Bookmark and Share

Wednesday, November 30, 2011

NZ Election 2011 - Praying to the Growth Fairy

Follow denistegg on Twitter

I had thought that my next post would be on the surreal lack of policy from any of the political parties in the Election addressing resource depletion and their collective failure to face the reality that "economic growth" is not returning.

Before I could get around to it I read this excellent post from James Henderson at "The Standard", and so I am re-posting it here. 


Paradigm Shift

"In the Budget, we were told to expect 4.2% growth in 2012, which would make getting back into surplus and creating jobs possible. The Pre-election Update reduced it to 3%. Now, the OECD says ’2.5%, providing Europe doesn’t go to crap .. oh, and Europe’s going to crap’. We’ve got to accept that economic growth won’t fall on us like manna from heaven anymore and work out how to build an actual brighter future.

At the anemic rate of ‘recovery’ we’ve had since the economy reached its lowest ebb two years ago, it will take until 2018 to recover the level of GDP per capita we enjoyed in 2007. But even that is unlikely to happen – the outlook is getting worse, not better.

We keep on being told that a return to ‘normal service’, rapid growth with rising wages and more jobs, is just around the corner but that’s all reliant on external factors – higher commodity prices, low oil prices, reinsurers coming to the party in Christchurch, even foreigners wanting to buy our power companies for high prices but generously not gouging us once they have them.

The fact is, growth isn’t coming back. That’s the reason why European countries are having debt crises. They borrowed in the expectation that growth would mean a larger economy in the future to pay back the money and the interest. When growth ceased, the debt pile just grew and grew as a portion of the economy until it reached danger point.

When you think about it, lending is essentially a bet by the borrower that they will have the capacity to pay back the principal plus interest in the future (ideally, because the borrowed money has been used to create more productive capacity) and a bet by the lender that the borrower’s wealth will grow sufficiently for them to pay back the loan. In other words, the credit system is all predicated on the economy growing.

Now, it’s OK to borrow for a while in recessionary times to keep everything ticking over and stop an even deeper recession caused by lending and borrowing freezing up and people paying down debt rather than investing or consuming. But, if growth isn’t coming back, all you’ve done is dig yourself a deeper hole.

Labour, I think, got about this far in their economic thinking: if growth isn’t happening, debt is a major problem. When it became evident earlier this year that no rebound is coming, if anything another recession is coming, Labour turned its focus on to getting debt down while maintaining control of strategic, income-producing infrastructure.

But only the Greens have started to think beyond that to why growth isn’t coming back and what to do about it. Unfortunately, their policy in the area isn’t all that detailed. The Greens know that the economy is an energy system – it will grow when there is more net energy being used effectively (ie efficiently) after accounting for the energy needed to generate the energy in the first place. Peak oil means that the ‘surplus’ energy that powers the economy is starting to decrease. For a while, the fall can be countered by increased efficiency. And that’s essentially where we have been for the last five years – the net energy available, at least in terms of oil (which is by far our most important energy source because it powers transport) has been steady or falling, and only efficiency gains are allowing the weak growth we’ve seen.

As a crude measure of this, you can look at how oil imports have grown as a share of our national income, squeezing out other things. We’re paying more (ie devoting more of our productive capacity/energy) for basically the same amount of oil, and that leaves less for everything else.
So, where does that leave us? It means the growth paradigm, particularly the export-led growth paradigm is dead. Even if we had enough water and fertile land to produce a whole lot more milk powder (and we don’t), our trade partners won’t be able to pay enough for it and the costs of transport or low-value, high-bulk goods will become prohibitive.

If we’re not growing our exports, we can’t increase our imports without going into debt, which we can’t do. We need, then, to become more self-sufficient and decrease our needs for imports. The biggest import is oil, so investing in replacing oil and lessening our need for it should be a priority. This is old-fashioned import substitution for the peak oil age – public transport instead of highways to nowhere, more energy efficient housing (which also means lower health burdens from poverty and a more productive workforce in the long-run), encouraging domestic IT and manufacturing.
If this looks a lot like the Greens and Labour’s economic policies, it is. The difference is that both of them are still assuming that ‘normal service’ will resume. They both base their forecasts on Treasury’s (fair enough), which assumes that growth is just around the corner.

They need to go the step further and plan for a steady-state economy, and how to maintain a steady-state economy in a world of shrinking oil supplies. We can’t assume any more that growth will magically show up and solve our problems. A steady-state outlook needs to be at the heart of our tax system, our economic policy, and our ideas about how income is distributed within the economy.
We can no longer rely on getting paid more for the few things we export so that we can import everything else- we need to become more self-sufficient. We need to build a resilient and fair economy and society that ensures we are getting the most out of everyone (which means not consigning 20% of kids to the scrap-heap from birth by allowing them to live in poverty) and every resource.

We can actually build a better future within these constraints. We have incredible wealth as a country and nearly $45,000 of economic output for every man, woman, and child every year. We can build a New Zealand that works (and provides work) for everyone, if we choose to. But it means really planning for the future, not pulling a few economic levers and leaving it up to the ‘genius’ of the private sector to decide. It also means not allowing our wealth to be so concentrated in the hands of the few, and paying everyone else off with promises of growth to come.

Unfortunately, we’re going to waste 3 more years before we even get started because we have a government whose plan is: cross fingers, sell assets, and pray to the growth fairy."


Anonymous said...

Denis. Lets pretend for a moment that maybe your prognosis of an oil price/supply crunch is wrong and that Bill English and John Key are in fact correct. There will be a slowish rise in the price of oil and kiwis will adapt with migration to cheaper forms of transport, including electric cars in some numbers. The RoNS will help lower transport costs as kiwis continue to use private transport, including electric cars. If this scenario is correct, power generation becomes a central part of our transport infrastructure. I am not sure where selling power generation assets fits into that plan. Maybe having a 'plan' is enough. Having a coherent plan is not necessary. Rob

Denis Tegg said...


why would we not have a coherent risk management plan for an oil crunch that we can at least partially mitigate against? The UK Govt is doing just that

Plenty of ways to do that.

Govt has reasonably well thought out and coherent plans for all manner of risks such as border biosecurity, terrorism, tsunamis, earthquakes, pandemics etc none of which have anything like the potential of an ongoing permanent oil cruch to wreck our econmony?

Anonymous said...

Denis. No argument from me on what you have said. I was merely trying to see things from the Governments perspective. In doing so the lack of coherence in their 'plan' (never mind the lack of serious intent, foresight or action) is glaring.

Why would we not have acoherent plan? Key, English, Joyce. Is that sufficient to explain things.

It may be possible, though extremely charitable, to argue that the Government does probably have a comprehensive (and coherent) plan but is not revealing it now so as not to cause 'public alarm or panic'. Such a plan could be quickly rushed out when a need arises.

Any comprehensive and coherent plan would still have some public face however. Even an iceberg has 10% above water. We'd be seeing some urgency on public transport and far less investment in Blue chip/South Canterbury Finance/Hanover/Bridgecorp style BCR RoNS. The Auckland rail loop could get some funding without ever needing to discuss a possible oil supply/price crunch.

Can you see that 10% poking up above the waterline anywhere? Me neither. Rob

Post a Comment