The politics of trading through to a new normal

Relax. If it is going to hit, it won't hit till after the election. Or, at least, it won't hit hard before then. The "it" is damage to our economy from the north Atlantic turmoil. There will be some damage. What no one knows is how much damage and in what form. What isn't happening in the so-called rich countries is a "normal" "recovery". That is because what used to be normal is not normal now and the world hasn't yet settled into a new normal. We have been in transition for a decade or more and we are not through. Politicians, commentators, economists and even philosophers argue over what poultices to apply. What should have worked under the old rules hasn't. Central banks have cut interest rates to the bone, then printed money furiously -- a travesty of old precepts of central bank prudence. Governments have sloshed out borrowed money, got dangerously indebted, then whiplashed in fright (or error?) into austerity. Banks have switched from lending to people who can't repay to lending to what should be safe --governments -- only to find them risky. Many European banks themselves now need mountains of taxpayer recapitalisation to stay in business. As these mad hatters party on, the World Bank and the International Monetary Fund heads both warned at their annual meetings last week of impending apocalypse unless governments acted. G20 finance ministers meeting on the sidelines of those meetings pledged action when their heads of government meet. But what? More debt to fix debt? There are many ingredients in this transition from old to new normal. One is what some call the "convergence" as previously poor countries -- notably, huge China and India and very big countries such as Indonesia but also many smaller ones -- raise living standards closer to those of rich countries. This intensifies competition for raw materials and fuels. That is great for supplier countries (but not all their citizens, as most Australians outside the resources sector testify). It is seriously painful for the non-elites in rich countries: the cost of living is climbing and wages can't compensate. Add to that the hollowing out of what Americans call the middle classes as better-paying manufacturing jobs disappear offshore to the rising economies or are displaced by technology. Alternative jobs, mostly in services, pay a lot less. Even manufacturers now pay less: Detroit car firms pay new entrants $US14 an hour, two-fifths of what used to be the effective rate. Debt and asset bubbles disguised this (here, too). Borrowing, justified on house prices, kept up pretences. The 2007-08 crash ripped up the pretence. That has left many in rich countries bewildered, angry or plain poor. In the United States that fuels votes for the anarchic Tea Party which is cowering the Democrats (including their floaty president) and parasitically destabilising the Republicans. Add the ending of what Waikato University demographer Ian Pool calls rich countries' "population bonus" as baby-boomers retire and the ratio of working-age people to retired people falls. Japan's stalled economy has been in this vice for 20 years. The spectre of Japan stalks North America and Europe. While this is a hard adjustment it is not (yet) Armageddon -- except to economists and policymakers stranded on old paradigms. Ben Bernanke made his academic fame critiquing the policy response to the 1929 crash, which deep depression followed. Bernanke is a sad case: a general fighting a previous war. The hard lesson for those policymakers will be that the new rules will not be made only in the north Atlantic countries. Chinese, Indians, Brazilians and south-east Asians will have a lot to say. Bill English grasps most of this. For nearly two years he has said fixing the United States and Europe is a 10-year or 20-year project, not a matter of a pull here and there on a few policy levers. That is English being realistic (by contrast with John Key's sunny optimism of early reprieve). English combines that with reassurance: the Australasian banks are reasonably sound and cashed up and so is English's Treasury. Thus, at least in the early stages of a second global crash we can trade through. But, of course, we are not immune, especially since China this time can't deploy massive amounts of state investment in infrastructure to keep its own economy, and so the world economy, going. At some point, as rich countries painfully adjust, that will hurt China -- and us. Commodity prices follow rules of demand and supply: if demand slips there is no magic to keep prices high. And, while English can count on getting through the election before there is much effect here, he can also count on any pre-election nerves helping him on November 26. Most voters will likely buy his "stick to basics" line rather than chance a return to Labour which they threw out only three years back. But what will the "basics" be in the "new normal"? That could be a core question for the 2014 election.