Labour Should Challenge Macro-economic Policy
Stewart Wood in this week’s Guardian is right to argue that the paradoxical popular support for George Osborne’s manifestly failing policies for recovery should not mean that Labour must abandon its social democratic approach to solving the nation’s problems.
The drive for “responsible capitalism” is of course an important aspect of such an approach, and is an area in which Labour should expect to carry greater credibility than its right-wing opponents. But focusing on that issue concedes far too much to an orthodoxy which has served us so poorly.
Why does Labour, in addition to looking for greater responsibility from our business leaders, not espouse as well “productive capitalism” or “efficient capitalism” – in other words, a market economy that actually works? We are now into a fourth decade of Labour failure to mount any effective critique of monetarist orthodoxy, with the result that the whole area of macro-economic policy has been effectively conceded to our opponents. Yet, if ever there was an open goal, this is it.
The monetarist approach to economic policy asserts that the only goal of policy should be the control of inflation – something that can safely be left to bankers armed with the single instrument of interest rates – and that otherwise the market, if left to its own devices, will deliver optimum results. Government should just let business get on with it.
How well has this doctrine prepared us to face the challenges of a new world economic order in which China and India, Korea and Brazil, are making the running? The answer is that it has served us appallingly. We have continued our inexorable decline in the world pecking order – whether it be in our share of world trade, in the output of our manufacturing industry, or in comparative living standards. We do not recognise this only because we have become enured to long-term failure.
And that failure has culminated, of course, in the global financial crisis and a threatened double-dip recession which have left this country flat on its back and apparently facing up to a decade of austerity, no growth and further decline.
What response has Labour made to these startling failures? Nothing – other than deservedly attracting a share of the blame. Far from pointing out the nakedness of “free-market” monetarism, Labour has joined in the acclamation for the emperor’s finery, pinning its hopes when in government on the exploits of the City of London, and only narrowly avoiding the euro trap in which the ECB applies a ruthless monetarism even more extreme than the domestic variety.
It beggars belief that – now in opposition – Labour still finds itself unable to develop its own economic policy. Far from developing a coherent critique of more than three decades of right-wing economic failure, Labour is still urged by many, even in its own ranks, to ape the Tories – to be ‘realistic’, to put forward its own alternative austerity programme, and to accept that there is nothing for it but to accept the monetarist framework.
But for Labour to do so is to accept defeat. If the political argument is only about the degree of austerity, it is an argument Labour cannot win. The Tories will always be seen as more credible exponents of such policies.
Nor can Labour expect to be taken seriously if – while not challenging the imperatives of monetarist policy – it simply proclaims its readiness to take on more debt so as to spend our way out of recession.
Yet the intellectual straitjacket embraced by Labour is easily discarded. One of the prime weaknesses of the monetarist approach has been that, by identifying inflation as the over-riding – indeed, only – focus of policy, and by adopting monetary measures to combat it, we have made inevitable a literally counter-productive upward pressure on our exchange rate – and this at a time when our competitiveness in world markets was already under extreme pressure from the rise of new economic (and particularly manufacturing) super-powers.
We tried to escape the consequences of this loss of competitiveness by pinning our hopes on the international asset and credit bubble created by the City – and when that bubble burst, we discovered that we had a much-weakened real economy to fall back on.
It is competitiveness, not inflation, that is our central economic problem. Until we deal with it, any attempt to expand our economy will run up against a balance of trade brick wall. There will then be no alternative but austerity which, through a lower tax take from a lower level of economic activity, will simply make our debt problems worse.
We have suffered for decades from a blind spot about the exchange rate. Yet it is the key to improving competitiveness. We have reluctantly agreed in the past to devalue only as the remedy for a loss of competitiveness that can no longer be ignored – yet the exchange rate is the most effective, quick-acting, and comprehensive means of establishing an improved competitiveness for the future that would make short-term sacrifices fair to all, while establishing a base from which we can quickly build a strong British manufacturing economy that enables us to break free from recessionary shackles and to find a route out of the austerity cul-de-sac.
