• What Happened to the Money?

    Larry Elliott is right to ask in Tuesday’s Guardian why 16.5 billion of quantitative easing made available by the Bank of England to the commercial banks through the funding for lending scheme has failed to show up in increased lending to the small and medium-sized businesses which desperately need a boost to their available funding. He is also right to dismiss the lame excuses offered by both the Bank of England and the commercial banks to explain why such lending has actually fallen rather risen since the same time last year.

    We are, of course, all paying the price, in a slower recovery from recession, higher unemployment, less investment and more business failures, for the fact that this resource, rather than being used, languishes in the banks’ coffers – so we all have an interest in why it has happened. The bad news is that the reasons for it are part of a much wider and longer-term picture.

    The excuses trotted out include the age-old claim by British banks that the comparatively low level of their lending to business does not evidence any reluctance to do so, but merely a shortage of demand – or, to put it another way, a shortage of suitable projects on which to lend. But no sense of this can be made unless we know not only how much is available to lend but also – and more importantly – the terms on which the banks are offering to lend.

    And that is precisely, of course, what we are not allowed to know. The banks are always very coy about the terms they offer. But, in the absence of information made available by the banks, we are entitled to make some assumptions on the basis of what is known of the long-term attitude of the British banking system to lending to industry.

    The information that is available shows that, by comparison with other and more successful economies, our banks lend over a shorter term – the repayment period, in other words, is shorter. This means that the annual repayment costs of bank loans for British firms over the life of the loan are much higher, the adverse impact on cash-flow is therefore more severe, and the need to make an immediate return on investment (and a quick boost to profitability) is much greater.

    My colleague, George Tait Edwards, has shown that annual repayment costs that are two, three or even five times lower are a large part of the reason for the greater amount and ease of bank borrowing enjoyed by businesses in, for example, Germany and Japan, and in the new powerhouses of China, Korea and Taiwan – and that is, of course, why they are able to buy and make a profit from our failing assets.

    This is the fons et origo of the much-lamented British disease of short-termism. For many British firms, short-term cash-flow or liquidity is at least as important as longer-term profitability, because it is literally a matter of life and death. It is a factor that both inhibits the willingness to borrow (and therefore the access to essential investment capital) in the first place, and – if the loan is made – greatly increases the chances that it will not and cannot be repaid in accordance with the loan period and terms insisted upon by the banks.

    If, as is all too likely, a business borrowing on these terms runs into difficulties before the return on the investment funded by the borrowing becomes available, the news gets worse. British banks, unlike their overseas counterparts, show little interest in the survival of their customers. Their sole concern is to recover the loan and interest payments due to them over the short period specified in the loan arrangement. If that means receivership or liquidation – even if the business had a good chance of survival were the investment plans funded by the loan allowed to proceed – so be it. The banks can console themselves not only with the return of the loan and other payments due to them sooner than if the business had been allowed to survive but also with the money to be made from the disposal of the assets (sometimes to foreign buyers) and the receivership process.

    Many people are vaguely aware of these factors but our lack of interest in what makes competitor economies more successful than ours – indeed, our conviction that we have nothing to learn from them – blinds us to these truths. It is time we opened our minds and demanded better from our banking system. And shouldn’t these decisions in any case be taken in the public interest and not those of self-interested bankers?

    Bryan Gould

    4 June 2013

  • 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

  • An Economic Policy for Labour

    It was significant that, in the seven issues that Tony Blair – in his article last week in the New Statesman – advised Ed Miliband to focus on, there was no mention of the state of the economy.

    It is true that Tony never had much interest in or knowledge of economic policy – a deficiency that might have been an exacerbating factor in his precarious relationship with Gordon Brown. But it is nevertheless surprising that, in identifying the big issues that warrant attention, the parlous state of the economy slipped under the radar.

    Tony Blair is not, of course, alone among leading politicians in disavowing any interest in economic affairs. Most are content to accept advice from supposed experts, which usually means (and was certainly true in the case of Gordon Brown) that they have no option but to go along with whatever may be the prevailing orthodoxy.

    Yet the issue of how an economy should be run and in whose interests is surely the central issue in democratic politics. The ability to think for oneself and to judge the merits of conflicting views should surely be a minimum requirement of anyone who seeks to run the country.

    We see today where the orthodoxy of the past thirty years has got us. It is one of the welcome changes that Eds Miliband and Balls have brought about that there is now a disposition in the Labour party to challenge that orthodoxy. There is certainly an appetite for such a change by virtue of a growing if belated realisation in the general public that the old nostrums have failed.

    What is needed now is more courage, not less – a focus on positive change (which these days means no more than a moderate Keynesianism) and a conscious effort to move the debate’s centre of gravity; the Blair advice to fight shy of any genuine clash of ideas is surely misplaced – not only representing a missed electoral opportunity but a betrayal of the interests that Labour should be fighting for.

    Labour should be ready to take on the tired and discredited proponents of austerity, monetarism and the “free” market with some bold new (or, in most cases, revived) thinking. What about, for example, abandoning the backward-looking and static view of the economy taken by monetarism (and the irrational reliance on austerity to recover from recession) in favour of a recognition of the great power of a competitive market economy to grow – like the US at the outbreak of World War II, the Japanese in the 1960s and 1970s, and the Chinese today? The new Governor of the Bank of England is signalling that he is already looking at this approach.

    What about addressing that issue of competitiveness, or lack of it, that has held us back and constantly threatened inflation and trade deficits when we have tried to grow, by making improved competitiveness the central determinant of policy – as Singapore does?

