ECONOMICS: Spreading The Good Word

Economic forecasters – quarter by quarter – have been ticking down their growth expectations for New Zealand as the domestic recession persists and the international recession widens. The NZIER’s March ‘Consensus Forecasts’ accordingly dropped the GDP growth forecast for 2008/2009 from -0.2 percent in December to -0.9 percent; for 2009/2010 from 0.9 percent to -0.6 percent; and for 2010/2011 from 3.0 percent to 2.7 percent. But around those mean figures, the forecasts for 2009/2010 range from -2.2 percent to 1.1 percent, while for 2010/2011 they range from sluggish 1.5 percent growth to robust 4.8 percent.
When the country’s economic forecasters are widely at odds on the outlook, we shouldn’t be surprised to learn there are differences within the Cabinet. Prime Minister John Key – questioned on TVNZ’s political programme Q & just after the Jobs Summit – ventured that “by the end of 2009, early 2010, this time next year”, New Zealand would be starting to come out of the recession, “and I think actually starting to come out of it reasonably aggressively. I’m more optimistic about 2011 than 2010 but nevertheless I think 2010 will be positive.”
A fortnight later, on the same programme, Finance Minister Bill English said, “I think one of the features of this recession is that we’re unlikely to aggressively grow out of it…” He wouldn’t want to say his boss was wrong, “but he’s setting high hurdle here and it’s our job as Government to meet those expectations…” Key was telling him – said English – he wanted the policy settings “that are going to get us aggressively out of here”.
Perhaps the Minister of Finance had been infected by his officials’ pessimism. Early in April, the Treasury advised it expected unemployment to rise above its previous worst-case scenario of 7.2 percent, leaving further 60,000 people jobless by next year. It warned that the recession (which started early last year) would last at least until March next year.
Key stuck to his guns. He said there were two basic views: we will grow “quite aggressively” when we come out of recession; or the destruction of credit will slow the recovery. No one knew for sure which it would be and the economic outlook was changing rapidly. But Key happens to think the world will start growing “quicker than people think”.
He acknowledged differences in opinion about how quickly and how much the country would grow. But he and his Minister of Finance were “locked at the hip” when it came to policy – the public sector must perform better, regulation must be reduced, taxes must be lowered, and policies holding back New Zealand must be reformed.
It’s pity the two aren’t locked into sharing sunny disposition. When optimism is exuded by country’s leadership, according to recent study, their good cheer can be an economic tonic. Hence global economies bogged down by widespread pessimism over the financial crisis should use positive thinking to talk themselves out of negativity.
Associate professor Ananish Chaudhuri, from the University of Auckland Business School, has been involved in the study – featured in the latest edition of the British Economic Journal – along with researchers from New York University and Rutgers, the State University of New Jersey in the United States. They used economic decision-making experiments to simulate an extreme example of real-life problem revolving around coordinating people’s actions.
Their paper points out that an economic recession is often caused by widespread pessimism among businesses and individuals, rather than as result of inherent systemic problems. That’s good news for policy-makers; it means the spread of appropriately optimistic beliefs can help to tackle such crises.
“In combating crises like the current situation, we really need to think of innovative actions or social processes that generate optimistic beliefs,” Chaudhuri said. But “a shared comprehension of the message is absolutely crucial to solving such coordination problems”.
Deep recessions – he explained – cause economies to get caught in an “under-
employment trap” where no firm will expand production unless it is assured that others will do so as well. This happens even though not doing so leads to an outcome that is worse for everyone concerned. For economic leaders to make difference, accordingly, the advice they give must be public and common knowledge in the sense that everyone must get the same advice and must also know that everyone else is getting the same advice.
“So if political leader makes public announcement that is heard by everyone, and everyone knows that everyone else has heard it, then necessary condition has been met for successful coordination. Creating appropriately optimistic beliefs is key way of tackling such crises.”
Obviously, this means we would be better off if English was to spread Key’s optimism, no matter what misgivings he might harbour.

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

Visited 4 times, 1 visit(s) today
Close Search Window