Don’t Be Wimps!
“Don’t be wimps,” seems to be the advice on offer to exporters groaning under the burden of the overvalued dollar. “Lie back and enjoy it,” advises one sage. “Get on with it – there’s nothing you can do about it anyway,” says another.
Such wrong-headedness would matter little if it involved only a handful of disaffected exporters. But it affects us all – as it has done for decades now, and will do for the foreseeable future.
But surely there is nothing we can do about it? The rate for our currency – floating as it is – will be decided by the foreign exchange markets, and not by the policy-makers? The answer to that is a resounding “No!”
There is no such thing as a clean float. The view that foreign exchange markets take of our currency will be influenced by many factors, most of them inevitably within the control of our policy-makers.
The legendary Japanese housewife or Belgian dentist knows nothing of our economy; if they knew about our slide down the OECD tables and our perennial trade deficits and record overseas borrowing, they might have been less keen to buy our dollars.
But what persuades them to buy our currency is the virtual guarantee that we will go on, as we have done for decades, paying them an interest rate premium. And, because so many are attracted by that risk-free windfall , and the demand for and price of the dollar therefore go up, short-term investors can usually expect a capital gain as well.
To top it all off, they are confident – after nearly thirty years’ experience – that we will not change our willingness to keep on doing it, even though it is plain by now that the more we borrow, the higher the interest rates we have to pay, and the higher rates we pay, the further the dollar’s value rises, and the further the dollar rises, the less we are able to produce and export, and the less productive we are, the more we have to borrow.
But isn’t the dollar’s recent rise (except against the Aussie – they have their own similar but more manageable problems) the result of high commodity prices? Yes, high commodity prices have helped to fan the flames, but the baseline was already established at an overvalued rate, where it has been for most of the past three decades. High dairy prices have simply exacerbated the long-term problem, making life even more difficult for other producers.
But what about the up-side of a high dollar – the cheap holidays and the low-priced imports? Aren’t they worth having?
Yes, there has always been an argument in the short term for overvaluation. Politicians are particularly fond of it, because it means that every overvalued dollar will buy more imports (or foreign holidays) than it should, so that people have the temporary illusion that they enjoy a higher living standard than they can really afford, at least until election day.
But the price we pay for that illusion in the longer term – in jobs, services and living standards – is a heavy one, particularly if governments (with our three-year terms) try to maintain it from one election to the next.
The high dollar means that our producers get less for everything they sell into international markets, including our own. Even our most successful enterprises and exporters find it harder to penetrate international markets, and when they do, their margins are decimated.
With smaller market share and lower profits, they find they have less capital to re-invest in new technology, new capacity, new product development, new skill training, new sales promotion, new export support – all the bases covered by their successful competitors from overseas. So, job growth is held back, service levels fall behind, the living standard gap with Australia widens still further.
Even our most successful exporters – currently our dairy farmers – find that the cream is blown off the top by the overvalued dollar, so that even in the goods times they have less to spend and invest in our economy than they would otherwise have.
If the over-valuation, or the threat of it, persists for any length time, there is then a second-order range of consequences. Bright graduates cease to go into productive industry; they prefer to try their luck in asset speculation, finance and retailing – anywhere that is protected from foreign competition. People look to non-productive assets like housing as the place to make their fortune. Capital moves to wherever it is possible to make a quick buck. Our successful businesses move overseas or are sold to overseas buyers. Corporate headquarters move to Sydney or Shanghai. Does any of this sound familiar?
In the longer run – a generation or more – the culture itself changes. Borrowing – in the belief that the word owes us a living – becomes a way of life. We lose faith in saving, investing, and producing goods and services for sale as a way of providing for ourselves.
It was Einstein who said “Insanity is doing the same things over and over again and expecting different results”. Our results are not about to change any time soon.
