• 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

  • Our Politicians Are Not Up To It

    The revelation that Growth in a Time of Debt, the influential 2010 paper by leading economists Reinhart and Rogoff, was vitiated by basic errors has removed one of the last credible underpinnings of the contention that austerity – and reducing the deficit at all costs – is the proper response to recession.

    But it is not just miscreant economists who have egg on their face; it is our political leaders too. The translation of the Reinhart/Rogoff findings into a simple ‘rule’ that a debt to GDP ratio exceeding a tipping point of precisely 90% produces a precipitate slump in economic growth has been the intellectual foundation of policies advocated and implemented by politicians across the western world. The two economists have frequently been cited as champions of austerity by Paul Ryan, the Republican vice-presidential candidate, by Olli Rehn, the European Commission’s economic chief, and by George Osborne, among many others.

    How did these luminaries come to accept and implement such a literally counter-productive policy? The answer is that there are very few politicians who are competent to make their own judgments on major economic issues. What most of them do is cast around for arguments that support their own political prejudices – and that is all the easier if those arguments are offered from within the comfortable confines of current orthodoxy.

    Reinhart and Rogoff were endorsed and applied (mistakes and all) because it is what political leaders wanted – on political grounds – to hear, and because it accorded with the ‘free-market’ doctrines that have dominated western economies for nearly four decades. A George Osborne, for example, found that the supposed ‘90% rule’ gave him all the scope he needed to justify and target the true aims of his policy – smaller government and ‘rolling back the state’.

    The dependence of political leaders on advice – especially on economics – is not new; but it matters more than ever today as the dangers of such dependence become clearer. While the austerity message is increasingly contested on grounds of historical experience, Keynesian economics, and the need to establish the direction of causality in respect of any postulated correlation, the thinking of most people is still corralled by those powerful forces which seized control of the global economy decades ago.

    There can be little surprise that advice from these quarters is extremely congenial to right-wing politicians. For most of them, economics is a simple business. They see no distinction between running a country’s economy and their own experience of running a business. Even when they think about the wider economy, their decades-long experience of monetarism leads them to believe that the essence of a successful macro-economic policy is a backward-looking insistence on stability and getting government out of the way. They are simply unfamiliar with the kind of thinking that has allowed other economies to grow and prosper.

    It is less easy to explain why politicians from the left of centre have been equally unwilling or unable to think for themselves. But the sad truth is that most simply assume, like Tony Blair, that economics is a difficult and technical business that can safely be left to the bankers, and is therefore no longer their responsibility. They tell themselves that the economic process is probably immutable anyway, and that the real business of politics is in any case about other issues. They place more value on the plaudits of the powerful than on the reproaches of the dispossessed.

    Even a Gordon Brown – who was widely thought for a time to be a master of economic policy – can now be seen to have been merely a prisoner of his orthodox advisers. He, at least, seems to have had the intellectual capacity to re-think his position to some extent since he left office.

    The dead hand of long-established orthodoxy continues to weigh down on the current Labour leadership. Even Eds Miliband and Balls, who clearly have some understanding of what is needed, find themselves constrained by the fear that anything too overt by way of new thinking will open them up to damaging attack. They have to move cautiously; and that inhibits them from developing and advancing a fully comprehensive and coherent alternative policy.

    The result is that our political establishment offers no one able and willing to break new ground, to consider, let alone advocate or act on, neglected issues that are nevertheless of great importance. Where, for example, is the debate about the need to improve competitiveness if we are to grow without running into the constraints of inflation and trade deficits? What about rejecting destructive austerity in favour of replacing – as the Japanese are doing – the banks’ monopoly over credit created for non-productive purposes with credit created by the central bank and directed – not into banks’ balance sheets – but in accordance with an agreed industrial strategy into productive investment? What about restoring macro-economic strategy as the responsibility of an accountable democratic government rather than leaving it as the preserve of an ‘independent’ central bank? And, above all, what about making full employment, on economic as well as social grounds, the central goal of policy?

    Bryan Gould

    24 April 2013

  • George Osborne’s Non-Event

    George Osborne’s budget was driven by an obvious political imperative but was, in economic terms, largely a non-event. The major interest, such as it was, lay in the minor adjustments offered to long-suffering consumers in the forlorn hope that they would be cheered up by cheaper beer and marginal concessions on income tax, and might not therefore notice that their jobs, services and living standards are still under constant threat.

    In terms of the wider economy, the Chancellor’s stance was “steady as he goes”; after nearly three years of his stewardship and in the sixth year of recession, nothing much, it seems, needed to change.

    There was no recognition that austerity as a response to recession had not only been invalidated by experience, both in the UK and in Europe, but had also, as a consequence, been rejected – following a review of their earlier recommendations – by the IMF. The Chancellor was apparently unconcerned that output still lagged behind its pre-recession peak, and that the government borrowing, whose reduction he had identified as one of his primary goals, had continued – reflecting the depressed level of economic activity – to grow as a percentage of GDP.

