On why our business leaders continue to believe in the confidence fairyJuly 6th, 2010
(Also: On Vincent Ward)
Given the poor economic data from the United States in June, the Reserve Bank obviously needs to halt the upward march of interest rates. While it has been politically expedient for the Key government to talk up the signs of recovery, the recent economic data on soft retail spending, minimal economic growth, falling imports, drops in productivity, and mixed data at best on job creation has continued to underline that the economic recovery is fragile at best, and non-existent for many New Zealanders.
Meanwhile in the United States, which has long the engine of the global economy, there are few positive signs of life. Major states – California and Illinois – are still in budgetary crisis, and are busily retrenching. Nationally, the stagnant US outlook is still evoking comparisons with 1932.
Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.
Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP. The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.
The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weninger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.
Washington’s fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.
Within the Eurozone, the dangers of debt default by Greece (and others) has been compounded by the risk that the austerity measures – currently favoured by the G20 in general and by Germany in particular to address the existence of large structural deficits – will only stall the recovery, and may well tip the region back into recession. As some G20 critics are saying – wouldn’t it make more sense to address those deficits when the economies concerned are actually back in robust growth mode?
Even so, little of this uncertain-to-gloomy situation seems to have filtered through to New Zealand boardrooms, judging by in the annual Mood of the Boardroom survey published a few days ago in the NZ Herald, where the usual ‘let them eat cake’ sentiments were being expressed by this country’s private sector leaders. Most of our CEOs are calling for policies of further contraction:
About 53 per cent of respondents to the Mood of the Boardroom survey agreed the Government needed to reduce the deficit more quickly….. Seventy-three per cent of all respondents favour spending cuts and [surprise, surprise] 84 per cent oppose tax increases.
During the trough of the recession last year, governments around the world embarked on spending programmes to keep their economies ticking over. New Zealand’s ‘stimulus package’ was smaller than most, and our level of government spending is expected to rise to only 34.5% of GDP next year – but will then drop back to 32.4% between 2011–2014. So, no crisis exists on that front. Even so, our CEOs seem unduly worried about the situation, and want to see further cuts in spending – including attacks on welfare, Working for Families and on subsidies to visit the doctor:
Top of their list of targets for a budgetary razor gang is bureaucracy, where 87 per cent believe savings can be made. Then comes welfare (54 per cent) and Working for Families (40 per cent).
The need for better targeting of spending was a theme running through the comments, with some referring to “middle class capture” of programmes or objecting to universal subsidies for visits to a doctor.
Why, when the local and global economies are still on the brink of recession, would any sane business leader be calling for further contraction? And why would any sane government think that this is a good time to crack down on welfare, via a working group on welfare reform? As always, the economist Paul Krugman has been a voice of reason on this issue. As he says, recent economic research indicates that the ready availability of the dole creates only a slight dis-incentive to the seeking of work:
Do unemployment benefits reduce the incentive to seek work? Yes: workers receiving unemployment benefits aren’t quite as desperate as workers without benefits, and are likely to be slightly more choosy about accepting new jobs. The operative word here is “slightly”: recent economic research suggests that the effect of unemployment benefits on worker behavior is much weaker than was previously believed. Still, it’s a real effect when the economy is doing well.
But it’s an effect that is completely irrelevant to our current situation. When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment benefits may keep employment lower than it would have been otherwise. But as you may have noticed, right now the economy isn’t booming — again, there are five unemployed workers for every job opening. Cutting off benefits to the unemployed will make them even more desperate for work — but they can’t take jobs that aren’t there.
So, why do business leaders keep on calling for cuts to welfare in future – when their own activities are currently failing to create sufficient jobs for those people likely to be tipped off welfare? Leave aside the possibility that our CEOs aren’t very bright, or that they remain captive to the old slash and burn policies they learned from Roger Douglas nearly 30 years ago. Krugman, again, has an apt explanation : he puts it down to a belief in what he calls the’confidence fairy.’
But don’t worry: spending cuts may hurt, but the confidence fairy will take away the pain. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, the president of the European Central Bank, in a recent interview. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”
What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? (By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.) Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But as far as I can tell, every one of those examples proves, on closer examination, to be a case in which the negative effects of austerity were offset by other factors, factors not likely to be relevant today. For example, Ireland’s era of austerity-with-growth in the 1980s depended on a drastic move from trade deficit to trade surplus, which isn’t a strategy everyone can pursue at the same time.
And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk. Other good soldiers, like Latvia and Estonia, have done even worse — and all three nations have, believe it or not, had worse slumps in output and employment than Iceland, which was forced by the sheer scale of its financial crisis to adopt less orthodox policies.
So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.
Exactly. The people living in the same fantasy world here are those hard-headed CEOs who keep on believing that spending cuts will somehow help to expand the economy. On past experience (eg.1991–1992) those cuts will hurt the retail sector as well as vulnerable families, and will almost certainly be manifested further downstream in our crime statistics and the spending on Corrections – which, as Labour’s Grant Robertson pointed out the other day, is well on track to become our largest government department within the next three years, bigger than either Social Welfare or Inland Revenue.
The Key government is captive to this ideology, and seems in thrall to the confidence fairy. The Reserve Bank is the only hope, and it should be putting further interest rates hikes on ice – if only because the main inflationary pressures in the New Zealand economy are coming from one-off factors like the GST hike and the Emissions Trading Scheme price rises. The real economy remains on its sickbed, and its condition could easily get worse in coming months.
Adieu, Vincent Ward
So film-maker Vincent Ward is leaving New Zealand because the Film Commission won’t support his work.
Really? Could this be the same guy who was supported by the Film Commission for decades, and who got over $4 million from the Film Fund only a few years ago to make his River Queen debacle? Ward feels that the Commission won’t support ‘established’ film-makers ‘in mid career. An alternative view might be that no film-makers have a lifelong right of access to funding from the Commission, and that an organization with limited funds might finally need to let others have a crack at the support available.