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  • rmacculloch

PM Ardern's Labour Party Conference Speech was written by economically illiterate advisers

Oh dear. What an embarrasment. The Prime Minister's advisers wrote her a conference speech which summarized why this government has become unfit to govern. Since it was based on a misunderstanding of the Covid-19 shock and, as a consequence, the types of changes we need to make to get things back on track. The start of the speech copied the Finance Minister's Budget Speech of 2021 when he said the first Labour government of Michael Joseph Savage and his establishment of the welfare state after the Great Depression in 1929 was the inspiration for this present government's welfarist policies after Covid-19. Here's the PM repeating the mantra:

"And while no one expects being in Government to be simple, the last few years have not been an easy run. A global pandemic of a scale not seen since the 1918 global influenza outbreak, followed immediately by an economic downturn the largest in scale since the Great Depression of the 1920s and 30s ... There was no rulebook written. But what we did have, was a set of values, and the history of past Labour governments. It wasn't a rulebook, but it was a guide. On the 9th floor of the Beehive building in Wellington, sitting directly behind my desk, is a picture of Michael Joseph Savage. You could say he's on my shoulder but also ever so slightly in my ear. Of course it was Savage and the first Labour Government that lifted NZ out of the depths of the Great Depression. Not by cutting taxes and services, but by investing in jobs, and building a social welfare safety net. They built the country's first state home ... The Finance Minister who supported Savage, Walter Nash, then led Labour's second government as it continued to build our nation's social welfare system".

How could the PM's advisers and Finance Minister get it so wrong? The Great Depression is widely acknowledge to be a demand-side shock, set off by the 1929 stock market crash. Consumption and investment slumped. It gave rise to Keynesian economics, the view that maintaining demand, running budget deficits and establishing a welfare state could help mitigate the effects. Which was all true! But the Covid-19 shock was entirely different. It was a supply-side shock: people couldn't go to work due to the virus, so the supply of labor crumbled. Now there are all sorts of other supply-chain issues.

Adverse demand shocks cause inflation to fall. Adverse supply shocks cause inflation to rise. Now we know why this government stuffed up monetary policy. They thought they were dealing with a demand shock which needed to be dealt with by money printing, but all that did was cause inflation. The PM and her advisers think the way out now is more Michael Joseph Savage welfare spending policies. But supply shocks need overhauls to competition policy and to sharpen incentives to lower costs and thereby prices.

The PM must be getting woeful economic advice to write a speech saying the way out of a supply shock is not to address the root cause of cost pressures but instead to embark on 1929-style welfare expansionism. By the way, the creation of a welfare state was a great victory back in the 1930s. But it was already in place when Covid-19 hit and a century before Ardern came to office. Her government have not furthered the cause of the development of the welfare state at all. Instead its legacy has been to throw our health-care system into turmoil. If the PM believes we're living in Great Depression style times and wants to spend more to get things moving, then she should have run for office in 1935 and not 2023.



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