M.J.Savage Memorial Lecture, La Trobe University, 4 September 1998
by Michael Bassett
When I was a small boy, few homes were complete in the working class suburbs of Auckland without a framed, tinted photo of Michael Joseph Savage. The photo was published in the Auckland Weekly News in early April 1940, the week after Savage's death. It was usually mounted, sometimes with a gilt surround that was out of all proportion to the socio-economic standing of the house in which it hung. The picture was a political declaration. My home didn't have one: it was enough that my mother named me Michael, born as I was during Savage's triumphant re-election campaign in 1938. My National Party grandfather never approved, and called me "Michael Joseph" for as long as he lived. By the time I first stood for Parliament as a Labour candidate in the election of 1966 the photos were disappearing from households; the older generation was moving on. I began looking for a photo of Savage. Out of the blue, an elderly Labour supporter in my electorate rang me asking if I would like hers. She knew her life was drawing to a close, and who better to look after the icon than the local Labour candidate? I hot-footed it to Devonport. It was a simple, Catholic, working class home. It was dark, and had become rather musty. There he was in the hall next to the crucifix. She picked him down, kissed him, and told me that Savage was the nearest thing to Christ in her life. The photo still hangs by our back door thirty two years later.
Historians today would agree almost unanimously that Savage was New Zealand's best loved Prime Minister.(1) He held the place in the hearts of many depression-scarred citizens that was occupied by Franklin Delano Roosevelt in the United States, and to a lesser extent by Curtin and Chifley in Australia. Uncritical devotion was lavished upon him, and upon his memory. His funeral witnessed a mass outpouring of emotion. An elaborate memorial was constructed to his memory on the best vantage point overlooking Auckland's Waitemata Harbour. During all my years as an MP it was de rigueur to attend a thanksgiving speech at the tomb each Labour Day . The explanation for this adulation was simple. More than any specific achievement, he had offered hope. He wanted, in his own words, to "let people govern themselves", to give them a "fair deal", to get the bosses and the interest groups off their backs, and to stop people going "bankrupt amidst plenty".(2)
Sixty years on, and thirteen prime ministers later, it is possible to re-assess Savage, his ideas and their implementation, both by him and his successors. To date, Savage has had a good press from historians. In 1959 the late Sir Keith Sinclair labelled Savage "a benign political uncle, cosy, a good mixer, with a warmly emotional appeal". Stressing the benign side of Savage, Sinclair added that "he smelt of the church bazaar and not at all of the barricades".(3) Savage's biographer, Barry Gustafson, called Savage a "gentle man of peace and warm humanity" who possessed a "mystical vision and charismatic appeal".(4) Some have questioned Savage's intellectual abilities, dwelling on his long rambling speeches about the "money problem". But implicit in all the comments about him has been an acceptance that the ambitious role for central government that he sketched out in his speeches and worked to put in place was both practical, and sustainable over time. There are still historians who dismiss those who question the role of the State in the modern world as right wing ideologues. But it's worth taking the risk. I want to look at the "Savage Ideal", and to examine whether some of its premises were a sound basis for the long-term development of the New Zealand economy and social policy. I will argue that in many respects Savage's policies, great as they seemed to people of the thirties and forties, are now well past their "sell-by" date.
