seen as unfair because they are often not as bright academically as the academically certificated but have far more common sense. This weakens the SME sector but strengthens the monopolies (or more frequently oligarchies) of big business and big government departments. The overall productivity of society thus declines and the institutional response is to lower interest rates, this penalises savers and benefits borrowers, resulting in higher house prices.
These problems are not as acute in NZ as elsewhere in the West, so for now we are on the Argentina track rather than the Yugoslavian one.
Good reply, thanks. Still not sure if Labour fits under the rubric of socialism - seems relatively centrist to me in terms of its desire to seek consensus across broad spectrum before implementing policies.
Also not sure if I agree about intelligensia comment, at least not here in NZ - possibly more so in U.S. Most places I've come into contact with diversity policies, although to varying degrees of implementation.
Agree with what you're saying about overregulation of SME's although I would extend this to include education and health sectors - they're just such an easy target for auditors they've become very slow and risk averse.
Interesting point about Argentina vs Yugoslavia.. needs thought.
Thanks. Yes, my reply seemed to be more about Western society in general than about NZ. I never know what I'm going to write once I get the urge. We do seem to be getting to some point of crisis/resolution though. I am struck by the contrast between the political/economic theories/ideologies favoured by the French and the practical solutions based on experience favoured by the Brits, Scandies and Germans though.
Interestingly, intellectual theories tend to favour over specialisation, practical solutions favour adaptation to events. The adaptable survive.
It was true once that white-collar workers were socially/politically favoured. I don't think it is anymore. Skilled tradies earn far more than office drones with degrees, and get more social kudos. The 'precariat' are often educated and middle-class. Academia is rapidly devolving into a bunch of poorly-paid contract workers, very far from the plush sinecures that are often imagined.
As ever, the genuine underclass remains beneficiaries.
Well said. Although it remains to be seen how this will evolve under current circumstances - it's a bit of a house of cards for tradies and a gig culture reliant on open borders. And Shamubeel is right about the need for big investment at a social level - and our infrastructure has been in dire need of an upgrade for too many decades anyway.
I'm not qualified to respond on the first part of your comment above but perhaps only on the second.
Cannot agree with your assertion that intellectual theories favour over-specialisation over the practical solutions. The two inform each other in action-research and practice-led methodologies. Pure theory by itself leads to abstraction, but pure practicality leads to reductionism, which is not particularly open to adaptation as proponents rigidly adhere to what they know rather than considering alternatives.
Very well put there. I guess my point was that it seems to me that theory has a sort of higher social ranking in the corridors of power, both in the bureaucracy that actually run them and the politicians who try to control them. To advocate a policy you need to have some sort of academic claptrap to back it up. So we get "immigration is good and this is confirmed by recent research" rather than "immigration can be good under certain conditions that are not well understood, but it can also lead to civil war, which is not good".
Right. Time for new Names for all parties. Labour, National, etc are so old fashioned and do not really indicate the policies, liberal or conservative or centrist or other. Remember the conservatives in Aussie go by the name Liberal Party. Go figure.
May be we should just have colours for the parties like our major banks here, Blue, Green, Yellow, Red ?
Yeah it's strange isn't it? The Nazis were national socialists but when you actually remove the totalitarian implementation the ideology is very similar to democracy - both claim 'power for the people'. Very attractive rallying call for those who are otherwise disenfranchised.
But this is the problem with all assertions of governmental authority, at all levels. They can be seen as either taking or granting power, depending on your perspective.
Vis-a-vis building consents; is it taking away your power to alter your own property, or is it granting you a power to challenge what your neighbours are building when it could adversely affect you? Might you not feel powerless if you couldn't stop them from building a piggery next door?
Piggery has external Effects - the very thing the RMA was designed to oversee, mitigate or forbid. Of course That didn't happen. But you have conflated Building with Use. That Piggery building could be a Craft Studio, an Apartment, a Chook-house, or a Man Cave. Building substantially identical except for internal partitions and fit-outs. Use - well, go figger them different Effects.
Agree use is not the same as building, and also agree that govt response can be interpreted as power over individual - in a binary approach. Balancing the needs of different interests in the community is no easy task for governance at any level, which can be difficult to appreciate if you're a proponent of individualism above all else. But I often find with councils for instance, there are a lot of good people in those organizations too - so long as you treat em with respect.
Problem is, why use zoning to prevent certain uses instead of hygiene measures?
Hygiene measures provide the freedom to use your own land for what you wish to, so long as you don't impact the ostensible stated concerns of the neighbours: noise, smell, pollution etc.
I have to say I don't fully have an answer to that, but I'm inclined to respond that hygiene only provides limits to human activities in relation to other humans (like those you've described). Zoning is a strategy that enables a wider range of environmental limits.
