Short Term Stimulus for Long Term Gain

Short Term Stimulus for Long Term Gain

NZCTU Discussion Paper on Current Economic Issues in the New Zealand Economy

30th October 2008  

Download the full paper here (Word doc, 255 kb). 

Introduction

The current global financial crisis is an extraordinary set of circumstances.

Therefore, Governments should be looking at measures which go beyond the normal. Although there are limits, there are steps a Government can take to reduce the negative effects of the economic cycle. Automatic stabilisers, appropriate fiscal stimulus, a sound monetary policy environment and maintaining momentum around long-term economic objectives can help.

Some Governments which have for years lectured developing countries about the need to rely on market mechanisms, reduce government ownership and control in the economy and promote deregulation are now doing the exact opposite from what they preached.  International financial institutions and policy makers need to go back to the drawing board.

It is hard for workers to comprehend the scale and deviousness of those in the financial sector who promoted derivatives and other financial instruments that have become toxic debt spreading like a virus throughout the global financial system.

For instance, the global estimate for credit default swaps is $100 trillion (US$62 trillion). This is over 600 times New Zealand annual GDP. These are essentially insurance instruments – but were described as swaps to avoid regulation.

The leverage of trillions of dollars based on minimal equity with ratios of 30:1 being a common scenario was crazy.

We have witnessed massive bailouts by governments of all kinds in relation to toxic debt and rescuing financial institutions that were deemed too big to allow to fail. While there may have been little alternative in the circumstances and these bailouts are often in the form of balance sheet transfers, such funds could have made a huge difference if invested in low cost housing, or sustainable job creation. The ongoing implementation of such bail-outs must be conditional on an overhaul in how financial institutions operate.

New Zealand should participate in international meetings and reflect the massive revulsion world-wide among ordinary people at the greed and sheer audacity of those that created this crisis. We should support proposals for necessary regulation. But it needs to go beyond this and address the role of governments, the need for international supervision that can be flexible enough to address new risks, and models that can address social, environmental and cultural needs. It should reject the model that is based solely on maximising shareholder wealth.

But now the focus is increasingly turning to the impacts of the global financial crisis on the real economy.

Theories about ‘decoupling’ of the financial systems of USA and Europe either from Asia or the real economy have been put to one side.

New Zealand is not immune from the effects of the global financial crisis. This has been demonstrated by the retail bank deposit scheme announcement, revision of Government Budget balances to reflect slower growth, and the impact on firms and jobs of an even slower economy.

Whether it is access to credit, the cost of credit, cash flow problems or simply the flow-on impact of less demand for goods and services we export, and fewer tourists coming our way – there is an impact here. If the USA consumers, Government and firms reduce expenditure then we are directly affected. But so are many other countries with whom we trade. If Australia is affected, so are we.

The current Government has said it will release a December Economic Stimulus Package. The National Party has said amongst other things that it also would bring forward infrastructure spending to stimulate the economy. Others such as the NZX and NZ Institute have suggested a range of measures.

This CTU document  is a discussion paper setting out some suggestions. It is pitched towards a December Economic package as the current Government has proposed but we believe it is relevant to either a Labour-led or National-led Government post election.

It is only a discussion paper because the CTU has not had the opportunity to discuss this fully with our affiliates. Our next major meeting is in late November.

Also, we think it is important to put up suggestions at this time even if they have not been thoroughly analysed or costed.

We welcome any comment and feedback.

The midst of an election campaign is not the ideal timing for such a discussion. But that is the reality we face.