Savage, as we all know, came from this part of Australia. Barry Gustafson vividly describes the bark-roofed, slab-walled cottage in which Savage was born in Benalla. He notes that Savage's personality and mind were developed not in an industrial slum, like many of his colleagues', but in the poverty of the Australian bush.(5) Savage knew the heartbreak of primary producers. His frequent talk about monetary policy and credit reform in later years brought legions of small farmers, especially dairymen into Labour's ranks in the months before his party's first victory in November 1935. Savage spoke a simple language. Unlike his well-read deputy, Peter Fraser, he seldom referred to books. It is also true that his thought patterns were not always easy to follow. Any reader of the transcripts of deputations to the Prime Minister between 1936-39 will often have difficulty comprehending the exact meaning of what Savage was saying.(6)
However, one thing is clear: Savage had implicit faith in the power of governments to improve the quality of people's lives. In his maiden speech a few months after he was first elected to Parliament in December 1919, Savage argued that the Government should get "the interests" off the backs of those people "who are rendering a useful service to society". The Government should buy up more land, set up a State Bank, improve pensions, "scientifically" improve the health system, and establish a national shipping line.(7) Labour MPs, he believed, would be above sectional interests. They would be beholden to no-one. As the years wore on, Savage's faith in the potential of government grew. By the time he became Prime Minister in 1935 he was arguing that politicians should take control of the nation's credit, use it to stimulate farming and industry, improve living standards by building state houses, introduce the 40 hour week, and empower trade unions that had suffered a severe drop-off in membership during the Great Depression. Wages should be lifted using new legislative powers that would be given to the Arbitration Court. At no point in his life does Savage ever seem to have doubted that direct state intervention was the answer to the problems of his time. Governments could encourage, finance, run and benefit from public, as opposed to private endeavour. It was a simple faith, the stronger because it was a reasonably novel concept to people in those days, and was untroubled by experience.
However, Savage appreciated that there were limits to what any one country's government could do for its people. He realised there was a danger that forces from outside New Zealand could undermine his ideal world. Low wage countries produced goods more cheaply, thus undercutting efforts to lift living standards in New Zealand. This in turn was connected to Savage's suspicion of immigrants from third world countries who might be prepared to work for lower wages. Increasingly he believed it would be necessary to protect the New Zealand economy, by ring fencing it with import controls, curbs on interest rates, and raising tariffs. Price controls first used in 1915 would be extended so as to ensure that Labour's experiment in advanced social welfare would survive. Inflation must be suppressed.
By 1938 Savage had an even more ambitiously interventionist attitude to the state than he had first espoused when taking office. Politicians, he now believed, needed to take unto themselves many of the functions of the market place. After a run on New Zealand's overseas cash reserves in the later part of 1938 the Prime Minister told reporters on 7 December 1938 that his government possessed a plan for the "scientific selection of imports" which was part of his "insulation plan" for New Zealand. Asked if luxury goods would be affected, Savage commented that the luxuries of today were the necessities of tomorrow. "There is nothing too good for the people of New Zealand", he declared. "Our job is to provide a foundation for all, starting with first things. The best music, the best means of travel, the best education, the best of everything is good enough for the people of New Zealand.... Anyone who attempts to build New Zealand and lift the standard of life without taking a reasonable measure of control of our overseas trade will fall down on the job".(8)
This was a classic utterance by the mature Savage; visionary, vague and, as time would show, vacuous. It was based on a belief that was unsound then, and which was very soon shown to be impractical - that is that New Zealand could go it alone, irrespective of developments elsewhere in the world. In spite of the high fence that Savage and his successors built around the New Zealand economy, outside forces have always impinged on it. The Second World War caused shortages despite frantic efforts to produce within New Zealand goods that were previously bought abroad. Excessive world commodity prices during the Korean War, their collapse in 1966, and the oil shocks of the 1970s were immediately felt in New Zealand. Yet, the "Savage ideal" - and there are some who still believe it - assumed that it was possible for the Government to intervene here, there and anywhere to ensure protection. Over the next forty years an endless series of interventions, many using statutory regulations, and a well-intentioned sequence of economic stimulations and subsidies were applied to the economy, all with the hope that progress would - in Savage's phrase - continue "onwards and upwards". Between 1935 and 1980 New Zealand became a social engineer's paradise, or as some called it, a "nanny state".
