Peter Lyons asks where the economic recovery is coming from.
Several economic commentators have expressed surprise that recent figures show unemployment has risen to 6.7% when many were predicting a fall.
It is hard to understand why.
There seems to be a dislocation between policymakers and economic reality.
This unemployment rate probably understates the true situation, as many Kiwis head to Australia.
The economic malaise that has gripped most Western economies since the global financial crisis in 2007 is largely because a lack of effective demand in most economies.
Total demand in an economy is made up of four key drivers.
Consumption spending by households, investment spending by firms on plant and equipment, spending by government and export revenue.
The current metrics of the New Zealand economy give a clear picture of what is happening in each of these areas. It is worth exploring each component of demand to understand why economic recovery remains elusive and unemployment is climbing.
Household debt still hovers near record highs of 170% of national income. Much of this debt was accumulated during the halcyon years before 2007.
After the crisis of 2007 the Reserve Bank slashed short-term interest rates to try to stimulate borrowing and spending by households and pump up demand in our economy.
Consumption spending has failed to respond to this stimulus because many people are already up to their eyeballs in debt and are desperately trying to pay it back.
Monetary policy has become largely ineffective as a means of stimulating household spending to pump up the economy.
The recent upsurge in the Auckland housing market is unlikely to be a precursor to a renewed national housing boom.
It reflects housing shortages in specific areas.
Reserve Bank statistics show little growth in total new lending.
This is the reason why monetary policy and low interest rates are failing tokick-start our economy.
Investment spending by firms on plant and machinery is also subdued and failing to respond to low interest rates.
Firms are unlikely to borrow and spend while consumption spending is stagnant.
The low inflation rate of 1% highlights the lack of demand in our economy. Firms that operate in competitive markets have little scope for increasing their prices because of muted demand.
There has been much talk about the need to rebalance our economy from debt-driven consumption spending to export-led growth. This strategy is experiencing severe headwinds. Commodity prices for key exports such as dairy and meat are falling because of the global downturn.
Our exchange rate remains stubbornly high because other countries have adopted policies that drive down their currencies and give their exporters a competitive advantage.
We remain wedded to the idea of explicit inflation targeting and so the New Zealand dollar retains its appeal as a plaything for currency traders.
Our Government has adopted a policy of austerity during the worst global downturn since the Great Depression. Prime Minister John Key recently announced that economic recovery would be the preserve of the private sector, with the assistance of monetary policy.
The irony is that as the Government cuts its spending in order to achieve the arbitrary target of balancing its budget by 2014 this reduces the effectiveness of monetary policy.
The current policy settings for fiscal and monetary policies counteract each other.
There should be little surprise that our unemployment rate is climbing. The total demand that drives economic activity is not there.
There is intense debate going on oversees about government policy in such a situation.
This debate seems to have passed New Zealand by.
Leaving it to the market to solve this situation invites a very lengthy period of stagnation and wasted human potential.
We are facing a once-in-a-lifetime economic slump that parallels the 1930s Great Depression.
This is the time for activist, innovative and wise government expenditure in such areas as housing, education, health and social infrastructure.
Because of the severity of this downturn, borrowing costs for government are at record lows.
Sadly, this Government seems to have abdicated any responsibility for such bold leadership.
We remain fixated on the tired ideology that markets always know best and in the long run will resolve this crisis.
As John Maynard Keynes famously stated, "In the long run, we are all dead."
Peter Lyons teaches economics at Saint Peter's College in Auckland and has written several economics texts.
