I Told You So
Jonathan Freedland, in last week’s Guardian, congratulates the UK Shadow Chancellor, Ed Balls, on being able to claim the rare privilege in politics of saying “I told you so”. Balls had warned in 2010 that austerity would not pull the UK out of recession – a prediction now in the course of being amply confirmed.
It is certainly true that, for most politicians, claiming to have been proved right is rarely possible – and, even if it is occasionally justified, it is not usually a claim calculated to endear the claimant to his audience. So, Ed Balls is fortunate to have someone else make the claim for him.
The claim is usually, of course, only of interest if it can be made by or on behalf of a frontline practising politician – someone who either does or might one day exercise the power of government, and whose fitness to do so would perhaps accordingly be enhanced.
The claim is even more difficult to make – and of considerably less interest – if made by someone who has long since departed the scene. So why – 18 years after I decided to leave British politics – should I think it worthwhile to make that claim in my own name now?
The answer is that I left British politics in 1994 because I despaired of being able to persuade my colleagues in the Labour party that they were pursuing the wrong course on a wide range of issues. And, since it is precisely those issues which have dominated news headlines over recent times, there is now the chance of assessing who was right and who was wrong.
What were those issues? First, the dominant role assumed by the City in British economic policy, something enthusiastically endorsed and encouraged by successive governments.
In 1986, I led for the Opposition when the Financial Services Bill was debated in Standing Committee, and warned repeatedly that self-regulation, “light-handed” regulation, or no regulation at all, would allow unregulated financial markets to subject us all to unacceptable risks – risks that eventually materialised with a vengeance with the Global Financial Crisis.
From even further back, I had argued consistently that macro-economic policy was being formulated in the interests of the financial economy, rather than the “real” or productive economy, and that this was creating a serious structural imbalance which would eventually come back to bite us. That view was dismissed in the euphoria engendered by the sight of large fortunes being made in the City. Like Winston Churchill, I would rather have seen “Industry more content, and Finance less proud.”
Then, there was the euro. My argument that the euro, imposing as it did a single and inappropriate monetary policy on a wide range of diverse economies, could not possibly work, had been preceded by my opposition to the euro’s predecessors – the European Monetary System and the Exchange Rate Mechanism, both of which had failed. I was constantly dismissed as “anti-European”, despite my contention that it was the concept of Europe itself that was being put at risk. I was eventually stripped of responsibility for policy-making on this issue.
And what about the current controversy over News International? I recall being invited to lunch by Rupert Murdoch in 1988. In retrospect, it is a reasonable assumption that he was interested in how malleable I might be (I was then the Shadow Trade and Industry Secretary) in responding to his ambitions. I remember little of the lunch but I am quite certain that I offered a less pliable prospect than some of my successors clearly have done since – and I remained throughout extremely concerned at and hostile to the dangers posed by the concentration of media ownership.
And austerity? I salute Ed Balls for his foresight in warning that austerity by itself takes us further into recession, and that we need a strategy for growth. But we are saddled with the current sterile orthodoxy because we accepted in the 1980s that the “free” (or unregulated) market must prevail, so that – even in a recession – government must step aside to allow the market to re-establish equilibrium. I have spent most of my political life arguing that markets are irreplaceably valuable but not infallible.
And, as long ago as 1981, I published – with two colleagues, John Mills and Shaun Stewart – Monetarism Or Prosperity? We argued that macro-economic strategy should be about much more than simply controlling inflation and that we needed a strategy for growth, focusing on full employment, competitiveness and putting the interests of the productive sector first.
There are many other (and not just economic) issues on which I would claim that events have supported the views I took – the invasion of Iraq, for example, where I was clear long before the invasion that any such action would be disastrous. My purpose, however, is not to claim any special far-sightedness, since there have been many others who have expressed similar views on each and all of these issues.
What I would claim, however, is that I was one of the very few in mainstream, frontline politics to have taken these views and to have swum against the prevailing tide. On all of these issues, in other words, we had choices – and we have suffered greatly from making the wrong ones.
