Light Cast on the Future
Every now and then, a single event can cast a bright and unexpected light on a complex issue of much wider significance. Just such an event was the government’s decision to award the contract to build a new ferry to a Bangladeshi firm rather than a New Zealand boatbuilder.
At first sight, the main reason for concern may be seen as the safety and reliability of the new vessel. Bangladesh does not have a boatbuilding industry of any repute; the New Zealand order will be their first contract for a foreign customer. Those who eventually travel on the ferry – bearing in mind recent bad experiences with ferries plying Pacific routes – will hope that the government’s confidence is justified.
But the real worry lies in the reasons given by ministers for the decision. The factor that weighed above all others, we are told, is that the Bangladeshis could build the vessel much more cheaply. The reputation for quality and technical excellence painstakingly built up by the New Zealand industry, it seems, counted for nothing. The efforts made to promote that industry to world markets – as witness the taxpayer subsidies to the America’s Cup campaigns – were apparently just money down the drain.
And if even our own government preferred to rebuff the New Zealand industry by buying foreign, why should any other customer reach a different conclusion? If the reasoning followed by ministers is sound, the decision means, in effect, the death knell of a proud New Zealand industry that has represented one of the few (and dwindling) instances of a technically advanced capability that can look world competition in the eye.
But the light cast by this decision illuminates yet more. If the reasoning applied in the case of boatbuilding is correct, why would it not apply to any other New Zealand manufacturing sector? We have already seen the consequences of such thinking in areas like railway rolling stock and aircraft maintenance; what will be left if, setting aside all other considerations, price alone must always determine the issue?
Why does the government not take a more strategic view, recognising that money saved on an individual contract may cost the economy hugely more over time? If one contract after another, each taken in isolation, is awarded on the single criterion of price, and one industry after another accordingly disappears, will that not threaten the destruction of our total manufacturing capability, leaving all our eggs (or milk) in the one basket of dairying?
The answer constantly offered to these questions is that “the market must prevail”. If decisions do not comply with market realities, we are told, our economy will be weaker in the long run. But, as Keynes’ famous dictum put it, “in the long run, we are all dead”. By the time the last person turns out the lights, those responsible will have departed the scene and will not be around to see the results of their handiwork.
Do they not wonder why so many of today’s economic powerhouses (including many who now enjoy higher living standards than our own) have found it advantageous to provide some protection to domestic industries while they are building up their strength? Why do we think that we alone are so invulnerable that we can successfully entrust our future to a global market place in which we are a tiny player whose interests will be wiped out without a moment’s thought?
And if even our own government puts New Zealand interests second to the dictates of the “free” global market, what does that tell us of the government’s attitude to the protection of New Zealand interests in contexts such as the negotiation for a Trans Pacific Partnership? Must “market realities” prevail there too? Must New Zealand interests be abandoned – in areas like intellectual property and pharmaceuticals – if they run counter to the demands of the major players in the international marketplace?
The ideologically driven insistence that the “free” market must always prevail might not be so damaging if the market really were “free”. But the market is rigged – and rigged against our producers and exporters in respect of precisely the issue that our government says matters above all – that is, price.
Ministers have decreed that decisions on contracts must be made on price alone; and they then ensure that New Zealand manufacturers must, by virtue of the overvalued dollar, carry an enormous price handicap in the race for orders. Our dollar is overvalued because comparatively high interest rates, and the prospect of higher rates to come, offer easy pickings to overseas speculators; our currency, the tenth most traded in the world, serves the interests of those speculators at the expense of our own producers.
We have learnt nothing from past mistakes. We are about to embark on another destructive round of raising interest rates, thereby pushing up the dollar’s value, destroying yet more of our industry, weakening our ability to pay our way, worsening our trade deficit, increasing our need to borrow, and leading to yet higher interest rates.
The boatbuilding decision is, in other words, just the latest instalment in a deliberate but disastrously short-sighted policy – and it casts a warning light on our economic future.
