• The World’s Best

    We know that the All Blacks have again struck top form when overseas rugby writers start to talk about “peaking too soon” and to mutter darkly about “choking” at World Cup time. It is almost as though they need to comfort themselves with the thought that, despite the evidence of their own eyes, the All Blacks cannot be as pre-eminent as their results and the manner of achieving them show that they are.

    The comfort is of course illusory and the criticism is fatuous. The “choker” label is an undeserved slur. The All Blacks win a higher proportion of their international matches than any other international team in any sport, and they accordingly bear a heavier weight of expectation than anyone else, but even they win just three out of every four matches. On any given day, there are at least three or four teams who could beat the All Blacks. In any World Cup tournament therefore, the odds must be against the All Blacks (and even more in the case of other teams) winning seven matches in a row – and the nature of the competition is such that one loss in the latter stages is enough.

    While the disappointments of successive World Cup campaigns are real enough, they reflect the capricious and unpredictable nature of a knock-out event rather than any mental frailty on the part of the All Blacks. This is, after all, a team that isn’t content to focus on one tournament every four years but is ready to defend its superb, century-long record every time it steps on the field. That record is not maintained and enhanced by a team of chokers, as we see again from the triumphs of the past two weeks.

    But it is not just overseas that the All Blacks are at times written down. Even at home, it is apparently fashionable to suggest that the New Zealand public’s support for rugby and the All Blacks is not what it was, while other sports and other successes are lauded. It is almost as though the All Blacks’ amazing record has become old hat for media that are hungry for novelty.

    Unscientific opinion polls are produced to show that “only” two-thirds of Kiwis support the All Blacks and – shock horror – one in ten “hate” rugby. It seems not to be realised that such a result, even if accurate, would demonstrate the centrality of rugby in New Zealand life, rather than the reverse. No one would “hate” a sport that mattered little or that made no impact.

    But, as it happens, we have had the chance over recent weeks to make a fresh assessment of the merits of rugby and of our number-one world-rated team. The Football World Cup in South Africa has been followed by the opening matches of rugby’s Tri Nations – and we don’t need to belittle the skill required for football and the spirit shown by the All Whites to conclude that the two recent rugby tests have shown us an altogether superior spectacle.

    Television coverage of the World Cup revealed that football is a game in which it is relatively hard to score, the ball gets moved up and down the field for long periods while little happens, the chances of a draw are very high and teams are often tempted to play for that inherently unsatisfactory result, and goals often come out of the blue with little build-up to stir the blood. The appeal of football as a spectator sport depends greatly on the atmosphere created and passion shown at big matches by supporters who flock to the grounds and who largely entertain themselves.

    Rugby at its best (and I mean union rather than league – union is a more varied, complex, demanding and therefore interesting proposition than that offered by the staccato and relatively simple rhythms of league) provides by contrast a stirring contest requiring not just the skilled feet or head of the individual footballer, but the collective skills, speed, strength and courage of the whole athlete, and the whole team. A rugby try almost invariably comes as the culmination of a passage of play that raises excitement and heightens expectation. There is little in sport to compare with the speeding winger heading for the corner, or the interplay and sleight of hand of a smoothly functioning back line, or the expenditure of every last ounce of effort and resolve as a forward pack masses to drive across the line.

    And we in New Zealand have an added bonus when we watch a top rugby match. No other team in world rugby can match the pace, power, precision and sheer elan shown by the All Blacks as they once again emerged victorious from renewed clashes with their greatest rivals. Surely we should savour and celebrate as we watch the world’s best in the knowledge that it is our team – our All Blacks – that have again maintained their century-old pre-eminence?

    Bryan Gould

    19 July 2010

  • Holding Banks to Account

    The dramatic and damaging collapse of the New Zealand finance company sector over the last three or four years has attracted a good deal of attention, largely because of the multi-billion losses that investors have suffered. One of the consequences has been a boost to the confidence felt in banks which have reinforced their reputation as the best place to put one’s money.

    It is certainly true that, while overseas banks are up to their necks in scandal, our largely Australian-owned banks have maintained an enviable stability and reliability. But the tribulations of banks worldwide make it inevitable that the role of banks in the global economy should increasingly come under the spotlight.

    The revelations that many of the world’s leading banks have been guilty of dishonestly rigging markets and misleading investors have already claimed one victim, in Barclay’s Bank, and seem certain to involve many more. And that comes on top of the role – dubious at best, irresponsible and dishonest at worst – that the banks played in bringing about the global financial crisis in 2008.

    Not surprisingly, the British government is establishing a full-scale review of the banking sector, and few would now bet against the pressing of criminal charges. But it could be argued that these scandals are not just a reflection of the criminality of a handful of bank leaders but arise inevitably from the role that banks in general have been allowed to play.

