"Politics versus the Economy, 1940-1975"
Speech given at the Stout Centre conference, Parliament Buildings, Wellington in April 1999. Published in Margaret Clark(ed) Three Labour Leaders: Nordmeyer-Kirk-Rowling, Dunmore Press, Palmerston North, 2001
by Michael Bassett
In 1937 Douglas Jay, an academic turned Labour politician (who incidentally was the father of Antony Jay, author of the scripts for Yes Minister) produced a book called The Socialist Case. In it appeared some words that have been much quoted since: In the case of nutrition and health, just as in the case of education, the gentleman in Whitehall really does know better what is good for people than the people know themselves.(1) This sentiment well reflected socialist thinking in Britain and New Zealand both then and since; many did not restrict the parameters of the Jay philosophy to diet, health and education. Plans, directions, regulations, subsidies and benefits could, and should be issued by those who knew best, to restrict choices and to mould a better society. The result, it was argued, would always be superior to the sum total of people exercising their individual choices. There is no indication that Peter Fraser, New Zealands Minister of Health and Education at the time, or Arnold Nordmeyer who would soon take over the Health portfolio, read The Socialist Case, although Fraser who was described by a contemporary as an omniverous scanner of books almost certainly dipped into it somewhere. In any event, Jays message was something New Zealand Labour had long since accepted.
By the time that Nordmeyer became a Minister of the Crown in January 1941 the first New Zealand Labour Government was encountering many difficulties applying Jays government knows best principles to the economy. Ministers had learned how to subsidise, how to regulate, how to prohibit. They had not found out - and none of their successors ever discovered the trick either - how to perpetuate the insulation process that was necessary to underpin big spending social policies. As the Auckland Star shrewdly observed after the 1938 election: The question is not whether the Governments high and increasing rate of expenditure can be continued this financial year, or whether the Government can begin paying out social security benefits on 1 April ; the question is whether both can be continued indefinitely.(2) The problem, quite simply, was that it became politically impossible ever to reduce the overheads of an active social welfare policy; but the Governments income which was needed to sustain the growing superstructure always fluctuated.
Guaranteed prices for a commodity like butter could tide an industry over for a year or two; a trading agreement such as New Zealand enjoyed with Britain between 1939 and 1950, or the preferential entry to the British economy that lasted into the 1970s, could sustain export income so long as the arrangements lasted. Moreover, efforts to make the New Zealand economy more self-sufficient encouraged (high-cost) jobs and took some of the pressure off importing. But inflation seemed to be the unavoidable cost of those interventions. Nothing could insulate New Zealand against a downturn in export prices spread across many commodities and lasting for several years in a row. Consequently, New Zealands growing welfare superstructure, the cost of which in practice raced ahead of economic growth, was vulnerable to world market developments, and became more so when the reasonably predictable high export returns of earlier years followed a downwards trajectory after 1965.
In the mid-1960s, Jack Baker, the Government Statistician, dryly observed that perpetuating Labours stabilised state required either unlimited overseas funds or irksome internal restraints.(3) In practice, he said, New Zealand seldom had enough foreign exchange to satisfy demand, and quickly adopted more controls than most people felt comfortable with. These, then, were the parameters within which the political careers of Arnold Nordmeyer, Norman Kirk and Bill Rowling were played out. Each of them believed in the creative potential of the State. And each appeared to leave the stage with a vague feeling that the system had played him false, and that we ought to have been in a happier state than we were. In retrospect we can say only that each one had been too optimistic about what the gentlemen in Molesworth Street could achieve on behalf of New Zealanders.
