June 26, 2022•1,021 words
Situation exposes fundamental economic issues
The so-called 'GIB crisis' in New Zealand is significant because discussion of it ignores a fundamental economic issue; far from being simply a supply issue, it is actually a demand issue created by activity in a sector that is outstripping the economy's ability to support it.
Anyone who works in the construction sector knows it has been going gang-busters since early in the COVID-19 pandemic. Two years ago, tradies were getting more work than they could handle; some I know were turning work down and asking suppliers to stop recommending them to customers. And it seemed to be across the board; I knew builders, electricians, roofers, and painters & plasterers in this situation. The 'joke' was that the people who would normally spend thousands of dollars on overseas holidays were spending it doing up their houses, although it probably wasn't a joke.
So, the news in February this year that wall board supplies were becoming harder to get and were going to be rationed came as no surprise. Ordering times were longer and not every builder could get it when they wanted. Now, it has become a political crisis for the government, with everyone suddenly an expert of construction supply chains and monopoly economics.
I know we are supposed to hate monopolies like plaster board manufacturer Winstone Wallboards, which has allegedly used its market dominance to keep competing manufacturers and importers out of the market. This was fine, up to a point, when the supply and demand were in balance; but demand has now considerably outstripped domestic supply. According to Winstone, they are working at maximum production capacity and will add more capacity in July, with a new plant in Tauranga starting production mid-next year. But, they still can't keep up with demand that is a result of record building activity, both new builds and renovations.
In an elastic market, supply would match demand to maintain generally stable prices. But a near-monopoly manufacturer operating at full capacity is not an elastic market and never will be. So, is this simply a matter of market failure? To some extent it is, and that is largely the way it is being discussed in the media, although I haven't yet heard anyone use that term. Of course, it's also portrayed as a political failure because New Zealanders still have the naive belief that the government both controls the economy and can easily fix it when things go wrong.
Supply chain problems with imports being disrupted by the ongoing effects of the pandemic are also significant. Getting all sorts of supplies, including plant and machinery, into New Zealand is a real challenge.
In New Zealand, we have relied for many years on a range of low cost inputs to our economy; virtually free credit, cheap renewable energy and a ready supply of immigrant labour being three big ones. Credit is still relatively cheap; there is plenty of it around, it just costs a bit more. Energy in the form of hydrocarbons is more expensive because of Russia's invasion of Ukraine. And labour is in short supply. Unemployment is very low and immigration policy settings and processing capacity mean employers are finding it hard to import workers. This is also affecting the construction sector. Many construction workers, particularly on large projects, came from overseas, and a lot of them went home at the start of the pandemic and haven't returned. However, this is not necessarily a bad thing. Imagine how overcooked the construction sector would be if labour was not a limiting factor!
(As an aside, you would think the demand for labour would put up the price of it in the form of higher wages and salaries, but it appears employers can manage to suppress labour costs at a time of high inflation, at least in the short-term.)
What the public discussion doesn't include is any focus on this being a demand-driven problem, and therefore partly the responsibility of customers. And there's a good reason for that; it doesn't suit the orthodox approach to economics in which the world operates. In orthodox economics, increasing demand is good because it can be matched with increasing supply, which leads to economic growth, which increases wealth. So, everybody wins; in theory.
Therefore, increasing demand should be a good thing, except when it's not, and at the moment it is causing both supply-side problems and inflation (partially, at least). However, it appears to be impossible to talk about demand being a problem. To do so is to challenge the orthodoxy that growth is always good. Look at the alarm people display at the suggestion we might have a 'technical recession' in the form of two quarters of negative GDP (i.e. shrinking of the economy). This is unthinkable and seen as a sign of massive failure by any government.
However, as low/no-growth proponents (and I'm one) would say, continuous growth is a bad thing because it is unsustainable. Our economy is heavily based on consumption and waste, and uses the environment as a free good to take our waste and to supply resources at no more than the cost of extraction. It is unsustainable because there is a limit to both the supply of resources and the ability of the environment to act as a sink for our waste. This will only become worse as the rest of the world catches up with the developed countries and tries to match our rate of consumption.
The current crisis should be a warning that the orthodox approach to economics is flawed. It might have served us well in the earlier stages of capitalism, but it cannot continue indefinitely in late-stage capitalism. The question is, do enough people recognise that? It's pretty obvious that our current leaders do not, and until we have leaders who do so, we are condemned to continuing on the current path to economic and environmental collapse.
As another aside, I know housing possibly isn't the ideal example of this issue, as we have a shortage of affordable modern housing and need to build more, but it serves to illustrate the general point.