• The Inequality Machine

    The widening gap between rich and poor that has disfigured and weakened our society over recent decades is widely deplored, but there is surprisingly little understanding of how that growing inequality has been brought about.

    For most people, it simply reflects the natural order; the rich have each individually taken their chance, as anyone would, to inflate the rewards of various kinds – profits, salaries, bonuses, share issues, golden handshakes – that they are able to command. Their riches are regarded, as a general proposition, as a reward for their success.

    But those huge advantages – on a scale so outrageous that it is hard to comprehend – have not so much come about by good fortune or because the rich have individually discovered the path to great wealth through their own hard work, cleverness or luck, but because the whole operation of the modern economy has been deliberately geared to favour them as a class. The statistics are incontrovertible; the rich have claimed virtually the whole of the additional wealth that has been produced over the past thirty years. They have been able to do so because they were already rich. It is beyond doubt that the best way to become seriously wealthy is to start off wealthy in the first place.

    The rich have, in other words, been the beneficiaries of a complex and comprehensive interlocking set of policies that have been deliberately put in place to ensure that their wealth just keeps on growing. Those policies have formed the bedrock of the neo-liberal consensus adhered to by governments in most western countries over the last three decades. That consensus has been peddled as benefiting us all, but it has been in reality a huge machine designed to increase the advantages that the rich enjoy over the rest of us.

    The merits of globalisation, the virtues of monetarism, the over-riding importance of restraining inflation while taking a relaxed attitude to unemployment, the primacy of banks in making decisions about our economy, the superiority – indeed, infallibility – of the market as opposed to the supposedly stultifying effect of government intervention, austerity as the correct response to recession, have all been articles of faith for governments of various political colours; indeed, in the British case, New Labour was among the most enthusiastic proponents of all of these nostrums.

    How have these policies – supported on the face of it because they are supposed to produce a more efficient and productive economy – actually contributed to widening inequality? Let us take, for example, the widely accepted view that the only goal of macro-economic policy should be the control of inflation, and that that is best done by restraining the growth in the money supply – a task that should be entrusted to unelected and unaccountable bankers and is therefore immune from scrutiny by democratic agencies.

    But monetarism takes an essentially static view of the economy’s capacity to grow and create new jobs. The priority given to inflation ensures that as soon as there is any sign of growth, the brakes – in the form of higher interest rates – are slammed on, with the intention that that the value of existing assets should be protected; but, at the same time, a high unemployment rate is also guaranteed and becomes endemic. Continuing high unemployment, of course, suits the interests of employers, by holding down any threatened growth in real wages – and unemployment remains the single most important factor in creating avoidable poverty. Monetarism, in other words, is a mechanism for protecting the interests of the rich but sacrificing those of the majority.

    The same inbuilt bias in favour of the rich can be seen in many other aspects of policy. The propensity to raise interest rates as the principal instrument of what remains of macro-economic policy has the effect of favouring the holders of assets – those who are already wealthy and who operate in the financial economy, at the expense of those wishing to borrow for productive investment – those who live and work in the real economy and are the creators of new wealth.

    And the primacy accorded to the banks in deciding economic policy places the alcoholic in charge of the brewery. The astonishing monopoly allowed to the commercial banks – the power to create money out of nothing by the stroke of a computer key and then to use the proceeds for the purposes that they alone decide – delivers to them immensely more power than that of elected government.

    They have not been slow to use that power to shift the balance of advantage further in favour of the “haves”. Their enthusiasm, for example, to lend for non-productive purposes, such as housing, inflates the value of housing, (and, incidentally, diverts investment from the productive sector), so that there is a massive transfer of wealth to home-owners at the expense of those who can’t afford to buy their own homes.

    Globalisation has also played its part. Our ability to defend and promote our own interests – to decide the direction of our own economy -has been steadily eroded by the increasing dominance of the global economy by an ever more concentrated group of super-rich. The freedom of international investors to move capital at will around the globe, and the vast sums at their disposal, have meant that democratic governments have found themselves compelled to comply – for fear of losing investment if they do not – with the wishes of those investors, rather than securing social, environmental or political outcomes that are more congenial to their electorates.

