Economics for New Zealand Social Democrats

Young Labour Summer School; January 26, 2013

Today I want to talk about social democracy, especially its economic aspects. There are many who have narrowed down their vision of social democracy to social justice, including in international affairs. That is not the comprehensive heritage of social democracy, nor do social democrats have any special claims to justice issues. They may think they do, but conservatives talk of justice too. You may disagree with them; when conservatives talk of justice their ideas may be fuzzy; true for social democrats too. If social democrats want to focus on justice issues they will be relegated to the margins of the political debate.

The heritage of social democracy is quite different and far more based on economic analysis. After centuries of slowly building up, the economic forces unleashed in the nineteenth century transformed much of Europe from an agrarian and rural society to an urban and industrial one with consequential economic, social and political turmoil.

There were two sorts of interdependent responses. One was the Left-Right dimension. The Left wanted to use democratic institutions and therefore collective ones to respond to the new economy, while the Right preferred to leave these matters to individual initiative, which is, of course, biased towards the rich.

The other dimension was modernisation versus conserving traditional society. This was not just an issue for the Right. There was a strong but now almost forgotten Left approach to returning to a rural agrarian Arcadia of an idealised eighteenth century. Many socialists did not think this was either practical or desirable. There is not time to detail that debate, but even today that division remains.

We saw the Left’s split between modernisers and traditionalists in 1984. Muldoon was a conservative traditionalist. The majority of the Left broadly agreed with much of his economic philosophy, which was that the First Labour Government under Savage and Fraser had resolved the problems that nineteenth century industrialisation had caused New Zealand. Admittedly there was still some fine-tuning to be done, and if you were a left-traditionalist you were keen to pursue social justice too. Fundamentally, though, the Labour Party traditionalists sought a kinder, gentler Muldoonism.

But the world had not stopped evolving in 1935. The drivers may have been different from those of nineteenth century industrialisation but they were no less titanic. Perhaps the most important was globalisation and the changing international structure, although technological change and environmental depletion were significant even in the 1970s; more recently the dominance of financial capitalism has added to the ongoing transformation.

One way to identify traditionalists is by their attitude to globalisation. They dont analyse it but instead hope it will go away.

Another useful test is what is called “whining”. When something goes wrong, traditionalists complain, saying they would do better once they are in office. But there is no underpinning analysis to the complaints and when they are in office things still go wrong.

Muldoon also hoped the problems would go away. As a result there were a myriad of modernising issues which he did not address, leaving a huge challenge to modernisers when Labour came to power in 1984.

The traditionalists had no answer other than to be kinder and gentler. But sadly the Labour Government had no social democratic answer either, and went down the road of neo-liberalism. To do this they had to crush the modernising social democrats.

The cost to the Left can be seen in the fate of the Clark-Cullen government. It was elected on a platform of rolling back the extremism of the neo-liberal policies. It largely but not wholly did so without reversing the modernisation elements of those changes. Even so, there was still much modernisation to be done, there always is change so there is always a need for modernisation but in the end Labour did not know how to do it.

There were two reasons. The first was that its intellectual firepower had been undermined by the neo-liberals. The social democratic tradition had always been based upon debate, analysis and empirical research. Not only did the neo-liberals repress intellectuals, they undermined research after all it showed that they were wrong replacing careful analysis with opinion.

Second, Labour had no mandate for further modernisation. Its support base was largely the traditional focus on social justice, while the rhetoric of modernisation remained largely neo-liberal. Keynes pointed out that practical men and women are slaves of defunct economists. When critics red, blue or green say that the macroeconomic problems New Zealand faces can be resolved by the Reserve Bank fiddling around, they are unconscious slaves of that defunct economist, Milton Friedman, who said monetary policy was all important. Yes, many of our lefties are monetarists.

Historically modernising social democracy and the empirical social sciences were intertwined because they were looking at the same thing, the process of economic and social change. That is why the neo-liberals had to attack the social science profession, replacing it with the insipid alternative which dominates today.

