Rescuing the New Zealand Economy
Bryan Gould’s new book “Rescuing the New Zealand Economy: What Went Wrong and What We Can Do to Fix It” will be published in New Zealand by Craig Potton Publishing. It will be in the bookshops on 22 September. Below is a short article about the subject-matter of the book.
As the Reserve Bank struggles to deal with both recession and inflation, it is time to review the course of the New Zealand economy over the past 25 years and to seek reasons for the cumulative failures which have led us to such disappointing long-term outcomes.
For too long, our policy-makers have argued that our poor performance – particularly in terms of productivity – is the result of everything other than their policies. Our comparative decline is now so endemic and so damaging to our living standards and even our continued viability, however, that we must draw the obvious conclusion that our policy-makers must take some of the blame.
The truth is that the simple certainties of monetarism, which seemed such a sure-fire recipe for success in the mid-1980s, have long since given way to a more balanced view of the true role of macro-economic policy. We now know that there is a huge downside to locking economic policy into a straitjacket from which only a single unelected official armed with one single target and one single instrument knows the escape route.
If we want a better economic performance, and in particular an improved productivity outcome, we must find a way of controlling inflation without burdening our producers with the highest interest rates in any advanced economy and with the perennial threat and reality of an overvalued exchange rate. The constant inhibition to competitiveness that results from an overvalued dollar means that New Zealand industry is never profitable enough to re-invest in new capability and innovation.
There is no shortage of options for dealing with inflation that are both more effective as counter-inflationary measures and less damaging to the productive economy. It is only the ideology of the “free market” fanatics that prevents us from taking these sensible steps.
Bryan Gould
12 September 2008
Don’t Leave It To The Bankers
As Gordon Brown’s tribulations mount, prompting amongst other things a reappraisal of his time at the Treasury, it is perhaps not surprising that even his most widely celebrated policy innovation – the “independent” central bank – should come under scrutiny. What is even more surprising, however, is why it was almost universally believed to be such a good thing in the first place.
The independent central bank was of course seen as an important weapon in the monetarist armoury. Monetarism is, after all, an expression of an extreme belief in the infallibility of the market – an article of faith for New Labour. Governments cannot be allowed to intervene since any such intervention will frustrate the market’s unfettered operation. What could be more natural, therefore, than to ensure that elected politicians are excluded from the formulation of monetary policy?
This is not, of course, quite how the independent central bank is presented to the public. The public have been sold on the idea that an independent bank is necessary if inflation is to be controlled, since politicians cannot be trusted to take the hard decisions that are necessary. But a careful study of the recent history of the battle against inflation suggests that it has very little to do with the independence or otherwise of the central bank. Inflation in the 1970s was a world-wide phenomenon, but by the mid-1980s – reflecting world conditions – it had largely been brought under control. The claim that an independent central bank is essential if inflation is to be controlled in any case looks less convincing today, with inflation running at over 4%.
But what is really remarkable about an independent central bank is that it is a major step away from democratic government. The price we pay, in other words, is not just an economic one, but is a significant weakening of our democratic institutions. What is identified as the over-riding issue in economic policy is now the exclusive preserve, not of elected governments, but of unaccountable officials.
How this has been accepted is even more of a mystery when one considers that the “independent” central bank is in no sense objective or neutral. It is a bank. Its main clients are banks. It is staffed by bankers. It can be relied upon always to put the interests of the financial establishment ahead of those operating in the rest of the economy. Our economic policy is, in a very real sense, made in the interests of the holders of existing assets rather than of those who live and work in the real economy where new wealth is created.
This bias seems more extreme the longer one looks at it. Not only has the Monetary Policy Committee ensured that the productive sector should bear the burden of its counter-inflationary measures. It seems also to have deliberately averted its gaze from the factor that really is the primary cause of inflation – the huge rise in bank lending.
How have we arrived at this remarkable situation? It is not surprising that the bankers themselves should support and welcome it. Economists, too, will naturally feel that the authority and credibility of their profession have been underpinned by this recognition that it is only the high priesthood that is competent to address these important issues.
But why have politicians so readily accepted this substantial diminution of their powers? The answer is that it is very convenient for politicians to be able to contract out the most difficult decisions they are faced with. How useful it has been for Ministers to be able to pin responsibility on the Bank and to claim that the travails of the economy are caused by the mechanistic workings of the market and of essential monetarist disciplines rather than actual policy decisions.
