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Key-nesian economics

Written By: - Date published: 10:46 am, August 8th, 2008 - 23 comments
Categories: economy - Tags:

I’m really starting to wonder why it’s the worst academics who seem to get the most media, Maybe it’s because the good ones don’t make extreme statements.

Today, we have Keith Rankin from Unitec arguing that, as we are in recession, we should be increasing borrowing to inject cash and growth into the economy, as is National’s policy.

This is apparently classic Keynesian economics – the Government should run a ‘counter-cyclical fiscal policy’, borrowing to expand its spending, typically in infrastructure, during times of down-turn to provide jobs and stimulate domestic demand. That’s what the first Labour Government and many other governments did to help end the Great Depression. But you do it when there’s mass unemployment and spare capacity in the economy to be used by the new spending. If you borrow try to increase infrastructure capacity when there is very low unemployment and no spare capacity in the economy, as now in New Zealand, all you get is inflation.

Increasing borrowing when your economy is already at full bore and already experiencing higher inflation is like pawning your possessions to buy petrol to throw on the fire when you’re already too hot.

23 comments on “Key-nesian economics ”

  1. Rob 1

    Anything has got to be better than the Neo Liberal Economic Hocus Pocus that we have had for the last eight years. That has done nothing to grow the economy onyl rape and pillage the tax payer

  2. Bill 2

    Rob

    Neo liberal (cough)economics have been peddled by both Nat and Labour since ’84

  3. Tim Ellis 3

    This is an interesting debate SP, thanks for starting it.

    I don’t subscribe to Keynesian economics, but the argument is interesting. You are quite right that the injection of capital when the economy has spare capacity is a main factor in Keynesian economics. But I disagree with you that there won’t be spare capacity when the borrowing takes place. The Reserve Bank forecasts unemployment to rise to 6% over the next couple of years. John Key’s plan does not assume that the government will borrow $5 billion immediately to fund the infrastructure. When you build a house, you don’t draw down all of your mortgage immediately: you draw it down in parts to pay for the expenses as you need it.

    Likewise National’s infrastructure plans won’t be immediate, it is about $5 billion over five years. There will be spare capacity in the labour market during that time. It will probably be something like a billion dollars in 2009-2010, two billion in 2010-2011, and two billion in 2011-2012. That would soak up the spare capacity in the labour market at that time.

    Secondly, following from your earlier post, we don’t know where the borrowing is going to come from, but it is unlikely it will all come from overseas financial markets. New Zealand has a large pool of capital that isn’t used locally very productively. That’s why several billion have been poured into dodgy property financing schemes which have now fallen over. That money has to go somewhere: at the moment it is just going offshore. Add to that the billions that are being invested in the kiwisaver funds, and in the Cullen Fund. Right now there is a dearth of high quality, low-risk capital instruments in New Zealand. I would much prefer to see mum and dad investors putting their savings into infrastructure bonds rather than the Bridgecorps and Blue Chip scams that have been some of the few local options.

    It is likely that a very high proportion of the funding for the infrastructure will be local. That is a good outcome for New Zealand.

  4. Rob 4

    Labour have always struggled with the Tax side they tax everyone into submission the feed them welfare payments to keep them under control

  5. Be quiet, Rob. Please try and understand whats being discussed instead of throwing out your tired lines.

    Keyensian economics works on the principle that when the economy is slowing (like now), that is the time for tax cuts and freeing up funds.

    When the economy has been great, like the last 10 years, there’s no reason to keep throwing money in the middle when it’s not likely to make any difference.

  6. r0b 7

    Anything has got to be better than the Neo Liberal Economic Hocus Pocus that we have had for the last eight years. That has done nothing to grow the economy

    You are one sadly confused individual. Especially if you think a change of government is going to reduce such an agenda – hah!

    Labour have always struggled with the Tax side they tax everyone into submission the feed them welfare payments to keep them under control

    You’re totally impervious to facts aren’t you. NZ has the third lowest rate of personal tax in the OECD, even before Labour’s tax cuts kick in. And numbers on benefits have plummeted under Labour.

