Tilting On Its Axis
New Zealanders often bemoan the fact that we are so remote from anywhere else. There’s not much we can do about geography, but we could sometimes make a greater effort to relate our own situation to what is happening in the rest of the world.
A case in point is the upheaval that occurred last month in the global debate about economic policy. The economic world, for a moment at least, tilted on its axis, but we have sailed serenely on as though nothing has happened.
The story is a simple one. Most people will know that the current government, from the moment it took office in 2008, has insisted that its top priority must be to cut spending and reduce the government deficit, thereby becoming a founder member of what is by now a dwindling group of countries that maintain that austerity is the correct response to recession.
On the face of it, this stance seems to run counter both to the Keynesian lessons we thought had been learnt from the Great Depression of last century and to the practical experience today of those countries that are finding themselves mired in recession while pursuing austerity policies.
But the proponents of austerity have been encouraged to stick to their guns, in the face of mounting evidence that they are on the wrong track, by the work of two highly regarded Harvard economists. Carmen Reinhart and Kenneth Rogoff published an influential paper called Growth in a Time of Debt in 2010 which purported to show that a country with international debts equal to 90% or more of its national output would suddenly experience a sharp fall in its growth rate.
For those countries with high levels of debt (and we are one of them), the lesson was clear. If they are to grow and escape recession, they must reduce the level of debt.
Reinhart and Rogoff’s paper became the favourite reading of the US Republicans (and particularly of Paul Ryan, their Vice-Presidential candidate), and this goes a long way to explaining the difficulties President Obama has had in persuading Congress to support his counter-recessionary strategy. It wasn’t just on paper that Reinhart and Rogoff peddled their message; they appeared in person before a House Committee and assured the legislators that there was not a moment to lose – that, far from stimulating the economy, it was essential to start cutting immediately.
The European Union economic policy chief, Olli Rehn, currently presiding over the worsening economic performance across the euro zone, is another enthusiast; and the British Chancellor of the Exchequer, George Osborne, in a Britain that has lost its top credit rating and has only just escaped a triple dip recession, is another to take comfort from the support offered by Reinhart and Rogoff’s research, which he is fond of citing at every opportunity.
The story has now, however, taken an unexpected turn. A young graduate student at Massachusetts University Amherst, Thomas Herndon, was required, as an exercise, to replicate Reinhart and Rogoff’s research. He was downcast to find that, try as he might, he could not do so. The young man finally discovered the truth; the Reinhart and Rogoff research was vitiated by fundamental errors. He published, with the help of two senior colleagues, the results of his work, and created a sensation which is still reverberating around the world.
The catalogue of mistakes is shocking. Reinhart and Rogoff had simply omitted through an oversight some of the key data; they had capriciously given excessive weighting to some minor factors (including, interestingly, New Zealand’s low growth rate in 1951 – the year of the waterfront strike) that had skewed the results; they had assembled the statistics in bands so as to suggest that there were tipping points (such as a 90% debt to GDP ratio) that were in fact artificially constructed; and even if their conclusions had survived these errors, they had hardly considered the possibility that any correlation between high debt and growth rates might have shown that slow growth produced high debt rather than the other way round.
What this means is that policies that have kept millions out of work, condemned many to continuing poverty, destroyed a number of European economies, and weighed down the whole global economy and its prospects have been based on sloppy research and political prejudice.
It seems unlikely, however, that the architects of austerity will be deterred. Their convictions remain unshaken. They will go on crucifying the poor and vulnerable, even in the face of both practical and theoretical evidence that they are mistaken.
Even Paul Ryan, Olli Rehn and George Osborne, however, cannot match Bill English and John Key for insouciance. Our government remains committed to the austerity path; it does not see the need even to acknowledge, let alone concede, that the intellectual underpinnings of the policies they are pursuing have been shown to be without foundation. It is little comfort to our unemployed (still at historically high levels) and disadvantaged that they can make common cause with millions of other victims around the world of what looks increasingly like a cruel deception.
