The Deal-maker
Our Prime Minister revels in his reputation as a deal-maker – and with good reason. His success in making a personal fortune as a foreign exchange dealer is, it seems, a major factor in establishing his claim to be an expert in how to run our economy.
It may not be immediately obvious that the short time horizon of the foreign exchange dealer – perhaps at times only a few hours or even minutes – is necessarily the best qualification for making good long-term strategic decisions about our economic future. But few would doubt John Key’s ability to close a deal.
It is only when we look closer at the deals that the Prime Minister concludes that doubts might arise. It seems that his negotiating stance in approaching a potential deal usually begins with, “The answer’s yes, now what’s the question?”
Those doubts might seem to be well-founded when we look at some of the deals he has concluded in recent times. The “negotiation” with Warner Brothers over The Hobbit seems to have been a process in which the Hollywood moguls dictated their requirements – $67 million in tax relief and a change to employment law that reduced the rights at work of actors and film crews – and John Key’s government “negotiated” by meekly complying, with the passage of overnight legislation.
We see a similar pattern in the “negotiation” with Sky City over a convention centre in Auckland. The Sky City offer was made conditional by the gambling bosses on the award of a significant number of new pokie machines – something strongly opposed on social and health grounds by those rightly concerned at the damage done by gambling to families who can ill afford it, but immediately conceded by John Key.
On this form, we can be confident that we will see the same pattern in future “negotiations” with, for example, overseas firms wishing to drill for oil, or mining companies wanting to operate in conservation areas, or foreign buyers proposing to purchase national assets. In all such cases, we can expect our “deal” maker to take whatever is offered and run.
“Show me the money” was John Key’s election campaign challenge to Phil Goff; in his mind, it seems, “showing the money” is the essential and only condition needed to settle any deal on offer.
Peter Dunne’s blog last week, in which he warned that there were real dangers in the Prime Minister’s propensity to “cut through” obstacles to a deal, was making a similar point. John Key, it seems, is quite ready to set aside legal safeguards, as well as commonsense considerations, if that is what is needed to close out a “deal”.
The defining characteristic of the Prime Minister’s big-ticket deals is that they typically involve large firms, preferably from overseas. He seems so impressed at being involved with such entities that any concern about whether or not a “deal” offers good value for New Zealand goes out the window.
The worry is that, in negotiations like those with the US and others over a Trans Pacific Partnership, the Prime Minister will take a similarly cavalier attitude to the protection of our national interests. We are already being softened up for what seems now to be an inevitable outcome – that, on a range of important matters, such as a continued and unchanged role for Pharmac, the “negotiations” will end up with an abject capitulation by our government. For John Key, the outcome that matters is putting the signature to the “deal” – not the practical (and possibly adverse) consequences thereafter for our economic wellbeing.
A similarly short time horizon is in evidence when it comes to asset sales. It is almost as though the Prime Minister is so dazzled by the potential price tag of billions of dollars that he is blind to any longer-term disadvantage. Yet, selling assets that generate a minimum return of 7% per annum at a time when the government can borrow at roughly half that rate is simply to put a short-term gain ahead of a much larger longer-term loss for future generations.
As on so many other issues, John Key seems not to understand that the sale of our income-producing assets into foreign hands is to deny future generations important (but dwindling) national income streams. Their loss makes us poorer, increases our need to borrow from overseas and weakens still further our power to decide our own future.
We have travelled a long way from the time when New Zealand was prepared to take a stand and stick to it, even in the face of condemnation from powerful overseas interests. Ask yourself a simple question. If John Key had come to power before our non-nuclear policy had been decided, would he have taken the initiative and introduced it on his own account, and then maintained it against all the odds? Or would keeping in with the Americans have been his first priority?
Bryan Gould
8 March 2013
Why Ignoring the Exchange Rate Widens Inequality
Last week’s report of an unexpected deterioration in our terms of trade adds a further and unwelcome twist to an already distressing story – the damage being done to our productive sector by an overvalued dollar.
The recent admission by the new Governor of the Reserve Bank, Graeme Wheeler, that the dollar is overvalued is welcome evidence that the issue is at last attracting the attention of our policymakers – and so, too, is the suggestion that the Reserve Bank might restrain bank lending for the purposes of house purchase.
But we have lived with an overvalued currency for so long that we no longer have a proper base mark by which to measure it. What we can do, however, to establish whether the dollar is overvalued is to ask what we might expect to see in an economy that has been fundamentally uncompetitive over a long period.
The answer is that such an economy would exhibit slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets – including national assets – into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.
Sound familiar? If we do not immediately recognise these characteristics as the hallmarks of New Zealand’s economic performance, it is only because of the resolute refusal of our policymakers to think about our loss of competitiveness, let alone do something about it.