    Hey I hear that National plans to cut wages so low that workers will be starved into submission and too weak to get to the polling booths to vote the Nats out. Makes about as much sense as your theory anyway.

  7. Matthew Pilott 8

    Tim, I worry that money is going under people’s pillows right now – faith in the finance sector is clearly shaken and justifiably so. Although people shouldn’t have put their money with companies that invested in poorly-structured car loans and marginal property developments, there was more than enough bad advice out there (not to mention downright immoral-to-illegal behaviour) to make it happen.

    The point I’d like to make is that in a slight downturn that bad faith will be hard to shake – what kind of vehicle do you see being used to increase large-scale local investment? Anything regulatory, or do you think it could be market-driven?

    Finally, what do you think these investments should be in? What would really drive our economy? I don’t think it’s traditional infrastructure, not by a long shot. I’m vaguely interested in seeing what National want to invest in, but suspect it’s roads and fibre. Rather lacklustre really. All sparkle and no bang.

  8. burt 9

    So Labour will continue to cut taxes, will not increase borrowing and will not cut govt spending. All the time spending current tax revenue to fund infrastructure projects – in a recession. How ?

    How can more spending be done with a recession and a falling tax base as a result of a falling employment market without significant borrowing – How ?

    The Labour party in an effort to push up their opinion poll results have painted themselves into a corner. All the “good” stuff will be done without any of the “bad” stuff – How?

    It’s not enough to just say “National bad” without explaining how Labour will deliver – How will Labour do it?

  9. Quoth the Raven 10

    Tim Ellis – Quoting Bernard Hickey is Bryan Sprondre’s job here. In the last budget the government actually did increase the number of infrastructure bonds issued Hickey notes this himself when he covered the budget. Your assertion or Hickey’s assertion that it’s all going to come from “Mum and Dad” investors (isn’t that a lovely little right wing prevarication) is wrong. National has stated that it will increase the number of PPPs. It will probably all just amount to a corporate welfare scam perpetrated on New Zealanders by John Key.

  10. Matthew Pilott 11

    Burt, have you ever complained about that nasty Dr Cullen and those surpluses – there’s your answer. I’m embarrassed I had to point that out to you, actually. You’re trying too hard I’m afraid.

    …a falling employment market… No. falling employment rate. Numbers in jobs is still going up; thus, more PAYE.

    National plan to lob in more than Labour. The whole point is there isn’t any more.

  11. burt 12

    Matthew Pilott

    Are they the surpluses that Dr. Cullen told us were not real enough to cut taxes or are there some other surpluses that I don’t know about? $8b surplus and no tax cuts – wot’s the cunnection. It’s not $8b, it’s about $2b…. It was good to talk them down when people were calling for tax cuts – now that the economy is in recession the historic surpluses are being talked up again. Please explain.

    Trying too hard – No, just listening to all the contradictory things that Labour say before/after each bad poll and wondering how it’s all going to work.

  12. burt 13

    Matthew Pilott

    I’ve booked marked your comment saying employment is still going up. We can come back to this for a revierw in 6 months. Best of luck.

  13. Tim Ellis 14

    Matthew, I agree that the finance company schemes are high risk for potentially high returns. There is a get rich quick mentality in New Zealand in a large part driven by poor savings historically. The government has improved its savings record over the past twenty years by reducing debt, but ordinary New Zealanders haven’t.

    A mature economy needs a broad mix of low risk/low return, medium risk/medium return, and high risk/high return investment vehicles. To date money has been skewed at both ends: it is either sitting in a bank on term deposit (low risk), or flooding into dodgy finance companies. The sharemarket is generally a medium risk investment. As savings levels rise with kiwisaver and the Cullen Fund, more money will flow into this middle level. As reality hits that high risk finance companies are a bad place to put all your money, money will flow in the short term into safer places–the bank or under your pillow.

