Was It All A Mistake?
As the euro zone’s long drawn-out agony staggers towards its inevitable conclusion, at least one issue is nearing resolution. Just as in the 1930s, it has taken a long time for the ideologues to accept that their nostrums do not counteract recession but make it worse.
Even the high-priestess of austerity, the German Chancellor Angela Merkel, has begun reluctantly to admit that what Europe now desperately needs is a strategy for growth. Without a change of direction, in other words, not only Greece and Spain and the whole of the euro zone, but the global economy as well, are staring renewed recession in the face.
We in New Zealand, of course, along with the rest of the world, are directly affected by the mistakes Europe’s leaders have made. But – fascinatingly – we have unexpectedly had our own domestic echo, in the words of our own Prime Minister, of the European debate.
Our own government is now well into its fourth year of grappling with the recession. Throughout that time, our leaders have relegated issues like growth, full employment, competitiveness, and investment to the back burner. The issue that matters most to them, it seems, is the government’s deficit.
Their priority has been to cut government expenditure – notwithstanding that, by international standards, the government’s finances (unlike the country’s) are in reasonably good shape, and that cutting spending to get the deficit down has actually, by depressing tax revenues, made matters worse.
The government has nevertheless preferred ideology over the practical evidence. Our economy continues to languish, and the deficit persists, because they take a Merkel-like view of what is needed to recover from recession.
They have placed their faith in what the Nobel Prize-winning economist, Paul Krugman, calls the “confidence fairy” – the belief that the money markets will respond positively if governments are seen to cut their spending. The markets are not, however, that easily distracted (and nor are the credit rating agencies).
As one economy after another looks in vain for the “confidence fairy” to appear, economic reality has a habit of intruding ever more insistently. That realism has now, it seems, even reached New Zealand.
The Prime Minister has over recent times begun to drop heavy hints that eliminating the deficit by 2014-15, which has up till now been the litmus test of his government’s credibility, may not be achieved. In one of those increasingly frequent moments when he appears to make policy off the cuff, he was even more specific last week on National Radio.
But it is the reason he gave for this shift in strategy that is really interesting. He would not, he said, stay committed to the 2014 deadline if that meant he had to “drag the economy back into recession”.
Here, at last, is a recognition that, in New Zealand as in Europe, there is a trade-off in our present situation between cutting the deficit on the one hand and economic recovery on the other. It may be doubted whether the Prime Minister was fully aware of the significance of his remark, but the rest of us should be in no doubt.
What it means is that we have wasted nearly four years pursuing the wrong strategy. That has unnecessarily cost us lost jobs and national wealth, and has meant we have had to increase our borrowing and make a painful fire-sale of national assets.
It remains to be seen what the Prime Minister’s Finance Minister, Bill English, and the Treasury Chief, Gabriel Makhlouf, will make of this admission and change of direction. The role of the Treasury Chief is particularly interesting.
He was recruited from the British Treasury presumably because his background there was seen as guaranteeing his commitment to austerity orthodoxy. He may well be surprised by the Prime Minister’s change of emphasis; or could it be that, having seen the damage done by that orthodoxy in the UK, his was one of the voices that brought about the change?
In any event, the Prime Minister’s change of heart might discourage the constant repetition, even by those who should know better, of the simple-minded mantras that “you can’t spend what you don’t have” or “if you have to borrow you should be declared bankrupt.”
These pearls of wisdom are constantly offered as justification for the austerity strategy which has proved so disastrous across time (the 1930s and the present day) and space (Europe and New Zealand). They rest on the false assumption that governments are no different from individuals and businesses – though have those giving this advice never heard of mortgages or bank loans?
But governments are in truth quite different from individuals and businesses. They have a wider responsibility to the whole economy and accordingly many more options for bringing about recovery, including adjusting fiscal and monetary policy, and – where appropriate – borrowing to invest or even printing money if that makes sense in context.
