Bryan Gould: Austerity proven as wrong answer to recession

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Over the past four years of recession, we have seen a re-run of the debate that surrounded the Great Depression. In the 1930s, there were those, like Herbert Hoover, who insisted that austerity - cutting government spending - was the way to beat recession. Others, like John Maynard Keynes, were convinced the remedy was stimulus and expansion.

In the event, it was a no-contest - and so it is today. It is now clear that the austerity being inflicted on the benighted Greeks cannot work, but even the other "PIGS" - Portugal, Ireland and Spain - who have done everything required of them by the austerity disciplinarians, have found that they are going backwards, deeper into recession and with a rising ratio of government debt to GDP.

And while the British may have avoided the problems of euro membership, they imposed their own austerity. The result? They are mired in a recession that threatens to be worse for them than the 1930s. In the US, by contrast, President Obama's stimulus programme - bitterly opposed and relatively timid as it was - is pulling the US economy around.

There can now be little doubt that stimulus is the key to beating recession. As that reality becomes increasingly difficult to deny or ignore, where do we in New Zealand stand? Sadly, we find ourselves with Herbert Hoover, down an ideological cul-de-sac with nowhere to go. The proponents of the current orthodoxy now don't even bother to defend it; they promise merely a continuation of the drawn-out stagnation - resorting, like school kids in the playground, to challenging their critics to offer something better.

The critics seem increasingly ready to respond to that challenge. A recent example is Bernard Hickey's interesting suggestion that we should consider "quantitative easing" (or, as it used to be called pejoratively, "printing money").

It may not be the first option to come to mind but it is not as way-out as it seems. Many governments (including the current British and US governments) have "printed money" at times and banks do it all the time, lending money that they do not have, and thereby creating most of the money in our economy out of nothing. If it's all right for them to make billions from doing so, why shouldn't governments do it in the public interest, and so get the economy moving?

There are, of course, many other proposals that offer an alternative to the failed orthodoxy. Here are a few suggestions which would make up a coherent programme.

Put beating unemployment centre stage by investing in much-needed infrastructure projects, so as to raise demand and create new jobs - a virtuous circle which would also help retailing, and private sector investment and productivity.

Get the exchange rate down to improve competitiveness so that higher demand is met by New Zealand, and not foreign, industry; do so by ending the use of high interest rates and over-valuation as counter-inflation tools and focusing instead on the real cause of inflation - excessive and irresponsible bank lending for non-productive purposes. Deny foreign speculators an interest rate premium and an unearned capital gain and the dollar's value will fall.

Remove the balance of trade constraint on expansion by boosting exports through improved competitiveness and so cutting the interest and profits paid to overseas lenders and owners; this will allow us to expand while paying our own way, so reducing the need to borrow overseas or to sell our key assets to foreign owners.

Encourage saving and exports rather than consumption and imports by promoting further saving through tax breaks, and - since imports will become comparatively more expensive than domestic production - reduce the incentive to spend on cheap imports at the expense of New Zealand jobs and production.

Tackle the Government's deficit by collecting a sharply increased tax take as a more buoyant economy generates much greater tax revenue. Reduce widening inequality by discouraging excessive salaries, introducing a fair tax system (including a capital gains tax) and stopping the destructive insistence on inflicting the cost of the recession on those least able to bear it - the low-paid, the unemployed, and beneficiaries.

Expect improved competitiveness, productivity and profitability in the private sector to stimulate increased investment, especially in skill training, education, and research, so as to utilise fully our potential human capital and achieve an economy that reaches its full productive potential.

Develop a close understanding of and support for Maori aspirations, given that Maori offer an important potential stimulus to new development and seem to have leaders with a better understanding than Pakeha - on issues like asset sales - of what the country needs.

Ensure that new investment is encouraged to develop advanced - and particularly environmentally friendly - industries based on green technologies.

Don't let anyone tell you there is no alternative.

Bryan Gould acts as a consultant to the Labour Party on its current organisational review.

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