Opening Our Minds
Over the past four years of recession, we have seen a re-run of the debate that surrounded the Great Depression. In the 1930s, there were those, like Herbert Hoover, who insisted that austerity – by cutting government spending – was the way to beat recession. Others, like John Maynard Keynes, were convinced that the remedy was stimulus and expansion.
In the event, it was a no-contest – and so it is today. It is now clear that the austerity being inflicted on the benighted Greeks cannot work, but even the other “PIGS” – Portugal, Ireland and Spain – who have done everything required of them by the austerity disciplinarians, have found that they are going backwards, deeper into recession and with a rising ratio of government debt to GDP.
And while the British may have avoided the problems of euro membership, they chose to impose their own home-grown austerity. The result? They are mired in a recession that threatens to be worse for them than the 1930s.
In the US, by contrast, President Obama’s stimulus programme – bitterly opposed and relatively timid as it was – is pulling the US economy around. There can now be little doubt that stimulus is the key to beating recession. The time for austerity policies, after all, is when the economy is booming; in a recession, they are the last thing we need.
As that reality becomes increasingly difficult to deny or ignore, where do we in New Zealand stand? Sadly, we find ourselves with Herbert Hoover, down an ideological cul-de-sac with nowhere to go. The proponents of the current orthodoxy now don’t even bother to defend it; they promise merely a continuation of the long drawn-out stagnation – resorting, like school-kids in the playground, to challenging their critics to offer something better.
The critics seem increasingly ready to respond to that challenge. A recent example is Bernard Hickey’s interesting suggestion that we should consider “quantitative easing” (or, as it used to be called pejoratively, “printing money”).
It may not be the first option to come to mind but it is not as way-out as it seems. Many governments (including the current UK and US governments) have “printed money” from time to time – and banks do it all the time, lending money that they do not have, and thereby creating most of the money in our economy out of nothing. If it’s all right for them to make billions from doing so, why shouldn’t governments do it in the public interest, and so get the economy moving?
There are, of course, many other proposals that offer an alternative to the failed orthodoxy. Here, in 400 words, are a few suggestions, which – if implemented – would go to make up a coherent programme.
· Put beating unemployment centre stage by investing in much-needed infrastructure projects, so as to raise demand and create new jobs –a virtuous circle which would also help retailing, and private sector investment and productivity.
· Get the exchange rate down to improve competitiveness so that higher demand is met by New Zealand, and not foreign, industry; do so by ending the use of high interest rates and over-valuation as counter-inflation tools and focusing instead on the real cause of inflation – excessive and irresponsible bank lending for non-productive purposes. As soon as foreign speculators are denied an interest rate premium and an unearned capital gain, the dollar’s value will fall.
· Remove the balance of trade constraint on expansion by boosting exports through improved competitiveness, so cutting the interest and profits paid to overseas lenders and owners; this will allow us to expand while paying our own way, so reducing the need to borrow overseas or to sell our key assets to foreign owners.
· Encourage saving and exports rather than consumption and imports by promoting further saving through tax breaks, and – since imports will become comparatively more expensive than domestic production – reduce the incentive to spend on cheap imports at the expense of New Zealand jobs and production
· Tackle the government’s deficit by collecting a sharply increased tax take as a more buoyant economy generates much greater tax revenue
· Reduce widening inequality by discouraging excessive salaries, introducing a fair tax system (including a capital gains tax) and stopping the destructive insistence on inflicting the cost of the recession on those least able to bear it – the low-paid, the unemployed, and beneficiaries.
· Expect improved competitiveness, productivity and profitability in the private sector to stimulate increased investment, especially in skill training, education, and research so as to utilise fully our potential human capital and achieve an economy that reaches its full productive potential.
· Develop a close understanding of and support for Maori aspirations, given that Maori offer an important potential stimulus to new development and seem to have leaders with a better understanding than pakeha – on issues like asset sales – of what the country needs.
