There have been any number of things that feel heartening about my country’s response to the challenges presented by Covid-19. We’ve seen a sense of community spirit and a calm, pragmatic approach to the business of politics. People have generally accepted that letting health experts guide public policy on this one, in return for a fair amount of transparency from our leaders, has been a sensible move. Although, like anywhere, we have our fair share of flat earthers and anti-vaxxers, there’s been little room for quirk and superstition in the public discussion, and that’s as it should be.
And now, joy of joy, it seems as if there may even have been a small crack opening up in the superstitious world of economic policy. Maybe it’s too early to get excited, but after thirty five long years of a weird sort of collective puritanism when it comes to monetary and fiscal policy, a little mainstream common sense has arrived by stealth on these lonely islands. Now admittedly it’s a while since I completed my economics degree, but over the ensuing decades the fundamental realities haven’t changed. The basic mechanism by which Governments and central banks operate, while different in detail, remain recognisable in the broader picture. And, as anyone who’s studied economics will tell you, there are options when it comes to funding public spending. We can raise revenue through forms of taxation, or earnings from government enterprises. We can borrow, in order to finance longer term capital projects where the benefits also accrue long term, or to smooth out economic growth cycles, spending more in hard times and less when the going gets good. And, whisper it quietly, the government can just create more money. That’s right, the central bank can simply honour the government’s spending commitments by putting more money into the system. Technically this will show as a transfer of 0% interest government bonds, but the effect is funding through money supply.
But what, you cry? That can not be true. Why then raise taxes at all? Why not just enjoy a glorious and endless flow of government largesse? The answer is that in economics, to employ the favoured cliche, there’s no such thing as a free lunch. Such policies as monetising government debt, as we now prefer to call it, have flow-on effects, two in particular. One is seared in the public consciousness, the other less so, but both are potentially important. Reckless disregard for economic conditions when you pursue this policy can lead to inflation, in the same way as reckless disregard for physical conditions when eating can lead to obesity. This, note, is not an argument against eating, just a caution to eat well and happily and be aware of the trade-offs. Oh, if only economist commentators possessed some degree of common sense. For a small trading nation like ours, the other danger is to do with our balance of payments. Amp up spending too much and as people’s incomes rise, they spend more on imports. If exports don’t rise at the same time, there can be some ugly adjustments further on down the line.
So there you go, printing money is a brilliant way of raising funds in some situations, just so long as you’re not in a situation where you’re close to capacity and new demand will be inflationary, or where the tradable sector is going to blow out. And so, all around the world, mainstream economists and political operators have advocated the cautious use of this approach to fund some government spending. As you’ll likely have already spotted, it’s particularly apt in times like ours where a calamity has tanked the economy or destroyed the capital base (like after a war, or a major earthquake). Because you’re attempting to boost lagging demand, there’s no need to fear inflation, quite the opposite, and similarly, because this is a short term measure designed to pull us out of a recession, it will not in and of itself threaten our balance of payments. Tourism has taken a mighty hit and there’ll be a new equilibrium to be found there, but that’s another matter. And, sort of perfectly, this is spending that is not going to be built in to future budget cycles. It’s one-off funding for a variety of support and restart projects, and if you think back to the genesis of state housing in New Zealand you’ll understand we’ve done that before, and with great success.
And yet, and yet, just wait for either the meek capitulation of government behind the scenes, so that the option doesn’t even appear on the table, or the baying howls of ‘remember Germany before the war?’ from the high priests of market purity who for some reason have a free pass to spout superstition in this country and not get called on it. I know this will happen because after the Christchurch earthquake the Greens suggested exactly the same idea and the backlash was so aggressively orchestrated that they lost their nerve and backed away from a perfectly sensible, middle of the road economic suggestion. I don’t even think it’s self interest on the part of the market worshippers; nothing so venal. I think it’s just deeply embedded ideological superstition, as always aided and abetted by commentators who are terrified of appearing ill informed.
But at least we’re talking about it, and make no mistake, the alternative is awful, a sustained period of unnecessary austerity that, as always, will disproportionately hit the vulnerable and the marginalised. You know, I don’t mind superstition. Whatever gets you through the night. Until it starts hurting other people. At that point ignorance needed to be named and shamed, and bullies outed. In my perfect world, this would become an election issue. I’m allowed to dream, right?