    And it is of course a curious aspect of the global economy that it apparently requires top executives to be paid at the highest international level – a level that is constantly being bid up – to ensure, we are told, that we attract the best talent; but, at the same time, it demands that wages – treated as just another production cost – must be held down to match the lowest levels in competing low-wage economies.

    And on the subject of our international competitiveness or lack of it, the deep-seated and long-term opposition to ensuring that our exchange rate is at a competitive level and the refusal even to consider the issue (dating back at least to Harold Wilson’s futile battle against devaluation and Denis Healey’s rejection of the IMF’s advice to frame monetary policy in terms of Domestic Credit Expansion), are a further reflection of the power of the wealthy to set the agenda. A lower exchange rate would of course stimulate the economy and create more jobs, and is by far the fairest and most immediately effective and comprehensive means of improving competitiveness in a global economy in which others are becoming constantly more efficient; but it would also reduce the international value of assets held by the wealthy, who have managed to dominate such limited debate as there has been by constantly asserting, in defiance of the evidence, that a lower exchange rate would erode any initial gain in competitiveness by increasing inflation.

    As a result, we have placed the whole burden of maintaining or improving competitiveness on wage-earners; we are constantly told that we can’t afford higher wages, and that improvements in competitiveness must come from cutting costs – and essentially labour costs. The preferred instruments have accordingly been measures to reduce the bargaining power of workers, weaken trade unions, make it easier for employers to pay low wages, and make life tougher for the unemployed and other beneficiaries so as to force them back into the labour market to compete for low-paid jobs.

    Our unacknowledged problems with competitiveness have meant the sacrifice of manufacturing, where working people are best able to earn a living and whose decline has reduced any prospect of new jobs, innovation and productivity improvements, in favour of a financial services sector which delivers its benefits uniquely to those who have access to capital.

    The otherwise incomprehensible insistence that austerity is the correct response to recession is to be explained in the same way. Recession has always been seen as an opportunity to weaken labour, ever since Andrew Mellon, the multimillionaire US treasury secretary, issued the rallying call to employers after the 1929 crash, to “liquidate labour”. The high rates of unemployment engendered by recession have always meant a reduction in the bargaining power of workers – an opportunity to swing the balance of advantage further in favour of employers that has been too good to miss.

    Recession has also meant that government spending has become an easy, if irrational, target. The constant impetus to privatisation, already powerful as an element in neo-liberal doctrine, has received a further fillip from the supposed need to “cut the deficit” by slashing government spending. So, the support provided by public services is weakened when the disadvantaged most need it, and the opportunities for profit-making and profit-taking by private commerce are enlarged. Again, the rich emerge from adversity with their advantage over the rest of us enhanced.

    Underpinning all of these developments is the article of faith that the “free” or unregulated market can be accurately predicted on the basis of mathematical models and that it is self-correcting and infallible. The acceptance of this doctrine has been a sure-fire recipe for allowing the rich to entrench and intensify their existing advantage. If intervention in the market is to be eschewed, and market outcomes are not to be challenged, the way is clear for those who are already dominant to use their power to grab what they can, all the while proclaiming that no one should complain because that is what the market ordains.

    None of this should be a cause for surprise. These elements have been present, if not overt, in the policies pursued for over three decades by successive governments. While attention has focused on the huge incomes and low tax rates organised for themselves by the rich, it may not have been fully recognised how far their gains are the result of policies that have been part of a coordinated and self-reinforcing pattern, that has had as its deliberate aim the reinforcement of the power of the wealthy to dominate our economy and the weakening of the power of workers to protect themselves. The destructive gap between rich and poor has widened, in other words, because the rich have been able to bend governments to their will and have used their power to ensure that it is so.

    Bryan Gould

    28 March 2013

  • Orthodoxy – Or Leadership?

    My decision to leave British politics in 1994 and return to New Zealand reflected both the pull of my home country and my failure to convince my colleagues in the British Labour Party that they were embarking on a mistaken course.