I couldn't stand the international corporatism from National, who also believed they had a divine right to rule, and constantly complained initially because they didn't agree with how MMP worked. I remember feeling like a drone under National, who constantly purport their superiority in economic management, with little evidence the prove it, or were at least comparable to the current lot.
Yes, indeed, National politicians have been very one eyed indeed. They have adopted a different bunch of intellectual nonsense, along the lines of "oligarchies are good, banking is wonderful, immigration is good, higher house prices are wonderful, aren't we clever". Not sure the conservative grass roots of the Party actually approve of this nonsense though, but under MMP their influence is low. A comment I heard from a National Party member summed it up "National Party politicians don't listen to the party members when they are in power".
I found the referendum on the flag very interesting. We were actually given the power to make a collective decision ourselves. Whilst I voted to keep the flag, I was quite happy to make the change to a new one if that's what people actually wanted. My suspicion was that it was a vanity project, like the sports stadia, and there was no public groundswell for it.
Certainly makes it tougher for the people who work for a living and want to build a life when neither major party is bringing policy that actually helps those people. Add in a refusal to 1) confront the RBNZ's ideology that rising house prices are to be desired and supported, and 2) the refusal to provide them more measures to work with that could enable a better approach, and people are left behind through wealth redistribution to the top and bottom.
Great questions.
But the combination of economics and the MSM has peddled such a false narrative (I heard "engines of economic growth" on Morning Report today, unchallenged by either reporter) that most folk are starting from a set of false assumptions.
What we are witnessing - for the first and perhaps only time globally - is the beginnings of the inevitable de-growth, and it's knock-on reverberations. The virus is too many people travelling too often, too fast, and too-close contact with wild sources too often. The refugee streams (and 'terrorists', both their actions and the label they are given) are also indications of overpopulation/overshoot. And poverty is lack of access to resources and energy. And a housing crisis is a population crisis.
What we need, is the truth(s) put simply and clearly; we have proved that we can pull together in a crisis and I'm sure we would do it again - if politicians, economists, the MSM and large parts of academia, acknowledged our predicament. Until then, people will vote for their back pockets in the short term, with inevitable results.
I agree. I find that most parties and even the author of this article are bound - no, hobbled by historical conservative conventional wisdoms. There is plenty of debate trying to shift the thought from those historic models, but the ones who get to implement the policies are not moving, yet if at all. And indeed the MSM and public are too. Where there is an opportunity for the MSM to take an educational stance and publish more articles on new models and theories for discussion and debate (and to be fair there are some who are trying), the central MSM are avoiding it, so no one gets to learn, or ask the hard questions of our politicians. In the up shot too much conservatism, not enough vision. Everywhere.
I also find Mr Eaqub being a little clever with his words; " ..boosting health capacity". Not really, there has been a focus on having intensive care capacity to cope with COVID19 needs, but the usual budgetary constraints that plague our health system are still there, and in fact driving the Canterbury DHB into melt down.
Great article. Refreshing to hear an economist saying "there is no playbook". Much of the raruraru in the media etc is people venting their uncertainty in uncertain times at others they feel should've done better, when really, everyone is just figuring it out as we go along. That's not particularly comforting for people who like year on year predictability. Totally agree with the sentiment that we need engage our local politicians on what they actually think of where we should go from here - so much better than just automatically voting for team red, blue, green etc.
"there is no playbook" - bzzt, wrong. The classic playbook since the Enlightenment is sanctity of contract, protection of private property, certainty (even if highly inequitable) in taxation and other imposts, defence of the realm, freedom of travel/speech/association, and freedom to pursue ways of living that lie broadly within the current zeitgeist. Almost all of these values are under threat.....and this gnaws away at the self-assembly/emergent General Good (however measured) that such an environment has historically delivered.
Border control - the 'containment' that was until recently more reminiscent of a Colander.
Infection control - the joke that was and still is the lack of testing of staff at ports, airports, flights, boats and ships.
These can both be subsumed under 'Defence of the Realm' and it is no coincidence that, and belatedly, the Defence Forces have been wheeled in to supply the vertebrae in the response that was so sadly lacking before.
Landowners will be deprived of the use of a 3 metre wide strip of their land on either side of a waterway, will be required to meet the cost of fencing this off and will still have to meet other expenses such as local body rates and weed control for land that they own but are not permitted to use. What is that but an attack on property rights?
You cannot redress one evil by enacting another one. If the land was being taken for a road compensation would be paid and landowner's costs would be met by the roading authority. Government is contributing $761m to local bodies to help them meet the costs of upgrading their three waters infrastructure. A similar contribution ( taxpayer dollars) could be made to regional councils to assist with fencing costs, and riparian planting. I am sure landowners would react positively. Carrots nearly always work better than sticks.
