• The EU, State Aids and a Labour Government

    It is a truism that one of the most important issues in politics – particularly for the left – is the extent to which the state can and should intervene in the operation of the free market. It is surprising, therefore, that the Labour Party has been so slow to recognise that the European Union takes a very particular and potentially damaging stance on that issue.

    The EU’s attitude towards the role of the state has always been one of its cardinal features. Paradoxically, one of the two fundamental building blocks of what was originally the Common Market was one of the largest state interventions ever put in place in a market economy. The Common Agricultural Policy was a major use of state funding and policy, designed to provide a huge benefit to inefficient French agriculture (and we shouldn’t forget that the German factory worker, with three or four dairy cows in his basement or barn, also benefited greatly).

    The CAP was regarded by President de Gaulle as so important that he maintained his veto on British membership of the Common Market until he could be sure that the CAP was set in concrete. I was personally witness to this in my work at the time on British relations with Europe in both the Foreign Office and our Embassy in Brussels.

    The corollary to the CAP, and the second leg of the Franco-German bargain on which the Common Market rested, was a guarantee that efficient German manufacturing could have unrestricted access to that total market. That Franco-German bargain was of course completely inimical to British interests – something that would not have displeased, and may even have been seen as payback by, the two countries that had no reason to love the British, having been in one case defeated by them, and in the other, rescued but only with their help.

    The bargain required Britain to forego access to cheap and efficiently produced food and raw materials from around the globe and instead to push up food prices to European levels, thereby negating the one competitive advantage enjoyed by British industry – the lower wages made possible by lower food costs. The Common Market also meant that the British market was opened up to direct competition from powerful German manufacturing – and British industry (with the help of home-grown policy mistakes) was duly (and literally) decimated as a result.

    It should come as no surprise that the question of state aid or otherwise should still be a live issue in the UK’s current and changing relationship with the EU. The customs union established by the EU regulates and prohibits the use of tariffs to inhibit or distort the operation of the free market; and the single market was put in place to ensure that state aids could not be used as an alternative means of gaining a competitive advantage for one member economy at the expense of others.

    The strict enforcement of these rules – commonly found as well in comprehensive trade agreements such as the TPPA and NAFTA – means that a major aspect of the state’s power to intervene in a free-market economy is removed. The effect, if not the intention, was to create in the EU a land, if not “fit for heroes”, at the very least fit for multinationals – an aspect of the EU that seems hardly to have registered with the British left.

    The issue of state aid or otherwise remains a live one as the UK attempts to extricate itself from the EU embrace (or perhaps “stranglehold” is more accurate). One of the difficulties created by the need to avoid a “hard border” on the island of Ireland is that the so-called backstop would require the UK, for as long as the backstop was in place, to comply with the rules of the single market and therefore with the restrictions placed by the EU on state aids. The problem would not end there; the EU, determined not to allow a competitive advantage to a non-EU member if they can help it, would retain the de facto power under the proposed exit agreement to dictate to the UK the extent to which state aids would be permitted, for as long as the transition period lasts.

    These provisions, to which little attention has so far been paid, at least by the left, would deprive a British government, and particularly a Labour government, of many of the levers and instruments which would be needed if a newly independent British economy was to function efficiently in its changed circumstances.

    In the modern world, an economy that wishes to remain competitive and efficient would certainly need the flexibility to keep pace with new developments and to take advantage of new opportunities. An economy, for example, that wished to protect the environment and to build a new and flourishing green economy would need to be encouraged and directed into such areas. The same can be said of any attempt to take advantage of new technologies, new materials and new skills, all of which would be necessary to the functioning of an efficient modern economy and which could best be encouraged and enabled by government policy and intervention.

    But the use of taxes or subsidies or tax relief to promote certain kinds of investment would fall foul of the EU’s prescriptive and restrictive approach – so, too, might state investment in important infrastructure projects – road, rail, airports, for example – that might be seen as improving the competitiveness of British industry.