    I had become increasingly despairing of the determination of those who eventually became New Labour’s leaders to embrace policies that I believed were fundamentally flawed. Tony Blair, Gordon Brown, and their allies were convinced that Britain’s economic future lay in the financial institutions of the City of London. They were persuaded that the market should not be second-guessed and would always get the right answer.

    They were, as Tony Blair told Rupert Murdoch, “all globalisers now.” They were “intensely relaxed”, as Peter Mandelson notoriously asserted, “about people becoming filthy rich” – with the corollary that they were equally relaxed about widening inequality. They accepted that government should treat economic policy as a largely technical matter of controlling the money supply that could safely be left to supposedly non-political bankers.

    They welcomed the asset bubble and the conspicuous consumption of the rich as evidence that these policies were working. And, though public opinion deterred them from joining the eurozone immediately, they remained convinced that a single European superstate – insulating so-called free-market policies against popular scrutiny – could be imposed on the people of that hugely diverse sub-continent.

    My decision to return to New Zealand was for me and my wife a good one. But it was disappointing to find that New Zealand had abandoned its long-standing commitment to social justice and community and had become the standard-bearer – lauded by The Economist – for the “free-market” policies that were expected to produce a new era of unparalleled prosperity.

    Like everyone else in the developed world, we were constantly assured that there was no alternative, and that the huge wealth amassed by a tiny minority would eventually “trickle down” to provide at least some benefit to the rest of us.

    These simple certainties were, however, stood on their head by the global financial crisis. We learned that asset bubbles would burst, that markets could not be relied on to get the right answers, and that only governments could step up to the plate to save us from disaster.

    But the cheerleaders for (and beneficiaries of) the policies that had produced such a disaster were not to be deterred simply because all experience showed that they had been wrong. So, in the United States, for example, political leaders solemnly assert that – in the general interest – tax cuts for the rich must remain sacrosanct, while the unemployed must fend for themselves.

    In Europe, the architects of the eurozone insist that the Greek people must shoulder the burden of the inevitable meltdown. And, right across the globe, our policy-makers defy all common sense by pushing austerity as the only remedy for recession.

    Our political leaders in New Zealand offer no exception to this sadly defective performance. They, too, plod wearily along the same well-worn track, providing yet one more proof of Einstein’s famous dictum that to go on repeating the same process while expecting a different outcome is the definition of insanity.

    Yet, we have good reason to expect better. This should be a time when New Zealand’s great advantages can be brought to bear. We have the huge benefits of climate and geography, we are politically stable, we have an educated workforce, we provide a safe and welcoming context in which to do business, and we have access to the world’s fastest-growing markets for the products we are uniquely skilled at producing. What more do we want?

    Yet our government continues to give priority to its own finances. All the talk is of financial orthodoxy, of getting the government’s own (perfectly manageable) deficit down. Little attention and even less action is given to our real problems, getting our people back to work and reducing our propensity as a country to borrow from overseas – even though those are the issues that have led to the credit downgrades that we were told had to be avoided at all costs.

    Those who practice what I call “politics by label”, however, judge arguments not by their weight but by their provenance. For such people, facts can be ignored if they appear in the mouths of the wrong people.

    In pointing out what a depressing document is the Treasury’s pre-election forecast (even with the by now obligatory element of over-optimism), I do not merely draw attention to the wasted three years during which we have barely lifted our heads above the recession-imposed parapet.

    What I do is re-affirm the arguments I have made over 35 years in public life. I bemoan the lack of ambition and leadership shown by this and other governments. I regret the failure to understand that economics is no longer (if it ever was) just a matter of the bottom line. It is, as Keynes said, “a behavioural science”; it involves how people lead their lives, how they interact with the natural world, and how they live and work together in society.

    Where can we find the courage to break the shackles of a barren and discredited ideology? Where can we find even a glimmer of new thinking?

    Bryan Gould

    26 October 2011

  • The Globalisation Bell Tolls for us All

    The decision taken in New York to close the Colgate Palmolive factory in Petone and supply the New Zealand market from production in Australia and elsewhere is the latest demonstration of just how far this country has lost control of its own economic destiny.

