• 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 Labour Leadership

    After thirteen years in government, it is not perhaps surprising that Labour’s response to election defeat has been somewhat uncertain. Almost all of those who now seek to lead the party have spent most of their political lives persuading both themselves and the electorate of the great virtues of New Labour. Their forward political horizons were bounded, until a few months ago, by New Labour. Now, with the voters’ rejection of New Labour, their lodestar has been shot out of the sky.

    It is true that the candidates have, to varying degrees, recognised that change is now the order of the day. They have understood that a line must be drawn beneath election defeat. As professional politicians, they have quickly learned to speak the language of new beginnings. But the suspicion must be that the need for change is something they know, but do not yet understand.

    So, while each of the candidates is clear that a readiness to embrace change is required to win the leadership and, more importantly, lead Labour back to power, there is a marked lack of any precision about what that change might comprise. There is confusion not only about where change might take the party, but even about what it is in the party’s present and immediate past that needs changing.

    Some say that a change of direction is needed; others that going further in the same direction will bring success. Some urge a return to basics; others argue that the party must recognise and adapt to the new political imperatives created by a right-wing coalition government. Those at the back cry “forward” and those at the front say “go back”.

    Underpinning this confusion is a great mystery. We have lived through the most serious economic crisis of most lifetimes, a crisis brought about by the individual greed and irresponsibility of those exploiting an unregulated market for their own ends, a crisis averted only by government which alone had the will, legitimacy and resource to undertake the task – and the election result seems to mean that the correct response is to diminish the role of government so that it is smaller and weaker and less able or willing to restrain the greedy and selfish.

    Here, surely, is the change that is needed for Labour. Instead of New Labour’s acceptance of the supposedly inevitable triumph of the “free” market, why not say in terms that the whole point of democracy is to use the political power of the people, as exercised by their government, to offset and restrain the overwhelming economic power that an unregulated market otherwise delivers to a tiny and selfish minority? If market outcomes cannot be challenged, what is the point of democracy?

    Why not say that a strong and successful society depends on a real sense of community – not the meaningless slogan of “we’re all in this together” which is manifestly contradicted by the purpose and impact of government policy – but a genuine community of interest in which the gap between rich and poor is reduced, the old and the sick and the poor – not forgetting those who might become so some day – are supported, everyone gets a fair share of the benefits of economic and social cooperation, and the potential of every individual skill and talent is realised for the common good?

    Why not say that, despite the bad press that government has received – something largely engineered by media barons and exacerbated by the self-inflicted wounds of the expenses scandal – it is government that, by setting the ground rules to take account of the interests of everyone and not just a minority, remains the best hope for building a society in which everyone feels they will get a fair deal.

    The loss of faith in government over recent years, even by those who have most to gain from effective government and most to lose from its enfeeblement, is one of the most serious indictments of New Labour. Nothing better serves the interests of the selfish and privileged than the acceptance that government is just another part of a power structure that ordinary people have no ability to change.

    The conviction that progress is possible, that a better society can be built by giving people more control over their own lives, and that the task is best undertaken by harnessing the power and legitimacy of democratic government, is central to Labour politics.

    Votes in the Labour leadership contest should be given to the candidate (Ed Miliband?) who most convincingly and clearly re-states the case for government and spells out the intention to use the power of government to build a fair, strong and united country. This is not “going back to basics” or re-inventing “old” Labour. It is the re-affirmation of a bedrock of vision and principle from which to face the sharp and changing challenges of the modern world.

    Bryan Gould

    12 September 2010

  • A New Labour Leadership

    In the aftermath of election defeat, Labour seems to be acting on at least some of the lessons of recent history. But there is little to suggest that any of the declared candidates for the leadership have fully grasped the changed situation that now confronts them.

    The leadership contest this time, with multiple candidates and a four month-long campaign, shows that the party at least recognises this time that a period of reflection is essential. There is to be no repeat of the uncontested coronation of Gordon Brown. While the 2010 defeat was on a smaller scale than might have been expected, there is clearly a need for a clear-out of a leadership that led the party down a cul-de-sac and wasted the greatest opportunity offered to a potentially reforming government since the Attlee government at the end of the Second World War.

