• Whose Interests Are Served by Unemployment?

    The unemployment figure announced this week at 6% and rising is a disgrace – not only a personal tragedy for individuals and families but a senseless waste of the nation’s resources that makes us all poorer. Nothing contributes more directly to growing poverty and widening inequality.  What’s more, the official statistics undoubtedly understate the number of those seeking work, or who would do so if there were jobs available, so the lost output and the numbers of blighted lives are even greater than they seem.

    Unemployment at this level is not just a fact of life or an act of God – it’s a policy choice and is the best indicator we have that the government has other priorities and that the economy is failing.  There is nothing economically efficient about denying a significant sector of our population the opportunity to make their contribution.

    The unemployment total tells us that we have failed to address our many problems. It tells us that the focus on eliminating “the deficit” at the expense of other more important goals has been sadly misplaced and that sustained government spending cuts have meant not only poorer services but also a lower level of economic activity – certainly lower than the level needed to provide full employment.

    The government, after all, is a customer like any other; if it cuts and lays off staff, there is a smaller market for the goods and services provided by the private sector, and therefore less incentive to employ more staff across the whole economy.

    The unemployment total also tells us that nothing has been done to remedy the deficit that really matters – the country’s deficit, or, in other words, our failure to pay our way in the world. It is that deficit that requires us to sell assets and to go on borrowing from overseas in order to make up the difference, and it is that deficit too that represents our continued appetite for imports that we can’t afford or that we could be producing ourselves.

    A sluggish economy and high unemployment tell us that we have wasted the opportunity provided by record commodity, and particularly dairy, prices, to broaden our productive base. Our dangerous dependence on the dairy industry has left us with few options when prices fall. The rest of the economy struggles to pick up the slack under the burden of interest rates that are still higher than elsewhere and of a dollar that is still overvalued and that prices Kiwis out of jobs.

    The one area of the economy that is, in some senses at least, booming, is the Auckland housing market. But that is little comfort to the unemployed who do not on the whole own their own homes. While record mortgage lending may have produced record bank profits, at over $4 billion, and Auckland home-owners can take comfort from an average $1600 weekly increase in house values, the unemployed have trouble making ends meet – and gains made in housing values and asset values more generally provide few jobs.

    While continuing high unemployment may be the mark of a malfunctioning economy, are we justified in holding the government to account, or is it the result of factors beyond their control? Keynes, the greatest economist of the twentieth century, provided a direct answer.

    His response to the Great Depression of the 1930s was to demonstrate that unemployment was the result of an inadequate level of effective demand in the economy – and that government policy was the main determinant of effective demand. A government that focused on a goal other than its own deficit, in other words, could act effectively to reduce unemployment. That lesson was learned last century – but seems to have been forgotten in the aftermath of the Global Financial Crisis and the consequent recession.

    So, why does the government not act? The answer is that it feels no need to, since most people – though not of course the unemployed – seem unconcerned, and in truth the government is not unhappy about the current numbers of jobless.

    The reason for this is not hard to find. The news bulletins, in reporting the rise in unemployment, also remarked on the fact that wage levels were barely moving. That stagnation in wage rates is an important factor in the current unduly low level of inflation that means that the Reserve Bank is in danger of missing its inflation target.

    But the flatness in wage levels is of course causally linked to the high unemployment rate. A labour market where there are multiple applicants for every job that becomes available is also one where employers have the whip hand and where the bargaining power of workers is much reduced.

    An economy with a permanent pool of unemployed and with no real growth in wage rates is also an economy with less purchasing power and demand than it ideally needs. We are all worse off as a consequence. Most of us can soldier on without too much inconvenience. It is the unemployed who are the sacrificial lambs on the altar of neo-classical orthodoxy.

    Bryan Gould

    5 November 2015

  • A Litany of Errors

    George Osborne may be just about the last person in Britain to believe that austerity offers a real path to recovery from recession and the resumption of growth – and it may be doubted that even he remains a true believer. The repeated fall back into recession, a government deficit that goes on rising, and the loss of the country’s top credit rating are surely enough to shake the confidence of even the most arrogant and obtuse practitioner of the dismal science.