    Successful New Zealand companies – Trade Me, 42 Below, Ihug – are snapped up by overseas investors. Failing New Zealand companies, like Feltex, are bought at a knockdown price by overseas competitors and the domestic workforce forced to accept poorer wages and conditions. Overseas owners of our basic infrastructure threaten, as in the case of Toll Holdings, to limit the service they deliver in the interests of maximising their profits. Even the most New Zealand of New Zealand companies, like Air New Zealand, propose to take large chunks of their operations offshore, and invite foreign contractors to deliver supposedly cheaper services by driving down wages and conditions.

    In most of these instances, it is the workforce that pays the immediate price. But none of us escapes. Workers may lose their jobs and suffer wages cuts, but we all bear the loss of that growing volume of profit that is repatriated – profit produced from our economy but, by virtue of increasing foreign ownership of that economy, benefiting others. We all bear the cost of the high interest rates needed to attract the “hot money” without which our record current account deficit could not be sustained, a deficit made larger by precisely those selfsame high interest payments and profits repatriated across the exchanges. And we all suffer the loss of control over our economic lives as a result of decisions increasingly made in boardrooms which may hardly know where New Zealand is, let alone care about it.

    These are high prices to pay for our enthusiasm to offer ourselves up to the global economy. Whereas once, an overseas company wishing to operate in New Zealand could be required to meet conditions stipulated by our government – conditions designed to protect the workforce, and consumers, and our social and environmental interests – our governments are now powerless to stipulate anything. If they should indicate any wish to establish minimum protections for our interests, they will smartly be told that the investment will go elsewhere.

    Now, as the economic and industrial news reinforces every day, our ability to establish our own conditions and pursue our own policies in the interests of our own people, has well and truly slipped through our hands. We have sold so much to foreign interests that we have little left to sell. We are no longer able to take the decisions needed to protect what is left. We are rapidly being absorbed into the economy of Australia, and – if not Australia – then further afield, without a single democratic vote being cast.

    Overseas interests now dictate a whole range of policies. Wage rates are increasingly set according to the benchmark of Chinese wages. Tax rates have to follow the Australians. Employment and industrial relations law, health and safety legislation, rules about the re-investment of profits, have to comply with the requirements of overseas investors, not of New Zealanders. Even environmental issues – so much in the news following the Stern Report – are determined according to the wishes of overseas operators. When a carbon tax was proposed in order to meet our Kyoto commitments, it was rapidly scuppered by the threat from Comalco and others to move their plants elsewhere.

    It is not, in other words, only economic power which has moved decisively out of our hands. It is political power as well. The political debate is now shaped and constrained in the interests of a small, self-interested and ideologically unrepresentative group of immensely powerful investors who could never have secured support for their extreme positions if they had had to seek a democratic mandate.

    Their influence extends as far as deciding what the macro-economic policy settings should be and how they should be decided. This week, we had yet another meeting of top businessmen to consider the question of how we, as a country, could improve our economic performance. The best they could apparently come up with, as a “big idea”, was that the removal costs of people appointed from overseas should be tax-free!

    No one apparently questioned the policy settings which are largely dictated by international capital and which mean that central issues of economic policy are decided by unelected officials, that the chosen instruments – like tinkering with interest rates – are increasingly ineffective as a counter-inflation strategy but do great damage to the real or productive economy, and that the economy as a whole is forced to pursue a dizzyingly damaging course up and down an exchange rate roller coaster.

    No one would want to put up the shutters, or to see a “fortress New Zealand”. But we should surely be debating the question as to whether our wholehearted readiness to hand over our economic fortunes to the whims of a more and more concentrated number of international investors is not exacting too high a price in terms of lost economic benefit and diminished democratic control over our own future. Isn”t it time – if democracy is to mean anything -to restore the power of governments to govern, in all our interests?

    Bryan Gould

    2 November 2006

    This article was published in the New Zealand Herald on 7 November 2006