Doing What The Big Boys Tell Us
It is surely now clear that this government sees our economic future as being dominated by big international players.
Little account is taken of the “little people” – the unemployed, the low-paid, the wage-earners, and their families – or of their contribution, both actual and potential, to a successful economy. Otherwise, the government would not be so relaxed about the numbers unemployed, or struggling to make ends meet in low-paid jobs with little or no job security.
Nor do small and medium enterprises figure largely in the government’s view of what makes a successful economy. Otherwise, they would not dismiss the plight of small manufacturers and exporters, burdened by an overvalued currency and the low level of demand.
No, the government pins its hopes of getting the economy moving again on persuading big international investors to favour us with their attention – and John Key seems ready to bend over backwards to close any deal that is offered, whatever its terms.
We have already seen how far the government is prepared to go. Warner Brothers didn’t even have to break sweat to get a $67 million tax concession and a change in employment law that reduced the rights of New Zealand workers.
Sky City was able, in a “negotiation” that excluded other options, to extract an increased number of pokie machines in return for building a convention centre which will deliver to them substantial economic benefits anyway.
But, as Ronald Reagan used to say, we “ain’t seen nothing yet.” The government is really pinning its hopes for foreign investment on drilling and mining – and it is leaving no stone unturned in its determination to make life easy for the big oil and mining companies, whatever price in domestic terms has to be paid.
The evidence for this is too compelling to be ignored. In the last few months, the government has cut the Department of Conservation’s capability with the loss of a further 120 jobs. Changes to the Resource Management Act will allow Ministers to go over the heads of local authorities and permit mining or drilling activities that are “of national importance”.
Large mining firms are permitted to prospect in areas that are environmentally unsafe, as in Northland, and in conservation areas such as Coromandel – and we are asked to believe that this prospecting is being done for fun, with no thought of a commercial return from any discovery of mineral resource that might be made. And the government have learned from the Warner Brothers issue; changes to please big business will now be made in advance and not left till the last minute.
The Prime Minister loses no opportunity to proclaim that our economic future depends on digging up whatever can be found, irrespective of the impact on the environment and on the “clean, green” image we project to tourists. So we can imagine how irritated he was when the Brazilian petroleum giant Petrobras last year pulled out of their exploration off the North Island’s East Coast.
He was even more angry that a protest at sea organised by local iwi and environmentalists had seemed to be a factor in that decision to withdraw, even though the company itself said they had withdrawn because they weren’t satisfied that the prospects were good enough.
Kiwis have a history of supporting protest at sea – against French nuclear tests and Japanese whaling – but John Key is determined that future drilling at sea will not be the subject of protest. That is why in Parliament this week, the government is changing the law to make peaceful protest at sea a criminal offence, and to threaten protesters with fines of up to $50,000 and sentences of up to 12 months in jail.
The proposed amendments to the Crown Minerals (Permitting and Crown Land) Bill break new (and probably unlawful) ground in a number of respects. A protest will be treated as criminal, even though no violence to person or property is perpetrated, and safety is in no way threatened; it will be enough if, in our 500-kilometre exclusive economic zone, the protest “interferes” with a vessel by approaching within 500 metres of it.
The law has in the past protected installations at sea, such as oil rigs, but this is the first time that a vessel (which may be moving around) has enjoyed similar protection; it is clear that this provision constitutes an infringement of the freedom of navigation, in contravention of the UN Convention on the Law of the Sea.
And the restriction on the right to protest should raise concern from all of those who value our civil and political rights. We know, from the measures taken to stop a legitimate protest against China’s policy in Tibet when the Chinese Vice-President, now President Xi, visited us in 2010, how readily this government is willing to abandon our own standards to please powerful foreign interests; these latest measures are in breach of both our own Bill of Rights, which guarantees the right of peaceful protest, and of the International Covenant on Civil and Political Rights.
The government are again prepared, it seems, to compromise our own standards so that powerful overseas business interests can have carte blanche.
Bryan Gould
7 April 2013
This article was published in the NZ Herald on 10 April.
The New Muldoon
In August 2011, the Herald published a piece of mine in which I warned that John Key was in danger of posing, by virtue of his dominance of both the political process and the media, a Muldoon-like threat to good government and accountability. Today, in the light of more recent events, there may be a better understanding of the point I was trying to make.
The most recent of those events is the controversy that has arisen about the Prime Minister’s role in the appointment of Ian Fletcher as head of the government’s security agency. The episode gives cause for concern on a number of grounds.
What seems beyond doubt is that Ian Fletcher, although no doubt a competent public servant, had no relevant experience to qualify him for the job. It is a mystery, therefore, that – following the rejection of a short list of four people with relevant experience – his name and his alone went forward.
