Jim Bolger will have surprised a few people this week.  In an interview with Guyon Espiner of National Radio, the former National Prime Minister expressed the view that “neo-liberal” economic policies have failed, and that an important aspect of that failure has been that most of such new wealth as has been created has gone to the richest people in society.

The surprise was occasioned, as Guyon Espiner pointed out, because Jim Bolger had headed a government that had set about cutting taxes and therefore public services, and weakening trade unions – policies often seen as the hallmarks of neo-liberalism – and that is to say nothing of Ruth Richardson and her boast of delivering “the mother of all budgets”.

I may have been less surprised than most.  I did not return to New Zealand until 1994, and therefore did not directly experience the early years of the Bolger government.

But, more importantly, I also had the pleasure of meeting up with Jim Bolger a few years back in a debate at Waikato University, of which he was then Chancellor and I had been Vice-Chancellor.  I was pleasantly surprised to find how much common ground we had.

I discovered a politician who had had time to reflect, and who had recognised the downsides of the changes in New Zealand society that had come about as a consequence of economic policies that had come to reflect the consensus across most of the democratic world.

His declaration in this week’s radio interview, supported as it is by evidence from around the world, was intended, I believe, to apply as much to the global economy as to New Zealand.

It is beyond dispute that the countries which have enjoyed the best economic outcomes have been those – like the Scandinavian countries – which have at the same time most stoutly resisted the growth of inequality.  As for the rest, the application of neo-liberal policies has meant a poorer economic performance, accompanied by greater social division.

We do not have to choose, in other words and as is so often asserted, between social justice and economic success.  The former is an essential element in producing the latter and is not just a “luxury” we can do without.

Or, to put it in another way, the failure of neo-liberal policies is largely attributable to their inevitable tendency to exacerbate inequality and to foster a lack of concern for the less fortunate.

And a moment’s reflection will tell us why that is so.  An economy will always be more successful if it engages with and uses all of its productive capacity – and that means its human resources – rather than leaving some of them under-used and undervalued.

It is pleasing that Jim Bolger – a decent and humane man – should have come to realise the truth of these sentiments.  The loss and damage we sustain, if we fail to take account of the interests of the whole of society, creates not only a weaker economy, but a more divided and unhappier society.

Interestingly, Jim Bolger’s declaration suggests an unexpected contrast between himself and his eventual long-term successor, John Key.  While Bolger allowed himself to appear driven by ideology, but was in reality more socially aware, Key was the reverse – apparently a pragmatist, but ideologically driven by the quintessential neo-liberal conviction that the market must always prevail.

This in turn suggests that, in today’s politics, it is the right that is ideologically driven while it is the left that constantly seeks merely pragmatic solutions to pressing problems.  The left’s difficulties in attracting majority public support suggest that solutions to problems will stand a better chance of being accepted if they are seen to be grounded in a coherent analysis of what has gone wrong.

It may be that, in their anxiety to gain support from the “middle ground”, the left has too easily been frightened away from developing such an analysis.  Surprisingly, they seem reluctant to engage in an ideological debate and prefer to leave the territory uncontested.

If Jim Bolger can do it, and link outcomes to policy frameworks, why not the left?  But, if there were to be a next time, Jim, could you please see the light and find the road to Damascus a little sooner?

Bryan Gould

23 April 2017

It is no surprise that a former Governor of the Reserve Bank should seek to defend the banking system from its critics.  It is less expected, however, that Don Brash should do so while displaying an apparently complete – and certainly shocking – ignorance of the subject.

In attempting to deny the accuracy of the points I made last week in the Herald about how the banks operate, Don Brash accused me of “peddling nonsense”.  I made two basic points.  First, I asserted that the banks do not, as usually believed, simply act as intermediaries, bringing together lenders (or depositors) and savers to their mutual benefit.  Secondly, I said that the vast majority of new money in circulation is created by the banks “by the stroke of a pen”, and they then make their profits by charging interest on the money they create.

