A Standard and Poor Budget
We may never know what passed between Standard and Poor’s and our Finance Minister on the eve of the budget. And only time will tell whether the “primary focus” of the budget was – as the Prime Minister claimed – the avoidance of a credit rating downgrade and whether, in the long run, that goal was achieved. But the episode does raise a number of interesting questions.
Eyebrows were understandably raised at the explicit acknowledgment that the government’s budget strategy has been shaped by the need to please an overseas credit rating agency. How did we, as a sovereign country, become so powerless to decide our own destiny?
We don’t have to look far for the answers. After decades of poor economic performance and – as a consequence – of living beyond our means, we are now one of the world’s most indebted countries. On some measures, only Iceland had a greater overseas debt in proportionate terms than we have – and we know what has happened to Iceland.
The size of our debt means that we are dangerously dependent on the willingness of others to lend to us. In times of plentiful and relatively cheap credit, borrowing (at a price) was not a problem. But the global crisis has changed all that. Credit is now in short supply and countries like New Zealand, with substantial deficits to finance, will have to pay an interest rate premium to borrow – if they are able to borrow at all.
The level of interest we must pay will depend crucially on our credit rating – and that is why the government is so concerned about the view taken of us by Standard and Poor’s. According to the Treasury, a downgrade would cost the country $600 million and interest rates could rise across the board by 1.5%.
But is this all as stark as it seems? Are the threats of a credit downgrade and its consequences as serious as they sound, and – even if they were – would they be a price worth paying for gains that are even more important?
We should note, first, that the Treasury and others have been very relaxed over a long period about interest rates that have been much higher and more damaging to our economy than anything currently contemplated. And we should also note that many of the more frightening Treasury forecasts of the likely level of government debt seem to be simple extrapolations of the short-term and recession-induced deterioration in the government’s financial position, and to pay little attention to the beneficial impact of an effective counter-recessionary strategy. And no one – least of all Standard and Poor’s – could overlook the fact that our government’s financial position is, by both our own historical standards and in terms of international comparisons, reassuringly strong.
Let us assume, in other words, that the credit rating agencies are not lacking in intelligence and know their own business. The government may be obsessed by the projected level of government debt but Standard and Poor’s know that the government’s relatively healthy debt position is only a small part of the real problem – the huge amounts that we as a country (and that includes all of us, banks, businesses, individuals as well as the government) have to borrow overseas if we are to keep our heads above water.
That is the real issue of credit-worthiness – not the government’s debt but the country’s indebtedness. That can be corrected only if we reverse the long-term failure of economic policy and performance and it will only get worse if we fail to use the spending power of government to rescue us from recession. That, surely, is what a credit rating agency should be focusing on.
The best and quickest way, after all, of bringing both the government’s debt and the country’s borrowing requirement down to manageable levels is to make the recession as short and as shallow as possible. The buoyant tax revenues produced by a recovering economy will quickly bring the deficit down, and repay the $600 million supposed cost of a credit downgrade (if it should happen) several times over. Just how rapidly that can happen can be seen from how fast the government’s finances travelled in the opposite direction once the recession struck.
No one would welcome a credit downgrade. No one can cavil at the government’s insistence on value for money in public spending. But our over-riding goal should surely be recovery from recession. In giving priority to a temporary increase in government debt as we face the worst recession in generations, we may be taking our eye off the ball. There is a bigger game in town, and that is the health of the economy as a whole.
Bryan Gould
28 May 2009
This revised version of an earlier piece was published in the New Zealand Herald on 1 June.
The Country Not The Government Should Be The Budget Priority
Even as they prepare their annual budgets, governments don’t always enjoy the freedom of action they would like. The intervention of outside agencies like the IMF is all too familiar to many governments whose economies have run into the buffers, and even at the best of times New Zealand governments have been content to hand over major decisions about the economy to an “independent” (for which read “unaccountable”) bank.
In terms of democratic accountability, however, we seem to be plumbing new depths in this country with the tacit acknowledgment that the government’s budget strategy is being shaped by the view taken of us by a mid-level desk officer in an overseas credit rating agency. How did we, as a sovereign country, become so powerless to decide our own destiny? Why, at a time when the economic crisis has called into question so much of what was the prevailing orthodoxy, are we still so dependent on the opinions of bean-counters who are focused on only one small part of our economic landscape?
We don’t have to look far for the answers. After decades of poor economic performance and – as a consequence – of living beyond our means, we are now one of the world’s most indebted countries. On some measures, only Iceland had a greater overseas debt in proportionate terms than we have – and we know what has happened to Iceland.
