• The Voters’ Anger

    The disenchantment of British voters with democracy, we are told, is to be explained by the anger they feel at the failings of politicians. Those failings, it is supposed, are to do with the perception that politicians are “on the make”; but that conclusion – while no doubt partly justified – is surely far from the whole truth.

    The Guardian/ICM poll finding that 50% of respondents chose “anger” as their principal sentiment when thinking of politicians may well conceal a deeper malaise. The scale and depth of public disaffection is, I believe, to be explained by something much more fundamental than the sadly all-too-common instances of politicians breaking the rules governing their “perks” and allowances.

    What is in play instead is a growing realisation that the political class – which extends far beyond the ranks of elected MPs to include the whole of what used to be called the establishment – has failed a country that is now in a state of unmistakable national decline. Those responsible for what passes for serious debate about the state of the nation – and that includes business leaders, the media, civil servants, leading academics and experts, as well as politicians – have contributed to a process that has not only meant manifestly hard times for many of our citizens but also offers little hope of a better future.

    Despite constant assurances that better times are just around the corner, the UK has over the last four or five years suffered the sharpest fall in living standards in over a century. Those who have borne the main brunt of that precipitate decline have been the weakest in our society, for whom the safety net is regressively being withdrawn. Economic decline and social disintegration are now seared deeply into the national consciousness.

    None of the major contenders for government seems to offer anything but further retrenchment. The voters look in vain for an alternative to the current orthodoxy. Labour continues to suffer the burden of the New Labour legacy. The Tories commit themselves to self-harming austerity and promise to make life tougher for the already disadvantaged. The Liberals look for ways of distancing themselves from Tory failure without giving up the fruits of office. Even those voters tempted by UKIP recognise that they offer a counsel of despair rather than redemption.

    Little wonder that voters feel a sense of frustration and anger. They understand that the democratic process has not protected them from national failure and decline and that – although the formal power of decision is exercised by government – the shots are really called by global business interests whose dominance over what actually happens has, if anything, increased as the failure of the policies they enjoin has become more evident.

    What the voters expect from those who govern them is what they expect from any other group of supposed professionals – simple competence. What they see instead is a bunch of amateurs with little understanding of the economy they are supposed to manage and therefore totally at the mercy of political prejudice and vested interests.

    The cure for voter disaffection with democracy is simple. Politicians have to convince the electorate that they are able to abandon a failed orthodoxy that continues to smother new thinking, in favour of a fresh and more positive economic policy – and then deliver on that promise.

    What should be the elements of that new policy? It should focus on real issues and not on imagined problems. It should take as its starting point the need for a sustainable rate of growth which current policy is incapable of delivering.

    It should recognise that decades of comparative failure have left us with a profoundly uncompetitive economy and a manufacturing industry that is on its last legs. We cannot rebuild our productive base for as long as we cannot compete in international markets.

    The loss of competitiveness means that we cannot and dare not grow for fear of ballooning trade deficits and rising inflation. It means that the government’s debt – even while public spending is being cut – will continue to grow faster than the economy as a whole. And while growth languishes, unemployment continues to cost us lost output, acts as a brake on recovery, and undermines our social structure.

    We need to face facts and to engineer an exchange rate that allows us to make a fresh start by immediately improving competitiveness. We need a new approach to monetary policy, treating it not primarily as a means of restraining inflation but as an essential facilitator of increased investment in productive capacity. We need an agreed industrial strategy and new investment institutions to ensure that an increased money supply goes into productive investment rather than into consumption or bank bonuses.

    Above all, we need to restore full employment as the central goal of policy. An economy that offered productive work to everyone able to work, that provided ample finance for those ready to invest in new and competitive businesses, that found ready markets around the world for all it could produce, would not only restore faith in the value of government and democracy; the Labour Party should note that putting such proposals forward might get them elected as well.

    Bryan Gould

    29 December 2013

    This article was published in the London Progressive Journal on 31 December and in Comment Is Free in The Guardian on 6 January.

