Max Bowden’s: Beware Distractions – It IS The Economy Stupid

Column – Max Bowden

The “Tea Party” sideshow has thrown a spanner in the works of this election campaign, and may yet throw up a rogue result.


Max Bowden’s BusinessSense: Beware The Distractions – It Really IS The Economy Stupid!

The “Tea Party” sideshow has thrown a spanner in the works of this election campaign, and may yet throw up a rogue result.

It has brought a bit of life to the campaign, but it means we are not getting to the bottom of what the main parties are going to do about the real problem facing the country – economic growth and prosperity for everyone.

While we all have our own opinion about the way the mainstream media operate, and the rights and wrongs of this incident have yet to be established by the Courts, it is clear there is an agenda to get some dirt into the campaign.

What this means is a smokescreen descending over real policy issues. How National, or Labour if they are elected, plan to get the country through the next few years as the global economy flirts with a second huge meltdown, will be critical to us all.

There must be both a plan A, and a plan B. Lessons must be taken from other nations which have successfully pulled themselves from the mire.

Trans Tasman’s Economic Debate www.transtasman.co.nz looks at two such economic success stories:

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“Economic Debate – How To Beat The Crisis A correspondent for CBS’s MoneyWatch has gone beyond regurgitating the bad news about the eurozone crumbling, Washington’s feuding “supercommittee” bumbling the job of budget trimming and the slump of US consumer confidence.

He asked if anyone was doing things right and found yes, some were. Despite the economic pall settling over much of the globe, he reported, some countries were showing resolve and ingenuity in getting their houses in order. He identified two (no, NZ was overlooked).

Each had been battered by separate financial crises and offered vital lessons for Europe and the US about how to spur economic recovery.

First, Iceland – remember its economic meltdown, bank collapses, debt mire and plunge into recession in 2009? Helped by a $4.6bn IMF loan Iceland has recovered rapidly.

Eschewing privatisation, the Govt nationalised the three largest banks, capital controls were imposed to protect the currency, financial regulation was tightened, and creditors, not taxpayers, were lumbered with most bank-related losses. Sharp spending cuts (favoured by many European states but now stifling the region’s growth) were rejected.

Iceland’s recession ended in the second half of 2010. Private spending increased and exports began to rise; wages rebounded and people’s purchasing power was boosted, income inequality declined and Iceland’s sovereign debt is stronger than that (eg) of Ireland, which wouldn’t nationalise its financial sector.

The lesson: The best route out of a recession is to boost, not slash, Govt spending and put money in the hands of people most likely to spend it. And in a financial crisis, bank executives, shareholders and bondholders – not taxpayers – must take the economic hit.

Argentina was the second case study in how to bounce back from financial calamity. It sparked re-growth over the past decade in several ways, including bucking IMF pressure to repay its creditors in full, cut spending, raise taxes and slash social services.

Its Govt revenue rose from 15% of GDP in 2002 to more than 23% seven years later but unemployment shrunk from over 16% to just over 7% today.

Its path to recovery suggests defaulting on debt doesn’t necessarily spell disaster, especially if it keeps creditors at bay. NZ, in contrast, is preoccupied with its budget deficit, rather than ready to make economic growth and employment top priority.

Yet the PM this week acknowledged private sector debt, rather than Crown debt, is NZ’s bigger problem as Europe’s debt crisis threatens the global economy. So which case studies have inspired him?”

As economists point out, austerity stops growth. Excessive savings stops growth, and without growth, debt cannot be repaid because there is not enough revenue.

The austerity message is widely discredited. The only way to get out of a recession is to encourage growth.

The question our political masters must answer is how they will encourage this growth.

This is why the “Tea Party” scandal is such a distraction. We are approaching a crucial election and all the media can focus on is who said what about whom in an innocuous meeting between two politicians.

We expect better, from our media, and our politicians.

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To see Max Bowden’s BusinessSense archives – go to http://www.themainreport.co.nz/business-sense

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