Bryan Gould
6 May 2013
This article was published in the NZ Herald on 14 May
History’s Judgment
As he finds himself sailing into increasingly choppy waters, it is perhaps not surprising that the Prime Minister’s thoughts might turn to the judgment that history might make of his term in office. There have been several occasions recently when John Key has speculated on that matter; and, amongst other predictions, he has confidently forecast that he will be remembered as having left the economy in a stronger condition than when he took over.
It is hard to conjure up much by way of statistical evidence to support that assertion. Indeed, the contrary seems more likely – that history will regard the Key government as having been responsible for a further and possibly decisive relapse in a long-term comparative economic decline that might even threaten New Zealand’s viability as an independent, self-governing state.
Could such pessimism be justified? Surely, it may be argued, in a world that is likely to provide an ever-expanding market for premium food and other primary products, New Zealand’s expertise in this area will guarantee a rosy future?
That should certainly be the case; our advantages as a primary producer, coupled with our political stability, our freedom from corruption and our access to expanding markets should mean increasing prosperity. But optimism on this account has to be tempered by our government’s insistence on pursuing policies that we know from hard experience will hold us back rather than take us forward.
Despite the advantage of conditions, like a stable banking sector and buoyant export markets, that are more favourable than most other countries have enjoyed, we have spent the last four years or more bumping along the bottom of recession. Even more worryingly, as a recovery of sorts gets under way, it is driven by factors that make it inevitable that we will compound the very problems that have dogged us for decades.
Far from resolving our economic problems, we are about to intensify them. The long-awaited “recovery” is a function of increased domestic consumption and a building asset inflation. We are heading straight back into the same old familiar vicious circle, and each time we do a circuit, yet more escape routes are closed off.
The Auckland housing bubble and the consequent diversion of savings and bank-created credit into property rather than the productive sector means that our manufacturing and other productive industries are denied the investment they need to compete in international markets.
The inflationary stimulus produced by rising Auckland house prices will mean higher interest rates – rates that are already offering a premium to “hot money” speculators – and that in turn will mean that the dollar remains over-valued.
High interest rates and an over-valued dollar will further handicap our manufacturers and exporters and will knock the top off the returns we are able to make even on the products we can still sell overseas – ask the dairy farmers.
The over-valued dollar will also trigger an orgy of imported consumer goods, worsening our balance of trade, necessitating more borrowing and therefore a higher premium to overseas lenders to induce them to lend to us, and the constant temptation (to which the current government willingly succumbs) to sell off more of our dwindling assets into foreign ownership so that we can balance the books.
The costs of increased borrowing and repatriated profits made by foreign-owned businesses have to be paid across the foreign exchanges, thereby worsening our indebtedness as a country and weakening our ability to control our own destiny. The damage to our productive sector means that, far from developing new products, our productive base has become dangerously narrow – and as the assets of, and income streams from, even that narrow base pass into foreign hands, we will look in vain for the national wealth to re-invest in our future.
Indeed, John Key sees overseas ownership (often given a positive gloss by being termed “investment”) as not just a painful necessity but as the most promising path to future prosperity. The short time horizon of a foreign exchange dealer does not apparently equip him to ask what will happen when the profits and assets of our shrinking productive base are in foreign hands, and foreign owners (think Rio Tinto) have extracted what profits they can from our mineral resources.
To paint this picture is not to speculate in pessimism; it is merely an extrapolation of trends that are already long-established. Those who resist such a scenario should ask themselves which part of it is not already familiar. If these trends are allowed to continue for much longer, our national future is grim. We would have lost any possibility of deciding our own future. The only question worth debating then would be whether we become an economic satellite or colony of China directly or whether we are first absorbed into a greater Australia on the way.
But none of this – either the inheritance left us by our forefathers or the mortgaging of our future – seems to matter to New Zealanders today. History’s verdict on today’s economic policy is likely to be harsh. But that will not be our concern; history, after all, is written by winners.