    Such interventions would come naturally to a government of the left – and such a government would be rendered completely ineffectual if it were denied the chance to pull such levers. Yet, that is exactly what is now proposed by the EU. The British economy, perhaps struggling to adapt to a new trading situation, would find itself not only with perhaps reduced trading opportunities with the EU but also having to identify and secure new trading links elsewhere, and without the ability to adapt quickly to those new circumstances.

    A new Labour government in Britain would find itself, in other words, denied one of its principal raisons d’etre. It would face the new post-Brexit situation with one hand tied behind its back. Having given up membership of the EU, it would still be subject to the EU’s prohibitions on state aids and could well find itself frustrated in doing what it wanted to equip the economy to face new challenges.

    The solution to the problem is to defer the departure date until a new trade agreement for the future can be reached. That would remove the need for a transition period and avoid a hiatus during which the UK was still subject to EU prohibitions and therefore unable to take steps to protect itself in the new circumstances.

    Sadly, there is a powerful strain of opinion on the left that regards the quest for economic efficiency and success as somehow unworthy of the high-minded. Such bien-pensants appear to give priority to their dream of a European destiny and to disregard the interests of Labour voters. Those voters may not share their insouciance.

    Bryan Gould
    30 March 2019

  • Brexit Explained

    For most New Zealanders, Brexit remains an impenetrable mystery – and, as the saga lurches from one crisis to the next, (most recently, with the rejection of Theresa May’s “exit deal” by the House of Commons) – the British are equally at a loss.

    As someone who was – as both diplomat and politician in Britain – closely involved with these issues over a period of decades, I have the temerity to attempt an explanation of why they are so confused and difficult to resolve.

    What is called “Brexit” in fact covers three separate but obviously linked issues. First, is the decision by a majority in the 2016 referendum that the UK should leave the European Union. Secondly, is the exit deal that has to be negotiated with the EU – that is, the terms on which the UK will be permitted to leave. And thirdly, there is the “political declaration” – an agreed statement by the UK and the EU as to how they see their future post-exit relationship developing.

    Much of the difficulty that the ordinary public, in both the UK and New Zealand, has in understanding the issues arises because various parties with conflicting objectives have a common interest in jumbling together these three separate issues.

    To take the referendum decision in favour of leaving the UK first. That decision must be regarded, whether one agrees with it or not, as the definitive judgment by the British people on their more than 40 years experience (not a snap judgment therefore) of being part – not of “Europe” but of a particular organisation that has evolved to become the European Union.

    That judgment was a negative one, and one that only the people could make. They may be told by “experts”of various sorts that they got it wrong, that they “don’t understand” and that they were misled. But only they had the day-today experience over decades of seeing their jobs disappear, of feeling that the country they lived in was no longer their own because all the decisions that mattered were made in Brussels, of seeing their streets and neighbourhoods, schools and health clinics taken over by immigrants from Eastern Europe.

    It is no accident that the pro-Brexit votes were delivered in large numbers in the north of England rather than in the more affluent south where people were less exposed to the daily reality of these downsides.

    It is not as though the facts do not support the popular concerns. Over the period of EU membership, Britain’s manufacturing industry was decimated and Britain’s trade languished in perennial deficit – so much for the supposed economic benefits of EU membership – and that is to say nothing of the large taxpayer-funded annual subscription paid into EU coffers.

    These consequences had been forecast by commentators such as myself at the point when Britain joined what was then the Common Market in 1973. It was clear to us that Common Market membership would require Britain to give up its access to preferential treatment for its manufactures in Commonwealth countries and to efficiently produced food and raw materials from those same countries, and to face up to direct competition from German manufacturing in their own home market – with consequent damage to British living standards, trade and manufacturing.

