The Undeserving Poor
Some things never change. The rich have always claimed that their good fortune is a recognition of and reward for their superior virtue – with the inevitable corollary that the poor have no one to blame but themselves.
The myth of the undeserving poor has a long and discreditable history. It has underpinned social policy over long periods in both the UK and New Zealand, from the workhouses of early industrial England to the present day. It is heard even more insistently in a society like New Zealand which has recently and rapidly become much more unequal – where, sadly, some people have incomes two or three hundred times those of others.
The frequently told story that poverty is a lifestyle choice – promulgated as it is by the rich and powerful – commands more attention in the media than other (perhaps more credible) accounts of how and why inequality in our society has widened. An enhanced access to the media is, after all, an important aspect of privilege.
It is not that those telling the story deliberately invent it. They are no doubt quite genuine in believing it to be true. The capacity to protect oneself from an unwelcome reality is, after all, one of the privileges that the rich enjoy.
This is because an inevitable feature of an unequal society is that the privileged, without even trying, insulate themselves from the less fortunate – and the wider the gap, the more substantial the insulation. They use their wealth to live in a separate part of town, to send their children to exclusive schools, to pursue expensive leisure interests and travel to different destinations – in short, they live quite different and separate lives.
Exclusivity then becomes an end in itself. The rich feel that belonging to an elite, distinct from the common herd, is a valuable and legitimate element in the enjoyment of their wealth. Their ignorance of the lives of the poor becomes a badge of status.
It is then all too easy to believe what one chooses about those whom one rarely comes across in the flesh. It is on this flimsy basis that common sense flies out the window, that unthinking judgments are made – even by Prime Ministers, and that issues of social justice are disregarded.The consequences are of course damaging to our society. The social cohesion – that sense that we are all in this together – that was such a marked characteristic of New Zealand society in the past is gravely weakened. And the evidence that widening inequality leads inexorably to social ills – crime, drug abuse, prostitution, gambling – is now established beyond real doubt in The Spirit Level, the hugely authoritative study by British social scientists, Kate Pickett and Richard Wilkinson.
But the price we pay for the ignorance of the rich concerning what it means to be poor may extend well beyond social factors. It may be that we – including the rich – suffer not just in terms of a fractured society but in economic terms as well.
The notion that the rich, even in hard times, should be generously treated, so that their well-being improves even while the less fortunate lose ground, has been given an extended trial over recent decades. We see recent instances in the tax cuts for the well-off while the poor bear the burdens of unemployment and GST increases. We see it too in the self-serving doctrine that international competition requires that, while wage rates for ordinary workers are held down, top earners’ salaries must go up so that “the best talent” can be attracted.
The theory is that the increased wealth will “trickle down” and that it will therefore – over a period – benefit everyone. The evidence, however, offers no support for this comforting view.
The increased resources of the rich – whether as individuals or as corporations – do not “trickle down”. They stay firmly in the hands of those who control them, doing little to benefit the economy as a whole. The big corporations who were bailed out by the taxpayer after the global financial crisis used the billions they were given to rebuild their balance sheets and to go on paying themselves huge bonuses.
And increased individual wealth is typically used to reinforce privilege. The barriers that separate the privileged from the rest of us are built higher. The insulation from the reality of the lives of ordinary people, and of the poor in particular, is made more complete. And our economy is not stimulated but stultified.
Isn’t it time that we rejected “trickle down” for what it is – a piece of special pleading by those who already have much more than their fair share? What about an economic policy based on “bubble up” – an approach that would put more spending power in the hands of the less well-off, in the confident assurance that they would spend it immediately on real goods and services, providing a direct stimulus to economic activity and wealth-creation for all of us and a hopeful way out of a recession that will otherwise be around for a long time to come.
Bryan Gould
18 February 2011
The General Election Judgment
A three-year electoral cycle may have its detractors – and, many would say, with good reason – but it is usually popular with first-term governments. The record shows that three years is not really long enough for voters to reach a definitive view that a recently elected government has failed, and the benefit of the doubt will usually mean a second term.
Add to that a Prime Minister with an unusually acute instinct for the popular gesture and the 2011 election might reasonably be thought to be a shoo-in. There is, however, one possible fly in the ointment.
“It’s the economy, stupid,” might not be such an obvious determining factor as it was claimed to be in Bill Clinton’s run for the presidency, but the way Kiwis feel about their economic situation on election day will clearly have a bearing on how they vote. And on that issue, the government’s record may not bear too much close scrutiny.