But is it not time that we reminded them of their responsibilities? If they want to exercise power in a democratic society, they should not be allowed to pick and choose which responsibilities they accept.
There is of course an important role for an effective central bank. A central bank is essential to maintain a proper prudential supervision of banks and of the financial sector more generally – something that has been sadly missing from the scene over recent years. A central bank will regulate and enable the banks to interact in an efficient way that benefits the economy as a whole. The central bank will be an important source of advice on financial matters. But none of this requires the central bank to be immune from challenge or that its actions should be free from debate and discussion, particularly when it is uniquely entrusted with the power to give expression to a narrow and bank-dominated view of the true purpose of economic policy.
The growing economic crisis demands that sacred cows should no longer be immune. Even in New Zealand, where the modern fashion for an “independent” central bank first surfaced, the debate is being re-opened. If we want an economy that more faithfully serves the interests of all of us, and not just those of a small self-interested minority, economic policy should be restored to the democratic arena.
Bryan Gould
4 September 2008
This article was published in the online Guardian on 6 September.
Putrefaction
I joined the Labour Party in 1964. I had been moving left since leaving home, and two years at Oxford during the fag-end of the Macmillan government had convinced me that Britain needed a Labour government. I was outraged when a run on sterling following Labour’s narrow election victory seemed to me to show that the City was intent on reversing the decision delivered by the popular vote. I joined up as my own small personal declaration of defiance.
I suppose I had expected when I joined the Labour Party to become part of a great movement of principle and social justice, dedicated to improving the lot of the common citizen – an heir to a great tradition of resistance to privilege, greed and injustice. It wasn’t quite like that – the primary focus was on a weekly bingo session which raised just enough money to keep our pathetically small branch alive – but there was no shortage of good people, and plenty of debate about how a Labour government could reform and improve society.
When I was eventually elected to Parliament, I discovered that there were many different kinds of people who had become Labour MPs. There were the usual placemen and time-servers, there were those who craved the supposed fame and glamour or who enjoyed the massaging of their egos, there were the machine politicians who relished playing the game for its own sake. But there were also, in good numbers, men and women who were genuinely motivated by a desire to do good (how odd that “do-gooder” is almost now a term of abuse) and who saw their time in Parliament as a chance to improve the lives of those who had sent them there.
And while MPs, like everyone else, had their share of character flaws, and some were attracted by the mantra that all was fair in love and politics, most dealt with their colleagues – from whatever side of the House – with the same courtesy, respect and fairness that they would expect to be shown in their private lives.
That is why I am distressed at the latest headlines. What have they got to do with Labour values and the true purpose of Labour politics? What relevance do Russian billionaires and Mediterranean yachts have to the lives of Labour voters who look to the Labour Party to advance and protect their interests? Are we really to accept that the road to social justice lies through the – literally – “filthy rich”?
What is that sweet fetid odour of putrefaction that assails our nostrils? What is the satisfaction to be gained from the “high life” if what it brings is a grubby game of tit-for tat and tittle-tattle? Are the knife in the back and the poisoned whisper the proper instruments for the achievement of Labour’s noble purpose?
If Gordon Brown wants to save his government, and more importantly his party, he should eschew the use of these reputed “skills” and “arts”. There are no straits so dire for government or party as to warrant a descent to these depths.
Was Gordon Brown’s Reputation Justified?
Like so many others, I looked forward to Gordon Brown’s accession to Number Ten. Here, I thought, was the chance of breaking with the spin and superficiality of the Blair years. With Gordon, we would surely hear the authentic voice of Labour and welcome the end, even if it was not publicly acknowledged, of the New Labour project.
Why have those expectations been so comprehensively dashed? How did we get it so wrong? Why is Gordon’s leadership proving such an unmitigated disaster?
There is not one, but several answers to these questions. Those who saw in Gordon a mere technocrat, a bloodless (not to say desiccated!) calculating machine, may have had a point after all. Here, it seems, is a man who may live and breathe politics, but who is incapable of articulating what he feels about it. The more he talks of his “vision” the more arid it seems.
We can now see that his many critics may have been right in condemning him for being more comfortable with figures than with people. Those long years of apprenticeship in The Treasury may have been, perhaps, an amazing stroke of luck – providing him with the closeted comfort of doing his sums while never having to confront the real blood and guts world of real politics.
