• 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

     

     

     

  • Is the TPPA Now Fit for Purpose?

    The reaction in some quarters to the outcome of the TPPA negotiations reflects a failure to understand the import of the objections made to what was initially proposed.

    There will be few who will not welcome easier access to the Japanese market for New Zealand beef, even if the big prize that was dangled before us – free access to the US market for our dairy products – was taken off the agenda when Donald Trump withdrew from the talks.

    The benefits of free trade for our exporters were never contested by those who were concerned at signing up for the TPPA as it was originally drafted.  If the reports coming out of the negotiations are correct (and we look forward to that being established when our new government keeps its promise to release the amended text before we sign up to it), the problems many had with the TPPA will have been substantially resolved.

    Those problems revolved around the attempt to use the TPPA for purposes well beyond the normal concept of free trade.  The original draft attempted to provide a guarantee to multinational corporations that their freedom of action and their quest for profits in the countries covered by the TPPA would not be restricted by laws passed by the parliaments of the countries concerned.  Foreign corporations particularly had in their sights local laws designed to protect the environment, workers’ rights, and the health and safety of workers and citizens more generally – all of which they fear could inhibit their drive for higher profits.

    As a consequence, the original draft threatened to allow challenges to anything that might interfere with the “free market” – encouraging, in other words, a free-for-all for big companies to do what they liked without any need to take account of other interests.  Anything that departed from the normal pattern, such as marketing products through co-operatives like Fonterra and Zespri, or regulating the sale of certain products such as cigarettes, or buying pharmaceuticals through an agency such as Pharmac on behalf of the whole community, could have been challenged, in a way not available to our own businesses, as contrary to the operation of the “free market”.

    Any such challenge would have meant our government being taken to special international tribunals.  If those tribunals were to find in favour of the foreign corporations, they could order the government to change the law and the way we do things – even if that meant defying the will of our elected parliament and the government being forced to go back on promises made to the voters.

    Little wonder that Jacinda Ardern set herself the difficult task of removing, or at least reducing the impact of, these clauses.  We will be able to judge how successful she has been when we see the full amended text.

    But the early reports are that substantial progress was made on these points of difficulty, and if that is so, it is entirely because she dug in her heels.  If she was indeed able to get agreement to the necessary changes, she will have acquitted herself – at her first major international gathering – very well indeed.

    She will have been helped not only by the presence of an experienced international negotiator, in Winston Peters, but also by the fact that her Trade Minister, David Parker, is one of the ablest members of her Cabinet.

    But there can be little doubt that she herself made a favourable impression with her international colleagues.  Her straight talking and the energy she brings to everything she does will have helped to show that she is not just about stamping her foot, but that she is well able to build a consensus and to persuade others of her point of view.

    Her opponents at home may try to downplay what she has achieved, but if we now have a “free trade” arrangement that is fit for purpose and does what it says on the packet, we can all celebrate – and that includes especially our exporters who have a trade deal they would not have had if it had not been shorn of the obvious obstacles to acceptance.  In the future, we might even be able to get, off the back of an amended TPPA, an international agreement that details the responsibilities of, and not just the concessions claimed by, those who seek to come into our country to do business.

    Bryan Gould

    13 November 2017

     

  • The TPPA – Not Just A Free Trade Deal

    As our new Prime Minister heads for her first APEC meeting, the talk is all about the Trans Pacific Partnership Agreement (the TPPA) and whether or not it can be revived, even without the participation of the United States.

    Our new government seems to hope so, even though there seems little chance that Donald Trump will relent on his decision to have nothing to do with it, meaning that the main benefit we were promised – free access to the US market for our dairy products – is therefore off the agenda.

    Let us be clear about one thing.  Those who have hitherto opposed the TPPA have nothing against free trade as such.  While the benefits of free trade are often overstated, and many economies (including, for example, post-war Japan) have seen advantage in protecting, at least for a time, their developing industries against foreign competition, it cannot be disputed that free trade is in principle to be supported.

    New Zealand has at times been unduly naïve in opening up our markets to foreign competition, with the result that we have little left to offer or negotiate with when a TPPA comes along – but, as the world’s most efficient producers of dairy produce, we have much to gain if we can obtain free access to the world’s biggest markets.

    The trouble with the TPPA, though, is that it is not just a free-trade arrangement.  As Jacinda Ardern and her ministers have recognised, it is the extra baggage it carries that is the problem.

    The deal offered by the TPPA involves much more than removing tariffs and other barriers to trade.  It also requires the parties to provide within their domestic economies an unimpeded level playing-field for international corporations.

    This may sound innocent enough, but what it really means is that any interference with the “free market” by national governments is outlawed.  The result is that the TPPA is in reality a charter for multinationals, giving them carte blanche to do what they like and able to object to any measure that limits their operations or places them at a disadvantage.

