An earlier column described market capitalism as a wobbly bicycle. Under the shock of the Covid Crisis, it has really fallen over – not only in New Zealand but in the rest of the world too. This column focuses on New Zealand, but I am not ignoring that the same thing is happening elsewhere. Our local woes illustrate much of everywhere else.
As I have mentioned, the world seemed to be going into some kind of downturn at the end of last year. Whether it would have just been a wobble or something more serious we shall never know, because the Covid shock has really destabilised the system. We sit on the side of the road with grazed knees and a banged head – or worse – the bike in a tangle, and through a dizzy vision wondering what to do next.
It is no good doing quantitative comparisons. We don’t have the local data, the international data is worse and, in case, some of the bikes are still crashing down the ravine. Some countries may experience a serious second wave.
In the following, I am going to assume that New Zealand does not experience a significant second wave: that we have no community Covid reservoir and that the border controls work well enough so that breaches are quickly contained. That is the official view.
Even so, the New Zealand economy is not functioning well. That is as true elsewhere, which is not a lot of comfort.
What may be unusual is that a number of businesses are using the crisis to downsize their workforce and establishments, but the downsize is not much to do with the Covid Crisis. It seems that for some time they have failed to face problems – such as overstaffing or over-capacity. But during the boom – with the bicycle racing along – they could cover the loss-makers by the profits from better parts of their business. Now they have to face up to reality. It is a pity they did not do the restructuring last year when the redundant would have been more easily absorbed into the booming sectors – now there are hardly any booming sectors.
This group does not include those businesses which are struggling with Covid-induced reductions in their structural demand – notably those relying on international tourism and education services. A not entirely unrelated change is that the Covid shock has speeded up the shift to working-from-home which is depressing office and accommodation needs in CBDs. (There are also complementary demand reductions in the CBD hospitality industries such as bars, cafes and restaurants which service office workers.)
The government wants to support workers (including owners) in these struggling enterprises but it does not want to have them staying in the dying jobs but rather to be redeployed to expanding industries. Yes, the two objectives are almost contradictory. The more support given to those in the struggling industries, the slower will be redeployment, starving the growing industries and adding to the fiscal burden.
The temptation is to see the support as a ‘bridging’ to a recovery for the struggling industry, without a lot of thought about how wide the canyon is. Some businesses may be more realistic than others. Air New Zealand thinks it will be two years before the airline can hope to be back to 70 percent of its pre-Covid-19 long-haul business. Can we expect the taxpayer to carry workers for the two and more years to full recovery?
A recent discussion pointed out that following the Rogernomics shock there was huge unemployment in the early 1990s (perhaps half the labour force was unemployed at some time, although unemployment at any point in time did not exceed 12 percent of the labour force). But it took over a decade for the unemployment rate to return to the pre-Rogernomics level of 4 percent.
Hopefully, more active labour market programs will shorten that period to, say, five years, but I am not convinced that we have the capacity to implement one. (Although there are glimmerings, especially in comparison to the 1990s response.) Such programs tend to be expensive.
And so we come back to the question of public financing. The Government seems to be spending like it was trying to win the election; the Opposition seems to be trying to outbid it.
The fiscal problem can be illustrated by those who have lost jobs in Centra Otago because of the tourism collapse being used to eradicate wilding pines. Make no mistake; I would like to see the damned weed exterminated and we cannot leave the task to private enterprise. So the program appears to be good one, providing support for the redundant and offering them a bridge until either the tourist industry recovers or until they move on to other opportunities. But how are we going to pay for it?
In the short term the government borrows the money. Somewhere in the world there are some holders of New Zealand Government debt who are, in effect, paying for the elimination of wilding pines. Good on them, even if they had not realised they were doing that.
Ironic, is it not? Improving environmental sustainability is compromising fiscal sustainability (and the social sustainability which comes from low wealth inequality). No wonder the bicycle is wobbly.
We can address the tension by repeating the austerity of the Key-English Government which resulted in a public sector which has often crippled the Ardern-Peters Government. Or we can raise taxes. Getting back onto the bike after the fall and riding it more sustainably may prove painful.