The World’s Best
We know that the All Blacks have again struck top form when overseas rugby writers start to talk about “peaking too soon” and to mutter darkly about “choking” at World Cup time. It is almost as though they need to comfort themselves with the thought that, despite the evidence of their own eyes, the All Blacks cannot be as pre-eminent as their results and the manner of achieving them show that they are.
The comfort is of course illusory and the criticism is fatuous. The “choker” label is an undeserved slur. The All Blacks win a higher proportion of their international matches than any other international team in any sport, and they accordingly bear a heavier weight of expectation than anyone else, but even they win just three out of every four matches. On any given day, there are at least three or four teams who could beat the All Blacks. In any World Cup tournament therefore, the odds must be against the All Blacks (and even more in the case of other teams) winning seven matches in a row – and the nature of the competition is such that one loss in the latter stages is enough.
While the disappointments of successive World Cup campaigns are real enough, they reflect the capricious and unpredictable nature of a knock-out event rather than any mental frailty on the part of the All Blacks. This is, after all, a team that isn’t content to focus on one tournament every four years but is ready to defend its superb, century-long record every time it steps on the field. That record is not maintained and enhanced by a team of chokers, as we see again from the triumphs of the past two weeks.
But it is not just overseas that the All Blacks are at times written down. Even at home, it is apparently fashionable to suggest that the New Zealand public’s support for rugby and the All Blacks is not what it was, while other sports and other successes are lauded. It is almost as though the All Blacks’ amazing record has become old hat for media that are hungry for novelty.
Unscientific opinion polls are produced to show that “only” two-thirds of Kiwis support the All Blacks and – shock horror – one in ten “hate” rugby. It seems not to be realised that such a result, even if accurate, would demonstrate the centrality of rugby in New Zealand life, rather than the reverse. No one would “hate” a sport that mattered little or that made no impact.
But, as it happens, we have had the chance over recent weeks to make a fresh assessment of the merits of rugby and of our number-one world-rated team. The Football World Cup in South Africa has been followed by the opening matches of rugby’s Tri Nations – and we don’t need to belittle the skill required for football and the spirit shown by the All Whites to conclude that the two recent rugby tests have shown us an altogether superior spectacle.
Television coverage of the World Cup revealed that football is a game in which it is relatively hard to score, the ball gets moved up and down the field for long periods while little happens, the chances of a draw are very high and teams are often tempted to play for that inherently unsatisfactory result, and goals often come out of the blue with little build-up to stir the blood. The appeal of football as a spectator sport depends greatly on the atmosphere created and passion shown at big matches by supporters who flock to the grounds and who largely entertain themselves.
Rugby at its best (and I mean union rather than league – union is a more varied, complex, demanding and therefore interesting proposition than that offered by the staccato and relatively simple rhythms of league) provides by contrast a stirring contest requiring not just the skilled feet or head of the individual footballer, but the collective skills, speed, strength and courage of the whole athlete, and the whole team. A rugby try almost invariably comes as the culmination of a passage of play that raises excitement and heightens expectation. There is little in sport to compare with the speeding winger heading for the corner, or the interplay and sleight of hand of a smoothly functioning back line, or the expenditure of every last ounce of effort and resolve as a forward pack masses to drive across the line.
And we in New Zealand have an added bonus when we watch a top rugby match. No other team in world rugby can match the pace, power, precision and sheer elan shown by the All Blacks as they once again emerged victorious from renewed clashes with their greatest rivals. Surely we should savour and celebrate as we watch the world’s best in the knowledge that it is our team – our All Blacks – that have again maintained their century-old pre-eminence?
Bryan Gould
19 July 2010
Holding Banks to Account
The dramatic and damaging collapse of the New Zealand finance company sector over the last three or four years has attracted a good deal of attention, largely because of the multi-billion losses that investors have suffered. One of the consequences has been a boost to the confidence felt in banks which have reinforced their reputation as the best place to put one’s money.
It is certainly true that, while overseas banks are up to their necks in scandal, our largely Australian-owned banks have maintained an enviable stability and reliability. But the tribulations of banks worldwide make it inevitable that the role of banks in the global economy should increasingly come under the spotlight.
The revelations that many of the world’s leading banks have been guilty of dishonestly rigging markets and misleading investors have already claimed one victim, in Barclay’s Bank, and seem certain to involve many more. And that comes on top of the role – dubious at best, irresponsible and dishonest at worst – that the banks played in bringing about the global financial crisis in 2008.
Not surprisingly, the British government is establishing a full-scale review of the banking sector, and few would now bet against the pressing of criminal charges. But it could be argued that these scandals are not just a reflection of the criminality of a handful of bank leaders but arise inevitably from the role that banks in general have been allowed to play.