    Most people still see banks as institutions that provide a safe repository for our savings and that from time to time lend us money either on overdraft or on mortgage. But this is seriously to underestimate the power that banks wield in our economy and the extraordinary nature of the concessions that allow them to do so.

    The central feature of banks, which seems only dimly understood even within the banking sector itself, is that they are private commercial enterprises which have been granted a unique and virtual monopoly over the creation of money. By far the largest proportion of the money in our economy (and in the economies of all advanced countries) is not notes and coins but bank-created credit. That credit represents no more than bank entries by bank officials; its status as money rests entirely on the suspension of disbelief – or, to put it another way, on our willingness to accept that it is money because the banks say it is money.

    The failure to understand this fundamental aspect of our economy leads to serious errors in formulating economic policy. The overwhelming role of credit-creation by the banks in inflating the money supply should be our central concern in controlling inflation, particularly when the vast majority of that credit is created and lent for non-productive purposes like house purchase.

    Because we don’t understand this inflation-engendering phenomenon, we grapple with inflation using seriously inadequate and inappropriate instruments like interest rates, which are not only slow-acting and poorly focused but do great damage to the rest of the economy. A more accurate analysis of inflation-producing pressures in our economy would lead to more effective measures to restrain them and at the same time encourage a more productive and competitive economy.

    We can see how privileged and unaccountable banks are from the fact that their unique capacity to create and lend vast quantities of “money” for private profit passes under the radar, whereas a democratically accountable government that occasionally “prints money” in the public interest draws screams of blue murder.

    But it is not only this aspect of the banks’ operations that should cause concern. Over the last two or three decades, the banks have used their ability to create money to invent a whole range of new financial instruments of dubious value which they are then able to sell to gullible investors; so profitable was this trade that it became much more important to banks than their traditional role.

    It was this prospect of unlimited profits created out of nothing (to say nothing of the huge rewards and bonuses paid to individual bankers) that led in due course to the global financial crisis. And when that irresponsibility inevitably ended in collapse, it was that same mentality that led bankers into the realms of fraud and criminality. In a world where anything goes, the rules are made to be broken, and personal fortunes are there for the taking, who can wonder that bankers could not accept that the ordinary rules applied to them? We have reaped what we have sown.

    In case we should assume that none of these problems afflict us, let us not forget that our own banks, pillars of propriety as they may seem by comparison with their overseas counterparts, have made strenuous attempts to avoid their tax liabilities and have only been made to pay up by court action.

    And in our case, the banks have not only made huge profits by exploiting their unique capacity to create money, but have then exported those billions across the Tasman, thereby placing a huge burden on our already beleaguered balance of payments. Isn’t it time to establish a banking system that supports the economy rather than places it at risk?

    Bryan Gould

    8 July 2010

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

  • Will We Ever Learn?

    Lessons from the Global Financial Crisis

    The G20 meeting in Toronto in June was remarkable in only one respect. The familiar protests, the police in the streets, the hob-nobbing of the leaders were all on show. But, what was extraordinary, if not unexpected, was the speed with which most of the world’s most powerful leaders headed back to familiar territory – not to say, political prejudices – and not only embraced again the very nostrums that had brought about the global financial crisis in the first place, but used the crisis as an excuse to press for a smaller state and a decimated public sector, even though that threatens a renewed dip into recession.

    This perverse reaction to the manifest failure of the model that had been so enthusiastically constructed over a 30-year period was a feature of not only the G20 meeting. It has characterised the responses of many individual governments around the world, and has certainly reared its head in New Zealand. Contrary to the expectations of many of us that the global financial crisis would be seen as a conclusive judgment on the failures of neo-liberal doctrine, it is the right that seems to have emerged, for the time being at least, unscathed and emboldened by the failure of their policies.

    It is worth reminding ourselves of the precise lessons that the global financial crisis should, and briefly appeared to, have taught us.

