This week we have been assailed in the media by John Key and other economic commentators by the news that the economic recovery is supposedly near at hand.
These bearers of good news have not only been busy locally but also internationally as signs of a nascent recovery have begun to appear at least within the financial markets, if nowhere else.
Free market capitalism seems to have a way of coming out of deep recessions and depressions only slowly and these first signs have traditionally appeared not in the household sector but in the speculative financial capital and banking sectors. Just in this past week, American banks such as Citigroup and Chase-Morgan have reported increased profits after the most significant state administered financial rescue ever undertaken in both the US and Britain. The economic stimulus administered to China's economy seems to be working as well with GDP growth there rising by over 8% in the second quarter of this year alone. Singapore's economy is also set to grow by a massive 20% or so in the next two to three quarters according to projections I saw last night on BBC World.
Meanwhile, there are other signs that any recovery will not impact on ordinary people for sometime yet.
In the US, Britain and Japan, growth rates have dropped precipitously and unemployment continues to rise in those countries despite sizeable stimulus packages having been introduced there. I do applaud the fact though that these countries have reacted to the financial crisis through the introduction of neo-Keynesian policies which have acted to prevent the Great Recession from becoming another Great Depression, which the financial meltdown of late last year could have easily precipitated. While I am concerned about the rising unemployment rates in these countries, I would have to say that without the Keynesian stimulus packages, things would be a lot worse. Besides it will take some time in these larger economies for any stimulus to take full effect and also given the length of time that the US and Britain have been in recession (as their downturns started in late 2007).
Lengthy lead times aside, another reason as to why the downturn has been so severe in these countries has been due to the generally high level of consumption in many Western economies which has led to the neglect of savings and investment, especially over the last two decades. Both economic and political commentators on the left and right agree that the general level of dis-saving has not been advantageous for the development of many Western economies, including New Zealand's.
Yesterday's credit rating downgrade for New Zealand by the Fitch agency is but one warning of the perils still facing our economy. It is true that we are now grappling with twin deficits in both the current and domestic (government) accounts, so any potential borrowers will be more reluctant to borrow money to us within this climate but we are not alone in experiencing this dilemma by any means. The US, Britain, Japan and most of Europe are in the same boat and it is the Chinese who are now supplanting the once mighty Japanese as the main creditors of the international capitalist economy (and who would have thought that 25 years ago?)
There are two contending schools of thought as to why this is the case.
The New Right school holds that many Western economies are still having their productivity stifled through the application of what they hold to be un-necessary bureaucratic regulations and other red tape. Besides, they decry the domestic fiscal looseness of various governments and call for this to be remedied through the slashing of government expenditure (mainly on social programmes and services) with a concommitant reduction in taxation to shift more 'productive' resources into the private sector (i.e. mere code for increasing the level of private sector profit maximisation).
The second school of thought offers the best critique from a Keynesian perspective and holds that with the large scale deregulation of both the domestic (New Zealand) and global economies over the last 25 years has largely exacerbated this imbalance rather than checked it. All of this comes through the interlinkage between the deregulation of the markets for labour, capital, goods and services and investment that has resulted from globalisation.
With the fall of trade barriers has come a rush of cheap consumer goods from Asia which have been snapped up in preference to goods from developing countries by consumers in wealthier nations. These same consumers (particularly in New Zealand) have become comparatively poorer due to the deregulation of labour markets and have, therefore, rushed out to buy cheaper goods and services. In order to fuel this spend up, multinational financial and banking institutions have sought to make money from the increasing deficits that households were running up by seeking to plug the income gap through the availability of easy credit. Therefore, this increased the level of household indebtedness which was supported by the speculatively driven real estate bubble that ran from earlier this decade until the end of 2007. But when the house of cards began to fall down starting with the rise of oil and food prices in late 2007/early 2008, this led to a consumption-driven downturn that began in North America and then spread to the UK, Europe, Central and Latin America and New Zealand.
And now we are living with the macroeconomic consequences of that.
So, what needs to happen next?
Already policy makers in the US, UK and Europe are tightening up on financial regulation in order to stave off another recession like the one we may now be slowly exiting. There is also a determination to keep running a neo-Keynesian economic policy in order that governments can help cover continuing private sector and household deficits until these rectify themselves. However, I see no determination on the part of multinationals and their allies within various global governments (including New Zealand's) to turn course on the policies of free trade and other sectoral market deregulation which assisted in the creation of the imbalances we now see. There is also no long-term committment (especially in New Zealand under National) to invest in social and environmental spending programmes that will act to reduce the growing social and ecological deficits that are impacting on ordinary people.
This is why I am confident that, in the end run, capitalism has almost eaten itself on this occassion and might do so again, given the chance.
Therefore, it is imperative that we introduce a real social democratic programme of domestic economic regulation underpinned by a compulsory retirement savings programme on the part of both ordinary individual households and businesses to raise the capital necessary for investment in new, green industries in order to prevent any recurrence of this economic crisis. Any superannuation-based savings programme (a modified version of the New Zealand superannuation savings scheme introduced by the third Labour Government in 1974 and then shelved by the Muldoon National Government in 1975) should seek to address the potential gender and other inequities that might result through paying out a higher sum to women and other disadvantaged groups in their retirement. Alongside this the Kiwi Saver scheme should be fully nationalised with private sector provision done away with and any disincentives to save (such as the 2% cap on government matched savings) abolished.
In tandem with this, there should be the full re-regulation of the labour market with a higher minimum wage and emphasis on collective bargaining so that wage rates can be driven up so eliminating income deficits within households. A progressive tax system that will fund fully free health, education and subsidised housing should be re-introduced too. Besides, the State (as it once used to do through the old State Advances Corporation and Housing Corporation) should guarantee fixed low-interest loans so that working class and poorer people have the chance to gain some capital through owning their own home.
The adoption of any, if not all of these measures, will produce real green shoots within the economy that will benefit the ordinary people of this country first, so that we don't all have to wait for the unemployment rate to come down for us all to believe that the recession is really over.