Where the objection to fencing is concerned, I have a dog. I am responsible for keeping my dog off the road and out of my neighbours property. You have animals. You have a responsibility to keep them out of the waterway. Once again, same principle. Build your fence any closer than 3 metres and in many areas it would be undermined/damage when in flood.
Weed control - yeah, I have to do that too.
You are still permitted to use the land - you can plant it out with native grasses and trees.
Since we're talking about western enlightenment values here, let's be precise (apart from the obvious difficulty of claiming universal application for a country with a bicultural founding document).. Sanctity of contract, unless you're a royal. Protection of private property - originally a white male privilege of a certain class - only if said property is owned by individual claimants deriving ownership from European royalty. Taxation - typically land based and yes, inequitable - paid to aforementioned 'crown'. Defence of the realm - somewhat questionable post treaty of Versailles. Freedom of travel/speech/association - has never been true, from slavery through to various European unification projects, wars, and current discourse on refugees.
Enlightenment values? You can keep em.
We can see what you're Against. But what are you For by way of Values? Enlighten us all with an exposition (heck, submit it to Interest as an Article because it Matters) of the Values you see underpinning your Utopia, but (and this is the kicker) provide us all with a real-world example of the country that comes nearest to that set. I'm not holding my breath, though - I'm used to less than perfection (as the School of Life urges).
Interesting that you think that I have an Utopian vision at all. Good to know you're not holding your breath for perfection as you might run out of air. Fundamentally I'm interested in social and environmental justice and, since I've traveled a great deal in my life, have observed that not only is no system perfect but that there are some systems (despite these imperfections) that have merit. It was baffling for me (for instance), to travel to East Berlin 2 years after the wall came down, to meet many people who missed the old communist way of life and who felt that they had been deceived by democracy. I've also traveled to places like Bolivia and Zambia and seen first hand what rampant inflation coupled with massive social injustice can do to a country.
So if you're waiting for some form of 'manifesto' from me, you'll be waiting a long time - I don't have one. I'm typically interested in finding pragmatic solutions to problems, despite the realisation that no solution will ever perfect. Many of the people on this forum seem to have previously placed their faith in MMT for example, but it never really worked outside a certain group of privileged people (including in a transnational sense).
Places I think are useful to study - Singapore, post soviet era Georgia, Argentina, Switzerland, and weirdly enough Lebanon (went there in the mid 90s, lovely country, remarkably adept at balancing the fragile peace that it had finally managed to broker). But in many, many ways, this country holds the most promise - because here there is a long history of people between two very different cultures trying to work things out without killing each other (at least not in this century, nor for most of the last). In the current world, that's an achievement.
Another useful to study;
https://en.wikipedia.org/wiki/Costa_Rica
And I'm with you - I think NZ is a beacon in a generally troubled world. We're all lucky to be here.
'And I'm with you - I think NZ is a beacon in a generally troubled world. We're all lucky to be here.'
Generally agree. But there's still lots of problems here. And in some areas we are really behind others in the OECD.
Also, depends what your situation is. The hundreds of thousands of kiwis in poverty wouldn't quite agree.
But yes, for 'middle class' people NZ is a pretty good place.
William Blackstone, in his "Commentaries on the Laws of England" 1765-69 held that property rights derive from God's gift to Adam of ..." dominion over the earth and every living thing". These rights were set out in Canon Law, which became English law following the Reformation.
Yes, Genesis 1:28:
‘Be fruitful, and multiply, and replenish the earth, and subdue it; and have dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the earth’
Lynn White (1967) wrote an essay on it being the historical roots of our ecological crisis;
https://www.cmu.ca/faculty/gmatties/lynnwhiterootsofcrisis.pdf
Yes, unfortunately Genesis did not enjoin us to do so wisely. If that little proviso had been tagged on do you think the outcome would be any different? Never the less, there is a direct link connecting property rights as a gift from God for those of us who believe in Him/Her. Those who choose to worship at the altar of environmentalism believe that property rights don't matter, as long as they belong to someone else.
"And have dominion over them" Interesting commentary on translation here: https://www.bibleodyssey.org/en/passages/related-articles/meaning-of-do…
GDP is a pretty wobbly metric anyway. It's like weather balloons - let's take an average of a bunch of other averages and take it as some form of indicator of the whole situation.
I do agree with the need to consider the scalar differences between the different respective economies, but there's also a lot of difference in how social policies work between the two countries. I also fundamentally appreciate what has been on many people's minds - money printers go brrr as several on this forum have pointed out - but it's also important to acknowledge that our QE is much lower than in other countries. And when this is not just a NZ situation but an international one, particularly as we become unmoored from any indexical link to fundamentals in markets, then those comments are more relevant than what they may've been in a pre-covid, pre-trump world.