    Our economy, it is clear, exhibits a number of common practices that could fall foul of these provisions.  Our use of cooperatives to market some products – dairy products or kiwifruit – could come under attack, as would our use of an agency like Pharmac to negotiate, on behalf of the whole community, prices of pharmaceuticals.  Regulating the sale of certain products, such as cigarettes, would be similarly vulnerable.

    The TPPA goes further.  Multinationals who believe that they have been disadvantaged by government action can take our government to special tribunals – and if they can show that their profits will suffer, they can force the government to change New Zealand law to suit them, even if that means that the government must go back on promises made to voters.  So much for democracy, self-government and sovereignty.

    This is the notorious Investor-State Dispute Settlement procedure (ISDS) that Jacinda Ardern has signalled she will try to change before she will agree to sign up to a TPPA – but she will not find it easy to secure the change and will come under great pressure to sign up even without it.

    There is of course no objection to seeking agreement on the rights and duties of foreign companies that wish to trade in our country – but that should not mean a one-way advantage for those corporations at our expense.  Rather than giving rights to foreign companies far in excess of those enjoyed by our own companies, such a treaty should focus on the obligation of foreign companies to comply with our laws, and to observe the rules laid down by our own sovereign government.

    If the TPPA drafters insist on the ISDS provisions, it is vital that our Prime Minister takes a stand, and refuses to sign.  In doing so, she could strike a vital blow, not just for New Zealand, but for everyone.  Others might then have the courage to follow suit, and that could mean the end of so-called trade deals, now and in the future, that violate the principles of democratic government by allowing multinational corporations to decide what is and is not the law of the land.

    Bryan Gould

    4 November 2017

  • Trump Versus the Establishment? Not Quite

    I am always surprised that, whenever I write a piece that is critical of Donald Trump, a number of people post comments that defend him, usually along the lines of what is now described, I understand, as “whataboutism”.

    Such responses make no attempt to dispute the charge sheet against Trump.  The defence they try to mount is to argue that any criticism of Trump has to be offset by the comparable crimes and offences of others – usually Hillary Clinton, or Trump’s predecessors  in the Oval Office.

    How, they imply, can it be fair to criticise Trump when others who can be similarly criticised go unchallenged?  I’m afraid that I have difficulty in understanding the logic of this position.

    Even if it were the case that Trump’s manifest failings could be equated with those of others, why should that invalidate in any way the criticisms that can legitimately made about Trump?  He is, after all, currently in a position (whereas others are not) where his shortcomings can matter very greatly, to both Americans and to the rest of the world.

    I suspect that the “whataboutists” share a particular personality trait – that they imagine themselves to be the intellectual superiors of the general run of people, and that they are therefore able, as others are not, to swim against the tide that carries others along, and enjoy being able to demonstrate that they can do so.  They alone, it seems, are able to see through the generally accepted attitudes and to make their own dispassionate assessment of the true position.

    They are joined, no doubt, by those who see Trump’s defiance of the usual norms of responsible and civilised behaviour as welcome evidence that he is prepared to “take on” the establishment and to “drain the swamp”.  The more extreme and outrageous his words and actions, it seems, the better the job he is doing in standing up for the ordinary American – and the criticism he attracts is merely further confirmation of this analysis.

    So, let us test this out.  Let us cast to one side his boorishness, his evident racism, his brutish treatment of and attitudes towards women, his willingness to bend the truth, his ignorance of the rules of the US constitution, his self-obsession, his inability to build loyalty from his own staff and colleagues, his furious intolerance of criticism – the list is a long one and could be much longer.

    Let us say that each of these failings is merely evidence of his willingness to break the rules, and to defy worthless conventions designed to rein him in, all in the interests of keeping faith with his “base”, who voted him into office.

    We are invited, it seems, to disregard the charges usually brought against him, and allow him to get on with what is really important.  So, after we have dismissed from our minds the evidence of our own eyes and ears as to the kind of person he is, what is it that wants to “get on with” that is so important?

    The evidence here is incontrovertible.  His central mission is beyond doubt to bring about huge tax cuts for the very richest Americans – principally the top 1%.  Such tax cuts, worth billions and billions of dollars, are to be funded by denying to millions of families access to affordable health care that would allow them to escape from the destructive vicious circle of poverty and ill-health, and ill-health and poverty.

    Don’t take my word for it that this is the focal point of the Trump presidency.  He repeatedly declares that those who stand in his way are frustrating his determination to cut taxes in this way – and the prospect of such cuts is the only reason his Republican colleagues in Congress maintain, in an unholy alliance, their wavering support for him.

    Here, then, is not the great champion of the rights of ordinary people or the courageous opponent of the establishment and the privileged.  His supporters may be prepared to forgive – even celebrate – his personal ability to pollute all he touches.  But are they prepared to stand shoulder to shoulder with him as he fractures – along religious, racial, and above all economic lines – the society he was elected to serve?

    Bryan Gould

    2 November 2017

     

     

  • 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