It is also beyond doubt that this unusual process came about as a result of John Key’s intervention. The Prime Minister’s memory may again have conveniently failed him, but it was his phone call to an old family friend which led directly to Ian Fletcher’s appointment. It is beyond belief that the knowledge that he enjoyed the Prime Minister’s patronage was not a factor in his appearance on a short list of one and his emergence out of left field as the preferred candidate.
Does this matter, or should we – like John Key – shrug our shoulders and say that that’s the way these things happen? The first point to make is that heading the GCSB is one of the most critical appointments in the public service. An incumbent who lacked the necessary qualities could make mistakes with very serious consequences – and this may have been a factor in what is now recognised as the mishandling of the Dotcom affair, the first major issue faced by Ian Fletcher following his appointment.
And how convenient it was for John Key that, following his visit to GCSB a month after the illegal raid on Dotcom’s mansion, the video recording of the briefing he received on current issues, and whose details he could not subsequently recall, could not somehow be found. This allowed the Prime Minister to escape censure for his incorrect assertion that he had had no knowledge of the Dotcom affair until much later.
At the very least, this episode illustrates the danger of what might be perceived as a close nexus between the head of the spy agency and the Prime Minister. A spy chief – possessing as he does the power to spy and report on ordinary citizens – should never be seen as the Prime Minister’s creature.
It is not only John Key’s role in the appointments process that should raise eyebrows. We have again witnessed an increasingly familiar sequence of events. First, the Prime Minister bypasses proper process and stitches up a secret deal with cronies – either business or political or both. He has grown accustomed to behaving, in other words, as a law unto himself; the Prime Minister’s fiat takes precedence, it seems, over normal process and rules. Then, when he is rumbled, he denies that anything improper has happened, or professes to have no recollection of what was done or said, or passes the responsibility on to someone else, or falsely claims, as in the case of the deal with Sky City over a convention centre, that – in defiance in this case of the Deputy Auditor General’s report – he has been vindicated.
What is worrying is his readiness to obfuscate, to slip and slide away from taking responsibility for what he has done. His confidence that he can get away with being economical (and in some cases just plain careless) with the truth has led him, it seems, to lose any respect for not only the media but – surprisingly – Parliament as well.
In the GCSB case, we have seen John Key treating Parliament with contempt, omitting to mention the phone call he made to Ian Fletcher (a call he claims to have “forgotten”) and also giving a misleading and partial account of his relationship with Fletcher.
Much of this will pass over the heads of most people. They will continue to respond to the Prime Minister’s ready smile and friendly manner. It is, though, one of the hazards of the media age that presentational skills have taken over from honesty and plain-dealing as the qualities we rate in our leaders.
Democracy is not just a matter of electing people to govern us. It works only if, having elected a government and a Prime Minister, we then hold them properly to account – a task that rests not only on the media but on all of us. The danger is that John Key can now assume that he can escape that test – that he can achieve through obfuscation and glad-handing the same immunity from scrutiny, the same release from the obligation to account to his electors, that Muldoon secured through bullying and intimidation.
Bryan Gould
4 April 2013
George Osborne’s Non-Event
George Osborne’s budget was driven by an obvious political imperative but was, in economic terms, largely a non-event. The major interest, such as it was, lay in the minor adjustments offered to long-suffering consumers in the forlorn hope that they would be cheered up by cheaper beer and marginal concessions on income tax, and might not therefore notice that their jobs, services and living standards are still under constant threat.
In terms of the wider economy, the Chancellor’s stance was “steady as he goes”; after nearly three years of his stewardship and in the sixth year of recession, nothing much, it seems, needed to change.
There was no recognition that austerity as a response to recession had not only been invalidated by experience, both in the UK and in Europe, but had also, as a consequence, been rejected – following a review of their earlier recommendations – by the IMF. The Chancellor was apparently unconcerned that output still lagged behind its pre-recession peak, and that the government borrowing, whose reduction he had identified as one of his primary goals, had continued – reflecting the depressed level of economic activity – to grow as a percentage of GDP.
So little account was taken of the most obvious and pressing problems facing the economy that one must wonder whether the Chancellor’s focus is political and social, rather than economic. It may well be that his unstated agenda is to take advantage of the recession to unleash forces and drive through measures that will change the balance of advantage between rich and poor, private business and the public sector, for a generation.
The Chancellor may well be, in other words, an (perhaps – if one is being generous) unwitting heir to a long and dishonourable tradition, epitomised by Andrew Mellon, the multimillionaire US Treasury Secretary, who called upon employers in the depths of the Great Depression to “liquidate labour”.
