Just watching the above video and I have to ask whether the ‘horror’ of the public service was as bad as some make out given the horror stories that seem to float around about New Zealand in the pre-reform days that have since circulated post-Rogernomics? although the documentary is probably a romanticisation of what occurred in New Zealand at that time it does raise some questions regarding how we deal with economic cycles and whether the private sector is truly the ‘most efficient allocator of resources’ given how lop sided property centric the economy has become over the last several years. The private sector, the business sector is relatively low in debt when compared other countries, and by that I mean household debt has been skyrocketing as hot money enter into the property market thus pushing up the debt meaning less disposable income (more money being used to pay down mortgages) but as noted by Dr. Richard Wolff and Thom Hartman the situation is made worse with stagnant wages resulting in people once again leveraging their house appreciation off the back of cheap money.
In other words, once again this will all end in tears but never fear – as monetarist devotees have said, “lower the interest rates! the private sector will borrow based on rational self interest and thus the economy will grow” but the problem is that there isn’t the demand there to justify further business investment. As noted just recently in a survey in the United States where small business were asked about access to credit and the response back has been that there is sufficient access to credit but there isn’t the demand there to justify further borrowing (aka borrowing to expand because there is increased demand for your good or service which results in more hiring to serve those new customers or customers who are spending more each week) so where does the growth come from? house holds are up to their gills in debt, the banks (at least in the US) are getting cash from the federal reserve at 0% so they can run off and play the market (hence the share market going through the roof – lots of cheap money).
So with that ‘doom and gloom’ introduction – why did I link back to a piece of Kiwi nostalgia? because much of what was achieved in terms of the rail infrastructure came about not through the ‘glory of the free market’ but because the government, rather than the private sector, took it upon itself to invest into infrastructure which has a result created jobs, trained people who could move out into market once it became stronger and more importantly the jobs created also addresses many social ills that come as a result of ‘idle hands being the devils playground’. The best explanation was the policy launch a couple of terms ago by the Maori party where there was an announcement of the $20,000 tax free threshold but the other part of the equation was getting rid of the unemployment benefit in favour of giving unemployment people jobs – aka a giant public works project. The rationale? if people are given a purpose, a reason to get up then that is what is called ‘mana enhancing’ – self esteem is bought about by knowing that you’re doing something with your life, that you have reason to get up in the morning, that you’re able to support your family, that in a nutshell you’re a contributing and valued member of society. The result of that is the addressing of many of the social issues relating to drugs and alcohol but it goes beyond just the target constituency that the Maori Party were going for but rather something that is applicable to anyone of any race, colour, creed etc. By addressing those issues it also addresses the down stream effects that come about as a result of drug and alcohol abuse so the investment in jobs can be seen as a preventative measure against the social disintegration of families and communities but the downside is that it is difficult to put a quantifiable dollar sign on ‘amount saved’ given the old adage by Oscar Wilde that “Nowadays people know the price of everything and the value of nothing” which could be applied to many bean counters and economist who inhabit the government offices.
So when it comes to the sort of quantitative easing (aka ‘printing money’) wouldn’t of it been better to actually use the ‘power of the printing press’ to let the government borrow off the central bank and then use it to for infrastructure projects along with some tough regulations on bank, debt forgiveness followed by a gradual raising of interest rates up to somewhere close to normal (say 6-8% as to encourage saving)? rather than trying to push more money out to the private sector in a hope the businesses or households would borrow more thus give a ‘dead cat bounce’ or worse create asset bubbles in the case of the property and stock market. It isn’t as though there is a shortage of things that need funding which ranges from the dire state of the rail network and lack of an integrated transportation package, the need to invest into re-newables, the building up of a mass transit system in Auckland and reversing urban sprawl towards a city that is denser and more compact through the investment into apartment complexes close near the centres of employment to reduce the cost of living in one of the biggest cities in New Zealand.
Maybe the whole monetarist ideas of Milton Friedman needs a examination given that right now we’re stuck in what monetarists claim would never happen in their system – we have a liquidity trap; excess liquidity, no one needing it or wanting it so the banks are now having some fun at the casino. In the case of Japan their domestic consumption fell off a cliff which necessitated the need for Japan to become overly dependent on exporting but when you starting dumping everything left, right and centre then you’re very much dependent on ensuring that the world economy doesn’t go to hell in a hand basket. In the case of the United States they’re in a situation where their dollar has decreased in value but it hasn’t decreased in value enough to offset the expense of operating a manufacturing business in the US meaning the sort of export based recovery would be difficult even if the rest of the world was motoring along and could buy lots of American made goods. In the case of Germany almost a decade of stagnating wages (an informal agreement between the government, unions and private sector) has allowed Germany to become an export power house because German labour has become competitive but the domestic economy is just lumbering along. The problem with that is a world where countries just export creates a situation of currency wars as one tries to one up the other as excess output not consumed by a stagnant domestic economy needs to find a place get exported to resulting in no one better off. Trade therefore should be a two way street of mutual benefit because if it turns into a trade war where one tries to dump stuff onto another country the end result is damage being done to both economies.