Labour must take steps to control the economy.
The key issue to win the election is the economy but our neo-liberal economics mean government is only there to support corporate welfare. We have abundant evidence the neo-liberal approach is very costly but basic needs are not being met. Look at our lack of affordable housing, our struggling health system, education system (where is the touted economic growth to pay for these), the massive growth in food banks. All these show our excessive reliance on private market systems to deliver for all people is failing. It’s hard enough for middle class people to pay for groceries.
This shows our free market economy lacks flexibility when faced with external crisis’s like Covid and the war in Ukraine. Supply chain collapse with rises in transport costs show market failure to adapt. The only adaptation is to raise prices to protect their profits. This is not a solution to the problems. There is simply no community in the market mechanism, there is no shared responsibility for costs. And many big companies, e.g., banks, groceries, energy, are making larger than normal profits. This indicates they raised their prices before their costs actually went up; they anticipated inflation and therefore created inflation. So no responsibility and no down side for them.
But this is all old news that everybody knew about back in the 1930s and their effective solutions did not primarily involve the market. Government stepped in. John Maynard Keynes described himself as a liberal socialist. For him this meant government had to take control of the investment capital within the economy and make the economy work for the people. The purpose of the economy is to supply goods and services to meet peoples wants and some needs. The basic needs are housing, education, health, the arts.
Keynes suggested government should control about two-thirds to three quarters of investment capital and use it for large scale investment into these critical areas; as well as into productivity investment. In the thirties Britain had highly concentrated wealth. One of the ways to get that capital was to drive down interest rates so that the money was freed from saving and could be actively used. But to secure the capital to be used inside Britain meant advocating for exchange capital controls, otherwise it would slip out to other jurisdictions. This is the same problem we have today with tax havens. Keynes wanted countries to have more control over their money supply to enable government control and direction of the economy.
So how would a government get control of capital and redirect the economy? Some steps are quite easy. First identify the main problems and follow the money. The main problems are high costs for housing, (rents and mortgages), groceries, quickly followed by transport costs.
Step one. Use Kiwibank or another government agency to offer mortgages using at cost interest rates, i.e., near zero. People could transfer their mortgage from an existing bank to that agency if they are living in the house over which the mortgage sits. (Might need to be a subsidy for a building society mortgage). They could only have one of their mortgages transferred and it must be in their name. A risk is wealthy investors will transfer their mortgage investment debt into their private home so the low rates subsidise more property investment. To prevent this, link an older sale for the mortgage and/or an asset test so that only smaller investors and, primarily, ordinary house owners get the benefit, The beneficiaries of this step will tend to be younger people with families. (There are ideas for renters too).
This will do many things.
- Firstly it will instantly put pressure on banks to find new revenue streams i.e. by investing in the productive economy. They have grown very fat off the simple and easy supply of mortgages.
- Secondly, it will instantly provide significant income relief for ordinary voters holding mortgages who will be extremely grateful that one of the essentials of life, housing, is fundamentally cheaper.
- Thirdly, it will free up demand for other goods and services in the economy, especially for smaller businesses, (mortgage holders tend to spend domestically). Stimulation of the economy means the Reserve Bank will be concerned about inflation; but most is imported. Ergo we need to look at ways to reduce imports to control inflation.
- Fourthly, if the government buys out the mortgages from banks they will have the asset on the books, so it won’t break the government accounts. But the banks will be flush with money. Tax changes suggested here will help make them pay the correct amount of tax.
For banks they could be encouraged to invest in hotels for tourism (revive — tourist hotel corporation concept so tourist money stays in the New Zealand economy. Otherwise large chains will strip tourism profits out of New Zealand). Banks could be invited or required to invest in some government infrastructure projects or green projects. (Private enterprise/markets are useless at investing green, or setting an effective price for carbon. Proven by our climate crisis; the market failed). Banks may like some government work as like all entrepreneurs they are risk averse and often want their hand held before they invest.
Step two. Like in a few parts of Australia, place a large tax on suppliers of short term accomodation in New Zealand to tourists (those suppliers who use residential property to supply tourists). e.g those who advertise on AIRBNB, Booking.com , etc. Give an exception for those who are living in the house when the renters are there. This will reduce demand in part by pushing up the price of short term accomodation making proper hotels and motels more attractive for tourism accomodation. But also reduced profits means some investors may want to invest elsewhere, which may mean more houses put up for sale and purchases supported by low interest rates. Less people renting ‘could’ help lower rental prices.
Step three. Get involved in purchasing existing housing from investors. (Using existing houses to fix the affordable housing crisis is quicker, far cheaper and less carbon intensive than building new houses). But investors must be encouraged to sell and not just buying at top dollar. So government must require houses to be done up to an excellent standard or extra costs start to be incurred. In Wellington I see several older houses deliberately being left to rot so there should be large taxes on empty or under-utilised residential houses. Not by removing community rights and setting up bully rights to pull down historic buildings.