If this is “nonsense”, the “peddlers” include some very distinguished economists.  My legal training has taught me the value of being able to turn to reliable authority to support what I say.

In my original piece, I invited my readers not to take my word for what I said.  I referred to a Bank of England research paper – published in the Bank’s Quarterly Bulletin in Quarter 1 of 2014 – which describes in detail the process by which banks create money.  A couple of extracts from the report’s summary will give the essence of what they found.

First, they say that “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them…[that] ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money…Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.

Bank deposits make up the vast majority – 97% of the amount [of money] currently in circulation.  And in the modern economy, those bank deposits are mostly created by commercial banks themselves.”

They then go on to say that “Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach…[but that] is not an accurate description of how money is created in reality.”

They go on.  “Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set… It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the [central] Bank.”

It is a pity (and a surprise) that Don Brash seems unaware of these findings in one of the most important research papers published in recent years.  If he would care to proceed with his charge of “peddling nonsense”, I could introduce him to the authors of the paper, with whom I have corresponded, and he could put that charge directly to them.

Perhaps the conclusive evidence that Don Brash is out of his depth is his argument (which he apparently regards as clinching) that it cannot be the case that banks create money, since otherwise – he says – why would they bother to do anything other than write cheques to themselves?

This simply betrays a failure to understand the process described in the Bank of England paper.  As that paper says, “Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”

Commercial banks create money, in other words, by placing loans (or credits) into the bank accounts of borrowers.  They then charge interest on, and demand security for and repayment of, those loans.  They have no capacity to create money in any other way or for any other purpose (though the central bank can pursue “quantitative easing” to increase the money supply if it thinks that is needed).

But the capacity they do have is hugely important.  I concluded my earlier article by asking whether it was wise to entrust such wide-ranging powers – so significant in their impact on the whole economy – to the banks, and then to arrange that the only person able to regulate that impact was himself a banker – the Governor of the Reserve Bank.  That concern is surely heightened if a former Governor seems not to understand what is really happening.

Bryan Gould

20 April 2017

It’s not every day that monetary policy dominates the news.  It is normally seen as a technical issue, very much within the realm of the Governor of the Reserve Bank, and – apart from the odd unexpected move in interest rates and therefore impacting on mortgage rates – of not much significance to anyone else.

But, in the past week, no fewer than three people have made the headlines by virtue of their views on monetary policy.  First, Steven Joyce, the Minister of Finance, has recommended the formal establishment of a committee to help the Governor decide on where to take interest rates, thereby following the example of other central banks around the world.

Secondly, Grant Robertson, Labour’s shadow Finance Minister, has made a similar recommendation concerning a Monetary Policy Committee to help the Governor, but has also followed another overseas example by supporting an extension of the Governor’s remit, so that he would, in addition to restraining inflation, be required to take account of the desirability of full employment.­­­

So far so good. The proposed changes are small steps in a sensible direction but are not going to set the world alight.  Rather less expected, however, was the issue highlighted by Sonny Bill Williams’ decision to tape over the Bank of New Zealand logo on his Blues jersey.

We are led to believe that this decision was taken as an expression of the Islamist opposition to anything to do with usury – that is, the lending of money and the charging of interest on the loan.  Sonny Bill, as a Muslim, did not wish to be seen as supporting a bank whose business it is to do precisely that.

Surprisingly, you may think, it is Sonny Bill who has made by far the most far-reaching statement.  The two politicians proposed quite minor technical changes which might achieve some small improvements.  Sonny Bill, however, has succeeded, if we are thoughtful enough to recognise it, in throwing a spotlight on the entire role of the banks in our economy and our society.

Most people believe – and it is a belief assiduously promoted by the banks themselves – that the banks act as intermediaries between those wishing to save and those wishing to borrow, usually on mortgage.  On this view, the banks are benefactors, bringing together those with money to spare and to deposit with them, and those who wish to borrow, often for house purchase.  The banks make their money, so it is said, by charging a higher rate of interest to the borrowers than they pay to the depositors – the equivalent of a small fee for the administrative costs of bringing the parties together.

