Another Alternative
Successful managers act when it becomes evident that change is needed – and that is just as true of managers of the economy as it is of those who manage individual businesses. The evidence is now mounting that the creation of a single global economy has produced results, for both the global and national economies, that are far short of optimal. The time has surely come to consider that evidence and respond to it.
In a single global economy, the herd mentality of international investors means that they all chase the same opportunities, imposing unrealistic expectations on the recipients of investment capital, disabling those who are denied it, and creating a lurching stop-start process for the global economy as a whole.
That is why the last 25 years have been marked by a series of crises (particularly in Asia, South America, and Eastern Europe), by huge flows of “hot money”, by widening imbalances between rich and poor countries (the poor have actually got poorer), and by a dangerous dependence on the willingness of the rest of the world to finance an unsustainable American deficit. That is why, too, commentators like Joseph Stiglitz, Paul Krugman and even George Soros, are leading the charge for a reform of the world’s financial institutions and the way they operate.
There has so far been less interest in changes that might be introduced at the national level. Yet the results of globalisation have been just as damaging for national economies like New Zealand as they have for the global economy as a whole.
New Zealand has been one of the most enthusiastic participants in the global economy – but, given our small size, the results have been all too predictable. A bigger proportion of our economy is owned overseas than in almost any other advanced country. Repatriated profits and the high interest rates needed to finance our current account deficit weigh heavily on and inflate that record deficit. Most important commercial, industrial, investment and employment decisions are now made in overseas boardrooms. Wage rates are forced down to meet Chinese benchmarks. The insistence by overseas owners on “externalising” costs means that we have less capacity to make necessary social, environmental and infrastructural investment. Economic inequalities have widened dramatically.
International investors demand that the fight against inflation should be entrusted to a monetary policy that commits us to an interest rate and exchange rate roller coaster. Yet, while manipulating interest rates is less and less effective as a means of restraining inflation (particularly in the housing market), an overvalued exchange rate and the high interest rates needed to sustain it continue to inflict their familiar damage on the productive economy on which our prosperity depends.
There is no shortage of possibilities for changing tack. The issues are political, not technical. What is needed is the courage to buck the current orthodoxy. Fiscal policy, both to regulate demand and to influence the patterns of saving and investment, would help us to control inflation, while helping rather than damaging the real economy. Selective credit controls, investment incentives, and savings schemes would help stimulate domestic investment and increase New Zealand ownership and control over our own economy. Requiring more responsible performance and a greater commitment to New Zealand from overseas investors would limit the transfer of decision-making power from our political and business leaders to overseas boardrooms.
No one is suggesting putting up the shutters. But, if we are to escape the policy dead end in which we are now trapped, improve our long-term economic performance, and restore a proper degree of democratic self-government, then we must surely reclaim – in conjunction with other like-minded countries – control of our own economic destiny, before it is too late.
Bryan Gould
9 December 2006
This article will be published in the February issue of Management.
Why Are Interest Rates Not Working?
In theory, it was all so simple. Since inflation could not happen if the money supply was held stable, all you had to do was control the money supply and – no more inflation! The productive economy would rapidly adjust to the new monetarist discipline and would benefit – along with everyone else – from low inflation.
True, early attempts to define the money supply ran into trouble, when money turned out to be a surprisingly slippery concept. The attempt to measure the money supply was therefore abandoned, and reliance was placed on the crude instrument of controlling money’s price. The simple task of raising or lowering interest rates as appropriate was handed over to bankers who could be relied upon not to be swayed by the inflationary pressures to which elected politicians were subject.
Raising interest rates, though, turned out to be far from painless and had a real and debilitating effect on many parts of the economy, not least on the wealth-creators as opposed to the wealth-owners. It was also, as a counter-inflation instrument, slow-acting and poorly focussed. But, despite these obvious downsides, it did seem to work, even if it took a long time and did a lot of damage in the process.
That is, until now. Alan Bollard has been raising interest rates for a couple of years now, but the housing market remains stubbornly buoyant, bank lending is correspondingly rising, domestic consumption refuses to die back, imports continue to surge, our current account is in record deficit. No one can be confident that these inflationary pressures will abate. So, where to from here?
Current orthodoxy allows the Reserve Bank few options. The Governor is now caught in a trap of his own making. If he raises interest rates yet further, this will in turn lift the exchange rate, sending our current account deeper into the red. The productive economy, on which our prosperity depends, will suffer further damage.
