• The Voters’ Anger

    The disenchantment of British voters with democracy, we are told, is to be explained by the anger they feel at the failings of politicians. Those failings, it is supposed, are to do with the perception that politicians are “on the make”; but that conclusion – while no doubt partly justified – is surely far from the whole truth.

    The Guardian/ICM poll finding that 50% of respondents chose “anger” as their principal sentiment when thinking of politicians may well conceal a deeper malaise. The scale and depth of public disaffection is, I believe, to be explained by something much more fundamental than the sadly all-too-common instances of politicians breaking the rules governing their “perks” and allowances.

    What is in play instead is a growing realisation that the political class – which extends far beyond the ranks of elected MPs to include the whole of what used to be called the establishment – has failed a country that is now in a state of unmistakable national decline. Those responsible for what passes for serious debate about the state of the nation – and that includes business leaders, the media, civil servants, leading academics and experts, as well as politicians – have contributed to a process that has not only meant manifestly hard times for many of our citizens but also offers little hope of a better future.

    Despite constant assurances that better times are just around the corner, the UK has over the last four or five years suffered the sharpest fall in living standards in over a century. Those who have borne the main brunt of that precipitate decline have been the weakest in our society, for whom the safety net is regressively being withdrawn. Economic decline and social disintegration are now seared deeply into the national consciousness.

    None of the major contenders for government seems to offer anything but further retrenchment. The voters look in vain for an alternative to the current orthodoxy. Labour continues to suffer the burden of the New Labour legacy. The Tories commit themselves to self-harming austerity and promise to make life tougher for the already disadvantaged. The Liberals look for ways of distancing themselves from Tory failure without giving up the fruits of office. Even those voters tempted by UKIP recognise that they offer a counsel of despair rather than redemption.

    Little wonder that voters feel a sense of frustration and anger. They understand that the democratic process has not protected them from national failure and decline and that – although the formal power of decision is exercised by government – the shots are really called by global business interests whose dominance over what actually happens has, if anything, increased as the failure of the policies they enjoin has become more evident.

    What the voters expect from those who govern them is what they expect from any other group of supposed professionals – simple competence. What they see instead is a bunch of amateurs with little understanding of the economy they are supposed to manage and therefore totally at the mercy of political prejudice and vested interests.

    The cure for voter disaffection with democracy is simple. Politicians have to convince the electorate that they are able to abandon a failed orthodoxy that continues to smother new thinking, in favour of a fresh and more positive economic policy – and then deliver on that promise.

    What should be the elements of that new policy? It should focus on real issues and not on imagined problems. It should take as its starting point the need for a sustainable rate of growth which current policy is incapable of delivering.

    It should recognise that decades of comparative failure have left us with a profoundly uncompetitive economy and a manufacturing industry that is on its last legs. We cannot rebuild our productive base for as long as we cannot compete in international markets.

    The loss of competitiveness means that we cannot and dare not grow for fear of ballooning trade deficits and rising inflation. It means that the government’s debt – even while public spending is being cut – will continue to grow faster than the economy as a whole. And while growth languishes, unemployment continues to cost us lost output, acts as a brake on recovery, and undermines our social structure.

    We need to face facts and to engineer an exchange rate that allows us to make a fresh start by immediately improving competitiveness. We need a new approach to monetary policy, treating it not primarily as a means of restraining inflation but as an essential facilitator of increased investment in productive capacity. We need an agreed industrial strategy and new investment institutions to ensure that an increased money supply goes into productive investment rather than into consumption or bank bonuses.

    Above all, we need to restore full employment as the central goal of policy. An economy that offered productive work to everyone able to work, that provided ample finance for those ready to invest in new and competitive businesses, that found ready markets around the world for all it could produce, would not only restore faith in the value of government and democracy; the Labour Party should note that putting such proposals forward might get them elected as well.

    Bryan Gould

    29 December 2013

    This article was published in the London Progressive Journal on 31 December and in Comment Is Free in The Guardian on 6 January.