· Ensure that new investment is encouraged to develop advanced – and particularly environmentally friendly – industries based on green technologies.
This is all just common sense; none of it is revolutionary. It would rescue us from recession and set us on the right course for the future. It would optimise the market’s strengths and minimise its weaknesses. Don’t let anyone tell you there is no alternative.
Bryan Gould
27 February 2012
This article was published in the NZ Herald on 29 February.
The Truth About Tax
Politicians sometimes, as Hillary Clinton once put it, “mis-speak”, and in doing so, can often reveal more than they intend.
A case in point was John Key’s surprising statement on TV One’s Breakfast on 13 February to the effect that “any tax sucks money out of the economy. There’s a limited amount of money in the economy. So when you put up a new tax, or you tax people more, then it sucks that money out.”
The Prime Minister would presumably admit, on reflection, that no one claiming to understand the economy would stand by that statement. But, like so many “mis-speakings”, it provides us with an insight into how the speaker really thinks – in this case, about economic issues.
Let us put to one side the dubious assertion that “there’s a limited amount of money in the economy”; the money supply is never a fixed amount and varies greatly according to its price (the whole basis of using interest rates to control inflation) and varies even more according to the banks’ lending policies which are responsible for creating by far the greater part of the money in our economy.
The really interesting part, though, of John Key’s brief foray into economic theory is his apparent belief that money raised through taxation, and then spent on public purposes of various kinds, is somehow no longer part of, or of any value to, the economy.
If it is “sucked out” of the economy, where does he think it goes to – into the stratosphere? And does he think that all those schools and hospitals, all those police and servicemen, all those roads and railways, all of those elements that are critical to our living standards and that are paid for out of taxation, are of no economic value?
The question is not a fanciful one, as we await a much-heralded speech from the Prime Minister in which it is expected that he will announce yet more cuts to the public sector and in the number of public service jobs.
At a time when domestic demand is at best flat for a fifth year in a row, and export receipts are constantly (and literally) decimated by an overvalued currency, the economy surely needs stimulus rather than further enforced contraction. We should be looking to the government to lift its level of activity – through investment, for example, in education, skills, research and infrastructure – rather than to cut it further.
A government that was serious about recovery from recession would not treat the reduction of its deficit as its most pressing priority. But if John Key really does believe that tax revenue and what government can do with it are of no value, then we can perhaps begin to understand why his government has adopted the priorities it has.
And there are wider issues still. The notion that the only economy that matters is the private sector, and that government is always a drag on that economy rather than a partner and supporter, is peculiar to that form of Anglo-American capitalism that is now having to struggle with its demonstrable failures.
I remember an occasion in the 1980s when a delegation of British parliamentarians met the leaders of French industry. The British MPs were surprised at the willingness of the French business leaders to work with their government. The French were equally surprised that the British found this unusual. “Mais,” they said, as if the British were mad, “c’est pour la France!”
In the US and the UK, though, (and, if we are not careful, in New Zealand as well), it is an article of faith that the best thing the government can do for business is to “get off our backs.”
In other, more successful economies, however, there is a different view – and historically, it has always been true that economic development is best achieved when the government takes a major role in supporting and enabling economic activity.
That has been true of the first countries to industrialise, in Britain, then Europe and the US, where the laws made by government to protect property and contractual rights, the limited liability company, and insurance have been essential components, and even more true of the more recently developing economies in Asia – China especially, where government remains the main economic driver, but also Japan, Korea, Singapore, India and many others.
Even in the US, despite the ideological reluctance to acknowledge the role of government, the military-private sector defence industry complex has been a powerful underpinning of the economy.
We are entitled to expect our government and industry leaders to understand the value of following successful examples, rather than their own ideological prejudices. If government continues to treat its role as – to quote Ronald Reagan – part of the problem, rather than part of the solution, we will continue to render redundant and ineffectual an important and productive part of our economy and fail to utilise the full range of our productive potential.