    So little account was taken of the most obvious and pressing problems facing the economy that one must wonder whether the Chancellor’s focus is political and social, rather than economic. It may well be that his unstated agenda is to take advantage of the recession to unleash forces and drive through measures that will change the balance of advantage between rich and poor, private business and the public sector, for a generation.

    The Chancellor may well be, in other words, an (perhaps – if one is being generous) unwitting heir to a long and dishonourable tradition, epitomised by Andrew Mellon, the multimillionaire US Treasury Secretary, who called upon employers in the depths of the Great Depression to “liquidate labour”.

    Austerity, and the withdrawal of government, represent, after all, increased space for private enterprise (though the Chancellor seems not to have noticed that manufacturing is so enfeebled that it is unable to take advantage of any supposed opportunities); and even the resulting failure to get the economy moving has a silver lining, in that it guarantees that unemployment remains an actual and potential restraint on wage growth.

    What was needed from the Chancellor in his Budget speech was so far removed from what was in his mind that there seems scarcely any point in rehearsing it. But the Budget speech would have made a positive difference if it had signalled the abandonment of austerity and its replacement by a strategy to recruit government, banking and industry in a joint effort to raise the level of demand, to provide finance for productive investment, to coordinate an industrial strategy focusing on those areas of manufacturing that represent the best possibilities for growth, and to frame a macro-economic policy with competitiveness rather than inflation control at its heart.

    Bryan Gould

    31 March 2013

    This article was written for Palgrave Macmillan’s newsletter.

  • George Osborne’s Deep Hole

    Whatever George Osborne may say on Wednesday in his budget speech, he cannot extricate himself from the wreckage that now surrounds him. He may be just about the last person in Britain to believe that austerity offers a credible path to recovery from recession – and it may be doubted that even he remains a true believer. The repeated fall back into recession, a government deficit that goes on rising, and the loss of the country’s top credit rating are surely enough to shake the confidence of even the most arrogant and obtuse practitioner of the dismal science.

    The Chancellor’s continued commitment to austerity has made a significant personal contribution to the digging of an economic hole from which there now seems no discernible path to recovery. Perhaps his only saving grace is that he should not be left to bear the burden of that responsibility alone.

    As a long-time critic of British economic policy under successive governments, I hear the flapping wings of chickens coming home to roost; for the truth is that the current difficulties – and the imminent prospect of long-term economic decline – are the inevitable consequences of decades of mistaken policy choices and the worship of false gods.

    It is hard to grasp, even now, just how thoroughly and comprehensively the favoured nostrums of the last four decades – those nostrums that have guided our fortunes over the whole of that period – have now been disproved and discredited. Let us look at some of them in turn.

    Take the propositions that the market (and especially financial markets) can be accurately predicted on the basis of mathematical models, that they are self-correcting and do not therefore need regulation, and that any intervention in unregulated markets will automatically produce results that will be worse than if they had been left alone. As Keynes warned, and experience in the form of the global financial crisis has confirmed, markets – and financial markets in particular – are all too likely, if unregulated, to lead to excess and collapse.

    Or, what about the belief – maintained for more than three decades – that macro-economic policy is not a matter for government but is a simple matter of restraining inflation – an essentially technical task through setting interest rates that can safely be entrusted to unaccountable bankers? Do we still believe that monetary policy is all that is needed for a healthy economy? Or that it is any more effective than pushing on a piece of string as a means of escaping from recession? Or – when we look to more successful economies overseas – that there is no role for government?

    And what about the related confidence displayed in the expertise and objectivity of bankers in running our economy? Do we still believe that bankers have the common interest at heart and do not make decisions to suit themselves? Are we happy that they continue to enjoy the astonishing privilege, as private monopolies, of creating money out of nothing, thereby exercising hugely more power over our fortunes than do elected governments?

    What do we think of the faith placed by successive governments, not least by New Labour, in the financial services industry as the means of paying our way in the world? Do we still accept that the huge fortunes made by a few in a largely unregulated City represented real and sustainable wealth-creation in which the rest of us would share?

    Even more importantly, what do we think of the careless assumption that focusing on financial services made it unnecessary to concern ourselves with our manufacturing base? Do we now understand that the loss of manufacturing means – now that the chips are down – that we are denied the most reliable way of maintaining our standard of living, the most important source of innovation, the most substantial creator of new jobs, the most effective stimulus to improved productivity and the provider of the quickest return on investment?

    Do we understand that globalisation has meant, with the removal of exchange controls, that major global investors can now move huge volumes of money – totalling as much in a single day as the total annual production of most economies – from one country to another, and have thereby disabled democratic governments from doing anything to protect us?

    And do we understand that the combined effect of all these policies has been to create a huge mechanism for shifting wealth and resource from the poor to the rich, and that it is that which is responsible, rather than any great ability or virtue on the part of the rich, for the widening inequality that weakens and disfigures our society?

    Underpinning all of this is a fundamental failure – an obstinate refusal to recognise that the world has changed and that, with the rise of newly efficient economies around the globe, we have no innate right to have a privileged standard of living delivered to us on a plate. The fact is that the UK has been a fundamentally uncompetitive economy ever since the 1970s, but we have preferred to avert our gaze from this uncomfortable truth.