Most people still see banks as institutions that provide a safe repository for our savings and that from time to time lend us money either on overdraft or on mortgage. But this is seriously to underestimate the power that banks wield in our economy and the extraordinary nature of the concessions that allow them to do so.
The central feature of banks, which seems only dimly understood even within the banking sector itself, is that they are private commercial enterprises which have been granted a unique and virtual monopoly over the creation of money. By far the largest proportion of the money in our economy (and in the economies of all advanced countries) is not notes and coins but bank-created credit. That credit represents no more than bank entries by bank officials; its status as money rests entirely on the suspension of disbelief – or, to put it another way, on our willingness to accept that it is money because the banks say it is money.
The failure to understand this fundamental aspect of our economy leads to serious errors in formulating economic policy. The overwhelming role of credit-creation by the banks in inflating the money supply should be our central concern in controlling inflation, particularly when the vast majority of that credit is created and lent for non-productive purposes like house purchase.
Because we don’t understand this inflation-engendering phenomenon, we grapple with inflation using seriously inadequate and inappropriate instruments like interest rates, which are not only slow-acting and poorly focused but do great damage to the rest of the economy. A more accurate analysis of inflation-producing pressures in our economy would lead to more effective measures to restrain them and at the same time encourage a more productive and competitive economy.
We can see how privileged and unaccountable banks are from the fact that their unique capacity to create and lend vast quantities of “money” for private profit passes under the radar, whereas a democratically accountable government that occasionally “prints money” in the public interest draws screams of blue murder.
But it is not only this aspect of the banks’ operations that should cause concern. Over the last two or three decades, the banks have used their ability to create money to invent a whole range of new financial instruments of dubious value which they are then able to sell to gullible investors; so profitable was this trade that it became much more important to banks than their traditional role.
It was this prospect of unlimited profits created out of nothing (to say nothing of the huge rewards and bonuses paid to individual bankers) that led in due course to the global financial crisis. And when that irresponsibility inevitably ended in collapse, it was that same mentality that led bankers into the realms of fraud and criminality. In a world where anything goes, the rules are made to be broken, and personal fortunes are there for the taking, who can wonder that bankers could not accept that the ordinary rules applied to them? We have reaped what we have sown.
In case we should assume that none of these problems afflict us, let us not forget that our own banks, pillars of propriety as they may seem by comparison with their overseas counterparts, have made strenuous attempts to avoid their tax liabilities and have only been made to pay up by court action.
And in our case, the banks have not only made huge profits by exploiting their unique capacity to create money, but have then exported those billions across the Tasman, thereby placing a huge burden on our already beleaguered balance of payments. Isn’t it time to establish a banking system that supports the economy rather than places it at risk?
Bryan Gould
8 July 2010
This article was published in the NZ Herald on 12 July.
Holding Banks to Account
The dramatic and damaging collapse of the New Zealand finance company sector over the last three or four years has attracted a good deal of attention, largely because of the multi-billion losses that investors have suffered. One of the consequences has been a boost to the confidence felt in banks which have reinforced their reputation as the best place to put one’s money.
It is certainly true that, while overseas banks are up to their necks in scandal, our largely Australian-owned banks have maintained an enviable stability and reliability. But the tribulations of banks worldwide make it inevitable that the role of banks in the global economy should increasingly come under the spotlight.
The revelations that many of the world’s leading banks have been guilty of dishonestly rigging markets and misleading investors have already claimed one victim, in Barclay’s Bank, and seem certain to involve many more. And that comes on top of the role – dubious at best, irresponsible and dishonest at worst – that the banks played in bringing about the global financial crisis in 2008.
Not surprisingly, the British government is establishing a full-scale review of the banking sector, and few would now bet against the pressing of criminal charges. But it could be argued that these scandals are not just a reflection of the criminality of a handful of bank leaders but arise inevitably from the role that banks in general have been allowed to play.
Most people still see banks as institutions that provide a safe repository for our savings and that from time to time lend us money either on overdraft or on mortgage. But this is seriously to underestimate the power that banks wield in our economy and the extraordinary nature of the concessions that allow them to do so.
The central feature of banks, which seems only dimly understood even within the banking sector itself, is that they are private commercial enterprises which have been granted a unique and virtual monopoly over the creation of money. By far the largest proportion of the money in our economy (and in the economies of all advanced countries) is not notes and coins but bank-created credit. That credit represents no more than bank entries by bank officials; its status as money rests entirely on the suspension of disbelief – or, to put it another way, on our willingness to accept that it is money because the banks say it is money.
The failure to understand this fundamental aspect of our economy leads to serious errors in formulating economic policy. The overwhelming role of credit-creation by the banks in inflating the money supply should be our central concern in controlling inflation, particularly when the vast majority of that credit is created and lent for non-productive purposes like house purchase.