We are not alone in this refusal. Many western countries are reluctant to recognise that the world has changed and that many developing countries are becoming, or have already become, more competitive than we are.
Yet to ignore our competitiveness problem is to invalidate the whole of our economic policy. It leads us to pay excessive attention to inflation, so that we slam the brakes on at the slightest hint of inflation re-appearing, because our unacknowledged lack of competitiveness makes us rightly fearful of any increase in our costs.
It means that we dare not – even in a long drawn-out recession – stimulate the economy so as to bring down unemployment, restore public services, reduce the government deficit through buoyant tax revenues and resume a sustainable rate of growth because we know that any growth will simply suck in more imports, worsen our balance of trade and increase our need to borrow. If we were competitive, we could afford to stimulate the economy because the growth would come in the form of exports and investment, not consumption and imports.
It means that – as all the signs confirm – any recovery from recession will lead us straight back to an overheated Auckland housing market and an import orgy.
It encourages the delusion that we can somehow improve productivity in a vacuum and that a few more ministerial speeches about it will do the trick. We do not grasp that productivity improvements are a function of competitiveness, not the other way round.
Most worryingly, our determination not to recognise our competitiveness problem means that we (or at least our government) are – apparently without a care in the world – destroying our future by selling off our productive capacity to foreign owners. The loss of those income streams makes our lack of competitiveness even worse and handicaps our ability to do anything about it.
And there is another – hitherto unrecognised – aspect of that blind spot on competitiveness that reflects not just ignorance or carelessness but, perhaps, a deliberate bias in favour of the “haves” as opposed to the “have nots” – an aspect that could be an important factor in New Zealand’s widening inequality gap.
The most obvious remedy for an economy-wide lack of competitiveness is to reduce our costs across the board through bringing down the value of the dollar. That would require everyone to make a fair and shared short-term contribution to the solution of our problems while providing a solid basis for future growth.
But our policymakers are reluctant to ask the better-off to make that contribution. They seem to be quite relaxed about workers losing their jobs and beneficiaries being targeted. They are quite prepared to force wages down by reducing workers’ rights at work and lowering, in real terms, the floor placed under wages by the minimum wage.
But they draw the line at a devaluation of the currency that, as part of the effort to reduce our costs, would have the immediate effect of reducing the value, in international terms, of financial assets, and would therefore impose a cost on the holders of those assets, and on financial institutions and banks.
They are asking, in other words, wage-earners to bear the whole burden of improving our competitiveness, while protecting the value of the assets held by the wealthy. Sadly, such a policy is doomed to fail in terms of improving our competitiveness; but it will certainly be effective in widening the already damaging gap between rich and poor.
Bryan Gould
1 March 2013
This article was published in the NZ Herald on 7 March
Lies, Damned Lies and Statistics
The debate about the current state of the New Zealand economy is less useful than it should be because of two increasingly dominant aspects of the way in which we address these issues.
First, is the perennial proclivity of our media to consult – almost exclusively – bank economists, as though they are able, from their positions as paid mouthpieces for the banking interest, to tell us all we need to know about the wider economy.
Second, is the growing practice of asserting – when the statistics fail to tell a story that suits our policymakers – that the statistics should not be believed.
We have seen both of these elements at work in the current discussion about employment. We are solemnly assured that the fall in the number of people both in work and seeking work cannot be taken seriously because it is an article of faith that the economy is actually doing rather well.
We have seen the syndrome at work, too, in the continuing discussion about the overvalued dollar and its malign impact on jobs, investment, output, productivity and the trade balance.
There are good reasons to believe that the dollar, we are told, is not really overvalued. This is an oft-told story. One of the most pernicious of such assertions is the fatuous “Big Mac index” published by The Economist; this populist version of a purchasing power parity index purports to measure the degree of under or over-valuation by comparing the local-currency cost of buying a Big Mac in various countries.
But the price paid for a hamburger in the domestic economy tells us very little about price competitiveness in the internationally traded goods sector. Successful exporters almost always have – as a consequence of, among other factors, the economies of scale available in manufacturing for export – a quite different cost and price structure from that of domestic production for local consumption.
When Japan, for example, was growing fast in the 1960s and 1970s, and exploiting worldwide markets for manufactured goods like cars and television sets, the inflation rate in their export industries was low by world standards, so that they could go on exploiting a price advantage, even while their domestic inflation rate across the whole economy was actually higher than average.
We are also told that there is no need to worry because our dollar is not overvalued against the currencies of all our trading partners. It is certainly true that the trade-weighted index has some deficiencies, and that against the Aussie dollar (which is also overvalued in world terms), our current parity is quite advantageous – thank heavens, because otherwise we would now be “drowning not waving.”