But this benign view of their operations is simply inaccurate and misleading.  The banks do not lend you on mortgage money deposited with them by someone else.  They lend you money that they themselves create out of nothing, through the stroke of a pen or – today – a computer entry.

Don’t take my word for it.  The Bank of England, no less, has confirmed that in the UK (and the same is true for New Zealand) 90% of new money is created in this way.

The banks make their money, in other words, by charging interest on money that they themselves create.  Not surprisingly, they are keen to lend as much as possible – and that of course is the explanation of the billions of dollars of profit made by our banks and then exported, in most cases, back to Australia into the coffers of their Australian owners.

But the consequences of this bizarre scenario go much further.  It is the willingness, not to say keenness, of the banks to lend on mortgage that provides the virtually limitless purchasing power that is constantly bidding up the prices of homes in Auckland and, now, elsewhere.   It is the banks that are fuelling the housing unaffordability crisis – a crisis that is leaving families homeless and widening the gap between rich and poor.

So far, the government has washed its hands of this aspect of the crisis.  They are content to leave the crucial decisions on monetary policy to the Reserve Bank.  That way, they can disclaim responsibility and leave the Governor – himself a banker – to carry the can.

Leaving monetary policy (which is usually just a matter of setting interest rates) to the Reserve Bank is usually applauded as ensuring that it does not become a political football. But monetary policy should have a much greater role than simply restraining inflation and has a huge influence on so many aspects of our national life.

Why should the government be able to hide behind the Governor of the Reserve Bank and duck responsibility for a policy of the greatest importance to so ma y Kiwis?  Why should ministers not be held to account in parliament and to the country for failing to deliver outcomes they were elected to deliver?

Steven Joyce and Grant Robertson seem content to tinker.  It may be that it is Sonny Bill Williams who raises – in economic rather than purely religious terms – the really important questions.

Bryan Gould

12 April 2017

Voters have been conditioned over recent years to applaud governments when they cut public expenditure – and they do so, not just as taxpayers, but because they have been persuaded that the government’s own finances should be treated as assuming a special importance.

Individuals, families and businesses, and – even more importantly – the country as a whole, might struggle to balance the books, but none of that matters, so it seems, for as long as the government’s finances are in good order.

In reality, the government’s finances are of course just one element in determining whether the country as a whole pays its way, and – sadly – New Zealand continues to run a substantial overall deficit.  Our perennial insistence on living beyond our means and having to borrow (and pay high interest rates) as a consequence, however, receives far less attention than the headline treatment accorded to the government’s accounts.

This order of priorities means that one cannot help but wonder whether the constant cutting of government expenditure is not – for a government opposed to the overall concept of public services – part of a political, rather than economic, agenda.

Whatever the truth of that, what is incontrovertible is that public spending cuts are not painless, and sometimes hurt in unexpected and even unrecognised ways.  One such instance is the impact they have on tertiary education institutions.

We now know that many of those working in tertiary institutions report that they are under increasing pressure to pass students who do not actually meet the course requirements – and that pressure, so damaging to the reputation of New Zealand institutions and to the value of the qualifications they grant – arises for financial reasons, since universities and polytechnics get paid only for those students who pass.

And there are other, and even more subtle, consequences.  One such instance involves the institution I had the privilege of leading for ten years – Waikato University.  The University has developed an enviable reputation for excellence in the field of music – its composition, performance, and teaching – all enhanced by the qualities of the concert chamber in the University’s Academy of Performing Arts which  is regarded as one of the best venues in the country for the performance of music.  The result?  Possibly the best music school in the country.

The teaching of music by gifted teachers to a comparatively small group of talented students is, however, relatively expensive – more expensive, say, than providing tuition to the larger numbers in the heavily subscribed courses such as computer or business studies.  Faced with the constant pressures of inadequate funding and the constant risk that it will fall further in real terms, a hard-pressed Vice-Chancellor is obliged to seek savings – and, sadly, an early candidate for cutting is the high-performing Music Department.