Because we don’t understand this inflation-engendering phenomenon, we grapple with inflation using seriously inadequate and inappropriate instruments like interest rates, which are not only slow-acting and poorly focused but do great damage to the rest of the economy. A more accurate analysis of inflation-producing pressures in our economy would lead to more effective measures to restrain them and at the same time encourage a more productive and competitive economy.
We can see how privileged and unaccountable banks are from the fact that their unique capacity to create and lend vast quantities of “money” for private profit passes under the radar, whereas a democratically accountable government that occasionally “prints money” in the public interest draws screams of blue murder.
But it is not only this aspect of the banks’ operations that should cause concern. Over the last two or three decades, the banks have used their ability to create money to invent a whole range of new financial instruments of dubious value which they are then able to sell to gullible investors; so profitable was this trade that it became much more important to banks than their traditional role.
It was this prospect of unlimited profits created out of nothing (to say nothing of the huge rewards and bonuses paid to individual bankers) that led in due course to the global financial crisis. And when that irresponsibility inevitably ended in collapse, it was that same mentality that led bankers into the realms of fraud and criminality. In a world where anything goes, the rules are made to be broken, and personal fortunes are there for the taking, who can wonder that bankers could not accept that the ordinary rules applied to them? We have reaped what we have sown.
In case we should assume that none of these problems afflict us, let us not forget that our own banks, pillars of propriety as they may seem by comparison with their overseas counterparts, have made strenuous attempts to avoid their tax liabilities and have only been made to pay up by court action.
And in our case, the banks have not only made huge profits by exploiting their unique capacity to create money, but have then exported those billions across the Tasman, thereby placing a huge burden on our already beleaguered balance of payments. Isn’t it time to establish a banking system that supports the economy rather than places it at risk?
Bryan Gould
8 July 2010
This article was published in the NZ Herald on 12 July.
The Productivity Puzzle
As the latest indicators show our economy struggling to escape recession, it is widely accepted that the key to improving our economic performance is to raise our productivity levels; and this is very much the focus of the government’s efforts to close the gap with Australia. But there is a mystery at the heart of our productivity performance. If we could solve that mystery, we might see our productivity performance lift very quickly.
One of the reasons that high levels of productivity are important is that, by improving our competitiveness in the internationally traded goods sector, our exports are stimulated – and buoyant exports, by removing a balance of trade constraint on growth, allow us to grow faster both at home and in overseas markets. That faster growth in turn promotes productivity improvements and – hey presto – we are in a virtuous circle of export success and productivity growth.
And this is indeed the experience of successful exporting economies. Their export industries exploit the larger markets and higher margins offered by the internationally traded goods sector, with the result that those industries grow quickly and lead the rest of the economy into productivity growth, rather as a locomotive leads a train. There is then a strong market imperative to move the economy’s best resources – of capital and skill – to those growth points in the economy.
Those factors can become so powerful that a country like Japan in the 1960s and 1970s will develop virtually two economies; statistics from that era show that the Japanese domestic economy was very similar to other economies, with normal inflation, growth and productivity levels, whereas the export economy showed rapid growth, low inflation and high and fast-growing productivity. That experience has been shared, perhaps not quite so dramatically, by other successful exporting economies ever since.
Some research* conducted two or three years ago on the New Zealand economy, however, suggests that we have not, for some reason, been able to tap into that successful experience. The research showed that – as expected – our exporting firms exhibited significantly higher levels of productivity than the generality of New Zealand firms. This is not surprising, since in general terms, only the more productive and therefore competitive enterprises can foot it in international markets.
But, unexpectedly, the research showed that – for the period covered by the research, from 2000 through 2005 – productivity in our exporting firms grew no faster than in firms in the rest of the economy. The boost to growth and productivity as a consequence of exporting seems simply not to have materialised. Our exporters, despite being our best performers, were not able to gain the benefits from exporting that exporters elsewhere had found so valuable. This begs the obvious question – why?
The question surely suggests that there are factors at work in our economy that inhibit our exporters but that are not evident in other more successful economies. Those factors, whatever they are, seem to mean that even our best firms, ready and primed to take advantage of export opportunities, cannot make them count.
There is of course always a small number of firms that will make a breakthrough in terms of a new technology or a new product and will be able to sell successfully in overseas markets without worrying too much about price competitiveness. It is then tempting (and the temptation is often yielded to) to be diverted into concluding that such firms show the way to successful exporting, productivity and growth, and that that is the course the rest of the economy should follow.
But most international markets are extremely price sensitive, and success in those markets depends crucially on the price competitiveness of the individual exporter, and even more of the export sector as a whole. Only if exporters are competitive in price terms can they grow market share and boost profits through healthy margins. Otherwise, they must choose between maintaining prices and losing market share, or dropping prices and taking lower margins.
