How bad is bad likely to be ? At this point, Friday’s job summit will begin under the shadow of a great unknown. No-one it seems, really has an up to date forecast on what unemployment will look like over the next couple of years. Or if they do have one, they aren’t saying – maybe because they turned into a pillar of salt on seeing the figures.
Will it be 7.5 % by 2011 as the briefing papers for the summit reportedly indicate, or 11.2 % as the horror estimate from the New Zealand Institute suggested on Sunday ? Or somewhere in between, for quite a while ….maybe even for the next five or six years or so ?
Prime Minister John Key – one of whose jobs is to keep the nation’s upper lip from trembling – poured doubt on the NZI figure on Monday. Yet the latest economic news lends credibility to the feeling that the hole is getting deeper and darker than Treasury’s public estimates – too rosy, and hopelessly out of date – would indicate.
Hate to be a bearer of bad news, but the deficit keeps ballooning at a rate that must be giving Finance Minister Bill English kittens. Currently, it is set to virtually double from a $6.6 billion deficit in the year to June to $11.3 billion by 2013. Even that estimate is already out of date. Government revenue for instance, is down by a cool $1 billion from the levels forecast only last October. Any savings in the government books, as English has indicated, will not be enough to staunch this deteriorating situation.
It may be time to draw the wagons in a circle, and take stock. If the Key stimulus package is the answer, what was the question again, exactly? Frankly, it is hard to see many links between the causes of the recession, and the actions taken so far by the Key government in response to it.
In total, we have seen so far : a modest package to assist the cash flow problems of small to medium business. A construction package mainly made up of an old wishlist compiled by the Clark government. A programme of tax cuts already budgeted before the crisis began. This week, we have a talk shop convened by the government. Now, is a tax cut/construction programme a particularly good response – or even any response at all – to the economic problems at the heart of this crisis? Or merely a band-aid on its effects ?
Given our past record, a tax cut/building programme will do little or nothing to address the problems facing exporters. Right now, building roads and saving exporters a few minutes on the trucking times to ports or airports is not the main issue on their minds. The $1.5 billion faster broadband infrastructure package – also announced well before the crisis began – will not have any serious action taken on it until year’; end at least.
Moving right along….for all the genuflections about improving productivity, tax cuts won’t do much in that respect, either. At best, tax cuts will help to keep spending levels up during these deflationary times – and that’s a good thing, although the benefits for retailers after the April round are likely to be less than they would traditionally expect, since the punters may have already earmarked that money to retire some of their unsustainable levels of household debt, or to keep pace with their power bills as winter approaches.
Tax cuts are meant to boost consumption. They’re not a tool for boosting productive investment, or for lifting productivity in the work place, either. People in jobs are already working hard and long hours, and it seems very unlikely that a few extra tax cut dollars will inspire any quantum leaps in productivity.
Nor, on past record, is business likely to use its share of any tax breaks virtuously. For the last 20 years, companies have dished out their profits in dividends to shareholders, and in padded pay packets and bonuses to their CEOs – not in ploughing the profits back into investments in r & d and new technology, which really would boost our productivity levels.
Instead, the private sector has been willing to ride the coat-tails of the state’s investment in r & d. When the Clark government offered tax credits to try and lift our abysmal business investment levels in r&d, those measures were among the first things scrapped by the Key government – who seem happy for the private sector to continue to be r & d freeloaders on the state.
So, what was the problem, again ? The Act Party keeps banging on that our domestic recession preceded the global crisis. Yet as Finance Minister Bill English conceded to Labour MP David Parker before the finance and expenditure committee last week, some major economies were also heading into recession before the global crisis struck, especially if we date that event from the collapse of Lehman Brothers on September 16, 2008. Meaning : the domestic recession here was not out of phase with the downturn occurring elsewhere – including within the US economy, which was also trending downwards for much of 2008, well before the global crisis hit.
Moreover, while the main features of the global crisis – the credit bubble and housing downturn, and related trades in toxic derivatives – were more severe in the US, some of those features were present here. All we lacked was a full blown trade in those heinous derivatives within the Australasian banking system. It doesn’t mean that we aren’t now vulnerable to sudden outflows of foreign capital.