And how lucky he was in another sense. He inherited an economy that had been released from the bondage of the Exchange Rate Mechanism and which accordingly proceeded to out-perform our European competitors, saddled as they were with euro-driven centro-monetarism, by a comfortable margin. This was the era of the easy-credit property bubble. The tenant of Number 11 Downing Street needed to do no more than look and sound tough, and then sit back and garner the plaudits of those who reaped the profits – plaudits which hugely inflated an unearned reputation.
It may be that that reputation has always been much more substantial than was ever deserved. I have recently consulted my own memoir of the period when Gordon Brown as Shadow Chancellor insisted, even more fiercely than the Tory government, that the United Kingdom should remain within the ERM, come what may. I noted at the time that “it has always been a puzzle to me that people who make mistakes of such magnitude and reveal such a total inability to understand the issues of which they are supposed to be masters nevertheless sail serenely on, unscathed by any suggestion that they might not be up to the job.”
Gordon’s reputation as a successful Chancellor and a Prime Minister in waiting may, perhaps, always have been based on a soufflé of good fortune and complacent media who were content to go along with the myth rather than probe for the reality. And the Labour Party itself failed to meet its responsibilities as well.
When the time came to elect a successor to Tony Blair, the Party had its one chance to satisfy itself that the Brown reputation was justified. A leadership election would have provided a contest of ideas, of vision, of sheer political nous, which might have been enough to ring alarm bells.
It was with that goal in mind that I was prompted to stand against John Smith, another widely anointed successor to the leadership, in 1992. Unhappily, no one could be found in today’s Labour Party to undertake such a daunting but necessary task.
So, is Gordon – and his personal qualities or lack of them – solely to blame for the debacle? Certainly not. The tragedy for Gordon is that a career that was blessed for so long by extraordinary good fortune has now seen his luck turn big-time. His undoubted strengths might continue to have won the day but for two strokes of bad luck over which he has had little control.
The first is the bursting of the credit bubble and the consequent and threatening damage to the whole international banking sector and world economy. It could be argued that, as Chancellor for most of the relevant period, he cannot escape blame for what has happened, but – even so – there are many reputations other than his that must, in the light of what we now know, be reviewed even more savagely.
The second is that he is not, in reality, a first-term Prime Minister. The Blair-Brown duo is so well-established in the public mind that Gordon has not had the luxury of a fresh start and fresh hopes for his government. The failures of the Blair government, and the disenchantment not only with Labour politics but with a politics as a whole, are Gordon’s failures as well. His long-time friend and rival has had the last laugh. The keys to Number Ten came enclosed in a poison chalice.
Bryan Gould
28 July 2008
This article appeared in the online Guardian on 28 July
New Labour – Not Labour
New Labour’s current travails have prompted a number of people to recall a piece I wrote for the New Statesman in 1999 – it was a review of Paul Routledge’s biography of Peter Mandelson – and to ask if they can see it again. So, here it is.
“When Peter Mandelson’s resignation from the cabinet was reported in New Zealand – a resignation apparently caused by Paul Routledge’s investigations – he was described to a public which had never heard of him before as “the architect of New Labour”. “Yes,” said my New Zealand friends, who had noticed the capital N, “but what is New Labour?”
As many have remarked, the capital N is significant (though the New Statesman style sheet sticks resolutely with the lower-case version). It signifies that “New Labour” is, and was intended to be, much more than might have been expected as a rational response to four consecutive election defeats and to the huge social and other changes which have taken place in Britain over two decades. Those changes, whose pressing necessity by the end of the 1980s was surely evident to all but the most purblind, would have taken place in any case.
The modernisation of Labour, the reappraisal of Labour policy, the rethinking of the relevance of Labour principle to modern circumstances, the recognition of people’s aspirations as well as their needs, the positioning of Labour as a political force which empowers rather than limits, the reaching out to a new majority – all of this was already being undertaken by many Labour thinkers and activists who did not see the need for that capital N.
The truth is that “New” Labour is more than a renewal or modernisation or updating of Labour. It is a project born of the conviction that Labour was dead – in the sense that it would never again be electable. Something new – in the sense of a complete break – was required. It was the completeness of the break that mattered. New Labour defined itself by not being Labour. Issues on which the break could be highlighted were actively sought. New Labour is not Labour renewed. It is Labour rejected, Labour renounced. New Labour is a negative. New Labour is, and is meant to be, Not Labour.
We do not need to look far for the genesis of this belief. There is a constituency out there which is instinctively Not Labour. They knew immediately what the three-letter word beginning with a capital N really meant.
