• The “Best” System?

    In 1974, as a newly elected MP for Southampton Test in the British Parliament, I was interrupted mid-speech on one occasion by a Liberal from the benches opposite. “How can you claim to speak for the people of Southampton,” he demanded “when you got only 39% of the vote?”

    “Who would you replace me with?” I rejoined. “With the Liberal candidate, who got only 23%?”

    That summed up for me a powerful advantage of the first-past-the-post voting system. If the purpose of a general election is to send a representative for each community to Parliament (and a House of “Commons” is historically a house of “communities”), it is hard to go past the candidate to whom that community gave more votes than any other.

    The other great virtue of first-past-the-post is that it almost always produces a clear-cut winner. This is valuable in itself, but it also has a couple of further advantages. It means that the voters themselves – rather than deals done by the politicians after the votes are counted – decide the result. And the voters have that greatest of all powers in a democracy – the ability to throw out one government and to replace it with an identifiable and alternative government-in-waiting.

    These virtues of certainty and predictability could be contrasted with the confusion and uncertainty that so often followed general elections in countries that used proportional representation systems. It seemed often that the voters played only a bit part and that the real decisions were left to the manoeuvrings of the politicians after the election.

    In some countries, this meant that – however often the voters were asked – the outcome did not change. Post-war Italy, for example, had a record number of general elections, but the voters could never get rid of the Christian Democrats who simply came up with differing combinations of themselves and minor parties. In other countries, by contrast – and Israel was for a time a prime example – the results were completely arbitrary, with small, extreme parties often deciding who should form the government.

    For all these reasons, I remained committed while in Britain to the traditional first-past-the-post system. Indeed, I once sat on a Commission that was asked to recommend any changes that might be needed to the British electoral system. I confess that I was instrumental in ensuring that the Commission made no such recommendation.

    And I recall that, at the time of the 1993 New Zealand referendum on MMP, and while I was still in the UK, I was telephoned by the organisers of the anti-MMP campaign and asked for advice and a statement of support for their position. I would have voted against MMP in that referendum.

    Eighteen years later, I am older and, I hope, wiser. My reasons for seeing virtue in first-past-the-post seem to me still to be valid, and my concerns about the dangers of proportional representation still carry weight.

    But my experience of MMP has given me a greater appreciation of how its advantages stack up against the downsides of first-past-the-post. And what I now understand is that no system is ideal. Each has its strengths and weaknesses, and delivers its own particular benefits and drawbacks. In the forthcoming referendum, the question is not so much which system is “best” but rather, what do you want your system to deliver?

    MMP supporters have always promised that it will deliver a fairer and more representative parliament and a more effective voice for otherwise unrepresented minorities. That promise has largely been delivered. And MMP has also meant to an end to what Quintin Hogg famously called the “elective dictatorship” – the power of a party with a parliamentary majority (even if it obtained only a minority of the total votes) to do whatever it wants without regard to anyone else.

    MMP has meant that major government parties have been forced to take a more inclusive and conciliatory approach to other views and interests. They have seen the need to negotiate for support before introducing legislation, rather than relying on a parliamentary majority to ram it through – and that has meant, on the whole, better legislation and a more constructive parliament.

    But the major surprise is that, even with these advantages, MMP has not denied us a fairly straightforward choice between broadly right-of-centre and left-of-centre governments. We get, in other words, the best of both worlds; we have made the promised gains in the sense of a more equitable representation without sacrificing our ability to choose between readily identifiable options as to who should form the government. And we still have that essential power to throw one government out and replace it with another.

    This is not to say that MMP should be uncritically supported. No one watching the machinations in Epsom, for example, could say that change is not needed. I, for one, remain unhappy at the power exercised by party machines in deciding who should get into parliament via the party lists. And we need to watch carefully that fringe parties do not gain disproportionate influence over what our governments do.

    But, in deciding which way to vote in the forthcoming referendum, we can at least applaud the genius of the New Zealand electorate who have ensured that, without achieving anything like perfection, we have at least created a system that works pretty well.

  • The Don and Rodney Show

    Rodney Hide’s declaration of allegiance to the man who had just cut his political throat was, I suppose, only marginally less bizarre than Don Brash’s compulsion to lead something, anything. One suspects that, if he had been thwarted in his drive to lead a political party, he would have announced his intention to found a new country, so that he could lead that instead.

    Yet the extraordinary spectacle of the Don and Rodney show has a wider significance than the question of which of two egocentrics should lead a minor party on the margins of politics. Ever since the Labour Party was taken over in the mid-1980s by extreme “free-market” ideologues, New Zealand politics has struggled to recover some sense of what political labels really mean.

    It is in everyone’s interests – and is certainly an essential element of a healthy political system – that politicians should take up positions that are consistent with their true beliefs and policies. The Labour Party has at last re-established a recognisably left-of-centre stance, which the voters – whether they support it or not – can identify and understand.

    Don Brash’s migration to the leadership of the Act party is similarly helpful. It means that he is at last positioned where he should have been all along, and can now openly make common cause with his old mentor, Roger Douglas.

    It also provides confirmation, if we needed it, that his brief leadership of the National party was an aberration – the product of a “hollow men’s” conspiracy, not just against the voters in general but against the National party itself.

    It was, presumably, his success (albeit short-lived) in hi-jacking the National party – backed as it was by wealthy but largely undeclared co-conspirators – that explains his assumption that he could repeat the trick with Act. We should all be grateful that at least we all now know where we – and he – now stand.

