• Lies, Damned Lies and Statistics

    The debate about the current state of the New Zealand economy is less useful than it should be because of two increasingly dominant aspects of the way in which we address these issues.

    First, is the perennial proclivity of our media to consult – almost exclusively – bank economists, as though they are able, from their positions as paid mouthpieces for the banking interest, to tell us all we need to know about the wider economy.

    Second, is the growing practice of asserting – when the statistics fail to tell a story that suits our policymakers – that the statistics should not be believed.

    We have seen both of these elements at work in the current discussion about employment. We are solemnly assured that the fall in the number of people both in work and seeking work cannot be taken seriously because it is an article of faith that the economy is actually doing rather well.

    We have seen the syndrome at work, too, in the continuing discussion about the overvalued dollar and its malign impact on jobs, investment, output, productivity and the trade balance.

    There are good reasons to believe that the dollar, we are told, is not really overvalued. This is an oft-told story. One of the most pernicious of such assertions is the fatuous “Big Mac index” published by The Economist; this populist version of a purchasing power parity index purports to measure the degree of under or over-valuation by comparing the local-currency cost of buying a Big Mac in various countries.

    But the price paid for a hamburger in the domestic economy tells us very little about price competitiveness in the internationally traded goods sector. Successful exporters almost always have – as a consequence of, among other factors, the economies of scale available in manufacturing for export – a quite different cost and price structure from that of domestic production for local consumption.

    When Japan, for example, was growing fast in the 1960s and 1970s, and exploiting worldwide markets for manufactured goods like cars and television sets, the inflation rate in their export industries was low by world standards, so that they could go on exploiting a price advantage, even while their domestic inflation rate across the whole economy was actually higher than average.

    We are also told that there is no need to worry because our dollar is not overvalued against the currencies of all our trading partners. It is certainly true that the trade-weighted index has some deficiencies, and that against the Aussie dollar (which is also overvalued in world terms), our current parity is quite advantageous – thank heavens, because otherwise we would now be “drowning not waving.”

    But, as Steven Joyce says, our exchange rate establishes values against all currencies; and what matters – in terms of whether it is overvalued or not – is the impact it has on our overall balance of trade. A correctly aligned exchange rate should allow us to balance our trade, by “clearing the market” in conditions where we are also achieving a sustainable rate of growth and the full utilisation of our resources, including labour.

    It is no comfort, in other words, to be told that we are not handicapped by overvaluation in respect of one or two of our trading partners when the corollary is that the total trading picture is one of considerable disadvantage.

    Nor is it much comfort to be told that the major impact of overvaluation is on our ability to compete against imports, rather than on our ability to export. The international market for manufactured goods embraces both exports and that part of our domestic market that is open to imports. So weak is our export effort (as a consequence, at least in part, of overvaluation) that it is the competition from imports in the domestic market that matters much more to us. The manifest and growing vulnerability of domestic producers to that competition is just as much a consequence of overvaluation, and even more damaging to our prospects, than is our disappointing export performance.

    We should also beware of historical comparisons designed to show that the dollar is, in some respects at any rate, no higher in value than in earlier times, particularly when those earlier times are themselves very recent and when our history of consistent overvaluation extends back for decades.

    Rather than juggle with the indices in an attempt to distract attention from the hard reality of overvaluation, it would be much more helpful to look at the characteristics typically exhibited by uncompetitive economies – in other words, those with overvalued currencies.

    Such economies have slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets – including national assets – into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.

    Sound familiar? Forget arcane debates about small fragments of the picture; if we want to judge whether or not our currency is overvalued, these are the consequences that provide the conclusive evidence.

    Bryan Gould

    10 February 2013

  • Manufacturing Matters

    New Zealand has always been somewhat unusual in economic terms. With our emphasis on agriculture and primary produce – the characteristic most often of undeveloped economies – we nevertheless succeeded in achieving a high standard of living, to the point where – in the 1950s – we enjoyed one of the highest living standards in the world.