But, as Steven Joyce says, our exchange rate establishes values against all currencies; and what matters – in terms of whether it is overvalued or not – is the impact it has on our overall balance of trade. A correctly aligned exchange rate should allow us to balance our trade, by “clearing the market” in conditions where we are also achieving a sustainable rate of growth and the full utilisation of our resources, including labour.
It is no comfort, in other words, to be told that we are not handicapped by overvaluation in respect of one or two of our trading partners when the corollary is that the total trading picture is one of considerable disadvantage.
Nor is it much comfort to be told that the major impact of overvaluation is on our ability to compete against imports, rather than on our ability to export. The international market for manufactured goods embraces both exports and that part of our domestic market that is open to imports. So weak is our export effort (as a consequence, at least in part, of overvaluation) that it is the competition from imports in the domestic market that matters much more to us. The manifest and growing vulnerability of domestic producers to that competition is just as much a consequence of overvaluation, and even more damaging to our prospects, than is our disappointing export performance.
We should also beware of historical comparisons designed to show that the dollar is, in some respects at any rate, no higher in value than in earlier times, particularly when those earlier times are themselves very recent and when our history of consistent overvaluation extends back for decades.
Rather than juggle with the indices in an attempt to distract attention from the hard reality of overvaluation, it would be much more helpful to look at the characteristics typically exhibited by uncompetitive economies – in other words, those with overvalued currencies.
Such economies have slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets – including national assets – into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.
Sound familiar? Forget arcane debates about small fragments of the picture; if we want to judge whether or not our currency is overvalued, these are the consequences that provide the conclusive evidence.
Bryan Gould
10 February 2013
Getting the Dollar Down
That dwindling band who continue to deny that our economy is being hurt by an overvalued currency will usually – in the face of the indisputable evidence – take refuge as a last resort in the assertion that “there is nothing much we can do anyway – we just have to live with it.”
Nothing is further from the truth. We have an overvalued dollar – which continues to destroy jobs, weaken our industry, worsen our balance of trade, and increase our indebtedness – because that is what our policymakers choose.
The usual assertion that there is nothing that can be done usually focuses on – and then dismisses – the possibility of intervening in the foreign exchange markets, as though this is the only option. But intervention is the least effective measure that could be taken; it is quite true the Reserve Bank, and its (comparatively) puny resources, would be quite unable to offset the huge flows of hot money that determine the value of our dollar. Intervention is merely a straw man that can be conveniently knocked down so as to distract attention from more effective options.
That is not to say that the occasional selling of New Zealand dollars (as the Reserve Bank has done recently) would not be helpful in inducing a little doubt in the minds of speculators who are usually confident of a guaranteed interest rate premium and probably a capital gain as well, while the Governor’s unequivocal description of the dollar as “overvalued” was also a useful signal; but there are much more effective measures that can and should be taken.
The first and most obvious step is to change the policies that inevitably force up the dollar’s value. We persist in paying an interest rate premium to overseas lenders to persuade them to lend us money; and the more we do that, we more we push up the dollar and weaken our economy, and – as a consequence – the more we have to borrow and therefore to offer high interest rates to persuade them to go on lending to us.
We insist on creating this vicious circle, despite all the obvious downsides, because we assert that controlling inflation – not sustainable growth, not competitiveness, and not full employment – is the only goal of policy, and that raising interest rates is the only way of doing it. If we identified wider goals of policy, and stopped using interest rates and the exchange rate for literally counter-productive purposes (when we should be focusing directly on the actual causes of inflation, such as unrestrained bank lending for non-productive purposes), we could avoid repeatedly shooting ourselves in the foot.
Other countries are rapidly learning these lessons; even the Governor-in-waiting of the Bank of England has signalled that he is ready to abandon inflation as the sole focus of policy. Sadly, so committed are our leaders to an increasingly discredited orthodoxy that they will not even contemplate any change. And our government has compounded this stubbornness by opposing policies that would help recovery from recession – and bring the exchange rate down at the same time.
By identifying the reduction in its own deficit as the principal goal of policy, the government has signalled that its priority is the financial rather than the real economy in which most people live and work. This concern for the short-term value of financial assets ensures that foreign lenders will go on buying dollars, secure in the knowledge that nothing will be done to jeopardise “confidence” amongst financial institutions and that the dollar will go on rising.
Other countries, by contrast, now know better. They know that the only way to escape recession is to get the economy moving again by improving competitiveness. They have increasingly turned to quantitative easing (or printing money) – as in the US and the US – or, even more interestingly and much more effectively, to fiscal stimulus – as in the case of Shinzo Abe’s new Japanese government. The effect of these measures is not only to encourage growth and recovery, and – interestingly – to get government deficits down, but also to devalue the currency; in the case of Japan, that goal is quite overt.