    1. 1. Markets are not self-correcting. This simple and obvious proposition, so strongly confirmed by the failure of many of the world’s financial institutions, had been conveniently overlooked and even flatly denied by neo-liberal theorists. They chose to believe that operators in a market are perfectly informed and enjoy a parity of bargaining power and that market outcomes are therefore the best available and should not be second-guessed. We now know that this is self-serving nonsense, and that the natural tendency of the unregulated market is to lead to excess, irresponsibility, inefficiency and eventually collapse.
    2. 2. Financial markets are especially prone to excess. The huge power wielded by the manipulators of international capital and the unprecedented wealth gained by operators in financial markets, resting largely on their ability to create new forms of financial assets out of nothing, led many to believe that they were the lords of the universe and could do no wrong. But, as Keynes pointed out, financial markets are the most likely to fail, depending as they do so much on hunch and guesswork and on assets whose value depends on subjective assessment and uncertain futures rather than on objective criteria.
    3. 3. Risk cannot be quantified according to reliable mathematical formulae. A great deal of modern economics has been driven by esoteric work aimed at providing an apparently reliable basis on which risk can be quantified. It was on this basis that much of what are now recognised as having been worthless assets were happily traded from one interest to another, each trader taking a profit as the asset appeared to grow in value as it passed from hand to hand. The huge superstructure of debt and valueless assets, built initially on the sub-prime mortgage market, eventually came crashing down.
    4. 4. Decisions taken by business leaders alone are a poor guide to a successful economy and society. Business leaders have been so eulogised over recent decades that many people were persuaded that more and more decisions affecting our lives should be handed over to them, and that they could be more trusted in many cases than our elected leaders. We now know that business decisions are invariably taken for reasons of self-interest and take little account of wider or longer-term interests. Those countries – like the US and the UK – that most enthusiastically accepted that societies should be run in the business interest are those which have, on the whole, suffered the most severe consequences of business failures, with the greatest damage to the social fabric and environmental sustainability.
    5. 5. Increasing the wealth of the rich so that inequality widens does not produce a better economy or a stronger society. The “trickle-down” theory was often used to support the proposition that, if the rich got proportionately richer, the rest of us would benefit in absolute even if not comparative terms from the lift in economic activity that the increased wealth of the rich would produce through increased investment and employment. This theory has been discredited in the absence of any credible evidence to support it, and in the face of evidence to the contrary that shows that in countries where inequality has widened the most, the living standards of the poor have actually declined.
    6. 6. Government matters. Contrary to the constantly repeated mantra that the best thing that government can do is to “get off our backs”, the global crisis shows that in the end it is only governments that have the resources, will and legitimacy to underpin a failed banking system and therefore the currency and the economy more generally. Without decisive government intervention, the recession would undoubtedly have become a depression. In a recession, governments have a duty to act against market logic in a way that individuals, either people or corporations, cannot.
    7. 7. The market cannot perform effectively without government help. The great benefits of the market can be optimised only if government, too, plays its part. The government must do those things in economic terms, like investing in fundamental infrastructure, that the market cannot do. It must protect wider and longer-term interests that the market treats only as potential (and preferably “externalisable”) costs – interests such as those of people who are left behind by the market, or the value of a whole, healthy and integrated society, or the importance of maintaining scarce resources and a clean and sustainable environment. It must correct mistakes made by the market and regulate the market to avoid excess and failure.
    8. 8. If the market cannot be challenged, the whole point of democracy is lost. The most significant aspect of the global economy that has developed over the past three decades has been the extent to which governments have been sidelined by the power of international investors to move capital around the world, and to hold governments to ransom by withholding investment if their requirements are not meant. The role of democratic government is, after all, to bring the power and legitimacy of the people’s will to bear so as to offset what would otherwise be the overwhelming economic power of capital. If the market is held to be infallible, and government must not intervene, we not only produce bad economic and social outcomes; we lose the point and effectiveness of democracy itself.

    None of these conclusions is revolutionary or even particularly radical. Each is evidence-based and arrived at through the merest common sense based on our own recent experience. This makes it all the more remarkable that these lessons are increasingly discounted by world leaders as they move into what we might all have hoped would be a post-crisis environment.

    New Zealand is not, of course, a member of the G20. We would be mistaken to think, however, that we had not been infected by, and contributed to, the emerging consensus as to the best response to make to the crisis. And, in our case, we can add the lessons from our own less than glittering performance to those that can be drawn from the global experience.

    Lessons from New Zealand’s Experience

    For New Zealand, the global financial crisis came on top of our own home-grown recession. By the time Lehman Brothers collapsed, we were completing our third quarter of decline in a recession that for us had begun at the end of 2007, and that was the latest episode in a tale of economic under-performance that had extended for 25 years or more.

    Paradoxically, our early experience of our own recession may have led us to understate the significance of the global recession. When it struck, around September 2008, we felt that we had already weathered much of the storm, particularly when our own, Australian-owned, banking system seemed relatively immune from the global collapse.

    The truth is, of course, that while we have been sheltered from the worst of the global recession by the buoyancy of our main markets in China and Australia, and the relative stability of our banking system, the deleterious consequences of the recession are still working their way through our economy and are proving very difficult to dislodge. The lessons from the crisis are just as applicable to us as they are elsewhere – and just as likely, it seems, to be ignored.

    Indeed, our enthusiasm to apply the free-market agenda further and faster than anyone else has given us particular reason to pause and reflect. It is only our small size and inability to develop a large-scale financial sector that has protected us from the worst ravages of the global crisis. But, our commitment to neo-liberal policies has meant that, in addition to the lessons to be learnt from the global outfall, we have our own lessons to learn and apply, by virtue of the fact that we have committed a series of mistakes over a long period that are all of our own making.