    Those who oppose Brexit, however, choose not to recognise these consequences of EU membership and have focused instead on trying to overturn the referendum decision. Both the EU itself and Remainers in Britain have sought to discredit the case for Brexit by praying in aid the quite separate issue of the difficulties posed in the way of withdrawal. It has served both their purposes to discredit the whole idea of Brexit – (an issue that had surely been resolved by the referendum) – by emphasising the problems raised by the process of withdrawal.

    For the unelected EU bureaucrats, it has been necessary to show to other members that withdrawal is not an easy option. Their concern has been to deter others (of whom there are many) who are unhappy at the way that the European Union has operated and, in particular, has weakened and in some cases destroyed the economies of countries like Greece, Spain and even Italy.

    They have been encouraged to make withdrawal as difficult as possible by those elements of domestic opinion which retain the hope of re-opening the whole issue. Neither seems to realise that the difficulties placed in the way of withdrawal will simply confirm to the British people the value of getting out of an entanglement that threatens to throttle them.

    Similar forces have been at work in the difficulty Theresa May has had in securing support from the British Parliament for her exit deal. Her problem has been the convergence of very different interests on the part of those who have their own (differing) reasons for resisting the exit deal. There are the members of her own party and of Parliament in general who oppose Brexit and the referendum decision and want to see it overturned. Conversely, there are also many in her party who believe that her exit deal does not go far enough in breaking Britain’s links with the EU. Add to these, the normal Parliamentary opposition from the Labour Party and the concerns of the DUP – the Government’s coalition partners from Norther Ireland – and throw in the ambitions of those in her own Party who want to replace her as leader and you have a toxic mixture of anti-deal votes.

    The dilemma now facing the British Parliament is that no next step is likely to resolve the problem. Replacing Theresa May as Prime Minister or the Tories as the government would leave the Brexit situation exactly where it is now – that is, unresolved. A second referendum would be no better, representing, as it would, the additional downside that it would be seen as a denial of the democratic decision taken by British voters and reinforcing the sense they had from the outset that their voices were not being listened to.

    The short-sighted decision taken in Westminster means that the most likely outcome is a no-deal exit – one that is undoubtedly risky and potentially damaging. Those who have engineered it have no one to blame but themselves.

    Bryan Goud
    16 January 2019

     

  • Who Caused the Problems in the First Place?

    The Guardian published a few days ago an article by Peter Mandelson, someone I might once have described as an “old friend and colleague” but for whom the term “former” is probably more accurate.

    In the article, Mandelson rehearses at some length and with considerable relish what he sees as the obstacles to an acceptable Brexit deal. His theme is the admonition of those who voted for Brexit and who are, as he sees it, foolish enough to think that we can extricate ourselves painlessly from our entanglement with the European Union.

    What is remarkable about the article is that there is not a hint of any apology from him or acceptance of any responsibility on his part for this dilemma. There is no recognition of the simple fact that it is those like Mandelson who urged us on in the first place and led to our being embroiled in an arrangement which, as I and others warned at the time, was contrary to our interests and from which it is proving so difficult to free ourselves.

    In the early 1970s, after I had spent some years in the Foreign Office and in our Brussels Embassy working on the UK’s relationship with what was then the Common Market, I had seen enough to convince me that the arrangement we apparently wished to join was totally inimical to our interests.

    It would require us to support as taxpayers (and at considerable cost), the Common Agricultural policy, and to pay higher food prices as consumers – turning our backs on our well-established trade links with the most efficient and cost-effective producers of food and raw materials in the world, and thereby forsaking as a result our main cost advantage as a manufacturing economy – lower food costs than those of our European rivals.

    In addition, we would lose the preferential markets for our manufactured goods offered by those same trading partners and would face instead direct competition with efficient German manufacturing in our own and European markets. It was hard to imagine any other voluntary change that would have – with absolute predictability – placed us at such a disadvantage.

    Those warnings were pooh-poohed at the time by Mandelson and his ilk but have been amply borne out by our actual experience. No one who reviews Britain’s history as a manufacturing economy since we joined the Common Market can doubt or dispute the damage we did to ourselves, or the plight we find ourselves in, with our manufacturing capability now diminished and weakened almost beyond repair.