Bryan Gould
17 April 2013
This article was published in the NZ Herald on 19 April.
Doing What The Big Boys Tell Us
It is surely now clear that this government sees our economic future as being dominated by big international players.
Little account is taken of the “little people” – the unemployed, the low-paid, the wage-earners, and their families – or of their contribution, both actual and potential, to a successful economy. Otherwise, the government would not be so relaxed about the numbers unemployed, or struggling to make ends meet in low-paid jobs with little or no job security.
Nor do small and medium enterprises figure largely in the government’s view of what makes a successful economy. Otherwise, they would not dismiss the plight of small manufacturers and exporters, burdened by an overvalued currency and the low level of demand.
No, the government pins its hopes of getting the economy moving again on persuading big international investors to favour us with their attention – and John Key seems ready to bend over backwards to close any deal that is offered, whatever its terms.
We have already seen how far the government is prepared to go. Warner Brothers didn’t even have to break sweat to get a $67 million tax concession and a change in employment law that reduced the rights of New Zealand workers.
Sky City was able, in a “negotiation” that excluded other options, to extract an increased number of pokie machines in return for building a convention centre which will deliver to them substantial economic benefits anyway.
But, as Ronald Reagan used to say, we “ain’t seen nothing yet.” The government is really pinning its hopes for foreign investment on drilling and mining – and it is leaving no stone unturned in its determination to make life easy for the big oil and mining companies, whatever price in domestic terms has to be paid.
The evidence for this is too compelling to be ignored. In the last few months, the government has cut the Department of Conservation’s capability with the loss of a further 120 jobs. Changes to the Resource Management Act will allow Ministers to go over the heads of local authorities and permit mining or drilling activities that are “of national importance”.
Large mining firms are permitted to prospect in areas that are environmentally unsafe, as in Northland, and in conservation areas such as Coromandel – and we are asked to believe that this prospecting is being done for fun, with no thought of a commercial return from any discovery of mineral resource that might be made. And the government have learned from the Warner Brothers issue; changes to please big business will now be made in advance and not left till the last minute.
The Prime Minister loses no opportunity to proclaim that our economic future depends on digging up whatever can be found, irrespective of the impact on the environment and on the “clean, green” image we project to tourists. So we can imagine how irritated he was when the Brazilian petroleum giant Petrobras last year pulled out of their exploration off the North Island’s East Coast.
He was even more angry that a protest at sea organised by local iwi and environmentalists had seemed to be a factor in that decision to withdraw, even though the company itself said they had withdrawn because they weren’t satisfied that the prospects were good enough.
Kiwis have a history of supporting protest at sea – against French nuclear tests and Japanese whaling – but John Key is determined that future drilling at sea will not be the subject of protest. That is why in Parliament this week, the government is changing the law to make peaceful protest at sea a criminal offence, and to threaten protesters with fines of up to $50,000 and sentences of up to 12 months in jail.
The proposed amendments to the Crown Minerals (Permitting and Crown Land) Bill break new (and probably unlawful) ground in a number of respects. A protest will be treated as criminal, even though no violence to person or property is perpetrated, and safety is in no way threatened; it will be enough if, in our 500-kilometre exclusive economic zone, the protest “interferes” with a vessel by approaching within 500 metres of it.
The law has in the past protected installations at sea, such as oil rigs, but this is the first time that a vessel (which may be moving around) has enjoyed similar protection; it is clear that this provision constitutes an infringement of the freedom of navigation, in contravention of the UN Convention on the Law of the Sea.
And the restriction on the right to protest should raise concern from all of those who value our civil and political rights. We know, from the measures taken to stop a legitimate protest against China’s policy in Tibet when the Chinese Vice-President, now President Xi, visited us in 2010, how readily this government is willing to abandon our own standards to please powerful foreign interests; these latest measures are in breach of both our own Bill of Rights, which guarantees the right of peaceful protest, and of the International Covenant on Civil and Political Rights.
