• Animal Farm

    In George Orwell’s Animal Farm, the pigs who have taken over the farm from their former human masters explain the policy of the new administration to the other animals in a simple slogan – “Four legs good, two legs bad”.

    John Key’s second-term government has, it seems, adopted an equally simple-minded and misleading slogan to underpin its policies. As the decisions over TVNZ7 and Kiwi FM demonstrate, the rationale seems to be “Commercial good, public service bad”.

    The loss of TVNZ7 is, as many would testify, a major blow. As a former TVNZ board member, I saw the channel as the last bastion of public service television. Despite the onerous nature of the combined commitment to make a commercial 9% return for the government shareholder and at the same time to meet the requirements of a public service charter, TVNZ succeeded for a time in using those apparently conflicting objectives to support each other.

    TVNZ adopted as its Unique Selling Proposition that it was, by virtue of the charter, the guardian and expression of the national identity, the first port of call for serious and reliable coverage of events of national significance, the keeper of the national memory; it was where people turned when they wanted to share the experiences that mattered with their fellow-citizens. The sense that TVNZ possessed an extra dimension that made it different from its commercial rivals allowed the state-owned broadcaster to boost its audience and command a premium in advertising rates.

    When the government decided that the charter should be abandoned, TVNZ7 was all that remained of the public service ethic and tradition. Its demise has left New Zealand alone amongst advanced countries in having virtually no public service television broadcaster.

    The one exception is of course Maori Television, and that exception is itself instructive. Maori Television costs the taxpayer more than three times TVNZ7’s price ticket; but not for the first time, Maori have identified and been able to demand from the government something better than the government is prepared to provide to the rest of us.

    The government’s preference for commercial over public service broadcasting is shown clearly by the decision this week to help Australian-owned MediaWorks by extending Kiwi FM’s free use of a radio frequency reserved for public service radio. This concession comes on top of major financial help provided to Media Works (remember the $43 million government loan guarantee?) and the watering down of Kiwi FM’s commitment to broadcast 100% of Kiwi music.

    We can see in this generosity to commercial broadcasters the influence of the Minister for Everything, Steven Joyce, who may not have the broadcasting portfolio but whose experience of owning and running a successful commercial radio company is clearly the dominant factor in determining policy in this area.

    It comes on top of a growing number of instances where the government has deliberately turned its face against public service in favour of commercial undertakings. Ministers seem to believe that the only motivation that counts is the drive to make a profit. From running prisons to diplomacy, legal aid to accident insurance, right across the whole breadth of provision, the government sees the bottom line as the only measure that matters.

    We see the same mentality at work in another news item this week. The threat to the survival of courts in small towns is further evidence that nothing matters other than reducing public spending. The cohesion of community, local knowledge, the convenience of those caught up in the justice system, none of these things have any value.

    It is not as though any money will be saved if these court closures go ahead. It will simply be that costs will be transferred from the public to the private purse. Any savings to the government would be more than offset by the increased cost and inconvenience to individuals of having to travel greater distances – a classic case of the “externalising” of costs so much favoured by the proponents of the “free market”.

    And this comes on top of a week in which we have been invited, in the pages of the Herald, to celebrate the proposition that we now have not so much a Prime Minister as a “Chief Executive”. That, we are told, is why we are blessed with such commercially brilliant policies as selling off our public assets and their income stream so that our government can spend the one-off proceeds.

    Let us leave to one side the question of whether the short-term (not to say overnight) time horizon of a foreign exchange dealer is the kind of commercial experience that is needed to run a national economy. The whole point of democracy, surely, is that the electorate is able to use its power at the ballot box to ensure that a range of views, and not just those of business, is brought to bear in governing the country.

    The irony is that the narrowness of the business mentality is increasingly seen by commentators across the world – in the wake of the global financial crisis – as a handicap in trying to run a successful business, let alone a country. Do we really want a government that cannot see beyond the private profit motive?