Disagree JC. MMT changes the perspective of fiat currencies owned by sovereign states from the historic, and I might add failed perspectives of the current conventional wisdom. Basically it says we have been sold a crock by the powers that be to enable them to entrench their power, make themselves and their mates rich, and keep the masses down. MMT says that all matters of public policy can be fully funded, living standards for all can be maintained at a good level and so on. But what some are claiming, it is not a panacea. It forces Governments to undertake a debate on the purpose of taxation and how it is applied. There are significant limits that must be acknowledged, some of which are not even acknowledged by the current models, such as environmental concerns, growth within a finite system and so on. Governments are afraid of the debates around taxation, as it would reveal that many of those so called 'emperors' really aren't wearing any clothes!
Disagree JC.
OK. Point well made. But my point was that Shamubeel's opinions are not at odds with MMT (which is not policy prescription anyway). I have the feeling people think that MMT means that public spending can wipe out h'hold debt issues and fundamentally that is partly true. I also believe that the ability of a govt to carry public debt or spend into existence is constrained by the industrial capacity of a nation for ex, Japan. Plenty of people now seem to think Aussie and NZ can just go on a state-sponsored spending spree that will somehow tie things over until we go back to 'normal' (supid housing bubble economics). I'm not so convinced.
While i think Shamubeel has not yet demonstrated that he understands MMT, I accept your view.
I agree that some believe that MMT would wipe out household debt, which is utter rubbish. MMT would not impact private debt at all. Even some public debt would not be affected by it. For example local bodies, councils etc are currency users, not issuers and would still need to figure out how they would fund their budgets.
Government spending on the other hand would be funded by the issuing of currency, not taxation. There could be an element of spending into existence, but I think that would be more along the lines of developing resilience and self-sufficiency. But again significant constraints will come into play. Another significant constraint I didn't mention, but closely connected to environmental limits is population size. Standards of living, employment, resilience, environmental impacts are all closely connected and need to be a part of the debate as does population size.
Government policies will come under more intense scrutiny too, as they could potentially spend almost without constraint, but to what end? Worst case the dollar could collapse, second worse and the American model, equity gaps would cause such extreme societal division that a breakdown would occur. In any of these we would also be poisoning the very land and waters we live off too. Taxation becomes very important here. How does the central Government govern an economy that benefits all, not just a few. Taxation, backed up by other legislation are the tools here. Quite a radical shift of thinking really.
Then explain to us why the current models have failed the people so dismally Nymad. Facetious criticism is unbecoming a professional when even the 'uneducated' can see that we've been sold a crock by them. Besides with the internet, even those who have not become qualified, can research the information, study the theory and form opinions based on those studies. Just because they are not formally 'qualified', doesn't make them wrong!
So tell us all where we are wrong? Shoot down the qualified economists who are promoting the MMT theory, by explaining why they are wrong?
"Shoot down the qualified economists who are promoting the MMT theory"
Which qualified economists? A sample of 3 does not really inspire me with confidence.
What's the theory? Not even the proponents have a unifying model. It's like the flat earth debate - every proponent arguing that it definitely isn't a sphere, but also unable to produce an alternative model.
This is literally a "do your own research" comment, murray.
Friedman cites other economists, but pulls them apart or uses them to support his own theories. Once he is adopted a number of others parrot him. Kelton cites Friedman, Keynes and others, and it goes on. It is so easy to criticise when you avoid putting up a weight of evidence Nymad. Please explain why the core of MMT, the Currency issuer v the Currency user is wrong or flawed? Put your money where your mouth is?
If by that you mean the core assertion that a country cannot go broke if it has a sovereign currency?
I don't disagree that a country can always print more money. Except I'm smart enough to realise that that is only a solution when you can control inflation through production and in an MMT framework this explicitly means through fiscal policy. That alone should be enough to tell you why it is a stupid idea.
The notion that open economies can simply print money to sustain any level of spending is simply plain wrong. You don't have to take my word for it - read those of Krugman, Blanchard, etc, etc. People who have Nobel Memorial prizes, not some professor from the University of Newcastle (Sydney).
Bill Mitchell responds to Krugman here. http://bilbo.economicoutlook.net/blog/?p=35148
MMT is a description of how our monetary system works here now, it is not something that has to be introduced or adopted. There is very little control on the money that banks can create apart from interest rates and capital requirements and the Reserve Bank is doing all it can to try and increase bank lending and so money creation. Most countries are trying to create inflation and they can't manage to do so. Japan runs large government deficits and it still has no inflation.