The biggest problem Nordmeyer, Kirk and Rowling had to deal with was the high public expectation of the State that was given such a lift by the First Labour Government. Their political careers in turn stoked those expectations, leaving a problem which modern politicians are still grappling with. After the heady days of 1938, a year when the government of Michael Joseph Savage virtually hoovered the cupboard bare, and won a whopping vote of confidence, the public expected governments to carry on producing miracles. (Minhinnick immortalised the cupboard in his cartoons. He often showed Labour ministers of finance dressed as Mother Hubbard going to it, with an expectant trade union dog at heel. In the cartoons, as in reality, more often than not the cupboard was emptier than expected). By the 1950s both parties were running their election campaigns like public auctions, the bills for which had to be settled the following year. Labours weekly, the Standard, liked to picture Walter Nash as Santa Claus throwing presents off a sleigh.(4) By 1978 the trick had worn a bit thin. In its special election year issue, the National Business Review carried a cartoon of Rowling and Muldoon, dressed as Santa Clauses. The article began, however, with the words: Politicians are like prostitutes: full of promise. Their services are also invariably more expensive than helpful.(5) With hindsight, we can see Norman Kirk, Bill Rowling, and Robert Muldoon as the last enthusiastic practitioners of the doctrine that politicians can create a much better world for people by spending their money for them.
The career of Arnold Nordmeyer is instructive. He ran the gambit from wild optimism to steady realism. In his early days he did his bit to lift public expectations about what the State could do. During the 1957-60 government he found himself hoist with his own petard. In a TV interview in December 1980, Nordmeyer told his interviewer that in the 1930s when he first became interested in politics he was particularly struck by the teachings of Keynes, especially those parts which spoke of the constructive use of credit in recessionary times.(6) When he entered parliament in 1935, Nordmeyer found himself amongst a majority of creditmen on Labours backbenches. He and his close friend Dunedin West MP, Dr Gervan McMillan, plus Bill Anderton(Eden), Jack Lyon(Waitemata), Gordon Hultquist(Bay of Plenty), Bill Barnard (Napier), Clyde Carr(Timaru) and Jim OBrien(Westland), and a number of others who were less public in their advocacy, strenuously supported passage of the Reserve Bank Amendment Act in April 1936. They watched with delight when credit was advanced to underpin Guaranteed Prices and State Housing.
John A. Lee was leader of the creditmen for a time. He was a man in a hurry and he constantly sought to speed the pace of reform between 1936 and 1940. He preached nationalisation of the Bank of New Zealand, and wanted politicians to control Reserve Bank policies in finer detail.(7) A majority of caucus, and of Labour Party activists in the electorates, also pushed for immediate action. They convinced themselves that Peter Fraser and Walter Nash were unimaginative, and were preventing Labour reaching the Promised Land. In this respect, the young backbenchers of the First Labour Government were no different from those of the Second and Third. A rather wiser Nordmeyer between 1957 and 1960, and a harrassed Bill Rowling between 1972 and 1975, were confronted with youthful enthusiasm in the caucus for policies that outstripped the capacity of the economy to deliver.
The Labour Party was experiencing economic difficulties long before Nordmeyer became a minister in 1941. By election time in 1938 consumer demand was so high, and the value of imports exceeded exports to such an extent, that Nash found it necessary to introduce import controls in December. The flow-on effects of the Social Security Act, as yet unfelt, were likely to make things worse. Nash went to London in 1939 to raise money, both for defence, and for what was coyly described as ordinary government purposes. He still hoped for a bilateral trade agreement, something the British had rejected in 1937. As Nash ran into difficulties with Londons banks and sceptical conservative British politicians, Peter Fraser, the Acting Prime Minister, defiantly assured New Zealanders that there would be no lowering of living standards.(8) Nash came home with less credit than he wanted, but relief greeted him as he stepped off the boat. Hitler had invaded Poland, New Zealand was at war, and the British would buy all our surplus dairy and meat for the duration at prices to be negotiated annually - which in practice proved more predictable than the market had ever produced since the end of World War One.