    The issue of competitiveness is not recognised, let alone discussed in Britain; yet much more successful economies use measures of competitiveness as their guide to what is required from macro-economic policy. We, on the other hand, have preferred to take refuge in a range of nostrums that we can now see have little merit.

    George Osborne’s budget will be scrutinised for signals that tiny changes in direction might be forthcoming and that salvation might lie therein. But the budget will be a minor factor in an economic dilemma which George Osborne – and his predecessors – have spent painstaking decades in creating.

    Bryan Gould

    17 March 2013.

    Bryan Gould’s new book Myths, Politicians, and Money will be published by Palgrave Macmillan later this year.

    This article was published in the online Guardian on 18 March.

  • Zero Budget, Zero Ambition

    The budget, Bill English tells us, will provide a further step towards a strong long-term economy. That step is certainly needed, since there is precious little evidence of economic strength, long-term or short-term, at present.

    In recent weeks, we have seen unemployment on the rise again, manufacturing output fall back, retail activity stalling, the trade deficit worsening, and GDP figures revised downwards. It is increasingly clear that we have wasted the chance we were offered by buoyant export markets and record commodity prices of pulling ourselves conclusively out of recession. Instead, we have at best bounced along the bottom for nearly four years and, at worst, have left our long-term problems unresolved and getting worse.

    As a result, Kiwis are voting with their feet. Record numbers are responding to unemployment, low wages, reduced public services and poor prospects by crossing the Tasman in search of a better life. Far from closing the gap with Australia, this government has seen us fall further and faster behind.

    Will the budget turn this around? Will the “strong long-term economy” at last materialise? Not if the constant drip-feeding of pre-budget announcements is anything to go by.

    Over recent weeks, prescription charges have been raised, student loan repayments made more onerous, class sizes increased, our diplomatic service decimated, our border security jeopardised, public service broadcasting abandoned, police numbers cut, jobs lost across the public service, help for first-time home buyers slashed, and 0800 numbers substituted for real help with benefits, legal advice, and housing problems.

    It is hard to see how any of this is likely to build a stronger economy, let alone a healthier society. We are told that the cuts – all part of a “zero” budget – are necessary to reduce “the deficit”. But even that limited objective is made more difficult to achieve by constant cutbacks. The reason that “the deficit” is so persistent is that a sluggish economy does not generate the tax revenue that would help to bring it down.

    Dealing with “the deficit” is in any case much more difficult than it should be because the government recklessly gave billions in tax cuts to the wealthy. Having failed to cover the cost of that misplaced generosity through the increase in GST, it must now scrape the bottom of the barrel to find extra funding to pay for the shortfall.

    And that is to say nothing of the fact that constant talk of “the deficit” is misleading in the extreme. The deficit we should be concerned about is not the gap in the government’s finances which – thanks to the prudence of Michael Cullen – are by international standards in reasonably good shape.

    Our real deficit is the amount we continue to borrow as a country from overseas lenders. It is that burden that is actually being made worse by the government’s failure to address our real economic problems and to get the economy moving.

    The Prime Minister has tried to conceal this truth by constantly raising the spectre of the Greek meltdown. If the government does not cut its spending, he says, we could face the same fate as the Greeks. This contention is so ridiculous as to be laughable.

    The Greek problem is the result of a combination of two huge mistakes by Europe’s leaders – mistakes that some of us have warned against for – in my case – many years. The first mistake was to encourage Greece to join a single currency that would impose conditions they simply could not live with.

    By the time that became absolutely apparent it was too late. Confident in the guarantee supposedly provided by membership of the euro, the Greece ran up huge debts which the burdens of euro membership meant they could never hope to repay. There is a dreadful symmetry in the fact that the price for this wilful blindness to economic reality is now being paid, not just by the debtor Greeks, but also by the creditor nations and banks who are equally culpable.

    The second mistake was to insist, as a dwindling band of ideologues continues to do, that the remedy for Greece and the rest of the increasingly recession-ridden euro zone is austerity. We now see (and so does President Obama), not only how hugely damaging this supposed remedy is for the hapless Greeks, but how quickly it is dragging Spain and Ireland, Italy and Portugal, into the same black hole.

    And let there be no doubt. Our own government is making those same mistakes, albeit on a smaller scale. They, too, deny the importance of the exchange rate (as euro membership forced the Greeks to do) in determining the competitiveness needed to improve our economic performance.

    And the emphasis quite unnecessarily placed by the budget on cutbacks is further evidence that, just as in Europe, our government’s watchword is austerity, which may be a sensible way to run a business, but – as all evidence shows –is the wrong response for a country. Like Europe’s leaders, our government stubbornly refuses to learn the lessons of the Great Depression. Can we really be content with an economic outlook about which the best that can be said is that it is “Greek-lite”?

    Bryan Gould

    19 May 2012

    This article was published in the NZ Herald on 23 May.