Bryan Gould
21 June 2011
No Gifts for the Greeks
Europe’s politicians and bankers have no one to blame but themselves for Greece’s current agony, but they insist that the price of their foolishness should be paid – not by any sacrifice on their own part – but instead by ordinary Greeks.
The euro-zone was always a disaster waiting to happen. Yet, even now that the inevitable has arrived, the architects of the arrangement insist that is for the Greeks to accommodate painful reality, and that their own illusions and self-deceptions should remain intact and unchallenged.
We do not need the benefit of hindsight to know that it was always going to turn out like this. Many of us warned from the outset (and even before that, when the euro-zone’s predecessor – the Exchange Rate Mechanism – was coming unstuck) that the euro owed much more to the grandiose posturing of politicians than to economic rationality.
Writing in the Guardian on 14 August 2000, for example, I warned that “in a single economy, subject to a single monetary policy, productive capacity will concentrate in the most productive parts of that economy. Monetary policy will necessarily be framed in the interests of that most productive part. Other less productive parts will find it difficult to live with unsuitable monetary conditions. In the long run, they will, in effect, close down. This loss of economic activity will eventually depress the level of demand and activity in the economy as a whole.”
I had in mind exactly the situation the Greeks now find themselves in. The Greeks’ own foolishness may have contributed to their plight, but they were urged on into a quite unsuitable set of obligations by senior – and wealthier – partners who assured them that all would be well.
Those senior politicians and bankers who insisted that the euro was a valuable and necessary step towards greater European unity (for which read the emergence of a European superstate, with a single Europe-wide government) must have known that bringing widely disparate parts of a wider European economy, with all their differing strengths and more particularly weaknesses and – most importantly – stages of development, under a single monetary policy would impose huge strains on the weaker members.
The reality has, however, turned out to be even more cruelly callous of Greek (and perhaps, in due course, of Portuguese and Irish, and even Spanish and Italian) interests than even we Jeremiahs had warned.
The euro has, in effect, betrayed the Greeks twice over. First, they were duped into believing that monetary conditions which were generous enough to allow the Germans to develop and expand could be accommodated in Greece without creating a borrowing and asset bubble that would eventually burst.
And, secondly, they had been led to believe that, if the going got too tough, the quid pro quo for taking on the challenge of sticking with the euro and feeling the pain of that for a time, was that the richer partners would come to their aid, with loans and regional assistance packages to ease them back into a prosperous future within the eurozone.
Such an implicit guarantee was after all the only condition on which a weak and under-developed economy like Greece could possibly take the risk of footing it with an economic powerhouse like Germany.
Foolish Greeks! They should have got it in writing. When it came to the reckoning, a German Chancellor – answerable to German taxpayers – showed herself unwilling to honour the cheque. The Greeks, having been lured into the trap, now find that their gaolers have walked away with the key.
The “remedies” so far applied to this desperate situation do no more than buy time while the politicians and bankers work out how much they can salvage. The cure they prescribe for Greece is, of course, worse than the disease. The time bought is merely a further period during which ordinary Greeks are required – in a futile attempted defiance of economic logic – to make the attempt to repay huge debt while decimating what they produce.
The authors of the catastrophe meanwhile will tolerate no questioning of their grand design. People may suffer, austerity and penury may rule, countries may founder, but the sanctity of the euro project must not be questioned. Nor must be the right of bankers – however irresponsible their lending – to reclaim what they’re owed, plus interest.
In these circumstances, what should the Greeks do? Their government has no doubt that they must bite the bullet and condemn themselves to hard times for a generation or more. The ordinary Greek, however, says that it is those who created the disaster who should bear the brunt.
I do not often agree with Boris Johnson. But, on this occasion, he is right. If I have to choose between the posturing of politicians and the greed of bankers on the one hand, and the decent lives of ordinary people on the other, there is no choice. The Greeks must default, abandon the euro and make a fresh start.
Bryan Gould
21 June 2011
Catching the Knowledge Wave?