The government inherited an economy which had already been in recession for most of a year, and which had then been assailed by the global financial crisis. Dealing with that recession and building an economy which would – as we emerged on the other side – reverse our decades-long comparative decline, was surely the most pressing task facing the new government.
How, after three years in office, will the government be judged to have done?
They have, after all, had their fair share of good luck. Record commodity prices have underpinned the economy and helped the balance of trade. Our banking sector has remained, by world standards, remarkably stable – though the same can’t be said of our finance companies. Our major export markets – Australia and China – have been beacons of light in the recessionary global gloom.
Yet – our unemployment remains stubbornly high, the retail trade is flat on its back, the housing market has stalled, business confidence is low and business investment equally so, the protections that the vulnerable depend on in tough times have been reduced, and the talk is all of further cuts.
The early flush of energy and enthusiasm – remember the “jobs summit”? – seem to have evaporated. The recession has lingered on well beyond what the forecasters predicted. There is precious little to show that the government has done more than hold the ring. We look in vain to see where the lift in demand and employment is to come from.
And, most seriously, if and when we do recover, there is no evidence that anything will have changed. The problems that have dogged us for decades will remain unresolved.
That, after all, was the central point made by Standard and Poor’s before Christmas. When they warned of a credit downgrade and placed us on negative watch, they pointed the finger specifically at the prognosis that, as we eventually do emerge from a protracted recession, all of our entrenched problems will also re-surface.
They predicted that we would return to our bad old ways of failing to save and invest and wondering why our productivity does not improve faster, of bingeing on artificially cheap imports and expecting to be able to borrow overseas to fund our excessive consumption, of wringing our hands while our counter-inflationary policies force up interest rates and an already over-valued exchange rate.
It was the prospect of the resultant deficit – the country’s rather than the government’s – and our reliance on overseas borrowing, that caused them real concern. Unusually, a credit-rating agency seems to be taking a longer-term view than that of our own government. Their message seems to be that, unless we grapple with those long-term problems, our credit rating is at risk.
If all of this remains true on election day, if the remnants of recession still linger on and we are poised to resume the unsustainable rake’s progress that has held us back for so long, how will the voters mark the government’s report card? It has to be said that, as the outcome of three years in office, it would not look good.
The government would surely not want to face the voters with a record that shows that nothing had really changed. Changes to the tax system, a renewed and welcome emphasis on research, and largely administrative fiddling with the delivery of education and health services may have their proponents but are hardly the stuff of fundamental economic reform.
The Prime Minister is nothing if not a pragmatist. As he approaches the election, he will figure that he has most bases covered. He would be uncomfortable, therefore, with any vulnerability on his government’s economic record. Can we expect that he will understand the need – however belatedly – for an “agonising re-appraisal” when something isn’t working and to strike out in a new direction?
Bryan Gould
18 January
This article was published in the NZ Herald on 24 January.
The Death Spiral
There are times when one can’t help feeling sorry for the government. After two years of framing economic policy to please the credit rating agencies – last year’s budget was virtually dictated by Standard and Poor’s – their reward has been a warning last month that our credit rating is on negative watch.
That blow has been followed by the revelation that the government’s deficit has blown out by $2 billion more than forecast. This intrusion of economic reality may not be welcome but it has been salutary.
The government’s response so far to these twin developments has been to maintain a stiff upper lip, and to continue to target a return to surplus by 2016. Others have not been so restrained. The air is thick with urgings – from the Reserve Bank, the Treasury, the Business Roundtable, and not least the Herald’s own leader-writers and columnists – that the government’s deficit must be cut and cut faster.
It is hard to see these warnings as anything more than a knee-jerk reaction to what people think they heard, or wanted to hear. They see or purport to see a substantial connection between the threatened downgrading of our credit rating and the size of the government’s deficit.
A careful reading of Standard and Poor’s statement, however, reveals that the government’s deficit (which remains perfectly manageable by international standards) played only a minor part in their expression of concern about our credit rating. Their focus was on the country’s external deficit – our propensity to finance an inflated consumption by borrowing from overseas.
It is true that the government’s deficit is an element in the country’s overall deficit but it is not the element that is of particular concern to S&P. What worries them – and they are quite explicit about this – is that, if and when a substantial recovery finally materialises, our appetite for imported consumer goods will re-emerge with a vengeance and we will be back to our bad old habits of borrowing to finance a persistent trade deficit.
The real import of their warning is that they see nothing in our current policy settings to suggest that we will avoid this all too familiar outcome. They fear that any revival in economic activity will see the application of the decades-old “remedy” of high interest rates leading to a yet higher dollar, with consequent damage to savings and exports while we binge on artificially cheap imports. Sooner or later, they warn, the willingness of overseas lenders to fund this rake’s progress may be exhausted.