    Why not tackle that issue by ensuring that – as Keynes warned – a shortage of money (for which read credit) does not hold us back, but that the credit that is created is put to productive purposes by being channelled, with the aid of an industrial strategy agreed with government, business and banks, into strengthening our neglected manufacturing base?

    What about using specific and focused measures to control inflation through restraining bank credit creation for non-productive purposes, so that the real and positive purpose of macro-economic policy – the productive use of all our resources, and the achievement of full employment in particular – become the main focus?

    And why not restore such macro-economic goals to their proper place in a democratic society – as the prime responsibility of elected and accountable governments, rather than being sub-contracted to unaccountable and self-serving bankers? And when government uses its power to “print money”, shouldn’t we ensure that those resources help industry through productive investment rather than sitting unused while they boost the balance sheets of the banks?

    And should we not nail forever the canard that we have to choose between social justice on the one hand and economic efficiency on the other? We have seen just how economically efficient is an economy that is run in the interests of a privileged few. There is nothing economically efficient about placing huge purchasing power in fewer and fewer hands, about allowing the wealthiest to treat the meeting of their tax obligations as a minor voluntary donation, about keeping large numbers out of work so that they are claimants rather producers, about leaving manufacturing flat on its back, about using vast amounts of money from both the taxpayer and the central bank to boost the banks’ balance sheets while both demand and investment remain depressed.

    A real debate about economic policy would produce great benefits – not just for the party brave enough to initiate it, but for the country as well.

    Bryan Gould

    15 April 2013

  • Doing What The Big Boys Tell Us

    It is surely now clear that this government sees our economic future as being dominated by big international players.

    Little account is taken of the “little people” – the unemployed, the low-paid, the wage-earners, and their families – or of their contribution, both actual and potential, to a successful economy. Otherwise, the government would not be so relaxed about the numbers unemployed, or struggling to make ends meet in low-paid jobs with little or no job security.

    Nor do small and medium enterprises figure largely in the government’s view of what makes a successful economy. Otherwise, they would not dismiss the plight of small manufacturers and exporters, burdened by an overvalued currency and the low level of demand.

    No, the government pins its hopes of getting the economy moving again on persuading big international investors to favour us with their attention – and John Key seems ready to bend over backwards to close any deal that is offered, whatever its terms.

    We have already seen how far the government is prepared to go. Warner Brothers didn’t even have to break sweat to get a $67 million tax concession and a change in employment law that reduced the rights of New Zealand workers.

    Sky City was able, in a “negotiation” that excluded other options, to extract an increased number of pokie machines in return for building a convention centre which will deliver to them substantial economic benefits anyway.

    But, as Ronald Reagan used to say, we “ain’t seen nothing yet.” The government is really pinning its hopes for foreign investment on drilling and mining – and it is leaving no stone unturned in its determination to make life easy for the big oil and mining companies, whatever price in domestic terms has to be paid.

    The evidence for this is too compelling to be ignored. In the last few months, the government has cut the Department of Conservation’s capability with the loss of a further 120 jobs. Changes to the Resource Management Act will allow Ministers to go over the heads of local authorities and permit mining or drilling activities that are “of national importance”.

    Large mining firms are permitted to prospect in areas that are environmentally unsafe, as in Northland, and in conservation areas such as Coromandel – and we are asked to believe that this prospecting is being done for fun, with no thought of a commercial return from any discovery of mineral resource that might be made. And the government have learned from the Warner Brothers issue; changes to please big business will now be made in advance and not left till the last minute.

    The Prime Minister loses no opportunity to proclaim that our economic future depends on digging up whatever can be found, irrespective of the impact on the environment and on the “clean, green” image we project to tourists. So we can imagine how irritated he was when the Brazilian petroleum giant Petrobras last year pulled out of their exploration off the North Island’s East Coast.

    He was even more angry that a protest at sea organised by local iwi and environmentalists had seemed to be a factor in that decision to withdraw, even though the company itself said they had withdrawn because they weren’t satisfied that the prospects were good enough.

    Kiwis have a history of supporting protest at sea – against French nuclear tests and Japanese whaling – but John Key is determined that future drilling at sea will not be the subject of protest. That is why in Parliament this week, the government is changing the law to make peaceful protest at sea a criminal offence, and to threaten protesters with fines of up to $50,000 and sentences of up to 12 months in jail.

    The proposed amendments to the Crown Minerals (Permitting and Crown Land) Bill break new (and probably unlawful) ground in a number of respects. A protest will be treated as criminal, even though no violence to person or property is perpetrated, and safety is in no way threatened; it will be enough if, in our 500-kilometre exclusive economic zone, the protest “interferes” with a vessel by approaching within 500 metres of it.

    The law has in the past protected installations at sea, such as oil rigs, but this is the first time that a vessel (which may be moving around) has enjoyed similar protection; it is clear that this provision constitutes an infringement of the freedom of navigation, in contravention of the UN Convention on the Law of the Sea.

    And the restriction on the right to protest should raise concern from all of those who value our civil and political rights. We know, from the measures taken to stop a legitimate protest against China’s policy in Tibet when the Chinese Vice-President, now President Xi, visited us in 2010, how readily this government is willing to abandon our own standards to please powerful foreign interests; these latest measures are in breach of both our own Bill of Rights, which guarantees the right of peaceful protest, and of the International Covenant on Civil and Political Rights.

    The government are again prepared, it seems, to compromise our own standards so that powerful overseas business interests can have carte blanche.

    Bryan Gould

    7 April 2013

    This article was published in the NZ Herald on 10 April.