Who’s In Charge?
Who’s in charge of the economy? We need to know the answer and to know that someone is taking responsibility. As is becoming clearer by the day, we are entering a very dangerous phase. If we are to avoid an increasingly likely calamity, someone will have to bring in the measures that are needed to steady the ship. We need to know who that someone is.
Our economy, which we tell ourselves is doing quite well, is in fact overloaded with debt. The sense that things are going well is engendered by no more than our propensity to borrow and to demand a standard of living that we cannot afford. It is a fool’s paradise.
The huge and alarming rise in house prices is the product of record lending by the banks on mortgage. That in turn helps to fuel a consumer boom, as home-owners are encouraged to borrow against the reported rises in the value of their equity and to spend large sums on imported consumer goods. The banks will continue to lend without limit to house-buyers and consumers alike for as long as they are allowed to do so.
The result is a dangerously inflated bubble of house prices, consumer spending, and imports, none of which reflects any actual increase in wealth or is sustained by anything other than borrowing. History tells us that bubbles of this kind do not go on inflating ad infinitum and only rarely deflate gently. If we insist on continuing our rake’s progress, the day of reckoning is sure to come and it will be painful.
In the meantime, the injury we are doing ourselves is not just in the economic short-term. Rising house prices continue to exacerbate the housing crisis and widen social division. The consumer boom diverts our resources away from productive investment and saving. The import spree widens our trade deficit and forces us to borrow more and sell more assets to fill the gap, with the result that we lose more and more control over our own affairs.
So much is now widely understood and is scarcely denied. It is when we ask what is to be done and even more, who is to do it, that we enter the realm of controversy.
It might be thought that the answer is obvious. What else is a Minister of Finance for, after all? But it is not as straightforward as that.
It is an article of faith for our government that their role is a limited one. Monetary policy is contracted out to the Reserve Bank. There is some responsibility for fiscal policy but that is largely focused on cutting public spending and making changes to top-end tax rates, for largely political rather than economic reasons. Otherwise, the theory goes, the economy is best left to its own devices – or to big business. The market can be trusted to produce the best outcomes and should not be second-guessed.
The government is of course concerned about “the deficit” but it is not the country’s deficit that worries them. It is the imbalance in their own finances that monopolises their attention. The private sector’s borrowing and consuming boom, and the country’s perennial and growing trade deficit, on the other hand, are best left, it seems, to look after themselves.
The results of the government’s efforts to cut its own deficit are very apparent. As The Economist reports this week, New Zealand spends a lower proportion of GDP on public social spending (excluding health care) than most other advanced countries. Not surprisingly, it has experienced a corresponding widening of inequality and become one of the most unequal countries in the developed world.
The Minister of Finance may feel, according to his own priorities, that this is a proper reward for his efforts to cut spending. His Prime Minister’s contribution to resolving the country’s problems – excessive borrowing, consuming and importing – has been, however, to indicate that he will engineer a further boost to spending with $3 billions of tax cuts.
If we cannot expect much action from the government, who can we look to for an effective response to the dangers we now face? The other obvious candidate is the Governor of the Reserve Bank – and there is reason to hope that help might be more forthcoming from that direction.
There are increasing signs that the Governor is aware of the problems and has analysed them correctly; he may even recognise that the central problem is excessive bank lending – a factor, after all, that emerges right at the heart of the Governor’s responsibilities.
The problem here, though, is that the Reserve Bank’s central duty is to protect the banks’ viability – which can all too easily mean simply their profitability. It is unlikely that he will dare to come up with macro-prudential measures that will really make a difference. The banks themselves, however – as witness their decision not to lend to foreign borrowers – recognise the risk to their profits if the Governor is eventually forced to act.
The outlook therefore is bleak. The problem may be clear, but there is no one ready to step forward with a solution. The government disclaims responsibility for correcting it and is ready to make it worse, gambling that the chickens won’t come home to roost till after the next election, while the Reserve Bank will continue to put its loyalty to the banking system ahead of the country’s well-being. Poor New Zealand!
Bryan Gould
10 June 2016
What Will Happen After Brexit?
As the polls suggest yet more insistently the possibility of a vote for Brexit, the language of the Remain campaign becomes ever more extreme. There is of course hyperbole on both sides of the argument; but while the Leave campaign has without doubt been guilty of using on occasion exaggerated and emotive arguments, the prize for outrage and vehemence must go to those who insist that only the dishonest, recklessly misguided and downright wicked could possibly vote to leave.
These extreme sentiments are given additional weight by being expressed in the measured and sonorous tones of those who are accustomed to being taken very seriously – the political and business leaders whose views on such matters have always prevailed. These are the figures who are now being wheeled out with increasing frequency to convince the as yet unconvinced that Brexit would be a disaster of unimaginable proportions.