    In those days, however, our economy had a certain balance. Small as we were, we were not only efficient primary producers but had developed a manufacturing base that met a reasonable proportion of our needs and a service and retailing sector that was responsive to local control. Able to pay our own way, with an economy that was competitive across the board, we could look the world in the eye.

    Since that time, however, the picture has dimmed. As we have been absorbed more and more into a global economy, international competitiveness has mattered more and more, and our small size and remoteness have counted increasingly against us. We were not helped of course by fundamental changes in our trading patterns, such as the UK’s entry into the European Common Market.

    In any uncompetitive economy, the less competitive parts struggle and eventually disappear. Ever larger parts of our economy – like manufacturing – have found the going tough, and have the felt the pressure of having to compete with more efficient and lower-cost producers elsewhere. Only the most efficient sectors – in comparative terms – survive. An uncompetitive economy like ours becomes as a consequence more and more dependent on those fewer and fewer sectors that can compete in international terms – and in our case, that means primary produce, and even more specifically, dairy produce.

    We have chosen, however, not to recognise the remorseless economic logic that underpins these developments. We have behaved as though – as a total economy and not just in terms of rapidly shrinking proportions of it – we are highly competitive. We have cheerfully entered into free trade arrangements with all and sundry, including the most powerful and efficient economies in the world, apparently confident that we can take them on across the board without suffering damage to our own productive sectors.

    Worse, we have quite deliberately set about making the problem more serious. We knowingly pursue policies that – through offering an interest rate premium to anyone who will lend us money – drive up our exchange rate, which immediately makes our lack of competitiveness much worse.

    We then avert our gaze from the consequences of these policies. As though a perennial balance of trade deficit, a huge private sector borrowing requirement needed just to keep our heads above water, and the pressing need to sell off more of our assets to foreign owners than any other advanced country are not enough, we still blithely tell ourselves that we are doing well and that our economy is in good shape.

    As large parts of our economy cease to exist, our Pollyanna Prime Minister denies that there is a crisis in manufacturing; yet manufacturing jobs, manufacturing output, the balance of trade in manufactures, are undeniably all in a bad way. He does not seem to be aware – and if he is – seems not to care, that manufacturing’s share of our economy has fallen from 26% in 1972 to just 12% by 2009, and will have fallen substantially since. Even those parts of our manufacturing economy that do survive – Fisher and Paykel Appliances, for example – are being sold off to foreign owners.

    Does the manufacturing crisis matter? Yes, it does, not just because of the lost output, the loss of jobs, and the increased burden on our balance of payments, but because all evidence shows that successful modern economies build their success on efficient manufacturing.

    Manufacturing is the most important source of innovation, the most substantial creator of new jobs, the most effective stimulus to improved productivity and offers the quickest return on investment. Almost without exception, economies that have given up on manufacturing have struggled and have discovered that supposed substitutes are either castles built on sand, as in the case of the UK’s financial services industry, or deliver their benefits to only a small part of the economy, as in the case of Australia’s mining industry.

    By contrast, the world’s new economic powers – China, India, Japan, Korea – have built their strength on manufacturing, while the strongest of the longer established economies – Germany – continues to do likewise.

    We, however, tell ourselves that competitiveness is not something we need worry about. We wave goodbye to manufacturing with nary a care, and expect dairying alone to carry the burden of guaranteeing our prosperity into the future.

    But our competitive advantage in dairying is already being eroded as well. We are already treading the familiar path of selling off large chunks of our productive capacity and expertise in dairying to potentially powerful competitors and we have taken the first fateful steps in selling ­vital income streams from dairying to foreign owners. When dairying has followed manufacturing into decline, what will we do then to pay our way?

    Bryan Gould

    21 January 2013

    This article was published in the NZ Herald on 23 January 2013

  • The Government’s Economic Report Card

    As we enter the fifth year of this government’s term, and the sixth year of bumping along on the recessionary bottom, we now know enough to make an informed judgment of the government’s stewardship of the economy.

