Are our hardships really necessary?

Press, 27 November 1982, Page 14

Are our hardships really necessary?

By J. D. GOULD, Professor of Economic History at Victoria University. John Gould’s new book, “The Rake’s Progress? The New Zealand Economy since 1945," will be published soon. In this article he takes an economic historian’s-look at the New Zealand economy in 1982.

The historian of the future will certainly look back on 1982 as not one of New Zealand’s better years. The familiar election year euphoria evaporated very quickly, giving way to falling output, soaring redundancies, and rising unemployment. The level of inflation continues to exceed that of our trading partners, and by an even larger margin than it has done for the past seven years, and 1982 has seen the introduction of a freeze on prices and incomes which, whatever its merits and chances of success, is clearly a tacit admission that previous policies have failed. At the same time, despite record government spending, widely-resented economies are being sought in many areas of government. spending, from proposed amendments which would further erode the al-ready-emasculated Accident Compensation scheme to the penny-pinching cuts in support to adult education. Why are we so poor? The short answer, of course, is that we are not. In very round terms the New Zealand standard of living, as measured by real gross domestic product per head, has improved since the end of the last war by something like 80 per cent. Those who distruct the, evidence of measures like the G.D.P, can reflect that in 1945 there were fewer than 12 private cars for every 100 New Zealanders; today there are about 40. Or that while in 1945 one New Zealand home in every four did not have a hot water system, and more than three' in every 10 did not have a flush toilet, by the 1970 s virtually 100 per cent of our homes had both of these basic amenities, and a large and growing number such additional comforts as a deep freeze, automatic washing machine, and colour television. On any objective basis of measurement our standard of living has risen enormously since the' war, even though not as much as in some of the world’s most rapidly-growing economies. 1 » Memories are short, and the New Zealand population iS still a young one. In 1982 more than half of the New Zealand population aYe still less than 30

years of age. and the large majority have no personal recollection of the early post-war years, much less of the depression of the 19305. Their assessment of present difficulties is therefore, necessarily formed by looking back on what has happened in the more recent past. Here the comparison is less favourable. Since the last boom year, 1973-74, when New Zealand was riding the crest of a dramatic improvement in our overseas terms of trade and the reality of the first oil price shock had not yet struck home, output (real G.D.P.) has increased only minimally, and output per head of the population has been at a virtual standstill. Brief gains in the election years, engineered by more relaxed budget and monetary policies to help the Government at the polls, have not been sustained in the postelection months. Still, given the great improvement in living standards achieved in the ’first 30 years after the war, surely even a static level'of output per head is not so bad? Unfortunately, two corrections have to be made to the real G.D.P. per head figures, because not all of our output is available for consumption within New Zealand. Something like 24 per cent of pur output is exported and, in effect, exchanged for whatever imports the proceeds will buy. Since 1973 the terms of trade, which measure the amount of imports that a given quantity of exports will buy at prevailing prices, have deteriorated by about one-third, so that in transforming the 24 per cent of our output which is exported into imports we have suffered since 1973 a loss of about 8 per cent of our G.D.P. Second, paying the interest on our external debt (private as well as government) now. absorbs something like 1 per cent more of our G.D.P. than it did in 1973. Adding these two things together, therefore, we can only sustain a standard of living not far short of 10 per cent down on its 1973 level. In fact, consumption has not fallen by anything like 10 per cent. It has been kept artificially high in two major ways:

by borrowing overseas so as to permit us to go on importing a larger quantity of goods than, current export earnings would permit, and by spending more of our income and saving less.. Neither of these strategies bodes well for our economic future. Further, for many individual consumers matters are even worse because the Government has been taking a larger and larger share of total incomes. Partly this is because its expenditure on goods and services as a proportion of G.D.P. continues to rise, but to an even greater extent it is because of the dramatic increase under Mr Muldoon’s administration in what are called transfer payments — that is, such things as social security benefits, national superannuation, and subsidies of various kinds. The main reason why there are so many penny-pinching cuts in minor expenditure items despite record levels of government spending is the increasing cost of those votewinning items, national superannuation and SMPs (supplementary minimum prices.) The individual taxpayer has also suffered, of course, because as we all know he has borne an increasing fraction of the total tax take. Where do the real problems and hope of a solution lie? 1982 has also been marked by the official recognition, endorsed by the Prime Minister, of inflation as Public Enemy Number One. I disagree. Inflation, to be sure, is a pest, something I would dearly love to see us get rid of. It is a source of grave social injustices, since the weak and the less resourceful suffer most from it, while those who are lucky, cunning, .or unscrupulous beyond the average, can actually benefit. Moreover, inflation diverts income away from savings into consumption, and savings away