  • A Sea-change in Economic Policy

    It took a very long time, following the Great Depression, for a consensus to emerge as to what had gone wrong. It is taking world leaders a similarly long time to realise that the Global Financial Crisis was not just an unfortunate, one-off accident, but was the culmination of three decades or more of mistaken economic policies.

    It is significant that it is those economies whose leaders have been slowest to recognise this that have remained most stubbornly in the economic doldrums. But even there, a change of heart is under way.

    The euro zone is the most obvious example of a refusal to learn the lessons. But the IMF has, over recent months, changed its mind and made it painfully clear that austerity for Greece and other euro zone economies is not the answer and that a more flexible policy, allowing debtor countries to grow their way out of debt, is now required.

    And the UK, still mired in recession and committed to austerity, has nevertheless experimented with quantitative easing (or printing money), while the incoming governor of the Bank of England, Mark Carney, has already indicated his interest in adopting a nominal GDP target rather than inflation as the preferred goal of monetary policy.

    Leading British monetary economists like Adair Turner and Michael Woodford are publicly debating which precise mechanisms of both fiscal and monetary policy will be most effective in improving liquidity for business; they recognise that the quantitative easing practised so far has had the effect of merely strengthening the banks’ balance sheets.

    Elsewhere, change is even further advanced. President Obama, in the face of determined and obstructive opposition from his Republican opponents, has succeeded in pulling the US economy out of recession and back on the road to recovery – and here, too, the Federal Reserve continues to stimulate the economy by systematically increasing the money supply.

    Perhaps the most dramatic shift in policy has occurred in Japan, where Shinzo Abe’s government has abandoned the restrictive policies of the last decade or so and has reverted to the kind of expansionary policy, based on credit creation for productive investment, that served the Japanese economy so well in its rapid growth phase of the 1960s and 70s.

    Then, there are of course the most successful economies – like China or Singapore – that have in their different ways always eschewed the Anglo-American insistence that the market must always prevail and must never be second-guessed by government. They have demonstrated that business does best when macro-economic policy provides them with an environment that is conducive to economic development.

    Even in Europe, the most successful economies are those, like Germany and Switzerland, whose governments have ensured that their industries are not handicapped by factors, like overvalued exchange rates, that make them uncompetitive in world markets.

    Here in New Zealand, our leaders seem oblivious to these developments. We seem to think that we have nothing to learn from other – and generally more successful – economies. We tell ourselves – as we sink back into our old failings of an inflated Auckland housing market, and increased spending on imports made artificially cheap by an overvalued dollar (with the consequent harm to our own producers, and a larger trade deficit that has to be financed by more borrowing and asset sales) – that we must not waver from applying the same old mistaken policies.

    We have such a short time-span that we refuse to ask ourselves how it is that – over three decades – other economies have done so much better. We are so far removed from any rational debate on these issues and so focused on deficits and public spending that we scarcely recognise the terms, let alone the policies, that are adopted as a matter of course by the new powerhouses of the world economy.

    Those economies focus on issues that are of crucial importance, like competitiveness and liquidity, manufacturing and an industrial strategy, full employment and productive investment – words that scarcely feature in our economic discourse.

    While the Swiss and the Singaporeans target competitiveness so that they can sell everything they produce at a profit, we pay the issue no attention. While the Japanese and Americans quite consciously use monetary policy to bring their currencies lower, we do the reverse. While the Chinese ensure that their industry is constantly supplied with credit-created capital so that they can both invest in and buy new capacity (how else do you think they can afford to buy up so much of others’ economies?), we focus on cutbacks and putting people out of work. While the Chinese, Japanese, Germans, Singaporeans, and many others give their primary focus to manufacturing, we are content with a narrowing productive base in primary industry and selling off whatever remains.

    But even here, change is afoot. The report on manufacturing, published by the opposition parties, is a belated recognition that we cannot go on as before. And there is a glimmer of hope even at the Reserve Bank. The new governor at least seems to understand that the overvalued dollar, the fall in saving and rise in imports, and the Auckland housing bubble are danger signals. The solutions are available, if only we care to look.

    Bryan Gould

    18 June 2013

  • 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