The briefcase I use to carry my papers and laptop to meetings bears a multi-coloured logo and the words “Catching the Knowledge Wave”. As Fran O’Sullivan recalls, the outcomes produced by that high-level conference in 2001 – designed to unlock the secrets of economic success as overseas luminaries revealed brilliant ideas and initiatives that had hitherto eluded us – proved disappointingly humdrum.
It turned out that there were few mysteries to divulge. The explanations for economic success were all too obvious and commonplace. Ireland, for example, in whose apparent prosperity there was a great deal of interest, was the beneficiary of European Union largesse which created an asset bubble that eventually burst. Australia, as has become increasingly clear, has the great advantage of being able to dig up its barren interior and sell the product to a mineral-hungry world.
Other explanations are equally obvious. Developing economies like China and India now, and Japan and Korea before them, do well if they can access mass international markets and exploit economies of scale by combining cheap and plentiful labour with rapidly growing technological expertise.
And wealthy mature economies that focus on re-investing in new wealth creation, like Germany, will do better than those, like Britain and now the US, that give priority to the protection of existing asset values and to consuming more than they produce.
Developed economies that suddenly benefit from a new source of wealth, like the discovery of oil, will do badly if they simply spend the proceeds through allowing the exchange rate to appreciate – as the British and the Dutch did, as the Australians may be in the process of doing with high mineral prices, and as we are in danger of doing with high commodity prices.
Those, like Norway on the other hand, that invest the proceeds in new assets so that they go on producing wealth after the initial benefit has dissipated, can enjoy a long-term benefit to economic development.
Yet, despite these commonsense conclusions, we in this country still persist in seeking the magic elixir that will propel us into the economic top league. We still believe that one more Jobs Summit, one more nostrum from the latest management guru, one more ministerial exhortation to improve productivity, one more brilliant new piece of research, will do the trick.
We have been unwilling to face an obvious truth – that economies are such large, complex and multi-faceted fields of activity that it is very unlikely that single, focused initiatives – even if worthwhile – will make much, if any, difference.
Of much more importance in determining whether economies perform well or otherwise, and whether or not they are stimulated to innovate and develop, is the broad context in which they operate. It is that context we should focus on. But that is precisely what we’re not prepared to do.
There are of course some contextual factors, such as the terms of trade, we can’t control. But even when those factors are, as they are today, the most favourable in nearly thirty years, we still manage to negate that advantage by allowing the rising dollar to reduce the return to our primary producers and to create a two-speed economy by penalising the rest of the productive sector.
And we insist that every such improvement in our national income is an inflationary threat, rather than an opportunity to strengthen our productive capacity. It is as though we have no faith in the propensity of a market economy to grow and develop.
But it is when it comes to managing those factors that we can control that we fail most spectacularly. We kid ourselves that we are focused on the need to save, invest and export more, and that we must consume, borrow and import less. But our policy settings actually encourage exactly the opposite.
Our narrow focus on inflation means that every opportunity for growth is sacrificed to shackling the inflation bogey. The decades-long use of high interest rates means that investment is constantly deterred. And because perennially high interest rates create an over-valued dollar that buys in the short term more than it should, we encourage people to consume rather than save and to import rather than invest in our own productive capacity.
The poor return on productive investment –and the high dollar means that margins and market share are driven down, and our productive sector is less profitable than it should be – further discourages saving and investment, other than in non-productive assets like housing, where asset inflation is fuelled by reckless bank lending. Our attempt then to maintain a standard of living that our poor performance means we cannot afford makes overseas borrowing and asset sales more and more necessary.
These are not short-term issues. They have been endemic for nearly three decades. And we are about to do it all again, as overseas opportunists drive up our dollar, confident on the basis of thirty years’ experience that we will be stupid enough to continue to pay them a premium.
If we really want to change our fortunes, these are the issues we must address. Instead of vainly looking for the silver bullet, what about catching the commonsense wave?