    The usual economic indicators do not paint a pretty picture. Unemployment remains stubbornly high, manufacturing is weaker, the balance of trade is deteriorating, overseas borrowing is on the rise, the government deficit remains a problem, and poverty is increasing.

    There is one bright spot, however – productivity. Not productivity in the usual sense of greater output per worker, which is still stuck at relatively low levels, reflecting no doubt equally low levels of investment and skill training; but the government has been remarkably productive in conjuring up excuses to explain our poor performance.

    The first and main excuse is the “global economic situation”, which should certainly be a cause for some concern from a global viewpoint. But, paradoxically, the travails of the global economy have so far had little impact on us.

    That is for a number of reasons. First, the global financial crisis left our Australian-owned banks virtually unscathed and they are still able to borrow with relative ease and at reasonable rates. We have quite simply avoided the huge burden imposed on other economies of having to re-build the credit-worthiness of their banking systems.

    Secondly, our two major export markets and trading partners have been China and Australia, both of which (despite a recent Australian slow-down) have motored on through the global recession and maintained a pretty satisfactory rate of growth and therefore appetite for our goods.

    Thirdly, and as a corollary of the second point, global commodity prices – particularly for our primary products – have been at high levels and have paid us (pace the overvalued dollar) a good return.

    While future uncertainty (largely generated by the Germans who insist on imposing on the euro-zone a harsher version of the same policies as we have had to suffer here) is never helpful, there is actually little in the international situation to explain why we continue to bump along on the bottom.

    But the government has a second ready-made excuse – the Christchurch earthquake. No one would have wished such a disaster upon us, but as an excuse for poor economic performance it suffers some limitations. Indeed, while it certainly means that we have to invest in re-building our asset base, it is also – often in the same breath – touted correctly as a major boost to the level of economic activity; without it, and the investment it necessitates, we would be in even deeper doldrums.

    The truth is that the government’s excuses offer a convenient story to tell, but the real reasons for our sluggish performance lie elsewhere – at the government’s doorstep. High unemployment, manufacturing’s decline, and growing poverty, are a direct consequence of the priorities they have adopted.

    The first mistake was the momentous decision to focus on the government’s own deficit, as though it arose somehow in isolation from the rest of the economy. By adopting this priority, the government ensured that other pressing problems – like unemployment, the country’s overseas borrowing, manufacturing’s difficulties – would remain unaddressed and get worse; and – paradoxically – the decision also ensured that the government deficit (made worse by the tax cuts given to top earners) would be more difficult to deal with.
    The surest way to get the deficit down, after all, would be to get the economy moving again, so that less is paid out in unemployment benefits and more is paid in tax revenues by workers, consumers and businesses.

    The government’s decision not only means that these issues are left neglected; by cutting spending, and trying to drive wages downwards, so that there is less money in people’s pockets, they have unwittingly done their bit towards creating a smaller and weaker economy overall.

    Worse, they have made no attempt to counter or correct the real problems that have made life difficult for us over recent decades. They continue to preside over a policy that encourages the value of the dollar to rise, so that New Zealand workers are priced out of jobs and New Zealand goods are priced out of international markets.

    They continue to focus on inflation (to the exclusion of problems like unemployment) and to use the single instrument of interest rates to deal with it, whatever the consequences for the real economy.

    Alarmingly, they are content to “solve” our growing economy-wide indebtedness by selling off assets and allowing the control and income streams from our most important productive industries to pass into foreign hands – a certain recipe in the longer term for worsening our balance of payments, increasing our need to borrow, and losing control of our own economic destiny.

    Even when the long-delayed recovery from recession does materialise, in other words, we will be heading straight back to the same old – but this time intensified – weaknesses. But, when these long-term failures do their inevitable damage, someone else will have to carry the can; this government will be long gone. It’s hard to think of a better definition of short-termism.

    Bryan Gould
    29 December 2012

  • I Told You So

    Jonathan Freedland, in last week’s Guardian, congratulates the UK Shadow Chancellor, Ed Balls, on being able to claim the rare privilege in politics of saying “I told you so”. Balls had warned in 2010 that austerity would not pull the UK out of recession – a prediction now in the course of being amply confirmed.

