• Growing Inequality Can Be Seen As Clever Politics

    Voter turnout has been falling steadily across the western world in recent decades, and not least in New Zealand. We have a proud record of high turnouts in general elections, but even here, we dipped below 80% in 2008 and fell further to a post-war low of 74.21% in 2011.

    The problem is even more acute with young voters; opinion polls show a growing number of those under 25 with no interest in voting. And turnout at local elections is much lower again.

    These figures are of real concern to the older generation who still retain a folk memory of what things were like before we achieved democracy and of the sacrifices our forbears made to do so. They are also a puzzle to politicians and activists who have difficulty in understanding that, to many people, politics is a sideshow that impinges on their lives only briefly – and even then, not very much – at election time.

    Short of following the Australian example by making voting compulsory, it is, though, hard to know what could be done to improve matters. We know very little about what makes people not only vote but vote the way they do – thankfully it may be thought, since if we knew more, even more would be spent on trying to sell them personalities and policies as though they were products on the supermarket shelf.

    What we do know is, not surprisingly, that people’s views and motivations vary greatly. Some are entirely settled in their preferences, others change their minds according to their perceptions at the time, while yet others make a random choice on the day or do not vote at all.

    It is no doubt broadly the case that the electorate comprises two groups of voters with consistent voting intentions at either end of the political spectrum, and in the middle, perhaps an even larger group of undecideds, swing voters and those who do not vote at all.

    I don’t think I am revealing any secrets of the polling booth when I recall that my own dear parents, and most of their respective families, voted National all their lives. For them, it required no actual decision; it was just what we – and “people like us” did. It was rather like being a lifelong supporter of, say, Manchester United.

    For many voters, in other words, voting – particularly in a broadly right-wing direction – is often seen as a badge of identity, of respectability and difference. It means being part of the successful people in society, those who are a cut above the common herd.

    Even if the facts of the voter’s situation may not actually bear that out, to vote in that direction is to express an aspiration that it should be so. And as so often, it is not just a matter of making common cause with the better off but with establishing an identity clearly differentiated from that of the less successful.

    There is also, of course, the belief that the “top” people know what they are doing and that the country can safely be entrusted to them. People who have had success in their own lives, particularly in financial terms, are thought to be best suited to run the country – though whether the kind of self-interest that produces personal fortunes is evidence of the breadth of vision needed to run the country is a question rarely asked.

    At the other end of the political spectrum, there is an equally committed group of voters who, either as a matter of self-interest or of social conscience, vote in solidarity with those who are struggling and who want to see the power of a democratic government used to offset the economic power of those who would otherwise dominate the marketplace.

    It is the composition of this group that is of most interest in terms of explaining falling voter turnout. It is a reasonable interpretation of the opinion polling figures that significant numbers of those who might once have voted in the hope of a government that would give them a better deal have now migrated to the group that despairs of or has no interest in politics and who do not, therefore, show up in the polls.

    These are the people – found disproportionately amongst the poorly educated, the badly housed, the ethnic minorities, the unemployed, those in poor health – who have concluded that “the system” has nothing to offer them. Many of them are on benefits or low incomes, and are in debt, with no foreseeable means of improving their situations. As my former colleague in the House of Commons, Tony Benn, once said, “people without hope do not vote”.

    The electoral message is clear but unwelcome. A government that puts the interests of the well-off first can relax. As a significant proportion of the population becomes increasingly voiceless and invisible – in other words, devoid of hope – their absence from the polling booths on election day means they can safely be ignored.

    Growing inequality can be seen, in other words, as clever politics. It allows a government that is so inclined to deliver to its supporters, but discourages the losers to such an extent that they are in effect disenfranchised.

    Bryan Gould

    21 July 2014

  • If the Poor Are Worse Off, We’re All Worse Off

    The Herald-DigiPoll last week cast an interesting light on the political debate as the election season approaches.  The poll showed that no fewer than 74% of New Zealanders thought that inequality had widened over the past six years – that, in other words, the rich had got richer and the poor comparatively poorer.

    On the face of it, this would seem to be good news for those trying to replace the current government with one that, it is presumably hoped, would have more of a social conscience.  And the poll comes, of course, on top of the rising tide of concern about the increasingly manifest impact of poverty on so many of our young children – an impact that blights prospects and stunts lives.

    It is certainly reassuring that Kiwis have not lost their traditional concern for the disadvantaged in our society.  Whereas in some other western countries, the fact of poverty is simply denied or ignored, the polling shows that, in our country at least, inequality and its corollary – poverty, have registered in people’s minds as issues that warrant attention.