Bryan Gould
11 June 2011
This article was published in the NZ Herald on 14 June.
The Centre Ground – Disappearing Stage Right
John Harris (The Guardian, 8 June) is no doubt right to say that the left is feeling frustrated and dispirited. But does that mean that we are bereft of ideas? I think not.
The frustration is born, I think, of the fact that ideas that seem so obvious and rational appear to have so little traction. The challenge for us, in other words, is not so much to come up with brilliant new insights, as to find ways of being better understood and commanding greater support.
On the face of it, the task should be an easy one. When events have conspired to demonstrate just how far the country has veered off course, there has never been a better time to argue that a change of direction is needed.
The unregulated market is self-correcting and infallible? Business leaders have all the answers? Government should step aside and allow business to get on with it?
None of this, surely, is credible in light of the disaster created by the greed, incompetence and irresponsibility of private sector operators and the intervention required of government that alone allowed us narrowly to avert full-scale depression.
Yet, these lessons have not been learned. The problems created by the wealthy, it seems, have to be shouldered by the poor and the unemployed. The rich need to be placated in the hope that their wealth, in an increasingly unequal society, will somehow “trickle down”. The economic power of government must be sidelined in the hope that contraction will, with the help of the confidence fairy’s ministrations, lead miraculously to recovery.
It is not that we are left at a loss, confounded by the superior expertise and arguments of our opponents. We do not need to cast around and dig deep for new ideas when there is no shortage of convincing and commonsense responses to these continued mistakes.
Markets – valuable servants but dangerous masters – function best when they are properly regulated. The greatest threat to our financial viability is that we fall deeper into recession. Government spending is essential in recession, both to protect the vulnerable and to stimulate recovery. Full employment is the most important goal of economic policy and the most valuable stepping stone to a full recovery. To widen inequality and to drive people further into poverty is to threaten the very fabric of our society.
There are powerful and widely endorsed arguments to support each of these propositions. The left should not, in other words, beat itself up for its supposed failure to come up with appropriate solutions to our problems. It should ask itself instead why a rival and implausible narrative has achieved wide acceptance, and why the obvious commonsense responses fail to carry conviction.
It is at this point that the real difficulty arises. The left, at least in the form of the Labour Party, has consistently undermined its own position by demonstrating in government that it prefers the case made by its opponents to its own. Indeed, New Labour – at a time when the Tories themselves had had enough of the Thatcherite revolution – insisted on regarding themselves as heirs to the Thatcherite legacy, and persuaded themselves that embracing it was the essential pre-condition for election victory.
So, both the Blair and Brown governments expressed confidence in unregulated markets and financial markets in particular. They looked to the private sector – in areas like health and education – as a preferable alternative to public provision. They uncritically supported the City as the flagship of prosperity for all. They were relaxed about widening inequality – and “intensely relaxed” about people becoming “filthy rich.” They presided over high levels of unemployment.
All this, we were told, in the interests of contesting for the “centre ground”. But the centre ground is a slippery concept. It is to be found where you choose to find it or where you allow it to be. It can – and did – move sharply to the right, when ground that was previously to its left was abandoned, and right-wing opponents took advantage of that surrender to keep moving right.
The left is at present damagingly incapacitated by its demonstrable failure, when it really mattered – in government – to show any confidence in left prescriptions. They found themselves, in pursuit of an ill-defined centre ground, constantly chasing it as it disappeared rightwards.
Politics in a democracy is largely a matter of who controls the agenda. The right begin with the huge advantage of overwhelming media support from right-wing media barons. They do not need additional help from acquiescent opponents.
There is little wrong, I believe, with much of the left analysis of the country’s current plight, particularly when that analysis is so strongly supported by experience. The deficiency lies in the confidence with which that analysis is advanced. We must draw a line under our recent unhappy experience and, with the force, eloquence and conviction of our arguments, define for ourselves the centre ground rather than let others do it for us.