    It is certainly true that, for most politicians, claiming to have been proved right is rarely possible – and, even if it is occasionally justified, it is not usually a claim calculated to endear the claimant to his audience. So, Ed Balls is fortunate to have someone else make the claim for him.

    The claim is usually, of course, only of interest if it can be made by or on behalf of a frontline practising politician – someone who either does or might one day exercise the power of government, and whose fitness to do so would perhaps accordingly be enhanced.

    The claim is even more difficult to make – and of considerably less interest – if made by someone who has long since departed the scene. So why – 18 years after I decided to leave British politics – should I think it worthwhile to make that claim in my own name now?

    The answer is that I left British politics in 1994 because I despaired of being able to persuade my colleagues in the Labour party that they were pursuing the wrong course on a wide range of issues. And, since it is precisely those issues which have dominated news headlines over recent times, there is now the chance of assessing who was right and who was wrong.

    What were those issues? First, the dominant role assumed by the City in British economic policy, something enthusiastically endorsed and encouraged by successive governments.

    In 1986, I led for the Opposition when the Financial Services Bill was debated in Standing Committee, and warned repeatedly that self-regulation, “light-handed” regulation, or no regulation at all, would allow unregulated financial markets to subject us all to unacceptable risks – risks that eventually materialised with a vengeance with the Global Financial Crisis.

    From even further back, I had argued consistently that macro-economic policy was being formulated in the interests of the financial economy, rather than the “real” or productive economy, and that this was creating a serious structural imbalance which would eventually come back to bite us. That view was dismissed in the euphoria engendered by the sight of large fortunes being made in the City. Like Winston Churchill, I would rather have seen “Industry more content, and Finance less proud.”

    Then, there was the euro. My argument that the euro, imposing as it did a single and inappropriate monetary policy on a wide range of diverse economies, could not possibly work, had been preceded by my opposition to the euro’s predecessors – the European Monetary System and the Exchange Rate Mechanism, both of which had failed. I was constantly dismissed as “anti-European”, despite my contention that it was the concept of Europe itself that was being put at risk. I was eventually stripped of responsibility for policy-making on this issue.

    And what about the current controversy over News International? I recall being invited to lunch by Rupert Murdoch in 1988. In retrospect, it is a reasonable assumption that he was interested in how malleable I might be (I was then the Shadow Trade and Industry Secretary) in responding to his ambitions. I remember little of the lunch but I am quite certain that I offered a less pliable prospect than some of my successors clearly have done since – and I remained throughout extremely concerned at and hostile to the dangers posed by the concentration of media ownership.

    And austerity? I salute Ed Balls for his foresight in warning that austerity by itself takes us further into recession, and that we need a strategy for growth. But we are saddled with the current sterile orthodoxy because we accepted in the 1980s that the “free” (or unregulated) market must prevail, so that – even in a recession – government must step aside to allow the market to re-establish equilibrium. I have spent most of my political life arguing that markets are irreplaceably valuable but not infallible.

    And, as long ago as 1981, I published – with two colleagues, John Mills and Shaun Stewart – Monetarism Or Prosperity? We argued that macro-economic strategy should be about much more than simply controlling inflation and that we needed a strategy for growth, focusing on full employment, competitiveness and putting the interests of the productive sector first.

    There are many other (and not just economic) issues on which I would claim that events have supported the views I took – the invasion of Iraq, for example, where I was clear long before the invasion that any such action would be disastrous. My purpose, however, is not to claim any special far-sightedness, since there have been many others who have expressed similar views on each and all of these issues.

    What I would claim, however, is that I was one of the very few in mainstream, frontline politics to have taken these views and to have swum against the prevailing tide. On all of these issues, in other words, we had choices – and we have suffered greatly from making the wrong ones.