Austerity, and the withdrawal of government, represent, after all, increased space for private enterprise (though the Chancellor seems not to have noticed that manufacturing is so enfeebled that it is unable to take advantage of any supposed opportunities); and even the resulting failure to get the economy moving has a silver lining, in that it guarantees that unemployment remains an actual and potential restraint on wage growth.
What was needed from the Chancellor in his Budget speech was so far removed from what was in his mind that there seems scarcely any point in rehearsing it. But the Budget speech would have made a positive difference if it had signalled the abandonment of austerity and its replacement by a strategy to recruit government, banking and industry in a joint effort to raise the level of demand, to provide finance for productive investment, to coordinate an industrial strategy focusing on those areas of manufacturing that represent the best possibilities for growth, and to frame a macro-economic policy with competitiveness rather than inflation control at its heart.
Bryan Gould
31 March 2013
This article was written for Palgrave Macmillan’s newsletter.
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
A Kiwi Haircut?
We have grown accustomed to treating crises in the euro zone as having little to do with us. So, there will have been a restrained response to the news of yet another crisis, even one that has provoked “outrage and panic” in Cyprus where it has arisen. But we should perhaps take a closer look, because what has happened in Cyprus could – in essence – happen here as well; and, if it does, we too would respond with outrage and panic.
This particular crisis does of course involve issues that are specific to Cyprus. Like many other euro zone economies, Cyprus is in urgent need of a bailout; and, as a condition of that bailout, European finance ministers are proposing that a somewhat unusual contribution to the cost of the bailout should be made by those who have placed their cash for safekeeping in Cyprus banks.
European finance ministers have announced (after markets closed last weekend) that the $25 billion bailout (Europe’s fifth) will come with a huge twist – a levy of 6.75% on deposits in Cyprus banks of less than $190,000 and 9.9% on deposits greater than that. The measures will raise, from those with deposits in Cyprus banks, about $10 billion.
The finance ministers are playing a dangerous game. They have their eye on the huge deposits kept in Cyprus banks by Russian oligarchs who apparently (but not for much longer) see Cyprus as a safe haven where not too many questions are asked.
But the risk they are taking is huge. If depositors find that their savings are not safe in Cyprus banks, there will not only be a mass withdrawal of funds from those banks (as is already happening), but from banks in other “bailout” countries as well. The euro zone crisis is on track to return with a vengeance.
What has this got to do with New Zealand, you may ask? The answer may surprise you. Our own Reserve Bank is well-advanced on just such a measure that would, in certain circumstances, present a similar threat to New Zealand depositors as well.
The “Open Bank Resolution” policy being proposed by the Reserve Bank is well-advanced and is framed in terms of settling in advance the question of who should bear which liabilities in the event of a banking collapse – whether of a single bank or on a much wider scale.
The current options in the event of a bank failure are limited – liquidation, government bail-out or takeover by another bank. The post-GFC history of the impact on government finances of bailing out failed banks has obviously reduced the appetite for such operations, and in most such cases there will not be a long queue of institutions willing to take over the failed entity.
The remaining option – liquidation – however, would immediately threaten the security of customers’ deposits, a political risk that governments would be reluctant to take. The Reserve Bank argues that in these circumstances the main priority should be to keep the failed bank afloat and functioning. They therefore propose that the bank should close for just 24 hours while a statutory manager is appointed and an assessment is made of the bank’s financial position.
A calculation should then be made of the proportion of customers’ deposits with the bank that would be needed to cover the bank’s liabilities and that proportion would then be frozen. The bank would then re-open, but the frozen deposits would be retained for the statutory manager’s use so that the bank’s financial situation could be stabilised. Any unused portion of the deposits could then be returned to the depositors. The balance (an as yet undetermined proportion) would be retained and lost to the depositor. Similar processes would be applied to shareholdings in the bank.
This proposal for what is popularly called a depositors’ “haircut”, on which the government and commercial banks are currently being consulted and which could well take effect this year, is presented in terms of a response to the failure of a single bank. But the measure would have its most significant impact in the event of a banking sector meltdown, such as might be triggered by a renewed global financial crisis – and who would bet against that?
As in the case of Cyprus, the New Zealand proposal is an astonishing assault both on the property rights of depositors and on confidence in the banking system. The mere fact that such a proposal is even being contemplated should ring alarm bells, even for a typically complacent New Zealand public – and if they were, like the Cypriots, actually denied access to their savings as they disappeared into the banks’ coffers, that would certainly be enough to trigger Cyprus-style “outrage and panic”.
The supposed need for such a draconian measure arises entirely because banks not only enjoy the unique privilege of creating money out of nothing but are also entitled to use their customers’ deposits for their own trading purposes. There can surely be no more compelling case for a fundamental review of the way banks operate in our economy. Shouldn’t we know more about this proposal and be consulted about it before it is too late?
Bryan Gould
18 March 2013