Creating Jobs In The Teeth Of The Financial Crisis

Giving the local government portfolio to Rodney Hide creates some management challenges for John Key. Can Key really afford to let Hide loose down the privatising track in local government – which would entail the wholesale contracting out of council services and the privatizing of water and roads, along lines set out in Hide’s private members’ bills on the subject. Only a minuscule number of people in New Zealand voted for this agenda.

Or will Key do the exact opposite – and try to repeat what Kevin Rudd is doing right now in Australia ? Rudd is treating local government as the best, most readily available jobs engine to soak up the unemployment bound to flow next year from the global recession. Which path will Key choose to follow – yesterday’s extremism, or tomorrow’s pragmatism?

First, look at what Rudd is planning to do. In his programme for regional and local community development outlined here

Rudd is making $A250 million immediately available to councils in a one off funding infusion, with every council receiving a minimum $A100,000 funding boost at least. An additional $A50 million for larger infrastructural projects is also being made available, and the guidelines for these forms of assistance can be found here.

Last week, the Sydney Morning Herald somewhat sardonically reported on the Rudd initiative in this way :

Kevin Rudd’s latest attempt to stave off a recession will manifest itself through such projects as disabled access to the Cootamundra council chambers, restoring a hall in Tumbarumba, and a bus for residents of the northern beaches.

The ideas were ventured by excited mayors yesterday after the Federal Government handed councils $250 million in cash grants for small projects.

Mr Rudd also made available another $50 million for councils to bid for grants of $2 million or more for bigger projects….
He said all the $300 million would be paid out by the end of this financial year and had to be spent before the end of September next year, to help stimulate the economy. "We expect that the Regional and Local Community Infrastructure Program will create thousands of jobs for tradespeople, engineers and administrators," he said. While Mr Rudd said this marked a new partnership between the Commonwealth and local government,,,,councils would be required to meet a national standard for financial and asset management plans.”

With the election barely behind us, New Zealanders have not heard any details from the new government on how it plans to cope with the financial crisis. Time is ticking by though – those 200 jobs at Air New Zealand have already started to go. One thing seems pretty clear. This is no time for a slash and burn approach to local government spending. It seems far more sensible to use local government as a jobs machine, and provide it with the funds to play that role to the hilt. Perhaps Hone Harawira and the Maori Party – with their fondness for the old PEP schemes – can be a voice for reason over ideology in this respect.

So far, all we have heard from Key are repeats of his pre-election campaign talk about “infrastructure” – ie, roads and bridges and faster broadband - and oh yes, PPPs. In other words, much the same policy agenda the National Party had before the financial crisis hit. Major roading stuff, whereby the private sector can make big money from the contracts. Right now though, there’s a crisis facing our communities - and whatever Rodney Hide may think of them, local and regional councils are the bodies best equipped for a rapid response. The main thing they need from central government is the money.

The only other element in New Zealand’s plan to cope with the recession – if we can discern a plan at all - is the Reserve Bank’s current yen for aggressive cuts to interest rates. Yet as BERL economist Ganesh Nana pointed out to Scoop, ‘ [Rates] are coming down only on the interest rates [that] banks are offering on mortgages. If you look at the interest rates that businesses still have to pay, [they’re] significantly higher. They haven’t really come down at all.”

Nana continues : “So if you’re looking at cost to businesses, I think the Reserve Bank now has to wave a big stick.at the banks, and say – look, you guys have got to start toeing the line and start passing the interest rate reductions on, Because if we’re looking to seriously insulate the real economy from the financial shenanigans, we need to maintain jobs. And one of the main ways you do that is allow firms access to reasonable credit, at a reasonable cost. “

Usually in New Zealand, the Reserve Bank pulls on the interest rate lever, and hopes that a lot of subsequent talking will move events in the right direction. Currently, as Nana points out, the new government also has at its disposal ‘a fairly good weapon’ to throw at the banks, if it is willing to use it. “Not all have signed up, but most banks do seem to be keen on the mortgage guarantee scheme. There’s a bit of a quid pro quo here. If they want the government and taxpayers to underwrite their business – which is effectively what we’re doing - its about time they started to play by the rules.”

