Here’s a bright idea: when you get into trouble by overspending, spend your way out.
Doesn’t compute? Well, it does in Washington, London, Canberra or in a capital city nearly everywhere in the rich world. Governments are throwing money at consumers, directly in grants and tax breaks and indirectly in saving firms and so jobs.
What started as desperate attempt to keep miscreant banks solvent, liquid and lending to avert recession has evolved into a desperate attempt to keep citizens spending to avert depression. If they don’t spend enough, jobs will be lost, spending will fall more and more jobs will go.
Even Reserve Bank governor Alan Bollard last week urged firms and households not to “unnecessarily contract their spending”.
What “unnecessary” might mean is anybody’s guess. The average New Zealand household spent more than it earned in the half-decade up to 2007. It racked up a mountain of debt, second only in relative terms to Iceland, now bust.
To cut debt to a manageable level, the average household now has to spend less than it earns. That is a big cut from boom-year spending. It means fewer manufacturing, importing, retailing and services jobs. That spells recession.
Now add the fact that in most rich economies households were also on a borrow-and-spend binge. They, too, now have to spend less.
That means lower demand for New Zealand exports and tourism, so they can’t offset the consumer contraction right now. That spells a deeper recession.
Add in the credit collapse engineered by American, then European, banks and quasi-banks forgetting that prudent risk management is the heart of their business. That pushes recession towards depression.
Lack of credit costs jobs because firms can’t trade. Those which over-borrowed to expand in the boom years are in serious difficulty. Those which did not over-borrow nonetheless face smaller sales as households retrench and banks (what’s left of them) are scared to extend credit to them.
It gets worse. Shipping lines say freight orders are being cancelled because willing sellers in one country and willing buyers in another cannot carry through on their deals for lack of letters of credit from banks. Ship-owners are said to be trying to break contracts with shipbuilders for new ships.
That is helping to turn the contraction in international trade that began last year into a steep slide in the last quarter, continuing this quarter.
So be sceptical of economists who tell you it is all going to come right in 2010 or 2011. Their models are programmed to revert to past trend, however bad things get now.
The careful household would logically play safer than Bollard wants it to. So would the careful firm. In fact, right now — just as the government is preparing its “jobs summit” — firms which made the easy staffing cuts last year are starting a much tougher second round.
The good news in this country is that while households were borrowing, the government was saving. In effect, the average taxpayer was paying more tax than necessary, which amounted to a transfer from savers to borrowers. The payoff is that the government here starts from a much better fiscal position than do governments in most rich countries — especially the heavily indebted United States one.
So John Key and Bill English have scope to borrow big for a time (if they can find lenders). Which they aim to do. Their short-term “summit” imperative is to save or create jobs to cushion households and keep them spending.
But, as Key and English have said, there is a short-term limit. Thanks to Michael Cullen’s big spendup and tax cuts last year and their own tax cuts in April, the fiscal stimulus to the economy this July-June year is already up in the world’s top three or five. They can’t match Kevin Rudd’s Australian blockbuster.
There is also a long-term limit. Too much government debt keeps taxes up and is hard to unwind. English knows this from the painful unwinding of the pre-1984 government borrowing binge.
What he knows — and what rich-economy households are having to learn but Barack Obama may have yet to learn — is that you cannot borrow your way out of an overborrowing problem. The buck stops.
So look past the “summit”. The better chief executives are starting to restructure and reposition their firms for the post-recession (post-depression?) world, which will be very different from the 2000s binge world.
The same goes for the economy at large, which is very heavily indebted to foreigners. Hence the Treasury’s focus in its second ministerial briefing last week on productivity growth and better value from government activity.
English has got that message. Borrowing and spending to save some jobs for now is urgent. But so is building jobs for five years hence.