Is This What We Want To Be?
There is never any shortage of international surveys ranking countries according to such matters as their freedom from corruption, the probity of their public life or the effectiveness and quality of their democracy.
We see frequent reports of them in our media because, I assume, we usually come at or near the top of such ratings. If we are not actually at the top, it is usually because we have been pipped by one or other of the Scandinavian countries.
A friend of mine runs one such international survey and has often congratulated me, as a Kiwi, on yet another good result for New Zealand. I haven’t heard from him on this subject, however, for a year or two, and I notice that we have slipped a little recently in other such surveys I have seen.
The revelation that New Zealand is regarded as, and indeed is, a tax haven for people overseas who want to avoid tax or otherwise hide what they are doing will not, of course, help our reputation in these matters. The worrying thing is that this news comes on top of a series of developments that also point in a downward direction.
It was bad enough to find that a Cabinet Minister could not keep her ministerial responsibilities and her private and family business interests separate – even worse to see that Judith Collins, after a minimal stand-down time, is back as a senior member of Cabinet, apparently unscathed and with reputation intact.
It has also been of concern that our police force seems so anxious to please the government of the day that it will harass those who are seen to cause it annoyance; the cases of Bradley Ambrose and Nicky Hager show how far the executive’s interests now dominate our public life, even at the expense of personal liberties. Those whom the government wants to protect, however – think Peter Whittall – seem to escape prosecution.
And that is to say nothing of the continuing erosion of those liberties in the supposed interests of security, or of issues like the replacement of representative, democratic bodies like District Health Boards or Regional Councils by government appointees when the government wishes to push its agenda and does not seem ready to trust the democratic process.
Then we have those increasing instances where private profit is at stake and the government accordingly chooses to bend or not to enforce laws designed to protect the environment. If a buck can be made, then kauri logs or fresh water supplies or our coastal environment can, it seems, be sacrificed to the government’s version of the greater good. Surely, their attitude seems to be, wadeable rivers are good enough?
There are also those issues where the government gives priority to looking after its friends, rather than to the wider public interest. Think farming and the issues of safety at work and climate change and, even more starkly, Warner Brothers and the government’s willingness to meet their demand that employees’ rights should be reduced.
Then there are the cases, increasingly frequent, where ministers take total executive power and are unaccountable to anyone as to how they use it. Paula Bennett’s power to sell off publicly-owned houses to whomsoever and on whatever terms she pleases is a good (or bad) example.
Perhaps the most obvious example of unfettered executive power was the Prime Minister’s secretly negotiated deal with Sky City, granting them extended gambling facilities in return for a Convention Centre. No one else got a look in – certainly not the public – to the extent that even one of the PM’s own ministers expressed disquiet.
One of the more worrying aspects of this pattern of behaviour is that the democratic process is more and more often sidelined in favour of those who can use their money to buy what they want. If you have the money, it seems, then anything goes. This is the very antithesis of democracy – and providing tax havens for the super-rich is a classic example of that mentality.
We see this approach in many parts of our policymaking and public life. One of the most hotly contested issues worldwide at present is who should or should not be allowed to enter a country and to seek residence and eventually citizenship. That question is largely resolved in our case by putting a price on it. If you have the money, it is more or less the case that you can buy the right to live here.
No one of these instances, taken in isolation, would necessarily set the alarm bells ringing. But it is their cumulative effect that leads to the uncomfortable conclusion that we are now at the top of a dangerous slope and sliding down; that, without realising it, we are becoming just like other countries where it is accepted that government serves the interests of the rich and powerful and the rest of us must live with it.
Apologists for what is happening may say, in private if not in public, that this is the modern world and we had better get used to it. I believe, however, that most Kiwis would rather we stuck to our standards – and they don’t include acting as a tax haven for the disreputable. This is one competition where it is good to be best. It’s one of the things that makes us what we are.
Bryan Gould
6 April 2016
The Pillars of a New Economy
An alternative (and shorter!) website address if you want to read my new Fabian pamphlet is http://www.fabians.org.uk/the-pillars-of-a-new-economy/
Productive Purpose
The Fabian Society today publishes a 15,000-word pamphlet from me, entitled Productive Purpose. It sets out an economic strategy which would turn round the British economy and reverse seven decades of comparative decline. The pamphlet can be found at http://www.fabians.org.uk/wp-content/uploads/2016/04/FABJ4254_Bryan_Gould_Ideas_Pamphlet_WEB_03-16-1.pdf
When Will We Learn?