Every dollar that the government spends is a new dollar, that dollar will either be taxed back again and cancelled or it will be saved and then become government debt when the government borrows it back again. Borrowing is a monetary operation and not a fiscal operation, it doesn't re spend that dollar. QE simply returns that dollar back to the banks again and eliminates a dollar of government debt. An article here that explains things quite well. http://www.matchesinthedark.uk/spending-chains-sankey-diagrams/
Borrowing is used for the purpose of controlling the levels of bank reserves and hence interest rates, a monetary operation. Borrowing does not finance the government, that would be a fiscal operation. Bill Mitchell explains here why governments borrow.
Part one. http://bilbo.economicoutlook.net/blog/?p=45106
Part two. http://bilbo.economicoutlook.net/blog/?p=45108
If by 'going broke' you are meaning that the value of the currency collapses and essentially becomes valueless? MMT does not at all propound that that cannot happen. Indeed it suggests that it is a very real risk with unconstrained currency printing. Again this becomes a part of the debate of what the purpose of taxation is, and of course Government regulation and legislation. As I indicated in another of my comments there are significant constraints on a Government when it recognises that it is a currency issuer over being just a user, including collapse of the currency. Read my second response to JC above where i identify that. I have never advocated that Governments can print money with no consequence, and do not in this stream.
Yes. And who does it put in charge of the currency printing - the government.
That is why monetarism is so favored - it doesn't rely on elected officials.
If you think it is hard to use fiscal policy as a regulator of production now, you wait until it is the only tool.
That is why MMT will never work. That is why similar regimes have never worked in the past and have only ever ended up in hyperinflationary situations.
MMT and monetarism are not exclusive Nymad. MMT still argues that the total amount of money in any economy must be constrained, as does the monetarist perspective. The point, and this is the second big perspective of MMT, how, why and where it is constrained. Friedman argued that the market should fix itself., but as we have seen that doesn't happen, as the market is always being manipulated by the players. Hence the problems we see today. MMT argues that through taxation, the amount of money available is constrained. What MMT is less clear on, is how, and where taxation should be applied. Indeed this debate is relevant outside the economy debate too, as we see here in NZ with housing as just one example. Any Government that chooses to ignore this is just setting themselves up to fail. Even our Government is setting themselves or their replacement up for some significant problems with their current COVID support packages. A lot of that money will need to be sucked back out of the economy somehow, and that will be the challenge for them. do it wrong and they'll worsen the equity gap, possibly significantly. Get it right and some people who thought they were relatively safe might squeal, but less harm will be done.
What MMT is less clear on, is how, and where taxation should be applied.
It's pretty unclear on many things.
But this is exactly the point. When you empower a government with the ability to control production with money supply, they universally end up doing shitty things with it. There is no denying this.
If what you want is less manipulation, empowering the government with absolute monetary control is the antithesis of this.
Does MMT make sense in an exclusively narrow minded understanding of macroeconomics? Maybe.
Does it stand up to anything past a first year undergrad understanding of macroeconomics? No.
MMT doesn't change a lot of the macroeconomic applications Nymad. it does question the rationale that lies behind a lot of what is done. For example it changes the rationale behind why Governments with sovereign control of a fiat currency impose taxes. The conventional view of historic models is that taxes fund Government spending. MMT says it doesn't, tax is applied to limit the amount of money in an economy. Friedman's free market model says the Government shouldn't regulate, but we know that is wrong because of the mess today. MMT says the Government must regulate through implication, and there are reasons and purposes to that regulation.
Your point re elected officials, is well taken. but are they any worse or better than the bankers? there is plenty of debate to indicate the Fed has pretty much screwed the pooch in recent decades, and who are they accountable to? At least elected officials are accountable to their constituents at least a little. And Government policy - where they spend their money should absolutely be under scrutiny, as publicly as possible, as should all tax policy (which almost no one understands). But i would rather have monetary control in the hands of accountable, elected public officials than unaccountable bankers with their own agendas.
As economist Bill Mitchell had said many times "university economics courses teach fake knowledge" They teach the money multiplier and the loanable funds theory of money just for starters, neither of which happen in reality. Not to mention the phillips curve, what a load of baloney that is.
Banks create all new money when they issue loans, they do not lend out their reserves or depositors funds. The Bank of England describes banking operations here. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
Lucky we have you, murray (and PDK), to teach all us economists about economics!
If only there were so many internet experts back when I started my (now evidently wasted) economics schooling.
Actually, I think there are far better opportunites to educate oneself about economics today than through a traditional institute like a university (Disclaimer: I have an economics degree from Otago).
Government policies will come under more intense scrutiny too, as they could potentially spend almost without constraint, but to what end? Worst case the dollar could collapse, second worse and the American model, equity gaps would cause such extreme societal division that a breakdown would occur. In any of these we would also be poisoning the very land and waters we live off too. Taxation becomes very important here. How does the central Government govern an economy that benefits all, not just a few. Taxation, backed up by other legislation are the tools here. Quite a radical shift of thinking really.
