• Opening Our Minds

    Over the past four years of recession, we have seen a re-run of the debate that surrounded the Great Depression. In the 1930s, there were those, like Herbert Hoover, who insisted that austerity – by cutting government spending – was the way to beat recession. Others, like John Maynard Keynes, were convinced that the remedy was stimulus and expansion.

    In the event, it was a no-contest – and so it is today. It is now clear that the austerity being inflicted on the benighted Greeks cannot work, but even the other “PIGS” – Portugal, Ireland and Spain – who have done everything required of them by the austerity disciplinarians, have found that they are going backwards, deeper into recession and with a rising ratio of government debt to GDP.

    And while the British may have avoided the problems of euro membership, they chose to impose their own home-grown austerity. The result? They are mired in a recession that threatens to be worse for them than the 1930s.

    In the US, by contrast, President Obama’s stimulus programme – bitterly opposed and relatively timid as it was – is pulling the US economy around. There can now be little doubt that stimulus is the key to beating recession. The time for austerity policies, after all, is when the economy is booming; in a recession, they are the last thing we need.

    As that reality becomes increasingly difficult to deny or ignore, where do we in New Zealand stand? Sadly, we find ourselves with Herbert Hoover, down an ideological cul-de-sac with nowhere to go. The proponents of the current orthodoxy now don’t even bother to defend it; they promise merely a continuation of the long drawn-out stagnation – resorting, like school-kids in the playground, to challenging their critics to offer something better.

    The critics seem increasingly ready to respond to that challenge. A recent example is Bernard Hickey’s interesting suggestion that we should consider “quantitative easing” (or, as it used to be called pejoratively, “printing money”).

    It may not be the first option to come to mind but it is not as way-out as it seems. Many governments (including the current UK and US governments) have “printed money” from time to time – and banks do it all the time, lending money that they do not have, and thereby creating most of the money in our economy out of nothing. If it’s all right for them to make billions from doing so, why shouldn’t governments do it in the public interest, and so get the economy moving?

    There are, of course, many other proposals that offer an alternative to the failed orthodoxy. Here, in 400 words, are a few suggestions, which – if implemented – would go to make up a coherent programme.

    · Put beating unemployment centre stage by investing in much-needed infrastructure projects, so as to raise demand and create new jobs –a virtuous circle which would also help retailing, and private sector investment and productivity.

    · Get the exchange rate down to improve competitiveness so that higher demand is met by New Zealand, and not foreign, industry; do so by ending the use of high interest rates and over-valuation as counter-inflation tools and focusing instead on the real cause of inflation – excessive and irresponsible bank lending for non-productive purposes. As soon as foreign speculators are denied an interest rate premium and an unearned capital gain, the dollar’s value will fall.

    · Remove the balance of trade constraint on expansion by boosting exports through improved competitiveness, so cutting the interest and profits paid to overseas lenders and owners; this will allow us to expand while paying our own way, so reducing the need to borrow overseas or to sell our key assets to foreign owners.

    · Encourage saving and exports rather than consumption and imports by promoting further saving through tax breaks, and – since imports will become comparatively more expensive than domestic production – reduce the incentive to spend on cheap imports at the expense of New Zealand jobs and production

    · Tackle the government’s deficit by collecting a sharply increased tax take as a more buoyant economy generates much greater tax revenue

    · Reduce widening inequality by discouraging excessive salaries, introducing a fair tax system (including a capital gains tax) and stopping the destructive insistence on inflicting the cost of the recession on those least able to bear it – the low-paid, the unemployed, and beneficiaries.

    · Expect improved competitiveness, productivity and profitability in the private sector to stimulate increased investment, especially in skill training, education, and research so as to utilise fully our potential human capital and achieve an economy that reaches its full productive potential.

    · Develop a close understanding of and support for Maori aspirations, given that Maori offer an important potential stimulus to new development and seem to have leaders with a better understanding than pakeha – on issues like asset sales – of what the country needs.

    · Ensure that new investment is encouraged to develop advanced – and particularly environmentally friendly – industries based on green technologies.

    This is all just common sense; none of it is revolutionary. It would rescue us from recession and set us on the right course for the future. It would optimise the market’s strengths and minimise its weaknesses. Don’t let anyone tell you there is no alternative.