Many interventions worked for a while. It was only in the longer term that it became clear that the beneficial effects of one act often cancelled out another. Nowhere was this more evident than with the blanket introduction of the 40 hour week in 1936 and the round of wage rises that followed. When working hours fell back suddenly and there was a requirement to pay overtime, manufacturers' costs shot up. Inflation followed this initial jump in wages. Savage and his colleagues thought this shouldn't be allowed to occur. Price controls were used more vigorously on essential items like bread. But the Government soon found that wheat producers were not prepared to continue growing a product the price of which was kept at an artificially low level. Ministers responded to this conundrum by introducing taxpayer subsidies to compensate for the gap between the price needed by the wheat grower and the low price which the baker had to pay for flour if the end-price of bread was to stay low. During the war a wide range of subsidies had to be introduced and the cost to the taxpayer rose even more steadily after the war, necessitating a higher tax take. Taxes have always impinged most heavily on wage workers who have few opportunities to avoid them. The State had become involved in a system of robbing Peter to pay Peter.
Savage's personality, and the love that he seemed to inspire, persuaded people to accept his government's economic policies. During the war people were prepared to put up with inconvenience. Price controls worked fairly well. A complex system involving wage and price stabilisation came into force in December 1942. This was overseen by a Price Tribunal and a Director of Stabilisation. Both were armed with very wide powers to search the books of any private company believed to be stepping out of line. Inflation built up a fair head of steam but did not get out of hand during the war.
However, companies soon became adept at circumventing price controls or profiting from them. How, for instance, could one fix a fair price for any item? Answer, by basing the cost on the average producer's costs, and allowing what seemed like a fair margin for profit. But this provided little incentive to a manufacturer to keep his or her overheads under control. In the case of bread production, the manufacturer simply employed as many as he felt comfortable with, paid whatever was the going rate for flour, and passed his costs along to the Price Tribunal which nearly always blessed the sale price. If the Price Tribunal refused to sanction price rises, as like as not it would end up before the courts, appearing to be unreasonable.
In this crusade to get private enterprise off the backs of the workers, Savage's colleagues were creating a serious problem for themselves and their successors. Over time, price controls caused endless difficulties for New Zealand producers and manufacturers. Establishing a raft of small industrial units that duplicated goods which were available from abroad at a much cheaper cost added to the problem. What came to be known as the "cost-plus mentality" soon overtook Labour's well-intentioned goal of keeping costs down and employing as many New Zealanders as possible. New Zealand's overall cost structure moved inexorably upwards at a rate that exceeded the cost structures of its principal trading partners.(9) The Third Labour Government in which I served as a back bencher between 1972-75 tried valiantly to make price controls work, but succeeded only in lining the pockets of many small manufacturers, while failing to make an appreciable dent in prices.(10) When he set out to control prices, it is a fair bet that Savage did not intend to deliver a series of privileges to manufacturers! But that is what happened. A considerable number of people in New Zealand today derived their wealth from state interventions that were made for the expressed purpose of helping the workers.
Having said this, it must be understood that in the short term many of Savage's interventions into the market place appeared to be beneficial, and they were certainly popular . A generation grew up believing they were effective. That's why Savage's government was so triumphantly re-elected in 1938 and why the nation mourned his passing in 1940. And it explains why the succeeding Labour administration under Peter Fraser lasted until 1949. Protection created jobs for a time, and depression unemployment levels subsided. In fact, Labour over-shot its target of full employment. By 1945, ten years after Savage had taken office, New Zealand was beginning to experience the very reverse of mass unemployment. Even with the return of 100,000 troops the country had "over-full employment". By 1946 there were many thousands of advertised vacancies. The New Zealand job situation had gone from famine to feast. This produced its own set of problems. Getting private entrepreneurs off the workers' backs managed to install union leaders in their place. The president of the New Zealand Labour Party between 1937 and 1950, a watersider called "Big" Jim Roberts, became known as the "uncrowned king of New Zealand". F.P. Walsh, the Vice-President of the Federation of Labour and a confidante of Peter Fraser was nick-named "the Prince".