But, say the deficit hawks, the external deficit, our poor savings record, and the narrow base of our export sector – all of which are fingered by S&P as causes for their concern – are problems for the future. Surely – whether S&P say it or not – the one thing the government can do to help is to get its own deficit down faster than planned, even if that means painful cuts that might impact the most vulnerable?
Let us be clear. All other things being equal, it would clearly be beneficial for the government to eliminate its deficit as soon as possible. And the government is quite right to seek savings in respect of public spending that may be wasteful or poorly directed.
But if cutting the deficit is the first and over-riding priority, we need to be sure that it would produce, in today’s context, the desired outcomes – and it is a pity that this realisation did not dawn before the government’s finances were further weakened by tax cuts that mainly benefited the better off.
But there is no evidence that simply taking the axe to government spending would help matters. The main reason for the government’s increased deficit is that tax revenue – already depressed by the recession – is much lower than forecast, and that in turn is a direct consequence of the slowness of our economic recovery. To cut government expenditure, thereby further depressing demand and eventually tax revenue, is not the most obvious solution to this problem.
The paradox is that, as many of us warned at the onset of the recession, the greater the priority and urgency given to cutting the deficit, the more persistent it is likely to be. The most effective course for a government worried about its deficit is – while maintaining proper controls over potentially wasteful spending – to play its part in ensuring that the level of economic activity rises.
As it is, we are in danger of getting caught in a downward spiral. Our export income is being depressed by the high dollar. The consumer is facing higher fuel and energy prices and the threat of continuing job losses, and uses any margin of spending power to pay down debt. The business sector is struggling with inadequate demand and therefore keeping tight tabs on employment and investment plans. If the government, too, cuts its spending further, where is recovery to come from? And how do we ensure that recovery, when it comes, does not take us straight back – as S&P warn that it will – to the problems that have dogged us for decades?
Bryan Gould
15 December 2010
Free Trade and Blind Faith
What’s not to like about free trade? Trade is obviously a good thing, and free trade must surely be better than the alternative? So convinced are New Zealanders of its merits that the “free trade” label need only be attached to this week’s talks about a Trans Pacific Partnership to persuade us that a successful conclusion would be an unalloyed blessing. Yet the actual basis for this touching faith has almost never been debated.
Ever since British membership of what was then the Common Market ended well over a century of managed trade, and Rogernomic fervour persuaded us that the “free” market would always produce the best results, it has been an article of faith in this country that free trade is the only way to go. Yet other developing countries (and who is to say we are not one?) have almost always seen the advantages of protecting nascent and vulnerable industries against the full force of competition from more powerful economies.
We, however, have approached the global marketplace as a child would a candy store. With astonishing naivety, we have optimistically and often unilaterally removed tariff and other trade barriers, confident that our trading partners would also one day see the light, and that our tiny and vulnerable economy could in any case prosper in direct competition with some of the largest and most efficient economies in the world.
Each new step towards free trade nirvana is celebrated and justified by pointing to the increased exports that increased free trade will bring. No matter that our trading partners only buy our goods because they want them – and in a world short of food that is likely to become even truer, as witness the proprietorial interest the Chinese are showing in our dairy industry.
No matter that the claimed increase in exports seems to owe little to the presence or absence of a free trade agreement. The sharp rise in our exports to China, for example, had already happened before our free trade agreement had time to take effect this year.And no matter that, in virtually every case, the increase in exports has been more than offset by a sharp increase in imports, with consequent damage and in some cases actual destruction of domestic industries. We are so dazzled by the prospects of export growth that we are ready to take any risk and make any concession.
If free trade were really as beneficial as is claimed, why have we endured our perennial trade imbalance over such a long period? And do we understand that free trade arrangements are not just about trade, but are really designed to produce an integration of economies?
A free trade arrangement operates very much like a single economy. If the whole of the combined market can be accessed without any restriction from any point within it, why would anyone manufacture anywhere else but the most populous part of the market and the most efficient or low-cost manufacturing centre?
That invariably produces a concentration of skills, resources and capital in the most efficient parts of the single market, and that does not usually include small marginal economies like New Zealand – just ask the Greeks or Irish or Portuguese.
And it is not just tariffs that have to be aligned. Anything that could be argued to upset the “level playing field” will not be allowed. As others have discovered before us, a free trade agreement with the United States, for example, would mean that our cooperative marketing of dairy products or kiwifruit through a “single desk” like Fonterra or Zespri would be targeted as an unacceptable distortion of trade.