    Bryan Gould

    1 June 2012

  • Travelling Further Down A No-Exit Road

    By the time of the 2008 election, New Zealand had already been mired in our own home-grown recession for nearly a year. A response that would get the economy moving again quickly was clearly needed.

    That urgency was reinforced by the global financial crisis that shook the world in the later part of 2008. Our Australian-owned banking system was mercifully affected only mildly by the turmoil, but the increased recessionary pressures across the economy as a whole made it all the more imperative that our new government should act decisively.

    We waited in vain for that decisive action. Apart from a largely abortive “jobs summit” in early 2009, the government seemed content to sit out the crisis, waiting for others to bring the recession to an end – and this, despite the buoyancy of our main export markets and a rise to record levels in our main commodity prices.

    The government’s main preoccupation was not –so it seemed – to get the unemployed back to work, so that incomes, purchasing power and demand would rise. They focused instead on government debt – surprisingly since, at just 23.4% of GDP, New Zealand’s government debt was one of the three or four lowest in the OECD.

    They asserted that – successful though the Labour government had been in bringing that percentage down – it was now their main focus to get it down further. Only in that way, they believed, would confidence return, recovery from recession be achieved, a credit downgrade be avoided, and interest rates be held at low levels.

    In expressing such faith in what the Nobel prize-winning economist, Paul Krugman, calls the “confidence fairy”, our government was following down a track mapped out by the leaders of other Western countries – those same leaders who had presided over the global financial crisis in the first place.

    Let’s be clear. Manageable levels of government debt are clearly desirable. The question is not whether that should be the goal, or at least one of them, but rather whether the government’s chosen method of achieving the goal has been effective.

    Three years later, how have we done? Did the “confidence fairy” appear and work her magic? The answer is sadly disappointing.

    Despite the priority they had, the government’s finances remain in a parlous state. As Brian Gaynor pointed out recently, the government’s cumulative deficit over three years will rise to $35.5 billion, compared to a surplus of $35.6 billion under the Labour government. As a result, government debt will rise to 37.7% of GDP. Why has this happened?

    The answer is really a matter of common sense. The main drag on government finances is the loss of revenue in an economy that refuses to grow out of recession – and, as this week’s figures show, still does. You don’t solve that problem by slowing the economy still further, by cutting what could have been a sensible investment in getting the economy moving again.

    The government, in other words, backed the wrong horse. If they had concentrated on getting people back to work, so that they earned and spent more, the economy would not only have been more buoyant, but so too would government revenues. The deficit may have been higher in the short term, as the investment in our future was made, but it would not have been so persistently high now and over the longer term. Cutting government deficits does not promote recovery; it is the other way round.

    Not only has the government failed to control its own deficits and debt. It has also increased the country’s debt, with the result that we have suffered the credit downgrades the government warned against, while the interest rates we pay to overseas lenders will rise.

    It is cold comfort to know that we have not been alone in making these mistakes. In many other Western countries, the expected appearance, in response to austerity and cutbacks, of the “confidence fairy” has not materialised. The Conservatives in Britain, the eurozone’s leaders, the Republicans in the United States, have all pinned their hopes on austerity – and, as those hopes have been dashed, their only self-defeating remedy is to inflict yet more pain.

    The “confidence fairy” seems unimpressed by more blood-letting, to which the nearest analogy is the use of leeches by medieval doctors to bleed their sick patients.

    We may feel sorry for the Greeks or Italians, but we have suffered the same dead-end policies that they have had to endure – albeit, given the size of the eurozone economy, on a smaller scale.

    We, too, have been driven by ideological tunnel vision down a one-way, no-exit road, unable to go forward or back – not a comfortable situation with a second recession bearing down on us.

    And, in case the we try to blame our lamentable performance on the global financial crisis or the Christchurch earthquake, let’s be clear that our government blew its best chance of pulling us out of recession well before the full impact of those factors was felt – a point not depending on hindsight but made by me and others at the time.

    If the exodus across the Tasman is to be stemmed, we surely cannot afford another wasted three years.

    Bryan Gould

    5 December 2011