The size of our debt means that we are dangerously dependent on the willingness of others to lend to us. In times of plentiful and relatively cheap credit, borrowing was not a problem, though even then the high interest rates we had to offer crippled our productive economy. But the global crisis has changed all that. Credit is now in short supply and countries like New Zealand, with huge debt to finance, will have to pay an interest rate premium to borrow – if they are able to borrow at all.
The level of interest will depend crucially on our credit rating – and because our debt is proportionately so big, the cost of even a small hike in interest rates as a consequence of a credit rate downgrade will be damagingly high. That is why the government is so concerned about the view taken of us by Standard and Poor’s, and why this month’s budget will be framed to please them.
This, then, is the long-term outcome of the economic policy we have pursued for twenty-five years – that our government feels that it must dance to the tune of a credit rating agency rather than address the worst recession in living memory with the policies that stand the best chance of bringing it to an early end.
There is, however, a mystery at the heart of the government’s acceptance that it must toe the credit rating line. The focal point of economic strategy appears to be the over-riding priority given to the size of the government’s debt. The scope for stimulating the economy through, for example, investing in much-needed infrastructure (which most commentators agree is the best way to deal with a recession) is said to be greatly constrained by a government debt that threatens to shoot into the stratosphere within a few years if public spending limits are relaxed.
But is this really the case? Let us leave to one side the argument I have advanced on other occasions – that stimulus now through public spending is the best way of reducing government debt in the medium to longer term. Let us instead register that even pessimistic projections of how far and fast the deficit might grow would still leave government debt at levels that in both our own historic terms and in terms of international comparisons would be comparatively low.
It is not government debt that is the problem. Careful management over the past decade has left the government’s finances in pretty good shape. We can afford, more than most countries, to allow the government deficit to grow a bit, if that is the price to pay for prudent investment in our economic future and for getting on top of the recession quickly.
Our real problem is not the government and the role that it might play in putting in place a counter-recessionary stimulus package. The underlying problem is the country’s indebtedness – what banks, businesses, individuals as well as the government need to borrow to fund our failure to pay our way. That problem is a function of the long-term failure of economic policy and performance – and it will only get worse if we fail to use the power of government to rescue us from recession.
This is a time for keeping our eyes firmly on the ball. There is a bigger game in town, in other words, than the government’s debt and the risk of a credit rating downgrade. The budget strategy should focus on the country’s accounts, not just the government’s. The best way of looking after the latter is to get the former right.
Bryan Gould
15 May 2009
The Expense of New Labour
As the scandal of MPs’ expenses unfolds, it threatens not only to expose individual sleaze but to create a crisis of confidence that will engulf the whole of the political class and Parliament as well.
While it’s not surprising that Labour, as the party in power, is in the firing line, the Tories, and others, all have their skeletons in the cupboard too. But for Labour loyalists, it is not enough to say that others are equally culpable; we feel that we have the right to expect better from Labour.
It is probably not too harsh to say that we don’t necessarily expect too much by way of principle from the Tories. They have always been a party of the self-interested. That self-interest is sometimes – in their better moments – tempered by a touch of noblesse oblige; but, in these days of the “self-made man”, there hasn’t been too much noblesse in evidence.
Politics is, we know, a difficult business which demands compromise and the adjustment of principle to suit reality; but Labour politics has always seemed to enjoy – even in an era of aggressive individualism – the redeeming influence of a genuine concern for others and for the well-being of the whole community. So, how did we come to this? How did Labour embrace a culture of self-aggrandisement, pursued even against the interests of the disadvantaged in that society that we like to insist, pace Margaret Thatcher, does exist?
It might be argued that we can’t indict the whole Labour Party because of the defalcations of a few. Well, that is indeed the question. Has New Labour’s “intense relaxation” about the “filthy rich” now been extended to ourselves? And does that indulgence cover the “filth” as well as the riches? Is this what New Labour now stands for in British politics?
Is there, in other words, a recognisable connection between the politics of New Labour and the fall from grace of individual Labour standard-bearers? The first evidence of this was the emphasis placed by the New Labour project on doing whatever was necessary in order to win power, even if that meant the abandonment of principle. Opinions may differ on whether the junking of much that had been considered to be core Labour values was really required for electoral victory – and no one can doubt that the way in which those values should be applied to the issues of the twenty-first century was overdue for re-appraisal.
But what was surprising about New Labour was the enthusiasm shown, not just for change and renewal, but for the positive adoption of a quite different agenda – one that had hitherto been seen, with its acceptance that the market should not be challenged and that growing inequality was the necessary condition for economic development, as the property of the right. The Labour Party found itself cut adrift from its traditional emphasis on the central role of government as defender of the weak, as a counter-force to an unfettered market and as a guarantor that everyone shared in growing prosperity.
As it floated free from its traditional moorings, little wonder that a new generation of Labour leaders became confused about what they were in politics for. If policy dictated that unashamed greed was indeed the irreplaceable mainspring of economic advance, how could it be wrong to act on those same precepts in one’s own life?