    Yet the polls on voter intentions continue to show substantial support for the current government.  What this quite clearly tells us is that, while the reality of inequality is recognised, it is not rated by many voters as important enough to determine the way they vote.

    Inequality and poverty are, in other words, to be noted but need not be addressed.  As long as it does not impact directly on people’s own lives, it can be treated as someone else’s problem.  When it comes to polling day, the salience of inequality as an issue will have dropped well down the list, way behind the more pressing immediate problems of managing one’s own budget and prospects.

    We get an insight into this kind of thinking from the Herald’s own poll of its readers following the publication of the Herald-DigiPoll.  What the poll showed was that, while many respondents were concerned about widening inequality, many others were less concerned and just over a third were prepared to accept it as the necessary price to be paid for economic success.

    The notion that inequality and economic success go hand in hand is, of course, well entrenched in the minds of those who embrace the modern doctrine that the market is infallible and must not be challenged; and it is a safe assumption that echoes of this view explain why, even for those who acknowledge the personal and social cost of poverty and inequality on both individuals and society, the need to do something about it tends to dim as polling day approaches.

    Yet there is actually no evidence to support a belief that is cherished by so many.  International comparisons of advanced western economies show conclusively that widening inequality is in no sense a corollary, let alone a pre-condition, of improved economic performance.  Indeed, the opposite is the case.

    The statistical evidence shows that countries with lower levels of inequality – such as the Scandinavian countries and Germany – have performed better than those countries, such as the UK, the US and, sadly, New Zealand, where high and widening levels of inequality have accompanied relatively poor economic performance over recent decades.

    This compelling evidence should come as no surprise.  A wide gap between rich and poor in an economy is inimical to economic success for reasons that apply at both ends of the scale.

    If wealth is concentrated in a few hands at the top end of the scale, the result is a significant degree of economic inefficiency.  The evidence shows that the rich have a greater propensity to “hoard” – that is to accumulate large cash reserves which remain unspent for long periods of time.  They are therefore not available to stimulate activity in the rest of the economy and the Keynesian multiplier effect is thereby much reduced.  And when they do spend, it is often on arbitrary and capricious purposes that do little for economic activity as a whole.  “Trickle down” is not supported by any evidence.

    At the other end of the scale, there is nothing economically efficient about depriving the economy of the productive capacity of a large chunk of the population.  Can it possibly make economic sense to relegate those potentially productive people to unemployment and minimum wages when they could be both working and spending to the benefit of the economy as a whole?

    Can it make sense to consign them to a future where poor education, skills and health – all consequences of poverty – mean that their productive contribution is limited for no good reason and they are more likely to become burdens rather than contributors?

    The conclusions are clear.  If the poor are worse off, we are all worse off.  Those who lament growing inequality and poverty but reconcile themselves to it on the ground that it is a price worth paying are quite mistaken.  Economic efficiency and greater equality are, together, the hallmarks not only of a successful economy, but of an integrated and happy society that is more at ease with itself.

    Bryan Gould

    3 April 2014



  • Why the Poor Can’t Put Food on the Table

    The OECD revelation last week that 17.2% of New Zealanders found it difficult to afford food is a shocking and shameful statistic for any country that claims to be prosperous and developed.  It shows how far we have come from the time when it could be said that “here, there is enough for everyone.”

    Among all the issues demanding attention from government, this is surely the one that must claim pride of place – that is assuming that pride is an appropriate sentiment concerning such an indictment.

    How did we come to this?  How does a country that aims to feed the world fail to keep its own citizens well-fed?

    The answer is that such deprivation has occurred for two main reasons; one turns on the distribution of wealth in our society, while the other reflects a long-term failure to make the most of our economic opportunities.

    The sad truth is that, as we have become wealthier, the greatest proportion of that increased wealth has gone to the better-off; the disadvantaged have stood still – and are now, therefore, comparatively worse off.  For the poor, unemployment, low wages, inadequate social benefits, poor health and housing, higher rents and power prices, have all taken their toll.

    There has been a different story for the better-off.  A renewed housing inflation is in effect a giant mechanism for increasing the wealth of home-owners and penalising those who must rent because they can’t afford to buy.  The share of profits in our economy has continued to rise while the share for wages has fallen.  Top salaries have risen fast while wages for ordinary workers have been restrained by high levels of unemployment and the failure to pay a living wage.

    The untaxed capital gains from property have increased purchasing power for the well-off who have also benefited from tax changes, away from direct taxation (where top rates have in any case fallen) and towards indirect taxation which hits the poor hardest.

    It is not the case, in other words, that we have become poorer as a society – merely that the well-off have taken the lion’s share of the economic growth of the past 30 year.