    And none of this is to say anything of other penalties we have had to suffer, such as those imposed by the Common Fisheries Policy. The referendum result is the definitive verdict on the whole of that experience.

    We were constantly advised by Mandelson and his friends that we should not concern ourselves with minor matters like paying our way in the world but should instead focus on the great virtues of the European ideal – but when the question was asked as to whether that European ideal included the creation of a European super-state, we were solemnly assured that no such thought was in anyone’s mind.

    We now know, decades later, that the European Union has pretensions to many of the powers of a sovereign state and that it is precisely the recovery of those powers, and the difficulty we have in reclaiming them, that underlies the problems in securing Brexit. It is a safe assumption that much of the case for Brexit, as voted for by the referendum majority, was based on the sense that the re-assertion of British sovereignty and self-government was long overdue.

    But, not a word from Mandelson and his friends about these matters – and no recognition that it is precisely the cession of sovereign powers to Brussels – and their part in advising us to take that fateful step – that makes the divorce so difficult.

    To recall and register these undeniable truths is, sadly, not to ease in any way the solution to these longstanding problems; but it might, and should, at least relieve us of the burden of having to listen to (or read) lectures about how intractable are the problems thrown up by Brexit from those who bear such responsibility for them in the first place.
    Bryan Gould
    30 November 2018

  • What Brexit Is Really About

     

    The current turmoil in British politics, with leading Cabinet members resigning over the progress, or lack of it, in the talks over Brexit, will have left many readers in this part of the world confused as to what it is all about. Any attempt to clarify the issues will, of course, be greatly influenced by the views and prejudices of the person making the attempt, but what follows is my explanation – based on my close involvement in the unfolding saga over many decades.

     

    The modern story must begin, of course, with the unexpected result of the referendum conducted in Britain in 2016, when the British people – asked if they wanted to remain in the European Union – replied with a narrow but clear majority for leaving. That verdict on over 40 years of membership no doubt owes much to the fact that, as I and many others had argued at the time, the original deal offered to Britain was a very bad one.

    The Common Market, as it was then known, had been formed on the basis of a Franco-German deal, which offered the French the huge advantage of the Common Agricultural Policy in return for free trade in manufactured goods which was of great benefit to German manufacturing. The deal was so advantageous to those two original members that General de Gaulle was determined to make it stick and therefore vetoed Britain’s belated application to join until it had been concreted into place.

    The result was always going to be a disaster for Britain (as I could see by virtue of a birds-eye view from my role, first, in the Foreign Office and then from my desk in the British Embassy in Brussels); instead of a rational trading pattern in which they imported efficiently produced food and raw materials from countries that offered them in return preferential treatment for British manufactures, the British taxpayer was required to subsidise inefficient French agriculture and then to pay again as a consumer by way of higher food prices – thereby negating Britain’s one major cost advantage as a manufacturing economy – while British manufacturers lost their preferential markets and had to compete in the same market as powerful and efficient German producers.

    The outcomes were inevitable (although ignored by those enthusiasts for whom “Europe” had become the promised land). The British “trade gap” widened alarmingly, British manufacturing was decimated, the British taxpayer continued to pay large sums into the EU coffers, and Britain’s links with its traditional trading partners were weakened. These burdens bore most heavily on working people who found, in addition, that their employment prospects, available housing, and public services were greatly reduced and weakened by the influx of migrants from eastern Europe who were keen to exercise their right as EU citizens to settle in the UK.

    The outcome of the referendum should not really, therefore, have come as a surprise – but it did. The bien-pensants – those who “know best” – were greatly attached to the notion of a Europe that carried with it a kind of cultural cachet, and they were remarkably insouciant about the price that was being paid. They were reluctant to accept the result of the referendum which they attributed to the “ignorance” and “racism” of those who “didn’t really understand” what a wonderful ideal “Europe” (which they conflated with the particular arrangement known as the European Union) really was.