    If we are to bring the recession to an end, instead of just bumping along on the bottom, and if we are to usher in an era of improved economic performance, it is essential in other words that we learn not only the more widely applicable lessons but also those that should hit us in the eye when we review our own recent experience.

    1. 1. Free trade is not always the best option. It has long been accepted as an article of faith in New Zealand, ever since the end of managed trade brought about by the UK’s accession to the Common Market, that we can do nothing but benefit from the widest possible extension of free trade. The issue has rarely been ventilated or debated; it is simply accepted as axiomatic that free trade is beneficial in practice and correct in principle.

    That conviction continues to drive policy. There has been a veritable explosion in free trade agreements over recent years, culminating most importantly with a free trade agreement in 2008 with China and now the prospect of an extension of the earlier P4 agreement with Chile, Singapore and Brunei to include – most importantly – the United States.

    We continue to be assured that free trade will best serve our interests. The argument is typically conducted by paying great attention to any increase in exports that could be attributed to free trade and ignoring other less convenient factors. The sharp increase in our exports to China, for example, is said to be a direct consequence of the free trade agreement; but the agreement has been in force for only a year, so most of the increase precedes and is not attributable to the agreement, is largely a function of the fact that China – almost uniquely – has continued to grow through the recession, and has occurred at the expense of an even greater increase in Chinese exports to New Zealand (and consequent loss of jobs and domestic manufacturing) over the same period.

    We might have expected that this dogged pursuit of free trade would have demonstrated its benefits to our exports and growth rate over the period. But, on the contrary, both have languished and are well behind comparable levels for other countries, and particularly for Australia. The experience of other countries also shows that free trade is not invariably the right option, but its appropriateness depends on the stage of development by comparison with trade partners and competitors. Developing countries, for example, have usually found some form of protection to be helpful until they build up their economic strength and both Japan and China have trodden that path. The Chinese are still sceptical of the benefits of free trade and it is no accident that they have so far chosen only New Zealand as a free trade partner.

    We, however, seem convinced that we can prosper in the face of direct competition from some of the most powerful and efficient economies in the world. We might do better to regard ourselves as a developing economy and to behave accordingly.

    1. 2. Foreign investment is not beneficial if the effect is to sell off existing capacity rather than develop new capacity. New Zealand, true to its overnight conversion to free markets and the free movement of capital, has opened its doors to foreign capital to a greater degree than any other comparable country. We have sold a greater proportion of our economy into foreign ownership than any other developed country. This has been partly a matter of choice, based on ideological conviction, and partly – though not advertised in this way – a matter of necessity; the proceeds of selling our assets into foreign ownership have been an important, not to say essential, factor in balancing overseas accounts that our economic failures have condemned to serious deficit.

    It might be thought that this sell-off was a once-for-all effort to balance our books and is now behind us. The figures show, however, that the process continues apace. By March 2008, we had sold off $93.3 billion’s worth of our assets, up 900% from 1989. We soon won’t have anything left to sell.

    The consequences for our economy have been disastrous. A current account in perennial deficit (eased only temporarily by the slow-down in imports caused by the recession) has been further burdened by the repatriation of profits to foreign owners, adding to the interest payments we must make to that other group of foreign owners (the proverbial Japanese housewife and Belgian dentist) who help fill the hole in our accounts by buying short-term debt as a response to our very high interest rates. The repatriated profits represent not only a drain on our foreign accounts but a very real loss of national wealth that could otherwise be applied to raising living standards and public services in this country.

    That loss is not merely economic. We also suffer a very real diminution in our ability to control our own affairs. Increasingly, under foreign ownership, decisions over major parts of our economy are taken in Sydney or Los Angeles or Shanghai. New Zealand jobs and businesses depend on people in boardrooms where our interests are remote from their concerns.

    1. 3. The government’s role in a successful economy should not be limited to trying to control inflation through adjusting interest rates. It is hard to separate New Zealand’s relatively poor performance over the past 25 years – something that has increasingly concerned successive governments as we have dropped down the OECD tables – from the policies pursued by those self-same governments. Our policy-makers have insisted that the only important goal of policy is the control of inflation, that that is simply achieved by controlling the money supply, that there is only one instrument – interest rates – that is effective to control the money supply, and that that instrument is best placed in the hands of a central bank whose decisions cannot and should not be challenged.

    The consequences of this extremely narrow view of policy are there for all to see. Even in its own terms, the policy has struggled to succeed. The control of inflation has proved increasingly difficult, and achieved only at considerable and growing cost to other objectives; even the Governor of the Reserve Bank has complained that interest rates alone are no longer an adequate instrument even for this narrowly defined task.