    But the second factor has also played its part.  Despite all the euphoria occasioned by the long-delayed recovery from recession, the fact is that we have failed over a similarly long period of several decades to do as well as we should with the resources we have – and while the well-off can protect themselves from such failures, the poor bear the brunt.

    There can be no better illustration of our long-term failure than another piece of economic news published last week.  We were invited to celebrate the fact that record commodity prices, particularly in dairy products, had allowed us to reduce our perennial trade deficit to smaller proportions.

    What was remarkable about this was that literally no one bothered to ask why it is that we always run such a deficit.  It may sometimes be smaller and is often bigger, but it is always there.  It is the best possible evidence that, despite the constant claims of successive governments that they are prudent managers of our affairs, we have simply failed – over a very long period – to pay our way.

    We cannot, in other words, sell enough to the rest of the world to pay for the living standards that we – or at least some of us – insist on enjoying.  The consequences of this failure are far-reaching.

    The gap between what we can sell and what we insist on buying has to be financed in one way or another; the rest of the world will not allow us to enjoy something for nothing.

    We must either borrow to fill the gap, or we must sell assets.  Our solution?  Do both.

    But the problem with both solutions is that they carry with them the certainty that they will make matters worse.  If we want to borrow, that means higher interest rates, and those interest payments must be paid to foreign lenders.  That outflow adds to our current account deficit.

    So, we sell assets as well.  The problem then is that a greater volume of profit is made from the larger range of assets owned by foreign owners, and those profits must again be repatriated across the exchanges.  It is no accident that, at the same time as dairy prices reduced our current account deficit, it was being widened again by the sheer volume of profits being repatriated overseas.

    What are we doing about this?  Nothing – we simply accept it as a fact of life and continue merrily on our rake’s progress.  As the economy resumes growth, we don’t care a jot that the huge increase in bank credit-creation – something that the Bank of England, no less, has at last conceded accounts for virtually all the money and monetary growth in a developed economy* – goes to stimulate housing inflation rather than the increased investment in productive capacity that we desperately need.

    It is truly said that “those whom the gods wish to destroy they first make mad.”

    Bryan Gould.

    21 March 2014

    *Money Creation in the Modern Economy” Bank of England Quarterly Bulletin, 2014 Q1

  • The Inequality Machine

    The widening gap between rich and poor that has disfigured and weakened our society over recent decades is widely deplored, but there is surprisingly little understanding of how that growing inequality has been brought about.

    For most people, it simply reflects the natural order; the rich have each individually taken their chance, as anyone would, to inflate the rewards of various kinds – profits, salaries, bonuses, share issues, golden handshakes – that they are able to command. Their riches are regarded, as a general proposition, as a reward for their success.

    But those huge advantages – on a scale so outrageous that it is hard to comprehend – have not so much come about by good fortune or because the rich have individually discovered the path to great wealth through their own hard work, cleverness or luck, but because the whole operation of the modern economy has been deliberately geared to favour them as a class. The statistics are incontrovertible; the rich have claimed virtually the whole of the additional wealth that has been produced over the past thirty years. They have been able to do so because they were already rich. It is beyond doubt that the best way to become seriously wealthy is to start off wealthy in the first place.

    The rich have, in other words, been the beneficiaries of a complex and comprehensive interlocking set of policies that have been deliberately put in place to ensure that their wealth just keeps on growing. Those policies have formed the bedrock of the neo-liberal consensus adhered to by governments in most western countries over the last three decades. That consensus has been peddled as benefiting us all, but it has been in reality a huge machine designed to increase the advantages that the rich enjoy over the rest of us.

    The merits of globalisation, the virtues of monetarism, the over-riding importance of restraining inflation while taking a relaxed attitude to unemployment, the primacy of banks in making decisions about our economy, the superiority – indeed, infallibility – of the market as opposed to the supposedly stultifying effect of government intervention, austerity as the correct response to recession, have all been articles of faith for governments of various political colours; indeed, in the British case, New Labour was among the most enthusiastic proponents of all of these nostrums.

    How have these policies – supported on the face of it because they are supposed to produce a more efficient and productive economy – actually contributed to widening inequality? Let us take, for example, the widely accepted view that the only goal of macro-economic policy should be the control of inflation, and that that is best done by restraining the growth in the money supply – a task that should be entrusted to unelected and unaccountable bankers and is therefore immune from scrutiny by democratic agencies.

