KEY POINTS:
Former Prime Minister Helen Clark criticised the Government last week for 'inaction' in light of the global financial crisis. It was a political score and may have engendered a modicum of public doubt about the Government's plans, but how fair was it?
Clearly, Keynes is king in the
economic thinking of the moment. The concept of state intervention in the economy is virtually unresisted.
But the events in the USA and Europe are so unprecedented we don't really know how stimulus packages ought to work or how to measure their relative effectiveness.
The Government must ensure it doesn't simply replicate a spending template that inadvertently overheats the economy or spends where spending is less effective. There needs to be a calm assessment of how much stimulus is needed and how much short term contraction can reasonably be tolerated. This is the magic balancing act.
If one was to (euphemistically) view the 'crisis' as a 'recalibration' there might be less haste. To stabilise the economy we accept a degree of alteration will result. Over-leveraged, poorly managed businesses may fail. House prices may draw back from unsustainable peaks and companies may batten down hatches by putting off capex and wage increases. Liquidity and availability of credit will undoubtedly tighten. All of this is to some extent necessary.
A New Zealand stimulus package is broadly welcomed as pre-emptive and proactive. While much of the stimulus appears intended for infrastructure spending (which is laudable) it cannot simply reflect initiatives during the Great Depression in 1930's America where the Keynesian theories were put to use.
Much of the theory of the 1930's was that money spent on infrastructure would go directly into the hands of many white-bread, manual labouring, working class American males who were the undisputed life blood of the economy.
The NZ economy today is vastly different to that one particularly in terms of the economic contribution of women. For example, the majority of our teachers are female. For the stimulus dollars to reach 'taxpayers', we ought to be assessing who today's 'taxpayers' are.
The Australian response has been notable for its cautiousness. The Federal Government provided a bank deposit guarantee in the same way as NZ but also gave families and older Australians a short term 'cash in hand' pre-Christmas payout.
The Australians may yet rethink their approach given uncertain economic news this week including bad news about finance companies such as Storm, a new round of iron ore benchmark pricing negotiations and analysis by Access Economics yesterday stating the NSW economy is in recession. The recession news was hotly denied by the Federal Government leaving some to wonder whether Treasurer Swan was proving to be more of an 'ostrich.'
A prime goal of a stimulus package is to restore confidence. After all, if people remain spooked any stimulus money reaching them is likely to go towards savings first. That's good news for banks but not so good for retailers.
The recession-deniers mantra, bought into by Prime Minister John Key, is that all the negative talk could become a self fulfilling prophecy. Undoubtedly, confidence should consolidate as the economic horizon becomes clearer, but the lack of confidence is not speculative.
The fundamental concerns about the US economy were well described by Steve Eisman, a portfolio manager and banking expert at American investment managers FrontPoint Partners quoted this week in the NY Times.
"I wish people would stop saying that this is a crisis of confidence," said Eisman, "The loss of confidence is just a symptom of bad credit and over-leverage. The banks are not lending because they know their balance sheets are loaded with future losses and they don't have enough capital."
The sentiment should be borne in mind by all developed economies affected by the economic crisis.
There is no question of the severity of the problems being faced. A 'wait and see' approach is not favoured because it is generally believed that early intervention mitigates severity.
But the stimulus package must be well thought out, well directed and subject to efficient and prudent oversight. Then confidence - true confidence which is palpably not the 'confidence' of financial whizz-kids of the 2000's - will return.
Simon Arcus is a solicitor who has lived in Sydney and Auckland
