• A Sea-change in Economic Policy

    It took a very long time, following the Great Depression, for a consensus to emerge as to what had gone wrong. It is taking world leaders a similarly long time to realise that the Global Financial Crisis was not just an unfortunate, one-off accident, but was the culmination of three decades or more of mistaken economic policies.

    It is significant that it is those economies whose leaders have been slowest to recognise this that have remained most stubbornly in the economic doldrums. But even there, a change of heart is under way.

    The euro zone is the most obvious example of a refusal to learn the lessons. But the IMF has, over recent months, changed its mind and made it painfully clear that austerity for Greece and other euro zone economies is not the answer and that a more flexible policy, allowing debtor countries to grow their way out of debt, is now required.

    And the UK, still mired in recession and committed to austerity, has nevertheless experimented with quantitative easing (or printing money), while the incoming governor of the Bank of England, Mark Carney, has already indicated his interest in adopting a nominal GDP target rather than inflation as the preferred goal of monetary policy.

    Leading British monetary economists like Adair Turner and Michael Woodford are publicly debating which precise mechanisms of both fiscal and monetary policy will be most effective in improving liquidity for business; they recognise that the quantitative easing practised so far has had the effect of merely strengthening the banks’ balance sheets.

    Elsewhere, change is even further advanced. President Obama, in the face of determined and obstructive opposition from his Republican opponents, has succeeded in pulling the US economy out of recession and back on the road to recovery – and here, too, the Federal Reserve continues to stimulate the economy by systematically increasing the money supply.

    Perhaps the most dramatic shift in policy has occurred in Japan, where Shinzo Abe’s government has abandoned the restrictive policies of the last decade or so and has reverted to the kind of expansionary policy, based on credit creation for productive investment, that served the Japanese economy so well in its rapid growth phase of the 1960s and 70s.

    Then, there are of course the most successful economies – like China or Singapore – that have in their different ways always eschewed the Anglo-American insistence that the market must always prevail and must never be second-guessed by government. They have demonstrated that business does best when macro-economic policy provides them with an environment that is conducive to economic development.

    Even in Europe, the most successful economies are those, like Germany and Switzerland, whose governments have ensured that their industries are not handicapped by factors, like overvalued exchange rates, that make them uncompetitive in world markets.

    Here in New Zealand, our leaders seem oblivious to these developments. We seem to think that we have nothing to learn from other – and generally more successful – economies. We tell ourselves – as we sink back into our old failings of an inflated Auckland housing market, and increased spending on imports made artificially cheap by an overvalued dollar (with the consequent harm to our own producers, and a larger trade deficit that has to be financed by more borrowing and asset sales) – that we must not waver from applying the same old mistaken policies.

    We have such a short time-span that we refuse to ask ourselves how it is that – over three decades – other economies have done so much better. We are so far removed from any rational debate on these issues and so focused on deficits and public spending that we scarcely recognise the terms, let alone the policies, that are adopted as a matter of course by the new powerhouses of the world economy.

    Those economies focus on issues that are of crucial importance, like competitiveness and liquidity, manufacturing and an industrial strategy, full employment and productive investment – words that scarcely feature in our economic discourse.

    While the Swiss and the Singaporeans target competitiveness so that they can sell everything they produce at a profit, we pay the issue no attention. While the Japanese and Americans quite consciously use monetary policy to bring their currencies lower, we do the reverse. While the Chinese ensure that their industry is constantly supplied with credit-created capital so that they can both invest in and buy new capacity (how else do you think they can afford to buy up so much of others’ economies?), we focus on cutbacks and putting people out of work. While the Chinese, Japanese, Germans, Singaporeans, and many others give their primary focus to manufacturing, we are content with a narrowing productive base in primary industry and selling off whatever remains.

    But even here, change is afoot. The report on manufacturing, published by the opposition parties, is a belated recognition that we cannot go on as before. And there is a glimmer of hope even at the Reserve Bank. The new governor at least seems to understand that the overvalued dollar, the fall in saving and rise in imports, and the Auckland housing bubble are danger signals. The solutions are available, if only we care to look.

