Can We Insulate The Farmer?

Press, Volume XCVII, Issue 28701, 26 September 1958, Page 2 (Supplement)

Can We Insulate The Farmer?

By

A. J. DANES, MA.,

Associate Professor of Economics, University of Canterbury.

A few weeks ago, it was reported that, as a nation, we had dosed ourselves with no less than five and a half medical prescriptions per capita per annum. No doubt this powerful and expensive appetite for medication will be transferred to our economic as well as our physical ills; and it appears likely that the economic prescription will detail so many scruples of that popular cure-all “insulation.” What is then to be said in general about this? Let us settle some initial doubts at once by stating quite flatly that insulation is possible in practice and is likely to be beneficial in conditions like those in force today, where severe export price reversals have been suffered. But it is not going to be able to restore the situation we had when prices were higher so that, properly insulated, we can jog along as though nothing had happened to butter, wool and lamb. Export prices are down: import prices are not. It takes more butter or wool or meat to buy a new motor-car or bicycle sprocket or dinner set. No economic sleight-of-hand is going to prevent this swing in the terms of trade from lowering our standard of living. We have suffered a set-back and that is that. When, then, does insulation come in? Consider how this export price fall might operate if left to work, itself out without any form of economic control. Farmers’ incomes drop. This quickly sets up secondary economic reactions within the community as those who serve the farmers lose business in their turn. And so the depressed situation spirals outwards, as it were, from the farm community, until the whole economy shares, to a greater or lesser extent in the general business fall-off. As incomes decline, prices might be expected to fall, and eventually, some unemployment to appear. This, you will note, is a classical picture of slump conditions getting under way, with the prime fount of the trouble in farm prices and incomes. Two-Fold Job Insulation can do a two-fold job in such conditions. It can use the technique of guaranteed prices to sustain farm incomes above overseas realisations by deficiency payments. In this way local demand is kept up and the process of cumulative reductions operating through the community is checked before it can properly start. And. by so maintaining demand within the country, insulation can prevent the loss of production that follows from unemployment These are important achievements which can be won by the guaranteed price technique. Then is a farm in equity: the farming community is no longer in the front line when economic trouble comes. And. there is the impor-

tant gain that the serious damages which follow from slump . conditions and unemployment qaay be avoided. But, of course, these advantages are not to be won, except at a price, and the price is a loss of balance of trade equilibrium. > This needs explaining. A local guaranteed price payout can hold up farmers’ incomes in New Zealand currency. But it cannot create real income from abroad to match internal incomes. If butter fetches, say, 2s 2d a lb in London, and, say, 2s 9d is paid out locally, then the 7d is a “gap” which makes itself felt in shortages of available imports. Clearly, if lower prices are the same as overseas there is no gap, and normally no shortage of foreign exchange. Somehow, then, some technique of making limited imports go around is needed, and import controls come into the picture. Basic Framework And, that sets the basic framework for insulation, which literally means separating local incomes, prices and costs from overseas prices. Guaranteed prices, in one form or another, and rationing of imports are the means of insulation, means which we have used for a long time. Indeed, the reader will now be realising that the New Zealand economy has been insulated, in one degree or another, for about 20 years—the time which has passed since the first import controls were imposed. It is, of course, not true to say that insulation, as imposed by guaranteed prices and import controls will save the day for us, and keep us out of trouble. W« still must suffer the drop in real income which is unavoidable through the swing in the terms of trade. And, we may get out of the frying pan of depression and unemployment into the fire of inflation. For with local purchasing • power bolstered up, and imports down, the situation is one where too much money may be chasing too few goods. Furthermore, insofar as imports are necessary to provide raw materials and components to keep the wheels turning, in New Zealand’s factories, we might get some “technological” unemployment from our import rationing. ' A moral is pointed to by all this. We may hope and expect that the worst features of, say, the last slump are avoidable by using these insulationary methods. But we cannot escape unscathed and we will be subject to a real inflationary threat by our artificially boosted internal incomes. This being so. restraint must be shown within New Zealand. Wages must be held, Budgets must skim off purchasing power, and guaranteed prices themselves must be at 1 modest support levels. This suggests that the chief risk of an insulation policy will be that persons may expect too much of It.