Isn’t that preferable to the stark lack of choice we now face? Why can Labour not find the courage for some new thinking?
Bryan Gould
10 January 2012
What Price Inequality?
It is surely no accident that both Garth George and Tim Hazledine have, in the last week or two, highlighted growing inequality as a prime cause for current concern. I find that many of those I talk to share that view.
It was, however, salutary to read Martin Robinson’s argument last week that growing inequality should be, if not actually celebrated, at least endorsed and justified. What was remarkable, though, was the paucity of the arguments he advanced to support his position.
It was noteworthy that he did not deny that the gap between rich and poor had widened substantially; nor did he contradict the OECD’s recently published finding that inequality had grown faster here than in most other countries. And he did not explain why todays’s more unequal society is an improvement on the New Zealand which, at the same time as once enjoying one of the highest living standards in the world, was also one of the world’s most egalitarian societies.
He seemed unconcerned by the increasingly strong evidence – stressed by the OECD – that widening inequality is the hallmark of societies and economies that are functioning poorly; indeed, he seemed completely unaware of the excellent research produced by the authors of The Spirit Level showing that countries where inequality is most marked – like the US and Britain – are also those which face the most intractable social and economic problems.
He took refuge instead in attacking positions that no one actually holds. To deplore widening inequality is not the same thing as insisting that everyone should be paid the same, nor does it mean rewarding the idle and feckless at the expense of those who work hard.
His main argument was that paying the All Blacks top salaries has made them the world-beating team they are. But All Black excellence depends on many factors, most of which have little to do with salaries; they were world leaders long before they turned professional and even today are often paid less than they would be if they went overseas. And, sadly, however much our business leaders are paid more than the rest of us, our economic performance stills fall a long way short of All Black standards.
Whole societies are, in any case, much more complex undertakings than a sports team, however eminent. The ground on which Martin Robinson really seeks to stand has nothing to do with rugby. Rather, it is the belief that if the market sanctions very large salaries, then those payments must be justified, since the market cannot be wrong.
It is precisely of course this touching faith in the infallibility of the market that produced our present difficulties. It was the unregulated market that brought about the global financial crisis, that continues to pay huge bonuses to failed bankers, and that exposed thousands of investors to the loss of their savings through the failure of finance companies.
It is only very recently that the view that challenging the market is somehow immoral has gained credence. Even Adam Smith took an explicitly contrary view. What extreme free-market ideologues do not seem to grasp is that the unregulated market can become an instrument of oppression, since it is so easily manipulated by those who wield dominant power in the market-place. And if the market cannot be challenged, then there is nothing to prevent that dominance from being repeatedly exploited to extend that advantage, to the disadvantage of everyone else.
All too often, the market’s apparent recognition of merit simply reflects the dominant position of those who walk away with the spoils. The best-paid people set each other’s salaries; and they are adept at ensuring that, while the global economy demands that working people’s wages are driven down to third-world levels, it requires that top people are paid the huge salaries that are now the norm in the international market-place.
No one begrudges appropriate rewards for those whose efforts add to the general welfare. But many big earners do not create new wealth; they merely manipulate existing assets. Bankers, property speculators and even (dare one say?) foreign exchange dealers cream their fortunes off the top of assets that others have created, thereby siphoning off wealth for themselves that might otherwise have been more fairly distributed.
Growing inequality of course means that the wealthy lead quite separate lives, buying themselves out of life as the rest of us live it. We gain little from them and they know even less of us. While few now give credence to the “trickle-down” theory, the flipside of the market as moral arbiter – invariably rewarding the deserving – is the belief that the poor have no one to blame but themselves. Those who manipulate the market to their own advantage enjoy not only material rewards but a sense of moral superiority as well.
What the apologists for inequality do not grasp is that we are all, including the wealthy, made worse off, not only because we live in a more divided and less cohesive society, but also because – by diverting so much national wealth into so few pockets – we thereby undervalue and make poor use of the productive potential of the rest of us, so that we produce less as a country than we should.
