• What Matters to our “National” Airline – Profits or Customers?

    Reports that Air New Zealand have been charging Kiwis twice as much for domestic flights out of Auckland as they charge Australians will come as no surprise to those in the provinces who are sadly all too familiar with the priority accorded by our supposedly “national carrier” to chasing the dollar rather than meeting its “national” responsibilities.

    There was a time when Whakatane and other regional centres had the benefit of several flights a day to and from Auckland.  But a year or two ago, those flights were ended.  It wasn’t that they had not been well patronised; the 20-seater planes were almost always full, so the service comfortably paid its way.

    The problem was that filling a 20-seater was not as profitable as filling a 50-seater, and there was not enough demand to warrant using the larger plane.  So, the service was cancelled, leaving Whakatane and other similarly placed towns in rural New Zealand deprived of an essential service.

    In the case of Whakatane, a small private operator, Air Chathams, stepped into the breach, and – within its limitations – has made a creditable job of running the replacement service.  But, far from welcoming this development, Air New Zealand showed no willingness to cooperate with the new provider so as to minimise the loss to its former customers.

    Those customers are left with a number of irritations.  There is, for example, no joint booking, so that – to travel from Whakatane to Wellington, a passenger must book first a flight to Auckland with Air Chathams and then make a separate booking with Air New Zealand for the flight from Auckland to Welliington.

    There has been little attempt (from Air New Zealand, at least) to co-ordinate timetables to ensure that connecting flights are scheduled appropriately.  And, for passengers who have taken the trouble to join Air New Zealand’s Koru Club, a passenger returning from Wellington and arriving in Auckland (and perhaps having to wait for the Air Chathams flight to Whakatane) will find that access to the Koru Lounge is barred because the passenger does not have a ticket for an onward Air New Zealand flight.

    All this is, sadly, evidence of Air New Zealand’s cavalier attitude to claiming the privilege of being regarded as our “national” carrier (though they are quick to expect loyalty from Kiwis when it comes to international travel).  How and why did this sad state of affairs arise?

    Air New Zealand is of course owned by the government and the annual profit they returned to their principal shareholder was no doubt of great value to a government that was obsessed with showing its financial accounts in a favourable light.   That is why it was not enough that the Whakatane service should show a profit – the profit had to be a humungous profit, so that it earned plaudits from the Minister of Finance and therefore bonuses for the senior executives.

    Since a full 20-seater plane, while financially viable, is not as profitable as a 50-seater – and services of this kind dragged down the average profit on capital employed – the Whakatane service (however valuable it was to Air New Zealand’s customers), and others like it, had to go – a classic case of profits being put ahead of the customers’ interests.

    The consequences of these decisions are far-reaching.  A town like Whakatane becomes a less attractive place to live and work in the absence of a fully functioning air travel service.  As Shane Jones, the Minister overseeing the new Provincial Growth Fund, has pointed out, the withdrawal of services from regional centres across the country runs counter to the policy direction the new government wishes to take.  If matters remain as they are, the handicap represented by the Air New Zealand withdrawal of services will remain and will hamper the regions in their drive to build their local economies.

    Fortunately, the remedy lies in the Minister’s hands.  He can, as the representative of Air New Zealand’s principal shareholder, make it clear that a bumper profit is not the only criterion of success that the government wishes to see.  He can instruct that the airline must pay more attention to other goals, and particularly to ensuring that our “national” carrier is national at home as well as abroad, so that significant parts of the country are not marooned as a result of being denied the services that are essential to their prosperity and well-being.

    Bryan Gould

    20 March 2018

  • New Zealand Must Grow Up In Trade Matters

    New Zealand’s involvement with the rest of the world, in trading and economic terms more generally, has always been atypical.  For the first century or more of European settlement, the country developed as an economic appendage of Britain.  Virtually all of our trade took place with Britain; they took almost all of our primary production, in return for which we offered preferential access for British manufactured goods.

    But that cosy pattern, which meant that we did not have to worry too much about trade agreements and markets, was disrupted dramatically by two major developments in the 1970s and 1980s.  First, Britain joined what was then the Common Market, and was accordingly obliged to play its part in reducing what was popularly called the “butter mountain” by buying expensive and otherwise unsaleable food in preference to our own more efficient production.  Secondly, and just as importantly (though with much less fanfare and public concern), Margaret Thatcher and Ronald Reagan agreed to remove exchange controls – a move which suddenly meant that the owners of capital could roam the world, looking for the best investment opportunities (which often meant the lowest labour costs or the most accommodating regimes concerning tax, labour laws, and health and safety requirements).