This deal indirectly provided enough money for many of the social reforms that Labour continued to put in place during the war. Nordmeyer had the resources to introduce General Medical Services benefits, Pharmaceutical benefits, X-Ray benefits, Hospital Out-patients benefits, District Nursing, Laboratory testing and Dental Benefits during his six years as Minister of Health. Some in the Labour caucus, and many in the community at large, always wanted more. Both Fraser and Nash became concerned, despite their earlier efforts to defend living standards. As wartime realities set in, Fraser talked in May 1940 of the need to face set backs, or even temporary reversals.(9) Nash told the Federation of Labour conference that New Zealand was living beyond its means. Then he pointed to the reduction of New Zealands productive capacity that resulted when a population the size of the town of Oamaru was overseas in the Armed Forces. Before long it was a city the size of Wellington.(10) When John A. Lee continued to argue in Parliament for imaginitive use of credit, Fraser burst into the debate. We do not eat banknotes; we do not wear credit; we do not build factories with credit for material. Credit in itself does not make machinery, or instal machinery, or turn out goods....(11) So worried was Fraser about the air of unreality that still lingered in New Zealand that he told a secret session of Parliament in December 1940 that it seemed as though nothing less than a bomb on the breakfast table would awaken many New Zealanders to current realities.(12)
Taming the creditmen who were sent to Wellington during and after the war by a public eager to wring more from the State, ironically became part of Nordmeyers job when he was appointed Minister of Industries and Commerce in May 1947. The calls on government resources by this time were enormous. Not only were there costs attached to war that were still being settled, but 117,000 people were in the process of taking up the generous rehabilitation benefits provided by Frasers Government. A shortage in housing and electricity strained the States resources to the limit, while railway rolling stock desperately needed upgrading. Some in the Labour caucus also wanted to press ahead with a multi-million-pound state forestry mill near Murupara. Nordmeyer found himself grappling with the ballooning cost of subsidies which the Government utilised to ease the effects of inflation on Labours economic stabilisation programme. In 1947 Nordmeyer, the creditman of a decade earlier, had to slash some farming subsidies, remove them altogether from tea and sugar, and allow rail and shipping charges to rise. Nash did his best to satisfy public demand; he let expenditure run to the limit in 1949, causing Bernard Ashwin, Secretary to the Treasury, to protest on several occasions.(13) Labour politicians were finding that their interventions had price tags which were beyond what the economy could pay.
The point to remember is that once the electorate had the taste of what could be achieved by a big spending government, it never let its politicians forget. They, in turn, have always been reluctant to preach reality. We will find a way, became Walter Nashs often quoted promise. In the election of November 1949, Labour was replaced by National. Sid Hollands talk about free enterprise had some appeal at the ballot box, but it was his promise to make the £ go further that won National that election. When the new government set about removing some subsidies and regulations in 1950, the public quickly became uneasy. The price of victory over the watersiders in 1951 was a return to controls and regulations. The new men in Molesworth Street found themselves caught in the web of import and price controls, and the social policies they had inherited from Labour. For two years Holland tried to restrain the inflationary impact of high overseas prices resulting from the Korean War. By 1952-3, with the benefit of the British wartime dairy and meat commandeer now gone, and world commodity prices fluctuating as they had pre-war, Holland knew that his political life rested on controls, regulations and subsidies. Like Labour, National sought also to boost import substitution industries in the hope they could further insulate the economy, and to broaden the countrys export base with the part-state, part-private Tasman Pulp and Paper project.
