Grand gestures fall flat as reality bites
Good intentions and high hopes are fine — but for too long, politicians have ignored real-world outcomes
It is looking ever more likely that the economic piper must indeed be paid, with the odds shortening on a worldwide recession in the next 12 months. It still beggars belief that Governments and central bankers didn’t realise what they were flirting with when they opened the fiscal and monetary spigots to such an unprecedented degree during the pandemic. Or that they took no corrective action once it became apparent we had a supply shock rather than a demand shock.
Nobody argued stimulus wasn’t necessary, but plenty were concerned about the sheer size and continuing nature of it. Let’s not forget President Biden’s massive fiscal stimulus on the back of President Trump’s massive fiscal stimulus at the beginning of last year. It made little sense economically then or now. Or our own Finance Minister saying in Budget 2021 that he would be tightening up, only to go nuts with the chequebook again this year.
Even now, central banks have been slow to concede that a period of negative growth is a likely outcome of all this. It was only last week that America’s Federal Reserve chair finally admitted what most people already knew. You can’t slow down an economy without . . . slowing it down. We can’t control inflation with big wage increases and partying up at restaurants all the time.
The immediate cause of the inflation we have been seeing is, as always, too much money chasing too few goods and services. Some of the supply-side issues were caused by the sudden shift during the pandemic from services consumption to goods consumption and back again. And yes, they were exacerbated more recently by the misadventures in Ukraine of Russia’s Vladimir Putin. That is the nature of supply shocks.
On the other side of the equation, the “too much money” bit was caused by central banks and Governments losing their heads.
It follows that the only way to bring demand and supply back into balance is to reduce demand or increase supply, or more likely both.
On the supply side, easing supply bottlenecks and the services sectors coming back on stream will help.
However, the big issue both in services and more widely is labour supply and gummed up borders. Plus, in our case, a Government that can’t philosophically or practically get out of its own way long enough to even have a decent crack at solving the problem. Unlike, say, Australia.
Which leaves the demand side, where there is an additional issue at hand besides the traditional ones of reining in expenditure and tightening up money supply through interest rate increases.
We have just come off roughly 30 years of what was known first as the “Greenspan put” and then the “Fed put”. As globalisation put paid to inflation, long-term interest rates declined and the Federal Reserve effectively put a floor under asset prices such as stocks and houses, until their values were all out of whack with historical norms.
After all that time, it is a real shock to markets to see central banks placing a higher priority on fighting inflation than protecting their asset values. Despite big drops in share prices and moderate drops in house prices this year, values are still well above historical norms and nobody quite knows how much more there is to unwind. Or how much unwinding is necessary to reduce consumer demand.
So where did we go so wrong? I blame a trend I’ll call performative policymaking. Over the past five to eight years there has been a worldwide tendency to make grand rhetorical gestures that instantly sound good, but with little regard for execution risk or consequences, especially economic consequences. The assumption has been that the economy will just keep trucking on.
Thus we have things like the “least regrets” super-sized stimulus packages, with little attempt to calibrate them. The decisions to close borders, without exceptions. Or Brexit — which was “taking back control” rather than the more apt “shrinking our economic market”. Or Angela Merkel’s decision to abandon nuclear power after the Fukushima disaster in Japan, a rash call that left Germany dependent on an unstable Russia for its energy needs.
Our own Government was an early adopter. Who can forget the oil and gas ban that has directly led to burning more coal, KiwiBuild’s 100,000 homes, reportedly dreamed up in the back of a taxi? The plan to slash migration? Or Shane Jones’ one billion trees?
During the coalition negotiations of 2017 I was delegated on our side to discuss with Shane his billion-tree aspiration and work out how to achieve it. I tried to break it down with him and assess what we could actually achieve but I was missing the point. It wasn’t about whether you could practically do it.
I thought we’d reached peak performative decision-making when Jacinda Ardern took offence at Jack Tame pointing out how many of her performative policy announcements hadn’t resulted in anything. Her reply was that she was proud of being merely “aspirational”.
Then, in a true master class in the genre, new British Prime Minister Liz Truss announced this week big increases in spending and large tax cuts, all in the face of high inflation, with no indication as to how she might square the circle, and duly crashed the pound.
There is a a legitimate debate to be
Whether it is inflation, the dollar, economic growth or the energy market, we are re-learning that economic decisions do in fact have consequences.
had about the size of the state and money being better off in the hands of the people that earned it rather than legions of bureaucrats. Particularly in tight economic times and including in our country where a statist Government has significantly increased its own size as a proportion of society under the cover of Covid. And no surprises which side I’m on.
But you can’t be aspirational and half-arsed about it, and forget about balancing the books. Ms Truss is getting an early lesson in economic reality. And she won’t be the only one.
Politicians have gotten used to being able to make feel-good announcements and rely on the short news cycles of the social media age to sweep away the need to deliver and be accountable. But times are a-changing again. Our political leaders are increasingly being faced with the return of political gravity and economic reality.
Whether it is inflation, the dollar, economic growth or the energy market, we are relearning that economic decisions do in fact have consequences.
I think we are witnessing a new age of political realism dawning.
It will likely be tough for a while as we unwind all the consequences of this performative policy-making but the world will ultimately be the better for it.
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