Most worryingly, if recent experience is anything to go by, inflation will go on unchecked, whatever damage is done to the real economy. If interest rates cause the dollar to rise, consumption will be stimulated. People will go out and spend on cheap imports for as long as every dollar will buy up to 20% more than it should. And they will stick with investing in houses rather productive industry for as long as monetarist orthodoxy and an overvalued dollar depress profits and growth in those industries and while high interest rates offer a better short-term return.
In vain will the Governor lecture New Zealanders on their failure to save and their predilection for investing in houses rather than in productive capacity. He has no one to blame but himself. Economics is a behavioural science. People do not respond to lectures, but to economic realities.
And the longer he persists, the worse his predicament becomes. The weaker our productive economy and the bigger our current account deficit, the more we need high interest rates to attract overseas “hot” money to finance it. And since even that inflow will not fill the gap, we have to sell off yet more assets to foreign owners, making our current account worse with the double whammy of increasingly high interest payments and larger volumes of profits repatriated overseas.
All of this might just about be tolerable if the medicine was working – but it isn’t. Interest rates are no longer effective as a counter-inflation instrument. Indeed, they might even be adding to inflationary pressures.
The initial impact of higher interest rates is of course to raise prices, not reduce them. The counter-inflationary effect is expected to come from restraining bank lending – by far the most potent inflationary factor in our economy – by making it more expensive. But what if borrowers simply absorb the increased cost and carry on regardless?
That is indeed what seems to be happening. This is partly because of the high proportion of New Zealand borrowers who have fixed rate mortgages, so that they are insulated for a time against rate increases, and partly because the continued strength of the housing market has taught home-owners that increased mortgage payments are only a minor offset compared to the constant capital appreciation against which they can borrow at the bank.
Higher interest rates simply become another cost increase which is painlessly absorbed into the cost and price structure of the housing market – and the overvalued dollar also chips in by raising the price of New Zealand assets against assets held overseas.
If the only monetarist means of slowing the housing market is to use an interest rate sledgehammer that kills everything, the time has surely come to look at other options, even if they may all have their downsides. Fiscal measures, particularly within the regime established by the Fiscal Responsibility Act, would certainly be more effective and better directed than interest rate rises. They could include investment incentives designed to promote productive investment. Restraints on certain kinds of bank lending could be put in place.
Monetarists take a surprisingly static view of how the economy works. Their insistence on using high interest rates to drive down prices has run us into a blind alley. Getting off the interest rate and exchange rate roller coaster, and giving priority to the real rather than the financial economy, might actually encourage some sustainable productive growth which would be the best counter-inflation strategy of all.
New Zealand led the way – misguidedly – into the more extreme versions of the monetarist revolution. We now have the chance to make amends by being the first advanced country to recognise the need to change course. The Governor himself has acknowledged the limitations of the current orthodoxy. Let the debate begin!
Bryan Gould
16 November 2006
The Globalisation Bell Tolls for us All
The decision taken in New York to close the Colgate Palmolive factory in Petone and supply the New Zealand market from production in Australia and elsewhere is the latest demonstration of just how far this country has lost control of its own economic destiny.
Successful New Zealand companies – Trade Me, 42 Below, Ihug – are snapped up by overseas investors. Failing New Zealand companies, like Feltex, are bought at a knockdown price by overseas competitors and the domestic workforce forced to accept poorer wages and conditions. Overseas owners of our basic infrastructure threaten, as in the case of Toll Holdings, to limit the service they deliver in the interests of maximising their profits. Even the most New Zealand of New Zealand companies, like Air New Zealand, propose to take large chunks of their operations offshore, and invite foreign contractors to deliver supposedly cheaper services by driving down wages and conditions.
In most of these instances, it is the workforce that pays the immediate price. But none of us escapes. Workers may lose their jobs and suffer wages cuts, but we all bear the loss of that growing volume of profit that is repatriated – profit produced from our economy but, by virtue of increasing foreign ownership of that economy, benefiting others. We all bear the cost of the high interest rates needed to attract the “hot money” without which our record current account deficit could not be sustained, a deficit made larger by precisely those selfsame high interest payments and profits repatriated across the exchanges. And we all suffer the loss of control over our economic lives as a result of decisions increasingly made in boardrooms which may hardly know where New Zealand is, let alone care about it.
These are high prices to pay for our enthusiasm to offer ourselves up to the global economy. Whereas once, an overseas company wishing to operate in New Zealand could be required to meet conditions stipulated by our government – conditions designed to protect the workforce, and consumers, and our social and environmental interests – our governments are now powerless to stipulate anything. If they should indicate any wish to establish minimum protections for our interests, they will smartly be told that the investment will go elsewhere.