Decisions about those issues have to be made carefully and with proper regard for their consequences – there are no options of course without downsides. But that is what government is about. Even the Prime Minister now seems to have realised that continued cuts are not the path to recovery and that a different strategy is needed.
Bryan Gould
24 June 2012
Market Solutions Are Best
A government that seemed in its first term to be self-consciously pragmatic has revealed itself in its second term to be much more ideologically driven. An increasingly obvious sign of that tougher approach has been the government’s apparent conviction that most issues are best entrusted to market forces.
The evidence for this is now coming thick and fast. We have seen it in the contract with a private firm to build and run a major prison in Auckland, and in the appointment of a businessman to ensure that the Ministry of Foreign Affairs and Trade either replaces diplomats with businessmen or compels them to behave like businessmen.
We have seen it, too, in the sharply increased use of private consultants and contractors for work hitherto undertaken by the public service. The motivation here has been not so much to save money, since private consultants are – as the record annual expenditure of $189 million shows – an expensive option; rather, the government believes that it is worth spending extra money because the private sector will inevitably deliver better results.
That belief rests more on ideological preference than hard facts; the proponents of the view that market provision is always best do not always bother too much with looking at the evidence. A recent example is the recommendation from the chair of Auckland Council’s business advisory panel, Cameron Brewer, that future motorways should be funded from tolls on existing roads – an idea, it seems, plucked straight from the pages of a beginner’s manual of improbable “free-market” solutions.
But perhaps the most startling example of the government’s keenness to use private business to pursue its objectives in every aspect of our national life is the decision to contract private firms to build, own and run publicly funded schools for our children. We are not permitted to know the financial details of that arrangement. The only thing we do know is that it is part of the price that Act demanded in return for supporting National in government.
Act was able to “demand” such a price of course only because National arranged it that way, so we must suppose that the initiative is one that National wants to take anyway. But there are other and more substantial reasons for looking askance at the so-called “charter” schools.
The “charter” school is, like the privately run prison, an example of a public/private partnership or PPP. The case for such arrangements is that what would normally be funded by the taxpayer is instead financed by private business, with allegedly a saving as a consequence to the public purse.
But a moment’s thought would suggest that this is unlikely to be the case. The cost of financing a project will be the same in principle, wherever the funding comes from. While the initial capital cost, under a PPP, is borne by the private investor, that investor will want to cover the cost of capital and in addition earn a return on capital (or profit) over the lifetime of the scheme –typically, 25 or 30 years. Not surprisingly, in countries like the UK where such schemes were pioneered two or three decades ago, recent impartial research has shown that they often cost the taxpayer more over the whole period than if they were built and funded by more conventional methods.
The truth is that the main function of PPPs is to provide, through infrastructure projects, secure and profitable investment opportunities for the government’s friends in the private sector, while ensuring that the greater cost of funding the projects in this way is spread forward over decades to be borne by future taxpayers.
But that is only one of the reasons that we should be wary of such arrangements. It is not just the funding that the government would prefer to provide from the private sector. It is also the policy direction of the education we provide to our children that the government wishes to sell to business.
This is, in other words, one more instance – though a particularly significant one – of the extent to which the market has now invaded virtually every area of our lives. The view that everything has a market price, and should be traded as though it were a commodity, is now deeply entrenched in our daily lives.
How long before prisoners are able to “upgrade” their cells in the new private prisons, as is already being done in some American states? How about buying the right to drive one’s car down a bus lane? We’re getting perilously close to that in Auckland.
What about the right to shoot endangered species? You can buy that, too, for the threatened black rhino in South Africa. Buying the right to live in New Zealand? Yes, if you’ve got the money. And how long before pupils at the new charter schools are paid $2 for each book they read –which is what privately run schools in Dallas do to boost performance?
If the market makes everything available at the right price, we lose sight of other – perhaps more important – values. But it will suit some people; those with the most purchasing power will be delighted to find that nothing can be denied them.
Bryan Gould
12 April 2012
This article was published in the NZ Herald on 19 April.