Despite the lack of support for the empirical sciences, despite the rewards going to neo-liberals and the repression of alternative viewpoints, despite the lack of venues for discussion and debate, a handful of economists have persisted with the social democratic project. Rather than list them and make some egregious omissions, I am going to finish by talking about some of my work.

First, a word of caution. My work is about analysing the processes of change. Only sometimes is the result is innovative policy. This is not the New Zealand way of “we know the answer; who cares what the question is”. (More crudely “bugger the analysis; let’s get on with the policy”.) While one may not always know what a good policy response is, good analysis can often tell you why the conventional wisdom is wrong and, sometimes, even stupid.

So, for instance, I wrote a book on globalisation, which poses an enormous challenge to modern New Zealand. The analysis tells you why the answers of the left-traditionalists who wish it would go away or of the neo-liberals who uncritically embrace free trade, are both wrong.

Similarly I have studied economic growth as much as any New Zealand economist. There is not a skerrick of evidence that governments are able to accelerate sustainable economic growth, despite that claim being central to our economic debate. In practice each side advocates policies which favour themselves saying they will benefit the economy as a whole.

So what is the purpose of the economy and of economic growth? The empirical evidence is that economic growth does not increase wellbeing generally, although some kinds may be of greater value than others. What this means in policy terms is that we should not pursue economic growth at all costs. Once more the conventional wisdom is wrong.

What about macroeconomics? I was one of the first New Zealand economists to recognise we were in for a long recession only months after the Lehman’s crisis of September 2008. I did not predict the exact form of the Global Financial Crisis before it happened, but you will find me thoughtfully discussing the possibility.

There are numerous problems in managing an economy during a long recession. While we should follow the international debate closely, my work has primarily been about the particularities of a small, open, multi-sectoral economy like New Zealand. They are quite different from those of a large economy, although too often we treat our economy as if it was as large and as powerful as the United States which issues an international currency; thus the foolishness of advocating quantitative-easing. It is an example of those who know the answer but have no idea what the question is. A particular conclusion of the research is that at the heart of our macro problem is the lack of domestic savings. That is an entire paper in itself.

Another research area is how markets work. Last year I contributed to a Fabian series which critiqued light-handed regulation. That is a good way to distinguish social democrats from the neo-liberals who uncritically support light-hand regulation with its deaths, human misery and economic waste. Go to the Fabian website to read the lectures.

Since the series finished I have been extending the alternative. The work focusses on prevention to minimise the consequences of catastrophic events and unified responses afterwards to minimise the transaction costs of remediation. An excellent example is our world class Accident Compensation Scheme. A Building Performance Guarantee Corporation, like we had in the 1980s before the neo-liberals hatchetted it, would have mitigated disasters like leaky homes and buildings which failed during earthquakes. Currently I am thinking about the Earthquake Commission again neutered by the neo-liberals, to the detriment of those who live in Canterbury. The white paper on the future of the EQC may well be based on neo-liberal principles. There will be the usual whining from the traditionalists; will there be a constructive response from the modernising social democrats?

The final research area to be mentioned today, there are others, is distributional economics. In the 1970s I was one of the pioneers who set out the paradigm to study the economics of poverty. You are warned against those who talk about poverty but avoid discussing the need for supplementing the poor’s income.

Today’s coverage has had to be brief, but it finishes with the following thought. Suppose you go back thirty years. Look at the public commentary of 1983. Much was traditionalist and whining; with hindsight it was also irrelevant.

The modernising social democrats got much wrong too, but they did provide a framework to respond to the future. Sadly the Lange-Douglas government did not take it up. Subsequent history has shown that the social democrats were broadly correct. Many of Labour’s failures were because it ignored their analysis; many of its achievements has been the result of listening to them. That is why modernising social democracy has to be at the heart of a future oriented Labour movement.