The government are again prepared, it seems, to compromise our own standards so that powerful overseas business interests can have carte blanche.
Bryan Gould
7 April 2013
This article was published in the NZ Herald on 10 April.
The New Muldoon
In August 2011, the Herald published a piece of mine in which I warned that John Key was in danger of posing, by virtue of his dominance of both the political process and the media, a Muldoon-like threat to good government and accountability. Today, in the light of more recent events, there may be a better understanding of the point I was trying to make.
The most recent of those events is the controversy that has arisen about the Prime Minister’s role in the appointment of Ian Fletcher as head of the government’s security agency. The episode gives cause for concern on a number of grounds.
What seems beyond doubt is that Ian Fletcher, although no doubt a competent public servant, had no relevant experience to qualify him for the job. It is a mystery, therefore, that – following the rejection of a short list of four people with relevant experience – his name and his alone went forward.
It is also beyond doubt that this unusual process came about as a result of John Key’s intervention. The Prime Minister’s memory may again have conveniently failed him, but it was his phone call to an old family friend which led directly to Ian Fletcher’s appointment. It is beyond belief that the knowledge that he enjoyed the Prime Minister’s patronage was not a factor in his appearance on a short list of one and his emergence out of left field as the preferred candidate.
Does this matter, or should we – like John Key – shrug our shoulders and say that that’s the way these things happen? The first point to make is that heading the GCSB is one of the most critical appointments in the public service. An incumbent who lacked the necessary qualities could make mistakes with very serious consequences – and this may have been a factor in what is now recognised as the mishandling of the Dotcom affair, the first major issue faced by Ian Fletcher following his appointment.
And how convenient it was for John Key that, following his visit to GCSB a month after the illegal raid on Dotcom’s mansion, the video recording of the briefing he received on current issues, and whose details he could not subsequently recall, could not somehow be found. This allowed the Prime Minister to escape censure for his incorrect assertion that he had had no knowledge of the Dotcom affair until much later.
At the very least, this episode illustrates the danger of what might be perceived as a close nexus between the head of the spy agency and the Prime Minister. A spy chief – possessing as he does the power to spy and report on ordinary citizens – should never be seen as the Prime Minister’s creature.
It is not only John Key’s role in the appointments process that should raise eyebrows. We have again witnessed an increasingly familiar sequence of events. First, the Prime Minister bypasses proper process and stitches up a secret deal with cronies – either business or political or both. He has grown accustomed to behaving, in other words, as a law unto himself; the Prime Minister’s fiat takes precedence, it seems, over normal process and rules. Then, when he is rumbled, he denies that anything improper has happened, or professes to have no recollection of what was done or said, or passes the responsibility on to someone else, or falsely claims, as in the case of the deal with Sky City over a convention centre, that – in defiance in this case of the Deputy Auditor General’s report – he has been vindicated.
What is worrying is his readiness to obfuscate, to slip and slide away from taking responsibility for what he has done. His confidence that he can get away with being economical (and in some cases just plain careless) with the truth has led him, it seems, to lose any respect for not only the media but – surprisingly – Parliament as well.
In the GCSB case, we have seen John Key treating Parliament with contempt, omitting to mention the phone call he made to Ian Fletcher (a call he claims to have “forgotten”) and also giving a misleading and partial account of his relationship with Fletcher.
Much of this will pass over the heads of most people. They will continue to respond to the Prime Minister’s ready smile and friendly manner. It is, though, one of the hazards of the media age that presentational skills have taken over from honesty and plain-dealing as the qualities we rate in our leaders.
Democracy is not just a matter of electing people to govern us. It works only if, having elected a government and a Prime Minister, we then hold them properly to account – a task that rests not only on the media but on all of us. The danger is that John Key can now assume that he can escape that test – that he can achieve through obfuscation and glad-handing the same immunity from scrutiny, the same release from the obligation to account to his electors, that Muldoon secured through bullying and intimidation.
Bryan Gould
4 April 2013
A Kiwi Haircut?