Bryan Gould
14 January 2014
A Dose of Reality
As the cheerleaders for economic recovery build up to a Christmas frenzy, it is worth injecting a dose of reality into the optimism. Let us recall that the so-called recovery comes off the back of five years in the doldrums – a period of policy failure that has cost us an immense amount of lost national wealth, thrown thousands on to the scrapheap, relegated thousands more (and not least their children) to poverty, and left public services, including the defence force, in tatters.
The recovery, such as it is, owes much to the Christchurch re-build, begging the question of why we had to wait for an earthquake before finding the money to get the economy moving again. But the real questions arise in respect of where the recovery is likely to take us and – most importantly – whether it means that we have at last resolved our deep-seated economic problems.
The key feature of the government’s policy is, after all, – as the Herald identified in its leading article on Monday – short-termism. The government’s apparent strategy has been merely to apply a series of sticking-plasters rather than to find long-term solutions.
Asset sales, for example, have filled an immediate gap in the government’s finances, even though in the longer term there will be a significant loss of government income; that, apparently, is something for future governments to worry about. The so-called industrial strategy amounts to no more than large taxpayer-funded subsidies to film companies, ill-judged deals with the likes of Sky City, and jeopardising our environment by backing any overseas project to dig up or drill for hoped-for mineral wealth under our land or sea.
None of these strategies helps in any way to resolve our economic problems – indeed, the opposite is true. Our dangerously narrow productive base? We are more dependent than ever on high dairy prices which won’t necessarily last forever. Turning our backs on investment in new productive capacity in favour of an overheated housing market? Much of the increase in economic activity comes from the greater spending power home-owners imagine they have as a consequence of the rise in house prices.
Our predilection for consuming and importing? Stronger than ever. The need to borrow from overseas and to sell our remaining assets to foreign owners in order to fund our spending spree? No change there. Our continued use of interest rates to restrain inflation as the sole goal of economic policy, with the consequent overvaluation of the dollar and its damaging impact on our ability to compete in the world? No lessons learnt. All of these familiar problems are about to rear their heads again.
We are enthusiastically getting back, in other words, on to a money-go-round that means a damaging failure to pay our way and a weakened productive base. It is a safe bet that – after a brief consumer bonanza – there will be (with much wringing of hands) a new outbreak of bewildered concern as to why our powerful new competitors in Asia and elsewhere are doing so much better than we are.
In the meantime, the government will carry on with the bizarre conviction that our economic future depends essentially on sucking up to overseas corporates whose sole interest is in cherry-picking our assets – actual or potential – and leaving us to pick up the pieces after they leave with the booty. At the same time, it is apparently believed that the plight of an increasingly large proportion of our population – with no jobs, poor prospects, worse education, sub-standard housing, third-world health standards – is irrelevant to our economic prospects and is merely a matter of individual responsibility.
The government certainly cannot be accused of proceeding by stealth; it has loudly proclaimed its sadly misplaced faith in international finance and overseas corporates coming to our aid; it has been equally clear in its casual dismissal of any thought that our fellow-citizens might be worth consideration, not only as essential elements of a healthy and integrated society but also as important contributors to our economy.
There will be, quite understandably, those who accept this critique of current strategy but look in vain for an explanation of what an alternative strategy might look like. But we can’t even begin to understand the need for an alternative until we understand why the current strategy is doomed to be self-defeating. And the case for an alternative is inevitably more complex than can accurately or persuasively be described in 800 words; readers might like to look out for my next book!
The first important step towards a better strategy, though, is to avoid misplaced optimism as the economy recovers from a long period of stagnation. And one point is clear; the best guide to a better economic future is to enable our own people to become economically active and productive, so that everyone can share in economic success – everyone, after all, is entitled to a merry Christmas – rather than accepting the doubtful benefits of the self-interested whims and vagaries of overseas bargain-hunters.
