Keywords: Macroeconomics & Money; Social Policy;
 

This One Will Be Different
 

New Zealand is going into what seems likely to be a long recession. We dont know how long nor how deep, nor the precise events that will drive it. There is not space to review this proposition, but it is most unlikely to be like any previous downswing. For instance in the last 80 years there has been the Great Depression of the 1930s, the postwar stagnation, the downturn of the late 1950s, the adjustment to the wool price shock of 1966 which included the sharp rise in unemployment of the late 1970s, the long (rogernomics) recession, and the Asian crisis of 1997-8. Each’s start-out points and external shocks have been so different from the others, that despite the same general economic (and political) mechanisms driving them, they provide only very limited guidance to public policy responses at this stage.
 

Beware the Habits of the Past
 

It is easy to ignore the particular aspects of this downswing, and to advocate the same policies that one was advocating in the expansionary phase. Or to assume the policies which would have been relevant in some previous recessions will be effective this time. Instead, we need to think about developing a policy framework which is responsive to the new evolving circumstances, rather than repeating the nostrums from the past.
 

Priorities in a Policy Framework
 

This is my guess of the priorities:
            1. Maintaining employment while allowing restructuring process to proceed.
            2. Coming out of any recession with a stronger national balance sheet than we went in.
            3. Sharing the misery and the opportunities.
 

1. Employment as a Priority Goal
 

All the research indicates that prolonged employment can be extremely psychologically and socially damaging, while unemployment lowers incomes and pressures the fisc. On the other hand we should not lock up the labour into businesses which are not viable in the long run, by protecting them. (This is what happened following the wool price shock until, eventually and devastatingly, during the long (rogernomics) recession almost half the labour force ended up registering as unemployed with the Department of Labour.) We need to move labour out of failing industries and firms and shift them to expanding ones, or hold them for a period in activities which are beneficial to them and the nation (such as upskilling and boosted infrastructural investment).
 

An issue which will complicate analysis is that compared to earlier downswings, the labour force is increasingly heterogeneous; so are the demands for labour. The Great Depression story of the professor who ended up on a road building gang may be mythical, but it reminds us that road building today is too skilled a task to simply employ academics.
 

Traditionally unemployment is the last indicator to turn down. Providing panic does not precipitate an early decline, we have time to plan ahead.
 

2. The Nation’s Balance Sheet
 

New Zealand came out of the Great Depression with strong overseas reserves but, on the physical and social measures of the extended balance sheet it, was worse off than it was when it went in. Infrastructure (including housing) was depleted and the workforce was less skilled. (Probably there was more environmental depletion too, but I have never seen this discussed).
 

I dont see that we should give up the ‘economic transformation strategy’ (or whatever policy is to follow it). There will be some re-prioritisation as public sector investment fills the gaps as private investment retreats; its regional pattern may change as opportunities arise in depressed regions. Among the re-prioritisations may energy conservation, house renovation, environmental protection, public transport extension and upskilling of the workforce.
 

The financial balance sheet of the government will look worse at the end of the recession with relatively more public debt. But we should aim to have public and private sector assets (including human capital and better housing) which offset the additional debt.
 

3. Sharing the Miseries and the Opportunities
 

There will be a struggle between those who want to protect the poorest and those want to enrich the better off. That’s politics (even if an economists tires of the self-serving using bad economics to promote their interests). It follows from the previous two (higher)) priorities that we should be hesitant to reflate the economy through consumption-led expenditure since it will compromise the government and national finance balance sheet without the offsetting asset gains. If such a reflation becomes necessary, let’s aim to make sure that the additional consumption is shared roughly equally rather than proportionally to existing incomes.
 

In the case of dealing with house mortgage failures, in the first instance the burden should be carried by the lenders. Not only did they unwisely advance what will prove to be irresponsible loans, but the bailing out of the financial sector suggests that some of their protected equity should be shared with struggling home owners.
 

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This policy framework is general rather than specific. I should mention that in another venue I am working on macroeconomic policy (and no doubt in a third I shall be working on growth strategy.) Getting them all to mesh may require  a fourth venue.