How Did We Come to This?
How did we come to this? When did New Zealanders become convinced that the care of the most vulnerable in our society, and particularly of those suffering mental illness and disability, should be treated as an opportunity to make a profit rather than as a community responsibility?
Nothing more clearly demonstrates the mindset of the government we re-elected just a few months ago than this stark assertion that it is the quest for money that alone motivates us. We now know beyond doubt that our government is convinced that the only way to persuade people to care for others is to encourage them to make money from other people’s desperation.
There will, of course, be those who will respond immediately with the argument that – distasteful though it may be – it is simply a recognition of what really drives people, and that we should welcome anything that produce better outcomes, however they are motivated.
Those of us who still retain a belief in the inherent attachment of New Zealanders to this country’s traditional values will reject that argument. But even if we were to overlook the moral bankruptcy of such a contention, we would still be entitled to show that the basic premise that we will thereby get better provision has no foundation.
We are by now familiar with the consequences, in many areas of our public life, of entrusting important interests to the tender mercies of those whose sole interest is the search for profit. Is Sky City concerned about the damage to problem gamblers from more pokies and gaming tables? Is Petrobras worried about the impact on our marine environment of deep-sea drilling off our coast? Was Pike River alert to the need to look after the safety of their miners?
We know from experience that the first concerns to fly out the window when the profit motive is at stake are the well-being of others, service to the community, and the conservation of scarce resources.
That lack of interest, let alone concern, for wider community values becomes more marked, the further removed the profit-seekers are from the impact on the ground of their actions for other people. If the extent of the investor’s involvement is that he or she puts in some money and then waits for the regular and promised payments, but never has the need or even opportunity to see what activity in practice actually generates those payments, it is simply unrealistic to believe that there will be much interest in whether or not a particular service is properly delivered.
The only concern will be as to whether the conditions that are specified in order for the payment to be made have been met. And it is here that the government’s experimental model really breaks down.
The government’s case for taking this action, after all, depends on their claim that the current models, involving either their own staff in the Ministries of Social Development and Health or the purchase of services from approved voluntary bodies, does not adequately guarantee that the required services are fully delivered.
That is presumably because the government has trouble in accessing sufficiently reliable information as to the level at which those services are provided. They have presumably discovered that a comforting report that certain goals have been achieved does not always accord with the facts.
Yet, if that is the case, it is hard to see how removing the government even further from the action, and interposing a range of private investors with literally no interest other than their regular payments in the quality of those services, can be expected to improve matters.
If the public servants and voluntary bodies that are directly involved cannot be trusted to provide reliable information about the services that are provided, what makes ministers think that a certificate provided to authorise payment of interest on a bond to a virtually anonymous investor will be any more reliable?
If the government is so suspicious of the reports it receives about the quality of services being delivered, it is hard to see that changing the method of funding those services can address the problem. Indeed, it is likely to become worse, since the pressure will be on from investors to ensure that, whatever the level of service actually provided, the reports will show that the required outcomes have been met.
And if there is a real issue here, and there are proper safeguards to ensure that stipulated outcomes are in fact achieved, so that the regular payments are not always guaranteed, what makes the government think that investors would tolerate that uncertainty and would buy the bonds anyway?
The case for this experiment in other words has nothing to do with better services or even just better value for money. It has the great advantage that it gets another tranche of public spending off the government’s books and helps to reduce the deficit. And it rests on a visceral conviction – or, if you prefer, a gut feeling – that making a profit, whatever the context and the wider outcome, should always be supported and is always worthwhile. It has, the government seems to be saying, an intrinsic value all of its own, and trumps all other considerations.
Bryan Gould
2 June 2015.
Nothing to Lose But Our Fears
The aftermath of election defeat for Labour has been marked by the familiar combination of soul-searching and mutual recrimination. The remnants of New Labour bemoan the supposed failure to address the concerns of middle-of-the-road voters, and point to the lessons they believe should be drawn from Tony Blair’s three successive election victories.