    Bryan Gould

    18 June 2013

  • Time for A Step Change

    Europe’s leaders are being taught lessons that they refuse to learn. The Greek economy was always too weak to join the euro zone; now that it is – as a consequence – flat on its back and weighed down by debt, the “remedy” imposed on them by their European partners is an enforced dose of yet more austerity that will make it quite impossible for them ever to pay off their increased debts.

    The consequences for the European – and ultimately the world – economy will be dire. Greece is only the beginning; a recession-infected Europe now looks inevitable. Already, even in remote New Zealand, we are being warned that the euro zone’s difficulties will mean a worse economic outlook for us in future years.

    But before we put the entire blame for our woes on the Europeans, let us recognise that the bizarre European determination to treat austerity as the remedy for recession is shared by our own leaders. We seem to be locked into the same ideological deep-freeze.

    We are, after all, now entering our fifth year of either negative or minimal growth. We, too, have insisted that the key to securing a recovery that seems constantly to disappear further over the horizon is to close part of our economy down.

    Our principal goal, it seems, is not to reduce unemployment and get the economy moving, but to cut the level of government economic activity. The result? The economy continues to stultify and the government deficit proves increasingly stubborn and difficult to manage.

    But our economic problems are not defined by the recession alone; they are more deep-seated than that. The simple truth is that, despite the great advantages of buoyant export markets and record commodity prices, we continue to live well beyond our means.

    We make up the gap between what we earn and what we spend by borrowing from overseas and by selling off our assets to foreign owners. We have been doing this for decades, but the price we pay for this indulgence is getting increasingly steep. We have to pay an interest rate premium to foreign lenders, if they are to continue to lend to us, and we also have to pay to foreign owners – across the exchanges – the profits on the assets we no longer own, with the result that our perennial trade imbalance gets even harder to manage.

    More and more of our national wealth goes overseas. We have less and less control over our own economy, as the proportion we actually own diminishes. High interest rates not only inhibit domestic investment but produce an overvalued dollar that prices our goods out of international markets, including our own, and reduces our return on those goods that we do sell.

    We have been travelling down this no-exit road now for nearly thirty years. Yet our policy-makers still set their faces against any change of policy. We continue to assert that the only focus of macro-economic policy must be to control inflation, even though the measures we use to do so are poorly focused and slow-acting, and actually make our real problem much worse.

    What is our real problem? It is certainly not inflation. It is that we are basically uncompetitive. We have steadfastly ignored the fact that the world has changed and that rapidly developing economies like China, India, Korea, Taiwan and Singapore are now super-competitive economic powers, determined to build on that huge advantage by holding down their exchange rates and becoming ever more competitive.

    They have rapidly built the strength of their productive sectors and have earned huge trade surpluses which have allowed them to buy up the assets (including our own) that they will need for further development. Many of them already enjoy living standards better than ours and pay wages and salaries that are higher.

    We, on the other hand, are arrogant (and stupid) enough to believe that competitiveness does not matter, and that we can – in defiance of economic rationality – continue to push up our exchange rate with impunity. By focusing on inflation, to the exclusion of other objectives, and using interest rates and an overvalued dollar in the attempt to control it, we make it inevitable that our lack of competitiveness gets worse.

    The result is that we dare not grow – even in a recession – for fear of balance of trade constraints, and are reduced – for as long as we can find willing lenders and buyers – to financing our unsustainable consumption by overseas borrowing and selling off what little remains of our assets.

    It is time that we realised that competitiveness produces improved productivity, and not the other way round. We cannot hope to innovate and develop if we are constantly fighting the headwind of being uncompetitive. We should no longer be tinkering at the margins, with largely ineffectual tax changes and constant but ineffectual exhortations to improve productivity; it is time to make a step change by making competitiveness the focus of policy.

    But our leaders seem blithely unaware that their out-dated nostrums are destroying our economic future. The exchange rate, and issues of competitiveness, it seems, are no-go areas for discussion. They prefer their own simple certainties to the evidence before our eyes.

    Bryan Gould

    12 February 2012

    This article was published in the NZ Herald on 14 February