    And that is precisely where most of the candidates are immediately seen to struggle. It is to be expected, perhaps even inevitable, that after thirteen years in government any candidate with the required experience and standing in the party will be irredeemably associated with the record of the Blair/Brown government. Yet making a decisive break with that past is what is now needed.

    This is not just a matter of acknowledging the mistakes that in the end disqualified Labour from re-election, though those failures – the shocking invasion of Iraq, the sickening subservience to the City, the “intense relaxation” about widening inequality, the complicity in torture –must be repudiated. Some of the declared candidates have – somewhat belatedly – begun that process, particularly in relation to the Iraq invasion. But there is also the small matter of a failed economic policy which has resulted in a serious structural imbalance and a gaping hole in the national accounts.

    It may be, too, that the voters have signalled a reaction against the continued pretension to a world role that marked the Blair premiership, and have decided that what they want instead of foreign adventures is an administration that focuses on the unexciting but important business of providing competent, fair and representative government to a medium-sized and mature democracy, perhaps more akin to the Scandinavian model.

    It is not all bad news for Labour. The election result – with the Tory failure to secure a majority despite the most favourable circumstances imaginable – suggests strongly that the country did not wish to return to what Tory strategists must have hoped were their Conservative roots. On the contrary, the experience of the global financial crisis, the reality of global warming, and the sickening spectacle of the City’s greed and selfishness seem to have had their impact. In the broadest sense, the voters have understood that the era of “grab what you can” and the devil take the hindmost, whether that means one’s fellow citizens or the planet, is over. That almost subterranean shift in sentiment should work powerfully in Labour’s favour.

    But a new leadership must grasp that the world has changed. The 2010 election showed that the voters are not in the mood for a “strong”, “winner-takes-all” government of the kind that New Labour was and aspired to be. The election has produced a government that will be quite different from its predecessors – less tribal, and more inclusive, responsive and consultative. Whatever their eventual judgment of this particular coalition, the voters may well like what they see in this new form of collaboration.

    So the new political context will require a different kind of government, one that will more effectively represent ordinary people and the wider and longer-term interest, and pay less attention to the rich and powerful, or to the political parties’ own interests. Politicians will need to be more humble. With electoral reform, a “hung” parliament and minority-led or coalition government could well become the norm. Labour will have to show that it is better equipped to deliver this kind of human-sized and responsive government than would a reformed and more moderate Tory party under David Cameron or than Nick Clegg’s Lib Dems who will be pitching themselves as the progressive alternative to the Tories.
    That will require a quite different mindset from that of New Labour. It seems doubtful at this early stage of the leadership context whether any of the candidates is ready or able to make the leap of vision and understanding that is needed. We need leaders who can see the shape of the future and can lift their eyes to longer horizons.

    David Miliband and Ed Balls are too much prisoners of their respective Blairite or Brownite pasts, though Ed Miliband is at least starting to use some fresh language that might just herald fresh thinking as well. Andy Burnham has immediately struck the right note in signalling a break with “stage-managed” politics but has a long way to go if he is to show that that means better than just tightening controls on immigration.

    The candidatures of Diane Abbott or John McDonnell, if they materialise, will be welcome in terms of widening the debate but their re-assertion of familiar values will be weakened by the long odds against their election. Jon Cruddas would have been a valuable addition to the lists. If Labour is to grasp the moment, the next four months will have to be put to good use. The party needs time for reflection; the candidates do as well. We can expect further movements in their positions.

    Bryan Gould

    21 May 2010.

    This article was published in the online Guardian on 24 May.

  • Wanted – Directors Who Think

    As the global recession gathers force and pace, spare a thought for our policy-makers. They are trying to confront a crisis whose dimensions they have only belatedly begun to recognise and to do so with policy instruments that the rest of the world has already rejected as irrelevant.

    Relying on monetary policy may have just about seemed adequate when we slipped into our own home-grown recession at the beginning of last year. Notwithstanding that it was that self-same monetary policy that had driven us into recession in the first place, our economic gurus at the Treasury and the Reserve Bank seemed satisfied that a few touches on the monetary tiller, plus the tax cuts offered as an election sweetener by both major parties, would be enough to turn the economy around.