Those who would prefer to disown the Blair legacy counter with the argument that Eds Miliband and Balls conceded too much to the Tories and did too little to establish their credentials with traditional Labour voters who accordingly failed to turn out in sufficient numbers.
It is certainly true that a number of familiar factors contributed to the Labour defeat – among them, the huge disparity in financial resources and media support enjoyed by the Tories, and the perennially lower turnout by disadvantaged voters. We can add by way of explanation some issues that were peculiar to this election, among them the collapse of the Liberals, the SNP’s exploitation of the discredited and moribund state of the Scottish Labour Party and the successful gerrymandering of the electoral roll and consequent disenfranchisement of mainly non-Tory voters as a result of the Electoral Registration and Administration Act of 2013.
But none of these factors – familiar or otherwise – helps very much in deciding where Labour should go from here. As those behind cry “Forward!”, and those before cry “Back!”, the dilemma for Labour is that one thing is clear – there is little future in simply waiting for the voters to tire of the Tories. History tells us that that can take a long time.
The options that are regularly recommended – returning to Labour’s core support (declining as it is) on the one hand or posing as Tory-lite in the contest for the centrist vote on the other have little to commend them, either in principle or practice. There is no point in fighting the next and future electoral battles from either of these stances (or more typically from a confusing attempted combination of the two) when there is no reason to expect that they will produce any better result than they have done in the past.
What is surely needed, rather than simply repeat failed strategies, is a game-breaker, not in the sense of some hitherto undiscovered silver bullet, but in the form of some genuine new thinking that breaks free from the neo-liberal consensus that has in effect imprisoned the left in an intellectual straitjacket for three decades or more.
Both those who would go forward and those who would go back reflect thinking that is the product of a debilitating lack of intellectual self-confidence. Those who would take refuge in the past are happy to bemoan the consequences of Tory policies but have no convincing alternative analysis or prescription to offer. They dare not admit it, but they are terrified that if they are seen to depart too far from neo-liberal orthodoxy they will be exposed as having no clothes.
Those who argue for a move towards the centre are more likely to admit that – at heart – they see no option but to accept the Tory programme. Their hope is that they can persuade the voters that they are nicer people and will deliver that programme more compassionately. The voters prefer those whose hearts are in it.
Both of these apparently polar opposite positions, in other words, implicitly acknowledge the immoveable centrality of the Tory approach. Sometimes, that concession is explicit, as in the commitment to giving priority to reducing the government deficit. In any event, the defeatism at its heart communicates itself with deadly effect to an electorate that does not need much persuading that Labour does not deserve their confidence.
The paradox is that the Labour leadership (not just in Britain but elsewhere in the English speaking democracies as well) are so paralysed by fear and lack of confidence that they have failed to notice that the world has moved on. All the major central banks have abandoned the cautious conservatism of conventional monetary policy. The IMF has turned its back on austerity as a proper response to recession. The OECD says that inequality is not the price that has to be paid for economic efficiency but is a major obstacle to that efficiency.
Other countries have shown how living standards higher than our own can be raised still further through an appropriate policy mix. The way is open to learn from them and to offer the British people a new approach to running the economy – one that does not require us to choose between social justice and economic efficiency (or, for that matter, between Labour’s core values and Tory “aspiration”) but that recognises that we will all be better off if we give proper value to all our citizens and to the contribution they can all make to the general welfare. There is no mystery as to how this can be done if we only open our eyes; the necessary policy levers are just waiting to be pulled.
Working people – and that means most of us – have nothing to lose but our fears, and principally a fear of abandoning an orthodoxy that is no longer fit for purpose in a modern democracy. As to precisely what alternatives should be adopted, why not at least begin to think about them? They are not in short supply.