When the Prime Minister makes his speech in a couple of weeks, let’s remember that “mis-speaking” can be forgiven. “Mis-acting” cannot.
Bryan Gould
19 February 2012
Time for A Step Change
Europe’s leaders are being taught lessons that they refuse to learn. The Greek economy was always too weak to join the euro zone; now that it is – as a consequence – flat on its back and weighed down by debt, the “remedy” imposed on them by their European partners is an enforced dose of yet more austerity that will make it quite impossible for them ever to pay off their increased debts.
The consequences for the European – and ultimately the world – economy will be dire. Greece is only the beginning; a recession-infected Europe now looks inevitable. Already, even in remote New Zealand, we are being warned that the euro zone’s difficulties will mean a worse economic outlook for us in future years.
But before we put the entire blame for our woes on the Europeans, let us recognise that the bizarre European determination to treat austerity as the remedy for recession is shared by our own leaders. We seem to be locked into the same ideological deep-freeze.
We are, after all, now entering our fifth year of either negative or minimal growth. We, too, have insisted that the key to securing a recovery that seems constantly to disappear further over the horizon is to close part of our economy down.
Our principal goal, it seems, is not to reduce unemployment and get the economy moving, but to cut the level of government economic activity. The result? The economy continues to stultify and the government deficit proves increasingly stubborn and difficult to manage.
But our economic problems are not defined by the recession alone; they are more deep-seated than that. The simple truth is that, despite the great advantages of buoyant export markets and record commodity prices, we continue to live well beyond our means.
We make up the gap between what we earn and what we spend by borrowing from overseas and by selling off our assets to foreign owners. We have been doing this for decades, but the price we pay for this indulgence is getting increasingly steep. We have to pay an interest rate premium to foreign lenders, if they are to continue to lend to us, and we also have to pay to foreign owners – across the exchanges – the profits on the assets we no longer own, with the result that our perennial trade imbalance gets even harder to manage.
More and more of our national wealth goes overseas. We have less and less control over our own economy, as the proportion we actually own diminishes. High interest rates not only inhibit domestic investment but produce an overvalued dollar that prices our goods out of international markets, including our own, and reduces our return on those goods that we do sell.
We have been travelling down this no-exit road now for nearly thirty years. Yet our policy-makers still set their faces against any change of policy. We continue to assert that the only focus of macro-economic policy must be to control inflation, even though the measures we use to do so are poorly focused and slow-acting, and actually make our real problem much worse.
What is our real problem? It is certainly not inflation. It is that we are basically uncompetitive. We have steadfastly ignored the fact that the world has changed and that rapidly developing economies like China, India, Korea, Taiwan and Singapore are now super-competitive economic powers, determined to build on that huge advantage by holding down their exchange rates and becoming ever more competitive.
They have rapidly built the strength of their productive sectors and have earned huge trade surpluses which have allowed them to buy up the assets (including our own) that they will need for further development. Many of them already enjoy living standards better than ours and pay wages and salaries that are higher.
We, on the other hand, are arrogant (and stupid) enough to believe that competitiveness does not matter, and that we can – in defiance of economic rationality – continue to push up our exchange rate with impunity. By focusing on inflation, to the exclusion of other objectives, and using interest rates and an overvalued dollar in the attempt to control it, we make it inevitable that our lack of competitiveness gets worse.
The result is that we dare not grow – even in a recession – for fear of balance of trade constraints, and are reduced – for as long as we can find willing lenders and buyers – to financing our unsustainable consumption by overseas borrowing and selling off what little remains of our assets.
It is time that we realised that competitiveness produces improved productivity, and not the other way round. We cannot hope to innovate and develop if we are constantly fighting the headwind of being uncompetitive. We should no longer be tinkering at the margins, with largely ineffectual tax changes and constant but ineffectual exhortations to improve productivity; it is time to make a step change by making competitiveness the focus of policy.