Now, as the economic and industrial news reinforces every day, our ability to establish our own conditions and pursue our own policies in the interests of our own people, has well and truly slipped through our hands. We have sold so much to foreign interests that we have little left to sell. We are no longer able to take the decisions needed to protect what is left. We are rapidly being absorbed into the economy of Australia, and – if not Australia – then further afield, without a single democratic vote being cast.
Overseas interests now dictate a whole range of policies. Wage rates are increasingly set according to the benchmark of Chinese wages. Tax rates have to follow the Australians. Employment and industrial relations law, health and safety legislation, rules about the re-investment of profits, have to comply with the requirements of overseas investors, not of New Zealanders. Even environmental issues – so much in the news following the Stern Report – are determined according to the wishes of overseas operators. When a carbon tax was proposed in order to meet our Kyoto commitments, it was rapidly scuppered by the threat from Comalco and others to move their plants elsewhere.
It is not, in other words, only economic power which has moved decisively out of our hands. It is political power as well. The political debate is now shaped and constrained in the interests of a small, self-interested and ideologically unrepresentative group of immensely powerful investors who could never have secured support for their extreme positions if they had had to seek a democratic mandate.
Their influence extends as far as deciding what the macro-economic policy settings should be and how they should be decided. This week, we had yet another meeting of top businessmen to consider the question of how we, as a country, could improve our economic performance. The best they could apparently come up with, as a “big idea”, was that the removal costs of people appointed from overseas should be tax-free!
No one apparently questioned the policy settings which are largely dictated by international capital and which mean that central issues of economic policy are decided by unelected officials, that the chosen instruments – like tinkering with interest rates – are increasingly ineffective as a counter-inflation strategy but do great damage to the real or productive economy, and that the economy as a whole is forced to pursue a dizzyingly damaging course up and down an exchange rate roller coaster.
No one would want to put up the shutters, or to see a “fortress New Zealand”. But we should surely be debating the question as to whether our wholehearted readiness to hand over our economic fortunes to the whims of a more and more concentrated number of international investors is not exacting too high a price in terms of lost economic benefit and diminished democratic control over our own future. Isn”t it time – if democracy is to mean anything -to restore the power of governments to govern, in all our interests?
Bryan Gould
2 November 2006
This article was published in the New Zealand Herald on 7 November 2006
Global Warming and Market Failure
The Stern Report draws some alarming conclusions from the growing scientific consensus that global warming is a fact and is caused by greenhouse gas emissions arising as a result of industrial and other man-made processes. The Report demands an immediate and effective response from governments around the world.
It also prompts a prior question. Why has the free market – so often hymned as infallible by right-wing economists – allowed this situation to arise? And why have governments not intervened before now to protect us against this extreme example of market failure?
As I point out in The Democracy Sham, the world economy is now controlled by a small number of highly ideological and self-interested power players who are prefectly prepared to put that self-interest ahead of the health of the planet itself. They are able to treat any cost that does not arise directly – in terms of the bottom line – as “externalised” – that is, to be borne by someone else or, in many cases, by no one at all. Environmental costs fall clearly into this category. Their existence is either denied altogether, as in the case of global warming, or lip service is paid to dealing with them. Governments, other agencies and individuals who dare to take a different view are told that if they do not like it, the economic activity at issue will simply be moved somewhere else.
A prime example of the impotence of governments, when faced with this kind of blackmail in tlhe global economy, arose recently in New Zealand. The New Zealand government has signed the Kyoto Protocol and proposed a carbon tax as a means of helping to meet its Kyoto commitments. They were promptly told by Comalco, the multinational aluminium smelters, who are major users of electricity, that a carbon tax would mean that they would move their plant elsewhere. The government abandoned the carbon tax and is left for the time being without any credible means of bringing about a significant reduction in emissions.
Global warming, in other words, is just the latest and highest-profile example of the heavy price we pay for conceding control of the world economy to a “free market” in which a handful of operators can hold the rest of the world to ransom. It is time, in the interests of us all and of the planet, to re-establish political and democratic control over the economic process.
Bryan Gould
2 November 2006
The Democracy Sham
In The Democracy Sham: How Globalisation Devalues Your Vote, Bryan Gould considers the impact of the global economy on the democratic process in a number of countries, including New Zealand and Britain. He shows that international capital is, by virtue of its freedom to move at will across national boundaries, now able to dictate to democratic parties and elected governments the economic and other policies they can and cannot pursue. The result is that the political choice offered to voters has, without their realising it, been narrowed and constrained and the voice of the left has been muted and virtually extinguished.