But nothing could shield New Zealanders in 1957-58 from the sustained downturn in prices for several principal export lines. Imports exceeded exports by nearly £40 million in that financial year. With Nash as Prime Minister, and Nordmeyer as Minister of Finance, Labour found itself saddled with the hugely expensive promises which they had dangled before the electorate in the election of 1957, and very little money to pay for them. As Keith Sinclair observed, Nash sounded like Santa Claus before the election, but after it soon looked like Scrooge.(14)
The problem was that believers in the Santa Claus state were not ready to forgo any of the presents they believed they were entitled to. Since the 1930s the voters had paid little heed to any economic difficulties facing the country; they always demanded action on promises. In 1977 Nordmeyer told me that he found the Labour caucus hard to deal with after the 1957 election. What they didnt realise, and I couldnt get them to realise, was that it was impossible to do the things that they wanted done without increased taxation. I put it to caucus that it might be wiser to delay the introduction of the Family Benefit capitalisation until the deteriorating economic situation had been arrested. But no, they insisted that the programme should be implemented.(15) The backbencher who had harried Nash between 1937 and 1940, now found himself having to introduce extra taxation in what was dubbed his Black Budget. It became synonymous with his name. It sank Nashs administration because the public held all governments accountable if promises were not delivered painlessly. The Nash-Nordmeyer government did make some bold bids to find innovative solutions to New Zealands economic difficulties. With its industrial development programmes the Government subsidised export industries, such as Comalco. It rolled out the red carpet to import substitution schemes such as Pacific Steel, and the ill-fated Nelson cotton mill. But Nashs government, too, left behind it a foreign exchange crisis. The incoming Holyoake Government cancelled the Cotton Mill, then sought refuge in state interventions of its own, such as New Zealand Steel, and further expansion at Tasman Pulp and Paper.
Bill Rowling was not a member of the 1957-60 government, although he did stand for Fendalton in the 1960 election against Harry Lake who became Keith Holyoakes Minister of Finance. But Norman Kirk was one of Nashs backbenchers. In his Address-in-Reply speech in June 1959 Kirk praised the measures which Nordmeyer adopted, including higher taxes, to solve the crisis he had inherited.(16) Yet, possibly because he sensed that his life would be shorter than his colleagues, Kirk became even more passionate about big government as the 1960s wore on. Like the creditmen of the 1930s, he believed that state spending would automatically boost the New Zealand economy. He took comfort from arguments that planning could lift New Zealands economic performance. In 1966, three years ahead of the National Development Conference, he told the Institute of Secretaries that a Labour Government, working in partnership with all key sections of the economy through a national planning council, could give New Zealand a higher and more adequate rate of economic and social progress.(17) He seems not to have been deterred by the rising level of world inflation after 1968, and might not have understood the likely results of higher state spending in a time of world inflation.
Where Fraser, Nash and Nordmeyer (in later life) tried to calm peoples expectations about what the State could do for them, the bomb which Kirk put on the nations breakfast table achieved the exact opposite. Indeed, sensible politicians have been trying to defuse it ever since. With his 1972 election manifesto Kirk sought to convince the public that in his hands the Government could produce miracles. He boldly proclaimed in Parliament that his government would rule with a strong social conscience. It would strengthen family life, and build social responsibility.(18) The 1972 manifesto had more dollar signs attached to it than a Christmas tree. The Government would fund new industries through an Industrial Development Finance Corporation, extend money to regional development councils, pour resources into housing, both private and state, set up a Shipping Corporation, foster physical fitness, boost staff numbers in hospitals, expand medical training facilities, state fund early childhood education, pay certificated teachers in independent schools, boost arts funding, provide cheaper local body loans, introduce a system of rate relief, extend ACC to non-earners, and work towards 1% of GDP for foreign aid.(19) To all this was added the DPB, hurried along in 1973 by Nationals Lance Adams Schneider, whose private members bill forced Labour to enact its own DPB in November that year.(20) Did it help strengthen family life as Kirk had promised, or play its part in dismantling families? Even the most charitable would have to admit that there was a bit of the latter about the DPB in practice.
By this time Kirk had become extremely impatient. The red-covered manifesto accompanied him to cabinet and caucus meetings, to the debating chamber, and to meetings with senior civil servants. It became his Bible. The Junior Whip, Jonathan Hunt, was given the job of compiling two publications: Labour Works and Labour Achieves which ticked off the achievements of the Government against the manifesto promises. Not long before he died, Kirk patted one of Hunts publications and told me how proud he was that his government had achieved so much, and how much more there was still to do. We soon found out that around this time he was seeking alternative economic advice, not liking what his officials were telling him about the economy. On this occasion, Labours most determined big spender was the Prime Minister, a man even more impatient than his most wild-eyed backbencher.
