• 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.

  • What Price Inequality?

    It is surely no accident that both Garth George and Tim Hazledine have, in the last week or two, highlighted growing inequality as a prime cause for current concern. I find that many of those I talk to share that view.

    It was, however, salutary to read Martin Robinson’s argument last week that growing inequality should be, if not actually celebrated, at least endorsed and justified. What was remarkable, though, was the paucity of the arguments he advanced to support his position.

    It was noteworthy that he did not deny that the gap between rich and poor had widened substantially; nor did he contradict the OECD’s recently published finding that inequality had grown faster here than in most other countries. And he did not explain why todays’s more unequal society is an improvement on the New Zealand which, at the same time as once enjoying one of the highest living standards in the world, was also one of the world’s most egalitarian societies.

    He seemed unconcerned by the increasingly strong evidence – stressed by the OECD – that widening inequality is the hallmark of societies and economies that are functioning poorly; indeed, he seemed completely unaware of the excellent research produced by the authors of The Spirit Level showing that countries where inequality is most marked – like the US and Britain – are also those which face the most intractable social and economic problems.

    He took refuge instead in attacking positions that no one actually holds. To deplore widening inequality is not the same thing as insisting that everyone should be paid the same, nor does it mean rewarding the idle and feckless at the expense of those who work hard.

    His main argument was that paying the All Blacks top salaries has made them the world-beating team they are. But All Black excellence depends on many factors, most of which have little to do with salaries; they were world leaders long before they turned professional and even today are often paid less than they would be if they went overseas. And, sadly, however much our business leaders are paid more than the rest of us, our economic performance stills fall a long way short of All Black standards.

    Whole societies are, in any case, much more complex undertakings than a sports team, however eminent. The ground on which Martin Robinson really seeks to stand has nothing to do with rugby. Rather, it is the belief that if the market sanctions very large salaries, then those payments must be justified, since the market cannot be wrong.

    It is precisely of course this touching faith in the infallibility of the market that produced our present difficulties. It was the unregulated market that brought about the global financial crisis, that continues to pay huge bonuses to failed bankers, and that exposed thousands of investors to the loss of their savings through the failure of finance companies.

    It is only very recently that the view that challenging the market is somehow immoral has gained credence. Even Adam Smith took an explicitly contrary view. What extreme free-market ideologues do not seem to grasp is that the unregulated market can become an instrument of oppression, since it is so easily manipulated by those who wield dominant power in the market-place. And if the market cannot be challenged, then there is nothing to prevent that dominance from being repeatedly exploited to extend that advantage, to the disadvantage of everyone else.

    All too often, the market’s apparent recognition of merit simply reflects the dominant position of those who walk away with the spoils. The best-paid people set each other’s salaries; and they are adept at ensuring that, while the global economy demands that working people’s wages are driven down to third-world levels, it requires that top people are paid the huge salaries that are now the norm in the international market-place.

    No one begrudges appropriate rewards for those whose efforts add to the general welfare. But many big earners do not create new wealth; they merely manipulate existing assets. Bankers, property speculators and even (dare one say?) foreign exchange dealers cream their fortunes off the top of assets that others have created, thereby siphoning off wealth for themselves that might otherwise have been more fairly distributed.

    Growing inequality of course means that the wealthy lead quite separate lives, buying themselves out of life as the rest of us live it. We gain little from them and they know even less of us. While few now give credence to the “trickle-down” theory, the flipside of the market as moral arbiter – invariably rewarding the deserving – is the belief that the poor have no one to blame but themselves. Those who manipulate the market to their own advantage enjoy not only material rewards but a sense of moral superiority as well.

    What the apologists for inequality do not grasp is that we are all, including the wealthy, made worse off, not only because we live in a more divided and less cohesive society, but also because – by diverting so much national wealth into so few pockets – we thereby undervalue and make poor use of the productive potential of the rest of us, so that we produce less as a country than we should.

    Bryan Gould

    7 January 2012

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