    The real failures become apparent, however, only when the focus is widened to include other desirable economic goals, such as sustainable growth rates, full employment, well-directed investment, effective public services, a cohesive society and acceptable living standards. It is in these areas that we have failed, and have fallen markedly behind our trans-Tasman neighbours in particular. The average New Zealand family would need at least a 40% increase in real income to reach Australian standards. Little wonder that our economic performance is constantly undermined by the flight of skills and talents across the Tasman!

    What seems to be a simple mechanism for dealing with inflation has become, in other words, a major deterrent to a better economic performance. The high interest rates apparently needed to control inflation make investment more expensive, favour wealth owners rather than wealth creators, stimulate a rise in the exchange rate that handicaps our own production in markets both at home and overseas, inhibits our investment, distorts our balance of trade, and then – to complete the vicious circle – requires a further round of high interest rates to attract the short-term “hot” money that is needed to fill the hole in our balance our payments.

    These problems will not be overcome without an “agonising reappraisal” of the policy we have doggedly pursued without success for 25 years. The global financial crisis might have been thought to offer just the opportunity we need for such a reappraisal; the evidence is though that we are intent on both overcoming the recession and correcting our own individual past failures by returning stubbornly to the policies that have consistently failed us.

    Turning Our Backs On The Lessons

    However clear the lessons – both from the global recession and from our own longer-established New Zealand disappointments – our leaders both overseas and at home seem determined to ignore them at the first opportunity. It is already clear that the majority of the world’s governments are keen to return to business as usual, and to reproduce the errors that produced and compounded the crisis in the first place. What are those errors?

    1. 1. The first priority is to deal with the deficit. Governments around the world, with few exceptions, have responded to the post-crisis environment by insisting that governments that had moved into deficit in a partially successful attempt to avert depression should now concentrate on cutting their spending so as to balance their books. Nothing is more likely to risk a “double dip” recession.

    Governments in Europe, Britain and here in New Zealand have succumbed to one of the most common fallacies of economic policy – that governments are no different from individual actors in the economy and should behave accordingly. According to this view, if a recession means that individual people or corporations should retrench and cut their spending and investment, so too should governments. If reduced government spending – not to say savage cuts – should mean that people are thrown out of work, so be it; the deficit will otherwise hang over our heads for years to come.

    It is hard to detect any rationality in this view. The best way of getting a government deficit down is to restore the level of tax revenue. A buoyant economy will generate a buoyant level of revenue. An economy that is flat on its back for the second time, on the other hand, will ensure that the deficit is persistent and deeply entrenched. You don’t get your deficit down by throwing people out of work.

    But, say the “deficit hawks”, the deficit needs to be funded, and the money markets will lend for that purpose only if they see strenuous efforts to get the deficit down. But this is to allow prejudice – a visceral dislike of public spending per se – to displace rationality. As Paul Krugman points out, our policy-makers run scared of the “bond vigilantes” on the one hand, and seem on the other to have a naïve believe that the “confidence fairy” will somehow convert policies that are intended to produce retrenchment into a recipe for recovery. And, since it was only a year ago that the financial sector was totally dependent on public finance for its very survival, how is it that their fantasies are again so soon able to dictate terms to the rest of us?

    These fallacies certainly seem increasingly to dictate policy in Europe and Britain and are alive and well in New Zealand. Our own government has been lucky in that living with the recession has been easier than it might have been, because our export markets have held up surprisingly well – not least because the Australians pursued a braver and more stimulatory course than we did. But it is becoming increasingly clear that the recession in New Zealand is proving stubbornly difficult to move; we continue to bump along the bottom with no real recovery in sight. The recession will be longer and more serious because we give priority to getting our (perfectly manageable) deficit down, rather than to ensuring that government plays its full part in helping recovery. This is a triumph of ideology over common sense. And that brings us to the next error.

    1. 2. The deficit provides a good reason for cutting back on the public sector in any case. In both Britain and New Zealand, the emergence of a counter-recessionary government deficit has coincided with the election of a right-wing government. In both countries, the response has been to focus on getting the deficit down, rather than on trading our way out of recession. In both cases, the suspicion must be that the opportunity to trim back the public sector for largely ideological reasons under the guise of dealing with the deficit has been too tempting to resist.

    The result has been and will be in both countries a substantial loss of jobs in the public sector, and a dangerous drop in the level of public services, including support for the poorest, just at a time when they are most needed. And while public sector cuts may seem easy to make in the short term, the longer-term consequences can be severe – Cave Creek comes to mind.

    The rationale for these measures – that otherwise the public sector’s demand for resources will crowd out necessary investment in the private sector – is simply not credible at a time when the economy is operating so far below capacity. It is hardly helping the private sector to throw a substantial portion of their customers on the dole. The projection might of course become self-fulfilling if mistaken policies are maintained long enough to mean that capacity does fall as resources that are kept out of use simply lose their economic value and utility.