Bryan Gould
24 May 2015.
Budget Blues
Twenty five dollars a week can’t be bad, can it? For families on the breadline, it’s surely better than nothing and every little helps. And when the total spend is $790 million, that’s not peanuts, is it? – even if multiplying $25 up to this total should surely tell just how many qualifying families there are and just how widespread family poverty is in today’s New Zealand.
The increase in benefits has of course captured the headlines and is apparently a master-stroke of so-called “compassionate conservatism” in disarming those critics who have complained about widening inequality and deeply entrenched poverty. Most people will not notice or care that it is chickenfeed by comparison with the handouts made to the rich under the current government. It is easy, after all, to get one’s head around twenty five dollars a week – not so easy to comprehend the billions of dollars that have been siphoned off for the benefit of the government’s wealthy supporters.
And memories are short. Who now recalls the cuts in top-rate income tax that were worth billions to our top earners? Who remembers the hike in GST rates that transferred so much of the tax burden away from income tax and on to spending – ordinary everyday household spending, the kind of spending that accounts for every cent of a poor family’s income?
And who registers, even today, as the drums are beaten for the paltry benefits increase, that it will have been paid for, when it comes into effect next April, by tax rises such as the airports tax, by the removal of the $1000 incentive to join KiwiSaver, and by the heartless tightening of the benefit rules that will force solo mums back to work on their child’s third birthday?
And who understands just how much more significant than a few dollars a week per family in poverty are the powerful macro-economic forces at work – the forces that determine who gets the benefits and who pays the price for what happens in the wider economy? Let’s take as an example the rate of unemployment – still at nearly 6%, stuck there stubbornly because of the priority the government has given to getting its own books back in balance rather than getting the country back to work, and still understating the true rate of joblessness by counting every part-time one-hour-a-week employment as a job.
Who benefits and who loses from this historically high rate of unemployment? A pool of unemployed helps employers of course by keeping wages down since there will always be those ready to step into low-paid jobs if those in them ask for a wage increase. The low-paid, and those who are increasingly long-term unemployed, pay the price and have no chance of breaking out of the poverty trap – and twenty five dollars a week is a cynically contemptuous price-tag to place on their unwilling sacrifice
And who pays the rising rents generated by the housing affordability crisis? Or the soaring power bills as the result of privatisation? Are they to be met from twenty five dollars a week? Who benefits, on the other hand, from the extravagantly increased value of the equity in Auckland houses which rises on average by $80,000 a year – or nearly $1600 a week – without the owners doing anything? That $1600 a week would certainly make a difference to families in poverty expected to be grateful for the $25 that will, we are told, give them a better life.
And where do the $4 billion of bank profits exported to Australia each year come from? Could they have something to do with the ever-increasing lending that drives the rise and rise in Auckland house prices? And we haven’t even begun to look at the huge tax breaks handed over to Rio Tinto Zinc or Warner Brothers, or even the comparatively trivial $6 million gifted to a Saudi businessman to keep him sweet. But the pattern is surely clear. The widening gap between rich and poor in New Zealand has not arisen by accident. It is not an objective moral judgment, handed down by the market gods, that rewards the hard-working and punishes the feckless. It is instead the direct result of the way our economy is deliberately run.
Some people, it seems, matter more than others. They deserve, we are told, to get richer. There are others – with low-paid jobs or no jobs at all, with poor health, unhealthy and overcrowded housing, low educational achievements – who slip under the radar, and have little chance of getting the economy to work for them. But when the polling shows at last a rising level of public concern about children growing up with blighted life chances, about families in poverty whose plight makes us all poorer, then $25 dollars will do the trick, won’t it? We can all relax.
Bryan Gould
22 May 2015.
Teaching the Facts
In the real world, supposed economic certainties are fast dissolving. All the major central banks have adopted one form or another of “quantitative easing”. The IMF has reversed its advocacy of austerity as the proper response to recession. OECD research shows that widening inequality is not the price that must be paid for economic efficiency but is in fact an obstacle to that efficiency.