Bryan Gould
17 December 2013
“Free Trade” for Big Corporations, Not For Us
The leaked document from the negotiations over the Trans Pacific Partnership, reported in the Herald last week, shows that the fears expressed in many quarters as to the outcome of those negotiations are more than justified.
We are constantly assured that the great advantages of extending free trade, particularly with the Americans, will more than offset any minor changes we might have to make as the price of such an agreement. The record of the negotiations shows, however, that – exactly as was to be expected – the Americans see the supposed advantages of free trade entirely in terms of advancing the interests of major American corporations.
The inevitable result? Since cooperative arrangements for handling both exports and imports are regarded by “free trade” zealots as an infringement of the “free” market, what is peddled as a simple free trade deal could require major concessions in the way we organise our exports – through Fonterra or Zespri – and in the freedom we have to negotiate, by using our collective purchasing power through agencies like Pharmac, the best possible prices for imports like pharmaceuticals.
The leaked document, focusing as it does on intellectual property issues like patents and copyright, pays little attention, however, to one of the main threats from the TPPA – the requirement that overseas corporations should be able to sue a future New Zealand government in a specially constituted tribunal if their trading opportunities were to be reduced by future legislation.
Foreign businesses would, as a consequence, have much greater legal rights than any New Zealand enterprise would enjoy, and those legal rights could not be altered, even by a future government elected with a mandate to do so.
These fears are in no sense fanciful. Other countries which have agreed to such obligations in the past are now regretting having done so. South Africa, for example, which accepted such arrangements in trade deals with the Americans in earlier years is now insisting that the deal should be re-negotiated in the light of their damaging experience of what they mean in practice.
Ecuador and Venezuela have already refused to extend trade agreements with the US containing such provisions and India has rejected an investment agreement with the US only if the dispute-resolution mechanism is changed.
Countries like these understand that granting permanent rights of this kind to American corporations would mean, for example, giving up the ability to protect the environment from the activities of mining and petroleum companies, or (as the Australian government has discovered) being sued as a result of trying to restrain tobacco companies from selling a product that is known to cause death and disease.
Our government would have to accept many other restrictions, as the Argentine government discovered when it imposed a freeze on energy and water prices, in an attempt to help hard-pressed consumers, and had to pay over a billion dollars in compensation to international utility companies.
Even the judges who sit on these specially constituted tribunals are amazed at the power they exercise; as one has commented, these provisions mean that “three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.”
Concerns like these have now extended to Europe and to the UK in particular. The Americans are negotiating a Transatlantic Trade and Investment Partnership with European countries which will contain the same investor-state dispute settlement provisions as are intended for the TPPA. It seems likely that those countries will provide stiffer resistance to these provisions than our own government will offer in the TPPA negotiations.
What justifies such pessimism about our government, you may ask? The first warning sign is that the negotiations are being conducted in secret and that, by the time the deal is done and announced, it will be too late. The government’s willingness to defy public opinion over asset sales is convincing evidence of the scant regard it pays to what our citizens want when it is a question of pleasing business interests.
Even more worryingly, the government has demonstrated in the deal it has made with Sky City over an Auckland convention centre that it suffers no twinge of conscience over signing up to a legally binding arrangement that is intended to prevent future governments from altering the deal. The granting of the licence for an increased number of pokies is meant to run for 35 years, whatever a new government – or the voters – might think.
The risk is clear – the TPPA, while presented as a free-trade arrangement, is really a very different beast. Free trade, in principle, is undoubtedly to be welcomed, but in the normal sense is meant to remove restrictions in order to benefit the consumer and ordinary citizen through lower prices and increased opportunities.
The TPPA is intended to do the reverse – to ensure that the dominant market positions of powerful overseas corporations are immune from challenge, so that prices stay high and the interests of the ordinary citizen, and the principles of democracy, are sidelined. You have been warned!
Bryan Gould
14 November 2013
This article was published in the NZ Herald on 21 November.