So, do any of the measures taken so far by the Key government address either the unfreezing of credit or the negative incentives to put investment in housing ahead of productive investment ? No, they don’t. So far, and in line with overseas experience, the aggressive cutting of interest rates by the Reserve Bank has had little or no visible impact, either. You can bet that when and if our economy ‘recovers’ to anything like previous growth levels, nothing substantive will have been put in place to stop another housing bubble from surfacing.
Sadly, it seems that the Key government doesn’t have any co-ordinated plan to protect this country from the financial crisis. It has done the bare minimum required to look politically responsible, and is taking a huge punt that the colossal sums being spent by other countries will put our overseas markets back in working order again, in time to save us from the worst.
If however, we are still in crisis mode 18 months from now – and that seems very likely – these enduring bad times are just as likely to curdle the current rosy perceptions of the new government. Nice guy, but out of his depth could easily become the public verdict on Key as this recession endures.
Could the meltdown and its effects really linger on for 18 months or more ? Unfortunately, yes. Very little energy has gone into figuring out the end game for this crisis. What events and/or policies does the Key government really think will restore global trade and economic growth to their pre-crisis levels ? Last week, there were some signs the US Federal Reserve and a few economists had begun to think about the duration of the crisis, rather than continue to debate its prime causes.
That end game does not make pretty reading. As economist Paul Krugman pointed out last week, the US Federal Reserve has been talking lately to central bankers around the globe, and all of them have concluded that unemployment rates will stay at substantially high levels until 2011 at least. A few central bankers are picking it could take until 2015 before we see a recognizable recovery :
All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”
Is the Key government ready for such a prospect? Not on the available evidence. Under sharp questioning from David Cunliffe before the finance and expenditure select committee last week, English would not indicate whether or not he had received any Treasury updates on unemployment since the early December forecasts contained in the Budget Policy Statement released that same month.
English veered away from confirming whether (a) he had fresher figures and didn’t want to release them or (b) whether he was making policy without having seen any up to date estimates. The best guess was that he had fresher figures ( surely) but didn’t want to scare the horses, or see his media strategy for this week’s jobs summit derailed by new and horrendous headline forecasts of unemployment.
That’s why that New Zealand Institute estimate was so unwelcome to the government. By using a US model geared to outcomes from previous large financial crises, the NZ Institute’s research director Benedikte Jensen reached the 11.2 % unemployment rate in the next two years:
Jensen said the 11.2% figure was the result of extrapolating these findings to the New Zealand situation. “And the present crisis is arguably more severe than any earlier banking crisis given its global scope.”
“However, I am not suggesting unemployment will necessarily be that high,” she said. Labour markets had become more flexible, meaning the impact of unemployment might be less extreme today than predicted on the basis of historical averages.
“But the research is challenging assumptions about how deep and serious this recession could be.”
It sure is. Because the main reason this recession may be so deep and last so long is that no-one knows how to climb out of these conditions in one piece. As Krugman says, it took an enormous world war to finally put an end to the Great Depression. Until then, the Depression had been resistant to desperate attempts to cut interest rates to near zero in order to stimulate growth – a tactic today’s central bankers are also finding just won’t re-start the engine.
Chillingly, it took Japan nearly the entire 1990s to come back from its major recession, and even then it needed a global boom to do so – which is the problem on the table right now, and not the solution. Krugman again :
The slump that followed Japan’s “bubble economy” also eventually ended, but only after a lost decade. And when Japan finally did start to experience some solid growth, it was thanks to an export boom, which was in turn made possible by vigorous growth in the rest of the world — not an experience anyone can repeat when the whole world is in a slump.
At this stage then, all we can do is plan for a very long haul. Which means the government’s discretionary government needs a reality check. Some state departments, such as the one managing welfare support, need to be bolstered, not cut. Yet as the Greens Sue Bradford pointed out last week, the government is planning to cut 500 jobs from the Ministry of Social Development.
This seems incredibly stupid. Someone needs to tell Paula Bennett that with the long recession stretching before us, the safety net in society needs more strands, not fewer.
Finally, if you happen to think that only stupidly greedy people have been caught out by the financial crisis, check this out.
Evidently, some really smart and greedy people have taken a hammering as well.