The imminent crisis in what is still laughingly called the British steel industry is being greeted just as other similar developments have been for decades – with consternation and anger, with concern for the implications for social cohesion in general and for workers’ families in particular, but with no recognition that this is just the latest episode in what is now a depressingly long saga.
As one British industry after another has either passed into foreign ownership or closed down, or – as in the case of the steel industry – both, very few recognise that this is not just a one-off but is part of the long and not so slow de-industrialisation of Britain.
As we emerged from the end of World War II, the UK’s share of world trade in 1950 was a respectable 10.7%. It is now just over 2%. Our share of trade in manufactures has fallen by a similar proportion.
Manufacturing accounted for 32% of national output in 1972, but that proportion is now about 10% and still falling. In Germany, the figure is 21%. No other major developed country attempts to maintain its developed status with such a low contribution from manufacturing industry.
Not surprisingly, we run a huge deficit in our trade in manufactured goods. Much of that deficit arises in our trade with the other developed economies of the European Union – the countries that, we are told, will stop trading with us if we leave the EU.
The consequence of the decline of manufacturing is that we have run a perennial trade deficit in every year since 1982. We have, in other words, traded at a loss and failed to pay our way in every one of the last 34 years. That deficit, the country’s and not the government’s, is of course the one that really matters – yet it is now so much part of the familiar economic landscape that it scarcely warrants a raised eyebrow.
How do we get away with pathetic rates of investment (a net rate of nil) and productivity growth (almost zero), and with running at a loss year after year? We don’t. We have to borrow from overseas and sell off our assets to foreigners to close the gap. We have sold over £600 billions’ worth of assets over recent years. This is a rake’s progress that cannot be sustained for much longer.
On the few occasions that the matter is raised, we are given reassuring answers. We can’t compete in manufacturing against low-cost, low-wage competitors, we are told – so how come the Germans can, and that some of those “low-cost” economies now enjoy higher living standards than our own?
Then we are told that it makes sense to concentrate on high-value activities like financial services rather than on dirty, smelly manufacturing. But doesn’t that leave the economy too narrowly based and isn’t it special pleading on the part of the City of London which in any case hogs all the benefits and leaves the rest of the country, in both social and geographical terms, scrabbling for a crust?
So, if we were for once to take these matters seriously, what is to be done? The first essential is to understand why de-industrialisation continues to gather pace.
The stark truth is that we can’t pay our way because we can’t persuade enough customers, either at home or abroad, to buy British-made products at the prices we ask for them. And that, in turn, is because it costs more to make goods in Britain than it does elsewhere. And why is that? Because we say that it should.
About 70% of the costs in manufacturing are domestic costs, such as the costs of labour and so on. Those domestic costs are translated into international prices by the exchange rate – and, in the end, we set the rate.
If the rate for sterling was higher, our goods would be even less competitive, so that our market share in international markets would fall further, as would profit margins on international sales. In the long run, if the rate is kept at too high a level, it will inevitably fall, but not necessarily to the point where we could start again with a level playing field.
If the sterling rate was lower, sales and profit margins would pick up – a lesson learned by many other countries which have grown at our expense. So, why don’t we learn from them, and manage our exchange rate so that it doesn’t prejudice our economic health?
The answer is that we set a high exchange rate because it seems to suit our interests – or at least of some of us. It suits those who hold assets, but it means that wage-earners are made to bear the whole burden of trying to improve competitiveness by accepting lower wages – a major factor underpinning widening inequality.
But the exchange rate is decided by the market, we are told – we couldn’t change it even if we wanted to. But if that were true, how is it that other countries have engineered lower exchange rates without difficulty and do so regularly? Just ask the Chinese, or Prime Minister Abe of Japan, who has brought about a depreciation in the yen’s value of more than 30%.
There will of course be much wringing of hands and crocodile tears over the steel industry, but there will be more of the same, continuing seven decades of decline, unless we face some hard facts and take the required action.
Bryan Gould
3 April 2016
I Have Become Patron of Positive Money, New Zealand – Here’s Why
The truth about money is now being told, and more and more people are listening. Among the most persuasive and authoritative of those truth-tellers is a British-based organisation called Positive Money. I am delighted to say that there is now a New Zealand branch, run by Don Richards and Sue Hamill. I have agreed to become patron of Positive Money, New Zealand.
