Let Children Pay the Price?
As a young law don at Oxford in the early 1970s, I came to know Tony Lynes, the activist who had recently founded the Child Poverty Action Group in Britain. With his help, I set up a free legal advice centre in Oxford, and I have ever since had a particular interest in the issue of child poverty.
The report this week on child poverty in New Zealand will, I hope, stir more than a few consciences. How can a country that, despite its economic problems, is still one of the most prosperous in the world tolerate such a large and growing number of young children growing up in conditions of deprivation which threaten not only the health, well-being and life prospects of each child but also our integrity and cohesion as a society?
Even those who dismiss the growing gap between rich and poor as of no concern would surely not require blameless young children to pay the price for our society’s failings? Why then do we do nothing about it?
If we were serious about lifting children out of poverty we would address at least three fundamental issues. The most serious cause of poverty in today’s New Zealand is the high rate of unemployment. Every new lay-off or closure – and they are coming thick and fast – means more families left without adequate means to support themselves; the unemployment totals are an indictment of our lack of understanding and concern.
It is time we stopped deluding ourselves that unemployment is a lifestyle choice. People are out of work because there are not enough jobs. There are not enough jobs because the economy remains stalled in recession mode. We are still bumping along the bottom, not because of the usual excuses – the euro crisis and the Christchurch earthquake – but because we have identified different priorities, rather than getting the economy moving again.
Getting people back to work should be our top priority. Nothing would do more to relieve family poverty and to give 270,000 deprived New Zealand children a decent start in life. Ironically, reducing the cost of unemployment, limiting the lost production that unemployment necessarily implies, and increasing the numbers who pay taxes and spend their earnings would also be the best way of meeting the government’s goal of deficit reduction.
The second essential step to reduce child poverty is to improve the living standards of those in work. The working poor are a drag on our economy as well as a continuing reproach to our society. We seem to think that keeping people in poverty is necessary if we are to compete with Australia – but the main economic consequence of holding wages down is that more and more of us cross the Tasman.
Higher wages would mean families able to support themselves and with more spending power to stimulate the economy. The most obvious means of raising low wages by a small margin would be to raise the minimum wage, but a private member’s Bill to do just that will soon be defeated in parliament. Another obvious step would be not to turn a blind eye to attempts by major employers – in areas like care of the aged or freezing works – to hold down the wages of already low-paid workers.
The third priority should be to recognise that poverty is a particular feature of families with small children because bringing up children is an expensive business. Governments, in New Zealand and elsewhere, have in the past acknowledged this obvious problem by providing special help through measures like family benefit. We have, sadly, abandoned such efforts, often on the ground that it is up to parents to provide for their own children – a sanctimoniously rigorous thesis which ensures that it is the children who must bear the burden if it proves to miss the point in practice.
This week’s report is in no doubt that if we want to address the poverty of families with children we would ensure that every family with children would have a basic level of income – one that ensures that children are not disadvantaged. But this, we are told, is resisted because it would deliver benefits to the rich as well as to the poor.
This objection to a measure primarily designed to help the poor is a little surprising when we consider the insouciance with which advantages have been delivered exclusively to the rich over recent times. But there is in any case an obvious solution to the supposed problem.
It is clear that the most effective way of getting help to those who need it is to avoid means-testing and pay the benefit to all families with young children, as we have done in the past. That payment is then easily “clawed back” through their income tax returns from those who don’t need it. Modern computerisation makes this even easier than it has been in the past – and it is surely not beyond a government that has been willing, through measures like drug-testing, to ensure that the value of beneficiaries’ entitlements is driven down. Should we not require our government to show equal zeal in tackling child poverty?
Bryan Gould
29 August 2012
This article was published in the NZ Herald on 4 September.
Unemployment? It’s The Fault Of The Jobless Themselves
The latest figures showing higher unemployment may have dashed hopes that, in our fifth year of recession-induced stagnation, we have at last begun to recover, but we are still being offered the same old excuses. The problems arise, we are told, because of factors beyond our control – the Christchurch earthquake and the euro-zone crisis.
No one would argue that these factors have been helpful; but the real reasons for continuing high unemployment are very much within our control. People are out of work because that is what free-market theory dictates.
The theory takes a very simple view of how markets work. If the supply of a particular commodity exceeds the demand, the price will fall. So far so good; that is generally true of commodities, like sugar or coffee. Where the free-market ideologues part company with common sense, however, is in insisting that labour is just such a commodity.
Unemployment happens, they say, because the supply of labour exceeds demand. This should mean that the price of labour will fall – in other words, wages should come down. The government takes the view that the remedy is therefore in the hands of the unemployed themselves; they can correct the situation by accepting lower wages.
There are several points to make about this. First, bringing wages down is seriously at odds with the government’s declared goal of closing the gap, in incomes and living standards, with Australia. It is a little odd that closing the gap requires us to accept lower incomes.
