Wednesday, November 26, 2008

Economic crisis - What crisis?

I can help thinking that there is much truth in the maxim that Governments rule by fear. In my lifetime we have had:
  • the Cold War
  • the Hole in the Ozone
  • Y2K
  • SARs and Bird Flu
  • Global Warming/Climate Change
In recent weeks there has been a huge emphasis given to the current "global economic crisis". It was extremely timely for the US Presidential Election and also for the New Zealand General Election. In both cases the candidates were able to transfix the populace with their proposals for how their administration would rescue us from impending and imminent doom. Other matters, such as social issues, morality or law and order, were either not addressed or were relegated to a very low priority.

As far as I can determine, there have been collapses of banks and lending institutions around the world due to them lending to people who acquire things that are not particularly good in terms of "security". The borrowers have defaulted on the loans, leaving the lender with a gap between what they themselves owe to their depositors and what they have as security (less their salaries, fringe benefits and bonuses). Easy credit has driven up the price of some more desired items e.g. houses; so that people have borrowed more than can be currently realised for that asset in a mortgagee sale - if a buyer can be found.

In short, a culture of spending what we don't have has lead to its natural consequences.

In the last few days we have the leaders of the APEC nations meeting in Lima, Peru. They have pledged to beat the economic crisis in 18 months. But their method seems to me a bit crazy. To me it sounds like what was said was: "Trust us. Don't lose your nerve. Keep spending." Talk of committing to Free Trade Agreements so that people can keep spending and help everyone trade their way out of this crisis does not sound like prudent management for a household - much worse for a nation.

It sounds like on the one hand we got into the crisis due to careless spending and the way out is to keep spending. As Barack Obama said, "it is not going to be easy for us to dig ourselves out of the hole we are in." (If that had have been Obama's predecessor the media would have leapt on it as a "Bushism"). Mr Obama, when you are in a hole, it only gets bigger if you keep on digging.

Because of the mistaken belief that the 1930's depression was ended by Keynesian economic policy of the "New Deal", which involved increases in Government spending, we are hearing a lot of talk about increasing or not curbing Government spending. This is nonsense. Governments either have to tax or borrow in order to spend. If they tax, then they will curb private expenditure. If they borrow then they end up constructing public works that people can ill-afford to use. (Given that most economies are in recession then the tax take is going to decline even if they increase the tax rates and Government expenditure only artificially grows the economy, imposing greater cost on the private sector.)

There is this "spend at all cost" (double-entendre intended) mentality. Buy a whole lot of stuff that you really don't need because the world needs to keep on selling stuff. But hey! Isn't it all this unnecessary stuff that got us here in the first place?

If some factory making big screen television sets closes because of the current economic crisis and all the workers end up out of a job, and a burden on the tax payer, is that such a tragedy? Yes. It is for the workers. But is the absence of the goods they produced going to make the world a worse place? Are the goods they produce a necessity?

If nothing else this economic crisis should help a new generation distinguish between necessities and luxuries. Unfortunately though much of the pain in these times is born by those who produce primary products. In the US in the '20s and '30s those most adversely affected were farmers and timber workers. Why? Those who took their produce, which was still in demand, were not prepared to concede their margin, so that the people who produced the raw materials could make a living.

My call is for a more pragmatic approach to this crisis. If luxury goods producers are suffering, that is of little import compared to those who, even before the current recession, were struggling with the basic necessities of life. Governments should "butt out" of economics and intervention, and get back to protecting the defenseless. They should revert to upholding a high moral standard and maintain law and order.

In my view Governments are too big a player in the economy. Governments can, and do, distort the economy to a disproportionate extent, either through taxation, spending or through legislation and regulation. The sub-Prime mortgage fiasco in the US is an example. It seems poetic justice that the good citizens of the US have voted in a Democrat President who will be faced with the consequences of the previous Democrat President's meddling in the economy.

In New Zealand we have had successive Governments being too involved in economics. Unfortunately the way politicians deal with economics is something like a game of "Whack a Mole". They club something they don't like here and something pops up over there, which they then try to smack. Over regulation has stifled growth, and expenditure by Governments in areas they really shouldn't be in has necessitated increased taxation which has similarly impeded growth.

Ideally Governments should be concerned with Defence, Law and Order, Health and Welfare and (possibly) education. All the petty regulations and laws that could easily be replaced by "It's illegal to be stupid" are costly and and frustrating. People need to take responsibility for their own lives, not cry out for the Government to intervene and regulate at every adverse turn.

I expect I am too optimistic to think we can completely dismantle the Welfare State and undo all the regulation and intervention, but stopping anymore occurring would be a good start.

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