    Bryan Gould

    2 July 2012

  • Do Businessmen Know It All?

    I was for a time the Shadow Secretary for Trade and Industry in the British Shadow Cabinet and, in that capacity, I frequently met business leaders. I was often surprised at how little they knew about the world beyond their businesses.

    So lacking in confidence on this score were some of them that they made some young friends of mine very rich by paying them large sums of money for the privilege of being introduced to supposedly important people who would have been happy to meet them anyway.

    All this is of course in marked contrast to today’s conventional wisdom that businessmen (and it usually is men) are the only people who are competent to decide almost anything. It is assumed not only that they know about business but that their business skills are essential for the resolution of otherwise difficult issues in every sphere of activity.

    It is not that they are assumed to know everything – far from it. It is just that they are believed to know all – little though it is – that is necessary.

    I was reminded of this by last week’s report that ambassadorial posts are to be advertised with a view to opening them up to a kind of competitive process. It is apparently no longer enough to graduate with a good degree and to be accepted against strong competition into the diplomatic service, to have gained years of experience and to have developed special knowledge and skills in foreign languages and international politics, and to have spent a good part of one’s life serving one’s country in sometimes difficult and even dangerous posts overseas.

    These qualities are not what we are now looking for. Anyone, it seems, can be a diplomat. Careful analysis, subtle judgment, accurate reporting, the ability to gain the confidence of people of different cultures and politics, are all beside the point. What is needed instead, apparently, is the ability to focus on the bottom line, to secure a proper return on capital, to cut costs and generally to bring the sharp lash of business realism to bear.

    I am a former diplomat myself and it may be thought that I am reading too much into this; but I can think of better ways of maintaining professional standards and morale if we want an effective diplomatic service. The Americans have for many years of course treated an ambassadorial post as a quid pro quo for financial contributions to political campaigns – and much good it has done them.

    But it is not just the diplomatic service that is in the firing line; it is only the latest bastion to fall to the cult of the omniscient businessman. From public service broadcasting to running prisons, from providing health care to protecting the environment, there is virtually no aspect of our national life that would not benefit, it seems, from being run as though it were a business. We scarcely have a public service any longer, so numerous are the highly-paid consultants who now compete for the work.

    Everything must be justified on purely business grounds. We are no longer citizens, but (if we’re lucky) shareholders – no longer people, but units of production. Workers in any case do not count; the business people we are invited to lionise do not include those who merely work for a living, since it is making money, not earning a living, that is held up as the pinnacle of achievement.

    Who cares whether there is any understanding of the complexities of conducting foreign relations, or of providing justice to the victims of the Pyke River disaster, or of the value of a national broadcaster in underpinning and helping to shape our own national identity? Who bothers with social, cultural and environmental goals, when everything revolves around the short-term return on financial investment? The only people who need to be satisfied are the accountants; the only measure that matters is the bottom line; nothing else is of value.

    We see the syndrome at its most virulent in the constant assertion that our economy must be run as though the country is a business. It follows that businessmen alone are equipped to make the important decisions. Nothing could be further from the truth.

    In hard times, a business will survive by cutting costs, laying off workers, suspending investment plans, delaying paying bills – the whole gamut of self-preservation measures. These are all sensible measures for a single business to take in its own interests. An economy that responds in this way, however, will drive itself into recession.

    Yet, so entrenched is the conviction that businessmen know best, that we continue to listen to individual business leaders who solemnly assure us that, in a recession, retrenchment is what the economy as a whole must pursue.

    No one can doubt that enterprising and successful business people are critical to our national future. Let us ensure that they are encouraged and helped to concentrate on what they are good at (and that they get better at it). But let us also recognise that there are many other facets of a healthy and happy society that do not lend themselves easily to the nostrums provided by the business manuals.

    Bryan Gould

    8 April 2011.

    This Article was published in the NZ Herald on 12 April.