Secondly, the theorists are looking at only one side of the equation; by concentrating only on the supposed excess supply of labour, they take a completely static view of the demand for labour and of how a market economy really works.
That demand could easily be raised. A more buoyant economy would mean that employers were keen to take on more people, but that could only happen with a change in policy – and that is negated by the government’s insistence that, as the theory requires, wages must be cut. If the government’s priority is to cut incomes and therefore spending, there is no hope of increasing demand in general and demand for labour in particular.
The government, though, continues to pin its hopes on forcing down the price of labour, as though it were just another commodity. They refuse to recognise that labour is not merely a commodity, but is really another way of describing people’s working lives and their standards of life – that it determines the cohesion of families, the life chances of children, the strength of our society.
In any case, after four years, we can say with some confidence that the policy has failed. Unemployment remains stubbornly high. The economy has stalled. But the government is not deterred. Ministers dare not say so publicly, but they use economists’ jargon to explain why unemployment remains high. Labour costs are “sticky” – that is, they have not fallen in order to clear the market, as the theory says should happen. Their conclusion is, therefore, that the market must be helped by “unsticking” labour costs to force them down.
This explains so much of government policy. It is why workers’ rights at work have been weakened. It is why benefits are removed so that even solo mums with young children are forced back into the labour market, whether or not there are jobs. It is why the level of benefits is being cut and the minimum wage is held down while top salaries zoom upwards. It is why the government lends covert support to big overseas employers like Oceania or Talleys as they cut the real wages paid to already low-paid employees. It is why the government seems so relaxed about unemployment.
The government has worked hard to put a euphemistic gloss on this policy. When the Prime Minister recently listed ten priorities in public policy, the first goal identified was to “reduce welfare dependency”. Few of those who no doubt nodded in support of such a policy would have stopped to understand that this is merely part of an overall strategy to force down wages.
And the sad truth is that, even if the strategy succeeded in its immediate goal, it would still be bad news. Lower wages would just mean less purchasing power, and that would mean a more sluggish economy, tougher times for retailing, less money for investment – and it would mean the jobs market chasing its own tail downwards.
If we are really concerned, as we should be, at our lack of competitiveness in international terms, there is a much more obvious, more effective and fairer way of dealing with it than heaping the burden on to the poorest in our society. A lower exchange rate would immediately cut costs across the board and ensure that everyone made a proper contribution to becoming competitive.
But the theory doesn’t allow that. The exchange rate must be manipulated as a counter-inflation tool, whatever the impact on competitiveness. Isn’t it time that we kicked a theory that serves us so poorly into touch?
Bryan Gould
13 August 2012
Cheap Imports Cost Jobs
KiwiRail’s problems with their Chinese-built rolling stock have provoked a predictable reaction, and not just from workers at the Hillside engineering works in Dunedin. That reaction will have intensified at the news that hardwood sleepers imported from Peru now constitute a safety risk.
It is understandable that many will see this as poetic justice. But, as KiwiRail’s management have argued, “these things happen”; and these problems may have passed without comment but for the fact that Kiwi jobs were lost in the process.
Yet, even if the Chinese-built rolling stock had performed well, the case would still have raised some important issues. When does it make sense to import, even if Kiwi jobs are lost as a consequence, and when does it not?
The conventional wisdom is that if it is possible to source goods more cheaply from overseas, then it makes sense to do so. Otherwise, the argument goes, efficiency and competitiveness will be jeopardised by costs that are higher than they need be and the domestic firm’s viability will be jeopardised.
Some would go further. For them, to deny the market’s judgment would be sacrilege. It is not only right for individual firms to buy from the cheapest supplier, they would argue; it is also in the best interests of the economy as a whole.
According to this view, there is no point in trying to maintain a domestic capability if the same product can be made better or more cheaply elsewhere. Better to accept that there are some areas where we can’t compete, and to move our labour and capital to industries where we can develop and exploit a competitive advantage.
In that way, it is said, we concentrate on what we are best at, and the law of comparative advantage will then – provided that our exchange rate is correctly aligned – give us an edge, and allow us to move resources to areas where we can out-perform our rivals. Workers might be inconvenienced by having to change jobs, but they will gain better-paid and more secure employment, in the long run, in industries where we are more likely to be competitive.
There is a good deal to be said for this approach. The whole focus on free trade under successive governments, after all, has proceeded on the basis that it is worth sacrificing production and jobs in a range of industries – clothing, footwear and carpets are examples – in return for expanded opportunities in overseas markets for those products that we are good at producing.
Unfortunately, the comforting theory about perfect competition doesn’t always work out in practice. There are often a number of awkward factors that distort what is expected to be a proper balance of gain and loss.
