National or Labour: who's gonna grow your economy?
An old political debate gets laid out for dissection.
The competence of New Zealand’s two major political parties as ‘economic managers’ is being debated ahead of this year’s election debate. How does this play out?
First, let’s look at the historical record. (There’s a graph below, if you like graphs.) The NZ economy suffered recessions from external shocks in 1987, 1997, 2008 and 2020 – while the downturn in 1991 followed public-sector restructuring and industrial deregulation, and hence was self-inflicted, thanks to Labour’s and National’s policies.
The Labour-led government under Helen Clark (1999–2008), however, experienced relatively good times with consistent growth and low unemployment.
John Key’s National-led government (2008–17) came into office just after the worst moments of the global financial crisis, which had originated in the US. He and finance minister Bill English ran budget deficits to help the economy weather the storm. J.M. Keynes would have applauded.
And the pandemic shutdowns of 2020/21 meant that the Labour government spent and borrowed to see us through. After both of those recent shocks, New Zealanders were eager to get back to producing, selling and buying, and the economy grew again.
Even setting aside their shared blame for the disasters of the late 1980s and early 1990s, I conclude it’s a draw:
Neither National nor Labour can claim first prize for ‘growing the economy’. They’ve both helped us through shocks; they’ve both overseen periods of growth.
Under normal circumstances, they both run conservative fiscal policy, and neither party upsets ‘the markets’ too much. Furthermore, unelected officials in the Treasury and the Reserve Bank share the credit (and blame) for keeping a macroeconomic policy consensus in place and keeping finance ministers in line.
The Reserve Bank raised the official cash rate (OCR) by 25 basis points to 5.5% last Wednesday (24 May). They reckon inflation is past its peak, but still needs to be tackled. This will mean high interest payments for many people, though it’s not as bad for borrowers as some bank economists had been expecting.
The Budget’s boost in spending and investment was one factor (among numerous factors) considered by the RBNZ in deciding to raise the OCR.
But the National Party leader, Christopher Luxon, blamed the rise in the OCR solely on Labour’s Chris Hipkins and Grant Robertson and ‘their economic mismanagement’.
Luxon then had to argue that tax cuts (which his party promotes) aren’t inflationary. ‘It’s pretty simple’, he said, ‘because people will choose to save or invest that money.’
But wouldn’t most of us simply spend it instead, and so fuel inflation?
In any case, the National Party’s oft-repeated justification for tax cuts is that people know better than Government how to spend (not save) what they earn. So don’t expect consistent arguments.
And what happened to the recession? After saying last year that they were ‘engineering’ a recession, the RBNZ is now warning of a possible ‘economic contraction’ – which isn’t really a recession. If, however, the economy does slow down before October, it could make the Labour government’s case for re-election look weaker.
Whether the economy grows or contracts, we shouldn’t uncritically believe any political party that claims they can ‘grow the economy’ faster than their opponents.
‘The economy’ isn’t really a singular thing anyway – other than in abstract aggregated statistics. In real life, if something’s growing my tiny slice of the economy, it may be shrinking yours, or vice versa. For instance, high interest rates are good for savers.
The economic debate is inherently political, not just technical…
There are two ironies:
According to neoliberal doctrine, a government doesn’t grow an economy; it only interferes in or taxes it. Free actors in markets generate growth, and the job of finance ministers is to provide ‘balanced’ budgets and reduce taxation.
But, contrary to point 1, there’s recently been an international turn back towards greater governmental intervention and industrial policy.
One example of this interventionism is the Labour government’s move to subsidise NZ Steel’s new furnace at Glenbrook. This should mean reduced reliance on coal (hence reduced carbon emissions) and more recycling of scrap metal rather than dredging iron sands.
In strict neoliberal terms, this policy is heresy. Hence, the opposition parties have predictably objected to Labour’s ‘corporate welfare’ and ‘picking winners’. These matters should be left up to the businesses themselves, it’s said. Surely NZ Steel and its Australian owners have balance sheets big enough to make these choices … as if, left to themselves, they ever would!
…government intervention is back…
In the wider world, the leading economies, especially the US, steer away from purist ideas about free trade and laissez-faire – which were always ‘honoured in the breach’ as much as the observance anyway.
With armed conflict going on in Ukraine, and looming over Taiwan, the Americans and Europeans need to secure their supplies of food, fuel and semiconductors – Taiwan being the world’s biggest producer of the latter.
Aside from growth, security is becoming a critical aim for stronger economic policy.
For instance, the Covid-19 pandemic necessitated lockdowns, border closures and huge fiscal injections and subsidies – none of which is in the neoliberal hymnbook.
Climate change policy and emissions targets are another cause for stronger, more directive industrial policies.
The world has changed since the 1990s when open competitive globalisation was the big issue (including asset-stripping the former Soviet Union) and when domestic politics saw social democrats try to rebuild what neoliberal reformers had dismantled.
China, Russia, India and others are now confidently playing by their own rules, not by the West’s. Accordingly, economic priorities are shifting too. Donald Trump’s trade war with China may have been Quixotic at the time, but it indicated where things were heading. Borders are going up; countries are imposing sanctions or banning one another’s products.
Tik Tok has been banned from government-owned devices, for instance. In response, the platform is developing systems to keep users’ data stored within their own territories, to prevent hacking by foreigners.
If – or when – China decides to take Taiwan back by force, New Zealand’s biggest trading partner will be at war with New Zealand’s biggest ally. Political actors (worrying more about national security than people’s wellbeing) may need to set strategic priorities for industry, trade and public investment in anticipation of that.
I’d like to hear what the two Chrises have to say about how the next government should respond to what’s now the big global issue: the China–US rivalry.
…and so will we be looking at a war economy?
Notes:
First a shout out to subscriber Alex Stone who raised this topic.
To support the point about a return of industrial policy, The Economist devoted an issue [15 Jan 2022] to ‘the new era of intervention’, the OECD commissioned a report in 2022 on how to measure industrial policies, or see the New Left Review’s recent newsletter.
For up-to-date growth data, I recommend the Massey GDPLive Tracker, run by Prof Christof Schumacher. It shows that the NZ economy has so far this year avoided recession, defined as two consecutive quarters of negative growth.
Here’s NZ’s past growth record:
On the permanent war economy: Duncan, T. K., & Coyne, C. J. (2013). The Origins of the Permanent War Economy. The Independent Review, 18(2), 219–240. http://www.jstor.org/stable/24563308
Sam Sachdeva’s interview with Kim Hill on China is worth listening to, although I think he underestimates the risk of US–China conflict over Taiwan.
Anyone in doubt about the power of the current macroeconomic policy orthodoxy needs to recall the short-lived prime ministership of Liz Truss. A good post-mortem was done by Nick Robinson for the BBC.