    Bryan Gould

    27 February 2012

    This article was published in the NZ Herald on 29 February.

  • Austerity or Jobs?

    Two issues – the turmoil on world stock markets, and the riots in English cities – have dominated news bulletins over recent days. Each is a significant news story in its own right, but the interesting question is whether they are in any way linked.

    What looks suspiciously like the global financial crisis, Part II, is widely reported as a problem of government debt. Those many governments that have identified debt reduction as their top priority have seen the renewed crisis as vindicating their analysis. In reality, however, what it demonstrates is that they have got it completely wrong.

    No one doubts that government debt in the US, the UK and the eurozone is higher than it should be and is a drag on economic recovery. Debt arises, however, because spending has outpaced revenue. As a matter of logic, therefore, there are two (and not necessarily mutually exclusive) ways of remedying the situation.

    Governments can choose to focus on cutting spending, or they can try to increase revenue. These further economic shocks show that, in focusing exclusively on cutting spending, they have made the wrong choice.

    The problem is that the level of debt is a function of the level of economic activity; the higher the level of economic activity, the more buoyant the government’s tax revenue. A government that has trouble in balancing its books in a recession, and that seeks to deal with that issue exclusively by cutting its spending, necessarily reduces the level of economic activity and – by depressing its tax revenue – makes the debt problem more difficult to resolve.

    Sadly, we have seen, in the economies that have spawned the current crisis, extreme examples of this error. In the US, the Republican majority in the House of Representatives has been wagged by the Tea Party tail, with the result that the usually technical issue of raising the government’s debt ceiling became an issue of moral probity.

    The Republicans not only resisted any increase in the government’s ability to borrow but refused to countenance any reversal of the tax concessions that George W. Bush made to the super-rich. A refusal to allow any tax increase, and an insistence on massive spending cuts in the short term – while the economy is still in recession – have rightly been seen by the credit rating agencies as a cause for concern.

    In Europe, the problems are more structural. The eurozone lured into its membership smaller and weaker economies – and some not so small – that could not hope to live with monetary conditions established to suit the interests of the dominant German economy. Those countries were lulled into a false sense of security when money and credit were plentiful; but – come the recession – they are now denied the usual remedy of devaluing their currencies. The only course open to them is savage cuts and austerity.

    The problem with austerity as a supposed remedy is that closing economies down in an effort to cut spending means that they cannot hope to repay the massive further borrowing they need just to keep their heads above water. Little wonder that European banks look nervously at the probably worthless securities they hold from deficit countries, that bank failures are now seen as a grim possibility, and that contagion threatens to spread not only throughout the eurozone but across the global economy.

    The problem is less stark in the UK, which sensibly stayed out of the eurozone. In the British case, however, the damage is self-inflicted. The coalition government, elected last year, has insisted that giving priority to savage cuts in spending will give confidence to the money markets, a view thoroughly discredited by the US and eurozone experience, and – as the “confidence fairy” fails to materialise – by the increasingly obvious failure of the British economy to recover from recession.

    The only fairy that has made its presence felt has been a very wicked one indeed. The recession – and, in particular, rising levels of poverty, high levels of youth unemployment, severe reductions in post-compulsory educational opportunities, and sharp increases in public sector rents – has certainly played its part in creating the conditions for last week’s shameful riots.

    Each of the many thousands of individual acts of criminality should of course be condemned and punished. But it is pointless and wrong to ignore the fact that riots on this scale are a social phenomenon. Many of us will have been bewildered by the absence – in the television pictures broadcast around the world – of any decent impulse, any sense of social responsibility.

    But the young people who behaved like a feral rat pack feel that they owe very little to a society that has banished them to its extreme margins and that treats them as worthless. This is not a question of making excuses, but an attempt to find an explanation for what is otherwise inexplicable to most people.

    And before we bless our own good fortune in New Zealand, let us recognise that many of these conditions apply here as well. We have a government that talks of nothing but deficit reduction while the developed world’s worst youth unemployment is allowed to fester. Like misguided governments overseas, given the choice between austerity and jobs, we have made the wrong choice.

    Bryan Gould

    This article was published in the NZ Herald on 15 August.