And, perhaps, most significantly of all, the Bank of England concedes that 97% of all the money in circulation was created by the banks out of nothing, and most of that took the form of lending on mortgage for house purchase. Indeed, they do more than concede – they explain in convincing and irrefutable step-by-step detail exactly how that process of money creation occurs.
In the academic world, however, things are different. The neo-classical certainties taught in the early 1980s by excited young dons and lecturers, convinced that they were privy to a brand-new approach to economic policy, are still being taught by grizzled veterans. A whole generation of students have been taught economics, not as a social science, but as a simple branch of business management and as a celebration of the “free market”.
They are believers. Their faith is not to be shaken by global financial crises and recession, still less by the apostasies of those prepared to evaluate doctrine against outcome. And they have their bibles. Huge numbers of students doing economics and MBA courses over the past thirty years across the globe have placed their faith in best-selling and apparently authoritative text-books, written by prominent professors in the best universities.
So secure are their beliefs that they bother little with anything new or different. They don’t keep up to date with the latest thinking and writing. Teaching is much easier if it is just a matter of pointing students to an unchallengeable and long-established text.
One such text is a book that is probably the best-selling book on economics across the globe. It is written by N. Gregory Mankiw, a professor at Harvard, with two New Zealand co-authors for the New Zealand edition, which is called Principles of Macro-Economics in New Zealand. It is the book currently used in New Zealand universities.
The book explains the banking function as follows: “Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. The term financial intermediary reflects the role of these institutions in standing between savers and borrowers.” It includes banks in the definition of financial intermediaries.
This is a standard description of what is often called the “loanable funds” role of the banks in providing finance to borrowers. It postulates that the banks merely put savers and borrowers in touch with each other and charge a small fee for doing so. It is devoutly believed by 99% of those who have been taught economics over the past 30 years (and that includes, no doubt, most bankers and economists, including a former governor of the Reserve Bank of New Zealand, as well as academics). It is accordingly almost never challenged. It is also totally wrong.
The money that banks lend has virtually nothing to do with the savings deposited with them. The volume of their lending, which goes on rising hugely year on year, is many times greater than the sums deposited with them, and is the result of a power that banks, alone amongst “financial intermediaries”, possess – the power to create new money out of nothing by making a bank entry that becomes a deposit (and therefore spendable money) in the account of the borrower.
This point has of course been well-established on many occasions in the past, and has recently been most authoritatively re=asserted, as noted above, by the Bank of England. It is of the utmost importance. It is the most significant single element in the consideration of monetary policy and its truth invalidates almost all of the macro-economic policy we currently apply.
The statement by N. Gregory Mankiw and his co-authors therefore cannot stand. But, when one of our leading universities, which uses the book as the basis of its teaching, was asked to correct it, they declined not only to do so, but even to consider the matter.
They mounted a number of excuses. Professor Mankiw was a noted authority and not to be challenged. Views that differed from his were merely theories or alternative interpretations. And – most surprisingly – academic freedom allowed them to teach whatever they liked, even if it was wrong.
Let us be clear. There is no room for equivocation in describing the banks’ function and their hugely important role in monetary matters. Either they are mere intermediaries or they are not. The undeniable facts – now well attested to for anyone who cares to look – show that the banks have become by far the most important creators of new money in our economy.
It is surely the role of our universities to teach what they believe to be true, to stay abreast with how that truth might be established, and to correct error when it is discovered. If they do not, can we wonder that the study of economics is in such a parlous state and that students round the world are protesting that their economics courses do not take account of the real world?
Bryan Gould
13 May 2015
Note for British readers: The Mankiw textbook is widely used in the UK too, and the issues discussed here are equally relevant there.
How the Election Was Won
Democracy is a messy and unpredictable business. The response to the British general election may well be to shrug one’s shoulders – and perhaps to enjoy the discomfort of all those pollsters and pundits who got it wrong. Perhaps the popular will is harder to read than we thought.