    But monetarism takes an essentially static view of the economy’s capacity to grow and create new jobs. The priority given to inflation ensures that as soon as there is any sign of growth, the brakes – in the form of higher interest rates – are slammed on, with the intention that that the value of existing assets should be protected; but, at the same time, a high unemployment rate is also guaranteed and becomes endemic. Continuing high unemployment, of course, suits the interests of employers, by holding down any threatened growth in real wages – and unemployment remains the single most important factor in creating avoidable poverty. Monetarism, in other words, is a mechanism for protecting the interests of the rich but sacrificing those of the majority.

    The same inbuilt bias in favour of the rich can be seen in many other aspects of policy. The propensity to raise interest rates as the principal instrument of what remains of macro-economic policy has the effect of favouring the holders of assets – those who are already wealthy and who operate in the financial economy, at the expense of those wishing to borrow for productive investment – those who live and work in the real economy and are the creators of new wealth.

    And the primacy accorded to the banks in deciding economic policy places the alcoholic in charge of the brewery. The astonishing monopoly allowed to the commercial banks – the power to create money out of nothing by the stroke of a computer key and then to use the proceeds for the purposes that they alone decide – delivers to them immensely more power than that of elected government.

    They have not been slow to use that power to shift the balance of advantage further in favour of the “haves”. Their enthusiasm, for example, to lend for non-productive purposes, such as housing, inflates the value of housing, (and, incidentally, diverts investment from the productive sector), so that there is a massive transfer of wealth to home-owners at the expense of those who can’t afford to buy their own homes.

    Globalisation has also played its part. Our ability to defend and promote our own interests – to decide the direction of our own economy -has been steadily eroded by the increasing dominance of the global economy by an ever more concentrated group of super-rich. The freedom of international investors to move capital at will around the globe, and the vast sums at their disposal, have meant that democratic governments have found themselves compelled to comply – for fear of losing investment if they do not – with the wishes of those investors, rather than securing social, environmental or political outcomes that are more congenial to their electorates.

    And it is of course a curious aspect of the global economy that it apparently requires top executives to be paid at the highest international level – a level that is constantly being bid up – to ensure, we are told, that we attract the best talent; but, at the same time, it demands that wages – treated as just another production cost – must be held down to match the lowest levels in competing low-wage economies.

    And on the subject of our international competitiveness or lack of it, the deep-seated and long-term opposition to ensuring that our exchange rate is at a competitive level and the refusal even to consider the issue (dating back at least to Harold Wilson’s futile battle against devaluation and Denis Healey’s rejection of the IMF’s advice to frame monetary policy in terms of Domestic Credit Expansion), are a further reflection of the power of the wealthy to set the agenda. A lower exchange rate would of course stimulate the economy and create more jobs, and is by far the fairest and most immediately effective and comprehensive means of improving competitiveness in a global economy in which others are becoming constantly more efficient; but it would also reduce the international value of assets held by the wealthy, who have managed to dominate such limited debate as there has been by constantly asserting, in defiance of the evidence, that a lower exchange rate would erode any initial gain in competitiveness by increasing inflation.

    As a result, we have placed the whole burden of maintaining or improving competitiveness on wage-earners; we are constantly told that we can’t afford higher wages, and that improvements in competitiveness must come from cutting costs – and essentially labour costs. The preferred instruments have accordingly been measures to reduce the bargaining power of workers, weaken trade unions, make it easier for employers to pay low wages, and make life tougher for the unemployed and other beneficiaries so as to force them back into the labour market to compete for low-paid jobs.

    Our unacknowledged problems with competitiveness have meant the sacrifice of manufacturing, where working people are best able to earn a living and whose decline has reduced any prospect of new jobs, innovation and productivity improvements, in favour of a financial services sector which delivers its benefits uniquely to those who have access to capital.

    The otherwise incomprehensible insistence that austerity is the correct response to recession is to be explained in the same way. Recession has always been seen as an opportunity to weaken labour, ever since Andrew Mellon, the multimillionaire US treasury secretary, issued the rallying call to employers after the 1929 crash, to “liquidate labour”. The high rates of unemployment engendered by recession have always meant a reduction in the bargaining power of workers – an opportunity to swing the balance of advantage further in favour of employers that has been too good to miss.

    Recession has also meant that government spending has become an easy, if irrational, target. The constant impetus to privatisation, already powerful as an element in neo-liberal doctrine, has received a further fillip from the supposed need to “cut the deficit” by slashing government spending. So, the support provided by public services is weakened when the disadvantaged most need it, and the opportunities for profit-making and profit-taking by private commerce are enlarged. Again, the rich emerge from adversity with their advantage over the rest of us enhanced.

