Since 1984 New Zealand has embarked on what has been labelled a ‘neoliberal’ course. We have been moving away from the Roger Douglas and Ruth Richardson agenda under recent governments of both National and Labour, but many of the core reforms have remained intact.
Are we going forward to the past?
In reaction to a number of economic shocks, including Britain joining the EEC and OPEC driven oil price increases, National Party Prime Minister Robert Muldoon (1975 to 1984) embarked on a series of debt-funded infrastructure projects.
The economic perspective of these measures is certainly varied but most of them are still with us today. The Clyde Dam, Glenbrook Steel Mill and a massive expansion of the Marsden Oil Refinery.
As these measures failed to control inflation and resolve the oil crisis Muldoon embarked on increasingly draconian measures to control his country’s economic life. These included a wages and prices freeze, carless days and periodic dawn raids on pacific island over stayers to divert the public’s attention to the economic malaise.
The current Minister of Finance, Grant Robertson, is talking about a massive program of development once the current crisis has passed, funded with debt and loans from the Reserve Bank’s printing press. This has the potential to dwarf anything Muldoon embarked on, both in terms of the sheer scale of what could be unleashed but also because our population and economy has grown considerably in the last forty years.
Even before this crisis hit over twelve billion had been earmarked for new projects, mostly roads, and this was in addition to the three billion allocated to the Provincial Growth Fund.
Parliament has voted Robertson fifty two billion to deal with this crisis and the Reserve Bank has indicated it is willing to buy whatever debt Treasury issues.
Will it work?
History provides little cause for optimism, but perhaps the best controlled experiment comes from the United States.
In 1920 there was an economic crisis in the US, caused in part to dislocation created by the end of the First World War and, some commentators such as Milton Friedman believe, a rapid rise in interest rates in the months before the January 1920 panic.
The US economy declined by as much as 6.9% and the stock market fell an incredible 47%. There was also widespread deflation and some sectors, such as automobile production, fell by as much as 60%. This was a severe economic shock.
What characterised this downturn, as opposed those that were to follow, was the lack of government intervention. Democratic President Woodrow Wilson was incapacitated and wasn’t replaced by Republican Warren Harding until March 1921, by which time the economy was moving steadily back towards recovery.
Harding was a strong believer in limited government and was content to let the economy heal itself, which it did. Eighteen months after the initial shock US GDP was back to pre-recession levels.
The Great Depression and the New Deal
Contrast this with the response after the 1929 stock market crash. Making this downturn much worse than previous economic shocks was the fact that the Federal Reserve severely restricted the amount of cash in the economy. The thinking was that if there was less commerce there was a lower need for money and in order to restrain inflation the money supply was cut back.
This, in hindsight, proved to be a calamitous mistake and triggered a large number of banking failures.
To alleviate the situation Republican President Herbert Hoover began an aggressive government intervention through half a billion, (in 1929 dollars) into agricultural subsidies, massive tariff restrictions in the Smoot-Hawley law of 1930, bailouts to banks via the Reconstruction Finance Corporation and a further two billion (again, 1929 dollars) in public works and finally the Glass-Steagall Act of 1932 that allowed the Federal Reserve to inflate the money supply.
This was at a time when the US GDP was less than one hundred billion in 1929 dollars.
Not only did these measures fail to return the US economy back to pre-1929 levels, the tariffs stifled a nascent recovery and plunged the economy further into an economic malaise. Hoover was booted out of office in 1933 and Democrat President Franklin Roosevelt embarked on his even more expansionary New Deal.
Welfare verses Stimulus
There is a difference between providing economic relief to those suddenly stripped of their incomes and embarking on massive infrastructure projects. Welfare provides people with an assurance that, during a period of uncertainty, there will be enough income coming into the household to provide the necessities of life.
But governments who seek to re-build an economy after an economic shock often find their efforts provide little, if any, long term stimulus.
Lessons from the past
The New Deal is often praised by contemporary economists but it is hard to find evidence of a sudden turnaround in America’s economic fortunes. Some economists who praise the effectiveness of the New Deal also claim that it was the Second World War that finally resolved America’s economic malaise.
Of course, it is possible to find examples from history to suit any narrative the author wants to advance but all of this is moot. What matters is what is going to happen in New Zealand in the years to come and how can business owners’ best prepare.
It is possible that we are entering a period of highly interventionist governmental control over our economy, a vastly expanded public works program and a slew of new regulations that may well result in a level of micro-management that we have not enjoyed in over a generation.