But our leaders seem blithely unaware that their out-dated nostrums are destroying our economic future. The exchange rate, and issues of competitiveness, it seems, are no-go areas for discussion. They prefer their own simple certainties to the evidence before our eyes.
Bryan Gould
12 February 2012
This article was published in the NZ Herald on 14 February
What Do Maori Know That We Don’t?
So, now we know. When the Prime Minister said last year, in respect of the proposed sale of the Crafar farms to the Chinese, that New Zealanders would not want to be “tenants in their own land”, it was a statement “full of sound and fury, signifying nothing.”
The Prime Minister tells us now that it would be – and in that case presumably always has been – illegal to stop the sale; he thereby reinforces a pattern that has become all too familiar – a pattern of broad assurances designed to allay public concerns on various issues, followed by periods of obfuscation, and then explanations as to why the assurances could not be acted upon.
So, for example, the government was to insist that the recovery of the bodies from the Pike River mine must be an inescapable commitment from any new owner; it now seems likely that will mean no more than that new owners must have a “plan” to be implemented (only if possible) at some indeterminate date in the future.
And so too, expectations are now being scaled down in respect of the commitment – so often trumpeted as confirmation of the government’s financial rectitude – to return government finances to surplus by 2014. That, we are now told, is in doubt because the global economy has – in a way that had somehow escaped the attention of the forecasters – proved to be in a parlous state.
And what of the assurances repeatedly given by the Prime Minister that the public assets his government now proposes to sell will somehow remain in New Zealand hands? Is it now not clear that we will in due course be told – when the assets have passed into foreign hands – that it would have been “illegal” to discriminate against foreign bidders?
There are of course many points that can be made in respect of those asset sales. Who can doubt, for example, that – just like an individual – a government that sells off an income-producing asset in order to spend the proceeds should be regarded as behaving somewhat imprudently. How, in other words, does the government propose to make good the hole in their finances when they no longer receive the income from the assets they have sold?
And the more we are assured – for the purpose of raising their market value – that the assets offer an investment that is secure, long-term, virtually inflation-proofed, and guaranteeing a good return, the more the question is begged – wouldn’t that investment be equally valuable and attractive in the hands of those who currently own them?
It is of course true that the New Zealand capital market would be enlarged, at least in the short term, if a major new range of investments became available. But we should surely pause to wonder why our capital market is so small and weak. The answer is that most of what were once New Zealand assets of comparable size and stability have long ago passed (via privatisation) into foreign ownership; and the further sale of what remains in public ownership seems certain to add to that longstanding trend.
We can, of course, expect a familiar response from the Prime Minister to the latest difficulty to arise in respect of asset sales – the belief that new private owners will not accept obligations under the Treaty of Waitangi in their management of what were public assets. John Key will assure Maori that they will lose nothing from removing those statutory obligations – and by the time they discover otherwise, it will be too late.
But the Maori stance on asset sales is instructive for another reason as well. Iwi have declared their intention of investing in the assets. They are clear that they will invest for the long term. They will hold their shares in trust for future generations. They will take seats on the boards of the enterprises so as to make the most of the influence their shareholding will give them.
Most people, I guess, would nod in approval of all of these propositions – but they constitute, of course, the clearest possible statement of the argument for not selling the assets in the first place.
The advantages sought by Maori are precisely the advantages currently enjoyed by all of us but which the asset sales would deny us. So, why is something that is clearly so valuable to Maori apparently of no consequence or value to the rest of us? The Prime Minister might be asked for an answer.
Why are Maori able to look to a leadership that takes the long view and has a proper sense of its obligations to the common interest and future generations? Why do the rest of us have to make do with a leadership that looks at worst to an ideological prejudice against public ownership and at best to a short-term boost to the balance sheet that will quickly be outweighed by the all-too-familiar burden of paying the profits across the foreign exchanges to overseas owners?