Bryan Gould
1 June 2012
Zero Budget, Zero Ambition
The budget, Bill English tells us, will provide a further step towards a strong long-term economy. That step is certainly needed, since there is precious little evidence of economic strength, long-term or short-term, at present.
In recent weeks, we have seen unemployment on the rise again, manufacturing output fall back, retail activity stalling, the trade deficit worsening, and GDP figures revised downwards. It is increasingly clear that we have wasted the chance we were offered by buoyant export markets and record commodity prices of pulling ourselves conclusively out of recession. Instead, we have at best bounced along the bottom for nearly four years and, at worst, have left our long-term problems unresolved and getting worse.
As a result, Kiwis are voting with their feet. Record numbers are responding to unemployment, low wages, reduced public services and poor prospects by crossing the Tasman in search of a better life. Far from closing the gap with Australia, this government has seen us fall further and faster behind.
Will the budget turn this around? Will the “strong long-term economy” at last materialise? Not if the constant drip-feeding of pre-budget announcements is anything to go by.
Over recent weeks, prescription charges have been raised, student loan repayments made more onerous, class sizes increased, our diplomatic service decimated, our border security jeopardised, public service broadcasting abandoned, police numbers cut, jobs lost across the public service, help for first-time home buyers slashed, and 0800 numbers substituted for real help with benefits, legal advice, and housing problems.
It is hard to see how any of this is likely to build a stronger economy, let alone a healthier society. We are told that the cuts – all part of a “zero” budget – are necessary to reduce “the deficit”. But even that limited objective is made more difficult to achieve by constant cutbacks. The reason that “the deficit” is so persistent is that a sluggish economy does not generate the tax revenue that would help to bring it down.
Dealing with “the deficit” is in any case much more difficult than it should be because the government recklessly gave billions in tax cuts to the wealthy. Having failed to cover the cost of that misplaced generosity through the increase in GST, it must now scrape the bottom of the barrel to find extra funding to pay for the shortfall.
And that is to say nothing of the fact that constant talk of “the deficit” is misleading in the extreme. The deficit we should be concerned about is not the gap in the government’s finances which – thanks to the prudence of Michael Cullen – are by international standards in reasonably good shape.
Our real deficit is the amount we continue to borrow as a country from overseas lenders. It is that burden that is actually being made worse by the government’s failure to address our real economic problems and to get the economy moving.
The Prime Minister has tried to conceal this truth by constantly raising the spectre of the Greek meltdown. If the government does not cut its spending, he says, we could face the same fate as the Greeks. This contention is so ridiculous as to be laughable.
The Greek problem is the result of a combination of two huge mistakes by Europe’s leaders – mistakes that some of us have warned against for – in my case – many years. The first mistake was to encourage Greece to join a single currency that would impose conditions they simply could not live with.
By the time that became absolutely apparent it was too late. Confident in the guarantee supposedly provided by membership of the euro, the Greece ran up huge debts which the burdens of euro membership meant they could never hope to repay. There is a dreadful symmetry in the fact that the price for this wilful blindness to economic reality is now being paid, not just by the debtor Greeks, but also by the creditor nations and banks who are equally culpable.
The second mistake was to insist, as a dwindling band of ideologues continues to do, that the remedy for Greece and the rest of the increasingly recession-ridden euro zone is austerity. We now see (and so does President Obama), not only how hugely damaging this supposed remedy is for the hapless Greeks, but how quickly it is dragging Spain and Ireland, Italy and Portugal, into the same black hole.
And let there be no doubt. Our own government is making those same mistakes, albeit on a smaller scale. They, too, deny the importance of the exchange rate (as euro membership forced the Greeks to do) in determining the competitiveness needed to improve our economic performance.
And the emphasis quite unnecessarily placed by the budget on cutbacks is further evidence that, just as in Europe, our government’s watchword is austerity, which may be a sensible way to run a business, but – as all evidence shows –is the wrong response for a country. Like Europe’s leaders, our government stubbornly refuses to learn the lessons of the Great Depression. Can we really be content with an economic outlook about which the best that can be said is that it is “Greek-lite”?