    They therefore set about doing all they could to reverse the result, through a sustained campaign (particularly in the pages of The Guardian, which gave up all pretence of impartiality on the issue) to hold a second referendum in which the “mistake” could be rectified. In doing so, they gave of course great comfort to the EU bureaucracy which was encouraged to believe that Brexit wouldn’t really happen.

    That bureaucracy of course had its own agenda. They were terrified that other countries – like Greece and Spain, even now Italy – that had suffered terribly as a result of the undemocratic and banker-driven intransigence of EU rules and institutions might also want to leave. They determined therefore to show other backsliders that exit was not an easy option.

    The result? The “Europe” held up as the key to a wonderful future proved to be remarkably impervious to the ideal of unity and more concerned with protecting its own structures and institutions than with building a cooperative arrangement with a departing Britain. The combination of a misguided rearguard action at home and a determination in Brussels to punish the British for their temerity in leaving has made the negotiation of a sensible arrangement almost impossible.

    If these problems are to be overcome, the answers are to be found at least as much in Brussels as in Westminster and Whitehall. Those with hearts and minds that are big enough could take the Brexit talks as an opportunity to build a new “Europe” that could fix its many current failings by becoming more democratic and less wedded to the neo-liberal prescriptions of its central banks and bureaucracies. But, on the evidence so far, sadly, that seems unlikely and a goal that had seemed so inspiring looks certain to become mired in its own short-sightedness.

    Bryan Gould
    11 July 2018

     

  • Why Does the Left So Often Disappoint?

    Political commentators have long been puzzled by the fact that, right across the globe and for several decades, the political left has been in retreat and – more than that – has apparently been unable to mount any significant challenge to the growing neo-liberal hegemony which has dominated western democracies since the 1980s.

    Many attempts have been made to find an explanation for this phenomenon, which has been marked not only by the difficulty that politicians of the left have met in getting themselves elected, but also by their apparent failure – when they are elected – to take the opportunity to put alternative policies in place.

    Even on those relatively rare occasions when the left secures victory, it seems that it is delivered only when the voters tire of an incumbent right-wing government and, even then, only when the left assures the voters that it will behave in a way that is little different from what its right-wing rivals would have done.  The consequence is that, when the left finally is able to form a government, it seems to feel compelled to provide as good a surrogate for a right-wing administration as it can muster.

    The stance usually adopted by left governments is that they accept that they must operate within the framework of policy and principle that they inherit and that no challenge to existing power structures is either possible or desirable.  It is believed that any attempt to make such a challenge would be a recipe for disaster and a guarantee of electoral rejection. This reluctant acceptance of the orthodox is the classic attitude of the unconfident outsider – an indicator of how much the left accepts the right’s narrative that the right are where they naturally and properly should be – at the centre – and that the left, by contrast, are – or at least run the risk of being seen as – literally eccentric.

    The consequence is that the left limit their ambitions to administering essentially the same set of policies, but with – it is hoped – a few tweaks that will show the voters that a left government will be more competent and compassionate.  Greater competence and compassion are of course worth having, but the voters quickly recognise that nothing much changes and are easily persuaded that it makes more sense to entrust those essentially unchanged policies to the right-wing parties that positively believe in, and proselytise for, them.

    Left politicians, in other words, are – or at least feel themselves to be – ill-equipped to argue for, and to deliver, a serious alternative to the neo-liberal orthodoxy or a serious challenge to existing power structures.  The most they feel able to offer, if we are lucky and provided they do not positively endorse their right-wing opponents’ support for the “free market” (as the Blair government in the UK did), is some minor mitigation of the free market’s excesses.

    One of the central issues – in fact, the central issue – in democratic politics is, who should run the economy and in whose interests?  Economic policy therefore becomes the most important political battleground, where the expected differences in approach are likely to be at their most acute; it is therefore disappointing that it is precisely here that left politicians are most ready to throw in the towel.