    We now know for sure what Keynes and commonsense always told us – that responding to recession by cutting spending is akin to the medieval practice of blood-letting as a treatment for disorders. The Chancellor’s continued display of commitment to failed policies may, of course, be for public consumption only and it may be that his real purpose is not economic but political and social. His undeclared goal may well be to drive home – at whatever economic cost – changes in the balance between private and public sectors, and rich and poor, that will take a generation to undo.

    What is undeniable, though, is that in economic terms he has dug himself – and the rest of us – into such a deep hole that there is now no discernible way out. But while his may be the most egregious of all the errors made by successive Chancellors, it would be wrong to overlook the fact that others have also contributed their efforts to digging a hole that has grown ever deeper over four decades or more.

    My own interest and involvement in these issues goes back to the mid-1970s, when – as a young Labour MP – it seemed clear to me that Britain’s real but unacknowledged economic problem was one of declining competitiveness. We refused to recognise then, and have done ever since, that the world has changed and that the rise of newly competitive economies has meant that we cannot rely on some kind of natural law that guarantees us a higher standard of living than others should enjoy.

    The competitiveness issue thrust itself centre-stage in 1976 in the form of a fully-fledged sterling crisis; but, true to form, and rather than concede that sterling was then overvalued, the UK exhausted its reserves and virtually bankrupted itself in trying to defend sterling’s parity.

    The resultant need for an IMF bailout did not arise, as popular (and an oxymoronic right-wing) wisdom often has it, because the Labour government profligately allowed public spending to rise out of control, but because it was determined to defend sterling at all costs. That same determination then dictated our (literally) counter-productive response to the course that the IMF suggested we should follow in order to overcome the crisis.

    The IMF recommended that monetary policy (which was already assuming greater importance as monetarism became fashionable) should be conducted in terms of Domestic Credit Expansion (DCE); we were free, in other words, to grow the economy as fast as we wished, provided that a credit-fuelled domestic inflation was restrained. This recipe for export-led growth was an explicit recognition that our problem was one of competitiveness and an implicit recommendation that the exchange rate should be lower.

    This advice was, however, under the influence of advisers like Terry Burns and Alan Budd, rejected by the Treasury who persuaded Denis Healey to go on protecting sterling and to frame monetary policy in terms of sterling M3 rather than DCE. In line with this decision, and as Denis Healey was forced by the crisis to turn back from the airport, Jim Callaghan told the 1976 Labour conference, “you can’t spend your way of recession.”

    The statement was of course a nonsense. There is no remedy for recession that does not involve spending more. Callaghan’s statement would have been more accurate if he had said, “we can’t do what is required to escape from stagflation because our fundamental lack of competitiveness means that spending more would make our inflation and balance of payment problems even worse.” The problem he was trying to describe was really one, in other words, of competitiveness rather than anything else.

    By the time Margaret Thatcher came to power, supposed monetarist certainties[i] were the order of the day and – with sterling floating and exchange controls removed – the much-heralded benefits of North Sea oil were confidently expected to resolve any balance of trade problems and to usher in a new era of prosperity.

    But North Sea oil, combined with monetarism and a floating exchange rate, proved a toxic combination. The monetarist prescription made it inevitable that, as North Sea oil output became available, some other area of production should decline – and manufacturing duly obliged. The theory predicted that the discovery of a new source of wealth would inevitably drive up the exchange rate so that other sectors of production were priced out of markets both at home and abroad. It was never explained why this should be inevitable in Britain but not apparent in the case of Norway, a smaller economy where the advent of North Sea oil was proportionately even more important, but where steps were taken to protect the rest of the economy. The Norwegians in fact found ways of insulating the domestic economy against the boost produced to overseas earnings by oil exports and import saving.

