Friday, February 27, 2009

Jobs Summit, 2: The solutions [update 4]

Keynesians embraced the notion that the economy could settle into an equilibrium characterized  by persisting unemployment.  Critics such as Haberler, Pigou, and eventually  Patinkin argued [however]that falling wages and prices would increase the real value of money holdings and that the spending out of those real cash balances would restore the economy to full employment…
Roger Garrison, Time and Money (p. 20) 

Gathered there now in Manukau is a collection of folks who have all fallen prey to the ‘Grocer Fallacy.’  They all figure that if the government can only keep their own wages and prices up, and spend enough to keep customers coming through their own particular door, then all will be well with their little part of the world.

Poor fools. As anyone familiar with the Fallacy of Composition would understand, what is true for a part is not necessarily true for the whole.  This is certainly true about the myopia of the merchants who are currently huddled desperately around the government’s feet.

As I said in Part One of my piece on this Jobs Summit, which addressed some of the problems in most of the mainstream solutions, the primary problem is not to encourage spending but to afford it.  We are not in this position because we didn’t spend enough – Gawd help us – but because the world’s orgy consumption over the past few years consumed our pool of real savings – about US$39 trillion of real savings according to Mr Bollard. The primary problem we must now confront is not a drop in spending, but a drop in the resources we now have command over.

In that analysis is contained the necessary solutions to recovery: to refill the pool of real savings, and to correct prices and production as soon as possible to the new realities we now face.

We can rebuild the pool of real savings just as long as we ignore the hysterical exhortations to keep spending.

We can still produce all we need just as long as we allow costs to reflect the new realities.

We can still employ as many people as are willing to work, as long as they are willing to work for what their job is now worth.

Economy-wide, and across the board, we need to stop spending so extravagantly. Urgently. And we need – all of us – to recognise the new worldwide realities we all now face.

