Revisiting the 1960s' Savings and Growth Bandwagon
Keith Rankin, 6 September 1998
Brian Gaynor, the Saturday columnist for the Business Herald, is jumping on the "we must save more / we must grow more" bandwagon ("Economic Policy Must be Changed", NZ Herald 5/9/98, p.E2).
It is true that more savings are good for a fully employed economy in which the people wish for a faster rate of growth. More savings are bad, however, for an economy such as New Zealand's which fails to utilise its resources and which exports its human capital. If capital is underutilised, more saving simply leads to an even bigger gap between an economy's ability to supply goods and the market demand for those goods.
More saving means an increase in the supply of capital. That is only useful if there is a strong unsatisfied demand for capital; hardly the situation today. The orthodox policy for such a situation of overheated demand is to use monetary policy to increase interest rates, to increase the quantity of capital supplied while decreasing the amount of capital demanded. There would be no need to adopt a fiscal policy to subsidise savers, even if New Zealand's economy was overheated.
Increasing savings is not the best way to raise economic growth in a fully employed economy. Sustainable long run growth arises from gains in "total factor productivity": ie in getting more value from capital and labour inputs, and not from simply raising capital and labour inputs.
Rather than seeking the orthodox remedy of raising interest rates, Gaynor wants the Government to pay benefits to people who save. Now, because people who receive more income save more, such benefits are clearly targeted in favour of high earners.
Actually, one of the most common forms of saving by ordinary New Zealanders is repayment of loans: mortgages, hire purchase credit cards, or payments of principal to loan sharks. People fighting their way out of a debt trap are as much savers as are people who buy shares or bonds.
We won't subsidise this form of saving, of course, because too many people today regard the payment of benefits that go by any name other than 'tax cut' as 'low quality spending'.
We don't need to raise our savings rate. We just need to put more money in the pockets of our bottom 80% of income recipients, making it possible for them to both save more and spend more; allowing the overworked to work less, and creating new opportunities for the jobless.
Brian Gaynor wants New Zealand to have a hothouse economy on a turbo-charged growth path. While he doesn't trust market forces to deliver, he uncritically adopts a simple 1960s' growth model (the "perspiration" model of economic growth - as Paul Krugman described Asia's economic "miracle" - rather than the inspirational neo-Schumpetarian model that underpins New Growth Theory.)
To implement this policy, Gaynor wants to establish a "New Zealand Development Authority" (NZDA) which would operate on a similar (ie technocratic rather than democratic) basis to the Reserve Bank.
He envisages the NZDA having the following statutory powers:
This sounds just like a dirigiste Five-Year Plan.
A few years ago, the BBC screened a documentary series under the rubric Pandora's Box. One of those programmes was titled "A Fable from the Age of Science", and it showed how such a technocratic experiment in hothousing economic growth failed in Britain in the 1960s, just as the very different Thatcherite monetarist experiment failed in the 1980s.
The very mechanistic 'old growth theory' that underpins Brian Gaynor's policy proposal is well past its use-by date. Growth theory today emphasises such things as knowledge, creativity, social capital. These do not arise out of a policy to pay targeted benefits to rich people as a reward for spending less than they otherwise would. Rather they arise out of an inclusive social environment in which everyone with creative potential has a chance to make use of their talents, in which everyone has access to publicly owned databases, and in which interdependent workers see the people they interact with on as being trusted colleagues rather than as ruthless competitors or exploiters.
Gaynor seeks intervention in the capital market, special benefits for Uncle Scrooge, and a new central planning agency, to together lay the basis for a "sustained economic recovery", meaning accelerated input-driven growth.
The twenty-first century needs something else; something new: environmentally sustainable economic growth, based on total factor productivity, innovation, conservation of non-renewable inputs and full (but not overfull) employment of those seeking paid work.
Rankin File | 1998 titles