We have grown accustomed to treating crises in the euro zone as having little to do with us. So, there will have been a restrained response to the news of yet another crisis, even one that has provoked “outrage and panic” in Cyprus where it has arisen. But we should perhaps take a closer look, because what has happened in Cyprus could – in essence – happen here as well; and, if it does, we too would respond with outrage and panic.
This particular crisis does of course involve issues that are specific to Cyprus. Like many other euro zone economies, Cyprus is in urgent need of a bailout; and, as a condition of that bailout, European finance ministers are proposing that a somewhat unusual contribution to the cost of the bailout should be made by those who have placed their cash for safekeeping in Cyprus banks.
European finance ministers have announced (after markets closed last weekend) that the $25 billion bailout (Europe’s fifth) will come with a huge twist – a levy of 6.75% on deposits in Cyprus banks of less than $190,000 and 9.9% on deposits greater than that. The measures will raise, from those with deposits in Cyprus banks, about $10 billion.
The finance ministers are playing a dangerous game. They have their eye on the huge deposits kept in Cyprus banks by Russian oligarchs who apparently (but not for much longer) see Cyprus as a safe haven where not too many questions are asked.
But the risk they are taking is huge. If depositors find that their savings are not safe in Cyprus banks, there will not only be a mass withdrawal of funds from those banks (as is already happening), but from banks in other “bailout” countries as well. The euro zone crisis is on track to return with a vengeance.
What has this got to do with New Zealand, you may ask? The answer may surprise you. Our own Reserve Bank is well-advanced on just such a measure that would, in certain circumstances, present a similar threat to New Zealand depositors as well.
The “Open Bank Resolution” policy being proposed by the Reserve Bank is well-advanced and is framed in terms of settling in advance the question of who should bear which liabilities in the event of a banking collapse – whether of a single bank or on a much wider scale.
The current options in the event of a bank failure are limited – liquidation, government bail-out or takeover by another bank. The post-GFC history of the impact on government finances of bailing out failed banks has obviously reduced the appetite for such operations, and in most such cases there will not be a long queue of institutions willing to take over the failed entity.
The remaining option – liquidation – however, would immediately threaten the security of customers’ deposits, a political risk that governments would be reluctant to take. The Reserve Bank argues that in these circumstances the main priority should be to keep the failed bank afloat and functioning. They therefore propose that the bank should close for just 24 hours while a statutory manager is appointed and an assessment is made of the bank’s financial position.
A calculation should then be made of the proportion of customers’ deposits with the bank that would be needed to cover the bank’s liabilities and that proportion would then be frozen. The bank would then re-open, but the frozen deposits would be retained for the statutory manager’s use so that the bank’s financial situation could be stabilised. Any unused portion of the deposits could then be returned to the depositors. The balance (an as yet undetermined proportion) would be retained and lost to the depositor. Similar processes would be applied to shareholdings in the bank.
This proposal for what is popularly called a depositors’ “haircut”, on which the government and commercial banks are currently being consulted and which could well take effect this year, is presented in terms of a response to the failure of a single bank. But the measure would have its most significant impact in the event of a banking sector meltdown, such as might be triggered by a renewed global financial crisis – and who would bet against that?
As in the case of Cyprus, the New Zealand proposal is an astonishing assault both on the property rights of depositors and on confidence in the banking system. The mere fact that such a proposal is even being contemplated should ring alarm bells, even for a typically complacent New Zealand public – and if they were, like the Cypriots, actually denied access to their savings as they disappeared into the banks’ coffers, that would certainly be enough to trigger Cyprus-style “outrage and panic”.
The supposed need for such a draconian measure arises entirely because banks not only enjoy the unique privilege of creating money out of nothing but are also entitled to use their customers’ deposits for their own trading purposes. There can surely be no more compelling case for a fundamental review of the way banks operate in our economy. Shouldn’t we know more about this proposal and be consulted about it before it is too late?
Bryan Gould
18 March 2013