Child poverty and neoclassical economics in New Zealand

Early yesterday, Radio New Zealand revealed that doctors and health workers have said the mould in Te Ao Marama Wensor’s Housing New Zealand home in Glen Innes has contributed to her seven-year old son’s life-threatening lung and heart problems.

Housing New Zealand is now offering to pay for her family to stay in a motel until a new home can be found.

Innes Asher, who is the Head of Paediatrics at the University of Auckland, said more than 2000 families were on the agency's emergency housing waiting list.

“That’s double what it was two years ago and these are people whose health and well-being is at immediate risk. Many of these are households with children, so I hope that Housing New Zealand will be looking at motels for all of these families immediately.”

Dr Asher said she sees many children with serious lung diseases and rheumatic fever because of poor public and private rental housing and action is not being taken swiftly enough.

She said all rental properties, whether state or privately owned, must provide a healthy environment for tenants. ^[1]

While it is imperative that the Government and Housing New Zealand, which provides no emergency housing, and any other agencies and agents concerned urgently address the issues presented by Professor Asher on Radio New Zealand on 21 August 2015, I believe that we should also interrogate the philosophy and economic practices that underlie this parlous state of affairs. ^[2]

Although there may be many convergent factors contributing to the current levels of child poverty in New Zealand, it seems to me that its principal cause lies in that combination of hyperindividualism and neoclassical economics that crash-landed in New Zealand in 1984 under the name of Rogernomics. By the former I mean the politico-economic theories of Friedrich Hayek that espouse the mutual exclusivity of individualism and collectivism and the superiority of the former over the latter, a seductive but simplistic belief summed up in the concluding sentence of The Road to Serfdom, Hayek’s anti-socialism polemic beloved of Margaret Thatcher: “The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century.” ^[3] It is this belief on which neoclassical economics is predicated along with the naïve view that markets will stay in perfect equilibrium and individual self-interest will maximize the benefits of those markets for the benefit of society as a whole. While the 2007 Global Financial Crisis (GFC) demonstrated that neoclassical economics is an abject failure, as the 1929 Great Depression did of classical economics, the former nevertheless continues to hold sway throughout much of the Western world not least because its adherents remain in charge of central banks, and neoliberalism, the portmanteau term commonly applied to these various theories and practices, continues to dominate many mainstream Western political parties.

How does this relate to child poverty in New Zealand?

At a philosophical level, neoliberalism operates on the principle that if anyone finds themselves in poverty that is their fault and a serious personal failing, regardless of their personal circumstances and the prevailing socio-economic conditions. We might call it economic Darwinism: survival of the savviest. On a practical level, the way money is created and where that money ends up has produced a poverty underclass in New Zealand while at the same time helping the rich to get richer. Here is how it works.

Commercial banks—the big five in New Zealand being ANZ, ASB, BNZ, Kiwibank and Westpac, four of which are Australian-owned—are “unique agents” able to create money almost out of nothing—the “almost nothing” being a banking licence or registration, the bank’s “intangible asset” that authorizes its money-creating activities—and to lend that money without the need, theoretically, of accumulated savings. ^[4] The process is a simple one: every time a commercial bank makes a loan to a borrower it simultaneously creates a deposit in the borrower’s account, that loan being recorded as an asset for the bank and a liability for the customer. ^[5] Although new, this money is not free because of the contractual obligations between bank and borrower that effectuate the loan. Significantly, “[h]ousing lending makes up about half of bank lending in New Zealand,” that figure totalling $206,140 million at June 2015, up by 93 percent or $99,541 million from $106,599 million at June 2005. ^[6] This incorporeal money, called “‘fountain pen money’” by some, endogenous credit money by others, sits largely unproductively in the housing market for extended periods (mortgages commonly being over 20-30 years) before it is “destroyed” or retired from the monetary system through repayment of the loan. ^[7] It is this, it would seem, that is the primary cause of the alarming house-price inflation in Auckland, rather than the reasons commonly put about and also advanced by the Reserve Bank of New Zealand (RBNZ), such as a shortage of housing stock, immigration, and investors, although these will undoubtedly have some influence on the inflationary trend. ^[8] Put otherwise, if credit money is not actualized but remains within the housing market through both long-term investment and reinvestment as well as growing in aggregate through the addition of more loans, its non-actualization into money will have an ongoing inflationary effect on house prices. Furthermore, it is in the commercial banks’ interest that this should happen, especially in the relatively benign market of residential housing, for the greater the aggregate of loans in that market and the longer they remain there the more profit the banks will make, until, of course, the point is reached when a sufficient number of borrowers can no longer service their loans. Hence “the banks create as much new money as they can get away with”. ^[9] We may think of this as inflation by displacement, the consequence of commercial banks lending credit-conceived-as-money to a large but largely unproductive sector of the economy.