Private Greed, Public Meanness
As more information emerges about the destruction wreaked by typhoon Haiyan in the Philippines, New Zealanders will have been pleased to note that our government is listed amongst those who have offered help. They may have been less impressed to learn that the initial offer of help offered amounted to just $150,000.
The sum offered to meet the desperate circumstances of tens of thousands who lost their homes, jobs and loved ones equated almost exactly – according to another current news story – to the amount claimed in salary and expenses by a single part-time Commissioner in Northland schools. Not only is this juxtaposition surprising in itself, but it demonstrates in a striking way the different values placed today on rewards to private individuals as opposed to spending on public and social purposes.
Even the revised offer of a further $2 million is less than the salary paid to some of our higher-paid executives and comes at the same time as new statistical evidence emerges about the rate at which top salaries and directors’ fees have risen by comparison with the wages of ordinary workers. In the ten years from 2003, the salaries of the CEOs of the top ten companies on the NZ stock exchange rose by 137% – a figure that conceals the doubling, trebling and even quadrupling of some top salaries over that period.
In a classic instance of “you scratch my back and I’ll scratch yours”, that generosity to top executives was exceeded only by the rise in the fees claimed by those who were responsible for awarding the salary increases – the directors of those self-same companies. Their fees rose by 146%. Over the same period, inflation rose by 32% and average wages by 47%.
These figures take little account of course of a range of other remunerations, such as expenses and share issues, paid to top earners. And they take even less account of the favourable tax treatment accorded to the wealthy, and particularly of the fact that – in the absence of a capital gains tax – the principal source of wealth of the already wealthy in New Zealand is completely untaxed.
This is a reflection of the phenomenon identified by Joseph Stiglitz, the Nobel Prize-winning economist, who found that – contrary to the comforting story that great wealth is the reward for hard work – the main income enjoyed by the wealthy accrues to them not because they have superior abilities or work harder or create new wealth but because they are already wealthy. Their greatest source of wealth is not the outcome of investment to create new production or provide new jobs – indeed, the net result of their activities (such as asset-stripping) is often a reduction in both production and employment – but the taking of a “rent income” from wealth they already hold and have often inherited.
This is reinforced by the research done by Robert Putnam, the American social scientist, who finds that the best chance Americans (and, by extension, New Zealanders) have of becoming wealthy is to be born into a wealthy family. Pre-existing wealth allows the rich to buy advantages for their children – educational privilege, social contacts, exemptions from obligations such as having to work to pay for an education, and job opportunities in family firms or those run and owned by friends – to say nothing of the opportunities to earn the “rent income” from the family wealth they inherit.
In the light of these findings, it is not a surprise to find that over the past three decades the share of national income going to profits has risen sharply while the share going to wages has declined equally sharply. Little wonder, too, that over those same three decades throughout the western world virtually the whole of the increase in wealth and income has gone to the very wealthiest; for the rest of us, it has been a case of running faster to stand still, with longer hours being worked and more members of the family working just in order to stop living standards from sliding backwards.
Those who peddle the fiction that wealth is always the reward for effort and virtue and that growing inequality is therefore to be welcomed must also accept responsibility for the corresponding and equally misleading canard that hard times and poverty are a proper penalty for fecklessness and laziness. It is hard to imagine any doctrine that – as well as being morally and rationally indefensible – is more destructive of social cohesion and a united country.
One of the great achievements of John Maynard Keynes was to prove conclusively that unemployment – the single greatest cause of poverty – was not (as the classical economists maintained) always voluntary. He showed (and experience as well as theory have proved him right) that unemployment would rise if demand – and particularly government spending – fell. For most of those seeking jobs, their only wish is the opportunity to work.
In deciding whether we have the balance right between private wealth for the few and general prosperity for the many, we would do better to frame policy in line with established facts and wisdom rather than conveniently self-serving myths.