    New Zealand suddenly found itself not only bereft of markets for its main exports but also a target for multinational corporations looking for safe investments and easy profits.  Much of our recent history in, and attitudes towards, international trade and economics is attributable to these two shocks to our system.

    As luck would have it, these changes in the international context took place at the same time as a domestic economic revolution was under way.  “Rogernomics” not only swept away subsidies and elevated the unfettered market to an unchallengeable status at home; it took the same “free market” ideology into the international sphere.  The counterpart to the “free market” domestically was “free trade” internationally.

    So, we took with us, as we looked for markets to replace those we had lost, a commitment to aggressively dismantling tariffs – and, in order to show our ideological commitment to the principles of free trade and free markets, for which we were receiving plaudits from right-wing commentators around the world, we proceeded to remove unilaterally our own tariffs and protections for our own industries without bothering in many cases to get anything in return.  This naïvete – there is no other word for it – was to cost us dearly.

    It colours still our attitude to free trade.  In the absence of the managed trade we enjoyed as an economic colony of Britain, and unable to find a suitable replacement for that cosy arrangement, we became obsessed with the need to reach trade agreements with all and sundry.  The signing of each new deal was represented as a return to nirvana; the emphasis was always on the boost each new deal would supposedly mean to our exports and economic growth, with virtually no account taken of what free access to our market for powerful competitors would mean for domestic production.

    The excessive value we placed on new markets led us to count our chickens before they were hatched and to treat as achieved realities what might only be distant prospects.  “Free trade” agreements were sold to the general public by listing, long before they had materialised, the supposedly long lists of manifold benefits to our exporters that would be delivered. The recent TPP negotiations, for example, were constantly justified by the confident and repeated expectation that a TPP agreement would provide us with tariff-free access to the US market for dairy produce.

    Such a prize would certainly have been worth a good deal, but our naïve optimism on this score should surely never have survived the repeatedly stated determination of the American dairy industry to resist any such concession.  As it happens, that mirage has been swept away in case, at least for the time being, by Donal Trump’s decision to have nothing to do with a TPP.

    None of this means that we should turn our backs on free trade.  The case for free trade in principle is as strong as ever.  As Adam Smith and David Ricardo argued, it is free trade that allows each economy to concentrate on what it does best, that encourages weaker and smaller economies to trade successfully with stronger ones, that means that there is a constant stimulus to greater efficiency and innovation, and that develops economic bonds between countries which support the general comity of nations.

    But, as always, arguments in principle need to be tempered by what is known or foreseen as to practical realities and consequences.  Free trade between a stronger and a weaker economy can all too often mean that the stronger simply reinforces its advantage while the weaker slips further behind.  All depends on the stage of development of the economies concerned.

    Most of the world’s economies have at some stage in their development recognised that some protection for their own domestic industries is needed.  Japan is a case in point.  In the course of re-building Japanese industry following their disastrous defeat in the Second World War, Japan did not hesitate to use tariffs and other non-tariff protections (such as an under-valued yen) to give their industry the chance to build its strength.  It was only once they could be sure that Japanese industry was big and strong enough to be internationally competitive that they became enthusiasts for and practitioners of free trade.

    In New Zealand, however, we have blithely ignored such reasoning.  We have rejected any notion that we might not be a fully developed and internationally competitive economy and have wilfully saddled ourselves over long periods with an over-valued currency.  If we insist on committing to free trade for ideological reasons, we should at least have enough sense to give some weight to the foreseeable and adverse practical consequences.

    Our naïvete in these matters has become even more evident when we have attempted to negotiate trade agreements, and have discovered that our premature and unilateral disarmament in matters of protection has meant that we have literally nothing to offer in return for the improved access to other markets that we seek.  Trade partners that already have free access to our market see no need to offer us concessions in return for concessions we have already granted to them.

    Nor does it stop there.  With the development of the global economy – the direct consequence of the free movement of capital engineered by the Thatcher/Reagan ending of exchange controls – we have discovered that our economic relations with other economies are not limited simply to matters of trade.  In such a global economy, the price we are asked to pay for trade (and, more particularly, investment) can extend well into the domestic policies we wish to apply.

