• The Voters’ Anger

    The disenchantment of British voters with democracy, we are told, is to be explained by the anger they feel at the failings of politicians. Those failings, it is supposed, are to do with the perception that politicians are “on the make”; but that conclusion – while no doubt partly justified – is surely far from the whole truth.

    The Guardian/ICM poll finding that 50% of respondents chose “anger” as their principal sentiment when thinking of politicians may well conceal a deeper malaise. The scale and depth of public disaffection is, I believe, to be explained by something much more fundamental than the sadly all-too-common instances of politicians breaking the rules governing their “perks” and allowances.

    What is in play instead is a growing realisation that the political class – which extends far beyond the ranks of elected MPs to include the whole of what used to be called the establishment – has failed a country that is now in a state of unmistakable national decline. Those responsible for what passes for serious debate about the state of the nation – and that includes business leaders, the media, civil servants, leading academics and experts, as well as politicians – have contributed to a process that has not only meant manifestly hard times for many of our citizens but also offers little hope of a better future.

    Despite constant assurances that better times are just around the corner, the UK has over the last four or five years suffered the sharpest fall in living standards in over a century. Those who have borne the main brunt of that precipitate decline have been the weakest in our society, for whom the safety net is regressively being withdrawn. Economic decline and social disintegration are now seared deeply into the national consciousness.

    None of the major contenders for government seems to offer anything but further retrenchment. The voters look in vain for an alternative to the current orthodoxy. Labour continues to suffer the burden of the New Labour legacy. The Tories commit themselves to self-harming austerity and promise to make life tougher for the already disadvantaged. The Liberals look for ways of distancing themselves from Tory failure without giving up the fruits of office. Even those voters tempted by UKIP recognise that they offer a counsel of despair rather than redemption.

    Little wonder that voters feel a sense of frustration and anger. They understand that the democratic process has not protected them from national failure and decline and that – although the formal power of decision is exercised by government – the shots are really called by global business interests whose dominance over what actually happens has, if anything, increased as the failure of the policies they enjoin has become more evident.

    What the voters expect from those who govern them is what they expect from any other group of supposed professionals – simple competence. What they see instead is a bunch of amateurs with little understanding of the economy they are supposed to manage and therefore totally at the mercy of political prejudice and vested interests.

    The cure for voter disaffection with democracy is simple. Politicians have to convince the electorate that they are able to abandon a failed orthodoxy that continues to smother new thinking, in favour of a fresh and more positive economic policy – and then deliver on that promise.

    What should be the elements of that new policy? It should focus on real issues and not on imagined problems. It should take as its starting point the need for a sustainable rate of growth which current policy is incapable of delivering.

    It should recognise that decades of comparative failure have left us with a profoundly uncompetitive economy and a manufacturing industry that is on its last legs. We cannot rebuild our productive base for as long as we cannot compete in international markets.

    The loss of competitiveness means that we cannot and dare not grow for fear of ballooning trade deficits and rising inflation. It means that the government’s debt – even while public spending is being cut – will continue to grow faster than the economy as a whole. And while growth languishes, unemployment continues to cost us lost output, acts as a brake on recovery, and undermines our social structure.

    We need to face facts and to engineer an exchange rate that allows us to make a fresh start by immediately improving competitiveness. We need a new approach to monetary policy, treating it not primarily as a means of restraining inflation but as an essential facilitator of increased investment in productive capacity. We need an agreed industrial strategy and new investment institutions to ensure that an increased money supply goes into productive investment rather than into consumption or bank bonuses.

    Above all, we need to restore full employment as the central goal of policy. An economy that offered productive work to everyone able to work, that provided ample finance for those ready to invest in new and competitive businesses, that found ready markets around the world for all it could produce, would not only restore faith in the value of government and democracy; the Labour Party should note that putting such proposals forward might get them elected as well.

    Bryan Gould

    29 December 2013

    This article was published in the London Progressive Journal on 31 December and in Comment Is Free in The Guardian on 6 January.

  • 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

  • No Gifts for the Greeks

    Europe’s politicians and bankers have no one to blame but themselves for Greece’s current agony, but they insist that the price of their foolishness should be paid – not by any sacrifice on their own part – but instead by ordinary Greeks.

    The euro-zone was always a disaster waiting to happen.  Yet, even now that the inevitable has arrived, the architects of the arrangement insist that is for the Greeks to accommodate painful reality, and that their own illusions and self-deceptions should remain intact and unchallenged.

