Better Democracy NZ is a non-partisan, non-profit organisation.

Our mission is to foster the improvement of New Zealand's democratic system and encourage the use of direct democracy through the

Veto, Citizens' Initiated and Recall referendum.

________________________________________________



Wednesday, 22 April 2009

NZ comparisons with Ireland problems


I thought this was an interesting article about the problems facing Ireland at present. In many ways Ireland is similar to NZ. I think

the reality of the credit crunch and faulty monetary system still hasn't hit NZ yet. Although there has been large amounts of money lost through finance companies, unemployment hasn't been affected yet. But when it does happen and more people start losing their jobs we will likely see something similar to what is happening in Ireland and other parts of the world.

6 comments:

Anonymous said...

I certinly hope things don't get as bad in NZ as some are predicting in Ireland. Irish economics professor Morgan Kelly told a conference recently that he expects house prices in Ireland may fall 80% from their peak, and that Ireland will see more demolition than construction of houses over the next decade. This was reported in the Irish Times.
He said, “Construction, but not demolition, of residential and commercial property will fall to zero for the foreseeable future”.

He also said it could take Ireland 10 years to recover from the current financial crisis. Our government plans to spend it's way out of this economic turmoil and I certainly don't think that is the answer.

Wilsta said...

You will see the same economic trends in NZ as in Ireland. Visit www.rbnz.govt.nz and take a look at our debt and housing stats. Government spending has shown to help ease recessions in the past ... but its unprecedented for every country around the world to be doing it all at once! Tax cuts will only help on the margin of things .. as most people (knowing we are in a bad state) will save, not spend it. KiwiSaver couldnt have come at a worse time either - we need that stimulus now .. not when we are 65!!

Steve Baron said...

Wilsta suggests that government spending has shown to ease recessions in the past. This is Keynesian economic theory. At the height of it last century, the Swiss people refused to allow extra government spending and were seen as naive and selfish as they were against all popular economic thinking of that time. They stopped this spending through their system of Veto which is a Binding Referendum. History proved that their decision was right when the rest of the world suffered under huge rates of inflation, Switzerland probably had the lowest in the developed world.

Now the Reserve Bank Governor, Dr Bollard is saying he is concerned about the amount of debt we have as show in the current account deficit. If governments spend more in the hope of stimulating the economy they either have to borrow more or tax more. This can only add to debt worries.

If we assume people will save and not spend we have to assume they have enough money to save. I suggest less government spending and more money in the pocket of citizens will encourage them to spend. Governments piling up more debt certainly isn't the answer.

Wilsta said...

To be honest, neither tax cuts nor a stimulus package is going save us (my opinion).

Steve, more money in peoples pockets is simply inflationary. Less is deflationary. It's all relative ... prices will adjust to the amount of money people have in their pockets. However, its their perception of where we are going as an economy that influences their spending...

Steve Baron said...

While some of what you say is true Wilsta, I think you missed the most important part of what I was getting at, which is government debt. More money through higher wages certainly isn't the answer as you suggest because that is indeed inflationary.

When the government is in debt this means each of us as individuals is in debt. By offering "stimulus packages" the government is simply spending more money it doesn't have so that isn't the answer either. This debt must eventually be paid back and that can only come from taxes which means less money in the taxpayer pockets.

So although higher wages may indeed lead to inflation, this doesn't mean that lower taxes will have the same effect. It is similar to an individuals economy. When a person reduces his debt he has more money to keep. He may or may not spend that extra money. He may indeed even save more money for his families future security. This money when invested can be used by industry to produce the goods and service a society needs.

The "value of money" is very important but money in itself is not wealth. Wealth is what is produced and what is consumed. It is our roads, schools, clothes, homes we live in etc etc. It is no use having higher wages if that extra wage buys less goods and services before the wage increase. This is what continues to happen decade after decade as each of us finds our money buys us less.

Although an economy is very intricate, the core of any successful economy has to be the reduction of debt. We can not continue to live beyond our means paying for things we couldn't afford and with interest on top of that.

We can quickly see how the American economy is struggling given their huge debt which is being added to every day they are at war. Certainly a little bit of debt for the right things isn't a bad thing for any economy. Just like a little bit of debt isn't bad for an individual. But when all of your wages are consumed to pay for all the goods you purchased but couldn't afford, then you are in trouble, as is any economy.

Debt has become too large and is strangling us. Yes there are sound arguments for borrowing to pay for some infrastructure for example, because future generations will use it so they should be responsible for paying for it as well. But overall debt must be reduced if we want to prosper.

So my argument is for government to reduce debt drastically so they don't have to tax as much as they do. This gives everyone more money in their pockets without increasing wages which drives the hideous monster of inflation. When people see that this process is not going to hinder the future value of their money or hinder the economy, they will have more confidence in their futures. This will allow them to invest in real wealth producing goods and steer away from speculative activities which eat away at wealth and redistribute it into the hands of just a few.

Wilsta said...

Steve, you must be talking in a general sense because the NZ government doesnt have that much debt relative to GDP. However, the NZ private sector is majorly overleveraged. Too much of anything is bad, debt is no exception. However, if used on the correct projects and in a sensible manner it will be beneficial. In saying that, I dont think there is a solution to the current economic downturn. Even the IMF said today that advanced economies are in depression.