    A good illustration of this point was the demand made by Warner Bros that, if we wanted them to make films in New Zealand, we would have to change our labour laws, so that the people they employed were not to be regarded as employees with all the rights and protections provided under our law to employees, including the right to belong to a union, but should be treated instead as independent contractors, negotiating individually with the US film company.  To the great shame of our then government, the law was changed to suit Warner Bros.

    We can see the same demonstration of the imbalance of power between our government and foreign corporations displayed on a much wider canvas.  There was much celebration when a free trade agreement with China was signed, and there is no doubt that improved access to the Chinese market is of considerable benefit to our exporters.

    But we have been very slow – and reluctant – to recognise that our economic relationship with China looks somewhat different when seen from China rather than from New Zealand.  For the Chinese, quite self-consciously on the way to becoming a global super-power, merely being able to buy our production is not enough.  A true super-power, they feel, must be able to guarantee access to the products it needs.  It should not have to rely on doing trade deals, or bidding in auctions – what is needed is not the power to buy a product produced by someone else, but the power to own and control the means and process of production itself.

    So, the Chinese interest in us is not that they want to be able to line up and compete with other customers to negotiate purchase arrangements for our dairy products.  Rather, they want to acquire and control the production itself.  Hence, we see the Chinese interest in purchases of dairy farms, the construction or purchase of dairy factories and the marketing by Chinese agents of dairy products made in New Zealand directly into the Chinese market.  Their purpose is not to develop a trading partner, but, in effect, to incorporate the New Zealand economy (and particularly the dairy industry) into the Chinese economy.

    It is not just the Chinese government that has this goal in mind.  Chinese companies doing business abroad invariably act as arms or agents of the Chinese government.  Virtually all business deals with Chinese companies will be, in effect, made with the Chinese state.  None of this means that we should avoid doing business with China but it does mean that we should be aware of what really is at stake.

    A further example of how extensive are the obligations we undertake when we negotiate what may appear to be a simple trade deal is the Trans Pacific Partnership.  That Agreement has long masqueraded as a “free trade” deal but, under it, foreign companies can insist, to the point of forcing our government to change the law in New Zealand, that they should have a “level playing field”, by which is meant that we must ensure that their profitability and successful operation is not adversely affected by any legislation we pass.

    So, for example, an attempt to restrict the sale of cigarettes or to make the business less profitable could land our government in court, before a specially constituted tribunal.  The government would be similarly open to attack if it used its power to negotiate agreements with foreign suppliers that would reduce their profitability.  So, Pharmac’s ability to use its monopsonistic purchasing power to hold down the cost of imported pharmaceuticals could be litigated by foreign pharmaceutical companies before those same tribunals.

    The current government claims to have restricted the range of these provisions in the TPP so that they are not such a threat to our sovereignty and democracy, but only time and practical experience will tell us if that is so.  Even setting aside the specific provisions of a TPP, however, there is no doubt that – for a small economy – getting into bed with powerful foreign corporations is fraught with danger, and almost inevitably raises the possibility of a loss of our power to decide important matters for ourselves.  Those corporations almost invariably want more than the goods themselves; they want to guarantee that they have the rights and protections that are properly available only by decision of our government.

    Without selling ourselves unnecessarily short, it is surely prudent to recognise that – in making trade deals with larger entities – we are a minnow getting into a global tankful of sharks.  If we are to survive and prosper, we need to be much more hard-headed and understand exactly what we are up against.  We need a much tougher approach than we have seen so far if we are to avoid being bought and sold by those who see us as fair game.  If we are not careful, by the time we wake up, it will be too late, and – for the sake of “free trade”, we will have sold our unique productive capacity and assets to foreign owners and with them the power to ensure that the benefits they produce come to New Zealand, rather than to those foreign owners.

    Bryan Gould

    22 February 2018




  • The Candidates’ Dilemma

    As the contenders for the leadership of the National party line up at the starting gate, they are each faced with a dilemma that confronts anyone seeking the leadership of a political party in a democracy.

    This is because – for them – the leadership of their party is presumably not an end in itself, but is merely a stepping stone to the ultimate goal of becoming Prime Minister.  The contenders are embarking, in other words, on a two-stage process that requires them to win two elections in succession and to do so by gaining support from two quite separate and very different electorates.