This turnaround was one of the most un-nerving discoveries made by Savage and his successors. Since the earliest days of the Labour Party they had argued that the workers' political representatives could control the economy for the general good without being beholden to anyone. J.T. Paul, president of the Labour Party in 1919, argued that whereas non-Labour governments were the playthings of predatory interests, a Labour administration would produce "sympathetic and sensible administration" that maintained a harmony of interests.(11) Yet, even before World War II broke out it was clear that some unions were getting out of hand. In 1939 Savage tried to rein in errant unions with the passage of an amendment to the Arbitration Act that gave the Minister of Labour the power to deregister a union that struck while an award was in force. After the war there were ugly confrontations between the Labour Government and watersiders, carpenters, drivers and freezing workers. Hundreds of thousands of days of production were lost. Without intending to, Labour had bestowed privileges on many strategically placed unionists whom they couldn't control. Wages and prices were soon leap-frogging each other.
The problem with rapidly escalating wages was that they threatened New Zealand's overseas reserves of funds. Surplus liquidity in the community led to a heavy level of importing. No government ever proved able to exercise adequate control, even using blanket import controls. The short three year election cycle meant that there was always a feast or a famine in foreign exchange, depending on the point in the political cycle. There were blow-outs in our London reserves following nearly every election between 1938 and 1984. Savage's ideal, no matter what its intention, ended up by encouraging New Zealanders to live beyond their means. By world standards, they were saving less than most people on earth by 1970. And when later governments resorted to borrowing to cover the trade deficit, or the cost of large employment projects designed to stimulate an increasingly lethargic economy, the country's total interest payments rose steadily. By 1984, nearly 20 cents in every tax dollar was being spent paying the interest on borrowed money, much of it having been spent, in effect, to pay the grocer.
As the historian David Thomson has shown, in the hands of Savage's successors, maintaining the good life meant more and more of what he calls "inter-generational theft". The generations of the 1950s to the 1970s, mouthed a mantra; they had paid for services through their taxes, and they were entitled to the payout, even if it did mean passing the costs across to their children's generation.(12) Not surprisingly, opinion polls show today that those under 30 have much less confidence in big government than did their parents, who grew up under Savage's benign spell.
Without doubt, the greatest accomplishment of the Savage Labour Government was the 1938 Social Security Act. Keith Sinclair, an enthusiastic Labour supporter all his life, called it "the greatest political achievement ... in the country's history".(13) The Act combined the introduction of what was intended to be a free-at-the-point-of-use health system with a comprehensive array of welfare benefits. Social Security was financed by a tax surcharge of one shilling in the pound or 5%. It was raised in 1946 to 7.5%. The extension of the "family benefit" to all mothers irrespective of the family's income increased the number of allowances overnight from 42,600 to 230,000, and multiplied the total cost of family benefits sixfold.(14) It also played a major part in Labours's retention of office in the closely-fought election at the end of 1946. Savage and his successors had learned how to capitalise politically by using the State's taxing and spending powers.
And in those days, a majority of voters believed that governments could effectively redistribute income without adversely affecting the productive base of the economy. For many years both National and Labour governments adhered to this basic belief about government beneficence. The introduction of a Domestic Purposes Benefit in 1973, Accident Compensation for non-earners in 1974 and a generous retirement system called National Superannuation in February 1977 added hugely to the cost of welfare in New Zealand. With National Superannuation, a married couple at 60, irrespective of income, received a pension equal to 80% of the average ordinary time wage. It was taxed, but net social welfare expenditure ballooned. The Government of Robert Muldoon that introduced it was obliged to trim aspects of National Superannuation when government spending as a percentage of GDP topped 40% in the early 1980s. These spending exercises further fuelled inflation which had already reached danger level.