Bryan Gould
19 May 2012
This article was published in the NZ Herald on 23 May.
Who Will Own The Dairy Industry?
It is a brave outsider who would claim to understand Fonterra’s proposed capital re-structuring, let alone try to explain it to others. Yet the issues raised by these proposals affect us all; if Fonterra gets it wrong, the country’s economic future – and not just that of our dairy farmers – could be seriously at risk.
Most people understand that Fonterra is a farmer-owned co-operative that manufactures and sells a range of milk-based products into international markets, and pays farmers for their milk out of the proceeds.
The farmers’ income therefore depends on the milk price (and there is currently some interest in how that price is determined). But farmers are owners as well as suppliers; they provide Fonterra’s capital by buying shares, (so-called “wet” shares) according to the volume of milk they supply. If they supply more milk, they have to buy more shares, and Fonterra’s capital increases. The converse happens if the milk supply falls – the so-called “redemption” risk – though this has happened only once, in the annus horribilis of 2008, when a drought coincided with the global financial crisis, and Fonterra warned that the share price could fall in the following season.
There is of course an inherent conflict between the interests of farmers as milk suppliers on the one hand, and as investors in a manufacturing and trading enterprise on the other. As suppliers, they want a high milk price; as investors, their goal would be maximum profits, meaning raw material (that is, milk) prices are kept low.
That conflict does not arise in a true cooperative, since milk suppliers and investors are the same people. But this could be about to change, if new Fonterra proposals mean that farmers and owners become separate groups with conflicting priorities.
The 2008 wobble in the capital base, coupled with the Sanlu debacle, gave renewed impetus to a push for change in some quarters. How, it was asked, could Fonterra finance a drive for increased market share worldwide if it had to contend with such uncertainty?
The initial suggestion was that Fonterra should cease to be a cooperative and become instead a listed company; the stock market would provide (it was hoped) a buoyant source of new capital. But this was quickly rejected by farmers, who saw the danger of conflicting interests with outside owners.
A second proposal was then put forward. In addition to the shares that farmers were obliged to buy in line with their milk volumes, it was proposed that they should be able to buy additional shares (“dry” shares) – and they could trade shares (or “securities”) amongst themselves.
This had the advantage of increasing Fonterra’s capital base and increased the banks’ willingness to lend, thereby largely overcoming the “redemption” risk. Farmers would still retain complete control over the cooperative since only they would own the voting rights. This proposal, in principle, was approved by a ballot of farmers.
Alarm bells began to ring, however, when more detail of what was proposed began to emerge. The proposal now before farmers (and on which they will vote on 25 June) is that shares should be tradable, not just with other farmer members of the cooperative, but more generally; non-farmer purchasers will acquire the right to the dividend stream, but – it is claimed – the voting rights will remain with the farmers. And this is where the real worries begin to surface.
The inherent conflict between two distinct interests – milk suppliers and investors – will no longer be mediated in house, but will be out in the open. There will be no going back. Once traded, the price of shares may rise to a point where farmers cannot afford to buy them back.
For how long in these circumstances will the new owners (and their top lawyers) allow economic ownership and voting rights to be separated and the value of their investment to be determined by the milk suppliers? And when those new owners use their clout to drive down the milk price, farmers’ income in the long term will have fallen for the sake of a short-term capital gain.
And it’s not just farmers at risk. Who can doubt that the shares will inexorably pass into the hands of foreign owners who are already salivating at the prospect, so that a large part of the dividend stream from our most important export industry – just like bank profits – will go overseas, imposing an additional burden on our precarious balance of payments and driving up our overseas borrowing requirement?
Why should we (or farmers) be happy with this? We’re told that we can achieve a stronger stock market if these “securities” can be traded. But when will we realise that a prime reason for our weak capital markets is that most of our assets of any value are sold off and traded offshore?