  • Wanted – Directors Who Think

    As the global recession gathers force and pace, spare a thought for our policy-makers. They are trying to confront a crisis whose dimensions they have only belatedly begun to recognise and to do so with policy instruments that the rest of the world has already rejected as irrelevant.

    Relying on monetary policy may have just about seemed adequate when we slipped into our own home-grown recession at the beginning of last year. Notwithstanding that it was that self-same monetary policy that had driven us into recession in the first place, our economic gurus at the Treasury and the Reserve Bank seemed satisfied that a few touches on the monetary tiller, plus the tax cuts offered as an election sweetener by both major parties, would be enough to turn the economy around.

    They were of course shaken, as were we all, by the sight of the world’s financial establishment coming apart. But they comforted themselves, no doubt, with the thought that our own banks and financial institutions (give or take a few dozen finance companies and a couple of billion dollars of people’s savings) were not under threat.

    It has taken them a long time to understand that the global crisis is no longer – or at least isn’t just – a financial crisis. As the unbelievable greed and stupidity of the world’s banking institutions have produced their inevitable consequences for the real economies in which most people live and work, we are now faced with a global economy in which consumer spending, jobs and investment are in free fall – with inevitable pain for a small, vulnerable, export-dependent economy like our own.

    In these circumstances, cuts in interest rates – while welcome at the margins, if only to help redress what would otherwise be an even greater than usual interest rate differential for us – simply will not cut the mustard. Relying on monetary policy in the face of a full-scale, real-live, worldwide recession driven by falling demand is like pushing on a piece of string. While the rest of the world has experienced a miraculous overnight conversion to Keynesian economics and the merits of fiscal stimulus, we are still tracking along as though our own comparatively small-scale recession is all that we have to worry about.

    So, while countries like the US and the UK have put in place huge fiscal packages to try to ensure that their economies do not freeze over altogether, (and that is in addition to the huge sums they have spent on shoring up their banking sectors), and while Kevin Rudd has announced a massive public spending programme in Australia, we continue to rely on taxing and spending decisions that were essentially taken in mid-2008 when they might or might not have been adequate to arrest our own mini-recession.

    As far as further fiscal stimulus to address the reality of global recession is concerned, we are apparently relying on a drip-feed of small measures whose main purpose seems to be to show that our policy-makers are at least doing something, however ineffectual. We are constantly assured that – at just 2.8% of GDP – our fiscal stimulus is among the largest in the OECD. We can only conclude that this calculation was made before the British, American and Australian packages – at several multiples greater than 2.8% – were actually announced.

    Such a cautious approach overlooks the very real point that what is now needed from governments is not just a boost to spending that is appropriate in dollars-and-cents terms, but that also helps to turn round the psychology of deflation and recession.

    One of the main lessons of Keynesian economics, after all, is that economics is above all a behavioural science. Economic issues have a nasty habit of springing off the page of the textbook or the latest mathematical model and biting real people in ways that the theorists do not predict. The danger of deflation is that it feeds upon itself – exactly what it is doing now. The more people take individual decisions to protect themselves against hard times, the more they ensure that those hard times will get even harder.

    As Robert J. Samuelson has argued, we are now entering that phase of the recession where people begin to respond to the “wealth effect”. Just as rising equity in their homes and continuing job security encourage people to go out to spend, so they jam on the brakes when house prices fall and unemployment rises. Samuelson calculates that for every dollar’s fall in perceived wealth, people reduce their spending by 5 cents, and that is enough to build in to the economy a massive deflationary impetus.

    An important part of government’s role, in other words, is to show everyone that effective, immediate, large-scale action is being taken – action that will put more money in people’s pockets and give them the confidence to go out and spend it. If we can’t or won’t do that, we might as well all hunker down and prepare for the worst.