They are the people who had always wanted a party that would salve their consciences, would give them a sense of moral and intellectual superiority, would provide them with the illusion that they were – under the skin – blood brothers of the dispossessed, without threatening the comfortable privilege which they enjoyed and expected. They are the intelligent, well-meaning, agreeable dinner party companions who reveal that, despite their socialist convictions, it turned out that the local school was simply not academic enough or little Johnny was just too sensitive and so, after an appropriate struggle with their consciences, they had to send him to a fee-paying school.
These people had always had a problem with Labour. They did not like Labour’s sharp edges. They voted Labour in a good year, but also flirted with the Liberals, might even have supported a liberal Tory, and enthusiastically supported the Social Democrats for a time. They are found disproportionately among the liberal professions, the universities and the media. They are people who love to, and are often paid to, think, talk and write about politics.
Peter Mandelson, as Routledge’s book shows, understands this world very well. It is his world. It is in numerical terms a small world, but it is disproportionately important in shaping the political agenda. It is also a world which, despite its smallness, has the self-confidence (not to say arrogance) to believe that it is all there is, or at least all that matters. (It is one of the paradoxes of a complex society like Britain that it is possible to have an existence which is almost completely insulated against the lives and experiences of large numbers of other and different people.)
And so Not Labour was born – a party shorn of all those aspects that might frighten the bien-pensants. It was, from the outset, an exercise in exaggeration, in overkill. Yet what determined the 1997 election result was that Thatcherism was a busted flush, John Major had been permitted by the electorate’s casual decision in 1992 to demonstrate conclusively that he was not up to it, and the voters were determined to secure a change. The question of renewed Labour or new Labour was simply not a major factor.
But a Labour Party that had been brought, understandably, over years in the wilderness to the belief that any sacrifice was worthwhile for the sake of election victory had given up any will to contest what they were told by the experts. If embracing Not Labour was the price of victory, then so be it. The possibility that the sacrifice may not have been necessary was not allowed to intrude into the euphoria when victory finally came.
Yet sacrifice it clearly was. Much that is important and valuable to British politics and British democracy has been jettisoned. The prospects of acting on a non-establishment view as to how British society might be reformed have been fatally undermined. Democratic choice has been limited. Not Labour is self-consciously a centrist party whose purpose is to marginalise and starve of sustenance parties to the right – and the left. The only competitors allowed will be those who provide, for marketing purposes, merely an alternative brand of centrist politics.
That is how it will seem, and rightly, to many Labour activists. For many of them (and I think particularly of members of the cabinet), the last decade has been a painful period, over which they have yielded up more and more of what it was that mattered to them as individuals and as a collective. This has involved more than the process of compromise and pragmatism which is central to all democratic politics. It is even more than the less savoury treacheries, large and small, that individuals make in secret for the sake of personal ambition. What was required of all those Labour activists was a sustained, deliberate and collective abandonment of what had brought most of them into politics in the first place.
Battle-scarred as they are (and the scars are in private as well as public places), most remain nevertheless grounded in Labour politics. For them, Not Labour is a device, a means to an end. Increasingly, they look from one to another, mutely asking for a sign that the sacrifice will soon be at an end and that the real business of government can begin.
It is beginning to dawn on them, however, that Not Labour is the end and not the means. When they look for reassurance that normal business is to be resumed, they discover a leadership whose instincts, particularly under pressure, are to reinforce the Not Labour message. Their leader’s response to some small local difficulties on returning from abroad is his announcement of new policies which will be “strict and authoritarian” – the authentic voice of Not Labour.
This is not an accident. When Peter Mandelson was famously or notoriously swapping horses in the race for the Labour leadership, it was not just presentational skills he was looking for. Gordon Brown was not instinctively a Not Labour man. Tony Blair was and is. In Blair, Mandelson found his political soulmate – someone who effortlessly and instinctively treads the same path that Mandelson, perhaps more consciously, had mapped out. It is not necessary to dislike Mandelson personally to try to lay this bare. Indeed, the Routledge book is on occasion seriously vitiated by the cheap shots – born no doubt of deep loathing – that he takes at his subject.
On the contrary, Peter Mandelson can be a delightful and charming companion. His charm is an important part of his armoury. It is not an exaggeration to say that he seduces those with whom he wishes to work closely – not in a physical sense, but for the purpose of establishing a sort of emotional thraldom. The bonds between Blair and Mandelson – emotional and political – will not be broken easily.
Nothing in politics is permanent, and Not Labour will fade away sooner or later. But it looks set for a good run. I think I can claim to have seen it coming. It is not for me.