Which is to say,

  • Recovery requires lower wages and salaries across the board.  Government (both central and local) can certainly start this process, not by congratulating themselves when they refuse to take a pay rise, or when they "cap" their own wages and salaries to the rate of inflation, but by actively cutting the wages and salaries of all those employed by government, right across the board.
        Since the cost of government is such a large part of costs to business, in spending terms alone this will have a huge impact -- not to mention the tremendous example it gives to others.
        Ten percent is a nice round number, and as it happens that was the figure adopted in the thirties when the Forbes/Coates Government cut government salaries, helping to kick off the revival that began less than two years later (and back then government was only a fraction of the size and influence it is today).
    • Policy Solution: Cut government wages and salaries by ten percent.
  • Recovery requires the freedom of wage rates to fall so that (as George Reisman points out) the presently reduced supply of capital and the credit becomes capable of supporting a larger volume of employment and production.  The introduction of the minimum wage increased unemployment in the thirties beyond measure; it visibly discriminates against Maori and youth employment.  Let us keep people employed in the work they want at a price that is affordable.
  • Recovery requires that producers and investors -– those who control the pool of real savings – have certainty.  Sure, governments always like to look as if they’re doing something, but the more they do – and the more they look like they might do – the less certainty producers and investors have, and the more likely they are to keep their money in their pockets.  It was this very "regime uncertainty" that was one of the key reasons the Great Depression continued so damned long in the US.  Let’s learn from that mistake.  Don’t confuse government action, which consumes real capital, with private action – which builds it up.
    • Policy Solution: Reduce regime uncertainty by government doing as little as possible, by getting the hell out of the way, and by stating clearly in advance what little is going to be done so that everyone knows what’s happening – that is, a policy of No Surprises which is far better than a “rolling maul” of meddling before which no one is able to plan ahead.
  • Recovery requires the rapid liquidation of unsound investments.  Capital has already been consumed and is now in short supply. Creditors themselves can be endangered because they’re unable to collect what they are owed.  The quicker liquidations are allowed to happen, the more rapidly the resources tied up in those investments can be released, and made available for recovery.  Which means not listening to most of the whiners at the Jobs Summit who want their own bad positions propped up, but allowing all the malinvestments to be liquidated – to stop consuming capital – to allow mortgagee sales to happen – to insist that debts are paid.  (Except of course the “debts” that are owed to the IRD. Those bastards can wait.)
    • Policy Solution: Allow the remaining capital of lenders to be freed up as soon as physically possible by allowing the rapid liquidation of unsound investments.
  • Recovery requires that government stops spending so goddamn much.  The single biggest cost to producers is the dead weight of government.  Government spending is not investment – it is consumption.  We’ve consumed enough – what producers have needs to be made available for recovery.  Cutting their wages and salaries would be a good start (see above).  Cutting useless and intrusive government departments would be even better; it’s not like there’s a shortage of the bastards to choose from.
  • Recovery requires that the pool of real savings are built up again.  According to Mr Bollard, up to $39 trillion has been consumed so far in the current economic collapse.  Those savings need to be built back up again – and with real savings, not with the counterfeit capital that caused so much of that capital destruction. (And we must realise that it is not consumption spending that drives an economy, it is spending on production – and we must understand that it is the pool of real savings that drives production spending).  In order to achieve this goal, as Mark Skousen explains, the government needs to find ways to stimulate savings and genuine capital reformation – and the best method is simply to remove barriers to capital accumulation, and to encourage everyone, including wage and salary earners, to save.  Which means reducing their costs.
    • Policy Solution: Reduce or eliminate taxes on interest and dividends, and resist calls for a capital gains tax.
    • Policy solutions: Resist the temptation to lower interest rates to negative real rates, and let the market leave them where they need to be to encourage the rebuilding of real capital.
  • Recovery requires that the costs of regulation and compliance are urgently reduced.  We’ve been hearing the rhetoric for years, that governments are going to reduce compliance costs, and still there’s no serious intent on the horizon – nothing soon enough, anyway. So let’s offer two simple methods by which that can happen NOW.
    The first is to declare several free enterprise zones around the country, at least one in every major population area, in which all taxes and regulations for new development and new businesses are severely, if not savagely, reduced.  Which is to say, instead of throwing money we haven’t got at projects that don’t make sense, allow small, new enterprises to attract real investment and create real jobs without the heavy hand of government slowing that process down.
    The second is to introduce a network of Small Consents Tribunals for Resource Consent Applications for projects under, say, $300,000.  This, at a stroke, will get builders back to work, and the cost of home-owning come down.  You can read the details of how these would work here.  Do it now.
    • Policy Solution: Declare several free enterprise zones around the country, at least one in every major population area.
    • Policy Solution: Introduce a network of Small Consents Tribunals for Resource Consent Applications for projects under, say, $300,000.
  • Recovery requires tax cuts. During America’s Great Depression, Franklin Roosevelt raised taxes to usurious heights – as Stephen Moore from the WSJ points out, “the top tax rate under Roosevelt soared to almost 80 percent and then 90 percent, thus smothering any possibility of a [US-led] recovery.”  Let us not make that same mistake here.  Let us also realise that the single biggest cost to producers is their tax bill.  At a time of economic distress, that is a bill few businesses can afford.  Taxes must be reduced.
    They must be reduced for producers.  And they must be reduced for the person working two jobs to keep their family afloat, and who’s being punished for it.
    A responsible government however would know that they can’t cut taxes without cutting spending.  Reality cannot be faked in that way.  Roosevelt, for one, tried deficit spending on top of his enormous taxes, with the result that at the end of a decade of deficits fully 17.2 percent of Americans were still unemployed (which was up from 16.3 percent or 8,020,000 in 1931) and those who were still working were trying to pay off a debt that amounted to US$280 billion in 1930s dollars
    Deficits don’t work.  They still have to be paid for.  Leaving the bill for future generations is a form of ‘fiscal child abuse.’
    • Policy Solution: Cut taxes.  But make commensurate spending cuts first.
    • Policy Solution: Remove the imposition of added taxes on secondary jobs.
  • Recover requires that the purchasing power of money be at least maintained, and at best enhanced.  What this means is that the dollar in our pocket needs to be able to purchase more real goods and services, not less, with every month and year that passes.
    And what this means is that producers must be able to produce more with less, so that real prices can come down – and we can buy more with less.  It means that the Reserve Bank must resist the temptation to flood the country with counterfeit capital as they have been, every new dollar of which reduces the purchasing power of every dollar in your pocket.  It means they must lower the fractional reserve rate that has allow private banks to so profligately inflate the currency with a reserve backing only a fraction of what a responsible lender would contemplate. 
    In short it means they must pull their heads in, insist on deleveraging, and get the hell out of the way so that real saving and genuine capital accumulation can happen.
    • Policy Solution: Restrict the Reserve Bank’s ability to inflate the currency, and remove the ability of private banks to inflate their own credit lines.