    The first contest demands that they should convince their own party members and activists that they are the candidate best able to represent and remain faithful to the party’s central values and goals and to sell those values and goals to the wider public; while the second contest will be about  persuading the (largely non-political) wider electorate that they are not so preoccupied with the party battle that they lack the breadth of vision and understanding that will equip them to tackle and resolve society’s wider problems.

    The difficulty is this.  Those whose vote will decide the party leadership are just a very particular sub-set of the wider public; they will tend to be the party warriors, intent on winning the party battle, attaching great importance to ideological issues and requiring evidence that the fight will be carried to the enemy.  They will be looking for proof of single-mindedness, aggression and the strength never to back down.  Politics is, after all, a tough business and it demands the capacity to give, and take, some pretty rough treatment – and I say this with feeling, as someone who stood unsuccessfully in 1992 for the leadership of the British Labour Party.

    But even those voters whose votes decide the leadership (as well as the candidates themselves) will have to have half an eye on the electoral contest yet to come at general election time.  What would be the point of demonstrating to the party faithful all that they might wish in terms of strength and toughness and ideological purity, if it is achieved at the price of alienating those whose support will ultimately decide who wins a general election?

    The contenders, in other words, are fighting two separate battles.  The first is to win the support of their own party’s “attack dogs” – but following immediately, and spilling over from that exercise, is the battle for the support of the uncommitted voters in the wider public.

    That is the dilemma that now faces the contenders, particularly the two who seem most likely to emerge as the front-runners, Judith Collins and Simon Bridges.  It is a dilemma that is, for both of them, extremely difficult to resolve.

    Judith Collins exemplifies the point.  She is reported as opining that the National party has moved “too far to the left,” a view calculated to appeal to the National party’s conservatives and ideologues.  Her problem is that while it may appeal to party members who want to see a tougher line – the party’s “red necks” perhaps – it may not play so well with those voters who are not so committed.

    It is, of course, a view that fits well with her carefully cultivated image as a tough operator –remember her role as mentor to Cameron Slater and how she seemed positively to relish the soubriquet of “Crusher” Collins.  But even those party members who would welcome that kind of aggressive approach might pause to wonder whether the floating voter will be attracted or repelled.

    Simon Bridges is another instance.  His reputation largely rests, for good or ill, on his aggressive performances in various television studios.  Many of his supporters will welcome and celebrate his “take no prisoners” approach but what will be seen by some as strength will seem to others to be combativeness for its own sake.

    In either case, sweetness and light would certainly be in short supply – and the lesson of our current politics is that our voters want to be led by people they like.  John Key cannot be resurrected (I think) but some of his famous affability might not go amiss.

    Bryan Gould

    17 February 2018



  • Why Do We Allow Banks to Make Huge Profits and Decide Economic Policy As well?

    Banks are, as we know, very profitable institutions.  Last year, the big five banks operating in New Zealand made a combined profit of over $5 billion.

    Reactions to this news will vary from one person to another.  Many will say “good on them”, and “just as well – we want our banks to be profitable, so that our money is safe” and “they provide a reliable service which we should be prepared to pay for”.  But many will have little idea as to how these profits are made, what happens to them and what is the true role of banks in our economy.

    The first point to grasp is that four of the” big five” banks are Australian-owned, and that last year they sent back across the Tasman to their Australian owners $3.485 billion.  It is as though there is a massive vacuum cleaner that is sucking this huge sum out of the New Zealand economy and depositing it back in the Australian economy where, as well as unbalancing our balance of payments and adding to our indebtedness,  it works to the advantage of Australian investment in new productive capacity.  Little wonder that, by virtue of this $7 billion adjustment (whereby we give up $3.5 billion and they gain $3.5 billion), the Australians enjoy a higher living standard than we do.

    The second point is that the profits are “earned”, not because the banks provide a service of this value but because the banks have a unique monopoly power – they alone are able to create new money, which they do every time they make a new loan, usually on mortgage.  They do not, as many people believe, lend money deposited with them by one group of people to another group of people who pay interest on their borrowings.  When a bank lends you money, it doesn’t actually send round a cartload of $50 dollar notes to put in your account.  It simply writes a bank entry that authorises credit of the agreed amount to be drawn down from your account, and then it makes its profit by charging you interest on the money it has created out of nothing.

    The truth of this is now established beyond all doubt by an excellent research paper published by the Bank of England.   What that paper demonstrates is of huge consequence to our economy.