    It is not too much to say that it is precisely on matters of economic policy that, time and again, and in country after country, elections are lost – lost by a left that has no confidence in its ability to resist the assaults of the right.  The left constantly finds itself on the back foot, unable to answer convincingly questions about how it can responsibly manage the government’s finances or struggling to explain how they intend to finance their spending plans or as to how they can avoid raising taxes if they are to fulfil their promises.

    The right have available to them, in other words, a fail-safe strategy for wrong-footing their opponents.  Not all right-wing leaders are quite as direct as New Zealand’s former Prime Minister, John Key, who won an election when he shouted over and over again in the main television debate of the campaign – and in his best barrow-boy fashion – “show me the money”.  But the strategy is always the same, whether or not delivered with more or less decorum.

    The basis of the strategy is a piece of sleight-of-hand that politicians on the left seem incapable of recognising, let alone exposing or countering.  Right-wing politicians – and Mrs Thatcher was an arch-exponent – always proceed on the basis, both explicit and implicit, that running a country’s or a government’s finances is just the same as running a household budget.  They know that most people will instinctively accept that this is so – and the rest is then easy.

    As soon as the proposition is accepted, or at least becomes common ground, it is game over.  The questions then come thick and fast – “how will you pay for it?’ – “where is the money to come from?” – “won’t you have to raise taxes to do all the things you say you will do?”  And so too the nostrums  – “you can’t spend what you haven’t got” and “you must keep within your means” and (a Thatcher favourite) the frequent parallels drawn with the prudent housewife.  The average voter will nod sagely when each of these points is made; left politicians, struggling to find answers, are left looking incompetent at best, dishonest at worst.

    This means that when the left does somehow overcome the odds, and wins power (perhaps by promising not to “tax and spend”), they spend most of their time trying to prove that they are just as cautious and “responsible” as the most doctrinaire of free-marketeers.  Ministers of finance in left governments, from Michael Cullen in New Zealand to Gordon Brown in the UK, have almost always staked their reputations on “earning the trust” of the business community, thereby foregoing the possibility of implementing a left programme that would serve the interests of working people.  Grant Robertson, Finance Minister in Labour’s incoming New Zealand government, has committed himself in exactly these terms.

    So, the left – not daring to say that running the country is absolutely different from managing a family budget – is always pushed on to the defensive.  Yet the two are indeed quite different, and in a way that the left seems scarcely to understand, let alone try to explain, or even less, act upon.

    Why are they so different and where does that difference lie?  Because a household, or, for that matter, a business or individual has, as we all know, a defined and limited income.  They must always tailor their expenditure so as to stay within the money available to them.  If they spend more than they should, they will have to borrow, and – if they cannot repay their borrowings – they will be bankrupted.

    A country – a sovereign country, at least – is, however, in a quite different position.  The one thing it need never be short of is money.  It is in the end the government of that country, usually through the agency of the central bank, that decides how much money there should be in that economy.  There may be all sorts of inhibitions on what a government can do, but we should never – and nor should left ministers – accept the excuse that “there is not enough money”.  Governments can always create the money that is needed – that is, indeed, one of their main responsibilities.

    There are of course consequences – some possibly adverse – of creating more money and it should not be done without assessing what those consequences might be.  The usual constraint is thought to be that creating more money is likely to be inflationary, and will therefore lead to a devaluation of the currency – and that is especially undesirable for a country, like New Zealand or the UK, that is perennially living beyond its means and consequently has to borrow, since repaying loans in a depreciated currency is never easy.

    But the doomsayers’ constant warnings of this kind now need to be looked at in the light of important recent developments.  The story starts, at least in its most recent form, with the now almost universal recognition that the vast majority of money in circulation is not – as most people once believed – notes and coins issued on behalf of the government by the central bank, but is actually created by the commercial banks through the credit they advance, usually on mortgage, and using bank entries rather than cash.