    I don’t know what kind of instruments might be offered, or what they will be used for, but infrastructure bonds backed by government guarantee at 6% are just as safe as putting your money on term deposit. And unlike putting your money in the bank, the profits of which just go offshore, building roads and broadband–just two of the likely possibilities–grow productive capacity. So too will enhancing energy supply. Several billion has been lost to the economy this year because of poor energy production. Building excess capacity over the long term isn’t productive either, but we’re not at the balance we need.

    The finance company collapses really hurt the investors in the short term, but in the long run if it’s a wake up call to people not to put all your money into high risk plans if you can’t afford to lose it, then that’s not a bad thing. It would be nice to think that with much more capital staying in New Zealand, we don’t have to have the debate in the future about selling Auckland Airport offshore because the only money available to buy it is from offshore. A wider range of local instruments designed to boost productivity will increase the attractiveness of local investment.

  14. Matthew Pilott 15

    Burt, you can bookmark all you wish, I merely said that the employment rate is down but numbers in employment are increasing. This is from the recent employment stats. I didn’t say that in six months this would be the case.

    I don’t see the inconsistecy – Cullen has said what he’s going to spend (or return, via tax cuts), and that that is all that is possible to spend without borrowing to fund tax cuts/infrastructure. National are going to spend more, and therefore have to borrow as what they are going to spend will be more than is available.

    I’m not sure what you mean by ‘it’s about $2b’, where did that figure come from and what’s it in relation to?

  15. Phil 16

    Steve says;
    “But you do it [borrow] when there’s mass unemployment and spare capacity in the economy to be used by the new spending. ”

    We can argue about the semantics of “masss unemployment”, but all the indicators suggest that spare capacity is exactly what we are going to have for the next little while.

    “If you borrow try to increase infrastructure capacity when there is… …no spare capacity in the economy, as now in New Zealand, all you get is inflation.”

    Lets take electricity as an example. If we have no spare capacity in the current network, wouldn’t that be EXACTLY the time you would want to borrow to produce more? Yes, of course it is. Why? because ongoing shortage of capacity is waaaaay more inflationary than the scenario you outline.

  16. jeremy eade 17

    “New Zealand has a large pool of capital that isn’t used locally very productively.”

    what’s your estimate on this Tim, how much capital?

    …and how did we get such large amounts of passive capital?

  17. The Federal Reserve of New York has been bailing out financial institutions left right and centre. The US Government has borrowed and borrowed and all that is happening is inflation, inflation, inflation.

    That’s part of why oil has gone up in price. That and speculation.
    All borrowing to prop up failed financial institutions does is perpetuate the living outside our means consumerism and will end in a worse depression. Best to face the music now, get rid of the fraudulent fractional banking system and start a new.

    Scary stuff but if we don’t the depression will be worse.

    Lucky for us our economy is in far better stead than say the American, English or Australian economies and we still have a lot of food sustainability compared with the 3 above mentioned countries.

  18. Draco TB 19

    In his opinion Rankin effectively states that financial institutions don’t have enough customers and then goes on to say (I almost said demands) that the government should become a customer of these institutions by borrowing money from them. His sole purpose for saying this seems to be because these institutions are failing. If they are failing it’s because they’re not doing their job and its certainly not the governments job to prop them up.

  19. I agree,

    It is a very pro-international banking system article while suggesting that it is just the NZ system. All the international banks are so interconnected and that system including the Aussie banks we have over here is collapsing as we speak. Not just here but the US the British and Aussie banks. Why should we borrow to keep their corrupt system cranking along. Let it collapse I say.

    I’ve decided to bank with Kiwibank and will open an account there next week, sod the big international banks.LOL.

  20. burt 21

    Draco TB

    If they are failing it’s because they’re not doing their job and its certainly not the governments job to prop them up.

    Air NZ ?

  21. Draco TB 22

    Burt, What about AirNZ?
    We’re not talking about a buy out of those investment institutions but loaning money from them so that they can attract investors and thereby stay afloat. That’s not the governments job as I’ve already said. The Labour government is only borrowing minimally and is keeping taxes such that the borrowing remains minimal in direct contrast to what National are saying they will do. Considering where National get most of their money from we have to ask just why they’re so enthusiastic about putting us in hock so much.

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