That is, indeed, what seems to be happening to New Zealand exporters. They get to the export starting line, but something then stops them from running a successful race. Their failure, or inability, to kick on means that they do not derive the expected advantage from faster growth, better returns, and higher productivity. The virtuous circle eludes them.
We do not need to look far to identify the culprit. We have run, and have done for many years, a policy of perennially high interest rates and consequently over-valued exchange rates that has meant that our exporters are always fighting a head wind. They struggle to the starting line but are then weighed down, in price competition terms, by a dollar rate that cuts their margins and shrinks their markets.
Our narrowly focused macro policy may, in other words, be more than an obstacle to individual exporters, but the major factor in our productivity disappointments. The key to our economic salvation may be a willingness to think again. Mystery solved?
Bryan Gould
6 July 2010
*Some Rise by Sin, and Some by Virtue Fall: Firm Dynamics, Market Structure and Performance, by Richard Fabling (Reserve Bank of New Zealand), Arthur Grimes (Motu Economic & Public Policy Research), Lynda Sanderson (Ministry of Economic Development), Philip Stevens (Ministry of Economic Development)
This article was published in the NZ Herald on 12 July.
What Is The Point of a Coalition If Only One Voice Is Heard?
Nick Clegg’s performance in the election campaign’s televised debates promised briefly to stand election projections on their head. The voters seemed to decide when the crunch came, however, that more was required than a pleasant demeanour and a winning smile.
Election arithmetic, though, came to his aid and gave him and the Lib Dems another chance to show what they were really made of. Sadly, he seems on course to demonstrate for a second time that there is no substitute for substance.
Personality and personal relations do of course matter in politics; and it is certainly true that the personal chemistry- a shared social and educational background perhaps – between Clegg and Cameron seems to provide a glue that might hold the coalition together for a time. But, if the Lib Dems are to make a success of government, they need more than goodwill and a conviction that nice people will prevail. They need a searching analysis of the country’s problems and a hard-headed agenda for resolving them.
That is especially important when they find themselves in bed with partners who are not only much bigger and nastier than they are but who have a positive surfeit of ideological conviction and a ruthless determination to make it count. Nick Clegg is simply ill-equipped to stand up to the George Osbornes of this world. He seems to have gone along with the basic strategy of cutting the deficit, come what may, without firing a shot.
How else to explain the extraordinary spectacle of a supposedly left-of-centre party and its leader tamely endorsing a budget strategy that is positively perverse and that threatens a re-run of the global recession that similar neo-liberal doctrine produced less than two years ago? How is it that a financial crisis that failed to become a full-scale depression only because governments and therefore the taxpayers – and our government and our taxpayers in particular – bailed out the failed financial institutions has become the launching-pad for savage cuts in public spending and a punitive scaling back in the role of government?
Why should anyone believe that throwing people out of work, and then cutting the support available to the unemployed, will somehow set the economy back on its feet? Why should anyone believe that the government’s finances – including an indebtedness massively increased by the billions spent on the bail-outs – can be restored by ensuring that tax revenues are depleted because economic activity is flattened?
The government’s determination to give priority to cutting the deficit, at the cost of any other objective, makes sense only if economic policy is to be deliberately handed over to the perversely irrational. Our policy-makers seem to be running scared of the “bond vigilantes” – the very people whose irrationality created our problems in the first place – and to have a naïve faith on the other hand that the “confidence fairy” will work her magic. It will be interesting to see how long confidence remains in the face of this assault on common sense and economic reality.
It is disappointing that this fairy-tale nonsense is swallowed whole by so many commentators, and that attempts to debunk it are portrayed as the ravings of the mindless and the angry. It is not – pace Guardian leader-writers – the duty of coalition ministers to close their ears to argument. There is of course a distinguished and long-standing intellectual pedigree – from Keynes to Krugman, Stiglitz to Skidelsky – for the view that government’s responsibility in our situation is to maintain the level of economic activity, so that its own finances as well as those of others are restored as soon as possible. And, those with a knowledge of economic history will know that George Osborne is all too faithfully following in the footsteps of those like Herbert Hoover who followed similar policies in 1932 and plunged us all into depression.
That pedigree and that hard-won experience are not so easily dismissed. We might have hoped that someone who chose to lead his party into government might have been better equipped for the task. Nick Clegg is not, sadly, unique among politicians in seeming almost totally bereft of any understanding of economics but nevertheless convinced of his fitness to make major decisions about our economic future.
The least we can expect of our senior politicians, surely, is that they will make sure they know enough to be able to reach their own conclusions on the major issues of the day. It is not enough that these issues should be debated in the columns of our best-informed journalists. They should be debated at the very heart of government. What is the point of a coalition if only one voice is heard?
Bryan Gould
5 July 2010
This article was published in the online Guardian on 5 July.