Which is why I find the claim that "MMT is not a policy prescription" to be a bit of a whitewash.
Really, even under the current models these questions should be more thoroughly debated rather than avoided. In truth I think that even if the Government embrace the MMT model proposed by the likes of Stephanie Kelton and others, much of the needed debate would still be suppressed.
I am not sure that proponent of MMT fully understand it either. MMT in a closed environment (i.e. an economic system that does not have any transactions with other jurisdictions using a different currency) is completely different to an open economic environment (where you trade with others).
They always use USD to demonstrate MMT can work anywhere, not acknowledging the fact that USD is in a very unique position (as the world trade currency). Ie. US is effectively a closed system as when it prints money, it prints for the globe.
When you consider MMT for other countries, their trading with others becomes so very important immediately. Does the issuer has foreign currency debt (which begs the questions why a sovereign must have foreign currency debt: i.e. they need to buy stuff from other countries and they do not have anything of value produced in their currency to offer: thus need to borrow), their trade position (i.e. do they export more than they import), their capital flows etc. Here lies the great dilemma of printing money: if and how it will impact your currency relative to others. You can look at Iran, a country with very little foreign debts, who has been printing money on a ridiculous scale in the past 30 years with ridiculous inflation.
Not true, if you look at sectoral balances as used by MMT there are three sectors to the economy, the government sector, the private sector and the foreign sector. As explained here.https://gimms.org.uk/fact-sheets/sectoral-balances/
The article referred to is overly simplistic. Everything is only referred to as "the sovereign cannot go bankrupt if it has no foreign currency". Jolly good. the paper says that Other countries sell their goods in £s and save in £s via their trade with us. I do not think that is necessary true. I.e. the exporting countries may not necessarily be saving in BP, but may have it convertible to USD, which means that the UK private sector is the counter party to that risk: if the exporter demands they will have to cough up USD.
So if they cannot raise it, then they will be in default. That is the case of Turkey. So you will have a solvent sovereign country but insolvent private sector. What will happen? You will either let the private sector go bankrupted, thus debasing your currency indirectly (i.e. it does not worth dealing with UK private sector as they will not meet their obligations). Or the government will have to step in and assuming such debt, thus directly debasing the currency and then making the real risk of insolvent sovereign.
Well then using your logic the only solution is in having import controls, not so easy when you have free trade deals with everybody. Even if US Dollars are required they must still be bought with the domestic currency so the end result is no different. Currencies are traded on a daily basis, the NZ Dollar is in the top ten for trading.
Sure. So if you do not have strong export sector that brings in the trade currency, you will need to rely on foreign banks and foreign suppliers of goods and products to offer that. THEY do not accept your local currency though. They accept a commitment to pay back in the trade currency. I.e. either your government or your private sector is exterminate exposed to exchange rate risks. If the government deficit spending to enable aggregate demand for buying the imported goods and services but does not increase your exports proportionally, then that has to result in drop in exchange rates, thus increasing prices, therefore offsetting the temporary impact of printed money and the inflation in those prices will flow through everything.
So the quality of government deficit spending is very very important. Not unlike the money you would borrow as a person. If you are truly investing that money wisely, in that in future your earning capacity is improved beyond the additional financial burden you have assumed, and you have the ability to borrow, then that is a great borrowing. If however, you are borrowing to fund your everyday consumption, without a fundamental improvement in your ability, capability or capacity, then that will be your doom.
That is your dilemma, if your government spending does not improve your exports immediately (you get more trade currencies) or in future, then it ought to result in debasing of the exchange rate thus sooner or later in a foreign currency crisis.
not every country can run surpluses, there must be an equal number that run deficits, it all has to balance out. Having floating exchange rates helps in this regard it makes exports more competitive. Past governments have sold off our assets because they wrongly said that they needed the money, how much better off we would be if we owned our own banks and insurance companies etc. How does having PPPs building our roads help, things that we can do for ourselves, but our government tells us it can't afford to do it itself.
But Stephanie Kelton indicates that a floating currency on the world market is crucial to MMT working. So the model she proposes is not a closed system.
But within the COVID19 restrictions, I think there is a risk of an economy, possibly under any model, becoming a closed system. What you are talking about is the inflation issue, essentially what is the value of the currency? And that is largely one of the prime purposes of taxation, and how it is applied. This is an important component of MMT.
"How will we unwind all the debt? Will we fatalistically dump it on our kids? Will we raise taxes or slash public services? Do we need to? Can we just get some money from the money tree?"
These are all terms that somebody would use when they don't understand our monetary system. Why don't mainstream economist ever tell us where the money comes from that the government borrows? Because they don't understand that spending occurs before borrowing, that currency must first be created before it can be borrowed and that borrowing doesn't finance spending anymore than taxation does. Why don't they ever tell us what the governments debt represents and that it is just private savings created from deficit spending and that it's not a burden on future generations.