The goods we import instead of making ourselves might, for example, have a higher value than those we concentrate on exporting. That seems to be the case with China; while we congratulate ourselves on increasing our primary product exports to China, we try not to notice the much greater increase in the value of our manufactured imports from that country. And we have to pay for those imports across the foreign exchanges, imposing a further burden on our balance of payments – a burden we already struggle to manage.
Furthermore, whatever the market says, we may be prepared to pay a premium for goods made in New Zealand on the ground that they are more likely to meet our particular conditions and requirements, and to offer better after-sales service, than would cheaper imports. And we may have strategic reasons for wanting to maintain some manufacturing capability in areas that the market tells us are difficult for us; we may not wish, in other words, to become totally dependent on overseas suppliers for goods that we can’t do without.
Most importantly, if we are to take this absolutist view that the market is always right, we need to be very sure that our own domestic policy settings are correctly positioned to allow us to make the strategy work.
We would need, first, to ensure that our exchange rate is correctly aligned so that we get the best advantage from exporting the goods we are best at producing. But we fail abysmally in this respect; because we use the exchange rate to restrain inflation, we don’t allow it to perform its proper function – and, as a result, we ensure that even our best exporters get a lower return than they should while importers are given a head-start advantage over our own production.
And if we are serious about sacrificing jobs so that workers move to more productive jobs elsewhere, we’d better make sure that those jobs really exist. Again, we don’t even get close. With high unemployment already, the government’s emphasis on cuts and its tolerance of an overvalued dollar ensure that workers whose jobs are destroyed by imports have nowhere else to go.
If we are blithely going to trade jobs for cheap imports, we should surely make certain that the theory is not contradicted by what we actually do?
Bryan Gould
2 August 2012
This article was published in the NZ Herald on 7 August
Animal Farm
In George Orwell’s Animal Farm, the pigs who have taken over the farm from their former human masters explain the policy of the new administration to the other animals in a simple slogan – “Four legs good, two legs bad”.
John Key’s second-term government has, it seems, adopted an equally simple-minded and misleading slogan to underpin its policies. As the decisions over TVNZ7 and Kiwi FM demonstrate, the rationale seems to be “Commercial good, public service bad”.
The loss of TVNZ7 is, as many would testify, a major blow. As a former TVNZ board member, I saw the channel as the last bastion of public service television. Despite the onerous nature of the combined commitment to make a commercial 9% return for the government shareholder and at the same time to meet the requirements of a public service charter, TVNZ succeeded for a time in using those apparently conflicting objectives to support each other.
TVNZ adopted as its Unique Selling Proposition that it was, by virtue of the charter, the guardian and expression of the national identity, the first port of call for serious and reliable coverage of events of national significance, the keeper of the national memory; it was where people turned when they wanted to share the experiences that mattered with their fellow-citizens. The sense that TVNZ possessed an extra dimension that made it different from its commercial rivals allowed the state-owned broadcaster to boost its audience and command a premium in advertising rates.
When the government decided that the charter should be abandoned, TVNZ7 was all that remained of the public service ethic and tradition. Its demise has left New Zealand alone amongst advanced countries in having virtually no public service television broadcaster.
The one exception is of course Maori Television, and that exception is itself instructive. Maori Television costs the taxpayer more than three times TVNZ7’s price ticket; but not for the first time, Maori have identified and been able to demand from the government something better than the government is prepared to provide to the rest of us.
The government’s preference for commercial over public service broadcasting is shown clearly by the decision this week to help Australian-owned MediaWorks by extending Kiwi FM’s free use of a radio frequency reserved for public service radio. This concession comes on top of major financial help provided to Media Works (remember the $43 million government loan guarantee?) and the watering down of Kiwi FM’s commitment to broadcast 100% of Kiwi music.
We can see in this generosity to commercial broadcasters the influence of the Minister for Everything, Steven Joyce, who may not have the broadcasting portfolio but whose experience of owning and running a successful commercial radio company is clearly the dominant factor in determining policy in this area.
It comes on top of a growing number of instances where the government has deliberately turned its face against public service in favour of commercial undertakings. Ministers seem to believe that the only motivation that counts is the drive to make a profit. From running prisons to diplomacy, legal aid to accident insurance, right across the whole breadth of provision, the government sees the bottom line as the only measure that matters.
We see the same mentality at work in another news item this week. The threat to the survival of courts in small towns is further evidence that nothing matters other than reducing public spending. The cohesion of community, local knowledge, the convenience of those caught up in the justice system, none of these things have any value.
It is not as though any money will be saved if these court closures go ahead. It will simply be that costs will be transferred from the public to the private purse. Any savings to the government would be more than offset by the increased cost and inconvenience to individuals of having to travel greater distances – a classic case of the “externalising” of costs so much favoured by the proponents of the “free market”.
And this comes on top of a week in which we have been invited, in the pages of the Herald, to celebrate the proposition that we now have not so much a Prime Minister as a “Chief Executive”. That, we are told, is why we are blessed with such commercially brilliant policies as selling off our public assets and their income stream so that our government can spend the one-off proceeds.