The whole thrust of the Blair government was, after all, that politics didn’t really matter, and indeed were best eschewed altogether. The Blair pitch was always that, if voters elected the right people (“pretty straight sort of guys”), they could safely forget about politics which would become nothing more than an annoying distraction – the domain of a few fanatics. The Labour Party was assured that it did not need political analysis or a programme for real reform.
But without that analysis and programme, what was power for? The question matters little to the right; power for them is the means by which the pace and direction of change can be controlled and, at times, completely frustrated. But for the left, power is surely a means to an end, to a different and better society – one which shares its benefits with everyone.
But that, too, was denied by New Labour. For them, the purpose of power was not to use it but to enjoy it and extend it. Power was a state of being, not a path to change. The over-riding priority of New Labour was always, from the first day of taking power, to retain it by winning the next election. Power as the instrument of change would be limited to those measures that did not alienate powerful interests and thereby jeopardise the perpetuation of power.
That is why controlling the agenda through spin, why manipulating events through a mastery of the minutiae, of the often grubby day-to-day detail of politics, became the leit-motifs of New Labour government. They rarely bothered to lift their eyes to wider horizons or to re-connect with their core values. Tomorrow’s headlines were always their prime concern.
Little wonder, then, that New Labour leaders lost their way. Short-term advantage, politically and personally, was all that mattered. The Labour Party is paying a heavy price for that distorted view of what left politics should be about.
Bryan Gould
12 May 2009
This article was published in the online Guardian (Comment Is Free) on 13 May
Step Forward Unesco
April in Paris is guaranteed to put a spring in the step of those fortunate enough to be here. Some may think, however, that attending the 181st session of Unesco’s Executive Board is not the best way to take advantage of the world’s most beautiful city.
But, while it is true that Unesco meetings are afflicted by the endless wrangling over procedure and drafting changes that characterise most international organisations, springtime may well be just round the corner – for Unesco, as well as for Paris. While the air is thick with warnings about the impact of the global economic crisis on Unesco projects, particularly in the developing world, there is good reason to think that that same crisis might propel Unesco – representing a quite different view of what is now needed – to the forefront of the global response.
We have, after all, witnessed the sudden demise of a set of beliefs which had placed huge emphasis on man as a purely economic being. For thirty years, we have increasingly handed control of our societies and economies over to those who insisted that all that really mattered was the bottom line, market forces, the profit motive. Economic man was, it was argued, all there was. The only way to extract maximum benefit for and from economic man was to entrust his future and wellbeing to the high priests of economic science – those lords of creation who alone understood the arcane secrets of what made economies tick and who required a heavy tribute, as bankers, financiers, and market manipulators, to reward them for their scarce and valuable skills.
We now know the outcomes produced by the exercise of those skills. The world’s economies have been laid waste by the global crisis – so much for that famed and hugely rewarded expertise – but the crisis itself was preceded by a growing recognition of the price to be paid for letting markets rip. Global warming, pollution, the threat to natural resources, a growing gap between rich and poor, have all been forerunners and storm signals of what is now revealed as the collapse of the era of economic man.
The time has come, surely, to recognise that our future as a species – perhaps even the future of our planet – now depends on more than the narrow, market-driven measurement of GDP. Economic recovery is certainly a priority, but it is a necessary rather than sufficient condition for a better future. We must now pay attention to wider questions – what is important to us as individuals and in our communities, what makes us who we are, what it means to be human. We need a new and more respectful relationship with the natural world in which we live and a greater hunger to understand and live harmoniously with our neighbours.
Step forward Unesco. The oldest UN agency, during the era of economic man, has been pushed to the sidelines. Its emphasis on education, on the physical, human and social sciences, on culture and language, on the sustainable use of natural resources, as the mainsprings of human development and wellbeing, has seemed quaintly old-fashioned in an era of aggressive profit-seeking. But a re-statement of those goals and values is now overdue. We can now assert, amidst the wreckage created by economic man, that we are more than economic agents, and that Unesco’s preoccupations point the way to a more complete and empowering sense of where our future lies.
It is after all the world’s billions who will pay for the current mess with their jobs, their homes, their taxes, perhaps even their lives. It is their interests – not those of banks and financial institutions – that should take centre stage. The focus of governments around the world on shoring up those institutions with taxpayers’ money may well be necessary in the short term, but an agenda based on the integrated wellbeing of people and societies will be needed if we are to restore the life chances of those ravaged by economic crisis.