  • Why Ignoring the Exchange Rate Widens Inequality

    Last week’s report of an unexpected deterioration in our terms of trade adds a further and unwelcome twist to an already distressing story – the damage being done to our productive sector by an overvalued dollar.

    The recent admission by the new Governor of the Reserve Bank, Graeme Wheeler, that the dollar is overvalued is welcome evidence that the issue is at last attracting the attention of our policymakers – and so, too, is the suggestion that the Reserve Bank might restrain bank lending for the purposes of house purchase.

    But we have lived with an overvalued currency for so long that we no longer have a proper base mark by which to measure it. What we can do, however, to establish whether the dollar is overvalued is to ask what we might expect to see in an economy that has been fundamentally uncompetitive over a long period.

    The answer is that such an economy would exhibit slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets – including national assets – into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.

    Sound familiar? If we do not immediately recognise these characteristics as the hallmarks of New Zealand’s economic performance, it is only because of the resolute refusal of our policymakers to think about our loss of competitiveness, let alone do something about it.

    We are not alone in this refusal. Many western countries are reluctant to recognise that the world has changed and that many developing countries are becoming, or have already become, more competitive than we are.

    Yet to ignore our competitiveness problem is to invalidate the whole of our economic policy. It leads us to pay excessive attention to inflation, so that we slam the brakes on at the slightest hint of inflation re-appearing, because our unacknowledged lack of competitiveness makes us rightly fearful of any increase in our costs.

    It means that we dare not – even in a long drawn-out recession – stimulate the economy so as to bring down unemployment, restore public services, reduce the government deficit through buoyant tax revenues and resume a sustainable rate of growth because we know that any growth will simply suck in more imports, worsen our balance of trade and increase our need to borrow. If we were competitive, we could afford to stimulate the economy because the growth would come in the form of exports and investment, not consumption and imports.

    It means that – as all the signs confirm – any recovery from recession will lead us straight back to an overheated Auckland housing market and an import orgy.

    It encourages the delusion that we can somehow improve productivity in a vacuum and that a few more ministerial speeches about it will do the trick. We do not grasp that productivity improvements are a function of competitiveness, not the other way round.

    Most worryingly, our determination not to recognise our competitiveness problem means that we (or at least our government) are – apparently without a care in the world – destroying our future by selling off our productive capacity to foreign owners. The loss of those income streams makes our lack of competitiveness even worse and handicaps our ability to do anything about it.

    And there is another – hitherto unrecognised – aspect of that blind spot on competitiveness that reflects not just ignorance or carelessness but, perhaps, a deliberate bias in favour of the “haves” as opposed to the “have nots” – an aspect that could be an important factor in New Zealand’s widening inequality gap.

    The most obvious remedy for an economy-wide lack of competitiveness is to reduce our costs across the board through bringing down the value of the dollar. That would require everyone to make a fair and shared short-term contribution to the solution of our problems while providing a solid basis for future growth.

    But our policymakers are reluctant to ask the better-off to make that contribution. They seem to be quite relaxed about workers losing their jobs and beneficiaries being targeted. They are quite prepared to force wages down by reducing workers’ rights at work and lowering, in real terms, the floor placed under wages by the minimum wage.

    But they draw the line at a devaluation of the currency that, as part of the effort to reduce our costs, would have the immediate effect of reducing the value, in international terms, of financial assets, and would therefore impose a cost on the holders of those assets, and on financial institutions and banks.

    They are asking, in other words, wage-earners to bear the whole burden of improving our competitiveness, while protecting the value of the assets held by the wealthy. Sadly, such a policy is doomed to fail in terms of improving our competitiveness; but it will certainly be effective in widening the already damaging gap between rich and poor.

    Bryan Gould

    1 March 2013

    This article was published in the NZ Herald on 7 March

  • The Same Tired Old Excuses

    As job losses reach crisis proportions, and many point the finger at an overvalued exchange rate, we have to put up with the same old tired and ill-informed assertions to the effect that overvaluation is not the culprit.

    Those who say this usually make two assertions; first, the exchange rate is irrelevant and secondly, there’s nothing we can do about it anyway. Neither assertion is remotely accurate.