One of the most difficult issues for the average person to grasp is that a country’s economy operates quite differently from the economy of an individual person or company. One of the main reasons for this is the government’s ability to create money. Whereas the individual or firm must accept that money has, at any given moment, a more or less fixed value, and the quantity in the individual’s hands will be limited by what he, she or it can earn, sell, borrow and so on, a government can overcome a shortage of money by itself creating, or directing the banking system to create, more of it.
One of Keynes’ most often quoted statements is that “there may be intrinsic reasons for the shortage of land but there are no intrinsic reasons for the shortage of capital.” This undeniable truth is often obscured by governments’ reluctance to acknowledge it. The confusion has been compounded by the doctrine of monetarism, which maintains that the quantity of money must be held at a stable level in the interests of controlling inflation; indeed, it is argued that any other intervention by government would be ineffectual, if not dangerous.
The Global Financial Crisis, though, was so terrifying in its threat of financial meltdown that a number of western governments abandoned their ideological prejudices. They followed instead a deliberate policy of “printing money” in a desperate attempt to ward off a crisis of illiquidity as the banking system threatened to implode.
In the US, the Federal Reserve pumped trillions of dollars into the US economy, at a rate as high as $85 billion per month; the result has been that the Federal Reserve’s assets have more than quadrupled to more than $4 trillion. Some of that money helped to increase the pace of recovery, and even to make some impression on unemployment, but much of it found its way more or less directly into the accounts of banks and other major corporations and thence into stock markets, which have accordingly enjoyed a substantial boom.
The UK government, too, undertook a programme of printing money, though on a smaller scale; the programme aimed at a total of £375 billion. Again, the major beneficiaries were the banks. In neither case was there any perceptible impact on inflation from governments using their power to create money through so-called “quantitative easing”.
It is not just governments, though, that create money out of nothing. The banks do so on a much greater scale. The truth of this matter is gradually becoming accepted. A significant milestone was achieved in the first quarter of 2014 with the publication of an important paper in the Bank of England Quarterly Bulletin. In that paper, three Bank of England economists acknowledged that the overwhelmingly greatest proportion of money in the economy – they estimate that it amounts to 97% – is created by the banks out of nothing.
It is widely believed that the banks lend out to borrowers the money that is deposited with them by savers; they are simply intermediaries, it is thought, which charge for the service they provide in bringing savers and borrowers together. The truth, however, is very different.
When a bank lends you money, it simply makes a book entry that credits you with an agreed sum; that sum represents nothing more than the bank’s willingness create money to lend to you. The debt you thereby owe the bank does not represent in any sense money that was actually deposited with the bank or the capital held by the bank. The money that banks lend has very little to do with the savings deposited with them and is many times greater than their total. As John Kenneth Galbraith said in 1976 ‘”The process by which banks create money is so simple that the mind is repelled”.
There are of course many, including a former Governor of our Reserve Bank, who scoff at the proposition that banks create money out of nothing. If they could do so, the argument goes, why would any bank ever go bankrupt? But, as the Bank of England paper points out, when bank loans on mortgage are repaid, they cease to be money. They are no longer available to the borrowers and they are no longer assets in the bank’s books. That is why banks cannot just create money for their own use; the money they create is available only to the borrower. The banks make their profits not by writing cheques to themselves but by charging interest on the money they create to lend to others.
But, for the lifetime of those loans (which could be decades), they will have added to the money supply and to the spending power enjoyed by the borrower. And, by the time the loans are repaid, they will have been replaced many times over by new loans created for new borrowers over years, if not decades and generations. It is no accident that there is a strong correlation between new bank lending and rapid growth in the money supply.
The astonishing aspect of this creation of new money, and to make billions from doing so, is that it is a monopoly power of private profit-seekers – the banks, especially after they moved into the mortgage market and took over from the building societies – and it is directly contrary to the public interest. It means that a huge proportion of the new money in our economy goes into asset speculation, mainly housing, and not into productive investment. The consequent asset inflation has meant that industry has suffered high interest rates and an overvalued dollar and we have all endured a poorer–performing economy, all in the attempt to control a problem created by the banks.
Positive Money aims to ensure that these matters are properly understood and that the power to create money is no longer used on a huge scale to make profits for banks but instead serves the public interest in securing a stronger and better balanced economy.
Bryan Gould
28 March 2016