When farmers decide these issues in June, they will no doubt bear in mind the government’s apparent lack of concern over increased foreign control, as witness the partial asset sales, the concessions made to overseas corporations like Warner Brothers and Shanghai Pengxin, and the special protection given to foreign investors under the Trans Pacific Partnership. Do they want to see Fonterra next on the chopping block?
Bryan Gould
16 May 2012
Self Government Anyone?
Getting lawyers to agree on anything is notoriously difficult. So when one hundred retired judges, prominent legal academics, lawmakers and leading practitioners from New Zealand and overseas put their names to something, it’s time to sit up and take notice.
What is it that raises the concern of so many eminent lawyers? It is the prospect that our government is about to trade away – in secret – an important part of our powers of self-government.
The Trans-Pacific Partnership (the TPP) currently being negotiated is presented as a straightforward free trade agreement. But it is clear that the Americans will insist (as they have done with other similar agreements) that the agreement should allow foreign corporations to stop our government (or any future government) from changing New Zealand law in a way they think might undermine their value.
Private companies from the other eight countries, even though not themselves parties to the agreement, would be able to sue our government, not in our own courts, but in private tribunals set up specifically for the purpose (and existing practice shows that the arbitrators in such tribunals can be judges one day, and lawyers for litigants the next).
Under these arrangements, an American corporation, for example, would be given far more extensive rights against our government than any New Zealand company would ever have. It would mean that a future government, perhaps elected to change policy in an area like environmental protection or health and safety (smoking comes to mind), could be threatened with a crippling law suit unless it backed off.
The rights protected by these provisions go far beyond real property rights and include financial instruments, mining concessions, intellectual property, public-private partnership contracts and even market share.
Nor is it just the government that would be hog-tied. A particular worry for lawyers is that our courts, too, could be over-ruled. The foreign investment tribunals have decided that courts are part of a country’s government (riding roughshod over any doctrine of the separation of powers) and that they, too, must comply. Even if our courts had upheld the validity of a law properly passed by the New Zealand Parliament, that decision could be challenged by a foreign corporation alleging it breached their rights under the TPP. Even a jury decision in private litigation could be challenged and lead to the government paying millions in compensation.
In a recent case brought by Chevron, for example, a tribunal ordered the Ecuador government, in defiance of their constitution, not to enforce a ruling by Ecuador’s Appeal Court that Chevron must pay $18 billion to clean up toxic waste in the Amazon Basin.
The concerns expressed by the 100 signatories to the lawyers’ open letter released today do not arise from mere speculation. Provisions like those causing concern have a well-established track record. When there were only a few cases, no one took much notice. But as American and European companies investing and trading overseas have increasingly enforced the rights arising from these treaty provisions, concerns have grown.
And with good reason. There has been an exponential increase in the numbers of such cases brought by (largely American) foreign corporations against governments which are parties to agreements similar to the proposed TPP. Over $675 million has been paid out in awards made by the special tribunals in cases involving US companies alone.
What adds to the concern is that the negotiations on these arrangements are being conducted by our government in secret. We are not allowed to know what is being discussed, and by the time the TPP is presented to Parliament, the deal will have been done. There will be no meaningful debate or Select Committee scrutiny. We won’t even be allowed to see what trade-offs the government has made until four years after the text has been signed.
Yet the concessions made in secret by today’s government would permanently lock New Zealand into a marketplace controlled and dominated by foreign corporations. Voters would be left without any possibility of redress.
When the Prime Minister was asked about these issues when the negotiations began some months ago, he described fears of special legal rights for foreign investors as “far-fetched” and pooh-poohed any concerns. Yet the Australian government has been quite open in declaring that it will oppose any such provision, basing itself on the Australian Productivity Commission’s warning that it would have no economic justification and carry policy and fiscal costs.
Our own government, by contrast, has demonstrated in its dealings with overseas corporations like Warner Brothers, Sky City and Shanghai Pengxin how far it is prepared to go to accommodate overseas business interests. We have good reason to fear that the TPP will continue that process.
