The Third Great Depression

Listener 10 December, 1977. This is the first of my Listener columns

Keywords: Macroeconomics & Money; Political Economy & History;

New Zealand is in the middle of its third great depression. Our first, the long depression, commenced in the late 1860s and finished in the 1890s. Our second, the inter-war depression, was from 1921 to 1939. The third comrnenced in the mid-1960s; its end is not in sight.

Comparisons with previous depressions are obscured by the fact that our present levels of unemployment are much lower than during those earlier ” ones. However, such an approach is faulty for at least three reasons. First, today’s unemployment statistics omit the unregistered unemployed, particularly housewives who cannot get jobs, the involuntary retired and beneficiaries. Second, today’s levels of unemployment must be compared with what is normal for the post-war period. Fifteen years ago total registered unemployment averaged about 1000 workers in a bad year. Today there are something like 45,000 workers registered unemployed. This is not to say things are 45 times as bad but certainly present levels of unemployment are phenomenal compared to what we used to treat as normal.

And third, each of the two previous great depressions was characterised by two phases. In the first phase conditions were depressed, but with a modicum of optimism amongst the population, a bout of false prosperity in export prices, and a foreign borrowing programme by the government, New Zealand was able to convince itself that there was no fundamental problem with the economy. In both the first two depressions that early phase finished with a financial collapse (in 1880 and 1930) which plunged New Zealand into a second phase of deep depression, including major unemployment, widespread bankruptcy, and universal acknowledgment of the depression.

It seems most likely that we are still in that first phase of our third depression, although the second phase is not inevitable– one hopes

What is the fundamental problem which faces the New Zealand economy? The experience of the previous two depressions, and of such research as we have, points to New Zealand having an inappropriate economic stTucture. We have our capital and labour force invested in the wrong industries, producing exports we can’t sell or being overdependent upon imports. And our prices and debt levels are based on the assumption that we can sell at higher returns and buy more cheaply than we do.

In previous depressions the excess debt, particularly in the farm sector as a result of expecting export prices well above realistic realisations, has been one of the main factors which generated the second phase of the depression. Bankruptcy and unemployment was the mechani$m through which the excess debt was scaled down. In this depression, the process of inflation may do the same thing by reducing the mortgage debt’s real value (i.e., what it will purchase in terms of goods whose prices are increasing).

If we are faced with a structural problem, then it is the result of investment mistakes made long ago in the 1950s and 1960s. These mistakes are not easily reversed. For instance, if one of these mistakes was an investment based on a wrong market assessment, then that investment has to be written off. If it was a capital gain due to faulty price expectations someone has to take the capital loss.

The conclusion that we are in our third great depression may appear pessimistic. But at least it provides a degree of realism, by which we can separate possible economic strategies from impossible ones. For unless the strategy recognises that our problem is a structural one, involving the correcting of mistakes made long ago, it will do little to solve the problem, and perhaps make it worse.

Yet how often do we hear ‘optimists’ advocating exactly the policies which got us into this depression; of pushing exports and ignoring the inflow of imports? How rarely do we hear anyone talking about the structural changes which are necessary? Although, to give ourselves a little credit, some progress has been made with structural reform in areas such as housing, energy, finance, transport and taxation. (Too often though, the progress is better plans rather than implementation.)

Is a second phase of the third great depression inevitable? Should we be saving sugar bags for the years ahead? There are three elements to avoiding such a situation again; time, expertise, and the political will. One can only guess how much time we have. I am among those who think we have been lucky not to have had the financial collapse at some time in the past six years. With regard to expertise, I have already indicated that we appear to have the competence to tackle major areas of structural change, if we have the time and the political will.

As for the question of whether we have the will to take the necessary and often painful steps to avoid a deep depression, that is not for an economist, or even a sociologist or political scientist, to answer. That rests with the New Zealand people.