• 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.

  • Don’t Be Wimps!

    “Don’t be wimps,” seems to be the advice on offer to exporters groaning under the burden of the overvalued dollar. “Lie back and enjoy it,” advises one sage. “Get on with it – there’s nothing you can do about it anyway,” says another.

    Such wrong-headedness would matter little if it involved only a handful of disaffected exporters. But it affects us all – as it has done for decades now, and will do for the foreseeable future.

    But surely there is nothing we can do about it? The rate for our currency – floating as it is – will be decided by the foreign exchange markets, and not by the policy-makers? The answer to that is a resounding “No!”

    There is no such thing as a clean float. The view that foreign exchange markets take of our currency will be influenced by many factors, most of them inevitably within the control of our policy-makers.

    The legendary Japanese housewife or Belgian dentist knows nothing of our economy; if they knew about our slide down the OECD tables and our perennial trade deficits and record overseas borrowing, they might have been less keen to buy our dollars.

    But what persuades them to buy our currency is the virtual guarantee that we will go on, as we have done for decades, paying them an interest rate premium. And, because so many are attracted by that risk-free windfall , and the demand for and price of the dollar therefore go up, short-term investors can usually expect a capital gain as well.

    To top it all off, they are confident – after nearly thirty years’ experience – that we will not change our willingness to keep on doing it, even though it is plain by now that the more we borrow, the higher the interest rates we have to pay, and the higher rates we pay, the further the dollar’s value rises, and the further the dollar rises, the less we are able to produce and export, and the less productive we are, the more we have to borrow.

    But isn’t the dollar’s recent rise (except against the Aussie – they have their own similar but more manageable problems) the result of high commodity prices? Yes, high commodity prices have helped to fan the flames, but the baseline was already established at an overvalued rate, where it has been for most of the past three decades. High dairy prices have simply exacerbated the long-term problem, making life even more difficult for other producers.

    But what about the up-side of a high dollar – the cheap holidays and the low-priced imports? Aren’t they worth having?

    Yes, there has always been an argument in the short term for overvaluation. Politicians are particularly fond of it, because it means that every overvalued dollar will buy more imports (or foreign holidays) than it should, so that people have the temporary illusion that they enjoy a higher living standard than they can really afford, at least until election day.

    But the price we pay for that illusion in the longer term – in jobs, services and living standards – is a heavy one, particularly if governments (with our three-year terms) try to maintain it from one election to the next.

    The high dollar means that our producers get less for everything they sell into international markets, including our own. Even our most successful enterprises and exporters find it harder to penetrate international markets, and when they do, their margins are decimated.

    With smaller market share and lower profits, they find they have less capital to re-invest in new technology, new capacity, new product development, new skill training, new sales promotion, new export support – all the bases covered by their successful competitors from overseas. So, job growth is held back, service levels fall behind, the living standard gap with Australia widens still further.

    Even our most successful exporters – currently our dairy farmers – find that the cream is blown off the top by the overvalued dollar, so that even in the goods times they have less to spend and invest in our economy than they would otherwise have.

    If the over-valuation, or the threat of it, persists for any length time, there is then a second-order range of consequences. Bright graduates cease to go into productive industry; they prefer to try their luck in asset speculation, finance and retailing – anywhere that is protected from foreign competition. People look to non-productive assets like housing as the place to make their fortune. Capital moves to wherever it is possible to make a quick buck. Our successful businesses move overseas or are sold to overseas buyers. Corporate headquarters move to Sydney or Shanghai. Does any of this sound familiar?

    In the longer run – a generation or more – the culture itself changes. Borrowing – in the belief that the word owes us a living – becomes a way of life. We lose faith in saving, investing, and producing goods and services for sale as a way of providing for ourselves.

    It was Einstein who said “Insanity is doing the same things over and over again and expecting different results”. Our results are not about to change any time soon.