Bryan Gould explains the development of the global economy and the reasons for its current hegemony. He shows that the orthodox justifications for globalisation – that it has delivered better economic and other outcomes for both the world economy and individual countries – cannot be supported, and that it has, on the contrary, produced a global slowdown and unsustainable inequalities and instabilities on both the international and domestic scale.
He looks at the political implications of what he describes as an historic shift in the balance of power between capital and labour, and at the failure of parties of the left to mount any effective resistance. He concludes by considering the steps that could and should be taken to restore balanced and sustainable economic development in the world economy and a fully democratic choice to voters in countries as diverse as New Zealand and the United Kingdom.
The Democracy Sham: How Globalisation Devalues Your Vote is published by Craig Potton Publishing in September 2006.
National Radio Interview
Bryan Gould was interviewed by Chris Laidlaw about The Democracy Sham on New Zealand National Radio on the morning of Sunday, 10 September. Excerpts from the interview appear below.
“What I am concerned to do is to dispel the notion that the social and political and environmental downsides [of globalisation] that are becoming increasingly apparent can be offset by economic considerations…in other words, the economic story is not a good one either. National governments have found the going tough and internationally the economy has grown quite slowly since globalisation and has been marked by tremendous inequities and uncertainties and instabilities.
If we’re drawing up a balance sheet, and we can show that it’s not very strong on the economic side, that then frees us to look at the political and environmental and social consequences that I think are inimical to the kind of world economy we’re trying to develop.”
“It’s not surprising that people have on the whole been persuaded that globalisation has meant better times because for some people it has. What you have to ask is, but which people? It turns out that those who have done well, both globally and within national economies, have been the top ten or twenty per cent. They are able to develop the myth of better times for all by virtue of their ability to influence the way the media treats these issues. The facts show that many people – certainly those below the median point and some of those even above it – have not done well out of globalisation, and that’s true in strictly economic terms as well as in terms of controlling their own lives and influencing events close to home.”
“I wrote the book to answer the question as to why, when there is so much unhappiness about particular aspects of globalisation across the political spectrum, these concerns have so little political traction. The answer is, I think, that people have lost touch with the sort of analysis that I have tried to develop. They tend to look at third world poverty or threats to the environment or the loss of control to multinational corporations as separate, individual and discrete issues rather than as manifestations of the huge loss of control that has flowed from the ability of international capital to dictate to elected governments what the political agenda should be. So, without people being aware of it, the political debate has been narrowed, so that no major party, either in power or seeking power, dares to pursue a policy, either economic or flowing from economic policy, that would discomfort the international investors on whom they think they depend. So, even quite liberal or radical governments, like the Labour government in New Zealand, tailor their economic policies to suit international investors.”
“Thirty or forty years ago, overseas investors would have to negotiate terms with the elected government of a country in which they wished to operate. That government would specify the terms that were needed to reflect the interests and needs of their electorate. Today, the free movement of capital around the world means that international investors – and that means in reality fewer and fewer but bigger and bigger – can roam the world looking for the most congenial conditions, with the result that across the globe wage rates are driven down, and the treatment of profits becomes ever more favourable because competing governments feel that they must do what is required of them if they are to secure the investment they need.”
“One of the many downsides of increasing globalisation is that there are fewer and fewer companies [in a country like New Zealand] flourishing and maintaining their headquarters in New Zealand….That means that fewer and fewer decisions about our economy are being made in New Zealand and that decisions about how workers should be treated and where investment should be made are being made by people who don’t even know where New Zealand is, let alone care about it. And there are some severe economic consequences as well. One of the major burdens overhanging the New Zealand balance of payments is the huge proportion of our economy accounted for by repatriated profits and the interest we pay to [purveyors of “hot money”] in order to finance our deficit.”
“You can’t argue that the huge power of international capital will be deployed to secure the best outcomes from the viewpoint of the international investor, which means that only market values and market forces that impact on the bottom line will be taken account of, and that they will then sit back and allow governments to come along and change those outcomes. This is not a play exercise. International investors want certain outcomes and they will insist on getting them. They might allow a little cosmetic exercise at the margins but they are not going to allow claims for social justice to override the infallible market. The deliberate objective of free market economics is social injustice. The dice must lie where they fall.”
“I think it’s quite possible that the pendulum [of intellectual fashion that would normally allow a change of policy in the light of increasing dissatisfaction with globalisation] may have got stuck because of the power of international capital and the international media, which are just a subset of that same group, to dominate the agenda.”