    Many monetarist economists at this time went so far as to work out the level of demand for money of a given economy (incidentally ignoring the significance of the velocity of circulation, which can vary substantially over time). This approach necessarily fixes a given economy in a given condition. The British economy was assumed to have a lower demand for money than the German economy and if this was exceeded, increased inflation was inevitable. This assertion, which was unexplained or unsupported by argument, was necessary to explain the fact that growth in the German money supply ran at a significantly higher level than the British money supply while at the same time permitting the Germans to maintain a stronger growth rate and a lower inflation rate. No attempt was made to explain why this supposedly immutable condition of the British economy should apply.

    In the same way, each economy was assumed to have a naturally occurring rate of unemployment which could not be changed by policy. A NAIRU, or non-accelerating inflation rate of unemployment, was ascribed to each economy. In the case of the United Kingdom, it was assumed to be relatively high and, more significantly, impervious to attempts to bring it down. In fulfilment of this prophecy, unemployment rose sharply through the 1980s, despite the repeated attempts to massage the statistics downwards. The number of claimants of unemployment benefit jumped from just over 1 million in 1979 to over 3 million in 1986.

    The UK balance of payments remained in substantial deficit throughout the period, reaching record levels at times in relation to GDP. The deficit reflected, of course, the decline of manufacturing and the deterioration in the balance of trade in wide areas of the productive sector. That in turn reflected the loss of competitiveness, which was shown – but ignored – by the various indices used to measure competitiveness.

    John Major’s government, supported by Labour, sought to address the continuing economic problems by taking refuge in the Exchange Rate Mechanism, thereby handing responsibility, in effect, for restraining inflation over to a foreign central bank and avoiding – it was hoped – any opprobrium for the price to be paid for such “discipline”. But, true to form, an inappropriate parity and the mistaken analysis that identified inflation rather than a lack of competitiveness as our fundamental problem wreaked such damage that we were eventually forced out of the ERM.

    By this time, our policymakers were running out of options. There was some respite as the UK, freed from the shackles of the ERM, performed a little better than most of our European partners. But we had long since surrendered ourselves to the belief that we could no longer – in the face of newly competitive developing economies – compete as a manufacturing economy.

    Instead of addressing that problem, and exploring appropriate remedies for it, however, we determined to find an alternative way of paying our way. I was the Opposition spokesperson on financial matters in 1986 at the time of the so-called Big Bang – the removal of effective regulation from City institutions – and had led for the Opposition in the Committee stage of the Financial Services Bill.

    I had argued in vain that self-regulation would be ineffectual in restraining excesses and maintaining prudential supervision. But an essentially unregulated financial services industry was – with heroic optimism – advanced as the ideal substitute for our declining manufacturing; it had the advantages of requiring a great deal of capital (which could not be replicated because it was not at that time available to most developing economies) but little by way of real skill, and it also offered the political bonus to Thatcherite politicians of disabling the large industrial trade unions.

    These dazzling prospects seemed for a time to be delivered. As recently as 2007, and as evidence of how thoroughly New Labour welcomed these developments, Gordon Brown, in his annual Mansion House speech – his swansong after a decade at the Treasury – heaped praise on the financial services industry developed by the City of London, and predicted that “it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created”.

    We now know, courtesy of the global financial crisis, that financial services did not provide the secure base for economic development that had been hoped for, and that such benefits as were delivered went in large volumes to a very small proportion of the population. Even more seriously, our neglect of manufacturing as a wealth-creator has meant that we are denied the great advantages that manufacturing alone can deliver – as the most important source of innovation, the most substantial creator of new jobs, the most effective stimulus to improved productivity and the provider of the quickest return on investment.

    George Osborne, and his dwindling band of supporters, seem bereft of any understanding of this sad history. Their insistence on austerity as the cure for recession is just the latest instalment in a total refusal by a long succession of Chancellors to face the reality of our long-standing difficulties – so that we are now facing the probability of permanent economic decline.