The Truth About Tax
Politicians sometimes, as Hillary Clinton once put it, “mis-speak”, and in doing so, can often reveal more than they intend.
A case in point was John Key’s surprising statement on TV One’s Breakfast on 13 February to the effect that “any tax sucks money out of the economy. There’s a limited amount of money in the economy. So when you put up a new tax, or you tax people more, then it sucks that money out.”
The Prime Minister would presumably admit, on reflection, that no one claiming to understand the economy would stand by that statement. But, like so many “mis-speakings”, it provides us with an insight into how the speaker really thinks – in this case, about economic issues.
Let us put to one side the dubious assertion that “there’s a limited amount of money in the economy”; the money supply is never a fixed amount and varies greatly according to its price (the whole basis of using interest rates to control inflation) and varies even more according to the banks’ lending policies which are responsible for creating by far the greater part of the money in our economy.
The really interesting part, though, of John Key’s brief foray into economic theory is his apparent belief that money raised through taxation, and then spent on public purposes of various kinds, is somehow no longer part of, or of any value to, the economy.
If it is “sucked out” of the economy, where does he think it goes to – into the stratosphere? And does he think that all those schools and hospitals, all those police and servicemen, all those roads and railways, all of those elements that are critical to our living standards and that are paid for out of taxation, are of no economic value?
The question is not a fanciful one, as we await a much-heralded speech from the Prime Minister in which it is expected that he will announce yet more cuts to the public sector and in the number of public service jobs.
At a time when domestic demand is at best flat for a fifth year in a row, and export receipts are constantly (and literally) decimated by an overvalued currency, the economy surely needs stimulus rather than further enforced contraction. We should be looking to the government to lift its level of activity – through investment, for example, in education, skills, research and infrastructure – rather than to cut it further.
A government that was serious about recovery from recession would not treat the reduction of its deficit as its most pressing priority. But if John Key really does believe that tax revenue and what government can do with it are of no value, then we can perhaps begin to understand why his government has adopted the priorities it has.
And there are wider issues still. The notion that the only economy that matters is the private sector, and that government is always a drag on that economy rather than a partner and supporter, is peculiar to that form of Anglo-American capitalism that is now having to struggle with its demonstrable failures.
I remember an occasion in the 1980s when a delegation of British parliamentarians met the leaders of French industry. The British MPs were surprised at the willingness of the French business leaders to work with their government. The French were equally surprised that the British found this unusual. “Mais,” they said, as if the British were mad, “c’est pour la France!”
In the US and the UK, though, (and, if we are not careful, in New Zealand as well), it is an article of faith that the best thing the government can do for business is to “get off our backs.”
In other, more successful economies, however, there is a different view – and historically, it has always been true that economic development is best achieved when the government takes a major role in supporting and enabling economic activity.
That has been true of the first countries to industrialise, in Britain, then Europe and the US, where the laws made by government to protect property and contractual rights, the limited liability company, and insurance have been essential components, and even more true of the more recently developing economies in Asia – China especially, where government remains the main economic driver, but also Japan, Korea, Singapore, India and many others.
Even in the US, despite the ideological reluctance to acknowledge the role of government, the military-private sector defence industry complex has been a powerful underpinning of the economy.
We are entitled to expect our government and industry leaders to understand the value of following successful examples, rather than their own ideological prejudices. If government continues to treat its role as – to quote Ronald Reagan – part of the problem, rather than part of the solution, we will continue to render redundant and ineffectual an important and productive part of our economy and fail to utilise the full range of our productive potential.
When the Prime Minister makes his speech in a couple of weeks, let’s remember that “mis-speaking” can be forgiven. “Mis-acting” cannot.
Bryan Gould
19 February 2012
Labour Should Challenge Macro-economic Policy
Stewart Wood in this week’s Guardian is right to argue that the paradoxical popular support for George Osborne’s manifestly failing policies for recovery should not mean that Labour must abandon its social democratic approach to solving the nation’s problems.