    Bryan Gould

    21 June 2011

  • The Productivity Puzzle

    As the latest indicators show our economy struggling to escape recession, it is widely accepted that the key to improving our economic performance is to raise our productivity levels; and this is very much the focus of the government’s efforts to close the gap with Australia. But there is a mystery at the heart of our productivity performance. If we could solve that mystery, we might see our productivity performance lift very quickly.

    One of the reasons that high levels of productivity are important is that, by improving our competitiveness in the internationally traded goods sector, our exports are stimulated – and buoyant exports, by removing a balance of trade constraint on growth, allow us to grow faster both at home and in overseas markets. That faster growth in turn promotes productivity improvements and – hey presto – we are in a virtuous circle of export success and productivity growth.

    And this is indeed the experience of successful exporting economies. Their export industries exploit the larger markets and higher margins offered by the internationally traded goods sector, with the result that those industries grow quickly and lead the rest of the economy into productivity growth, rather as a locomotive leads a train. There is then a strong market imperative to move the economy’s best resources – of capital and skill – to those growth points in the economy.

    Those factors can become so powerful that a country like Japan in the 1960s and 1970s will develop virtually two economies; statistics from that era show that the Japanese domestic economy was very similar to other economies, with normal inflation, growth and productivity levels, whereas the export economy showed rapid growth, low inflation and high and fast-growing productivity. That experience has been shared, perhaps not quite so dramatically, by other successful exporting economies ever since.

    Some research* conducted two or three years ago on the New Zealand economy, however, suggests that we have not, for some reason, been able to tap into that successful experience. The research showed that – as expected – our exporting firms exhibited significantly higher levels of productivity than the generality of New Zealand firms. This is not surprising, since in general terms, only the more productive and therefore competitive enterprises can foot it in international markets.

    But, unexpectedly, the research showed that – for the period covered by the research, from 2000 through 2005 – productivity in our exporting firms grew no faster than in firms in the rest of the economy. The boost to growth and productivity as a consequence of exporting seems simply not to have materialised. Our exporters, despite being our best performers, were not able to gain the benefits from exporting that exporters elsewhere had found so valuable. This begs the obvious question – why?

    The question surely suggests that there are factors at work in our economy that inhibit our exporters but that are not evident in other more successful economies. Those factors, whatever they are, seem to mean that even our best firms, ready and primed to take advantage of export opportunities, cannot make them count.

    There is of course always a small number of firms that will make a breakthrough in terms of a new technology or a new product and will be able to sell successfully in overseas markets without worrying too much about price competitiveness. It is then tempting (and the temptation is often yielded to) to be diverted into concluding that such firms show the way to successful exporting, productivity and growth, and that that is the course the rest of the economy should follow.

    But most international markets are extremely price sensitive, and success in those markets depends crucially on the price competitiveness of the individual exporter, and even more of the export sector as a whole. Only if exporters are competitive in price terms can they grow market share and boost profits through healthy margins. Otherwise, they must choose between maintaining prices and losing market share, or dropping prices and taking lower margins.

    That is, indeed, what seems to be happening to New Zealand exporters. They get to the export starting line, but something then stops them from running a successful race. Their failure, or inability, to kick on means that they do not derive the expected advantage from faster growth, better returns, and higher productivity. The virtuous circle eludes them.

    We do not need to look far to identify the culprit. We have run, and have done for many years, a policy of perennially high interest rates and consequently over-valued exchange rates that has meant that our exporters are always fighting a head wind. They struggle to the starting line but are then weighed down, in price competition terms, by a dollar rate that cuts their margins and shrinks their markets.

    Our narrowly focused macro policy may, in other words, be more than an obstacle to individual exporters, but the major factor in our productivity disappointments. The key to our economic salvation may be a willingness to think again. Mystery solved?

    Bryan Gould

    6 July 2010

    *Some Rise by Sin, and Some by Virtue Fall: Firm Dynamics, Market Structure and Performance, by Richard Fabling (Reserve Bank of New Zealand), Arthur Grimes (Motu Economic & Public Policy Research), Lynda Sanderson (Ministry of Economic Development), Philip Stevens (Ministry of Economic Development)

    This article was published in the NZ Herald on 12 July.