In short, to borrow once again the words of CNBC’s courageous Rick Santelli, we need to reward people that could carry the water instead of drink the water.

If that doesn’t happen, then we’ll be needing our own tea party right here in NZ.

Part One of my posts on the Jobs Summit is here: Jobs Summit: The Problems.

UPDATE 1: First speaker up at the TalkFest was Reserve Bank Governor Alan Bollard … he is looking for ideas … he has none …

‘UPDATE 2: Matt Nolan at The Visible Hand says, “I get the feeling this ‘summit is going to provide some quality quotes.”  Based on the first two he’s harvested, I’d say he’s dead right:

  • JOHN KEY: “The Government doesn’t have a monopoly on good ideas…” 
    Responds Matt: “See I didn’t even think the government was in the market for good ideas…”
  • GERRY BROWNLEE says “there were two key messages coming out of the discussions he had been involved in at the summit today: the need to cut red-tape and the difficulty small and medium-sized businesses are facing in trying to raise capital in the current climate.
    Responds Matt: “Now if we asked businesses what is “restraining” their activity three years ago we would have gotten the same two responses…”

Keep ‘em coming!

UPDATE 3:  According to Stuff: “Another idea on the table [at the Jobs Summit] is a $50 million cycleway built the length of the country. It would provide 3700 jobs and would take two years to build. The government is keen on it…” [hat tip Standard]

Looks like they’re taking their Keynes too literally.  To paraphrase the destructive duffer,   Pyramid-building, earthquakes, even wars may serve to increase wealth.  To dig holes in the ground or build cycleways the length of the country will increase, not only employment, but the real national dividend of useful goods and services.

Fatuous fiscal foolishness.

UPDATE 4:  I need to make something explicit in my solutions above that at present is only implicit.  I say that we can still employ as many people as are willing to work, just as long as they are willing to work for what their job is now worth.  And I say that one solution to looming unemployment is to devise various means by which costs, including wages and salaries, can fall in order to reflect the new economic realities of lower costs.

But while this means lower wages and salaries in monetary terms, in fact in real terms this need not mean a fall at all – and could in act mean a rise in real wages.

This seemingly paradoxical conclusion is reached by means of two related arguments.  The first is that if all costs fall across the board, then it follows that the same amount of money will now command a greater number of goods and services – in other words, since the purchasing power of every dollar has been increased, we can now buy more real goods and service with our reduced monetary incomes.  In other words, even with reduced monetary incomes, our real incomes may have risen.

The second is that if we resort to cutting hours – or to the nonsensical idea of a nine-day fortnight – and if we maintain full employment, then by that means we are actually producing less, we are reducing our productivity, and so rather than putting us back on the path to prosperity we are instead only marking time at best, or even going backwards.  By contrast, if we can maintain full employment, even with reduced wages and salaries, then the economy will not need to fund the extra expenditure required to pay the doles, but it also means that productivity itself can be maintained. Which means we will be producing more with less cost – which is the necessary path to recovery.

This is not slight of hand.  This is just simple economic reality.

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Anonymous Falafulu Fisi said...

I read the Herald that All Black great Michael Jones was participating in the Job Summit to raise concerns about us Pacific Islanders (PI) job prospects in this country.

If I knew the Iceman's contact (email/phone), I would have sent him a message to take to the Job Summit, stressing that all PIs should stop the bloody spending too much on Church related things (ie, donations, tithe, building of new churches, etc...).

2/27/2009 06:17:00 pm  
Anonymous Anonymous said...

cut salaries by 10% - not enough.

Fiji cut by 30%, so I think that's more likely. 10% takes us back to about 2007 wage rates. We need to get back to 1995 at least. Or did you mean rolling 10% cuts per annum?

Then of course you should eliminate all corporate taxes and FBT immediately. That one - along with salary cuts (except police and the army, yes I do mean cut judges pay!) - should also be a no-brainer.

And if you eliminate the minimum wage, you absolutely must remove the dole as well, or else you just drive people onto the dole. That must no longer be an option for anyone under any circumstances.