    They were of course shaken, as were we all, by the sight of the world’s financial establishment coming apart. But they comforted themselves, no doubt, with the thought that our own banks and financial institutions (give or take a few dozen finance companies and a couple of billion dollars of people’s savings) were not under threat.

    It has taken them a long time to understand that the global crisis is no longer – or at least isn’t just – a financial crisis. As the unbelievable greed and stupidity of the world’s banking institutions have produced their inevitable consequences for the real economies in which most people live and work, we are now faced with a global economy in which consumer spending, jobs and investment are in free fall – with inevitable pain for a small, vulnerable, export-dependent economy like our own.

    In these circumstances, cuts in interest rates – while welcome at the margins, if only to help redress what would otherwise be an even greater than usual interest rate differential for us – simply will not cut the mustard. Relying on monetary policy in the face of a full-scale, real-live, worldwide recession driven by falling demand is like pushing on a piece of string. While the rest of the world has experienced a miraculous overnight conversion to Keynesian economics and the merits of fiscal stimulus, we are still tracking along as though our own comparatively small-scale recession is all that we have to worry about.

    So, while countries like the US and the UK have put in place huge fiscal packages to try to ensure that their economies do not freeze over altogether, (and that is in addition to the huge sums they have spent on shoring up their banking sectors), and while Kevin Rudd has announced a massive public spending programme in Australia, we continue to rely on taxing and spending decisions that were essentially taken in mid-2008 when they might or might not have been adequate to arrest our own mini-recession.

    As far as further fiscal stimulus to address the reality of global recession is concerned, we are apparently relying on a drip-feed of small measures whose main purpose seems to be to show that our policy-makers are at least doing something, however ineffectual. We are constantly assured that – at just 2.8% of GDP – our fiscal stimulus is among the largest in the OECD. We can only conclude that this calculation was made before the British, American and Australian packages – at several multiples greater than 2.8% – were actually announced.

    Such a cautious approach overlooks the very real point that what is now needed from governments is not just a boost to spending that is appropriate in dollars-and-cents terms, but that also helps to turn round the psychology of deflation and recession.

    One of the main lessons of Keynesian economics, after all, is that economics is above all a behavioural science. Economic issues have a nasty habit of springing off the page of the textbook or the latest mathematical model and biting real people in ways that the theorists do not predict. The danger of deflation is that it feeds upon itself – exactly what it is doing now. The more people take individual decisions to protect themselves against hard times, the more they ensure that those hard times will get even harder.

    As Robert J. Samuelson has argued, we are now entering that phase of the recession where people begin to respond to the “wealth effect”. Just as rising equity in their homes and continuing job security encourage people to go out to spend, so they jam on the brakes when house prices fall and unemployment rises. Samuelson calculates that for every dollar’s fall in perceived wealth, people reduce their spending by 5 cents, and that is enough to build in to the economy a massive deflationary impetus.

    An important part of government’s role, in other words, is to show everyone that effective, immediate, large-scale action is being taken – action that will put more money in people’s pockets and give them the confidence to go out and spend it. If we can’t or won’t do that, we might as well all hunker down and prepare for the worst.

    So, what should our policy-makers be doing? The first thing they should do is to throw their ideological baggage out of the window and make a pragmatic response to the practical situation that confronts us. They should acknowledge that their first priority is to get the economy moving; there are of course limits as to how far increased spending should push the government deficit, but we are far from having reached them yet. What, after all, was the point of ten years of reducing the government’s debt if we are not allowed to use the fruits of that prudence when they are needed?

    The second thing they should do is take a more clear-eyed and realistic view than they have managed so far of the true dimensions of our problems. That is far from an easy task. They now have to add to their earlier preoccupation with our domestic woes, which now include sharply rising unemployment and a nose-diving housing market, with the much greater international threat posed by collapsing export markets, falling commodity prices, more expensive imports, and more difficult and expensive international credit.