The drive for “responsible capitalism” is of course an important aspect of such an approach, and is an area in which Labour should expect to carry greater credibility than its right-wing opponents. But focusing on that issue concedes far too much to an orthodoxy which has served us so poorly.
Why does Labour, in addition to looking for greater responsibility from our business leaders, not espouse as well “productive capitalism” or “efficient capitalism” – in other words, a market economy that actually works? We are now into a fourth decade of Labour failure to mount any effective critique of monetarist orthodoxy, with the result that the whole area of macro-economic policy has been effectively conceded to our opponents. Yet, if ever there was an open goal, this is it.
The monetarist approach to economic policy asserts that the only goal of policy should be the control of inflation – something that can safely be left to bankers armed with the single instrument of interest rates – and that otherwise the market, if left to its own devices, will deliver optimum results. Government should just let business get on with it.
How well has this doctrine prepared us to face the challenges of a new world economic order in which China and India, Korea and Brazil, are making the running? The answer is that it has served us appallingly. We have continued our inexorable decline in the world pecking order – whether it be in our share of world trade, in the output of our manufacturing industry, or in comparative living standards. We do not recognise this only because we have become enured to long-term failure.
And that failure has culminated, of course, in the global financial crisis and a threatened double-dip recession which have left this country flat on its back and apparently facing up to a decade of austerity, no growth and further decline.
What response has Labour made to these startling failures? Nothing – other than deservedly attracting a share of the blame. Far from pointing out the nakedness of “free-market” monetarism, Labour has joined in the acclamation for the emperor’s finery, pinning its hopes when in government on the exploits of the City of London, and only narrowly avoiding the euro trap in which the ECB applies a ruthless monetarism even more extreme than the domestic variety.
It beggars belief that – now in opposition – Labour still finds itself unable to develop its own economic policy. Far from developing a coherent critique of more than three decades of right-wing economic failure, Labour is still urged by many, even in its own ranks, to ape the Tories – to be ‘realistic’, to put forward its own alternative austerity programme, and to accept that there is nothing for it but to accept the monetarist framework.
But for Labour to do so is to accept defeat. If the political argument is only about the degree of austerity, it is an argument Labour cannot win. The Tories will always be seen as more credible exponents of such policies.
Nor can Labour expect to be taken seriously if – while not challenging the imperatives of monetarist policy – it simply proclaims its readiness to take on more debt so as to spend our way out of recession.
Yet the intellectual straitjacket embraced by Labour is easily discarded. One of the prime weaknesses of the monetarist approach has been that, by identifying inflation as the over-riding – indeed, only – focus of policy, and by adopting monetary measures to combat it, we have made inevitable a literally counter-productive upward pressure on our exchange rate – and this at a time when our competitiveness in world markets was already under extreme pressure from the rise of new economic (and particularly manufacturing) super-powers.
We tried to escape the consequences of this loss of competitiveness by pinning our hopes on the international asset and credit bubble created by the City – and when that bubble burst, we discovered that we had a much-weakened real economy to fall back on.
It is competitiveness, not inflation, that is our central economic problem. Until we deal with it, any attempt to expand our economy will run up against a balance of trade brick wall. There will then be no alternative but austerity which, through a lower tax take from a lower level of economic activity, will simply make our debt problems worse.
We have suffered for decades from a blind spot about the exchange rate. Yet it is the key to improving competitiveness. We have reluctantly agreed in the past to devalue only as the remedy for a loss of competitiveness that can no longer be ignored – yet the exchange rate is the most effective, quick-acting, and comprehensive means of establishing an improved competitiveness for the future that would make short-term sacrifices fair to all, while establishing a base from which we can quickly build a strong British manufacturing economy that enables us to break free from recessionary shackles and to find a route out of the austerity cul-de-sac.
Isn’t that preferable to the stark lack of choice we now face? Why can Labour not find the courage for some new thinking?
Bryan Gould
10 January 2012
Austerity or Jobs?