Finally its utterly, crucially important to eliminate large ares of government "services' - the rest of the benefits, super, and the two bigges of Health and Education.

Frankly even the libz polices (fund entitlements out of asset sales) are no longer affordable if they ever were -and they are just capitalised benefits for losers anyway. We couldn't afford them before and we certainly cannot afford them now

2/28/2009 06:37:00 am  
Anonymous Anonymous said...

Sir Roger called for 40% salary cuts last week. Ha, so
ACT wants more than the libz. But cutting wages rather than cutting jobs is just crazy. We need to eliminate the unproductive people as well as investments. Joint pay cuts just won't do it. We need people on fired and we can't keep paying 15000 of my tax dollars to those who are a drag on the economy

2/28/2009 10:42:00 am  
Blogger PC said...

Judging by the rest of Anonymous 10:42's comments, they aren't intended to be taken seriously. But if you have a reference for Douglas's recommendation, I'd be interested to see it.

"Then of course you should eliminate all corporate taxes and FBT immediately. That one - along with salary cuts (except police and the army, yes I do mean cut judges pay!) - should also be a no-brainer."

Yep, i can go along with all that.

2/28/2009 02:33:00 pm  
Anonymous Anonymous said...

Judging by the rest of Anonymous 10:42's comments, they aren't intended to be taken seriously.

pray why?

Given the choice of 10 people working say a 30 hour week to get 300 hours, or 4 people working 75 hours, a company of 4 people will do better every damn time. Much less overheads, much less cost, much less management required etc.

And whether it's NZ software developments competing against silicon valley, NZ farmers competing against Chile, or NZ manufacturers competing against China - that's the competition.

But if you have a reference for Dougla's comments...

radio socialism:

Note that eliminating FBT has the effect of a zero tax rate for anyone who can be a contractor. That fact will push most Kiwi workers onto contracts, where "Labour protections" (protections for unionists and the unproductive) no longer apply in any case. It would also force an effective 30% pay cut for those who can't move - basically servants of one kind or another, teachers, etc etc

2/28/2009 08:19:00 pm  
Anonymous Anonymous said...

This is not slight of hand. This is just simple economic reality.

Crap, Peter. It's mathematically illiterate bunkum.

What needs to happen - as Bernard Hickey has said - is wage reduction in real terms. That's already happened to some extent with the drop in the NZ peso, but that doesn't affect relativities inside NZ - in fact, it makes the productive worse off relative to the unproductive.
Hundreds of thousands of Kiwis are unable or unwilling to work at internationally competitive tasks. This is partly the result of socialist government legislation (minimum wage, health&safety, etc) but mostly the result of our culture. Then there are hundreds of thousands who have chosen to be functionally illiterate
and innumerate; and hundreds of thousands more who have useless tertiary "qualifications".

Frankly - someone who has worked hard, who has real international qualifications, and is reaping the just rewards of that work - why should they have to subsidize those millions of undeserving? Why should we expect them to stay here to do so?

Most Kiwis need to understand that their highest asset is probably their body parts on the international markets. And after that, well if they're willing to really work 70, 80 hours from age 15 or less then they probably earn enough internationally
to be able to eat. But not enough to own a quarter acre paradise, a real car, a big TV or playstation or PC or whatever. This is simple mathematics, basic economics 101. NZ - especially under Labour - has been in denial about this for years.

then the economy will not need to fund the extra expenditure required to pay the doles,

The way to not fund the extra dole is to stop the dole. Otherwise you'll end up with the government having a super-WFF to prop up the salaries of workers who can't afford to "feed their families" (or buy their TVs playsations, run cars, pay mortages).

People who's style of living is not supported by their external market value deserve nothing.

2/28/2009 08:51:00 pm  
Anonymous LGM said...


Why did previous NZ govt regimes (and likely this present one as well) allow hundreds of thousands of NZers to degenerate into a culture of such non-productive uselessness?

How do you expect this "culture" to come to an end or be ended?

I'm genuinely interested by your answers since in my travels and career (working here, Europe, USA, Asia etc.) you're right on the money when it comes to the value of what NZers are providing to others. That is, they are, in the main, not producing nearly the value of that which they expect to consume.


3/02/2009 07:47:00 am  

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