Popular, too, were the health reforms which were part of the 1938 Social Security package. By the early years of the war New Zealand had the first comprehensive, universally-accessible public health system in the world. When one of Savage's opponents twitted him in Parliament with the suggestion that the scheme was so generous that it was "applied lunacy", Savage retorted that to his mind it was "applied Christianity". If so, neither he nor his successors developed the skills of Christ with the loaves and fishes. By paying for care for everyone, the State found itself funding costs that always exceeded budget, in spite of the increase in the Social Security Tax in 1946. Bigger top-ups from the Consolidated Fund became necessary, and in 1967 the the Government simply did away with the charade and abolished the dedicated Social Security tax. Henceforth everything was funded entirely from the Consolidated Fund.
In 1948 a crisis developed with the over-prescription of pharmaceuticals, just as it did within three years of the introduction of Australia's Medicare system in the 1980s. Moreover, huge provider forces of doctors, nurses and general hospital staff emerged. Not only did they take full advantage of the political process when pay and conditions came up for renewal, but they succeeded in making the system quite inflexible. By 1984 only a fool-hardy minister responded to the request for a new service in an area of population growth by down-sizing staff in areas of population loss. Savage's welfare state developed lock-jaw. It caused one of my predecessors as Minister of Health to comment in 1981 that at the then rate of increase in the Health budget, the whole of government expenditure would be needed to fund it alone by the year 2030. Similar stories can be told about education expenditure which was always one of Labour's top priorities.
Some people still argue that there was nothing wrong with Savage's social policies that a more robust economy could not have solved. What does have to be remembered, however, is that open-ended provision of public health services that are free, or nearly so, to everyone at the point where they are needed, has not proved to be sustainable in any country, anywhere. It is true that stronger economies such as Canada's were able to sustain a gold-plated health system for a considerable number of years. But as Australians well know, the Hawke and Keating governments both had to nip and tuck bits of the Medicare system within a few years of its introduction. And by the 1980s Canada and the United Kingdom were busily restraining health expenditure, too. In the 1990s, Sweden, Germany, and most reluctantly, the French, followed suit. Those who have tried to guarantee universal free health care provision have all found it impossible to do so over the longer term.
Having raised the question of New Zealand's economic performance in the years since Savage, it is worth saying a little bit about it. All New Zealand governments between 1935 and 1984 put the maintenance of full employment as their number one goal, ahead of economic competitiveness in the wider trading world. But the privileged position that organised labour came to enjoy under this policy was never able to be controlled by governments. For a time the Arbitration Court was constrained to take economic factors into consideration before it could award wage increases. But when the New Zealand economy slumped in 1967 and the Arbitration Court responded by awarding a nil increase in wages in 1968, Keith Holyoake's National Government caved in to political pressure with the support of the Labour Opposition - and awarded a 5% wage rise, despite the deplorable state of the economy at the time. Between 1968 and 1984 wages were increasingly set not by reference to the economy, but by political agreements. They were often announced in the annual budget. By the late 1970s, disputes between employers and unions usually went straight to the Minister of Labour who would negotiate a settlement that took no account of New Zealand's increasingly parlous economic position or the world competitiveness of the industry in question. If, as a result of the wage increase the industry was imperilled, then it often became eligible for a government subsidy. Once more Peter was being robbed to pay Peter. New Zealand, as one wag put it, was running its economy like a Polish shipyard!
In other words, popular expectations of politicians were triumphing over common sense. And as successive governments sought to grapple with the rapidly rising expenditure they incurred in the name of "good government", inflation galloped ahead of the OECD average. New Zealand's economic growth subsided in the 1960s. Between 1960 and 1984 other OECD countries grew their economies at an average rate that was 2% per annum faster than in New Zealand. The effect on domestic living standards was predictable. In 1950 New Zealand's per capita income was third or fourth in the world; by 1985 per capita income was only 65% of the OECD average, and New Zealand was 21st in the world rankings.(15)
Deep down, what I am saying is that Savage's ideal of a harmonious society presided over by a benevolent set of ministers who owed allegiance to no special interests, and who would re-organise society "scientifically", that is, in modern parlance, engage in a bit of social engineering on behalf of those they deemed deserving, was bound to fail. Things worked for a time, but the optimism of the ideologues was constantly challenged by the greed of man. Any band of social engineers who don't realise that the majority will always approach reform with a "what's in it for me" attitude, will always end up being surprised at the public's creeping sense of entitlement. In the end, this creeping sense of entitlement will undermine what reformers see as the collective interest. Each country in the western world has been finding this out for itself over the last thirty years. The modern challenge to all politicians is to recognise this basic reality and re-design policies.