    1. 3. The banks must be protected at all costs. The determination on the part of many governments to respond to the recession by cutting back the public sector, and therefore the role of government, is all the more surprising when it was the public purse that had to be opened, at the taxpayer’s expense, in order to save the global economy from the consequences of the private financial sector’s irresponsibility. The sharply increased indebtedness of governments around the world is the direct result of the money borrowed and spent on bailing out a failed banking sector; in addition, the current deficits in government accounts are a secondary outcome, via a recession-induced slump in government revenues, of the same failure.

    Rather than sheet the responsibility and the burden home to where they belong, however, governments have spent billions on helping the banks to shore up their balance sheets, with the perhaps unintended result that the banks have continued to pay out massive bonuses to their employees. It is the taxpayer that must now pay the burden, not just in repaying borrowings made to deal with the crisis, but in suffering the cutbacks in public services and the loss of jobs that are the inevitable consequences of current policies.

    The G20 were not even able to compel the banks to accept, as had been foreshadowed, tighter rules about capital reserves and lending ratios. While President Obama has introduced tighter regulation of US banks, other governments have dragged the chain – and, while individual voices have been raised in support of measures like a Tobin tax on financial transactions, no government has so far given them consideration. In view of this timidity in dealing with the banks, we cannot be surprised that no one apparently stopped to wonder why, if the taxpayers put up the money, they did not acquire the ownership interest – and, even more pointedly, why it did not occur to anyone that, if banking so obviously relies in the last resort on underpinning by the public purse, we should perhaps recognise that banking is in essence a public function.

    1. 4. Free trade is the only answer. Our experience in New Zealand of free trade over 25 years, during which the much-touted benefits have failed to materialise, has not deterred our policy-makers from pressing on. Potential free trade agreements are now coming thick and fast, and include most recently a Trans Pacific Partnership Agreement which would, if completed, bring us into a free trade relationship with, amongst others, the United States. Typically, the attempt is being made to sell the deal by focusing entirely on the supposed benefits to our dairy exports, despite the growing evidence that powerful American interests are making it their business to ensure that tariff-free access to the American market for those exports will not be made available.

    Little attention is paid, on the other hand, to the obvious downsides, which include threats to the organisation (through cooperative marketing) of some of our major exports, to our effective strategy (through Pharmac) in keeping down the cost of pharmaceutical imports, and to our (theoretical) ability to resist overseas purchases of our assets. These are remarkable blind spots for a country that seems in any case to have derived so little benefit to its economic performance from two and a half decades of free trade.

    1. 5. The sale of our assets to overseas buyers is good for us and our economy. It might be thought that, having sold off a large proportion of our productive capacity and economic infrastructure to overseas owners, and having suffered the consequences of loss of wealth and loss of control over our own economy, to say nothing of the increased burden on our balance of payments, we might be a little chary of going further down that path. Our government, however, is not deterred by our experience or by the blow delivered by the global crisis to the neo-liberal doctrines that apparently endorse the policy of an open market in New Zealand assets; their policy is to further weaken such protections as we still have against an overseas buy-up of our remaining assets and to welcome what they choose to treat as an “expression of confidence” in our economy rather than as a fire sale.

    This laissez-faire approach has been seen most recently in the Chinese bid to buy a significant part of our dairy industry. That bid, whose effect would be to remove from New Zealand hands, and – in an almost physical sense – from New Zealand itself, a measurable part of our wealth-producing capacity, so that the wealth produced by that capacity went more or less permanently overseas and New Zealanders were left as relatively low-paid wage slaves on what had been their own land, is currently being considered by the Overseas Investment Office as merely a matter, apparently, of the business reputation of the prospective buyers. There is no indication so far that any issue of principle is involved.

    1. 6. Private ownership and the profit motive are the best guarantors of economic efficiency. New Zealand, consistently with the commitment of successive governments to the “free” market as the driver of economic efficiency, has a 25-year history of privatisation. Like so much else in the neo-liberal agenda, repeated privatisations have done little to raise the level of performance, and in all too many cases, privatisation has meant only profit-gouging by private owners who have then sold back the enterprises – inadequately invested and saddled with debt – into public ownership; the New Zealand railway system is an obvious case in point.

    Post-crisis governments, however, including New Zealand’s, have not lost their faith in privatisation as a panacea for all economic ills. The current government is already moving towards a partial privatisation of the Accident Compensation Corporation, and further privatisations – Television New Zealand, for example – are clearly in sight. The fallibilities of the global masters of the world economy have not dimmed the faith of our leaders in the ability of business leaders to work the oracle.