Bryan Gould
9 June 2011.
Rebutting Tina
Much of the comment on (and criticism of) the budget has focused on the impact of the specific measures designed to rein back the government’s deficit. But, as the dust settles, we can see that the budget’s real failing was not in the specifics. Quite simply, it identified the wrong strategic target.
A casual observer could be forgiven for assuming, on the basis of what we were told about the budget’s objectives, that the country’s most pressing priority is to cut government spending. But, on the facts, that should be the least of our concerns. As Brian Fallow showed conclusively before the budget, our government’s gross financial liabilities as a percentage of GDP are the third or fourth lowest in the OECD.
Indeed, we could say that the government’s financial position is, comparatively speaking, one of the few bright spots in an otherwise pretty gloomy scenario – and it is strong because the government’s predecessors ran surpluses and prudently paid off debt over most of the preceding decade.
So, why is there so much emphasis on the deficit? And why do so many people believe that, because “we” are living beyond our means, the government must therefore cut back?
The answer is that confusion rules. There is of course a debt problem – but it is not the government’s. It is ours. While the government’s financial position is amongst the strongest, the country’s indebtedness – what we owe to others – places us at the bottom, along with Greece, Ireland, Spain and Portugal.
So, the budget – and much of public opinion – addressed the wrong problem. Does it matter?
Yes, it does. It means that, contrary to the story we have been told over recent years, we can and should be using the government’s financial strength to build our recovery. That was the point of paying off debt in the good times.
We have to assume that our policy-makers understand this perfectly well and that it is not economic rationality but political dogma – the ideology that, whatever the circumstances, government should play a smaller role in the economy – that determines that priority should be given to cuts in public spending.
But that focus means that our recession drags on for longer than it should. Those who pay the price are the unemployed, the sick and the poor, but it is also bad news for small businesses and producers, for the profitability, productivity and competitiveness of our industry, and for the economy as a whole.
Paradoxically, it is also a recipe for continuing government deficits, since a contraction in government spending, allied to contraction everywhere else in the economy, makes it virtually certain that the recession will endure and that tax revenues will stay flat.
Yet many people are persuaded that, until the government cuts back, we cannot afford to expand the economy.
But both common sense and overseas experience confirm that this is to get things the wrong way round. There is increasing evidence that recovery must come first, and deficit reduction second, and not the other way round.
Those countries, like Greece, Ireland, and now the UK, which have pursued an austerity programme in the hope that this will build confidence and thus stimulate recovery, have found that contraction is exactly that – contraction – and not the path to expansion through the hoped-for ministrations of the confidence fairy.
Other countries, like Canada, have demonstrated that getting recovery under way, by stimulating economic activity, is the best and necessary pre-condition for tackling a budget deficit. The Canadians have successfully undertaken – in that order – both exercises.
Moreover, while it would be good to return to government surpluses as soon as it is sensible to do so, it is not as though debt is itself such a frightening concept. A modern economy depends on debt, largely created by the banking sector; and the debt that really is a cause for concern is not the one we owe to ourselves but the debt we owe to overseas creditors.
That outsize debt – the one we all, you and I, owe to foreign lenders – is a function of our overall economic failure and our insistence on consuming more than we produce. That is the problem we should prioritise.
A government that applied common sense rather than ideology would, in other words, have identified quite different strategic targets. They would have focused on substantially reducing our overseas borrowing – the most significant step we could take towards protecting our credit rating.
As stepping stones towards that goal, they would encourage, not discourage, savings. They would give priority to restoring full employment. They would set about reversing the increase in inequality and the growing poverty in our society. They would halt the selling off of our important assets to foreign owners. And they would back this up with a reformed macro-economic policy that gives priority to the competitiveness and profitability of our productive sector.
None of these goals featured in the budget. Each should have had a higher priority than the strategic focus that was in fact selected. Shouldn’t we expect better?
Bryan Gould
22 May 2011