What are budget advisers to make of the Reserve Bank governor’s call for increased public and private spending?

Adrian Orr has reportedly even floated, as a future contingency option, taxing cash holdings to encourage savers to either spend or invest to stimulate the economy.

What do these messages mean for prudence and savings? The next recession is feared but not expected. The Reserve Bank projects real economic growth to hold between 2% and 3% a year through to 2022. Most people who want to work are working. At 3.9%, the unemployment rate is the lowest in a decade.

Most households do not have much in the way of savings. Savings are age-related. Many students start working life in debt with student loans. Adults of child-rearing age fortunate enough to own a home have mortgage debts that horrify my generation. Most people do not get much free cash to save before the kids leave home. Credit card debts are large.

It is hard to imagine any budget adviser who would advise people against saving in good times for the rainy days that the future must bring. Based on the experience with recessions in the past 25 years, the next recession could easily see 80,000 more people out of work. Many more would have reduced incomes from fewer hours of work and fewer customers.

The more the government pumps up the minimum wage relative to the productivity of those with the least to offer, the tougher the next recession is going to be for those people.

Prudence dictates building financial strength in the good times, to the degree that one can. But apparently not in the eyes of the governor. He has reportedly said that negative interest rates are “easily within the realms of possibility.” That is not an encouraging message for savers with little appetite for risk.

Borrow more?

The governor is encouraging people to borrow more. He seems to be saying he has the means to shift borrowers’ risks to taxpayers. If the going gets tough, the Reserve Bank is apparently willing to spend vast amounts of money buying assets to keep asset prices high and borrowing costs low. If the Reserve Bank pays too much for those assets, the costs will fall on taxpayers.

The governor’s call for more spending and borrowing is on top of unrelated calls on the government to spend even more than it is spending already. They want it to increase the net public debt above 20% of GDP. The governor appears to want that too. Apparently, now is the time to expand infrastructure spending in a big way.

The government hardly needs this encouragement. In its 2017 general election campaign, it planned to increase government spending by ‘just’ $12 billion over a five-year period. That is about $650 per household. In Budget 2019 that had risen to $29b. That figure is still going up.

Older readers might remember that in 2005, the call was the opposite. The then minister of finance was telling us that “we” were lousy savers. (Doubtless he meant us, not him.) The then governor of the Reserve Bank was lauding government as a “strong” saver while lamenting householders for dissaving “in spectacular fashion.” But, of course, the government was only running fiscal surpluses because it was taking more from households and businesses than it was spending in return. Its budget surplus was a net drain on New Zealanders’ own budgets.

Back in 2005, we were told in a finger-wagging way that we were exuberant spenders. Our alleged compulsion to spend was causing all manner of problems, including continuing deficits in the current account of the balance of payments and ever-rising household debt. KiwiSaver was born to help New Zealanders mend their wayward ways.

So why is the latest governor singing from such a different song sheet? It is hard to say. Fads change. The lessons from earlier mistakes fade from memory. New generations displace earlier ones.

To be fair, the governor surely does not mean that anyone should be throwing caution to the winds. But if not, it would have been helpful if he had got this message across from the outset.

Also, low – even negative – interest rates are a global reality. Neither is he alone among central bankers in believing monetary policy can usefully and predictably smooth economic activity. That belief is far from universally shared. The theme of this week’s timely annual Jackson Hole conference – the US mecca for central bankers ­– is “Challenges for Monetary Policy.”

Even so, his reasoning is hard to follow. Perhaps he thinks that, if enough people run down their savings today, recession will be avoided. That would be an illusion – at best it can be deferred.

In truth, no one knows how to avoid the next recession. Gordon Brown, when UK Chancellor of the Exchequer, used to boast that under his superior economic management, economic boom and bust was a thing of the past. The 2008 recession exposed that delusion.

It is important for people to understand economists really do know something about recessions. But the profession is poor at forecasting their timing. That is worth knowing. It teaches humility for a start.

Some prominent commentators were surprised that mainstream official economic forecasters largely did not forecast the global financial crisis. They should not have been surprised. There are too many confounding factors. Surprise events and herd-like changes in expectations can abruptly tip the balance in one direction or the other.

Unpredictable behaviour

There is also the problem that, if people widely believe a recession is going to occur in, say, six months, they will be wrong. It will occur earlier because believers will cut back on hiring and slow planned capital spending from the day they start believing.

Economists are not alone in finding changes in human behaviour hard to predict. Political pollsters are getting used to eating humble pie after failing to forecast yet another general election outcome correctly.

On my reading, many economists would agree that calls on government to pump up infrastructure spending to counter a feared recession are ill-conceived. Infrastructure spending is a long gestation activity, which makes it a poor tool for smoothing fluctuations in economic activity.

Clearer messages from the bank about what it is communicating about prudent saving and spending would be helpful.

Dr Bryce Wilkinson is a senior fellow at The New Zealand Initiative.