• The Wrong Target

    What the media described as a “back to black” budget was greeted in some quarters as though it was a test match victory. Beyond the headline, however, little attempt was made to help the public understand what the budget was all about.

    For many people, the prospect of “getting back to surplus” was enough to assure them that all is well. Few would ask whose surplus we were actually talking about, whether it was or should be the prime goal of policy, what price we might have to pay to achieve it, and whether its achievement – when it happens – would have helped or hindered the resolution of our long-term problems.

    Many, for example, would not distinguish the government’s position from the country’s; still fewer would understand that a government surplus could actually mean that the country’s indebtedness gets worse. All other things being equal, it would be nice to have the government’s books in balance, but the debt we should really be worried about is the amount we owe to overseas lenders – and that is going up, not down.

    A government surplus, after all, means only that it takes more from us in tax than it spends on services and that is just one part of the overall picture; and sadly, its decision that its own accounts should take precedence over the country’s has meant that we are much slower in coming out of recession than we should be. Those looking for work but without jobs (of whom there are many more than revealed by the statistics), the families in poverty, the children going to school hungry, the families crowded into substandard housing, are all paying the price for an ideologically driven focus on reducing the size of government.

    That slow escape from recession has meant that we have again spent several years failing to make proper use of our productive resources – and we are a poorer country as a result. And the focus on the government’s books has of course played its own part in directly creating unemployment, as public servants have been thrown out of work and sent to join the dole queue.

    Even more importantly, the rundown of public services – the inevitable corollary of the constant cuts – means that in all sorts of areas, like biosecurity and safety at work, we are less well equipped to build an efficient economy; it is only occasionally, when PSA arrives or a Pike River disaster occurs, that we see in stark terms a price that is usually unseen but is actually being paid day by day and across the board.

    Even in those areas where the government has found it necessary to acknowledge public concern, the theme that business, not government, must provide the solution remains dominant. Affordable housing, the government contends, is best provided if local government and community are shunted out of the way and developers are given free rein. The best way of securing an Auckland convention centre is to sell long-term concessions to a casino operator. Prospecting for oil and minerals will attract private investment if civil rights and environmental protections are scrapped.

    If the price we pay for balancing the government’s books is that the country’s trade account goes into deeper deficit and the private sector continues to consume rather than save, there can be only one outcome – the country’s sizeable debt owed to foreigners will go on getting bigger.

    That likely outcome is a recipe for a vicious circle of higher interest rates to persuade foreigners to lend to us, an even more overvalued dollar, more asset sales to overseas buyers to help close the gap between what we spend and what we earn, less national wealth so that we are more dependent on foreign capital to “invest in” (for which read “own”) our productive base and – as interest payments on our borrowings and profits exported overseas take their toll on our balance of payments – the need to undertake yet more borrowing to start the cycle all over again.

    These prospects are not fanciful; it is precisely such fears that prompted both the IMF on their recent visit and the credit rating agency Standard and Poors last week to make their own damning judgment of the government’s strategy. However careful their language, neither of these agencies – historically predisposed as both are to “responsible”, not to say conservative, policies – could conceal their alarm at what are now emerging as the prospects for our economy.

    While the government and our media are focused on the sideshow of a prospective government surplus, the wider economy is belatedly coming out of recession by making a headlong dash back to all our familiar problems writ large. Little wonder that informed observers (including our own Reserve Bank) are alarmed at the overheating Auckland housing market and at the impact of an overvalued currency on our weakening productive sector and growing trade deficit.

    “Back to black”, in other words, was a snap judgment on a budget that, by again ignoring the important elements in our economy in favour of an ideological predilection for reducing the role and responsibilities of government, has compounded rather than resolved our real problems.

    Bryan Gould

    18 May 2013

    This article was published in the NZ Herald on 24 May

  • 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.

  • Rebutting Tina

    Much of the comment on (and criticism of) the budget has focused on the impact of the specific measures designed to rein back the government’s deficit. But, as the dust settles, we can see that the budget’s real failing was not in the specifics. Quite simply, it identified the wrong strategic target.

    A casual observer could be forgiven for assuming, on the basis of what we were told about the budget’s objectives, that the country’s most pressing priority is to cut government spending. But, on the facts, that should be the least of our concerns. As Brian Fallow showed conclusively before the budget, our government’s gross financial liabilities as a percentage of GDP are the third or fourth lowest in the OECD.

    Indeed, we could say that the government’s financial position is, comparatively speaking, one of the few bright spots in an otherwise pretty gloomy scenario – and it is strong because the government’s predecessors ran surpluses and prudently paid off debt over most of the preceding decade.

    So, why is there so much emphasis on the deficit? And why do so many people believe that, because “we” are living beyond our means, the government must therefore cut back?

    The answer is that confusion rules. There is of course a debt problem – but it is not the government’s. It is ours. While the government’s financial position is amongst the strongest, the country’s indebtedness – what we owe to others – places us at the bottom, along with Greece, Ireland, Spain and Portugal.

    So, the budget – and much of public opinion – addressed the wrong problem. Does it matter?

    Yes, it does. It means that, contrary to the story we have been told over recent years, we can and should be using the government’s financial strength to build our recovery. That was the point of paying off debt in the good times.

    We have to assume that our policy-makers understand this perfectly well and that it is not economic rationality but political dogma – the ideology that, whatever the circumstances, government should play a smaller role in the economy – that determines that priority should be given to cuts in public spending.

    But that focus means that our recession drags on for longer than it should. Those who pay the price are the unemployed, the sick and the poor, but it is also bad news for small businesses and producers, for the profitability, productivity and competitiveness of our industry, and for the economy as a whole.

    Paradoxically, it is also a recipe for continuing government deficits, since a contraction in government spending, allied to contraction everywhere else in the economy, makes it virtually certain that the recession will endure and that tax revenues will stay flat.

    Yet many people are persuaded that, until the government cuts back, we cannot afford to expand the economy.

    But both common sense and overseas experience confirm that this is to get things the wrong way round. There is increasing evidence that recovery must come first, and deficit reduction second, and not the other way round.

    Those countries, like Greece, Ireland, and now the UK, which have pursued an austerity programme in the hope that this will build confidence and thus stimulate recovery, have found that contraction is exactly that – contraction – and not the path to expansion through the hoped-for ministrations of the confidence fairy.

    Other countries, like Canada, have demonstrated that getting recovery under way, by stimulating economic activity, is the best and necessary pre-condition for tackling a budget deficit. The Canadians have successfully undertaken – in that order – both exercises.

    Moreover, while it would be good to return to government surpluses as soon as it is sensible to do so, it is not as though debt is itself such a frightening concept. A modern economy depends on debt, largely created by the banking sector; and the debt that really is a cause for concern is not the one we owe to ourselves but the debt we owe to overseas creditors.

    That outsize debt – the one we all, you and I, owe to foreign lenders – is a function of our overall economic failure and our insistence on consuming more than we produce. That is the problem we should prioritise.

    A government that applied common sense rather than ideology would, in other words, have identified quite different strategic targets. They would have focused on substantially reducing our overseas borrowing – the most significant step we could take towards protecting our credit rating.

    As stepping stones towards that goal, they would encourage, not discourage, savings. They would give priority to restoring full employment. They would set about reversing the increase in inequality and the growing poverty in our society. They would halt the selling off of our important assets to foreign owners. And they would back this up with a reformed macro-economic policy that gives priority to the competitiveness and profitability of our productive sector.

    None of these goals featured in the budget. Each should have had a higher priority than the strategic focus that was in fact selected. Shouldn’t we expect better?

    Bryan Gould

    22 May 2011