Granny’s advice – spend up dearies

Written By: - Date published: 3:56 pm, December 20th, 2008 - 27 comments
Categories: economy - Tags:

Economics 101: if you consume more than you produce, your standard of living is unsustainable and, unless you fix the situation, it will eventually come tumbling down. As a country we import more than we export equivalent to 8% of our annual domestic production. The current account deficit is projected to widen to 9.4% of GDP next year.

Which is why the Herald’s editorial is so dangerous. It tells us that we have a social duty to spend, spend, spend. This, we are told by the writer, who clearly has no knowledge of economics, is the way to boost our economy out of recession.

OK. So, we don’t want everyone to shut their wallets because that will just amplify the recession, in one of those vicious spirals so familiar from sixth form economics. But we can not and ought not try to spend our way out of recession.

All that an orgy of spending would do is means that we import more. Most of our manufactured consumer goods are imported and it is from overseas that more goods would have to come to satisfy any attempt at a consumer-led recovery. We would just end up even more in debt to others and more vulnerable to international crises. And we would just put already over-indebted households further in debt.

To get out of this recession, we do not need to just spend more buying wealth produced by others. We need to increase our capacity to sustainably produce wealth ourselves.

The right approach is to use the spare capacity in the economy during a recession – unemployed workers, idle plant – and use it to increase the productivity capacity of the economy by building infrastructure. That puts more people in work, increasing their consumer demand, and also gives us the ability to satisfy more of that demand from domestic production, as well as producing more exports to pay for our imports.

We need production-led growth, not consumer-led growth. We will not grow our economy, we will not become richer by selling each other Chinese-made crap.

27 comments on “Granny’s advice – spend up dearies ”

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  1. Ianmac 1
    20 December 2008 at 4:16 pm

    Nial Fergusson on Kim Hills show this morning was concerned that the infrastructure spending by the USA was aimed at building more roads. I thought hey! That is just what John Key wants to do instead of as you say above:
    “The right approach is to use the spare capacity in the economy during a recession – unemployed workers, idle plant – and use it to increase the productivity capacity of the economy by building infrastructure.” Roads????

  2. Steve Withers 2
    20 December 2008 at 4:59 pm

    Whoever is writing the Herald’s editorials on economic and political matters is very much out of touch with anything resembling reality.

    How on earth are people, already mired in too much debt (it hasn’t gone away!) AND facing the risk of losing their jobs altogether in the next few months, supposed to spend up?

    And THEN what?

    Sounds to me like the Herald is trying to bolster the fortunes of its advertisers through its editorial content…….and screw the truth, reality and anything else that gets in the way of their bottom line.

    My fingers are crossed the Herald goes the way of the LA Times and Chicago Tribune.

    The Herald has become a sclerotic, intellectually bankrupt monopoly and needs breaking up.

    The editorial on the environment two days ago was similarly stupid. Breathtakingly so.

  3. Steve Pierson 3
    20 December 2008 at 5:15 pm

    Steve, totally agree about that editorial on the environment.. it was so bad I didn’t know where to start. guess i should have started with the punch – the economy is dependent on the environment -> environmental problems are economical problems and they’re not going awayjust because we’re having a recession.

  4. John BT 4
    20 December 2008 at 5:19 pm

    It would be hard to use “idle plant”to build infrastructure surely. Unless I am missing the point on what biscuit factories, aluminum smelters, timber mills and the like do.
    Think about it possums. We have a lot of roads. We like going for drives. Cars are good fun. Sitting on a bus with smelly people is not fun. So before we run out of oil some smart people will build good electric or hydrogen powered cars. Oh, thats right it is already happening. That means we will need better roads to cope with all those idiot hat wearers and people in green (with a small g, as in colour ) cars who drive so slow.
    Surely, the problem is going to be too many cars as a result of too many people. Now, I think too many people is something we should really be worried about. Unlike so many of our other worries this one will not go away.
    In the meantime we should not stop spending but neither should we be silly as so many have been in recent times. It is economics, not rocket science.

  5. J 5
    20 December 2008 at 5:45 pm

    “The right approach is to use the spare capacity in the economy during a recession – unemployed workers, idle plant – and use it to increase the productivity capacity of the economy by building infrastructure.”

    Um no, the Japanese have tried this approach for the past 15 years and it’s failed. Their debt is now approaching 200% of GDP. On the plus side they do have nice roads with world class tunnels going to remote villages populated by the elderly.