We have already sold off into foreign ownership a higher proportion of our national assets than any other developed country. The TPP could mean that control over what remains, now and into the future, would in effect be handed over to international corporations. This is a heavy price to pay for a trade deal in which our partners, at most, commit to buy what they want to buy anyway.
Bryan Gould
7 May 2012
This article was published in the NZ Herald on 9 May.
Access to the Law Under Threat
Back in the late 1960s in Britain, I became friendly with Tony Lynes, the activist who founded the Child Poverty Action Group. With his help, I set up a free legal advice service in Oxford, where I was then living and teaching.
When I became the parliamentary candidate in Southampton, I opened a similar advice centre in that city – and I was delighted to be joined by another young Kiwi law teacher, Malcolm Grant, who is now the Provost of University College, London.
I have ever since taken a supportive interest in the provision of free legal advice to those who couldn’t afford it. I was delighted to find – on my return to New Zealand – a well-established network of 27 community law centres, offering free legal advice (and, on occasion, legal representation) to people in need.
Being denied legal advice might not spring to the top of many minds when it comes to forms of deprivation. Yet it can be one of the most severe disadvantages in a modern society. The rule of law is fundamental to our claim to live in a free society (it was the great Chief Justice Edward Coke who declared in the seventeenth century that everyone is equal before the law) but that is not much help to someone who cannot get the advice needed to make use of it.
The denial of legal advice is of particular significance to those of few means and little power or influence. Unless they are helped to call the law in aid, they will have no defence against those who treat them wrongly.
New Zealand’s 27 community law centres cover most of the country but focus especially on those areas of acknowledged greatest need. In the Eastern Bay of Plenty, where I live, the need is certainly acute, and is recognised in matters such as health care through the excellent work of the Eastern Bay Primary Health Alliance which I have the privilege to chair.
No one would wish to see a high-needs community denied a proper standard of health care. Yet the possibility has now emerged that access to legal advice for the same deprived community might be in jeopardy.
The funding provided for the community law centres has hitherto come from a special fund financed by the interest earned on monies held in solicitors’ trust funds, topped up when necessary by the government. The recession has meant that this source of funding has fallen sharply, so that the government needs to find more money to keep the service at its present level.
The sums involved are, by government standards, pretty small; but finding more money runs directly counter to the government’s drive to offset the recession-induced decline in tax revenue by cutting public spending.
It comes as no surprise, therefore, that the Community Law Centres of Aotearoa have been put on notice that a review is under way, with a view to cutting rather than increasing expenditure. The goal of the exercise is to make savings – to achieve “economies of scale” – which are likely to reduce the numbers of such centres and restrict the geographical coverage they provide.
The review has some all too familiar features. The Ministry of Justice, in its drive to save money, is not averse to spending money on consultants to conduct the review. The intention is to rank the areas of the country which will need to be covered, with the implication that some areas – perhaps like the Eastern Bay of Plenty, with a small population – will be left out.
Even in areas where the service is maintained, it will no longer be funded but will be “purchased” following a tendering process, so that existing providers might lose out to those who offer a lower price. As so often, it seems, the market model is the only one that is contemplated.
Areas that are left out will be served by a centrally funded 0800 national call centre. The designers of the scheme seem unaware that those most in need of help are the least likely to get on the phone to explain their problems to a faceless stranger. My own experience over decades of offering help and advice is that those seeking help feel most comfortable when they can relax face-to-face with a real person who is there to help them.
No one should resist the search for better ways of doing things. I entirely support the quest for more streamlined organisation, more shared services, better value for money.
But the omens are not good. The chances are that, when the results of the review are announced later this year, there will be a reduced and less effective attempt to maintain in place one of the cardinal features of a civilised society.
And it would be a pity if – in the course of what is proving to be so far a pretty ineffectual counter-recessionary strategy – a government that has spent billions on tax cuts for the rich should again look for penny-pinching but nevertheless painful sacrifices to be made by those who can least afford to make them.
Bryan Gould
28 April 2012