    So, what should our policy-makers be doing? The first thing they should do is to throw their ideological baggage out of the window and make a pragmatic response to the practical situation that confronts us. They should acknowledge that their first priority is to get the economy moving; there are of course limits as to how far increased spending should push the government deficit, but we are far from having reached them yet. What, after all, was the point of ten years of reducing the government’s debt if we are not allowed to use the fruits of that prudence when they are needed?

    The second thing they should do is take a more clear-eyed and realistic view than they have managed so far of the true dimensions of our problems. That is far from an easy task. They now have to add to their earlier preoccupation with our domestic woes, which now include sharply rising unemployment and a nose-diving housing market, with the much greater international threat posed by collapsing export markets, falling commodity prices, more expensive imports, and more difficult and expensive international credit.

    Drawing up a list of our pluses and minuses shows how difficult a calculation of our true position really is. On the one hand, there are factors at work that offer some better prospects for growth. The cut in interest rates will certainly help those with mortgages by leaving more purchasing power in their pockets. Those looking for bank loans will benefit, provided they are willing to borrow in the first place. And lower interest rates have partially corrected the dollar’s over-valuation that was the single most damaging aspect of our monetary policy over more than two decades. At least our exporters can now approach export markets without both hands tied behind their backs.

    The world recession has seen a marked fall in oil prices (only partially reflected so far in prices at the pumps), so that disposable income is no longer so greatly absorbed by fuel costs. The world will still need food, so that our commodity prices, though having fallen back from their peak, may still stay comparatively strong. Reduced emigration and a flow of returning ex-pats might help to stabilise the housing market and add a margin to retail sales. Tax cuts, those delivered last October and those yet to come in April, will help consumer spending. The relatively small public spending programme so far announced might still save a few thousand jobs. And tight conditions in retailing should help to put a lid on price increases.

    But for every glimmer of hope, there is a weightier reason for apprehension. Domestic interest rates might come down further, but the interest rate differential between us and other countries will be largely unaffected, and the high proportion of domestic lending that is financed from overseas will soon reflect the greater cost of borrowing from overseas sources. And, as we have already seen, mortgage rates don’t necessarily fall as fast as the OCR, and even when they do, they don’t necessarily revive a dying housing market. Samuelson’s “wealth effect” will be felt with a vengeance.

    Commodity prices are bound to fall further, as the recession gathers pace, and we will see more of what the reduced Fonterra payout has already shown us – a multi-billion deflationary shock to our total economy since the heady days of 2007. As well, our food products tend to be at the higher end of the market which will probably be more vulnerable to reduced purchasing power in overseas markets. And although the inflationary effects of a lower dollar are consistently overstated, there is no doubt that there will be upward pressure on import prices, including petrol prices.

    Tight retail conditions might rein back price rises, but they will also reduce margins and increase closures and job losses. Higher unemployment, and the fear of more of it, will cut consumer spending. And the whole of this deflationary momentum will be supercharged by the growing impact of what is happening overseas, and particularly in those export markets that matter most to us. Fisher and Paykel’s tribulations are just the start.

    The third requirement is courage. Having focused, without ideological preconceptions, on the job in hand, and having made a clear assessment of the scale of the challenge, we should then look for a response that matches the needs of the moment. So far, that response has been too late and too small.

    Yet, we might perhaps feel a twinge of sympathy for our policy-makers. They face the most difficult economic situation of modern times. And, like each individual, and especially each individual company and company board, they face the perennial challenge posed by recession – that the actions that each individual are most likely to take in their own interests are precisely the actions that will intensify the recession.

    It is at this point that we need to be strong-minded and to be clear about who is responsible for what. No one should be dissuaded from thinking about the wider picture, but the responsibility of directors remains primarily to the company whose fortunes they help to direct. It is for governments to look after the economy as a whole and to work for an economic context in which companies can thrive.

    That is not to say that directors need do nothing in this regard. While keeping their eyes firmly fixed on the interests of their own companies, they should not shy away from expressing a view about how economic policy should be developed. This is a time for business leadership with the courage and wisdom to understand the context in which they are operating. For too long, directors have gone along with a view of how economies should be managed which we can now see was mistaken and which has led us to our current plight. We need business leaders who are less preoccupied with ideology and more aware of the real world.