    We do not need the benefit of hindsight to know that it was always going to turn out like this.  Many of us warned from the outset (and even before that, when the euro-zone’s predecessor – the Exchange Rate Mechanism – was coming unstuck) that the euro owed much more to the grandiose posturing of politicians than to economic rationality.

    Writing in the Guardian on 14 August 2000, for example, I warned that “in a single economy, subject to a single monetary policy, productive capacity will concentrate in the most productive parts of that economy. Monetary policy will necessarily be framed in the interests of that most productive part. Other less productive parts will find it difficult to live with unsuitable monetary conditions. In the long run, they will, in effect, close down. This loss of economic activity will eventually depress the level of demand and activity in the economy as a whole.”

    I had in mind exactly the situation the Greeks now find themselves in.  The Greeks’ own foolishness may have contributed to their plight, but they were urged on into a quite unsuitable set of obligations by senior – and wealthier – partners who assured them that all would be well.

    Those senior politicians and bankers who insisted that the euro was a valuable and necessary step towards greater European unity (for which read the emergence of a European superstate, with a single Europe-wide government) must have known that bringing widely disparate parts of a wider European economy, with all their differing strengths and more particularly weaknesses and – most importantly – stages of development, under a single monetary policy would impose huge strains on the weaker members.

    The reality has, however, turned out to be even more cruelly callous of Greek (and perhaps, in due course, of Portuguese and Irish, and even Spanish and Italian) interests than even we Jeremiahs had warned.

    The euro has, in effect, betrayed the Greeks twice over.  First, they were duped into believing that monetary conditions which were generous enough to allow the Germans to develop and expand could be accommodated in Greece without creating a borrowing and asset bubble that would eventually burst.

    And, secondly, they had been led to believe that, if the going got too tough, the quid pro quo for taking on the challenge of sticking with the euro and feeling the pain of that for a time, was that the richer partners would come to their aid, with loans and regional assistance packages to ease them back into a prosperous future within the eurozone.

    Such an implicit guarantee was after all the only condition on which a weak and under-developed economy like Greece could possibly take the risk of footing it with an economic powerhouse like Germany.

    Foolish Greeks!  They should have got it in writing.  When it came to the reckoning, a German Chancellor – answerable to German taxpayers – showed herself unwilling to honour the cheque.  The Greeks, having been lured into the trap, now find that their gaolers have walked away with the key.

    The “remedies” so far applied to this desperate situation do no more than buy time while the politicians and bankers work out how much they can salvage.  The cure they prescribe for Greece is, of course, worse than the disease.  The time bought is merely a further period during which ordinary Greeks are required – in a futile attempted defiance of economic logic – to make the attempt to repay huge debt while decimating what they produce.

    The authors of the catastrophe meanwhile will tolerate no questioning of their grand design.  People may suffer, austerity and penury may rule, countries may founder, but the sanctity of the euro project must not be questioned.  Nor must be the right of bankers – however irresponsible their lending – to reclaim what they’re owed, plus interest.

    In these circumstances, what should the Greeks do?  Their government has no doubt that they must bite the bullet and condemn themselves to hard times for a generation or more.  The ordinary Greek, however, says that it is those who created the disaster who should bear the brunt.

    I do not often agree with Boris Johnson.  But, on this occasion, he is right.  If I have to choose between the posturing of politicians and the greed of bankers on the one hand, and the decent lives of ordinary people on the other, there is no choice.  The Greeks must default, abandon the euro and make a fresh start.

    Bryan Gould

    21 June 2011

  • There Are Other Options

    The Reserve Bank Governor, Alan Bollard, used a speech last week to defend the policy that has been applied in this country for over two decades – a policy that he inherited and has since perpetuated. That approach to running the economy essentially revolves around monetary policy – and Alan Bollard’s advice to his critics was that they should accept a monetary policy framework which takes inflation targeting as its central element as the best means available of achieving good economic outcomes.

    His critics are unlikely to be convinced. It is not just that our economic performance over more than two decades has been less than impressive and has seen us slide down the OECD tables. It is also that the Governor seems to misunderstand the nature of the criticism.

    If we are to take his argument at face value, he is rather like a pastry chef who – using only flour – produces a flat and tasteless cake and then tries to rebut critics by insisting that flour is a very important and valuable ingredient. Most would argue that eggs, butter and sugar might also be helpful – just as, in economics, the Governor’s critics would say that to rely entirely on monetary policy is to ask it to do too much, including much for which it is not suited, and its exclusive use therefore prejudices the chances of achieving a buoyant and successful economy.

    No one says, in other words, that monetary policy should be abandoned. But what the critics do say is that we would do better if we used other policy instruments as well.