Bryan Gould
7 January 2012
This article was published in the NZ Herald on 12 January.
Leadership for A New Crisis
When Anne Tolley disclaimed responsibility last week for misleading Parliament, blaming her department instead, those with long memories might conclude that we have come a long way from Crichel Down.
Crichel Down was a tract of land that had been compulsorily acquired for the war effort by the British government, on condition that it was returned to the owners when the war was over. After the war, the government broke that promise by retaining the land and leasing it to new tenants. The Minister, Sir Thomas Dugdale, who was personally unaware of the error, resigned when it was discovered because he believed that was required by the doctrine of Ministerial responsibility.
Modern governments seem to recognise no such doctrine. Public servants enjoy so little esteem, so it seems, that they are cheerfully thrown to the wolves when Ministers are asked to take responsibility for mistakes made by their departments.
It isn’t just the former Education Minister who rejects any responsibility for misleading Parliament. The Prime Minister, too, seems remarkably insouciant. His attitude suggests that, whereas it was the Prime Ministerial smile that was the leitmotiv of his first three years, it will be the Prime Ministerial shrug that characterises his second term.
We will see less of the affability he showed while basking in the public approval of his first term, and much more of the somewhat grumpy dismissiveness and impatience that we saw during the election campaign when he came under pressure. The task of an effective opposition, under its new leadership, will be to ensure that there are many more such moments.
David Shearer made a good start in appointing his new front bench. He struck a good balance of old and new, and made effective use of the considerable talent available.
He now has to show what he himself is made of. He won the leadership with the claim that he represents a fresh start, but freshness alone is a rapidly wasting asset and is not enough by itself.
He also has a claim (though it should be made by others rather than himself) that he can match, if not out-do, John Key in the niceness stakes. Indeed, he could re-define niceness to mean more than just a ready smile and a glib answer but rather a genuine concern for all our fellow-citizens, including the most vulnerable and disadvantaged. His own personal record of humanitarian service helps to give substance to that claim.
But what he now has to show is that he has the stuff of which leaders are made. Re-connecting with voters, and listening to what they say and want, is commendable, but leadership is about leading and not just following. We are entitled to expect from our potential leaders a view, if not a vision, as to where the country – and even the world – are or should be heading.
So far, our political leaders have shown no real grasp of the dangers we now face. We cannot expect a John Key government – content as it is to just go along for the ride – to face up to the challenges that confront us. Yet it is now clear that business – or politics – as usual will not cut it.
The last time we faced comparable risks was in the non-nuclear world of the 1930s. World leaders then failed abysmally to deal with the Great Depression. The consequent economic strains were not only disastrous for millions of people, but produced an international climate which led directly to the Second World War.
The risks this time are even greater. Today’s leaders, particularly of what we used to call the West, are repeating the mistakes of the 1930s; it is now virtually certain that the euro-zone’s crisis will drive us into renewed and prolonged recession. This time, though, in a nuclear world, a major international conflict would not have a happy ending – and our self-inflicted economic wounds would in any case leave us in a state of permanent weakness.
We desperately need leaders who can see wider and further than politicians usually do. We need to recognise that the world has changed, that the extreme “free-market” global capitalism that has prevailed for three decades has shown itself to be fundamentally flawed, economically and socially, and now threatens to impoverish and enfeeble us. We need to understand that others, less burdened by this same ideology, are doing much better than we are.
New Zealand, it may be thought, is no more than an observer of this unfolding tragedy. But that is not quite true. We are one of the most credible and at the same time most exposed proponents of Western values and the Western way of life. We have both an interest and a duty to propose the changes that are needed to avoid their destruction.
In the 1930s, our leaders led the world in striking out in a new direction to lead us out of recession. For David Shearer, winning the next election is of course a top priority. But winning elections is not enough. We need far-sighted leadership that will set the country on the right course.
Bryan Gould
21 December 2011
Europe’s Disaster
New Zealand observers of the long drawn-out death throes of the euro-zone might be excused for finding it hard to understand what is going on. They will have lost count of the number of times that Europe’s leaders have proclaimed that they have yet again found a permanent solution to the euro-zone’s ills.