The dismembering of the Music Department is of course an unwelcome blow to students and teachers alike, but it is also an injury to the fabric of the University itself.  A university is, of course, essentially about education – teachers passing on to students knowledge and understanding to the mutual benefit of both.

But it is more than that.  It is a community – and one which is enriched internally by the combined skills and enthusiasms of all its members.  The University community itself benefits hugely from the civilising effect that music brings to the campus, but so too does the wider community of which the university is a part.

It is so often music that strengthens the valuable links between the institution and the community it serves.  It is music that brings people on to campus and that gives them some understanding of what a university is really about – not just a machine for churning out job tickets but a source of shared enjoyment and the exploration of the further reaches of human learning and experience.

What a tragedy that financial stringency, imposed in the interests of enhancing the government’s self-image,  should mean the weakening of one of the University’s finest assets – and one that, once lost, will take years – if ever – to rebuild.  And what further tragedy that one of the country’s best venues for the performance of music, built with the help of community generosity, might stand increasingly empty, and that the music should fall silent.

Bryan Gould

4 April 2017

Public services are never far from the headlines.  Whether it is inadequate police numbers in Northland, or a shortage of social workers in Child, Youth and Family, or a possible failure of border bio-security that allowed PSA to decimate our kiwifruit industry, we are constantly reminded of the fact that effective public services are essential to our well-being, both as individuals and as a society.

It is therefore worth pausing for a moment to consider the whys and wherefores that should define our attitudes to public services.  We need public services to do a number of things – to ensure that everyone, whatever their purchasing power, can meet basic needs, such as effective health care, a good level of education, decent housing, enough to live on, and that those, especially children, who cannot fend for themselves are properly looked after – and that’s to say nothing of the support needed in times of natural disaster and other emergencies.

And we also need the assurance that law and order will be maintained, that we have an independent legal system that will protect our rights as citizens, that we have armed forces that will defend us when necessary, that we have skilled diplomats to represent our interests overseas.

And what about all those essential elements of a modern society – the roads and railways, the communication systems, electricity generation and distribution – all areas where the public purse and public supervision are needed to ensure that acceptable standards of provision are met?

It is easy to recognise the value delivered by public services and how bereft we would be without them.  So, why is there such reluctance in some quarters to see that they are maintained at an effective level?

Consider the efforts that are constantly made to replace or cut back on a wide range of public services.  One constantly touted option is privatisation, but that always carries with it a number of risks and downsides – that the drive for private profit will outweigh the delivery of a proper level of performance (think Serco and prison management), that there will be no accountability for failure (think Novopay and the disastrous handling of teacher’s pay), that jobs will be lost and pay rates slashed (think the problems faced by care workers in earning a decent living).

Or, if not privatisation, what about those public servants forced to become self-employed one-person businesses?  Or, as in the case recently reported of District Health Boards, contracting out major functions to private consultants?  That can mean millions of dollars spent seeking advice that either confirms what the management want to hear or repeats back to those engaging them what they have themselves told the consultants in the first place.

But perhaps the most pervasive, constant and easily available attack on the public services is simply to starve them of resources.  That becomes even more likely with a government that is ideologically opposed to the general concept of public service and believes in the superiority of the private market.  It becomes even more likely still when that government seeks to gain political brownie points by “cutting the deficit” and promising tax cuts.

When all these factors coincide, we can’t be surprised if public services suffer, through staff shortages, lower levels of service, poorer training of staff, less investment in modern equipment.  Those who suffer as a consequence are not only the staff who work for the service but those who depend on it for some of the basics – and, in one way or another, that means most of us.

Public money must of course be spent prudently and efficiently.  But that should not mean a general unwillingness to devote the necessary resources to public services, with the result, for example, that screening for bowel cancer is delayed one day, and police training is cut the next. There is a price to be paid, in other words, for the money saved as a result of cutting the public services.

The government may seek an electoral gain in the short term, but we are weaker and less well served as a society if our government does not have the courage to tell us the truth – that good public services matter and have to be paid for, and that means by us.

Bryan Gould

2 April 2017