  6. Steve Pierson 6
    20 December 2008 at 5:55 pm

    Japan’s situation is very different to ours. it is coping with a very sharp aging, it has a current account surplus, and a strong private saving culture that has seen it stuck with 0% official interest rates and deflation.

  7. Mr Magoo 7
    20 December 2008 at 6:13 pm

    Wont be following the link and would never have seen the story…and been better for it.

    The Herald is a populist pile of crud with the very occasional good story which is usually replicated on stuff.co.nz anyway. Their opinion pieces are a joke.
    I have decided to boycott them. (I will just pretend anyone cares)

    On a more positive note:
    If we are talking about economic comentary I have liked Rod Oram so far. He seems not to be compromised by some industry or another and has so far been bang on with predictions/observations.

    Unlike the chief economists, real estate salespeople and god knows who else they wheel out for biased (and often completely wrong) commentary.

  8. Tanya 8
    20 December 2008 at 6:31 pm

    Yes, I thought the editorial was irresponsible, and makes out as though we are all goldenly rich. They have also chagned their tune, not so long ago we were being told to tighten our belts. Short memory, I guess.

  9. RedLogix 9
    20 December 2008 at 6:59 pm

    JohnBT,

    Public transport comes in three main forms:

    1. Public provision of roads for private vehicles. Optimal for low density, high diversity traffic.

    2. Public/Private provision of bus services. Works best with medium denisty, medium diversity traffic.

    3. Public provision of public rail/subway/tram services. Delivers excellent high density services but with low diversity.

    If you visit any developed nation with a high population (especially in Europe) you will find a balanced provision of all three types of transport, according to the circumstance, and working in synergy accross all three modes. New Zealand, by sad contrast, currently has a very unbalanced transport system and this govt is proposing to unbalance it even more by continuing to put all development funds into motorways. It is a deeply regressive policy, and one we will regret for decades into the future.

    We have a lot of roads. We like going for drives. Cars are good fun. Sitting on a bus with smelly people is not fun.

    However this reveals that you actually have not the slightest interest in discussing rational transport policies…. you’re just here to vent emotive prejudices.

  10. RedLogix 10
    20 December 2008 at 7:20 pm

    SP,

    As a country we import more than we export equivalent to 8% of our annual domestic production.

    Not quite. The largest portion of the current account deficit is a category that Treasury call “investment income”…. which amounts to around $12b of the $15b deficit.

    This is a structural imbalance caused by overseas owners repatriating profits from NZ businesses and investments. The real problem is that New Zealanders have become, to an uncomfortable degree, tenants in their own country.

  11. pk 11
    20 December 2008 at 7:21 pm

    Feels like a bit of a long bow this idea around the Herald making us all max out our credit cards is the devils work as it seems unlikely that it will make any real difference in spending.

    An editorial is less influential than seeing a colleague made redundant or a delayed pay review or watching the value of your retirement savings drop. The intention is good – don’t over-react as kiwis invariably do as it makes the situation worse – but the language poor. Not that I’m defending papers I hasten to add. They exist to sell advertising and investigative journalism is rare. Depending on what sells papers Labour is good and National bad – early 90s – and nowadays vice versa.

    I think they mean well but …..

  12. bobo 12
    20 December 2008 at 8:21 pm

    About as useless as Jim Cramer’s advice on cnbc.

  13. John BT 13
    20 December 2008 at 8:23 pm

    It has been a long time since I have read the Herald. Boring left wing piffle last time I looked. It has been a while. It was also big without a lot to say. Typical bloody Aucklanders. Needless to say, that was where I last rode a bus.
    Personally, I think there is only one sort of public transport. It is how folks travel when they are not in private vehicles. That is why….etc, etc.
    I thought it was a good idea for the previous government to buy back the railways. Until I found out how much it cost us. Us. It would have been a good idea if we had been in a position to spend the big bucks necessary to make it worthwhile. It is unfortunate that the big bucks have been blown. It is also unfortunate that for the last decade our government has been less than proactive in providing decent public transport .
    Also, RedLogix my prejudices are not emotive. They are based on logix.

  14. John BT 14
    20 December 2008 at 8:29 pm

    I don’t know why we should worry anyway. That nice Mr Bollard said we are out of our recession.
    Mind you , he did say petrol prices were going to drop shortly before they doubled.

