Keith Rankin: For solutions, choose the right words

The word 'saving' is a euphemism for 'lending'. Photo / Thinkstock

The stories about debt and joblessness keep increasing: recently we've heard about the "Greece-like" plight of the Kaipara District Council, and the $2.5 million debt of the Otago Rugby Board.

Then we also hear about the unacceptably large proportion of working-age New Zealanders - especially those under 25 - who are neither in employment, education nor training.

There appear to be no answers, other than austerity (which, as Bryan Gould implied, is tantamount to digging an even bigger hole) and exhorting people to stop being lazy.

We have difficulty discussing these issues fruitfully, because of the language we use. In reality the word "working" is a euphemism for "selling". And the word "saving" is a euphemism for "lending".

It is obvious to all that it is impossible to have more selling without more buying. (And "buying" is another word for "spending".) Also, it is logically impossible to have more lending without more borrowing.

Generally, when we talk about work, we mean paid work; that is, employment. The official definition of employment is either self-employment, or working for an employer. In the case of self-employment the link between working and selling goods or services is obvious. The official statistics on employment are a bit generous, because a person who is self-employed but makes few sales is counted as employed despite having a near-zero-income.

In hard times, often the only route to employment is self-employment. Indeed, in the Great Depression, the redundancy of an employed father might have created four self-employed people (himself, his wife, and his teenage son and daughter).

Over a year of depression each will have earned some income; a bit of casual handyman work, selling some cakes on the street, selling some wares as a door-to-door hawker, and a few domestic or other personal services. Anyone who's been in a Third World city understands the ubiquity and the poverty of streetside self-employment.

Together, this family may be offering 200 hours of work per week to the market, yet earning barely enough to pay for the rent and some food. Is this what our government and its backers want in 2010s New Zealand?

Being employed by an employer is also selling. It represents the successful sale of labour services to an employer. In hard times, private employers are buying substantially fewer labour services, because they themselves are making significantly fewer sales of goods and services.

Savers are either hoarders or lenders. Hoarders are problematic, because they stop the circulation of money in its tracks. But lenders can only lend if there are acceptable borrowers. Thus in reality increased saving must mean increased borrowing. If, as now, there are insufficient acceptable borrowers in the private sector, then saving must mean increased borrowing by the public sector.

Looking at the bigger picture, total surpluses in the surplus sectors must equal total deficits in the deficit sectors. Surpluses mean saving, or repaying debt. Deficits mean running down past savings, or borrowing.

Private sector surpluses and public sector debt are thus two sides of the same coin. Yet I heard Nick Smith, Minister for Local Government, saying with respect to the Kaipara debt, "council debt is continuing to rise at a rapid rate when households, businesses and central government are getting their debt under control" (TV3 news, 25 Feb). In fact it is quite illogical to suggest, as Mr Smith does, that all sectors can run surpluses at the same time. Public sector debt is up precisely because private sector debt is down.

In the world as a whole, IMF statistics show that private sector surpluses were eight percent of world GDP in 2010, meaning that combined government deficits were also eight percent of world GDP. Private savers lend to governments when there are insufficient alternative borrowers. In New Zealand the private sector had a financial surplus of about four percent of GDP, which, along with a share of the foreign surplus, was lent to our public sector, giving a government deficit of about six per cent.

Disaster occurs if the public sector resists attempts of the private sector to repair its balance sheets. The good news is that the private sector does not always attempt to run surpluses. Governments can run surpluses when the private sector is in spending mode.

Japan's experience in 1990s was one of avoiding a 1930s' depression-like experience by allowing the private sector to repair its balance sheets. Government accepted big deficits to accommodate the necessarily big private surpluses. Japanese governments were not generally given due credit. Averting a depression by accepting mere stagnation is not as heroic as being at the helm during an expansion. To extend Bryan Gould's analogy, Japan's unheralded Obamas wisely and successfully resisted the overwhelming advice for them to be Hoovers.

When people of working age wish to sell their labour services to the market - ie when they wish to work - if the private sector is not buying their services then it is the responsibility of our governments to do so. Clearly governments must borrow to do this, and the banking system naturally accommodates this borrowing by creating the required money. None of this is a problem because, at these times, the private sector is lending rather than spending and has no-one but governments to lend to.

This kind of public-sector stimulus is a necessary prerequisite to subsequent private sector investment; a prerequisite to the revival that generates private sector jobs and allows governments to repair their balance sheets.

* Keith Rankin teaches economics at Unitec.