Where to for the New Zealand economy?

– Philip Ferguson

This is the second of a two-part feature; the first looked at how a capitalist economy works (and doesn’t work), while this part looks at trends in the NZ economy, government policy and the February 28 Jobs Summit

The state of the New Zealand economy today, like that of the global economy, is best understood in the context of the end of the post-WW2 boom (around 1973-74), the onset of a protracted period of capitalist economic crisis and the failure of counter-crisis measures (both Keynesian and neo-liberal) to solve the problems that came to the fore with the end of the boom, let alone open up the road to a new period of dynamic growth on the same kind of level as the postwar boom.

As we noted in last month’s paper, the end of the boom and the onset of a new period of crisis was the result of the working out of the law of the tendency of the rate of profit to fall, a process which is built into capitalism.  In New Zealand, the crisis was exacerbated by the loss of traditional markets, dependence on imports such as oil and the use of Keynesian policies to try to escape the crisis.  None of these latter factors were causal, but they did make the problems worse.

The entry of Britain into what is now the EU and the dependence on oil are fairly straightforward to understand as factors making things more difficult.  But how would Keynesian-type policies deepen the crisis?

They did this is several ways.  For instance, the fall in the rate of profit in the productive sphere of the economy led to sluggish productivity and output growth and made capitalists less likely to invest there.  In this context, Keynesian pump-priming measures meant that more money was being pumped into the economy without a parallel increase in productivity and output.  So prices rose to soak up the extra funds.  This brought about stagflation – economic stagnation coupled with inflation – something which was supposed to be impossible under Keynesian economic policies.  The other side of this was an expansion in the role of the state sector, through projects such as Muldoon’s ‘Think Big’ scheme and through greater regulation.  Since the state sector is financed out of surplus-value produced through the exploitation of workers in the private sector, diverting more surplus-value into underwriting the state sector in the context of an increasingly acute crisis of profitability made that crisis even worse.

The economy increasingly began to seize up.  This was the situation when the fourth Labour government arrived in power in 1984.  Completely committed to managing capitalism, the Labour politicians sought to overcome the crisis in the only way capitalism can – by driving down the wages and living conditions of workers, by cutting the amount of surplus-value that underwrites the state sector (through a combination of selling off the potentially profitable bits and making as much of the remaining state sector make some kind of profit or break even), by letting chunks of inefficient capital go to the wall and through deregulating large parts of the economy.

In the absence of a fighting trade union movement and an authoritative revolutionary political movement to point the way forward out of the crisis through getting rid of capitalism altogether, the Labour Party and their wealthy business friends largely succeeded in implementing their anti-worker policies.  Real wages fell, tens of thousands of workers in both the state and private sector lost their jobs, and capital was ‘rationalised’ through being more concentrated.  However, none of these measures led to a new burst of investment in the productive economy – the economic sphere where goods and services involving new value are produced.  Instead, massive amounts of capital were invested in the artificial economy through the property market, the share market, currency speculation and other activities which make profits without creating new, expanded value.  The result was a frenzy of buying and selling and increases in the paper values of shares, companies, property and so on that bore no relation to their actual value.  This huge financial bubble was global and burst in the global crash of October 1987.  Half the paper values on the NZ stock market were wiped out literally overnight and a large percentage of the companies on the stock market simply disappeared.  An artificial boom turned into a new recession.

When Labour was tossed out of office in 1990, the new National government continued Labour’s ‘new right’ or ‘neo-liberal’ agenda, selling off state assets, deregulating the labour market (through the Employment Contracts Act), making workers work harder and longer for less and, with the 1991 ‘Mother of all Budgets’ cutting the dole, domestic purposes benefit, widows benefit and other state benefits by up to 25 percent.  All that this encouraged capitalists as a class to do, however, was to continue to starve the real economy of investment, relying on increasing productivity and output simply by continuing to make workers work harder and longer.  The gains in productivity that can be achieved through this approach are quite limited and from the time of the Employment Contracts Act on, productivity increases in New Zealand began to fall well below Australia, not to mention other competitors.  The overall NZ economy remained sluggish and certainly no bright new period of dynamic growth on the level of the postwar boom was opened up by the ‘new right’ or ‘neo-liberal’ economic policies pursued with vigour by the two main parties from 1984-1993.