  15. Ari 15
    20 December 2008 at 8:38 pm

    It has been a long time since I have read the Herald. Boring left wing piffle last time I looked. It has been a while. It was also big without a lot to say. Typical bloody Aucklanders.

    May I humbly suggest you have your left and right wings mixed up?

  16. RedLogix 16
    20 December 2008 at 8:44 pm

    my prejudices are not emotive.

    Not while you are telling us how much “fun” cars are. That’s an argument based on an emotional justification, not a rational one.

    Sure cars can be fun. I’ve enjoyed plenty of great trips in my life. Like driving non-stop from Picton to Wanaka down the entire length of the West Coast one damp day in August in a nice Subaru. Very memorable.

    However I’m pretty sure the average punter trying to get to work grinding across Auckland’s grid-locked rush hour (now most of the day) traffic is not having fun.

  17. Bill 17
    20 December 2008 at 9:01 pm

    Didn’t George Bush implore USers to spend, spend, spend? And they did. On easy credit. And the rest is…well, here it comes.

  18. John BT 18
    20 December 2008 at 9:09 pm

    The last time I was in Auckland I arrived late morning and there were cars bumper to bumper on the motorway. I thought to myself “what sort of person would live like this when there are alternatives?’ The answer is ……. crazy people.
    If you don’t have a fun car Red you should try a Porsche. Mine is a bit like me, old and a bit rough around the edges but real fun if you like a good time.

  19. QoT 19
    20 December 2008 at 9:32 pm

    Gosh, wouldn’t it be helpful in times like this to have some kind of campaign to motivate NZers to spend their money on items produced in, and profiting, New Zealand companies?

    Oh wait, no, that would have no real benefit or some such nonsense. Probably tantamount to Communism, too.

  20. Simon 20
    20 December 2008 at 11:13 pm

    [deleted]
    [lprent: You are currently banned]

  21. ieuan 21
    21 December 2008 at 9:44 am

    Actually the Herald encourages people to spend on services as well as (imported) goods:

    ‘There is no point saving money in a recession. Prices are low, builders, electricians and the like are available again. There is no better time for households to stock up, do repairs and extensions, afford some luxuries.’

    I am sure that you can see the logic in people spending on builders, electricians etc as this will help keep people employed.

    I think they also make a good point that with lower interest rates, lower petrol prices and tax cuts that there is more money around and some of this needs to be spent to stimulate the economy. This is exactly the point that IrishBill made in his post ‘Good One Bill II’ on the 19th.

  22. Billy 22
    21 December 2008 at 12:47 pm

    SP,

    You’d better explain this to Irish Bill, who was griping as recently as Friday:

    The only shame is that he’s using that position to throw money at people who are more likely to pay down debt and increase savings than engage in stimulatory spending.

    http://www.thestandard.org.nz/good-one-bill-ii/

  23. IrishBill 23
    21 December 2008 at 1:18 pm

    To be fair Billy, I was talking about tax cuts only. If you had the wit to follow the link in that post through to my previous post on economic stimulation you would realise that I agree with SP that infrastructural spend is a far better stimulus than tax cuts. What little stimulatory value tax cuts have in a long-term recession has been largely wasted by National’s focus on providing them to people more likely to pay down debt and/or save than spend on local goods and services.

  24. Billy 24
    21 December 2008 at 1:29 pm

    I had the wit, just not the interest.

    Why so damned grumpy all the time IB?

  25. Kerry 25
    22 December 2008 at 4:04 pm

    Bloody tories and their wanky ideas!

    Well Johns off to Hawaii for a break…poor mans exhausted….theres reading involved in being PM John!!!!

    Keep the wallets shut……I for one have purchased zilch! Have told the family I will be getting xmas pressies when im in OZ next week……may as well spend my money in a country which is not ran by a knob!……also booked my tickets online from an Aussie travel agent and am not flying Air NZ.

    Happy recession!

  26. lampie 26
    24 December 2008 at 9:53 am

    “Our Government has not been quite so plaintive but there is no doubt it has the same desire. As consumers we hold the recession’s cure in our hands”

    Haha we were also the cause, stupid fucking herald.

  27. Pascal's bookie 27
    24 December 2008 at 1:10 pm

    I guess the Herald will be following it’s own advice and rehiring all those editorial staff and whatnot then.