web analytics

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


    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.

Links to post

Recent Comments

Recent Posts

  • Tokelau Language Week reminds us to stay united and strong
    Staying strong in the face of challenges and being true to our heritage and languages are key to preserving our cultural identity and wellbeing, is the focus of the 2020 Tokelau Language Week. Minister for Pacific Peoples, Aupito William Sio, says this year’s theme, ‘Apoapo tau foe, i nā tāfea ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • NZ announces a third P-3 deployment in support of UN sanctions
    The Government has deployed a Royal New Zealand Air Force P-3K2 Orion (P-3) maritime patrol aircraft to support the implementation of United Nations Security Council (UNSC) resolutions imposing sanctions against North Korea, announced Minister of Foreign Affairs Winston Peters and Minister of Defence Ron Mark. “New Zealand has long supported ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Pacific trade and development agreement a reality
    Pacific regional trade and development agreement PACER Plus will enter into force in 60 days now that the required eight countries have ratified it. Trade and Export Growth Minister David Parker welcomed the announcement that the Cook Islands is the eighth nation to ratify this landmark agreement. “The agreement represents ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Securing a pipeline of teachers
    The Government is changing its approach to teacher recruitment as COVID-19 travel restrictions continue, by boosting a range of initiatives to get more Kiwis into teaching. “When we came into Government, we were faced with a teacher supply crisis,” Education Minister Chris Hipkins said. “Over the past three years, we ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Border exceptions for a small number of international students with visas
    The Government has established a new category that will allow 250 international PhD and postgraduate students to enter New Zealand and continue their studies, in the latest set of border exceptions. “The health, safety and wellbeing of people in New Zealand remains the Government’s top priority. Tight border restrictions remain ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • First COVID-19 vaccine purchase agreement signed
    The Government has signed an agreement to purchase 1.5 million COVID-19 vaccines – enough for 750,000 people – from Pfizer and BioNTech, subject to the vaccine successfully completing all clinical trials and passing regulatory approvals in New Zealand, say Research, Science and Innovation Minister Megan Woods and Health Minister Chris Hipkins. ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • International statement – End-to-end encryption and public safety
    We, the undersigned, support strong encryption, which plays a crucial role in protecting personal data, privacy, intellectual property, trade secrets and cyber security.  It also serves a vital purpose in repressive states to protect journalists, human rights defenders and other vulnerable people, as stated in the 2017 resolution of the ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Ministry of Defence Biodefence Assessment released
    The Ministry of Defence has today released a Defence Assessment examining Defence’s role across the spectrum of biological hazards and threats facing New Zealand. Biodefence: Preparing for a New Era of Biological Hazards and Threats looks at how the NZDF supports other agencies’ biodefence activities, and considers the context of ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020
    New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020 Hon David Parker’s response following Thomas Piketty and Esther Duflo. Good morning, good afternoon, and good evening, wherever in the world you might be. I first acknowledge the excellent thought provoking speeches of Thomas Piketty and Esther ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Kaipara Moana restoration takes next step
    A Memorandum of Understanding has been signed today at Waihāua Marae between the Crown, local iwi and councils to protect, restore and enhance the mauri of Kaipara Moana in Northland. Environment Minister David Parker signed the document on behalf of the Crown along with representatives from Ngā Maunga Whakahī, Ngāti ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • New Zealand and Uruguay unite on reducing livestock production emissions
    Agriculture Minister Damien O’Connor and Uruguayan Minister of Livestock, Agriculture and Fisheries Carlos María Uriarte have welcomed the launch of a three-year project that will underpin sustainable livestock production in Uruguay, Argentina, and Costa Rica.  The project called ‘Innovation for pasture management’ is led by Uruguay’s National Institute of Agricultural ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • 3100 jobs created through marae upgrades
    Hundreds of marae throughout the country will be upgraded through investments from the Provincial Growth Fund’s refocused post COVID-19 funding to create jobs and put money into the pockets of local tradespeople and businesses, Regional Economic Development Minister Shane Jones and Māori Development Minister Nanaia Mahuta have announced. “A total ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Health volunteers recognised in annual awards
    Health Minister Chris Hipkins has announced 9 teams and 14 individuals are the recipients of this year’s Minister of Health Volunteer Awards.  “The health volunteer awards celebrate and recognise the thousands of dedicated health sector volunteers who give many hours of their time to help other New Zealanders,” Mr Hipkins ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community COVID-19 Fund supports Pacific recovery
    The Minister for Pacific Peoples, Aupito William Sio says a total of 264 groups and individuals have successfully applied for the Pacific Aotearoa Community COVID-19 Recovery Fund, that will support Pacific communities drive their own COVID-19 recovery strategies, initiatives, and actions. “I am keen to see this Fund support Pacific ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community benefits from Māori apprenticeships
    Up to 50 Māori apprentices in Wellington will receive paid training to build houses for their local communities, thanks to a $2.75 million investment from the Māori Trades and Training Fund, announced Employment Minister Willie Jackson today. “This funding will enable Ngāti Toa Rangatira Incorporated to provide its Ngā Kaimahi ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Training fund supports Māori jobseekers
    Rapidly growing sectors will benefit from a $990,000 Māori Trades and Training Fund investment which will see Wellington jobseekers supported into work, announced Employment Minister Willie Jackson today. “This funding will enable Sapphire Consultants Ltd. to help up to 45 Māori jobseekers into paid training initiatives over two years through ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Ruakura Inland Port development vital infrastructure for Waikato
    The Government is investing $40 million to develop an inland port at Ruakura which will become a freight super-hub and a future business, research and residential development for the Waikato, Urban Development and Transport Minister Phil Twyford, and Māori Development Minister Nanaia Mahuta announced today. The funding has been has ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Appointments made to Defence Expert Review Group
    Defence Minister Ron Mark announced today the establishment of an Expert Review Group to review a number of aspects of the New Zealand Defence Force’s (NZDF) structure, information management and record-keeping processes.  The Expert Review Group’s work arises out of the first recommendation from the Report of the Government’s Inquiry ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • No active community cases of COVID-19
    There are no active community cases of COVID-19 remaining in the country after the last people from the recent outbreak have recovered from the virus, Health Minister Chris Hipkins said today. “This is a big milestone. New Zealanders have once again through their collective actions squashed the virus. The systems ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Clean energy upgrade for more public buildings
    More public buildings will be supported by the Government to upgrade to run on clean energy, the Minister for Climate Change James Shaw announced today. Minister Shaw announced that Lincoln and Auckland universities will receive support through the Clean-Powered Public Service Fund to replace fossil fuel boilers. Southern, Taranaki, and ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • Schools back donations scheme for the second year
    More schools have opted in to the donations scheme for 2021, compared to 2020 when the scheme was introduced. “The families of more than 447,000 students will be better off next year, with 94% of eligible schools and kura opting into the scheme,” Education Minister Chris Hipkins said. “This is ...
    BeehiveBy beehive.govt.nz
    3 weeks ago