And unimaginable is, in their minds, exactly what it is. In the landscape of their imaginings, to leave the European Union would mean a kind of full stop. There is no conceivable world that could exist beyond such finality. It would be the equivalent of toppling over a precipice or of a train running into the buffers at full speed.
Hence the dire warnings that we would be turning our backs on Europe, or that our trade with the EU would come to a juddering halt, or that our economy would go into free fall. They can see no future for a post-Brexit Britain because they have neither the wit nor the will – or even the daring – to conceive of such a thing.
This failure of imagination, this refusal to think beyond the possibility of Brexit, is only to be expected, of course, in the run-up to the fateful decision; to admit it is only to encourage it. Instead, the Remain campaign repeats with blood-curdling emphasis the threats of retribution pour encourager les autres that are naturally to be heard from our European partners in the weeks and days before the vote. In the event of a decision to leave, though, all that would change. The rules of the game would transform overnight.
The cards in the hands of those involved would no longer be those of dark threats on the one hand and schoolboy “Yah, boo, sucks!” on the other. A new negotiation between sovereign negotiating partners will – after some initial jockeying for position, no doubt – get under way with the aim of arriving at a new and mutually beneficial arrangement. It beggars belief that either party would permanently turn its back on valuable trading and other opportunities in a fit of pique.
That negotiation will no doubt be difficult, drawn-out and detailed, as all the UK’s negotiations with our EU partners have been. But self-interest on both sides, to say nothing of the underlying value placed by all sides on European cooperation, will certainly produce an outcome that all parties can accept and endorse.
That outcome will of course differ in some important respects from the one we have become accustomed to over the last 40 years. The British parliament will regain some of the powers of self-government that have been conceded to undemocratic and unaccountable European lawmakers. Our ability to serve the interests of British industry, even at the cost of some damage to the supposedly sacrosanct principles of the unfettered free market, will increase. The trade balance, particularly in manufactures, might actually move in our favour instead of remaining stubbornly in deficit for every one of the last 34 years. Our ability to negotiate in our own interest trade deals with powerful emerging economies – as even little New Zealand, for example, has been able to do – would increase.
We have, after all, been here before. The same horrified voices now raised against Brexit urged us not to be “left behind” when we were pressed to join the euro zone. Our failure to do so certainly meant that we were in many senses excluded from the EU inner circle, but who would now dispute that we got the better of that bargain?
The truth is that the bien pensants who prefer grand visions and theories to practicalities have always been animated by a fundamental lack of confidence in the UK’s ability to function as a valuable partner and good friend to our continental neighbours while maintaining the powers of self-government, the policies and the trading links that best serve our interests.
It is that same defeatism that now makes it impossible for them to contemplate a re-negotiation of our arrangement with the EU. A Brexit would of course have costs as well as benefits – that is, after all, what a negotiation would be about – but a post-Brexit Britain would not be so inconsiderable that it could be tossed aside in anger by an EU that has its own severe difficulties and needs all the friends it can muster.
And as for “turning our backs” on Europe, a re-negotiation would confirm, not weaken, the undeniable truth that we are historically, geographically, politically, culturally and in every other way a part of Europe. It would allow us not only better to define our own role and contribution but also potentially to help set Europe itself on a more constructive course. A Brexit could be a new beginning both for us and for Europe.
Bryan Gould
7 June 2016
The New Consensus Misses the Target
So, now we know. The two major parties are agreed that the homelessness and unaffordability crisis has arisen because the market has not been allowed to function properly. It seems that the Auckland Council, in a misguided attempt to prevent urban sprawl, has restricted the supply of land with the result that prices have risen. With the Council cast as the villain of the piece, it looks as though the government can celebrate getting off the hook – but whether the consensus is in Labour’s interests, or those of the homeless, is less obvious.
The Greens, on the other hand, have a different take. For them, it seems, the pressing problem is the one that has been hogging the headlines – the plight of that growing number of Kiwis, in Auckland and elsewhere, who literally have no home, no washing or toilet facilities, no home comforts, nowhere to relax at the end of the day, nowhere to call their own.
That crisis demands the fastest possible solution. That will not be achieved by firing the starting gun for another round of property development. The crisis has arisen because we have not been building homes for that significant sector who simply cannot afford either purchase prices or rents – those whom the market, in other words, totally overlooks and does not provide for.
Our decade-long failure to concern ourselves with this group of our fellow-citizens has led inexorably to the current crisis. It can be remedied only by making good – and fast – our past failures. That means a publicly funded building programme of decent houses at reasonable rents in the areas where they are needed.
How is that funding to be found? It depends where our priorities lie, but a decent start could be made, as the Greens suggest, by desisting from treating Housing New Zealand as a cash cow, extracting over $100 million a year from the poorest people in our society to pay over to the government, and using that money instead to finance a building programme.