A monopsonistic purchaser like Pharmac, which has saved us millions of dollars, would be attacked as inimical to the “free” market that the major pharmaceutical companies would want to exploit. And across the board, any attempt to give priority to local suppliers would be outlawed.
If the Trans Pacific Partnership follows, as American “free traders” have assured us it will, the model provided by the North American Free Trade Agreement, there are yet more far-reaching consequences in store. A NAFTA-style arrangement would give individual companies the power to enforce rights against our government in specially constituted international tribunals, even if those rights were not available to our own firms.
This is an international agreement of an unusual type – one where individual corporations have the same rights as governments. Those rights could include exemptions from domestic obligations in fields like health and safety, or concessions on tax treatment, or preferential treatment when it comes to awarding contracts, or relief from attempts to protect the local ownership of assets. Even if our own government – perhaps a government of the future – wished to change domestic law in these respects, foreign corporations could still enforce their rights under the “free trade” agreement.
There is no reason why a sensible trading relationship should not benefit both parties. There are many situations where free trade is appropriate. But we would be foolish to go on, as we have done for 25 years, taking on trust that the “free trade “ label is the only safeguard we need.
Bryan Gould
5 December 2010
This article was published in the NZ Herald on 7 December.
Re-opening the Debate
Something important has happened in New Zealand politics. After two and a half decades in which economic policy has been a no-go area for political discussion, we have at last seen the beginnings of a debate about what is potentially the central issue of our politics.
“There is no alternative” was very much Mrs Thatcher’s mantra, but it held equal sway in New Zealand. Indeed, it has been even more significant here, because the aggressive free-market orthodoxy first introduced by a Labour government was then reinforced by their National successors. As a consequence, the major parties chose not to engage each other over the basic principles of economic policy, and the whole question of how our economy should be run was consigned to the sidelines.
The reluctance to discuss economic policy was nevertheless surprising, given the constantly expressed concern and disappointment at our poor economic performance. As the gap between New Zealand and Australia widened, and our productivity figures remained stubbornly unimpressive, the finger was pointed at every conceivable explanation – bar the obvious one. It is only now that the realisation seems at last to have dawned that our comparative economic decline might – just might – have something to do with the economic policy settings we have faithfully followed for twenty five years.
For most of that period, we have slavishly adhered to the view that government’s involvement in the economy should be limited to regulating monetary conditions and that even that limited function should be delegated to unelected bankers charged with the equally limited goal of controlling inflation. Beyond that, the rest of the economy could safely be left, it was thought, to look after itself.
It turned out that things were not so simple. The apparently simple and technical question of controlling inflation through interest rates and exchange rates proved to have important and unfortunate consequences for the real economy. The productive sectors of our economy were constantly handicapped by high interest rates and an overvalued dollar, and by secondary consequences like the relative attractiveness of investing in property as opposed to productive capacity and of bingeing on cheap imports as opposed to saving. There was, in other words, a price to pay for using instruments like the exchange rate for purposes they were not meant for.
Government over this period, of course, was let off the hook, disclaiming any responsibility for managing the economy as a whole. It was content to dabble in micro-economics, and in balancing its own books, but showed no interest in issues of competitiveness or demand management. Macro-economics simply did not exist.
So, what has changed? The Labour opposition has been thinking. They seem to have grasped that there is no upside in either electoral or practical terms in simply agreeing with the government, and that the evidence before our eyes demands that New Zealand should strike out in a new direction.
So, the two-party consensus on economic policy is at an end. It is proposed that the purpose and techniques of government’s involvement in economic policy should change. Macro-economic policy is back.
What are the chances of the debate taking off? They are better than one might imagine. The current government continues to stick to orthodoxy, but they are led by a pragmatist. Sooner or later, and hopefully sooner, John Key is going to realise that he and his government will get nowhere near the goals they have set themselves if they continue to slog along the same road that has led nowhere for so long. That would mean just watching the Australian tail lights disappearing into the distance.
There is also reason to hope that the official mind might be less rigid than it has seemed for so long. The regime at the Reserve Bank under Alan Bollard is clearly less doctrinaire than it was under Don Brash. Even the Treasury cannot be entirely immune from common sense.
To get the debate under way is not of course to win the argument. But whatever the outcome, our public life will be stronger for re-opening a real discussion about the role of government in achieving economic success. And not for the first time, we might even lead a world-wide trend.
The voters may or may not reward Labour for its courage in challenging an orthodoxy that has prevailed for so long. But we all owe Labour a debt of gratitude for starting a debate that is long overdue.
Bryan Gould
25 October 2010
This article was published in the NZ Herald on 27 October.