Listener28 June, 1997.
Keywords: Macroeconomics & Money;
The economy seems to have been in a growth slowdown. It is not easy to tell its current state because the data is incomplete. But as best can be judged, the upswing phase of the business cycle following the long recession of the late 1980s is over, and the economy is now expanding at a modest rate. The upswing was heralded by ideologues as a permanent and sustainable. The more cautious commentators recognised that this was a cyclical recovery, and economic growth would then slow down. It has. What does that tell us about the long term prospects of the economy?
In my 15 February 1997 column I criticised an article by three New Zealand economists for their selecting only the material which suited them. This was confirmed when one replied in a letter (March 29), which also ignored any contradictory evidence (while misrepresenting my position). Readers of my 17 December 1994 column would seem to be more knowledgeable than the letter writer, because they have seen the entire data set of our post-war growth record. Evident in that data, is that there have been two sustained long term growth periods in our recent history – up to 1966, and from 1978 to 1985. In those periods the economy grew about the same rate as the rest of the OECD. Between the two periods was one of relative stagnation due to the collapse of export prices. There was also a period of stagnation – even contraction – from 1986 to 1992.
My problem about what is now happening is not that of selecting opinion to suit my prejudices, but of identifying research, which is helpful. There has been a big cut back in relevant research in recent years, especially that which might contradict the official ideology. I especially miss the long term forecasts made by BERL consultants Bryan Philpott, Dennis Rose, and Adolph Stroombergen. Among the exercise’s strengths in the forecasting process the inclusion of each industrial sector’s assessments about its prospects. The last forecasting was published five years ago.
Events have rolled on, and we are entering period when the winding down of the Maui gas field becomes important. The ideologues seem to suggest the “think big” projects were a disaster and had little positive effect on the economy. The research is more equivocal, for there were some significant real impacts, although the return was not as much as was promised. So the phasing out of the hydro-carbon processing plants will depress overall growth. In addition a number of plants – most publicly in the car assembly industry and NZ Steel – are getting to the end of their lives and need refurbishing or – and this seems all too likely in some cases – closedown. The manufacturing sector may be about to undergo another substantial downsizing. If this sectoral contraction occurs it will slow down the growth rate of the overall economy.
The best guess for the long run growth rate is about the same as for the rest of the OECD (perhaps a little less), unless we get hit by a major external shock as occurred in the late 1960s, or if economic policy goes awry as it did in the 1980s and early 1990s. While the ideologues promise a higher growth rate, I have not seen them provide any evidence to support their prognoses. (It is “trust me baby, I know what I am doing”, although they did not seem to have in the past.)
The macroeconomic policy – especially the high exchange rate and interest rates – are cutting back the key industries upon which growth depends. A further deterioration in the external deficit, warned about in earlier columns, suggests the danger of a balance of payments crisis may be closer.
It is nonsense to say public spending will damage economic growth, but equivalent tax cuts will not. The covert ideology is the speaker prefers private goods and services to public ones, a perfectly respectable stance for with which economists have no particular competence to argue. If the public want more spent on health, education, and the environment, our job is to tell how to do it, not “you cant because I dont like the idea.”
It is most unfortunate that the economic debate is dominated by those in the financial industry, which functions quite differently from ordinary producers. It does not follow what is good for the financial sector is good for the rest of us. The economic commentary by numerous independent economists of varying views that was characteristic of the 1970s has all but disappeared. So has the research, which gave the debate a connection with reality.
This, you have probably realised, is a column for budget week. If, dear reader, you hear during it only a lot of jargon ridden self-serving ideology without much analytic content by exceedingly confident commentators who have been frequently wrong in the past, then you will recognise the economic debate is on track to depression, even though the economy may not be.