Well, who is the "private sector"? if government printing money, makes the rich richer on paper (exactly what has been happening since 1980s) you will be shouting "inequality"! nad if you introduce aggressive taxing, then the private sector may not be so eager to undertake those "debt", specially if they can "save" in currencies who do not do that kind of aggressive printing.
Historically our governments have all striven to run budget surpluses and this is why we have such low levels of savings. This is all explained by the use of sectoral balances. Economist Bill Mitchell did an article on NZ a couple of years ago where he describes our obsession with budget surpluses. You can read it here. http://bilbo.economicoutlook.net/blog/?p=38819
Government deficit is private sector saving. But that does not show the breakup of such saving. The private sector and public sector of NZ own all the wealth of NZ which equals to all money printed. So, printing money will make the rich, richer and increases inequality. Yes, you will be enabling less rich people consumption (i.e. health, education, food, housing etc) but if the surplus of such additional consumption is accumulated with the wealthy (i.e. the owners of companies or entities who sell such goods and services at a profit) and not by the government (i.e. you are not assuming by MMT that government will replace private sector. i.e. we are not living in the soviets), then the inequality is unavoidable. And rich, by definition will have a lot more money, so they will outbid others in 1) keeping their own asset 2) acquiring other assets (including the wealth that is being formed, due to unused labour capacity that is activated by MMT) by outbidding others.
MMT (i.e. government just printing money to fund whatever it wants) does not work very well if you do have three sectors. The outcome will either be a dysfunctional and ineffective government (as their deficit has made the rich powerful) or elimination and destruction of private sector (i.e. to stop the wealth to accumulate more wealth, the public sector goes on war to destroy them. This can be through excessive taxing. I.e. tax wealth at higher rate than its accumulation) and ending private ownership of assets.
So saying a sovereign will not go bankrupt, while factual, is misleading as it does not actually show the very delicate balance between the private sector, the public sector and the foreign sector. If sovereign starts to use its power too bluntly, it will have sever and negative impact on the other two.
I don't disagree with your point Believer, but you indicate a common assumption and also flaw in your comment. "printing money will make the rich, richer and increases inequality" It is probably what does happen now, and even under an MMT system would continue, and this is the point I am trying to make about having a debate on the purpose of, and point to taxation. Any Government has an opportunity to address the 'equity' issue, but most avoid it like the plague. This probably locked into some obscure economic assumption like there being a lower limit to unemployment. Some perverse view that poverty is necessary in some parts of the economy. The whole debate should be about why is there inequity and what can be done about it. MMT, and Government spending without creating a burdensome debt on future generations creates the opportunity to address this if there is the political will.
Much of the problem comes from our politicians not understanding the purpose of taxation and in their belief that it is to finance the government. Beardsley Ruml director of the New York Fed had this to say in 1945. since the end of the gold standard, "Taxes for Revenue are Obsolete". The real purposes of taxes were: to "stabilize the purchasing power of the dollar", to "express public policy in the distribution of wealth and of income", "in subsidizing or in penalizing various industries and economic groups" and to "isolate and assess directly the costs of certain national benefits, such as highways and social security". https://en.wikipedia.org/wiki/Beardsley_Ruml
You cannot have a government who deficit spends and an economy that allows private ownership of assets (or a significant portion of the assets) as I have explained. It either results in 1) inequality (when private sector owned by the asset owning class, accumulate all the surplus from deficit spending) or 2) the destruction of private sector (as the government will either need to assume a greater role in supply of goods and services or has to tax so heavily as to prevents accumulation of wealth) without taking away a lot of assets from private sector or without heavily taxing private wealth, 1 will happen sooner or late. If 2 happens, you have lost private sector, and now the government dominates everything. If you look at history, a great reason why the west managed to get where they are, was the ability of some players to limit the power of the central power. It was initially the aristocracy who checked the king, later it was the middle class you checked the aristocracy and finally the common people who checked the rest. The need to tax, as opposed to direclty owning everything the king fancied has been a great balancing tool.
A government that does not need tax, is a very dangerous government. I do not see how it can avoid becoming authoritarian sooner or later, regardless of nobility of their initial ideas.
The excessive government interventions resulted in the imbalance in the mixed economy providing the backdrop for the structural changes. I have no issue with "mixed economy", but I also note that if the mixed economy is sustained by unchecked and rampant government deficits, it does not end well. I rather, less deficit and more tax to properly fund what government needs to do. You have not really responded to any points I make, MMT will destroy the balance. Nowhere in my comments i advocate for a private sector only economy. But to have a private sector in a trade-dependent country who does not control the trade currency, which I see as absolutely necessary to provide some balance, flexibility and innovation to counter government negatives as well as making democracy more meaningful, you will need to curb government ability to deficit spend. You actually need it, because as MMT explains there is really nothing to stop government to print as much money as they want and fund whatever they want. MMT will destroy the mixed economy by either rendering government impotent by making private sector so rich and powerful that will be too strong to rein in, or by government taking over the private sector in life.