But, it will be argued, homelessness is only one aspect of a malfunctioning housing market. It surely stands to reason that an increase in the supply of housing will help to resolve the separate problem of unaffordability by bringing prices down? Isn’t the National/Labour cross-party consensus right on the money? And doesn’t the enthusiastic support from Business New Zealand, the Property Developers Association and the real estate industry show that the politicians have at last agreed on the right solution?
It is certainly true that property developers, the banks, speculative investors, all love the idea – I can hear them salivating from here. Any concept of sensible planning and land use, any concern for other interests such as our important horticulture industry, any reckoning of what further urban sprawl would mean in terms of infrastructure costs and longer travel distances is swept aside.
Supporters of the consensus have little patience with these concerns. The market, they say, must be allowed to operate. The housing market is like any other market, and rigidities must be removed so that it produces optimal results.
But the housing market is not like any other market. There is no other market of any size where purchasers are armed with a purchasing power up to nine times higher than their annual incomes, where recent experience shows that they can expect huge untaxed capital gains, where speculative investment using borrowed money can virtually guarantee a huge return – all because house prices go on rising and banks go on lending.
Economists may see, and warn about, all the signs of a rapidly inflating bubble, but those who are responsible for the inflating are not to be deterred. As the consensus promises to provide yet wider opportunities for profitable investment, property developers stand ready to bid up the prices of the newly available land, the banks stand ready to lend virtually without limit to both the developers and the eventual purchasers of the new houses, and the inflow of new lending and credit into the housing market ensures that the bellows applied to housing prices will continue to blow fiercely.
As another round of house price increases is generated, the gap between those who are already in the housing market or who are able to borrow, and those who are not and cannot grows, ever wider. And, the diversion of yet more of the country’s finances into speculative rather than productive activities leaves us even more dangerously exposed to the risk of a housing bubble that one day is certain to burst.
The proposed solution, in other words, may in due course bring housing values down all right, but not in the way that is foreseen – and that outcome would be at huge cost to the national economy.
Bryan Gould
20 May 2016.
“Middle ” New Zealand?
The Prime Minister, asked on National Radio this morning what advice he would offer to an Auckland family with nowhere to live but in a car, suggested that they should “go to see Work and Income to see what help they could give them.” The advice that a desk officer in Work and Income could miraculously find them a house they could afford was the equivalent of shrugging his shoulders and saying, “I have no idea of what they could do and I don’t really care.”
Auckland’s shortage of affordable housing and soaring house prices are now so significant that they could threaten the financial stability of the whole country, but there is no one at greater risk than Auckland’s poor. For them, the possibility of buying a house is non–existent, and – as speculative investors buy up the cheaper houses and force up the rents – their meagre budgets do not extend as far as even the cheapest rented property.
Yet let us be clear. The problem of families with children forced to live in third-world conditions is eminently resolvable. It simply requires the application of resources – resources that a country with our wealth could easily afford. The issue is one of priorities. We could put an end to child poverty and housing shortages if we decided to move the issue nearer the top of the list. It doesn’t happen because we choose that it shouldn’t.
We choose to elect a government that we know will give a low priority to the most vulnerable in our society – a government that on the other hand will strive might and main and will take considerable political risks in the interests of, for example, its friends in the foreign trust industry. We endorse, in effect, the Prime Minister’s confidence that “middle New Zealand” will support his casual dismissal of concerns about the plight of the homeless and the consequent blight on our society.
Mike Hosking, the self-proclaimed champion of “middle New Zealand”, that apparently uncaring and blinkered sector of society, assures us, in the authentic language of neo-liberalism, that the “free market” would solve the problem if only there were more opportunity for speculation, profit-taking and unrestrained bank lending. The market, it seems, despite its current excesses and failures, is the solution, but government – our government – is either part of the problem, if local, or absolved from responsibility, if central.
We, “middle” or otherwise, could change this attitude if we so decided. There was a time when New Zealanders would have reacted with distress and even anger at the thought that we would tolerate homelessness on a significant scale in our midst. Sadly, the cynical view of human nature represented by the values of so-called “middle New Zealand” now allow our government in effect to wash its hands of the problem.
It is no accident that the concept of “middle New Zealand” has been established and has prospered in the media where, with honourable exceptions, a self-serving attitude has been assiduously propagated. That trend is likely to strengthen if proposed changes in media ownership take place.
The concentration of cross-media ownership in New Zealand is already of dangerous proportions. With important outlets in the press, radio, and television already in single ownership, we already see a politically partisan figure like Mike Hosking free to peddle his literally eccentric views across all of those outlets. His very ubiquitousness allows him to claim his chosen role as the spokesperson for “middle New Zealand”.
That, however, is just the forerunner of what will happen if NZME and Fairfax merge their New Zealand operations. Virtually the whole of New Zealand media will then be in single ownership; views that diverge from the supposed “middle” will be heard even less than they are today.