    This is because money created in this way is by far the single most important source of new money in our economy and therefore has a major influence on issues such as the rate of asset inflation (particularly for property and especially houses) and inflation more generally, and on the affordability of housing.  We, and our political leaders, may think that they are in charge of economic policy but they are actually just operating on the fringes; the real running is made by the banks.

    As well as the price we pay in terms of the bank profits that many see as excessive and that are then transferred across the Tasman, in other words, we concede to these Australian-owned banks the major influence over how our economy develops, with the result that, because lending on mortgage is more profitable than lending to industry, a large proportion of our national resource is diverted into house purchase rather than into productive investment.  We cannot hope to improve our productivity in comparative terms while this bias in our economy remains.

    We suffer, by virtue of the current role of the banks in our economy, not only an economic loss, but also a partial loss of the power of self-government.  We have less control of where our economy is heading than a truly sovereign country has a right to expect.  The amazing thing is that this huge influence over our economy is achieved – through their unique ability to create new money – by private (and in this case foreign-owned) companies in the course of pursuing their own private profits, and that they are allowed to do this without any democratic control whatsoever.

    Our politicians, however, seem unconcerned; they are happy to disclaim any responsibility for this important aspect of economic policy and to rely on the ignorance of the public to allow the situation to remain undisturbed. Wouldn’t it be good to think that our new government might take a fresh and more critical look at it?

    Bryan Gould

    17 February 2018

  • Get Over It, National

    As the National party struggles to come to terms with its failure to win the general election, it needs to face up to the reality of its situation.  So far, it has done little more than feel sorry for itself, and that has been rapidly followed by looking for someone to blame.

    The prevailing sentiment is that, in reality, they “won” the election and were cheated out of it – if not by a perverse electoral system, then by an unprincipled chancer who refused to play by the rules.

    What they will not recognise is that they were required to play by the rules that everyone else (including the electorate as a whole) had accepted, and that their failure to prevail was theirs alone.  They lost because they could not assemble enough seats in parliament to command a majority.

    What they cannot seem to accept is that, having held office for nine years and won three elections in a row, it should have come as no surprise that the voters might have been prepared to give someone else a chance – especially when the main opposition had a new lease of life under a new and charismatic leader.  Nor should it have been a surprise that the voters who signalled their wish for a change should have reached a range of different views (under a proportional representation voting system) as to precisely who they wanted to see take over, and that it was then up to the various parties to construct a parliamentary majority and form a government.

    The difficulty National has had in accepting these simple truths is significant in at least a couple of respects.  First, it represents a real obstacle to their chances of recognising, rapidly adjusting to, and overcoming their current plight.  And secondly, it tells us something about how National sees its place in New Zealand politics.

    Although my own political sympathies lie elsewhere, I like to think that I have some insight into that very question – and that is because my own dear (and long departed) parents were lifelong National party supporters, as were their parents before them.  For them, the way they voted was less a matter of personal advantage or political calculation as it was an expression of a social attitude.  “People like us”, they felt, and would sometimes say, “vote National”.

    “People like us”, in their terms, were people who had a vested interest in the status quo, by virtue of their achievements, and who therefore had a special responsibility to maintain the social order.  And with that responsibility came a special and unique role – to be available to take the important decisions needed to hold society together.

    It is only a short step from those assumptions to a belief that the exercise of governmental power was almost a kind of birthright, and that any departure from that norm was at best an aberration.  I encountered a much more overt and deliberate expression of the same attitude when I became involved in British politics.

    British Conservatives, of course, operate in a much more class-conscious society than we are used to, and noblesse oblige is perhaps one of the less objectionable manifestations of the belief that some people are “born to rule”.  It is an attitude that generations of public-school educated boys took with them, for good or ill (more usually for ill), to the further corners of the Empire.

    It may seem somewhat fanciful to draw a parallel between the New Zealand National party and the British establishment, but I suspect that the incredulity of National supporters at the loss of power and their refusal to accept it or accommodate it stems from a similar belief that they are meant to govern and that the natural order has somehow been overturned by the advent of a Labour-led government.

    The sooner National can get over their failure to win, and can accept that they have no special claim to government, the better for them and for New Zealand politics.  The most difficult lessons are sometimes the most salutary.

    Bryan Gould

    8 February 2018