    We must never again make those egregious mistakes that were scarcely ever challenged by business leaders over two or three decades. It is not the case that markets work best if they are left unregulated. It is not the case that governments should be kept at arm’s length from economic policy. It is not the case that growing imbalances in the global economy have no adverse consequences. It is not the case that economies need only small technical adjustments of monetary policy and that fiscal policy is too risky and too interventionist to be used. Nor is it the case that the important decisions in the economy can be safely entrusted to bankers who will pursue the wider interest rather than their own.

    We need, in other words, boardrooms that will not only do their best for their companies but will also make a proper and thoughtful contribution to the wider public debate. There is no shortage of business leaders who do precisely that. They are directors who do not necessarily follow the herd by adopting the prevailing orthodoxy. They do their own thinking. We need more of them.

  • Another Alternative

    Successful managers act when it becomes evident that change is needed – and that is just as true of managers of the economy as it is of those who manage individual businesses. The evidence is now mounting that the creation of a single global economy has produced results, for both the global and national economies, that are far short of optimal. The time has surely come to consider that evidence and respond to it.

    In a single global economy, the herd mentality of international investors means that they all chase the same opportunities, imposing unrealistic expectations on the recipients of investment capital, disabling those who are denied it, and creating a lurching stop-start process for the global economy as a whole.

    That is why the last 25 years have been marked by a series of crises (particularly in Asia, South America, and Eastern Europe), by huge flows of “hot money”, by widening imbalances between rich and poor countries (the poor have actually got poorer), and by a dangerous dependence on the willingness of the rest of the world to finance an unsustainable American deficit. That is why, too, commentators like Joseph Stiglitz, Paul Krugman and even George Soros, are leading the charge for a reform of the world’s financial institutions and the way they operate.

    There has so far been less interest in changes that might be introduced at the national level. Yet the results of globalisation have been just as damaging for national economies like New Zealand as they have for the global economy as a whole.

    New Zealand has been one of the most enthusiastic participants in the global economy – but, given our small size, the results have been all too predictable. A bigger proportion of our economy is owned overseas than in almost any other advanced country. Repatriated profits and the high interest rates needed to finance our current account deficit weigh heavily on and inflate that record deficit. Most important commercial, industrial, investment and employment decisions are now made in overseas boardrooms. Wage rates are forced down to meet Chinese benchmarks. The insistence by overseas owners on “externalising” costs means that we have less capacity to make necessary social, environmental and infrastructural investment. Economic inequalities have widened dramatically.

    International investors demand that the fight against inflation should be entrusted to a monetary policy that commits us to an interest rate and exchange rate roller coaster. Yet, while manipulating interest rates is less and less effective as a means of restraining inflation (particularly in the housing market), an overvalued exchange rate and the high interest rates needed to sustain it continue to inflict their familiar damage on the productive economy on which our prosperity depends.

    There is no shortage of possibilities for changing tack. The issues are political, not technical. What is needed is the courage to buck the current orthodoxy. Fiscal policy, both to regulate demand and to influence the patterns of saving and investment, would help us to control inflation, while helping rather than damaging the real economy. Selective credit controls, investment incentives, and savings schemes would help stimulate domestic investment and increase New Zealand ownership and control over our own economy. Requiring more responsible performance and a greater commitment to New Zealand from overseas investors would limit the transfer of decision-making power from our political and business leaders to overseas boardrooms.

    No one is suggesting putting up the shutters. But, if we are to escape the policy dead end in which we are now trapped, improve our long-term economic performance, and restore a proper degree of democratic self-government, then we must surely reclaim – in conjunction with other like-minded countries – control of our own economic destiny, before it is too late.

    Bryan Gould
    9 December 2006

    This article will be published in the February issue of Management.