One of the biggest questions facing western countries today is: what is the best way to ride out debt – austerity or growth. Of course, it’s linked with most of the other major question of the age, including wealth disparity and climate change.
In Greece, Spain, the UK and now France the question is being asked in deadly earnest. Although the debt crisis may not be as great in New Zealand, we still have large and potentially crippling deficits to deal with and the question is being asked here too.
Should a nation and its citizenry tighten their belts to the point of real pain? Or should money be thrown at the debt problem in the hope that everyone spending more will produce more jobs and create an upward spiral in confidence that makes the money keep going around and eventually even out?
For most people it’s something of a left-vs-right issue, almost a good old class battle.
The people advocating austerity tend to be those with plenty enough already and who hold the levers of power with inside knowledge of money and debt markets and the like. They can still live comfortably with reduced services and less disposable income, and understand how to manoeuvre their assets to remain safe and even work the system and even the crisis to their advantage.
Meanwhile the people arguing for stimulus and growth tend to be those who don’t really understand how macro economies work, live to short-term goals and are envious of those with plenty.
I know that these are pretty simplistic stereotypes, but I think they’re close enough for a large number of people. But I also know there are a good number who do understand how economies work, who don’t live in relative wealth or poverty, and who have opposite opinions largely depending on their personal view of life (such as poorer people who religiously avoid debt).
I think there are essentially three approaches – two on the extremes (hard right and hard left) and one in the middle. As usual, as is apparently my character, I have a strong position near the middle. I believe that both austerity and stimulus can be achieved, and would work, if a particular combination of them is chosen. And in particular if our leaders (and we as their electors) are capable of looking to a distant enough horizon.
1. The hard right view is a country-wide version of the option applicable to a severely indebted individual – just stop spending and work harder. Pay back your debt (or reduce it to a manageable level) as quickly as is possible and stop paying all that wasted, dead-money interest.
I’m pretty certain that, while this is good advice in for most individuals and particularly for strict Presbyterians, this cannot work for countries, for several reasons.
First, any attempt to take a nation into emergency footing must include taking the citizens with you. This is no easier an ask than it ever was throughout history. Done badly, the result is almost inevitably and eventually expensive and destructive civil unrest and possibly revolution. Civil unrest is already a big problem in Greece and, apparently, in Spain, with France and UK now familiar with scary events of disorder and confrontation over lifestyle and immigration issues. Add to that the uprisings in Middle Eastern and Northern African countries and you can see what can happen if you anger your citizens without convincing them, intellectually and emotionally, of the benefits of your policies. Britain managed austerity measures during World War 2 because the citizens understood the reasons: I doubt very much this is the case now.
The second main reason why austerity can be counter-productive is that it can easily produce a downward spiral, for individuals and the country as a whole. The less money people have (having lost their jobs or seen cuts in their benefit entitlements) the less they spend and so the less local businesses make. This leads not only to more people unemployed and therefore with less money to spend, but also a fall in government income in taxes, meaning fewer services and lower benefits it can offer.
As the New Zealand government is now showing, the way out of this is to sell more assets to foreign “investors”, providing some immediate relief with new money in, but in the long run further reducing income streams from dividends, more of which go offshore. Put simply, this is not a sustainable situation but a slow, downward spiral that we will regret in decades to come.
2. The hard left view is to borrow money and distribute it as cash, tax cuts, and benefit payments. You give everyone more money in the hope that (a) they won’t put it all into the bank, and (b) they buy products made and sold locally, putting more money into local businesses who can then spend more themselves within the economy.
This works if two conditions are satisfied. First, if the resultant increased tax take (GST on sales, business income) by the government pays for at least the interest on the money borrowed to make it happen and preferably pay off some of the principal. Secondly, if the bulk of the money is in fact spent or invested locally.
But if the spending on imported stuff (or overseas trips) is more than the income our exporters can bring back into the country, then we’re going backwards into an ever worse position, with the only response being either a switch to austerity or even more (borrowed) cash stimulus to put off the day of reckoning.
Sadly, Kiwis being as they are, the debate is largely along these black-and-white lines – austerity or borrowing. Everyone is looking after number one and demanding of their political leaders whatever solution suits them best. If those struggling to keep up come into extra money, many tend to spend it on imported flash goods and trips to Oz, trying to retain their accustomed lifestyle. And if they are already well protected they resent money going to the undeserving, lazy strugglers and demand their government get tough.
3. My view is in between. As a country we should be careful with our money (a touch of austerity or at least a measure of caution), but make sure that as much as possible of the money the government borrows to keep us going is spent within the economy on projects that produce tangible and sustainable assets.
I’m okay with certain levels of debt. I know how important debt was for me to end up owning a house. And when things get hard, I’m okay with borrowing a bit more, but under certain conditions.
Certainly not as a stimulus for spending! The “free market” ideology of giving consumers the cash and letting them choose how to spend it is folly. By nature, too many of us see it as a windfall and spend it on treats or stuff we don’t need, often imported and not necessarily good for us. It’s unwise for New Zealand’s recovery to be dependent on retail activity – that’s the model of the rat keeping the treadmill going but getting nowhere.
Extra “stimulus” money (borrowed from overseas) should be spent on things which have long-term benefits for the country. To name a few, I can suggest: power projects (preferably using renewables), communications technology, encouragement for tech-based niche export industries, transport infrastructure, cleaner and better primary produce, ways of making the country more attractive to tourists, better education and health of younger people, and reducing the causes of costly expenditure associated with low socio-economic status.
If we borrowed more money but invested it in some or all of these areas, we would (a) keep the money in an economy that is actually making advances rather than just spinning the wheel, (b) employ people who would then spend it, (c) dampen down feelings of disenchantment or even revolt among ordinary Kiwis.
Posted by David Armstrong 