Let us leave to one side the question of whether the short-term (not to say overnight) time horizon of a foreign exchange dealer is the kind of commercial experience that is needed to run a national economy. The whole point of democracy, surely, is that the electorate is able to use its power at the ballot box to ensure that a range of views, and not just those of business, is brought to bear in governing the country.
The irony is that the narrowness of the business mentality is increasingly seen by commentators across the world – in the wake of the global financial crisis – as a handicap in trying to run a successful business, let alone a country. Do we really want a government that cannot see beyond the private profit motive?
Bryan Gould
2 July 2012
Was It All A Mistake?
As the euro zone’s long drawn-out agony staggers towards its inevitable conclusion, at least one issue is nearing resolution. Just as in the 1930s, it has taken a long time for the ideologues to accept that their nostrums do not counteract recession but make it worse.
Even the high-priestess of austerity, the German Chancellor Angela Merkel, has begun reluctantly to admit that what Europe now desperately needs is a strategy for growth. Without a change of direction, in other words, not only Greece and Spain and the whole of the euro zone, but the global economy as well, are staring renewed recession in the face.
We in New Zealand, of course, along with the rest of the world, are directly affected by the mistakes Europe’s leaders have made. But – fascinatingly – we have unexpectedly had our own domestic echo, in the words of our own Prime Minister, of the European debate.
Our own government is now well into its fourth year of grappling with the recession. Throughout that time, our leaders have relegated issues like growth, full employment, competitiveness, and investment to the back burner. The issue that matters most to them, it seems, is the government’s deficit.
Their priority has been to cut government expenditure – notwithstanding that, by international standards, the government’s finances (unlike the country’s) are in reasonably good shape, and that cutting spending to get the deficit down has actually, by depressing tax revenues, made matters worse.
The government has nevertheless preferred ideology over the practical evidence. Our economy continues to languish, and the deficit persists, because they take a Merkel-like view of what is needed to recover from recession.
They have placed their faith in what the Nobel Prize-winning economist, Paul Krugman, calls the “confidence fairy” – the belief that the money markets will respond positively if governments are seen to cut their spending. The markets are not, however, that easily distracted (and nor are the credit rating agencies).
As one economy after another looks in vain for the “confidence fairy” to appear, economic reality has a habit of intruding ever more insistently. That realism has now, it seems, even reached New Zealand.
The Prime Minister has over recent times begun to drop heavy hints that eliminating the deficit by 2014-15, which has up till now been the litmus test of his government’s credibility, may not be achieved. In one of those increasingly frequent moments when he appears to make policy off the cuff, he was even more specific last week on National Radio.
But it is the reason he gave for this shift in strategy that is really interesting. He would not, he said, stay committed to the 2014 deadline if that meant he had to “drag the economy back into recession”.
Here, at last, is a recognition that, in New Zealand as in Europe, there is a trade-off in our present situation between cutting the deficit on the one hand and economic recovery on the other. It may be doubted whether the Prime Minister was fully aware of the significance of his remark, but the rest of us should be in no doubt.
What it means is that we have wasted nearly four years pursuing the wrong strategy. That has unnecessarily cost us lost jobs and national wealth, and has meant we have had to increase our borrowing and make a painful fire-sale of national assets.
It remains to be seen what the Prime Minister’s Finance Minister, Bill English, and the Treasury Chief, Gabriel Makhlouf, will make of this admission and change of direction. The role of the Treasury Chief is particularly interesting.
He was recruited from the British Treasury presumably because his background there was seen as guaranteeing his commitment to austerity orthodoxy. He may well be surprised by the Prime Minister’s change of emphasis; or could it be that, having seen the damage done by that orthodoxy in the UK, his was one of the voices that brought about the change?
In any event, the Prime Minister’s change of heart might discourage the constant repetition, even by those who should know better, of the simple-minded mantras that “you can’t spend what you don’t have” or “if you have to borrow you should be declared bankrupt.”
These pearls of wisdom are constantly offered as justification for the austerity strategy which has proved so disastrous across time (the 1930s and the present day) and space (Europe and New Zealand). They rest on the false assumption that governments are no different from individuals and businesses – though have those giving this advice never heard of mortgages or bank loans?
But governments are in truth quite different from individuals and businesses. They have a wider responsibility to the whole economy and accordingly many more options for bringing about recovery, including adjusting fiscal and monetary policy, and – where appropriate – borrowing to invest or even printing money if that makes sense in context.
Decisions about those issues have to be made carefully and with proper regard for their consequences – there are no options of course without downsides. But that is what government is about. Even the Prime Minister now seems to have realised that continued cuts are not the path to recovery and that a different strategy is needed.
Bryan Gould
24 June 2012