By the mid-1990s Jim Bolger’s National government was casting around for new ideas and began dabbling with the concept of ‘social capital’, recognising that downsizing carries with it the loss of the skills built up over long periods of time by the workers who were being laid off.  However, the main ‘big picture’ concept to emerge was the ‘Third Way’, pioneered by the Blairite leadership of the British Labour Party drawing on ideas from sociologist Anthony Giddens and policies of the Clinton administration in the USA, especially ideas associated with Robert Reich, Clinton’s secretary for labour.  In the New Zealand context, the ‘Third Way’ meant maintaining most of the neo-liberal reforms, but knocking off some of the rough edges and partly bringing the state back in to try to reinvigorate capitalism since capital was clearly incapable of doing the job alone.

Despite some absurd scare-mongering on the left, along the lines that Act and the Business Roundtable would be calling the shots, the plain fact is that the current National government has little use for these failed policies and policy-makers.  The smart money understands that neo-liberalism was good for screwing over the working class but has been a failure in terms of reinvigorating the productive economy and that more of the same is a recipe for New Zealand capitalism falling further behind in the global competitiveness stakes and NZ society itself becoming more fragmented and dysfunctional.  National today is far more influenced by post-neo-liberal thinkers such as the New Zealand Institute, an important new think tank founded in 2004.  This is evident in a whole number of ways, including the make-up and agenda of the February 28 Jobs Summit called by National.

The document Economy on the Edge: swan dive or belly flop authored by the Institute’s CEO, David Skilling, and the CEO of NZX (the stock exchange), Mark Weldon, provides a good glimpse of the kind of ideas being considered by prime minister John Key, deputy-prime minister and finance minister Bill English and their colleagues.  Skilling and Weldon see a significant role for the state sector, albeit much more thoroughly interlocked with the private sector and much more commodified (ie the state sector operating much more as a set of businesses owned by the state or by the state and private share-holders).  Skilling and Weldon also point to the need for much more economic planning and offering various incentives to firms, especially NZ firms, in the productive sector.  They favour discouraging investment in the artificial economy which has such a mesmerising place in neo-liberal thinking and such a negative impact on the real economy – the productive sphere.  Weldon is chairing the Jobs Summit.

After coming to power in 1984 Labour called an Economic Summit with the purpose of pushing a neo-liberal economic agenda, an agenda which involved shedding tens of thousands of jobs.  The February 28 summit is much more focussed on how to manage the crisis while retaining jobs and expanding productive employment.  This is an agenda more in line with the views of bodies such as the New Zealand Institute and Businesses for Social Responsibility.  And whereas conspicuous consumption was the order of the day during the 1984-1993 period, austerity and more modest lifestyles for the rich – at least in public – along with pay freezes for top income-earners, are the new orthodoxy being pushed by National.  At the same time the minimum wage has been increased by a further 50 cents an hour, the kind of increase which Labour in more prosperous times had to be pushed into agreeing.  Clearly the National-led government is not some simple re-run of either the fourth Labour or fourth National governments, completing the “unfinished business” of the Douglas-Richardson “revolution”.

The strategy being deployed seems to involve cautious use of state intervention and public spending both to limit the recession and its impact on every class in New Zealand society and improve and expand the productive sector of the economy, through greater investment, in order to emerge from the current global financial malaise in a more competitive position.  If the government, employers, top union brass and the capitalist media can convince workers to go on accepting lowered horizons and the continuous ups and downs of a system driven by profit rather than human need, they may well not need to attack the working class in anything like the way workers were attacked in the 1984-1993 period.

In that case we would be in for some years of stagnation, sluggishness and relatively-depressed living conditions, before a partial economic recovery – until the next bust.  If the global recession deepens significantly, however, the only way that capital could revive itself would be through much more substantial attacks on workers’ pay, conditions, rights and living standards.  Either way, this system has little to offer workers.  We need to lift our expectations and horizons and say, “If this is as good as it gets, then let’s try some other way of organising society, like using production to meet the human needs of the many instead of creating private profits for the few.”