The difficulty is compounded by the determination of Europe’s leaders – born of either self-delusion or a deliberate intention to deceive – to describe the worsening crisis in deeply misleading terms.
As Brian Fallow explained in these pages last week, the talk in Berlin and Paris is all about deficits. The crisis is caused, we are told, because euro-zone governments have irresponsibly spent like drunken sailors and have allowed their deficits to spiral out of control. This narrative is of course very congenial to fiscal conservatives.
The facts, however, tell a quite different story. Virtually all of the euro-zone governments, with the exception of Greece, have maintained a generally prudent stance, either staying in surplus or running deficits well within the 3% limit dictated by the Maastricht Treaty.
There have been of course occasions when individual governments have, for a short time and for good reason, temporarily run deficits above the 3% limit. And interestingly, these supposed miscreants have included those governments that are now leading the charge to tighten the rules yet further.
Even the Greek deficit is to be explained in terms that do not correspond with the story told by Merkel and Sarkozy. Greece is as much a victim as a culprit. Greece was never going to live with the monetary regime required by membership of the euro-zone and imposed from Berlin. It was the attempt to do so, without being allowed the usual remedies for lack of competitiveness offered by exchange rate and monetary policy that led directly and predictably to Greece’s current woes.
What was true of Greece is also true – to varying degrees – of many other euro-zone countries. It is the futility of the attempt to require so many diverse economies, at different stages of development and with such different interests, to subject themselves to a single and largely inappropriate monetary policy, that is the true explanation of the euro-zone’s difficulties. The deficit contagion is the result and not the cause of the crisis.
Not surprisingly, the mis-diagnosis of the malaise has led to a succession of misplaced remedies and, worse, a failure to grapple with the problem that demands and is susceptible to an immediate solution – the need to ensure that Europe’s banking system does not grind to a halt for lack of liquidity. That failure has placed the global economy in extreme danger of a double-dip recession.
But it is the longer-term outlook for Europe that is even more depressing. The so-called “solution” agreed in Brussels will simply make matters worse. Far from releasing member countries from an economic straitjacket, Europe’s leaders have decided in their wisdom to give the lock a double turn.
If the new arrangement holds, which seems doubtful, this would simply condemn Europe to an economic policy that makes it inevitable that half the European economy will, in effect, have to close down. Without access to exchange rate and monetary policies suited to their own circumstances, many euro-zone countries will collapse under the burden of policy dictated from Berlin. And just to make doubly sure, the new arrangement will tighten the rules and impose severe penalties for any breaches.
Committing Europe’s diverse economies to a one-size-fits-all blueprint would be bad enough. But the dangers are compounded because the blueprint is in fact a recipe for increased austerity across the board, whatever the needs of individual economies. Germany may prosper in conditions decided in Berlin; others will not be so fortunate.
The remedy for threatened recession is apparently that euro-zone governments must retrench, and achieve a fiscal balance at whatever cost, even if it means running their economies into the ground and thereby making their deficits worse. Such policies applied across Europe will simply drive the European economy into depression.
Democracy, of course, has played no role in any of this. The people of Europe are required only to bear the burdens of policy failure, not to express an opinion. In implementing the Brussels agreement, no consultation with democratic opinion across Europe is to be countenanced. Elected governments are to be supplanted by a political elite who, pinning their hopes on a political mirage rather than economic reality, are perfectly prepared to defy experience and common sense.
Does any of this matter to us? A failure of the European banking system, and a renewed financial crisis, would certainly hurt us. Our overseas borrowing, for example, would become much more expensive and difficult – and a prolonged European recession would also depress our major export markets.
But we should also be aware that the issues being played out in Europe have their echo here, albeit on a much smaller scale. The attempt to outlaw steps that elected governments in future might wish to take, for example, to get people back to work is not limited to Europe. Our own newly elected government has, it seems, signed up in its agreement with Act to do just that.