This failure to control private debt and to effectively leave the determination of the level of that debt up to banks and borrowers may yet prove a fatal flaw in RBNZ policy. It also means that young people and individuals on low wages in New Zealand’s low-wage economy are greatly inhibited or even prevented from owning their own homes, and, if they do somehow manage to enter the housing market, are likely to be saddled with massive mortgages for much of their working lives. The above also helps to explain why rents are so high, and, with neoliberalism’s emphasis on greed dressed up as self-interest, why the quality of some rental housing appears to be so poor. The current National government’s selling of the state housing stock is also part and parcel of this philosophy. The problem in terms of New Zealand’s oppositional politics is that the Labour Party is also complicit in the current levels of child poverty because it introduced neoclassical economics into New Zealand in 1984 and has continued to implement its theories whenever it has been in power.

While undoubtedly a complex issue, if the cause of child poverty in New Zealand could be sheeted home to any one organisation, my vote would got to the RBNZ. For not only does the RBNZ continue to pursue those neoclassical economic ideas that produced the GFC, it continues to have little if any real control over the creation of private debt, and yet, as the organisation responsible for the country’s financial system, it is obliged to support it even as it is being enlarged. ^[10] Put otherwise, the huge amount of endogenous credit money that is fuelling house-price inflation and making it impossible for many to own their own homes, is created on the basis of the borrower’s need, the desire of the commercial bank to make a profit from that need, and its assessment of the borrower’s ability to realise that profit for its shareholders. On the other hand, the bank is mainly constrained only by competition from other banks for the borrower’s custom, and the rate at which it can profit from the borrower’s need, that rate having been influenced by the RBNZ’s variable interest rates.

My view, then, is that poverty in general and child poverty in particular are here to stay until the naïve belief that individualism and collectivism are mutually exclusive concepts is overturned and neoclassical orthodoxy and the rortocracy of its bloated financial sector is replaced with some form of banking democratization. This could include anything from a full democratization of the big four Australian-owned commercial banks so that the $7,000 million of core earnings that they and Kiwibank appear to be on target to make collectively for the current financial year is returned to the polity, not to private shareholders. ^[11] Alternatively, a significant portion of the big five’s earnings from the housing sector could be set aside, by way of legislation, to provide housing for those who cannot afford it, or a fully democratized bank established to finance the private housing sector while the big four remain licensed to fund only the business sector where, no doubt, they will have to work harder for their profits than they do collecting interest like slumlords from families throughout the country while their “fountain pen” money continues to inflate house prices to preclusive levels. Yet another alternative, though an even more drastic one, would be to have a “debt jubilee”, as Steve Keen has suggested, during which all debts would be forgiven and the entire system rebooted, in the wake of which the private banks that fail could by replaced by democratized ones. ^[12]

There are no doubt many ways that good quality housing could be provided for those in need and their children thereby able to live in secure and healthy environments. It has been done before in Aotearoa New Zealand. Why not again?