Or perhaps not. Perhaps what we have seen is a demonstration that the popular sentiment on political issues can be manipulated; after all, we have now seen a series of election results around the globe – in Australia, New Zealand and the UK – which have produced similar results following the use of similar techniques.
Those results have meant the election – and in some cases re-election – of right-wing governments which have used remarkably similar strategies. The pattern is now well established.
The first technique is a relentlessly sustained assault on left-of-centre rivals, focusing not just on their supposed disunity and incompetence, but even more specifically on the ground that they are extremist, left-wing (now used exclusively as a term of abuse) and financially irresponsible.
So, in New Zealand, a Labour party that in government produced eight successive surpluses is compared unfavourably in terms of economic competence to right-wing successors who have presided over six successive deficits.
In the UK, a Labour government that had to pick up the pieces following a Global Financial Crisis created by “free market” excesses and irresponsible banks is blamed for the unemployment, falling living standards and increasing poverty brought about by the austerity policies pursued by their Tory successors.
The second technique is to talk up, with equal relentlessness and disregard for the facts, the supposed successes of incumbent right-wing governments. So, a New Zealand economy that suffers a sustained trade deficit, a dangerous dependence on a single commodity price, an unsustainable bubble in its most important housing market and an overvalued dollar that destroys jobs, profits and investment in the productive sector is regularly described as a “rockstar”.
Similarly, a UK economy whose supposed recovery is based shakily on asset inflation and an unsustainable consumer boom that has still not ended the longest and deepest fall in living standards in modern times is celebrated as a triumph for the policies of a Tory government that remains intent on piling more misery on the most vulnerable.
These techniques, depending as they do on the simple and repeated assertion that black is white, cannot succeed of course without the willing connivance of large parts of the media and the business community. That connivance is regularly forthcoming and allows right-wing parties to avoid what would normally be expected in a properly functioning democracy to be a proper level of scrutiny.
So far, so expected. But there is another aspect of the ease with which the right wing establishes its version of events in the public mind that may be less expected and that certainly attracts little attention. That aspect is the supine attitude of left-of-centre parties in responding to the assaults made on them by their rivals.
So, in both the UK and New Zealand, Labour parties have made little effort to defend the economic record of Labour governments. They have on the whole preferred to remain silent on such issues, as if doubting their own ability to mount the obvious counter-arguments and as if resigned to an inability to win an economic argument.
Indeed, they have gone further in allowing their opponents to set the economic agenda. So cowed have they been by the attacks on their economic competence that they have hastened to assure the voters that they will be just as tough as the Tories in cutting public spending and deficits and just as heartless in sheeting home to the beneficiaries and the unemployed the responsibility for restoring balance in the public finances.
These attitudes have been made quite specific. In both the UK and New Zealand, Labour parties have gone out of their way to proclaim their over-riding commitment to cutting the deficit, thereby validating in the eyes of the public the improbable Tory proposition that this must be the prime goal of policy. It was at that point that the election was lost.
It was this eagerness to embrace Tory doctrine that made it impossible for Labour oppositions in either country to argue convincingly that, accepting as they did the same policy framework, they could be expected to produce different and better outcomes. Little wonder that the voters opted for the devil they knew.
The siren voices are at it again. Instead of learning the obvious lesson – that Labour wins only when it is seen to offer what the British people most crave, something fresh and full of hope and ambition – the Blairs and Mandelsons urge that Labour should become even more like the Tories. At a time when even the central banks and the IMF have abandoned their support for retrenchment and austerity, and neo-liberal orthodoxy is seen as a busted flush, Labour is advised to show no interest in a brave new world but to cower in a craven old one.
Lynton Crosby may have a lot to answer for. But at least he knew what he was doing and achieved what he wanted. Even so, he may not have succeeded if Labour had not been running scared.
Bryan Gould
11 May 2015