    We now seem to have run out of options. We have tried qualitative easing and low interest rates, apparently unaware that using monetary policy to promote recovery is like pushing on a piece of string. We reject an expansionary fiscal policy in favour of cutting spending, refusing to acknowledge that this has meant, inter alia, a larger rather than a smaller deficit. Even if we now wished to take the commonsense path, and focus on rebuilding our long-neglected productive industries, we would find that we have lost much of the technological lead, the workplace skills, and the available markets that were once ours. Without the political will to change tack completely and to plan and make provision in the long term to rebuild our industrial strength – learning to think, in other words, as a developing economy and eschewing short-term fixes – the future looks grim.

    George Osborne, in other words, is heir to a long and dishonourable tradition. He is not the only person who must carry the can. But the immediate challenge is not just to escape from recession but to recognise and deal with the long-term problems. The Chancellor has shown that he is not the man to do it.

    Bryan Gould

    10 March 2013

    [i] See Monetarism or Prosperity by Bryan Gould, John Mills and Shaun Stewart, Macmillan, 1981

  • GFC Part II

    The collapse of Lehman Brothers in September 2008 ushered in the global financial crisis, and seemed to bring an era to an end. The orthodoxy that had prevailed for thirty years crumbled overnight. Markets, it was realised, are not infallible and self-correcting; private business skills and disciplines are quite different from those needed to run a whole economy; governments are not obstacles to economic development but its indispensable guarantor.

    Suddenly, lifelong sceptics sought salvation in Keynesian prescriptions, for fear that the crisis would turn into full-scale depression. The taxpayer shelled out billions to save the global economy from total collapse.

    The prescriptions worked. The depression was averted. The banking system was shored up. We lived to fight another day.

    But the stimulus to make good the sudden collapse in global liquidity took us only so far. It was enough to steady the ship but not enough to prevent the vessel from foundering in the longer term.

    Most of the taxpayers’ money went directly to the banking sector where it was used to re-build balance sheets and resume the payment of large bonuses. Surprisingly little went to re-build the economy, with the result that employment, investment and production continue to languish. But it was not only the banks that were keen to return to business as usual.

    The global establishment quickly – and without waiting for the recession to be over – put Keynes’ General Theory of Employment, Interest and Money back on the shelf. In a surprisingly short time, the old orthodoxies were re-asserted.

    Paradoxically, the main lesson drawn from a crisis that had been created by private sector failure and averted only by government intervention was that the role of government should be wound back. It was constantly asserted that governments should behave like private individuals or companies and must cut back their spending, irrespective of the deflationary impact on economies still struggling with recession.

    The Keynesian lesson that governments have a responsibility for the economy as a whole and not just for their own finances was quickly forgotten. While some economies – like China and, on the back of a mineral commodity boom, Australia – continued to prosper, most others plunged willingly into austerity programmes that, in effect, closed down their economies.

    The theory was that austerity was needed in order to preserve credit ratings and to reduce the need to borrow. The money markets, it was calculated – the same money markets that had created the crisis in the first place – had to be placated. If they did not have confidence that deficits would be reduced, they would be less willing to lend.

    But, like most fairies, the “confidence fairy” has failed to materialise. Despite doing what the money markets are assumed to want, economies continue to languish. Austerity continues to do its depressing work and remains the order of the day.

    In Europe, countries like the UK press headlong on into austerity programmes, even while the economy is stalling and less ideologically committed commentators look in vain for anything that might bring the recession to an end.

    The financial crisis in Europe is of course exacerbated by the disaster that is the eurozone – a project that subjects weaker economies to monetary conditions that are dictated by much stronger economies, that denies to them the usual escape route of devaluing the currency, and therefore requires them to deflate savagely so that they are less and less able to afford – let alone repay – the huge borrowings that are needed simply to keep them afloat.

    How is debt to be repaid and deficits reduced by economies that are going backwards? Can we be surprised that the world economy is increasingly threatened as the contagion spreads from Greece, Portugal, Ireland, and Spain to a growing group that includes Italy, Belgium and possibly others?