The rules of that game comes down, in the end, to whether the banks and financial sector should function – or can be made to function – as a service sector for the real economy. Hitherto, our light handed regulatory approach to the banking and finance sector has worked no better here, than it has anywhere else. In other words, not at all. For a long period of time, banks in New Zealand have been more interested in throwing money at households to buy houses. So, in future, Nana suggests: “There needs to be tighter regulation and oversight around the types of lending that banks can get involved in.”

Specifically, what tools are at the government’s disposal to channel the credit flows more positively? Well, Nana explains, you would start by looking at the mechanisms for mortgage lending. Don’t just focus on the price of credit – via interest rate hikes or cuts - but set a target for supply, and limit the amounts available for lending. In addition, limits should be set – say at 80% max of the house price - for mortgage lending.

Otherwise… if things are left as now, the bulk of lending will not be invested in virtuous production, and the Reserve Bank cuts in interest rates will provide only short term stimulation at the retail/consumption end of the economy. A sugar fix, essentially. While sugar is nice, it lacks protein. And past history has to place a fairly large credibility question mark over what Bollard is doing.

Look at it this way : here is a Reserve Bank that has made a fetish out of controlling inflation, for the past 15 years or more. Now, out of desperation, Bollard is slashing rates to put some life back into the economy. Does he really think the productive sector will believe the Reserve Bank leopard has changed its spots? Wouldn’t any business have reason to believe that as soon as the real economy shows genuine signs of life, Bollard won’t revert to type and start hiking interest rates up again to kill inflation ? This is precisely what happened in Japan in 1990. Recently, economist Paul Krugman nailed the credibility problem involved in this way :

The whole subject of the liquidity trap has a sort of Alice-through-the-looking-glass quality. Virtues like saving, or a central bank known to be strongly committed to price stability, become vices; to get out of the trap a country must loosen its belt, persuade its citizens to forget about the future, and convince the private sector that the government and central bank aren’t as serious and austere as they seem.

Luckily our low levels of public debt – thanks, Michael Cullen, good job! - and comparatively high interest rates give us more room to safely stimulate the economy. As Krugman suggests though, it wouldn’t hurt if the central bank could give a ‘pre-commitment’ to keeping those rates low for an extended period. Getting banks to lend to the productive sector is not the only problem, however. Reform and rebuilding of financial markets is required. And that’s a long term project.

Right now, Dr Bollard is reportedly poised to make another major cut in interest rates next week. So, as Nana says, the banks will need to be directed to pass on the benefits to the productive sector. But have Bollard – and Bill English – really got the spunk to make sure that happens ?

While we wait to find out, the fuzz and buzz about ‘infrastructure’ will continue. It does seem we are all Keynesians now – National and Labour alike – in the sense of sharing a consensus view that infrastructural projects funded by government are the best way of saving and creating jobs, as the domestic recession threatens to tip over into a full blown Depression.

Local government could have a major role here, Nana suggests, if it is allowed to play it. “ A lot of local government has a backlog, of drainage, sewage, or work in irrigation.” Yet with Hide as the newly appointed Minister of Local Government, isn’t he more likely to want to tighten the screws on council funding, rather than loosen them ?

“I’d be really concerned about that,” Nana replies. “ Local government has been the major driver of the economic growth that we’ve had in the last few years across the regions, rather than something focused on a few big areas. A lot of local government bodies have got a fair few of these infrastructure projects on their books there, ready and waiting. These are the councils who are going to feel the pressure of funding, and it’s the role for central government to step in, and say, ‘Look, this is what we are going to do.’”

In the end, it could come down to ideology. If Key is not willing to follow Rudd’s example, then Hide and Roger Douglas – who doesn’t have to be in Cabinet to damage New Zealand, all over again - may be let loose to shut down what is arguably the best option we have of averting a jobs massacre during 2009.

Semantically of course, that fuzzy word ‘infrastructure’ can be taken to mean only major medium to long term projects – more roads and bridges, as Key says. That would be the preference of the major corporates who have happy dreams of scoring the contracts. ( So far, by the way, we haven’t even begun to have a debate on whether there would be more jobs and socio-economic benefits from building light rail systems. than more roads and bridges.)

As Nana has indicated and Kevin Rudd clearly believes, local government could be a quicker ‘more jobs for the buck’ delivery system, one that is closer in touch with community need. So perhaps Key needs to rein in his new Minister, and free up more funds for local communities to use and spend - on their own schools, health facilities, dental clinics, public transport, road repairs, sewage, drainage and the like. Its their money, after all. And their jobs.

ENDS

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