New Zealand Economics/Keynsianism

Introduction

“When I ask two economists a question I get two different answers, unless one of them is Lord Keynes, in which case I get three." - Sir. Winston Churchill

The central tenets of Keynesian economic thought are the rejection of the neoliberal assumption that market economies are self-regulating and market clearing, and the elevated significance of aggregated demand . Keynes himself put it best, stating, “The system is not self-adjusting and, without purposive direction, it is incapable of translating our actual poverty into potential plenty” .

Keynesian Interpretation: 1945-1973

Keynesian proponents ardently refute monetarists’ explanation of the pre-1973 period of relative prosperity, and the subsequent stagnation. Monetarists’ critically highlight the substantial per capita GDP decline after 1945, however Gould asserts that this can be attributed to a relatively high population growth rate, and compositional characteristics of the NZ economy .

A central Treasury critique was that Sir Robert Muldoon’s (Prime Minister and Finance Minister, 1975-1984) Keynesian policies had failed, engineering the disintegration of the post-war boom, and that this was unambiguous testimony to the inherent faults of Keynesian demand-management strategies and economic theory. This is stringently contested by Keynesian economists, who claim that whilst fiscal policy was an economic instrument employed by the Third National Government, the administration was “far from being a paragon of Keynesian virtue” .

Whilst Keynes promoted state investment, it had to be accurately employed. Muldoon’s heavy agricultural subsidisation (Supplementary Minimum Price) and ‘Think Big’ energy production scheme were arguably misallocated state funds, in contrast to support for the manufacturing sector (Export Performance Tax Incentives) that were successful in stimulating exports . Internal fiscal deficit did not increase sufficiently during 1975-1984 to stimulate activity in the domestic economy, negating assumptions of neutral fiscal policy based on coincidental stagnation and increasing unemployment . These assumptions also ignore the effect the Reagan administration’s Keynesian policies had on the revival of the US economy . Finally, Muldoon’s unpredictable handling of the economy can be as equally criticised from a Keynesian standpoint as much as a monetarist.

Keynesian Interpretation: 1974-2005

Empirical evidence illustrates how the reform period brought the NZ economy to its knees. Dalziel notes that if growth had continued at pre-reform rates, the income sacrificed between 1987 and 1992 was “$11 500 per working age person, or 32 percent of annual GDP” . According to Kelsey’s studies, whilst OECD countries experienced 20 percent growth between 1985-92, the NZ economy actually contracted by 1 percent . Although the period 1994-05 achieved higher real GDP growth (3.43 percent) and lower inflation (2.12 percent), growth was still significantly slower than the 1950-74 epoch (3.47 percent) , and is expected to decline from 2006/07 onwards .

The worsening economic situation in the 1980s and 1990s, Keynesians believed, was chiefly due to the neoliberal strategy employed by the Fourth Labour Government. The Reserve Bank was forced to use interest rates and currency devices to ease demand for credit, as they failed to control the M3 money supply in a laissez-faire financial market. The Bank’s attempts to control rising inflation led to increased interest rates and exchange rate, harming productive businesses. The subsequent decline in profits and evaporation of investment lead to a contraction in output, and thus employment. In addition, the economic channels designed to transmit policy and market signals did not effectively communicate authorities messages, damaging much of the NZ economy . The inflexible product and wage markets reacted poorly to monetarist ambitions, and considerable inflation reduction can be attributed to diminishing real output and employment.

A patent differentiation in Keynesian thought is that the long-run trend is merely the aggregate of the short-run, as opposed to monetarism’s assumption that medium-term growth increases would outweigh the short-term slump in employment and growth generated by economic reform . Dalziel and Withwell criticise the monetarists’ disinflationary policies and aims as hysteresis and short-sighted.

For Keynesians, the heavy costs paid by New Zealanders were not worth the resultant mediocre, and possibly temporary, economic growth. Keynesian adherents believe that as long as the neoliberalism prevails as the orthodox mechanism driving policy, the NZ economy will continue to trail behind the OECD average.