    1. 7. There is no alternative to the macro-economic policies that have been pursued for 25 years. It might be thought that the greatest economic upheaval in 75 years might have prompted a re-appraisal of the policies that have served us poorly over two and a half decades. Sadly, this seems not to be the case. To be fair to the Governor of the Reserve Bank, he has indicated from time to time that he is prepared to look at measures to supplement the current reliance on the sole instrument of interest rates, and his requirement on prudential grounds that bank lending should be more responsibly tied to capital reserves may be the first swallow of a new summer.

    The government, however, shows little interest in widening the goals of policy, or in adding new counter-inflationary instruments to the armoury. As a consequence, there is increasing evidence that, if we were able to haul ourselves painfully out of recession within the current policy framework, any recovery would be quickly knocked on the head by the familiar combination of high interest rates and an overvalued dollar which is already gearing up before our very eyes. Little wonder that investment languishes and recovery is uncertain.

    What is to be Done?

    It would be easy to subside into despair as we see the greatest economic crisis of most lifetimes – a crisis brought about by manifest and egregious errors of policy and understanding – come and, hopefully, go without apparently disturbing the simple certainties of a self-serving orthodoxy that should surely have been discredited. If, at this precise moment, governments cannot learn lessons and strike out in new and better directions, what hope is there of a better future?

    There are of course never any final battles in politics or economics. The balance of advantage swings from one position to another in often belated response to our understanding of real events. The consequences of the global financial crisis will be real enough, and our understanding of those consequences will evolve and grow for years to come. We must hope that the lessons will not be driven home all over again by an almost immediate relapse into a double-dip recession, brought about by the failure to recognise what went wrong in the first place and what must be done to correct it.

    In the meantime, we must equip ourselves with the knowledge and the arguments to carry the debate to those who are reluctant to listen. We should ensure that the lessons are so clear that they cannot be ignored.

    Bryan Gould

    2 July 2010

    This article was published in the August issue of Watchdog, the journal of CAFCA (Campaign Against Foreign Control of Aotearoa)

  • Standing Up for Ourselves

    Prime Minister John Key was seen at his best in Nelspruit, South Africa, when the All Whites achieved their famous result against Italy. He was there supporting our team, celebrating their success, blowing a vuvuzela and praising the team’s “courage and pride.”

    Back home, however, “courage and pride” were less in evidence. A New Zealand MP, within the precincts of our own Parliament, had been roughed up by Chinese security officers. This was seen as requiring an apology to the Chinese on behalf of the New Zealand people for the embarrassment caused to the Chinese Vice-President.

    Let us be clear. This was a straight conflict of political cultures. On the one hand, the Chinese intolerance of free speech, let alone protest, and on the other, our proud history of human rights, freedom of expression and tolerance of political dissent.

    In this area, and quite apart from the intrinsic value of the human rights that we take so much for granted that we seem to think that they are scarcely worth defending, we do indeed have a proud record. We regularly top international assessments for the effectiveness of our democracy. We are recognised as pioneers who have been the standard-bearers for a whole range of social and political advances. When we speak on issues of free speech, we are listened to with respect.

    We rightly celebrate our sporting success but our record on human rights is truly a matter for national pride. We demand in the way we conduct our public affairs a range of democratic freedoms that are not only stamped on in China but where even an attempt to exercise them would lead to prison or even execution. A peaceful protest against government policy in China would not only be suppressed immediately; it would not even be reported.

    It was necessary to apologise to the Chinese, so we are told, because we owed the Chinese Vice-President, as an invited guest to this country, a duty not to embarrass him. But this is to allow the Chinese to import their political culture into our Parliament. Protest is, by definition, embarrassing and even offensive to those whose interests are challenged. Freedom of speech isn’t worth much if it is only acceptable when it suits the interests of those in power. If that were the case, we should stop posturing and pretending and concede that our human rights are worthless when it comes to the crunch.

    We have instead entered an Alice-in Wonderland world where government ministers feel able to say with a straight face that a scuffle in which a flag was seized from a peacefully protesting New Zealand MP by Chinese security guards at the entrance to Parliament and that was clearly seen by reporters on the spot and shown on television news programmes was in fact an assault by that MP on Chinese officials for which an apology was required.

    It must surely have required a very powerful motivation to prompt people who expect to be taken seriously to come up with such a laughable distortion of what happened. We are assured that our new dependence on trade with China was not a factor, but it is hard to see what else could explain such a craven response.

    The irony is that it is precisely our relationship with China that is likely to suffer in the long term. Even if we do not apparently have enough self-respect to stand up for what we say we believe in, it is the respect of others – not least the Chinese – that is truly at stake.

    The relationship with China is, we hope, one for the long term. But if, at the outset, we demonstrate that we are pushovers, that we are prepared to ditch our supposedly most fundamental values for the sake of staying in Chinese good books, what chance is there of the relationship developing in any way other than that of a client state entitled to no respect or consideration? Surely we trade with the Chinese because we have products they want and for which they are prepared to pay a fair price, not because we will give up our principles at the sight of a five-dollar note?