Which is not to excuse them. As with both previous Labour governments, the Third Labour Government contained its fair share of young politicians, myself included, who busied themselves spending the States resources rather than acquiring them. The Government had initially been so flush with money that Bill Rowling as Minister of Finance was able to revalue the currency in 1973. That measure only briefly restrained imported inflation. High state spending pushed it upwards.(21) Warren Freers complex Maximum Retail Prices scheme (MRP) was designed to bolt the door on food price inflation, but by the time MRP was introduced the horse had bolted. Worse, export prices began to sag from the brief highs of 1971-72. The first oil shock hit cabinet with a wallop at the end of 1973. On 27 November Kirk was photographed catching a bus, and preaching the need to conserve oil products. Ministers soon found that it took more than symbolic gestures to quell a generation of rising expectations. And of course it was impossible to countermand world trends from Wellington.
World trade which had bounced along at an average annual growth rate of 7% between 1948 and 1971, sank to minus growth in 1974-5.(22) Rowling and Bob Tizard, and a majority of the cabinet, tried to persuade the caucus to quieten their demands. A majority in cabinet wanted to suspend the manifesto promise to hold all costs over which the Government exercised direct control, such as phones, electricity and milk. But Kirk intrigued with backbenchers, and the cabinet was out-voted in caucus.(23) In 1974 calls for restraint were greeted by the Labour caucus in much the same way that they had been in the days of Fraser, Nash and Nordmeyer, only on this occasion the Prime Minister was leading the insurrection. The politics of rising expectations were getting completely out of hand.
The cruel point to the story is that Labour politicians got no credit from the electorate for trying to do so much. The Third Labour Government lost on two fronts. Since few were prepared publicly to preach the necessity for restraint, many thought Labour was going slow on its promises. They disliked the personal saving implicit in the New Zealand Superannuation scheme, and were tempted by Muldoon when he wafted his no-extra-taxation National Superannuation past their noses. In 1975, others with a better appreciation of world trends, and their inevitable impact on New Zealand, thought the Third Labour Government had been too reckless by half.
With hindsight, what eventually rendered ungovernable the sort of regime engineered by the gentlemen in Molesworth Street was the tendency of politicians always to want to do more for people than the economy could pay for. Invariably, rising expectations moved at a faster clip than growth. The percentage of the economy handled by the State grew steadily from 14% in 1924 to 28% of GDP in 1950. It reached 42% in 1982. Every homily from Labour and National politicians about the need for extra effort if there were to be better living standards went unheeded.(24) And as the State took more unto itself, economic growth gradually got more sluggish as time passed. And when growth couldnt sustain spending, politicians were more inclined to tax rather than preach spending restraints. Moreover, targeting remained heresy. The end result, in retrospect, was predictable. The economy went from bad to worse. It was the classic bind that left wing parties in all other parts of the world were also experiencing by this time.
What added to the problems of the Kirk Government was the fact that the degree of export market security enjoyed by New Zealanders for so many years evaporated. Britains entry into the EEC, which was discussed with growing determination during the 1950s and 1960s, became a reality on 1 January 1973, a few days after Kirk and Rowling took office. Commodity prices which had not been good after 1965, except for a brief heavenly spurt in 1971 and 1972, now had the added problem of quotas being enforced by the European Community. This further threatened income from traditional exports. The National Development Conference of 1969 sought to put policies in place that would ensure sustained growth of 4.5% p.a. Instead, during the first five years of the policies existence, they produced an average of 2.8% annually, and growth disappeared altogether towards the end of the 1970s.(25)
And yet, there are still those who believe that one more rub of the lamp might produce the magic formula that has so far eluded social and economic engineers in Molesworth Street, Whitehall, Pennsylvania Avenue, the Elysee Palace, and Frankfurt. Some still argue that politicians can create social and political heaven. Only a few weeks ago I heard one parliamentary inmate argue that tax cuts were a form of Government spending that should be resisted! The inference - that taxpayers money really belonged to the politicians - is striking. Douglas Jay retains a following, albeit rather smaller than once upon a time.
