Remembering Muldoon

I’m old enough to recall Rob Muldoon striding across the 1970’s New Zealand political landscape like an enraged garden gnome, and this week was starkly reminded of how little has changed since he was around.

National is dead keen on more tax cuts, despite the precarious state of the economy, and it seems there are only a few ways that this can be achieved. The alternatives seem to be cutting government spending, increasing other government (i.e. non-income tax) revenue, asset sales, or borrowing.

It’s likely that John Key will attempt a mix of all four, whilst fudging the figures to make it all look affordable. And in truth, any incoming government will have to grapple with striking a balance between a set of relatively unpalatable alternatives.

But the one that scares me the most is the potential for borrowing – largely because I vividly remember the economic hangover that resulted from Muldoon engaging in exactly that approach.

For those who weren’t around at the time, Muldoon reacted to the economic shocks stemming from the 1970’s oil crisis by trying to insulate the New Zealand economy from world events. (OK, that’s an oversimplification, but will serve our purposes here.) One of his long-standing policies was to run large external deficits, which over the 9 years of his reign resulted in a massive external debt and a resulting currency crisis. It arguably took a decade or more – and a benign international economic environment – for the country to recover.

Whether you agree with the actions that Roger Douglas took once he assumed power in 1984, there’s no getting away from the fact that New Zealand was damn near broke, due to Muldoon’s complete mis-reading of the global economic situation. In practically every major economic decision over those long nine years, Muldoon zigged when he should zagged, and persistently made the wrong calls. Arguably he did so because he had the best interests of New Zealanders at heart, but his track record as an economic manager is truly shocking.

And the parallels with John Key are obvious. He’s promising what probably can’t be delivered, and clearly intends to borrow to make good on promises he should never have made. The only redeeming feature I can see is that the current seizures in the international credit markets may make it impossible to fund the kind of overseas debt he’s contemplating.

As the saying goes, history doesn’t repeat, but it sure does rhyme.

Making bets about the future

Making purchasing decisions about all kinds of consumer “durables” – from fridges to cars to houses – is a key part of living in any Western capatalist society. We routinely spend significant amounts of money on these energy-consuming objects, and as the old saying goes, we tend to buy things for emotional reasons and then justify them logically afterwards.

The effect – in my case – is a car that I thoroughly enjoy driving, but which spends most of its time in the garage due to the convenience of public transport for my daily commute. The emotional reason for not selling it is the sense of freedom and enjoyment I get from occasional drives; the rational justification is that trying to get ten bags of groceries home from the supermarket on the bus is a complete pain. (The astute will notice that infrequent trips from supermarket to home via taxi would be a couple of orders of magnitude cheaper than hanging onto the car … thus exposing the tissue-thin nature of post-facto rational justifications.)

As it turns out, I’ve been thinking a fair bit about the various consumer durables in my life, particularly the car. In these high-petrol-prices-and-excess-CO2 times, I’ve been eyeing up the latest generation of diesels, thinking that lower fuel consumption and lower CO2 emissions may be a sensible investment. In fact, the putative benefits of half the CO2 (emotional reason) can at least be partly funded by the lower fuel costs (post-facto rationalisation) … and the massive overtaking urge of the Audi A4 with the 3-litre twin-turbo diesel I was test driving the other week is only incidental to the discussion!

Every time we weigh up the pros and cons of these kinds of decisions – what kind of car should I drive, how close to town do we need to live, I think our household may need a bigger fridge – we’re really making bets about the future.

In my case, a diesel Audi would be my bet that oil prices will continue to rise over the next few years and that global warming is a real issue that demands I take some action. These seem like sensible bets – you can’t read The Oil Drum or see An Inconvenient Truth and conclude the world will not change in the future. In fact, it seems an exercise in perversity to assume that we can simply go on as we have in the past, and – miraculously! – neither global warming nor peak oil will bite New Zealand in the arse.

What amazes me is that a great many people see no connection between their buying decisions and their bets about the future. That decision to buy an SUV or invest in coastal property is as much a prediction about what the world is going to be like as it is a lifestyle decision. If you buy a big truck, you’re effectively assuming petrol will be $1.50 a litre, and not $10 a litre. A beachfront property is a half-million-dollar bet that sea levels won’t rise. Trying to get rid of the buses from your suburb full of McMansions is a bet that you’ll always be able to afford the commute.

Needless to say, only one side of these bets is going to be correct. If sea levels don’t rise, the coastal property will be a damn good investment and I can look on with envy from my place on the hill. If the levels do rise, the beachfront place will be a total loss.

And that’s the bit that seems quite surreal. Most of the bets I’m making don’t seem to have much downside – the diesel car is not much different to the petrol car, so if the price of petrol doesn’t change I haven’t lost anything. The place on the hill has different views to the place on the beachfront, so if the sea levels stay the same it’s just a different lifestyle decision.

But if my bets are correct – petrol hits $5 or $10 per litre, and sea levels rise half a metre – the SUV and the waterfront house are total losses. They will be worth nothing. Nada. Zilch. And losing that amount of equity will be an horrific, stressful process for the people involved. They are also running the risk – placing a bet, if you like – that when the beach place is destroyed in a big storm, the insurance company will pay out instead of saying “you knew global warming was occurring, yet you bought the place anyway – so tough luck, we’re denying your claim.”

The only reason I can think of for these poor decisions is the emotional factor – a big SUV makes me feel safe, I love the feel of sand between my toes. I’m as susceptible to these as anyone else. But when I see otherwise smart people making bad bets, I can’t help wondering how the emotional appeal of the consumer durable manages to switch their brains off altogether.