There are, in other words, better ways of spending our money. If we want a decisive break with the mistakes of the immediate past, we should be investing for more than a short-term financial return. Our focus should be on strategically planned programmes for education in countries where schooling is still at a premium, in the strengthening of cultural identities to give people confidence to understand who they are and how they can play a constructive role in the world, in projects to protect and develop sustainable supplies of fresh water.
An agency like Unesco has never been funded to undertake these activities itself. Its current budget is pathetically small, and – in the current crisis – likely to get smaller. But, with proper financing, Unesco can provide the intellectual leadership and strategic direction to ensure that skills and capabilities that are at present scattered and fragmented across the globe can be linked and coordinated, so that we get the maximum benefit from what we already have. Unesco’s role is to help us to do better than merely learn what not to do. Agencies like Unesco can help us move forward by providing outcomes that are greater than the sum of their parts.
If these efforts are not made, we will be slower out of crisis and less confident of our future than we should be. With all the talk of trillions being spent on the economic agenda, a tiny fraction of that sum spent on the human agenda would pay rich dividends. That should be the real lesson learned from the demise of economic man.
Bryan Gould
26 April 2009
Bryan Gould chairs the New Zealand National Commission for Unesco.
This article was published in the online Guardian on 28 April.
Governments and Markets
As the global recession takes hold, governments around the world have – with varying degrees of reluctance or enthusiasm – found themselves taking centre stage. This is usually seen as a case of dangerous times requiring special measures. Many commentators and practitioners impatiently await the opportunity to return to what they see as business as usual, so that governments can safely be put back in their boxes.
This is, however, to misunderstand what has happened. The current role of government is not an unfortunate aberration. The recession has revealed an abiding truth – that the market can deliver its unmatched benefits only if governments are there when needed to make good its deficiencies and act against its excesses.
The plunge into recession illustrates what happens when market operators become so powerful that governments are unable to restrain market excesses. And the response we now see to recession shows that governments can act to correct market failure in ways that the market, left to itself, cannot. Economies are robust things. They would recover sooner or later without intervention. But – as all but the most purblind now recognise – governments can significantly hasten the recovery process, and thereby limit the misery that recession inevitably brings about.
The reason for this is that only governments can counter the inevitable tendency of recessions to feed on themselves. For most actors in the economy, the demands of self-interest mean that, in a recession, they spend less, invest less, cut costs, employ fewer people. Each individual decision may be rational and justified, but the cumulative effect for the economy as a whole is that recession is intensified.
There are those who say that governments should act as though they were individual people or companies. According to this view, governments in a recession should also cut costs, spend less and lay people off. But if governments behave like everyone else, the economy is condemned to a deeper and harsher recession than needs be. Those holding this view are so blinded by an ideological hostility to the very idea of government as to deny Keynes’ statement of the obvious – that governments have a unique responsibility to act counter-cyclically.
Only governments have the capacity and the duty to defy market logic. Only governments have the resources to over-ride what would normally be market-based self-interest and to substitute for it the wider interest in getting the economy as a whole moving again. Only governments can afford to live with long-term indebtedness if that is what is required in the interests of their shareholders – for which read everyone.
Government intervention, whether to underpin the liquidity of the financial sector or to stimulate demand in the real economy, may well be necessary if recovery is to be hastened, but it is – importantly – more than a singular response to a singular problem. It is a statement of a wider and ever-present relationship between governments and markets. Markets function best – indeed only function properly at all – if government is ready and willing to second-guess market outcomes. What is true of the economy as a whole and of financial markets is equally true of markets in general. If, for example, we are to save the planet, market regulation will be needed in place of the unrestrained exploitation of natural resources.
There are of course those who would at this point throw up their hands in horror. For them, the debate is about absolutes. The alternative to the unfettered market is state socialism. They do not see that to recognise and correct the deficiencies of the market is the best guarantee that a market economy can sustain itself efficiently and beneficially.
The recession has laid bare and illustrated in other words that the readiness of government to intervene is the essential condition on which the market can be made compatible with democracy. The whole point of democracy, after all, is that it ensures that the wider and longer-term interest is brought to bear so that the often harsh and unfair outcomes of unfettered market operations are softened and made more acceptable. That is what governments are for. If the market is infallible and must never be challenged, there is no role for democracy. Governments are then merely bit players and democracy merely a sham – a cosmetic trick to provide the illusion that the rich and powerful can be made to account for themselves.
As Rahm Emanuel remarked, a good crisis should never be wasted. We can profit from this recession if we draw from it the important lesson that the legitimacy conferred by the democratic mandate empowers and requires government to ensure that personal and sectional interests must not prevail over the general interest. There can be no return to the fallacy that the “free” or unfettered market establishes a kind of economic democracy that renders democratic politics irrelevant. The recession and the need for a government response to it may be, one hopes, an exception, but the value of the proposition that democracy rules is a constant.
Bryan Gould
17 April 2009