A carrot could be houses sold to the government could avoid the bright line tax, or a capital gain tax. Houses gained can be sold to first home buyers. Or rent to buy for social housing users. Or just held as state housing. (This reduces the number of people renting and which will help keep rent down — but direct action to control rents must be taken)
Step four. For tax purposes remove deductibility of expenses and the capital revenue distinction for non-individuals. (All gains are revenue for a non-individual, so why make suggestions capital gains are taxed at a preferential 15% rate. ). This is the simplest and most effective way to tax capital gains, while sending helpful signals to the economy on limiting resource use/waste etc. I have written about this economic transformation before; and removal of the regressive and economically damaging GST.
These steps are just some the government must make. Some of the wealthy, or their employee/contractor proxies, will fight to protect the status quo because it works for them, so extra steps by the government will be needed. But these outlined steps are essential for the economic strength and growth of the New Zealand economy. These steps encourage local low cost structure businesses, and support a focus on exports as the path to wealth for producers.
Good points, but there are much deeper problems.
The backward state of the productive forces, insufficient investment into PME and R&D, extreme reliance on imports, poor infrastructure, high energy cost, low wages.
The large exports are all low value added — primary commodities. The highest complexity goods are a negligible part of exports.
The largest trading partners happen to all be industrial superpowers. They have the ability to rapidly undertake the reconstruction of all branches of production.
By returning to an Import Substitution Policy, this industrialisation will address the backwardness of production. Bilateral deals with these industrial powers could switch most imports for domestic production.
The Chinese state owned companies would happily build and operate all the new local factories. The Germans and the French would gladly licence their designs for machinery and consumer goods, as other countries already do.
This would combine the most advanced manufacturing techniques and the most advanced designs. Now you can produce very desirable, high-end complex goods — i.e. high value added.
This would provide the basis for returning to the high wages of the 1960s, and reviving the Full Employment Policy.
Necessary infrastructure such as high speed rail, rebuilding the tramways, and electrification could also be built via such agreements (China is building these things already in other countries).
Hi Kristoff R. Your points are valid ideas. I’m not sure it is good to bring back heavy manufacturing to a country of 5 Million. I think clothing/fashion or arts related topics have more interest for NZ production (?). My article is about looking at things that will have major positive quality of life impacts quickly. i.e. holding a carrot to Labour that they could win an election following these sort of ideas because of the quick impacts on inflation and cost of living. My step 4 tax changes will lead to some of your results you want from protectionism, the main benefits would be in the retail and small business production areas, e.g coffee importers or local furniture makers.
Thanks for the good article, Stephen! Keep the ideas coming — there is so little discussion around this.
Bringing back clothing manufacturing would certainly be a good start, but less value is added. To “move up the value chain”, you also want complex goods production (more value added, higher wages).
I think people underestimate how attractive a country becomes when it can offer everyone well-paid jobs. Huge numbers of Italians, Greeks and other Europeans emigrated to work in the plants building Commodores, Falcons, Chryslers etc.
So the country might not remain “small” for long, particularly as living standards in Europe continue to collapse.
Great stuff Stephen. Less independent than at any time in our history, Rogernomics and Neo Liberalism has reduced us to a mere colony of the global capitalist empire, and our government to the role of a Gauleiter appointed to administer its dictates. And all the while a bought-and-paid-for (some of public money) media, keep the people mollified with beer and circuses. If the English were a land of shopkeepers, New Zealand is a land of barns and barristers.
You want to increase tourism and fight the climate change .Is this not trying to serve to masters pulling in opposite directions
There’s no reason that a proper government-owned banking system couldn’t fund tourism that keeps the money here and benefits local businesses, rather than taking tourists from certain countries on package tours where every single site they visit is owned by the same (foreign) corporation.
Hi Trevor, I’m not keen on our current mass tourism model that NZ markets have developed. A positive is it does give those holding a property on AIRBNB or one of the other companies, an income so tourism wealth is spread across a wider number of people, than if everyone just stayed in international hotels and they would just send the profits back overseas. The biggest negative for tourism is the affordable housing crisis it has helped created, along with the redirection of investment capital into holding residential property. It’s going to take time to shift older middle class people who own rental property to move into other ways to make money. I think we do need to go to a different, higher end tourist market, to reduce carbon impacts. I’m just trying to deal with realities of our current economy and how to change it rather than endorse our tourism market.
I do personally envisage a future where more banks invest in more hotels. If you look at the state of the global economy this only makes sense.
I enjoyed reading this article.
We (and by that I mean the electorate) are a long way from seeing the government as an economic contributor. Most voters still believe that government is like a household with simple linear constraints and a constant desire to reduce costs.
When you offer middle class NZ a few thousand dollars a year in tax cuts they will vote for it almost without thinking. They don’t seem to understand the long term costs to the economy of underinvestment and the social impact of a large reduction in redistribution – the inevitable result of tax cuts.
You seem to be talking sense Stephen, halfway through the post.
But it/s too hard to read, such plain unvarnished ideas, I want ones in stripes, with fractals as well. I think I’ll take a break and come back with something seemingly intelligent. But please keep it up Stephen with sensible, workable ideas even if we have to say near our end loudly, ‘FGS we told you so’!