Bryan Gould
11 December 2011
This article ws published in the NZ Herald on the 13th of December
Travelling Further Down A No-Exit Road
By the time of the 2008 election, New Zealand had already been mired in our own home-grown recession for nearly a year. A response that would get the economy moving again quickly was clearly needed.
That urgency was reinforced by the global financial crisis that shook the world in the later part of 2008. Our Australian-owned banking system was mercifully affected only mildly by the turmoil, but the increased recessionary pressures across the economy as a whole made it all the more imperative that our new government should act decisively.
We waited in vain for that decisive action. Apart from a largely abortive “jobs summit” in early 2009, the government seemed content to sit out the crisis, waiting for others to bring the recession to an end – and this, despite the buoyancy of our main export markets and a rise to record levels in our main commodity prices.
The government’s main preoccupation was not –so it seemed – to get the unemployed back to work, so that incomes, purchasing power and demand would rise. They focused instead on government debt – surprisingly since, at just 23.4% of GDP, New Zealand’s government debt was one of the three or four lowest in the OECD.
They asserted that – successful though the Labour government had been in bringing that percentage down – it was now their main focus to get it down further. Only in that way, they believed, would confidence return, recovery from recession be achieved, a credit downgrade be avoided, and interest rates be held at low levels.
In expressing such faith in what the Nobel prize-winning economist, Paul Krugman, calls the “confidence fairy”, our government was following down a track mapped out by the leaders of other Western countries – those same leaders who had presided over the global financial crisis in the first place.
Let’s be clear. Manageable levels of government debt are clearly desirable. The question is not whether that should be the goal, or at least one of them, but rather whether the government’s chosen method of achieving the goal has been effective.
Three years later, how have we done? Did the “confidence fairy” appear and work her magic? The answer is sadly disappointing.
Despite the priority they had, the government’s finances remain in a parlous state. As Brian Gaynor pointed out recently, the government’s cumulative deficit over three years will rise to $35.5 billion, compared to a surplus of $35.6 billion under the Labour government. As a result, government debt will rise to 37.7% of GDP. Why has this happened?
The answer is really a matter of common sense. The main drag on government finances is the loss of revenue in an economy that refuses to grow out of recession – and, as this week’s figures show, still does. You don’t solve that problem by slowing the economy still further, by cutting what could have been a sensible investment in getting the economy moving again.
The government, in other words, backed the wrong horse. If they had concentrated on getting people back to work, so that they earned and spent more, the economy would not only have been more buoyant, but so too would government revenues. The deficit may have been higher in the short term, as the investment in our future was made, but it would not have been so persistently high now and over the longer term. Cutting government deficits does not promote recovery; it is the other way round.
Not only has the government failed to control its own deficits and debt. It has also increased the country’s debt, with the result that we have suffered the credit downgrades the government warned against, while the interest rates we pay to overseas lenders will rise.
It is cold comfort to know that we have not been alone in making these mistakes. In many other Western countries, the expected appearance, in response to austerity and cutbacks, of the “confidence fairy” has not materialised. The Conservatives in Britain, the eurozone’s leaders, the Republicans in the United States, have all pinned their hopes on austerity – and, as those hopes have been dashed, their only self-defeating remedy is to inflict yet more pain.
The “confidence fairy” seems unimpressed by more blood-letting, to which the nearest analogy is the use of leeches by medieval doctors to bleed their sick patients.
We may feel sorry for the Greeks or Italians, but we have suffered the same dead-end policies that they have had to endure – albeit, given the size of the eurozone economy, on a smaller scale.
We, too, have been driven by ideological tunnel vision down a one-way, no-exit road, unable to go forward or back – not a comfortable situation with a second recession bearing down on us.
And, in case the we try to blame our lamentable performance on the global financial crisis or the Christchurch earthquake, let’s be clear that our government blew its best chance of pulling us out of recession well before the full impact of those factors was felt – a point not depending on hindsight but made by me and others at the time.
If the exodus across the Tasman is to be stemmed, we surely cannot afford another wasted three years.
Bryan Gould
5 December 2011