    The truth of this proposition, so long denied, is now explicitly accepted by both the Bank of England and the German central bank, and was – as long ago as 1994 – explained in a letter written by the New Zealand central bank to an enquirer, and stating in terms that 97% of the money included in the usually used definition of money known as M3 is created in this way by the commercial banks.

    The truth of this explanation is endorsed by the world’s leading monetary economists – Lord Adair Turner, the former chair of the UK’s Financial Services Authority and Professor Richard Werner of Southampton University, to name but two – and they are joined by leading financial journalists, such as Martin Wolf of the Financial Times.

    The second development was the use by western governments around the world of “quantitative easing” in the aftermath of the Global Financial Crisis.  “Quantitative easing” has usually (and pejoratively) been termed “printing money” but the term applied to it has now been sanitised, necessitated by the fact it was new money created at the behest of the government and applied in this instance to bailing out the banks by adding it to their balance sheets.

    These two developments, not surprisingly, generated a number of obvious questions – except, it seems, in the minds of our leading politicians.  If banks could create – year in, year out – billions in new money for their own profit-making purposes, (making their profits by charging interest on the money they create), why could governments not also create money, but for public purposes, such as investment in new infrastructure and productive capacity?

    And if governments can and do indeed create new money through “quantitative easing”, why could that new money not be applied to purposes other than shoring up the banks?

    The conventional answer to such questions (and one apparently and unthinkingly accepted by left politicians) is that “printing money” will inevitably be inflationary – though it is never explained why it is miraculously not inflationary when the new money is created not  by the government but by bank loans on mortgage, or is applied to bail out the banks.  Those who support the status quo, and who want to inhibit a left government from enlarging the role of government, are of course more than happy to perpetuate this useful cautionary tale.

    But, in any case, the great economist, John Maynard Keynes, had long ago explained that new money could not be inflationary if it is applied to productive purposes (like investment capital from any other source) so that new output matches the increased money supply.  Nor is there any reason, Keynes said, why the new money should not precede the increased output, provided that the increased output materialises in due course.

    These arguments are borne out by practical experience.  President Roosevelt used exactly this technique, in the face of conventional opposition, to boost investment in American industry in the couple of years before the US entered the Second World War. The substantial increase in American industrial output as a result was the decisive factor in equipping the Allies to win the war.

    The great Japanese economist, Osamu Shimomura, (who is virtually unknown in the West), then took the same approach in advising the post-war Japanese government on how to re-build a Japanese industry devastated by defeat and nuclear bombs.  The result?  The post-war Japanese economic and manufacturing miracle.

    Today’s Japanese Prime Minister, Shinzo Abe, is a follower of Shimomura.  Shimomuran policies, re-applied today, have Japan growing, after years of stagnation, at 4% per annum and with minimal inflation.

    And in New Zealand, the great Labour Prime Minister of the 1930s, Michael Joseph Savage, created new money with which he built thousands of state houses, thereby helping to bring an end to the Great Depression in New Zealand and providing decent houses for young families (including the one I grew up in).

    And ask yourself a simple question.  When, during the Second World War, Britain was being assailed from sea and air by Nazi forces, was the huge effort being made in British factories to build the tanks and planes and ships and guns with which to repel the invader called off for lack of money?  And if not, where did the money come from?  Or was it just created because it was needed?

    It is the incomprehension of, or rather, the refusal to comprehend, these precedents and the views of experts and braver and better informed leaders elsewhere and at other times that is the most damaging inhibition to the ambitions of left leaders across the globe, and especially in countries like the UK and New Zealand.  If they cannot bring themselves to understand how money is created, and in whose interests it is done, they will never escape the “household fallacy” and they will always be on the back foot in the battle for public support.