These measures show that not only that these countries understand the importance of improving competitiveness by bringing down the value of their currencies but at the same time how easy it is to do so – just check out what has happened and is happening to the US dollar, the pound and the yen.
We remain stubbornly in that dwindling group of countries whose priority is maintaining the value of the currency and who are willing to sacrifice everything, including recovery from recession, to that end. While others reduce the value of their currencies, we say we know better and continue to push up the value of our dollar.
We have an overvalued dollar, in other words, because we choose to. When bankers, stockbrokers and other holders of financial assets assure us, in other words, that we “just have to live with it”, they are just putting their own sectional interest ahead of the rest of the economy.
Bryan Gould
2 February 2013
This article was published in the NZ Herald on 6 February.
Why Are Houses So Expensive?
As a young solicitor in Auckland in the early 1960s, I handled the conveyancing for young couples who were buying their first home. It was one of the more satisfying parts of my work.
At that time, a deposit of just L50 ($100) would purchase, for a total price of L850 ($1700), what was called a deferred licence on a quarter-acre section. It was then possible to borrow the total cost of building a new house through a 100% mortgage either with the State Advances Corporation at 3% interest or with a non profit-making building society with which the young couple had been saving and of which they were members and co-owners.
These arrangements promoted what was then virtually the highest rate of home ownership in the developed world. Many young families were enabled to bring up their children in the secure environment provided by ownership of their own homes. It is hard to know why that was possible 50 years ago but is said to be beyond our reach today.
The damage done by the shortage of affordable housing today does not need emphasis. Young families with children are growing up in conditions that threaten their health, handicap their education prospects and destroy their life chances. The benefits to those who already own their homes of the rapid, unearned and untaxed growth in the value of their housing equity, by contrast, represent a huge transfer of wealth from the poor to the well-off. We cannot be surprised that New Zealand today is disfigured by growing inequality.
The contrast between 1960 and today in terms of housing affordability is the result of a fundamental shift in policy. In 1960, decent housing for all was seen as a social responsibility to be discharged by the community through its government or through cooperative arrangements. Today, confidence is reposed in the market to achieve this same outcome.
The evidence as to which is the better approach is surely conclusive; the market has – in this respect at least – failed. But, says the government, that is not the fault of the “free market” (which ideology asserts is infallible), but rather the consequence of “rigidities” which stop the market from operating as it should.
The argument is the same as that used to explain why the market has produced an historically high rate of unemployment. The reason for this, we are told, is that “labour market rigidities” preclude a low enough price of labour to clear the market.
In the case of unemployment, in other words, the fault is said to lie with the trade unions, notwithstanding their “small influence” – described by the Prime Minister as a principal reason (together with a tax gift of $67 million) for Warner Bros deigning to come here to make The Hobbits.
In the case of affordable housing, the villains are supposedly the local authorities. Again, the government – and “free-market” theory – cannot, it seems, be blamed. In both cases, not only does the government deny responsibility but they have conveniently found a scapegoat in those who do not share their political view.
Abandoning the effective planning of land usage, however, so that developers were free to go wherever and do whatever they liked, might stimulate a short burst in property development and building activity, but is unlikely to bring down the cost of housing in the long term. Much more likely would be a surge in the profits made by both property developers and banks – both significant elements in pushing up the cost of housing.
The very term “property development” gives the game away. The development value of land, which is almost entirely produced by the wider community’s success in building new communities and local economies, has been siphoned off into private pockets.
An even more significant factor has been the increasing role of the banks in financing house purchase. With the replacement of mutually owned building societies by profit-making banks, the whole nature of lending for house purchase has changed. The banks make most of their money from lending on mortgage. Its appeal is that it is risk-free lending, with houses providing real and immoveable assets as security. It is in the banks’ interests to go on lending ever more; they thereby apply in effect a huge pair of bellows to the housing market.
The huge increase in the money supply caused by inflated bank lending for non-productive housing, moreover, seriously skews the whole economy. It diverts investment away from productive investment and into housing and creates an asset inflation problem which we choose – unbelievably – to address by raising interest rates so that productive investment becomes even less attractive and housing yet more expensive.
It is encouraging to note the first glimmers of recognition of this issue in the Reserve Bank’s contemplation of “macro-prudential” measures to restrain bank lending; but their emphasis is still on the health of the banks’ balance sheets rather than on the distortion of the macro-economy. And, as on so many issues, the government’s loyalties seem to lie with its big business and corporate backers, rather than with families and children in need.
Bryan Gould
29 January 2013
This article was published in the NZ Herald on 31 January