In conclusion, let me go a step further. It is possible to re-define the role of government so that it sets acceptible parameters for public and private endeavour. At the same time it is also possible to devise systems for assisting those who cannot make a go of it in a market economy. As Savage always said, everyone must be able to obtain an adequate standard of living. Who can deny that? But in so doing, a basic principle of the First Labour Government - that people ought to work for their living and acknowledge a sense of self responsibility - must be reinforced. After all, the State since 1935 has not been very effective as thy brother's keeper. Knowing what I do about the growing cynicsm of Savage's'colleagues in their last few years in office,(16) I feel fairly certain that the approach taken by the Fourth Labour Government between 1984-90 would be nearer to their hearts than the excesses which some of the big spending apostles of the modern left want to perpetrate these days - supposedly in the name of Michael Joseph Savage. Savage, it should be remembered, believed that government should give people a hand-up, not a hand-out. Some later politicians of the left have forgotten that - to their cost.
1. See Simon Sheppard, "Ranking New Zealand's Prime Ministers", Political Science, Vol.50, July 1998, pp.72-89
2. The phrases are taken from Savage's speeches in 1934-5 that are quoted by Barry Gustafson, From the Cradle to the Grave: A Biography of Michael Joseph Savage, Auckland 1986, pp. 154-157, and from his maiden speech, NZPD, 7 July 1920, pp.210-218.
3. Keith Sinclair, A History of New Zealand, Harmondsworth, 1959, p.258.
4. Gustafson, p.270.
5. Gustafson, p.7.
6. A good example is the file on a deputation of manufacturers, 7 May 1936, IC/1/31/171, part 1, National Archives, Wellington. Savage's warm personality and delphic utterances were real political assets; people listening to him heard what they wanted to hear.
7. NZPD, 7 July 1920, pp.210-218.
8. Evening Post(Wellington), 7 December 1938; Dominion(Wellington), 8 December 1938.
9. These issues are dealt with in Michael Bassett, The State in New Zealand 1840-1984: Socialism without Doctrines? Auckland, 1998, chapter 7.
10. Bassett, The State in New Zealand, chapter 11.
11. Maoriland Worker, 23 July 1919, p.5.
12. David Thomson, "Society and Social Welfare" in Colin Davis and Peter Lineham(eds), The Future of the Past: Themes in New Zealand History, Palmerston North, 1991, pp. 98-120. David Thomson deals with the subject in greater detail in Selfish Generations?: The Ageing of New Zealand's Welfare State, Wellington, 1991.
13. Sinclair, History, p.263.
14. There is a discussion of Family Benefits in the official publication The Growth and Development of Social Security in New Zealand, Wellington, 1950, pp.66-70.
15. New Zealand Planning Council, The Economy in Transition: Restructuring to 1989, Wellington, 1989, p.7. For comparative world economic tables see also Paul Kennedy, Preparing for the Twenty First Century, Toronto, 1993, pp.351-352.
16. Fraser's Government became so worried by escalating health expenditure that it ordered restraint. See Cabinet Decisions 9 February 1949, AAFD, 811/1a/1/1/1, National Archives. Dr Doris Gordon, Director of Public Health in the mid 1940s, reported in her book Doctor Down Under, London, nd, pp.133-134, that Janet Fraser, who was wife of Prime Minister Fraser, and herself the most convinced of socialists, broke down and sobbed on one occasion at the realisation that the more assistance people received from the State the more they seemed to expect.