    As to the first, the usual line is that factors other than price matter in international markets; yet only a moment’s thought will produce the commonsense conclusion that it would be very surprising if we could charge whatever we like. If we ask more for our products than the market says they are worth, we will have trouble selling them, or at least selling them at a profit. To argue otherwise is to deny simple reality.

    The one sure way of ensuring that we have to charge more than we should is to allow the exchange rate to rise too high. The exchange rate, after all, converts all our domestic costs of production – for labour, energy, raw materials and so on – into the prices we charge in international markets, and that includes our own, where we compete with imports. As the rate rises, it ensures that those prices are artificially inflated, and are no longer competitive. Even on those sales we do make, it cuts the profit margin – just ask the dairy farmers; the whole economy suffers as the cream is blown off the top of our dairy exports by the overvalued dollar.

    That is why, in a nutshell, we can’t pay our way in the world, and have to borrow excessively to cover the gap between what we can sell and what we want to buy. That is why we dare not grow our economy fast enough to bring down unemployment; it’s because we know that if we do, we’ll run into balance of payments constraints and will have to borrow even more.

    We’ve been doing this for so long that we think it is natural and unavoidable. That’s why ministers in successive governments over three decades have believed that solemn lectures about improving productivity, and promising that new research – always “soon” – will generate new “sunrise” industries, will do the trick. As any manufacturer will tell you, if the profit on your exports is decimated by the exchange rate, you have no money to re-invest in improving productivity, funding new research and technology, or taking any of the other steps needed to close the gap on better-resourced international rivals.

    The second argument is the fallback position always adopted by those who have run out of other arguments. All this may be true, they say, but there is nothing to be done about it. The dollar’s value is established by the market and reflects the fortunes of other currencies, like the US dollar. If that means a high New Zealand dollar, we just have to live with it.

    But this is nonsense. There is no such thing as a clean float. The view that the markets take of the Kiwi dollar is strongly influenced by what they know to be government policy, especially if that policy has a direct bearing on the dollar’s value and has been maintained for decades so that there is little prospect of it changing.

    What determines the value of the dollar, so that it is higher than it should be in terms of balancing our trade, is quite simple; it is the fact that we have for many years offered investors – especially overseas investors, the legendary Japanese housewife or Belgian dentist – an interest rate premium for buying New Zealand dollars. That premium has been so high for so long that short-term investors find it worthwhile to borrow money they don’t have at low interest rates in their own countries so that they can buy New Zealand securities at a high rate of return; and because so many do this, the demand for and therefore the price of the New Zealand dollar rises, and the investors make a capital gain into the bargain.

    The only people who lose from this are the people and businesses of New Zealand. Why does our government go on allowing this to happen? Because we insist on using high interest rates as our main, indeed only, counter-inflation tool; and since those high rates destroy our competiveness by pushing up the value of the dollar, we are then forced to borrow even more at even higher rates.

    Quite apart from other factors – like commodity prices and the terms of trade – that influence the value of the dollar, the main element of over-valuation is, in other words, a direct consequence of government policy. We could change that tomorrow if we wished. We need to understand that high interest rates and the overvalued dollar are not only damaging our economy but are not even appropriate as counter-inflationary tools. If we addressed the real reasons for inflation – excessive bank lending and credit creation for non-productive purposes – we could stop the insane process of deliberately pricing ourselves out of world markets.

    Bryan Gould

    12 September 2012

    This article was published in the NZ Herald on 14 September.

  • 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.

  • Needless Casualties in the Economic War

    On Anzac Day, we remembered the sacrifice made by thousands of young New Zealanders at Gallipoli – sent to their fate because those with the power to make decisions had neither the wit nor the courage to depart from a course that everyone knew was doomed to disaster.

    A day after Anzac Day, we learned of another kind of sacrifice – of 350 jobs at one of New Zealand’s most iconic enterprises. This time, there was the same inevitability about the outcome of a strategy that everyone knew was failing but there were no incompetent and far-away British decision-makers to blame. This time, we were doing it to ourselves.