    The picture is equally depressing in the United States. An expensive but only partial stimulus programme slowed down but did not solve the crisis. Unemployment continues at a high level and the recession persists, yet – reflecting an almost religious zeal – a minority of legislators has ignored those pressing problems and artificially elevated the raising of the government’s debt ceiling into the USA’s number one economic problem. The consequent US credit downgrade leaves the real problems more intractable than ever.

    Almost everywhere we look, in other words, policy-makers seem determined to ensure that the conditions for recovery are displaced by the requirements of a failed ideology. Can we wonder that even the architects of these errors, as they survey the results of their handiwork, have lost confidence in the outcomes, and that another round of crisis is threatened?

    We in New Zealand will of course be directly affected if the global financial crisis is given a new lease of life. It may be thought that there is little we can do to influence the situation. But we cannot escape responsibility for making our own small contribution to the general malaise.

    We have – like so many others – treated unemployment, investment and productivity levels as of little importance and denied that government has any responsibility for them. We have eschewed intervention and treated the reduction in a modest government deficit as our over-riding priority. By placing ideology above common sense, we have played our own small part in prolonging an avoidable disaster.

    Bryan Gould

    7 August 2011

  • Leaning Against the Market

    When Lord Myners proclaimed this month that “there is nothing progressive about a government that consistently spends more than it can raise in taxation” he gave support and comfort to one side of an argument that is at the heart of the new government’s agenda – what to do about the government deficit.

    Lord Myners’ intervention was all the more significant because it came from someone who, just a few weeks ago, was a minister in the Labour government. He weighed in on the side of those who seem to assert that the first priority of the new government must be to get the deficit down; but he may have also given us a clue as to why Labour’s position on this issue during the election campaign was so confused.

    Most commentators agree that the global financial crisis has prompted an overdue resurrection of the reputation of last century’s greatest economist. But, for Lords Myners it seems, Lord Keynes may never have existed. He continues to exhibit an unreformed attachment to one of the most common fallacies in economic thinking over the past thirty years.

    It is a common assumption in right-wing thinking that the government should be regarded as merely an individual person or corporation writ large, and that it should therefore always act as a prudent individual would do. Although most individuals would plead guilty to the charge of borrowing in order to build or acquire an asset (like a house), the government – according to this view – must never spend beyond its means. In a recession, when individuals stop spending and investing, and the government’s tax revenues therefore decline, the government must also slam on the brakes.

    This view is especially ironic when a large element in the government’s indebtedness is the money provided to bail out failed institutions, and especially banks, in the private sector. But, more importantly, it completely overlooks the responsibility of governments during a recession to lean against the logic of the market.

    As Keynes saw, a government that behaves in a recession as everyone else behaves will simply make the recession worse. It is the special role of government in that situation not to retrench but to use its huge resources, its ability to create new money through “quantitative easing”, and its responsibility to take the longer view and to act in the common interest, in order to stimulate the level of economic activity so as to shorten the recession and thereby restore its own financial position as soon as possible.

    A government that ignores that responsibility and focuses narrowly on its own short-term financial position is likely to see the recession last longer with inevitable longer-term consequences for its own tax revenues and finances. A braver government that lives with a deficit as its contribution to a counter-recessionary strategy will see its tax revenues recover faster and – paradoxically, it may seem – bring the deficit under control sooner than it would otherwise have done.

    None of this means that government spending should be let rip. If the deficit is to be effective in bringing the recession to an end, the spending must be economically worthwhile. The new government is quite right to scan the whole of its expenditure so as to eliminate wasteful, unnecessary or ineffective spending. The spending that is undertaken must not be focused on consumption but on encouraging investment, employment and improved productivity. The goal must be investment in an improved economic performance for the future so that a double bonus is obtained – an immediate counter-recessionary boost to the level of demand in the economy that takes the form of a counter-cyclical stimulus to longer-term productive capacity.