Footnotes:
1. Radio New Zealand, “Mould family not the only ones suffering,” (21 August 2015), accessed 21 August 2015: http://www.radionz.co.nz/news/regional/282017/’mould-family-not-the-only-one-suffering’. As advised by the interviewee, paragraph three of the Radio New Zealand report should be corrected to read: Innes Asher, who is the Head of Paediatrics at the University of Auckland, said more than 2000 households were on Housing New Zealand’s “Priority A” waiting list, having a housing need “that must be addressed immediately.”
2. Housing New Zealand Corporation, “Emergency Housing Information,” accessed 23 August 2015: http://www.hnzc.co.nz/renting-a-house/emergency-housing-information; Paula Bennett, “$500,000 boost for emergency housing providers,” The Official Website of the New Zealand Government (25 March 2015), accessed 23 August 2015: http://www.beehive.govt.nz/release/500000-boost-emergency-housing-providers.
3. Friedrich A. Hayek, The Road to Serfdom (Chicago: The University of Chicago Press, 1969, first published 1944), 240.
4. Faruk Ülgen, “Forward,” Jean-François Ponsot and Sergio Rossi (eds), The Political Economy of Monetary Circuits: Tradition and Change in Post-Keynesian Economics (Basingstoke: Palgrave Macmillan, 2009), xxii; Steve Keen, “A Primer on Endogenous Money: 1,” Fields Institute, Canada (18 June 2012), accessed 22 August 2015: http://socialdemocracy21stcentury.blogspot.co.nz/2012/06/steve-keen-on-endogenous-money.html; Sergio Rossi, “ Monetary Circuit Theory and Money Emissions,” Ponsot and Rossi (eds), The Political Economy of Monetary Circuits, 40.
5. Michael McLeay, Amar Radia and Ryland Thomas, “Money Creation in the Modern Economy,” Quarterly Bulletin (Bank of England) 54/1 (2014 Q1), 11, 14, 16; Steve Keen, Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned? (London: Zed Books, 2011, firs published 2001), 370.
6. Reserve Bank of New Zealand (hereinafter RBNZ), “Loan-to-value ratio restrictions – FAQs,” accessed 24 August 2015: http://www.rbnz.govt.nz/financial_stability/macro-prudential_policy/5393159.html; RBNZ, “S8 Banks: mortgage lending (SSR Part E),” accessed 12 August 2015: http://www.rbnz.govt.nz/statistics/tables/s8/.
7. McLeay et al., “Money Creation in the Modern Economy,” 16; Ponsot and Sergio Rossi (eds), The Political Economy of Monetary Circuits, xxi passim.
8. Graeme Wheeler, “Policy assessment,” RBNZ, Monetary Policy Statement June 2015, 2, accessed 24 August 2015: http://www.rbnz.govt.nz/monetary_policy/monetary_policy_statement/; Grant Spencer, “Investors adding to Auckland Housing Market risk: A speech delivered to The Northern Club, in Auckland On 24 August 2015,” accessed 25 August 2015: http://www.rbnz.govt.nz/research_and_publications/speeches/2015/investors-adding-Auckland-housing-market-risk.pdf.
9. Keen, Debunking Economics, 370.
10. Ülgen, “Forward,” Ponsot and Rossi (eds), The Political Economy of Monetary Circuits, xxiv; Stefano Figuera, “From Wicksell to Keynes? Some Thoughts on the Role of a Central Bank in the Tradition of Monetary Circuit Theory,” Ponsot and Rossi (eds), The Political Economy of Monetary Circuits, 153.
11. Price Waterhouse Coopers, ‘‘Can New Zealand’s banks sustain strong performance and good lending growth?” (August 2015), 2, accessed 20 August 2015: http://read.pwc.com/i/557687-new-zealand-banking-perspectives-major-banks-analysis-august-2015.
12. Keen, Debunking Economics, 354-5.

Copyright © 25 August 2015 John Bevan-Smith

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