    Underpinning all of these developments is the article of faith that the “free” or unregulated market can be accurately predicted on the basis of mathematical models and that it is self-correcting and infallible. The acceptance of this doctrine has been a sure-fire recipe for allowing the rich to entrench and intensify their existing advantage. If intervention in the market is to be eschewed, and market outcomes are not to be challenged, the way is clear for those who are already dominant to use their power to grab what they can, all the while proclaiming that no one should complain because that is what the market ordains.

    None of this should be a cause for surprise. These elements have been present, if not overt, in the policies pursued for over three decades by successive governments. While attention has focused on the huge incomes and low tax rates organised for themselves by the rich, it may not have been fully recognised how far their gains are the result of policies that have been part of a coordinated and self-reinforcing pattern, that has had as its deliberate aim the reinforcement of the power of the wealthy to dominate our economy and the weakening of the power of workers to protect themselves. The destructive gap between rich and poor has widened, in other words, because the rich have been able to bend governments to their will and have used their power to ensure that it is so.

    Bryan Gould

    28 March 2013

  • Why Ignoring the Exchange Rate Widens Inequality

    Last week’s report of an unexpected deterioration in our terms of trade adds a further and unwelcome twist to an already distressing story – the damage being done to our productive sector by an overvalued dollar.

    The recent admission by the new Governor of the Reserve Bank, Graeme Wheeler, that the dollar is overvalued is welcome evidence that the issue is at last attracting the attention of our policymakers – and so, too, is the suggestion that the Reserve Bank might restrain bank lending for the purposes of house purchase.

    But we have lived with an overvalued currency for so long that we no longer have a proper base mark by which to measure it. What we can do, however, to establish whether the dollar is overvalued is to ask what we might expect to see in an economy that has been fundamentally uncompetitive over a long period.

    The answer is that such an economy would exhibit 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? If we do not immediately recognise these characteristics as the hallmarks of New Zealand’s economic performance, it is only because of the resolute refusal of our policymakers to think about our loss of competitiveness, let alone do something about it.

    We are not alone in this refusal. Many western countries are reluctant to recognise that the world has changed and that many developing countries are becoming, or have already become, more competitive than we are.

    Yet to ignore our competitiveness problem is to invalidate the whole of our economic policy. It leads us to pay excessive attention to inflation, so that we slam the brakes on at the slightest hint of inflation re-appearing, because our unacknowledged lack of competitiveness makes us rightly fearful of any increase in our costs.

    It means that we dare not – even in a long drawn-out recession – stimulate the economy so as to bring down unemployment, restore public services, reduce the government deficit through buoyant tax revenues and resume a sustainable rate of growth because we know that any growth will simply suck in more imports, worsen our balance of trade and increase our need to borrow. If we were competitive, we could afford to stimulate the economy because the growth would come in the form of exports and investment, not consumption and imports.

    It means that – as all the signs confirm – any recovery from recession will lead us straight back to an overheated Auckland housing market and an import orgy.

    It encourages the delusion that we can somehow improve productivity in a vacuum and that a few more ministerial speeches about it will do the trick. We do not grasp that productivity improvements are a function of competitiveness, not the other way round.

    Most worryingly, our determination not to recognise our competitiveness problem means that we (or at least our government) are – apparently without a care in the world – destroying our future by selling off our productive capacity to foreign owners. The loss of those income streams makes our lack of competitiveness even worse and handicaps our ability to do anything about it.

    And there is another – hitherto unrecognised – aspect of that blind spot on competitiveness that reflects not just ignorance or carelessness but, perhaps, a deliberate bias in favour of the “haves” as opposed to the “have nots” – an aspect that could be an important factor in New Zealand’s widening inequality gap.

    The most obvious remedy for an economy-wide lack of competitiveness is to reduce our costs across the board through bringing down the value of the dollar. That would require everyone to make a fair and shared short-term contribution to the solution of our problems while providing a solid basis for future growth.

    But our policymakers are reluctant to ask the better-off to make that contribution. They seem to be quite relaxed about workers losing their jobs and beneficiaries being targeted. They are quite prepared to force wages down by reducing workers’ rights at work and lowering, in real terms, the floor placed under wages by the minimum wage.

    But they draw the line at a devaluation of the currency that, as part of the effort to reduce our costs, would have the immediate effect of reducing the value, in international terms, of financial assets, and would therefore impose a cost on the holders of those assets, and on financial institutions and banks.

    They are asking, in other words, wage-earners to bear the whole burden of improving our competitiveness, while protecting the value of the assets held by the wealthy. Sadly, such a policy is doomed to fail in terms of improving our competitiveness; but it will certainly be effective in widening the already damaging gap between rich and poor.

    Bryan Gould

    1 March 2013

    This article was published in the NZ Herald on 7 March