    The irony is that, if we read the Governor’s speech carefully, he seems to agree with this. And it may be better to watch what he does, rather than what he says. Whatever the headlines may say, Alan Bollard indicates very clearly that he is increasingly looking to other elements of policy, even while still focussing on the very narrow definition of his responsibilities with which he is saddled by our legislation.

    Let us take, for example, the Governor’s plea to the government that it should get fiscal policy under control by mid-year. We can put to one side whether or not he is right to call for a reduction in government spending, which seems a little misplaced, given that we are still bumping along on the bottom of the recession. What is significant is his argument that an effective fiscal policy will reduce the burden that has to be carried by monetary policy – an acknowledgment that monetary policy needs help from an integrated fiscal policy, even when the policy focus is as narrow as simply controlling inflation. How much more true would that point be if we widened the focus to the wider and proper goals of economic policy?

    He is also right to call for a re-appraisal of taxation policy, particularly as it affects the taxation treatment of housing as an investment proposition. This again is a recognition that taxation policy, by focusing on the micro-economic mainsprings of inflation, might have a useful role in a counter-inflationary strategy.

    And, the Governor’s rehearsal of the tighter regime he has applied to the banks in respect of their lending policies may find its justification on prudential supervision grounds, but it also has the merit of addressing one of the most significant of factors contributing to inflation – excessive bank lending, particularly for residential property. Again, the Governor has identified an important and additional ingredient – beyond interest rates -in a sensible policy mix.

    Alan Bollard, in other words, may talk a good fight against the critics of an exclusive reliance on a monetary policy focused on inflation targeting, but his actions tell a different story. The call for a new debate about macro-economic policy has not fallen – in his case – on entirely deaf ears.

    It should be acknowledged that the Governor made some points in his speech that even his fiercest critics would support. His rejection of an Anzac currency, as a means of achieving greater currency stability, is entirely right. A common currency could only work within the context of a common monetary policy; and a common monetary policy could be applied in a democracy only by a common government. Unless we see our future as an Australian state, we should maintain our own monetary policy – and currency.

    He was on less convincing ground when he also rejected the kind of competitiveness target that has worked so successfully for Singapore. But whether or not he is right in this, he has at least recognised that a debate on these issues is desirable and appropriate. We are at last making some progress by consigning the mantra that “there is no alternative” to the dustbin of history!

    Bryan Gould

    1 February 2010.
    This article was published in the NZ Herald on 8 February

  • Treasury Must Look Past Interest Rates To Boost Economy

    As the participants prepare for the “jobs summit” this week, they will be hoping for a strong lead from Treasury and the Reserve Bank as to the way ahead. But, on the evidence so far, our policy-makers are floundering. 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 dramatically 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.

    We should in any case temper any sympathy we might feel for our policy-makers with the thought that it is their mistakes that created many of our problems in the first place. Our 2008 recession – well-entrenched by the beginning of 2008 – was the end result of decades of ideologically-driven policy errors that 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 unfortunate starting-point that we now have to 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 the steps that have been taken 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, drip-feed timetable and to be just tracking along in the wake of a crisis that is relentlessly gathering pace.

    Worryingly, there seems to be more concern in some quarters about allowing the government deficit to grow than with the increased and substantial fiscal stimulus the economy now needs. But that 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. The prudence of past governments has meant that, in that respect, 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.

    We are of course constantly assured by Treasury that the size of the fiscal stimulus already delivered to the economy is very large by international standards. But that assertion was made last year, before the crisis truly hit and before other countries had made responses that dwarf ours by comparison. The stimulus so far provided (including tax cuts and spending yet to materialise) is estimated to equate to 2.8% of GDP. But in the US and the UK (where huge sums have also been spent on bailing out the banks), packages the equivalent of several multiples of our own have been put in place, and our response is of course also much smaller than the fiscal stimulus 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; they were not already in recession, as we were, when the global downturn struck.

    It is time to forsake ideological purity (for whatever that is worth) and focus on what pragmatically needs to be done. On top of our domestic woes, we now need to address a desperate international situation that is unprecedented in most people’s lifetimes. If jobs and businesses are to be saved, we will need more than occasional, case-by-case interventions. We must recognise that, if bank lending and credit creation are falling back, the case for the government to fill the gap with programmed credit for investment is overwhelming.

    The Prime Minister, at least, seems aware that more needs to be done, and that spending on infrastructure is the way to go. We must hope that this week’s summit – and his own advisers – will agree with him.

    Bryan Gould

    19 February 2009
    This updated version of an earlier article was published in the NZ Herald on 26 February