    Worse, since they appear to accept the legitimacy of the right-wing demand that they must explain “where the money is to come from”, they are always held back from doing what they seek election to do.  And, even more importantly, their failure to understand the role of money means that they are never able, however radical they may wish to be, to challenge the most important power structure of all – the power to create money that lies in the hands, under current and long-standing policies, of those who know how to use that power to advance their own interests.

    Those interests are those of asset-holders and speculators.  The status quo – one that the left seems so reluctant to challenge – is one in which monetary policy is entirely left in the hands of the banks to deliver.  The commercial banks are allowed to create virtually all the new money in the economy, and the rate of growth in the money supply is regulated only by its price – and that in turn is decided by another bank through the Reserve Bank’s power to adjust the Official Cash Rate.

    Monetary policy currently determines therefore  not only how money is created – that is, by the commercial banks – and sub-contracts (beyond the reach of democratic control) to another bank the power to decide the rate at which it is created.  But it also has a major influence over the purposes to which it is put – and those purposes are not those that would promote better productivity and higher wages, but are those which offer, by underpinning and lifting asset values, untaxed capital gains to rentiers and speculators.  At the same time, the productive sector constantly has the odds stacked against it by the consequences of asset inflation such as the overvaluation of the currency.

    The bias in such a policy is surely evident.  It ensures a significant and virtually constant asset inflation (mainly in housing but also in other real property and in share values) and greatly distorts the economy by diverting the greater part of new money into the accumulation of assets and speculation rather than into new productive capacity.

    By requiring higher interest rates than would be necessary if new money creation were not proceeding at such a rapid rate, it imposes a further disincentive to investment and ensures, as “hot money” pours in from overseas to take advantage of high interest rates, a damaging over-valuation of the dollar that further handicaps our exporting industries.  It is, it seems, this double-whammy – so damaging to our exporters but essential we are told to “earning the trust of business” – for which the left is apparently persuaded that it must abandon its ambitions for a more productive and fairer economy.  Surely the “business” (both sides – employers and workers) whose interests matter most are our producers, manufacturers and exporters.

    Little wonder that the share of the economy accounted for by wages has fallen, whereas that accounted for by profits has risen. The successful obfuscation practised for decades as to how, by whom and for what purposes money is created has allowed monetary policy in its present form to serve as a vital bulwark for the rich and privileged against the ability of democratic politics to bring about a fairer distribution of wealth and power in our society – yet it was precisely that purpose that was sought by those who fought for our democracy in the first place.

    Left leaders, in other words, may be ready to fight the political and electoral battle but they have always shied away from taking on the real battle – that between money power on the one hand and democratic principles on the other.  In a democratic country, there should be no question as to whose interests should be served by the state’s power to create money.

    A left government that created money for productive and infrastructure purposes could revolutionise the country’s prospects, by serving the whole country’s interests, rather than those of the already rich.

    A “lack of money” should, in other words, never be accepted as a valid excuse for inaction by a government.  There may of course be other constraints – shortages or deficiencies of raw materials or skills or technology, or of markets for what is produced – and there may be social or environmental factors to be taken into account, but none of these does more than demonstrate how important it would be that money creation by government should be aligned with an agreed industrial strategy.

    Money is a man-made construct; it does what we want it to do – and, in a democracy, that should mean that it enables those outcomes that serve the wider interest.  Money is, or should be, merely an enabler, a facilitator.  As the eminent economist, Ann Pettifor, has observed, “we can afford what we can do.”

    It is the failure to understand these simple truths that has disabled the left.  They have allowed themselves to be ensnared by the spider’s webs spun by their opponents, and they have lacked the will and intellectual fortitude to disentangle themselves.  Far from debunking the fairy stories, they have even been half-convinced by them themselves.

    Democracy is intended to place the power of government in the hands of the people.  That power includes the ability, and the responsibility, to create the money that is needed to achieve the people’s purposes.  When the left realises the truth of this, they will have taken a major step towards making democracy a reality.

    Bryan Gould

    18 October 2017