    To follow this course requires political courage and political leadership. The Lord Myners of this world are always quick to condemn a departure from what passes as orthodoxy. It is not something that should be sub-contracted to officials. The new government has received plaudits for setting up the Office for Budget Responsibility and George Osborne has now announced greater regulatory responsibilities for the Bank of England. But these agencies cannot be expected to take the tough decisions about the overall course of the economy that are now necessary. That is what we elect governments to do. The new government must step up to the mark.

    Bryan Gould

    16 June 2010.

    This article was published in the online Guardian on 14 June.

  • When The Facts Change

    “When the facts change, I change my mind. What do you do, sir?” Such was John Maynard Keynes’ famous riposte to a critic who accused him of changing his mind about monetary policy during the Great Depression.

    A similar response might be made today to those, like Don Brash, who maintain that they have been right all along, when the facts say otherwise. And there must be a suspicion that the Treasury are similarly afflicted – more concerned to maintain ideological purity than to do what the situation requires.

    If we were feeling generous, we might feel a twinge of sympathy for our policy-makers. After trying and failing to use monetary policy to grapple with our own home-grown recession throughout 2008, they now have to meet the new challenge of a world that has changed and to do so with a monetary policy instrument that now seems even less relevant.

    What, after all, is now the goal of monetary policy? For decades, we have been told that inflation is all that matters and monetary policy all that is needed to deal with it. Now that inflation is the least of our worries, and the limitations of monetary policy are evident, a significant change in mindset and a new range of policy instruments are surely needed.

    Any sympathy we might feel should in any case be tempered by the thought that it is those same policy-makers who created many of our problems in the first place. Our 2008 recession – well-entrenched by the beginning of the year – was the end result of decades of ideologically-driven policy mistakes which had eventually run us into the buffers. Those mistakes had seen the average New Zealand family end up $80,000 a year worse off than their Australian counterparts, and even that disastrous performance was achieved at the expense of massive overseas borrowings, a huge trade deficit, and the fire sale of many of our national assets.

    It is from this calamitous starting-point that we now face the threat of world recession. The measures put in place just to deal with our own recession were hardly adequate for the task, but they certainly need reinforcing now if we are to ward off the worst effects of the global downturn as well.

    That is not to say that those measures are not welcome, as far as they go. The cuts in interest rates may be far too late but are better late than never. Tax cuts will also help but fall far short of what is needed and, according to most observers, are less effective than public spending in stimulating economic activity. The promise of a rolling programme of public investment in infrastructure is certainly welcome, though it seems to be proceeding on a somewhat leisurely timetable and needs to be decided and implemented soon if it is not to be too late.

    On the other hand, some Ministers seem more worried about allowing the government deficit to grow than with the increased fiscal stimulus the economy now needs. But this is to put ideology ahead of practicality. The whole point of the last decade of reducing government debt was surely to equip us to use public spending to stimulate the economy when it proved necessary. In that respect, the prudence of past governments has meant that we are better placed than most to use government spending to help counteract recession – and that, rather than the size of the government’s deficit, is surely our top current priority. As Keynes insisted, deficits should in any case be measured and evaluated over a period, not in the short term.

    We are of course constantly assured by Treasury that there is no need to worry because the size of the fiscal stimulus already delivered to the economy is very large by international standards. But that assertion needs to be carefully examined. The stimulus so far provided (including tax cuts and spending yet to materialise) is estimated to equate to 2.8% of GDP. This may have seemed adequate when planned last year as a response to our own recession, but as a counteraction to the global crisis it provides only half the stimulus delivered in the US and the UK (where huge sums have also been spent on bailing out the banks), and of course falls well short of the package announced by the Rudd government in Australia. These countries have, in other words, done much more than we have, from a starting-point that was much less difficult than ours; they were not already in recession, as we were, when the global downturn struck.

    What we must recognise, in other words, is that – on top of our domestic woes – we now need to address a desperate international situation that is unprecedented in most people’s lifetimes. Much now depends on the “summit” arranged for 27 February. The Prime Minister seems at least to be aware that more needs to be done, and that spending on infrastructure is the way to go. We must hope that the summit – and his own advisers – agree with him.

    Bryan Gould

    6 February 2009