    Drawing up a list of our pluses and minuses shows how difficult a calculation of our true position really is. On the one hand, there are factors at work that offer some better prospects for growth. The cut in interest rates will certainly help those with mortgages by leaving more purchasing power in their pockets. Those looking for bank loans will benefit, provided they are willing to borrow in the first place. And lower interest rates have partially corrected the dollar’s over-valuation that was the single most damaging aspect of our monetary policy over more than two decades. At least our exporters can now approach export markets without both hands tied behind their backs.

    The world recession has seen a marked fall in oil prices (only partially reflected so far in prices at the pumps), so that disposable income is no longer so greatly absorbed by fuel costs. The world will still need food, so that our commodity prices, though having fallen back from their peak, may still stay comparatively strong. Reduced emigration and a flow of returning ex-pats might help to stabilise the housing market and add a margin to retail sales. Tax cuts, those delivered last October and those yet to come in April, will help consumer spending. The relatively small public spending programme so far announced might still save a few thousand jobs. And tight conditions in retailing should help to put a lid on price increases.

    But for every glimmer of hope, there is a weightier reason for apprehension. Domestic interest rates might come down further, but the interest rate differential between us and other countries will be largely unaffected, and the high proportion of domestic lending that is financed from overseas will soon reflect the greater cost of borrowing from overseas sources. And, as we have already seen, mortgage rates don’t necessarily fall as fast as the OCR, and even when they do, they don’t necessarily revive a dying housing market. Samuelson’s “wealth effect” will be felt with a vengeance.

    Commodity prices are bound to fall further, as the recession gathers pace, and we will see more of what the reduced Fonterra payout has already shown us – a multi-billion deflationary shock to our total economy since the heady days of 2007. As well, our food products tend to be at the higher end of the market which will probably be more vulnerable to reduced purchasing power in overseas markets. And although the inflationary effects of a lower dollar are consistently overstated, there is no doubt that there will be upward pressure on import prices, including petrol prices.

    Tight retail conditions might rein back price rises, but they will also reduce margins and increase closures and job losses. Higher unemployment, and the fear of more of it, will cut consumer spending. And the whole of this deflationary momentum will be supercharged by the growing impact of what is happening overseas, and particularly in those export markets that matter most to us. Fisher and Paykel’s tribulations are just the start.

    The third requirement is courage. Having focused, without ideological preconceptions, on the job in hand, and having made a clear assessment of the scale of the challenge, we should then look for a response that matches the needs of the moment. So far, that response has been too late and too small.

    Yet, we might perhaps feel a twinge of sympathy for our policy-makers. They face the most difficult economic situation of modern times. And, like each individual, and especially each individual company and company board, they face the perennial challenge posed by recession – that the actions that each individual are most likely to take in their own interests are precisely the actions that will intensify the recession.

    It is at this point that we need to be strong-minded and to be clear about who is responsible for what. No one should be dissuaded from thinking about the wider picture, but the responsibility of directors remains primarily to the company whose fortunes they help to direct. It is for governments to look after the economy as a whole and to work for an economic context in which companies can thrive.

    That is not to say that directors need do nothing in this regard. While keeping their eyes firmly fixed on the interests of their own companies, they should not shy away from expressing a view about how economic policy should be developed. This is a time for business leadership with the courage and wisdom to understand the context in which they are operating. For too long, directors have gone along with a view of how economies should be managed which we can now see was mistaken and which has led us to our current plight. We need business leaders who are less preoccupied with ideology and more aware of the real world.

    We must never again make those egregious mistakes that were scarcely ever challenged by business leaders over two or three decades. It is not the case that markets work best if they are left unregulated. It is not the case that governments should be kept at arm’s length from economic policy. It is not the case that growing imbalances in the global economy have no adverse consequences. It is not the case that economies need only small technical adjustments of monetary policy and that fiscal policy is too risky and too interventionist to be used. Nor is it the case that the important decisions in the economy can be safely entrusted to bankers who will pursue the wider interest rather than their own.

    We need, in other words, boardrooms that will not only do their best for their companies but will also make a proper and thoughtful contribution to the wider public debate. There is no shortage of business leaders who do precisely that. They are directors who do not necessarily follow the herd by adopting the prevailing orthodoxy. They do their own thinking. We need more of them.