Public confidence essential to prosperity

Press, 29 August 1978, Page 16

Public confidence essential to prosperity

If we are to have prosperity instead of depression we must discard some traditional economic attitudes. In popular jargon we must get down to basics and think laterally. Unless we do this we will not be able to identify our economic problems and resolve them. New Zealand can do things with its economy which larger nations could not do with theirs. The New Zealand dollar is insignificant in a world economy, whereas in the United States domestic economic changes affect the rest of the world. So let us do something positive to overcome our most pressing problems which I see as rising unemployment, reduced production of goods and services, and an unfavourable Balance of Payments. Our over-riding problem is not inflation, that is too much money chasing the available goods and services and causing prices to rise. Inflation is only part of the total problem which is “Stagflation,” that is rising prices, wages, and so on, together with substantial unemployment and lower production. During the last 20 years or so we have been lulled into an erroneous belief that fiscal policy and measures to control interest rates, the money supply and savings, with from time to time some sort of encouragement for

investment and production, would keen everyone happy. Our attitude must change because the frequent alterations on the monetary scene have caused instability and lack of business confidence. Monetary controls have done nothing to correct significantly the ingredients of “Stagflation” nor our unfavourable Balance of Payments.

Our misplaced concentration pn the rate of inflation has led us to accept substantial unemployment which is regarded as debationary. There has recently been a slight reduction in the rate of inflation together with an increase in unemployment and this would appear to justify the view that unemployment is deflationary.

Yet this view is both wrong and illogical. Unemployment is inflationary. There are many things other than the employment level which affect the rate of inflation and, in any case, we have yet to feel the inflationary effects of the recent General Wage Order and other wage increases. There are several reasons why unemployment is inflationary. First, a good many industries are capital intensive. That is, they have high fixed costs. Consequently as output decreases the costs of producing a unit of output do not decrease at the same rate as the level of employment be-

cause the fixed costs have to be spread over a lower output. Second, we do not like destitution. The “There but for the grace of God go I” syndrome also gives a little push and we are quite happy to see a benevolent Government paying unemployment benefits and finding “special work” for people who have become “redundant”. But what we are really doing is giving them a portion of our own share of production and when we find that our own standard of living has declined we do not like it, especially when we transfer part of our income in the form of taxation. Looking back, we hardly noticed the change at first because there was no change in tax rates, but the total amount of taxation increased every time wage rates increased and soon we found we were becoming progressively worse off. This deterioration occurred in two ways. First, our portion of the national

cake became smaller because we had given some of it to the unemployed people. Second, the cake itself was smaller because fewer people were employed in producing it. Unfortunately the share of the cake we had given the unemployed people was not large enough to feed them so they had to be given money found in a Budget deficit. As a result we had to pay more for our piece of cake. Its price rose even though it was reduced in size and this forced us to seek higher wages.

Then some of the bakers had liquidity problems and could not pay the higher wages so they reduced their staff numbers and also their output. The higher wages paid to those in employment plus the money paid to the unemployed people, resulted in increased purchasing power for a cake which was dwindling in size. This led to further price and wage increases.

This is why unemployment is inflationary. Inflation can be cured by employing

people to produce a bigger cake. It cannot be cured by reducing employment and production. There are a number of causes of our present unemployment and reduced production, but two stand out clearly. They are the lack of confidence in the future shown by the public and by businesses.

Members of the public have an increasing tendency to hold money rather than spend it. Small savings are increasing. The traditional “saving for a rainy day” attitude is back with us. Unfortunately to the extend that savings increase, real income and employment opportunities decrease because one man’s spending is another man’s income.

It might be argued that increased savings are due to high interest rates, but this is not tenable because high interest rates have applied for quite some time whereas the increase in savings is a recent phenomenon. Reduced spending reflects in reduced business confidence and a reduction in production which, in turn, causes unemployment and further reductions in consumer spending — a vicious circle.

We need stability and confidence in the economy. The traditional monetary policy changes cannot achieve this. In the last six years there have been frequent changes in the “reserve assets ratio”

which controls the level of bank money and 11 changes in the proportion of funds private banks and trustee savings banks must hold in Government securities and so on. For life insurance offices the ratio changed six times and for private superannuation funds the ratio changed eight times.

Then there have been a number of changes in hirepurchase arrangements and in other controls. Another cause of instability arises from fluctuations in the Balance of Payments current account so the monetarists say that there must be a limit on overseas exchange which a New Zealander holidaying abroad can purchase. This would be fine as a means of reducing a Balance of Payments deficit if it were not for a small thing called a credit card which gives access to overseas exchange. I have no doubt that there are good reasons why such credit cards should not or could not be banned. But it is clear that a system of control based on monetary policy must fail and certainly causes instability and lack of confidence on the part of industry. We must look elsewhere for ways to establish economic stability. Business confidence and economic growth will be discussed in a second article tomorrow.

A Wellington economist, Mr P. P. Geddes, gives his interpretation of New Zealand’s economic problems. Until recently Mr Geddes was an assistant general manager of the Railways Department dealing with the department’s commercial affairs. His article will be continued tomorrow.