    The Fisher and Paykel decision, after all, did not come out of the blue. We have been sleep-walking towards it for a very long time. Nor is it an isolated instance of policy failure. Behind this decision stand many other Fisher and Paykels, all facing the same imperatives, the same inevitability, the same disastrous consequences of a discredited orthodoxy that no one in power has the courage to challenge.

    In theory, the current orthodoxy could not be simpler. Inflation is to be controlled by manipulating the price and therefore the supply of money, a task entrusted to technicians who are immune to political pressure. With the threat of inflation painlessly removed, the economy is free to flourish and investors can make their decisions with confidence.

    We have now had a protracted opportunity to test this attractive theory in practice. We now know that, while increasingly ineffective and possibly even counter-productive as a counter-inflationary strategy, the orthodoxy is profoundly destructive of the high-productivity, export-oriented economy that our business and political leaders say they want.

    Fisher and Paykel’s catastrophic loss of competitiveness as a New Zealand manufacturer represents just the first-order consequences of the high interest rate, high exchange rate regime that monetarist policy makes inevitable. Faced with an over-valued currency, all New Zealand enterprises that seek to do business in the internationally traded goods sector (including our own home market) face an unattractive choice; either they lose market share through declining competitiveness or they try to maintain price competitiveness by shaving margins and risk having to trade at a loss. For most, the outcome will be an even less attractive combination of both.

    The medium-term impact is severely damaging to our economy. New Zealand companies struggling to maintain competitiveness find that shrinking markets and disappearing profits mean that they do not have the money to catch up on foreign competitors by re-investing in new technology or upskilling staff or conducting leading-edge research or mounting an effective sales campaign or offering improved after-sales service. The result? They fall behind in the productivity race, forced to lose yet more market share at home and to give up the attempt to export. If they do survive, they move offshore or are bought up by foreign competitors.

    In the longer-term still, the consequences of an over-valued currency begin to shape our culture. The only people who make money are the speculators, who manipulate existing assets and create no new wealth. The best brains and best resources gravitate to the non-traded sector and we give up the attempt to move them to the traded sector where the real prospects for growth lie. We become risk-averse, preferring to invest in domestic assets, like housing, rather than chance investment in a high-risk productive enterprise where the threat of failure is ever-present.

    In vain do our leaders berate us for our obsession with housing, our predilection for artificially cheap imports, our unwillingness to save. In vain are we urged to improve productivity, to spend less and to save more. Economics is a behavioural science. Like Fisher and Paykel, we each of us make the decisions made inevitable by the policies adopted by our leaders.

    We are now being driven towards what everyone knows is literally a dead end. We have impaled ourselves on the horns of a dilemma of our own making. It is happening in the name of an orthodoxy that cannot deliver even the limited counter-inflationary outcomes that it promises. Ministerial exhortations do nothing but emphasise how far the dream of high productivity has become – by virtue of literally counter-productive policies – an unattainable chimera.

    We cannot escape from this dilemma until we recognise what it is. The more we push up interest rates and the exchange rate, the less competitive we become and the more we fall behind in terms of international competitiveness. The less competitive our real economy, the more entrenched is our inability to pay our way in the world and the more dependent we are on short-term “hot money” to bale us out. The more we need “hot money”, the more we need to push up interest rates and the exchange rate, the more our competitiveness declines still further and the more threatening inflation becomes.

    We must stop relying on interest rates and the exchange rate to perform tasks for which they are not suited. We should instead free our minds of current dogma, restore economic policy to democratic control and ensure that the economy is run in the common interest. That means a more accurate analysis of what is going wrong and what is needed to fix it. It means a better focus – not just on controlling inflation through fiscal measures, more effective controls on the level and purposes of bank lending, and measures to restrain the booming housing market – but on macro-economic measures to improve competitiveness and encourage growth and investment.

    For the moment, however, there is only one question worth asking. How many more needless sacrifices must be made before we say that enough is enough and that a new course must be tried?

    Bryan Gould

    27 April 2007