The Commerce Commission will of course have to assess the proposed move in terms of whether or not it will reduce competition. But that is a financial judgment that takes little account of the importance to a properly functioning democracy of allowing a diversity of views to be expressed.
If those views are not heard, we will become more and more inclined to accept that we should look at all issues in the public domain through a business lens. We have already travelled a long way down that path.
How many people, for example, even noticed, let alone reacted adversely to, the statement from our Health Minister that he was “preparing a business case’” in respect of a decision as to whether or not to fund a bowel cancer screening programme? When other countries with whom we like to think we are comparable see it as a worthwhile expenditure, what does a “business case” have to do with it? And in such a business case, what dollar value is to be placed on the lives saved, the pain avoided, the grief and misery of bereaved families?
There are some areas of course that are apparently exempt from a calculation as to a monetary return on investment. Does anyone recall a business case being prepared for the $26 million spent on the flag campaign?
Bryan Gould
16 May 2016
A Blight on the Game
There was a point in Friday night’s Super Rugby game between the Crusaders and the Reds when Scotty Stevenson said in his television commentary, as the referee signalled yet another penalty advantage to the visiting Reds, “it’s like a never-ending advantage.”
There must have been many, both at the ground and watching on television, who shared his frustration, and not just because they were supporting the Crusaders. The comment came during a passage of play with which we have become all too familiar and which epitomised what is in danger of becoming a blight on the game.
The sequence of events followed a mind-numbingly predictable pattern. All that is required to set it in motion is that a penalty is awarded to the recipient team somewhere in the opposition’s half of the field. The decision is taken to kick for the corner rather than take a shot at goal, or a quick tap, or an up-and–under, or any other option that might involve the handling, passing and running skills that constitute so much of the appeal of rugby as a game.
The kick for the corner is duly taken and results in a lineout, usually five metres or so from the line. By virtue of the penalty, the attacking team has the advantage of throwing into the lineout and can be virtually guaranteed possession, since the defending team dares not contest the lineout for fear that if it does so it will not be properly prepared to resist the inevitable drive for the line.
The drive duly follows, and is organised on the basis that players from the attacking team who do not have the ball are entitled to charge forward, clearing opponents out of the way, so that one of their number carrying the ball at the back of the five-metre drive can dot it down over the line when the opposition have been splintered.
If the opposition are unwise enough to respond in kind by tackling the players advancing on them, they are penalised for “dragging down” the drive, in which case the ball is again kicked into touch and the manoeuvre is repeated. If the same result is produced, another penalty will be awarded and there is a danger that the outcome will eventually be a penalty try, perhaps accompanied by a yellow card.
The repetition is so marked that, as Scotty Stevenson remarked, it’s as though we are “on a loop”. The defending team, once locked into the sequence, finds it very difficult to break free, and the effect is magnified by the length of the advantage that most referees now allow.
The tactic is permitted by the current rules, which referees cannot be criticised for applying. But it is surely obvious that the lineout drive is increasingly at odds with the kind of contest that the game is intended to promote.
It is increasingly used by teams that do not have the wit, skill or ambition to score tries in any other way. In recent weeks, in the Super Rugby competition, we have seen teams like the Sharks, the Brumbies and the Reds all attempt to negate the superior skills of their opponents by taking advantage of the rules that in effect hand the ball to them just five metres from the line and then invite them to mobilise anything up to the whole team in order to push opponents out of the way so that one ball-carrier can cross the five metres to the line.
The rules mean that the awarding of a penalty on the halfway line can produce an outcome that is often out of all proportion to the gravity of the offence. It will often lead to a protracted sequence of play, when the ball does not move for minutes on end from a narrow sphere just metres from the line and when repeated and valiant defensive efforts are met by a succession of penalties that ensure that the same dismal manoeuvre is endlessly reproduced. The advantage from the original penalty can be endlessly prolonged.
It is worth noting that the Crusaders on Friday night, after scoring five tries through running rugby, eventually made what might be regarded as an ironic point by scoring a sixth as a result of a well-executed lineout drive. They demonstrated that there is room in the game for the traditional rolling maul – as long as it is not the only tactic employed. The varied range of skills and tactics that are possible in rugby is, after all, one of the reasons why it is such a great game.
The powers that be have already begun to address some of problems arising from the current rules. The solution surely lies in ensuring that the balance of advantage does not lie, with such boring predictability, so one-sidedly in the hands of a team that has done nothing more to earn it than to be awarded a penalty within kicking distance of the corner. It must surely be made possible for the defending team to resist the drive by legitimate means so that it does not repeatedly run the risk of being pinned on its line until a try or further penalties are conceded. What must be changed is the high probability that the endless deployment of a sterile tactic will produce an unjustified bonus on the scoreboard.
Bryan Gould
7 May 2016