Bryan Gould
1 February 2012
Eternal Vigilance
I had the privilege, until quite recently, of chairing the New Zealand National Commission for UNESCO. During my term as Chair, my fellow Commissioner, Paul Smith, established – with my support – what we called the Freedom Page on the Commission’s website.
Our goal was to raise awareness of the importance of press freedom, and of the threats to that freedom – particularly, and sadly, in some of our Pacific neighbours. There was, however, some nervousness when we made it clear that the Freedom Page would not shrink from drawing attention to similar issues if and when they arose in New Zealand.
New Zealand enjoys of course an enviable record, in international terms, in matters of freedom of expression. It would be ridiculous to claim that a New Zealand government might pose a direct threat – through censorship or the abuse of executive power – to our press and broadcast media and their freedom to publish what they wish.
But threats to press freedom can come in much more insidious forms – and two recent instances make the point very clearly.
Many will recall the extraordinary episode of the Prime Minister’s conversation over a cup of tea with John Banks during the recent election campaign. The Prime Minister was clearly very keen that the contents of that conversation should not be made public.
When it became clear that a record of that conversation was in the hands of the media, and that they saw no legal problem in publishing it, the Prime Minister’s reaction was very instructive.
He did not go to court to seek an injunction and assert his right to privacy. Instead, he laid a complaint with the police and asked them to investigate what he maintained might be a criminal offence.
The police were quick to comply. They not only initiated an investigation but also warned the media that they, too, could be criminally liable if they published the recording. This warning was sufficient to frighten the media into silence.
Two months later, we are still waiting for the outcome of the police investigation. No criminal offence, it seems, has yet been established. The only legal outcome so far is that the Attorney General, acting for the government, has declared his intention to seek substantial costs from the cameraman who had the temerity to try to establish that he had committed no offence.
The police investigation, while so far inconclusive on the issue of criminality, has nevertheless been successful in another respect; it has fully met the Prime Minister’s requirements by keeping the conversation secret till beyond – well beyond – the election.
The message is clear. The police will support threats issued by the executive to deter the media from publishing material that as far as we know was lawfully obtained and that was of substantial public interest. And just to make sure, the Attorney General’s threat to the cameraman is a warning to others that they cross the executive at their peril.
Some of the same features are shown by the issue that became public last week. New Zealand On Air has expressed concern that a programme on child poverty it had funded was broadcast in the days leading up to the election. It has announced that it may seek legal advice on obtaining a law change that would give it the power to delay until after an election a broadcast that might embarrass politicians.
What is worrying about this episode is that an expression of concern from the Prime Minister (in this case, through his electorate chairman who is an NZOA board member) about a perfectly lawful broadcast was enough to induce the body that has a public duty to fund such programmes to seek to limit the freedom of the broadcasters.
Again, it is not any direct threat or interference that is of concern; rather, it is the threat that the executive is ready to act against anything that displeases the Prime Minister. Who can doubt that broadcasters will in future make sure that their programmes do not attract Prime Ministerial displeasure and risk losing the necessary funding? And others in the media will also learn the lesson – if they want to get on, they must stay on the right side of the Prime Minister.
To make these points is not to attack the Prime Minister. He is doing what many politicians in government around the world would do if they could get away with it. It is, rather, a clarion call to journalists and to the public they serve to stand up for press freedom and the independence of the media.
The threat is always there, and it is particularly acute in the case of this Prime Minister – not because he is especially unprincipled or autocratic, but because his very popularity might encourage him to think that he can get away with more than he should.
We are entering dangerous territory if the flow of information and opinion can be turned off or diverted by the mere expression of Prime Ministerial concern. It was Thomas Jefferson who warned that “the price of freedom is eternal vigilance.” That vigilance must be alert to the subtle nature of today’s threats to press freedom.
Bryan Gould
19 January 2012
This article was published in the NZ Herald on 23 January.