Two issues – the turmoil on world stock markets, and the riots in English cities – have dominated news bulletins over recent days. Each is a significant news story in its own right, but the interesting question is whether they are in any way linked.
What looks suspiciously like the global financial crisis, Part II, is widely reported as a problem of government debt. Those many governments that have identified debt reduction as their top priority have seen the renewed crisis as vindicating their analysis. In reality, however, what it demonstrates is that they have got it completely wrong.
No one doubts that government debt in the US, the UK and the eurozone is higher than it should be and is a drag on economic recovery. Debt arises, however, because spending has outpaced revenue. As a matter of logic, therefore, there are two (and not necessarily mutually exclusive) ways of remedying the situation.
Governments can choose to focus on cutting spending, or they can try to increase revenue. These further economic shocks show that, in focusing exclusively on cutting spending, they have made the wrong choice.
The problem is that the level of debt is a function of the level of economic activity; the higher the level of economic activity, the more buoyant the government’s tax revenue. A government that has trouble in balancing its books in a recession, and that seeks to deal with that issue exclusively by cutting its spending, necessarily reduces the level of economic activity and – by depressing its tax revenue – makes the debt problem more difficult to resolve.
Sadly, we have seen, in the economies that have spawned the current crisis, extreme examples of this error. In the US, the Republican majority in the House of Representatives has been wagged by the Tea Party tail, with the result that the usually technical issue of raising the government’s debt ceiling became an issue of moral probity.
The Republicans not only resisted any increase in the government’s ability to borrow but refused to countenance any reversal of the tax concessions that George W. Bush made to the super-rich. A refusal to allow any tax increase, and an insistence on massive spending cuts in the short term – while the economy is still in recession – have rightly been seen by the credit rating agencies as a cause for concern.
In Europe, the problems are more structural. The eurozone lured into its membership smaller and weaker economies – and some not so small – that could not hope to live with monetary conditions established to suit the interests of the dominant German economy. Those countries were lulled into a false sense of security when money and credit were plentiful; but – come the recession – they are now denied the usual remedy of devaluing their currencies. The only course open to them is savage cuts and austerity.
The problem with austerity as a supposed remedy is that closing economies down in an effort to cut spending means that they cannot hope to repay the massive further borrowing they need just to keep their heads above water. Little wonder that European banks look nervously at the probably worthless securities they hold from deficit countries, that bank failures are now seen as a grim possibility, and that contagion threatens to spread not only throughout the eurozone but across the global economy.
The problem is less stark in the UK, which sensibly stayed out of the eurozone. In the British case, however, the damage is self-inflicted. The coalition government, elected last year, has insisted that giving priority to savage cuts in spending will give confidence to the money markets, a view thoroughly discredited by the US and eurozone experience, and – as the “confidence fairy” fails to materialise – by the increasingly obvious failure of the British economy to recover from recession.
The only fairy that has made its presence felt has been a very wicked one indeed. The recession – and, in particular, rising levels of poverty, high levels of youth unemployment, severe reductions in post-compulsory educational opportunities, and sharp increases in public sector rents – has certainly played its part in creating the conditions for last week’s shameful riots.
Each of the many thousands of individual acts of criminality should of course be condemned and punished. But it is pointless and wrong to ignore the fact that riots on this scale are a social phenomenon. Many of us will have been bewildered by the absence – in the television pictures broadcast around the world – of any decent impulse, any sense of social responsibility.
But the young people who behaved like a feral rat pack feel that they owe very little to a society that has banished them to its extreme margins and that treats them as worthless. This is not a question of making excuses, but an attempt to find an explanation for what is otherwise inexplicable to most people.
And before we bless our own good fortune in New Zealand, let us recognise that many of these conditions apply here as well. We have a government that talks of nothing but deficit reduction while the developed world’s worst youth unemployment is allowed to fester. Like misguided governments overseas, given the choice between austerity and jobs, we have made the wrong choice.
Bryan Gould
This article was published in the NZ Herald on 15 August.