    And it is not only the Chinese who will draw the conclusion that we are full of wind and no substance. When we speak up for the rule of law and freedom of expression on behalf of those who are repressed, in countries like – for example – Fiji, do we now expect them to take us seriously? We do not even allow Fiji’s political leaders to come here, let alone be protected from protest when they get here; is that because it is easier to pick on the little guys?

    For once, John Key’s touch may have deserted him. Many of those who have no sympathy with Russell Norman’s protest will come to see that they would be aghast if their own right to protest at something they felt strongly about were to be trampled on. When minds have cleared and the immediate party political loyalties have subsided, New Zealanders who are rightly proud of what we have achieved in this free country will view this episode as a source, not of pride, but of shame.

    Bryan Gould

    23 June 2010

    This article was published in the New Zealand Herald on 29 June.

  • Wealthy Individuals Do Not Hold the Key to a Stronger Economy

    As the smoke clears, and the mirrors are packed away for another year, we can now make a more considered judgment of the 2010 budget. It should straightaway be acknowledged that the budget was a well-balanced and intelligent exercise, with something in it apparently for everyone. There may be a raised eyebrow as to why a Paul Reynolds of Telecom deserves an extra $3500 per week from the tax cuts, while the average family has to get out a calculator to check whether they will be better or worse off by a few dollars, but – on the whole – people see income tax cuts more clearly and place a greater value on them than they do on GST increases of the same monetary value. Politically, the budget will play well.

    A similarly positive assessment can be made of the budget’s underlying fiscal stance. The deficit, about which there was so much alarmist talk a year ago, will keep on rising with a consequent boost to economic recovery, and yet is still projected to rise less and come down sooner than was earlier forecast. Indeed, the positive noises about the government’s finances lead one to wonder why we allowed last year’s budget to be so totally circumscribed by Standard and Poor’s narrow view of what was required. A more confident budget last year could have seen a stronger recovery today.

    But what of the most important of the government’s stated budget objectives – the promotion of growth and a better economic performance? Here, the report card is much less favourable.

    The budget seems to be driven by a view of how the economy works that is intuitive rather than reasoned or supported by evidence. The government believes, apparently, that if the wealthy can earn more and keep more of their wealth, they will work harder and invest more, and we will all benefit as a result.

    There are many things wrong with this view. First, it is not supported by the evidence, and is contradicted by the experience of those countries which have tried it. It rests on the discredited “trickle down” theory, which flies directly in the face of the correlation, in countries like the US and the UK, between greater inequality and greater proportionate rewards for the wealthy on one hand, and on the other hand, a poorer economic performance, including more irresponsible behaviour and a greater propensity to financial meltdown.

    The evidence suggests that if the spending power of the wealthy is increased, it does not “trickle down” to the rest of us through greater investment and a keener eye for new opportunities, but manifests itself instead in more ostentatious and unproductive consumption. If it is invested at all, it is directed into riskier and less worthwhile get-rich-even-quicker schemes, rather than into the substantial strengthening of our productive capacity through solid investment in the whole economy – investment that, to its credit, the government is trying to make in research, and needs to make in our economic infrastructure and in the education, skills and health of our workforce.

    But the main concern about the budget approach is that it reveals a limited and out-dated understanding of how a modern economy works, though one that obviously commends itself to those like the wealthy whose interests it serves. The pages of Adam Smith might suggest that an economy comprises an agglomeration of unrelated individuals, each pursuing their own private interests to the general advantage, but that is not how a successful modern economy works. Economies are huge and complex mechanisms that respond to broad policy settings that determine major issues like competitiveness, profitability, investment and productivity. They are not driven by individual motivations but by responses across the board to broad economic realities.

    There is little point in offering tax hand-outs to wealthy individuals, if macro-economic policy settings ensure that investment in productive capacity will not produce a worthwhile return, however it is taxed. The government shows no sign that, as we come out of recession, it will abandon overall policy settings that will once again knock the top off any recovery by burdening the whole economy with high interest rates and an overvalued exchange rate.

    Why should we expect that offering additional discretionary purchasing power to a few wealthy people will do the trick, when the price competitiveness and profitability of everything we do is undermined because every domestic cost is raised in international terms to uncompetitive levels, with knock-on and adverse consequences for investment and employment, and in the end living standards as well?

    That would be as sensible as expecting to win the Rugby World Cup off the back of a couple of brilliant individuals, while overlooking the fact that the rest of the team cannot pass, catch the high ball or throw the ball into the lineout straight. Missing out on the Rugby World Cup would be one thing, but we might also fail in our attempt to move up the OECD league tables if we can’t get the basic skills right and the whole team playing well.

    Bryan Gould

    24 May 2010.

    This article was published in the NZ Herald on 26 May.