MMT only tells us how the system works, it is still up to the politicians what they do with that knowledge. But why should we be lied to and be told that we have to endure poverty because the government has no money of its own. We trade quite successfully using the NZ Dollar and of course trade deficits must be funded by the issue of more currency and that has to be expected. At least we are not like the Eurozone countries that gave up their own currencies and so they do have to fund their deficits by borrowing.
Big, big statement B1980! What you are essentially saying is that fundamental individual freedoms, which must include the choice of private ownership of assets, or not, cannot be had. I have to say I disagree. What you are saying essentially is that when two different people choose two different paths, and one of those paths leads to an equity difference in time, then one can claim it is unfair because they missed out on the equity? How can that be fair? One of the responsibilities that go with choice is the responsibility to accept the consequences of that choice.
There is a problem when the choice is corrupted or denied through some means. An example of this is the current housing crisis. A lack of adequate regulation has caused a significant distortion of the housing/property market resulting in the fact that although superficially it can be argued that the young still have a choice to buy as an alternative to renting, the shear unaffordability of housing means that rents are so high it is almost impossible for the young, or anyone to save to buy their own home.
So Government deficit spending and the ownership of private assets are only connected through any policy, regulation and legislation in place to manage an economy. When that policy, regulation and legislation is inadequate to the task, then the distortions you refer to occur. that is why Government policy should have so much scrutiny.
Does it strike anyone else as odd that the government is finding a lot of places to throw money and yet the CDHB has executives quitting basically due to pressures through lack of funding.
Their deficit this year is approx $100m on 'revenues' of $2Bn ... so 5%. If the government gave each DHB an extra 5% of their funding, surely this would 'flow through the economy' a lot better than many other things they have spent money on recently.
The tragedy of all this sugar money is that while Cindy and co were happy to spend billions on Covid lockdowns other infrastructure spend goes wanting now and in future. E.g. is 13billion on wage subsidy support is 3/4 of annual health budget. How many lives could have been saved if we invested that directly into our health system!
As Seymour succinctly put it “they couldn’t run a bath”
Many will also vote on the assumption that the world's ills and evils can be laid at the food of the mythical 'wealthy' and that someone else will always end up paying things like extra taxes, without realising that new taxes almost always fall on the middle (despite protestations, things like CGTs that affect Kiwisaver actually affect almost everybody of working age).
Not true, if you look at sectoral balances as used by MMT there are three sectors to the economy, the government sector, the private sector and the foreign sector. As explained here. https://gimms.org.uk/fact-sheets/sectoral-balances/
people get the government they deserve. Majority of the electorate get their information from media that suits their belief and shut out anything that challenges their belief.
Electorate has weak memory. they tend to criticize the current government because they cannot remember the inadequacies of the government before.
Electorate doesn't read policy manifesto and do not look at competing arguments.
Finally, voters vote for the party that favors their interest. for example, landlords relying on capital gains tend to vote for National whereas delusional left votes for Labor expecting utopia.
I think, TOP has the best common sense policies but we do not want to vote for TOP. why? because you are competing with other poorly informed voters :)
The bigest nonsense thus far, is the claim upthread that a piece of paper is an 'asset'.
Easton made the same false claim, hereabouts a while back.
Proxies are not assets - perhaps they should teach economics students that if something isn't underwritten tangibly, it isn't guaranteed to be something. And since fractional-reserve, we've been outrunning the underwrite at exponentially-increasing rates. Only one way that ends - and MMT cannot help a godd--n. Piddling around with numbers, issuance or ownership thereof, makes no difference to depletion-rates of the physical underwrite. How long does it take for the penny to drop? Pun intended. And we will never see inflation again, is my guess. Too many debt-holders would fall over, not enough being done in real terms to fund even re-ownership by elites (mostly accessing debt themselves); the system tanks.
'Together this could limit the fall in overall tourism to around 25%. Some regions that are good at regional tourism could even be better off. '
Looking forward is scarier for tourism. Summer is approaching, and this is when tourism is going to be hit hardest without the high season of international tourism. Wage subsidies are coming off. I know a couple of people in the sector who are very worried.
It sucks huh, but if people are just not travelling there isn't much to be done. Tourism all around the world is affected by this global event.
It will likely be years before things get back to 'Normal' so to those in the industry (which i used to be in) I would suggest pivoting to serve a local customer base for the next few years will be wise, otherwise you will likely not make it out the other end.
Its a time for innovation and change and sadly those who dont will simply get left behind.
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