The Prime Minister's advisers wrote her a conference speech which summarized why this government has become unfit to govern. Since it was based on a misunderstanding of the Covid-19 shock and, as a consequence, the types of changes we need to make to get things back on track.
The start of the speech copied the Finance Minister's Budget Speech of 2021 when he said the first Labour government of Michael Joseph Savage and his establishment of the welfare state after the Great Depression in 1929 was the inspiration for this present government's welfarist policies after Covid-19.
Here's the PM repeating the mantra:
"And while no one expects being in Government to be simple, the last few years have not been an easy run. A global pandemic of a scale not seen since the 1918 global influenza outbreak, followed immediately by an economic downturn the largest in scale since the Great Depression of the 1920s and 30s ... There was no rulebook written. But what we did have, was a set of values, and the history of past Labour governments. It wasn't a rulebook, but it was a guide.
"And while no one expects being in Government to be simple, the last few years have not been an easy run. A global pandemic of a scale not seen since the 1918 global influenza outbreak, followed immediately by an economic downturn the largest in scale since the Great Depression of the 1920s and 30s ... There was no rulebook written. But what we did have, was a set of values, and the history of past Labour governments. It wasn't a rulebook, but it was a guide.
"On the 9th floor of the Beehive building in Wellington, sitting directly behind my desk, is a picture of Michael Joseph Savage. You could say he's on my shoulder but also ever so slightly in my ear. Of course it was Savage and the first Labour Government that lifted NZ out of the depths of the Great Depression. Not by cutting taxes and services, but by investing in jobs, and building a social welfare safety net. They built the country's first state home ... The Finance Minister who supported Savage, Walter Nash, then led Labour's second government as it continued to build our nation's social welfare system".
How could the PM's advisers and Finance Minister get it so wrong?
How could the PM's advisers and Finance Minister get it so wrong?
The Great Depression is widely acknowledged to be a demand-side shock, set off by the 1929 stock market crash. Consumption and investment slumped. It gave rise to Keynesian economics, the view that maintaining demand, running budget deficits and establishing a welfare state could help mitigate the effects. Which was all true!
But the Covid-19 shock was entirely different. It was a supply-side shock: people couldn't go to work due to the virus, so the supply of labor crumbled. Now there are all sorts of other supply-chain issues.
Adverse demand shocks cause inflation to fall.
Adverse demand shocks cause inflation to fall.
Adverse supply shocks cause inflation to rise.
Now we know why this government stuffed up monetary policy. They thought they were dealing with a demand shock which needed to be dealt with by money printing, but all that did was cause inflation.
The PM and her advisers think the way out now is more Michael Joseph Savage welfare spending policies. But supply shocks need overhauls to competition policy and to improved incentives to lower costs and thereby prices.
The PM must be getting woeful economic advice to write a speech saying the way out of a supply shock is not to address the root cause of cost pressures but instead to embark on 1929-style welfare expansionism.
The PM must be getting woeful economic advice to write a speech saying the way out of a supply shock is not to address the root cause of cost pressures but instead to embark on 1929-style welfare expansionism.
By the way, the creation of a welfare state was a great victory back in the 1930s. But it was already in place when Covid-19 hit and a century before Ardern came to office. Her government have not furthered the cause of the development of the welfare state. Instead its legacy has been to run-down our health-care system.
If Ardern thinks we're living in Great Depression times and wants to create a welfare state, she should have run for office in 1935 and not 2023.
References:
https://www.newshub.co.nz/home/politics/2022/11/full-speech-prime-minister-jacinda-ardern-addresses-new-zealand-at-2022-labour-party-conference.html
References:
https://www.newshub.co.nz/home/politics/2022/11/full-speech-prime-minister-jacinda-ardern-addresses-new-zealand-at-2022-labour-party-conference.html
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics.
2 comments:
As an ignorant ordinary citizen it struck me as daft to make money cheaply available to firms at great risk of collapse. Most were striving to maintain assets, not set up a debt situation which would have eliminated any return in the event of total failure. Seniors of the Reserev Bank are too young to have heard directly tales of the Depression, or even to have experienced the inflation of the 70s or the 1987 shares collapse. All just remote textbook events. Measures could ave been taken to restrict lending on houses and the disastrous inevitable inflation there avoided. It is forever claimed that the poor suffer most from inflation. In fact most are near fully compensated one way or another. House buyers are being severely punished and mug savers always were. Despite all the exhortations to save over the years, it seems the practice is really not necessary. It is a device to punish those who do not contribute to the money go round.
Wrong Keynesian economics and government intervention did not end or lift NZ out of the Depression There is no economic or statistical evidence that it did. In fact it extended and worsened the Depression leading inevitably to the Second World War which ended the Depression
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