from growth-promoting investments towards inflation hedges. • Even so, a country can live with inflation, provided that it can prevent it escalating to astronomical levels, as happened in Germany in the hyper-inflation of the early 19205. Indeed it seems probable that after a couple of years of really trying, immediately after winning the election of late 1975, the National Government virtually abandoned serious attempts to reduce inflation and instead concentrated on devising ways of living with it: the widespread indexation of wages, salaries and social welfare benefits to the consumer price index; the inflation-proof-ing of superannuation payments; the introduction of in-flation-proof bonds; the introduction in 1979 of an automatic inflation adjustment to the exchange rate to protect exporters. The real threat to our society, in my view, comes less from inflation than from unemployment, and from the socially and racially explosive effects of the worsening distribution of income as each group in society tries to cut a rather larger slice, or at least a not smaller slice, from a cake which is slowly shrinking. New Zealand’s claim to be a country where extremes of wealth and poverty are unknown is hardly credible when we read daily of luxury apartments costing up to $750,000 on the Auckland waterfront or Wellington’s Oriental Bay, while a few miles away street kids live a dirty, hungry, and futureless life in unused sewer pipes or under bridges. I do not see that the fight against inflation, even if successful, will solve these problems even in the long run, and in the meantime, in New Zealand as in Britain, present techniques of fighting it are making the problem worse.

What we need is a resumption of economic growth. I don’t say that because I am any grea't enthusiast for economic growth. It would of course be insincere and perverse to deny its benefits, for example from the improvement in housing and the spread of domestic amenities, but there are so many adverse by-products of growth to set against such gains: the encouragement of greed and selfishness in a materialistic society; the rise of organised and white-collar crime; the exploitation of the young and the feeble-minded by the purveyors of drugs, pop music, and pornography; the massive social .damage wrought by the abuse of alcohol. Like many older people I increasingly tend to think that the world was a better place when we all had to work a little bit harder for a little bit less. If I say that we need economic growth it is not through any great enthusiasm for growth as such, but because I am convinced that only resumed growth will cure unemployment; that until the national cake starts growing again instead of shrinking, the effects of fighting to maintain one’s share of it will continue to tear society apart; that governments will put the country deeper and deeper into debt rather than take any drastic action which would threaten the loss of the next election. What prevents us stimulating the economy in a way which would get growth started again? Two major fears: the fear that higher growth will mean higher inflation, and the fear that it will mean a worsening of the balance of payments. For reasons I have already mentioned I do not regard the first of these fears too seriously, if only because, given the choice between higher unemployment and a continuation of even some mild increase of inflation, I would choose the latter as the lesser of two evils. I am not convinced that in an economy with as much

spare capacity as New Zealand. a resumption of growth need generate higher inflation anyway. In fact, a considerable number of productive activities could hold their prices more easily if output increased. It is virtually certain, for example, that the’ Railways and Air New Zealand would not have needed to increase their fares and freights so often if the rail system had been operating at full capacity or the planes flying with every seat taken. Nor am I as worried as most of my fellow economists about the Government’s budget deficit. which doesn’t seem to me inappropriately large when there is so much unemployment of labour and capital and when the expansionary influences in the private sector are as weak as they are today. The balance of payments is the real concern. One of the surprising features of our postwar economic history is that despite all the changes which have occurred, the ratio of imports to output in real terms has not changed very greatly. The total income New Zealand can generate has therefore been constrained by the volume of imports we can finance, and it has been possible to increase total income, with allowance made for changes in the terms of trade, .only in something like the measure that we have been able to increase export earnings. The danger in a resumption of economic growth, then, is that an already-weak balance of payments will become totally unmanageable unless we can find some way of either increasing our export-earning capacity or reducing the ratio of imports to income. The second of these we have been trying to do, with not much success, for many years. The first will hardly be possible unless concerted world action can be taken to persuade at least most of the major trading nations to reflate their economies simultaneously, and thus halt the present worldwide trend towards greater protectionism. At least in recognising this basic truth our Prime Minister is on the right track.