While many of the interventions during the forty year period 1935-75, can, when analysed in isolation, be said to have produced beneficial outcomes, collectively they gave us a mixture of contradictory incentives and ever-so-well intentioned extravagance that was unaffordable over the longer haul. On balance, each of our political practitioners, Arnold Nordmeyer, Norman Kirk and Bill Rowling, leave me with the impression that their political lives were less fulfilling to them than they hoped for. Their problem was that they endeavoured to do too much, and certainly they tried to do more than the economy could stand. They left contingent liabilities behind which the Exchequer had difficulty financing then, and which their successors have had trouble rearranging ever since. What none of them did, except perhaps in his most private moments, was to ask whether there were other ways to assist the people whom they wanted to help, rather than by throwing state resources at every problem which reared its head.
In those days there was little debate within New Zealand about the ideal role of the State, or about ways of compassionately assisting people in need. It was simply assumed that the gentlemen in Molesworth Street would find a way. There was little talk about the need constantly to review, and redesign social incentives. Our welfare state, like everyone elses, became a heavy, inflexible beast that could no longer be shouldered. Nordmeyer, Kirk and Rowling, along with all of their National contemporaries like Holland, Holyoake and Muldoon, still believed that Douglas Jay was right, for quite some time after it was becoming clear that he was seriously astray.
1. Quoted in Antony Jay(ed), The Oxford Dictionary of Political Quotations, Oxford, 1996, p.190.
2. Auckland Star, 17 October 1938, editorial, p.6. The Dominion had made a similar point on 11 July 1938 and reiterated it, 17 July 1939. See P/19/3, NA.
3. J.V.T. Baker, The War Economy, Wellington, 1965, p.16.
4. See especially Standard, 24 July 1941, p.6.
5. National Business Review, April 1978, Election Year Special, p.1.
6. Interview on TV1, 8 December 1980.
7. Lees views on credit are discussed in detail by Keith Sinclair, The Lee-Sutch Syndrome: New Zealand Labour Party Policies and Politics. 1930-1940, NZJH, vol.8, October 1974, pp.95-117.
8. Standard, 6 July 1939, p.11; 31 August 1939, p.2.
9. Standard, 23 May 1940, p.7.
10. Standard, 28 March 1940, p.2; 30 May 1940, p.6.
11. Standard, 25 July 1940, p.7.
12. Standard, 12 December 1940, p.7.
13. Michael Bassett, The State in New Zealand 1840-1984: Socialism Without Doctrines, Auckland, 1998, pp.244-245. Also B. Ashwin to W. Nash, 13 April 1949, T/1/52/835/5, National Archives.
14. Keith Sinclair, Walter Nash, Auckland, 1976, p.307.
15. Michael Bassett interview with Nordmeyer, 9 December 1977, p.26, Bassett Papers.
16. See for example, NZPD, vol.319, 30 June 1959, p.64.
17. Norman Kirk, Towards Nationhood, Wellington, 1969, p.22.
18. NZPD, vol.382, 21 February 1973, p.117.
19. 1972 Election Manifesto: New Zealand Labour Party.
20. Adams-Scneider introduced his Domestic Purposes Benefit Bill, based on the 1972 Social Security Royal Commission, on 22 February 1973. Labours bill, the Social Security Amendment Bill, dealing with the DPB, appeared on 5 September 1973. It got its Third Reading on 13 November 1973.
21. Many of the problems that developed during 1973 are discussed in Michael Bassett, The Third Labour Government, Palmerston North, 1976, chapter 9
22. Paul Johnson, Modern Times, London, 1983, chapter 19.
23. Bassett interview with Bob Tizard, 10 June 1997.
24. Bassett, The State in New Zealand, pp.247-248.
25. Bassett, The State in New Zealand, p.320.