Bryan Gould
1 November 2013.
The Public/Private Partnership Illusion
There has been over recent years a surprising reversal of roles. It was always thought that ideologues were to be found on the left while politicians of the right tended to be pragmatists. But, as the Herald pointed out last week over asset sales, today’s government of the right seems overly concerned with ideology, while parties of the left seem more driven by outcomes than by doctrine.
We see a similar commitment to ideology over another issue – the role that private finance should play in funding projects that are in most senses public in nature. If it is the mark of the doctrinaire that evidence and experience should be ignored in favour of political theory, then Bill English’s repeated assertions of the case for Public Private Partnerships (PPPs) – in the face of all the evidence that they represent a poor deal for the taxpayer – surely fills the bill.
As it happens, and after thirty years of experience of PPPs in the UK where they originated, a great deal is now known about how such arrangements perform. In principle, of course, the private funding of capital projects like new prisons will relieve a burden on the taxpayer, with supposedly a saving as a consequence to the public purse.
But a moment’s thought would suggest that this is unlikely to be the case. The cost of raising capital for a project will usually be lower for government than for a private borrower, as was confirmed in research recently completed by Professor David Hall of the University of Greenwich. And while the initial capital cost under a PPP might be met by the private investor, that investor will want to cover the cost of capital and in addition earn a return on capital (or profit) and will usually want to secure as well contractual rights to run the project (think Serco) over the lifetime of the scheme – typically, 25 or 30 years.
Not surprisingly, the UK experience confirms that PPP projects will cost the taxpayer much more over the whole period than if they were built and funded by more conventional methods. The UK Treasury reported in 2012 that the 717 PPI contracts, funding new schools, hospitals and other public facilities with a total capital value of £54.7bn, would ultimately cost £301bn by the time they are paid off.
Much of this difference was due to ongoing running costs built into the contracts, but the schemes were also criticised for providing poor value for money. The Treasury found that some National Health Service organisations will end up paying almost 12 times the initial sum over what is usually a 30-year contract.
Governments of the right have, in other words, quite unnecessarily and wastefully spent billions, saddling future generations of taxpayers with massive debts, for the sake of an ideologically driven preference for private business as opposed to public provision. And this despite the fact that there is no evidence that anything of value is gained from this excessive expenditure, other than inflated profits for the fortunate contractors.
It is certainly not the case that there is a gain in efficiency, since there are many instances of private providers, not least in New Zealand, performing very poorly – and this is on top of a study by our own Treasury that found that there was “little evidence of systemic underperformance” in New Zealand’s publicly owned State-Owned Enterprises.
Professor David Hall found that “the empirical evidence shows that the private sector is not more efficient than the public sector”. PPPs, he found, have to offset the handicap of a higher cost of capital by achieving lower operating costs, supposedly the result of greater efficiency, but usually meaning higher prices for consumers and lower wages for employees.
Professor Hall also draws on an analysis of UK privatisations by Professor Florio of MIT which meticulously examines all the companies privatised by the Thatcher Government and finds no evidence whatsoever of efficiency gains; Professor Florio also shows that in almost all instances of privatisations, the assets sold were underpriced, there was a large rise in management salaries and most important of all privatisation made little difference to long-term trends in productivity and prices.
In a scathing review of the history of British privatisation, the author James Meek identifies the signal failure of the safeguards that were supposed to protect British consumers – in industries like electricity and water – from the pricing policies of rapacious new owners. The regulators thought they had done enough by putting in place a regime that allowed the new owners to raise prices only in line with inflation. What they had not bargained for was the scope for cost-cutting that was gratefully exploited by the private owners; and reduced costs, of course meant that it was the workforces that lost jobs and had wages held down so as to allow large profits to be made by the new – and largely foreign – owners.
What can be offered to offset this wealth of expert research and evidence showing that Public Private Partnerships are an expensive folly? The answer is nothing – other than the political convictions of those who believe that in all circumstances private ownership is best.
Bryan Gould
27 October 2013