    Most of us will have been open-mouthed but relatively detached observers of recent events. For the National party, however, there may be real consequences of the change in Act’s leadership.

    On the one hand, if Don Brash is right in arguing that his leadership will provide a lifeline for an Act party that was otherwise in a terminal condition, John Key will have good reason to welcome the change. The deal whereby an Act success in holding on to Epsom provides National with five or six additional support MPs will clearly be advantageous in the event of a close election result this year.

    On the other hand, a close link in the voters’ minds between John Key and Don Brash may not be helpful to National’s chances with voters beyond the boundaries of Epsom. John Key’s cautious reaction to the prospect of Ministerial office for Brash, and his rejection of any possibility that the new Act leader might take an economic policy portfolio, show that he is all too aware of the possible risks to National of a higher-profile Act leader – particularly when that leader is Don Brash.

    The risk is all the greater when the voters know much more now about Don Brash’s true politics than they did. Many voters will have concluded by now that we all had a lucky escape when Brash – in his National guise – was narrowly defeated in the 2005 general election. They will not welcome the prospect of a Brash re-entry to front-line politics through an Act back door.

    That is especially true at a time when New Zealand voters are being asked to re-evaluate their MMP voting system (interestingly, at the same time as British voters will also vote on a possible proportional representation system).

    Proportional representation inevitably throws up the issue of what role could and should be played in parliament and in government by small, perhaps extreme, parties on the fringes of politics. The fear of those who support first-past-the-post is that PR will allow extremists to exercise an undue influence over the government of the day.

    The good sense of the New Zealand electorate has, however, done much to lay those fears to rest. MMP has largely delivered the more representative parliament that was promised, with better representation of women and minorities, and has ushered in a style of government that operates more by negotiation than by diktat.

    And this has been achieved without sacrificing the central virtue of a first-past-the–post system – the voters’ ability to throw one lot out and replace it with another. The New Zealand electorate still chooses between a right-of-centre and a left-of-centre government, with a continuing assurance that small, extreme parties will not be allowed to exercise a disproportionate influence.

    A major party that allowed that assurance to be called into question could pay a heavy price. John Key cannot let it be thought that a vote for National is a leg-up for Don Brash. The back-stabbing intrigues of minor politicians should not be allowed to mean the intrusion of extreme policies into our mainstream politics.

  • The General Election Judgment

    A three-year electoral cycle may have its detractors – and, many would say, with good reason – but it is usually popular with first-term governments. The record shows that three years is not really long enough for voters to reach a definitive view that a recently elected government has failed, and the benefit of the doubt will usually mean a second term.

    Add to that a Prime Minister with an unusually acute instinct for the popular gesture and the 2011 election might reasonably be thought to be a shoo-in. There is, however, one possible fly in the ointment.

    “It’s the economy, stupid,” might not be such an obvious determining factor as it was claimed to be in Bill Clinton’s run for the presidency, but the way Kiwis feel about their economic situation on election day will clearly have a bearing on how they vote. And on that issue, the government’s record may not bear too much close scrutiny.

    The government inherited an economy which had already been in recession for most of a year, and which had then been assailed by the global financial crisis. Dealing with that recession and building an economy which would – as we emerged on the other side – reverse our decades-long comparative decline, was surely the most pressing task facing the new government.

    How, after three years in office, will the government be judged to have done?

    They have, after all, had their fair share of good luck. Record commodity prices have underpinned the economy and helped the balance of trade. Our banking sector has remained, by world standards, remarkably stable – though the same can’t be said of our finance companies. Our major export markets – Australia and China – have been beacons of light in the recessionary global gloom.

    Yet – our unemployment remains stubbornly high, the retail trade is flat on its back, the housing market has stalled, business confidence is low and business investment equally so, the protections that the vulnerable depend on in tough times have been reduced, and the talk is all of further cuts.

    The early flush of energy and enthusiasm – remember the “jobs summit”? – seem to have evaporated. The recession has lingered on well beyond what the forecasters predicted. There is precious little to show that the government has done more than hold the ring. We look in vain to see where the lift in demand and employment is to come from.

    And, most seriously, if and when we do recover, there is no evidence that anything will have changed. The problems that have dogged us for decades will remain unresolved.

    That, after all, was the central point made by Standard and Poor’s before Christmas. When they warned of a credit downgrade and placed us on negative watch, they pointed the finger specifically at the prognosis that, as we eventually do emerge from a protracted recession, all of our entrenched problems will also re-surface.

    They predicted that we would return to our bad old ways of failing to save and invest and wondering why our productivity does not improve faster, of bingeing on artificially cheap imports and expecting to be able to borrow overseas to fund our excessive consumption, of wringing our hands while our counter-inflationary policies force up interest rates and an already over-valued exchange rate.

    It was the prospect of the resultant deficit – the country’s rather than the government’s – and our reliance on overseas borrowing, that caused them real concern. Unusually, a credit-rating agency seems to be taking a longer-term view than that of our own government. Their message seems to be that, unless we grapple with those long-term problems, our credit rating is at risk.

    If all of this remains true on election day, if the remnants of recession still linger on and we are poised to resume the unsustainable rake’s progress that has held us back for so long, how will the voters mark the government’s report card? It has to be said that, as the outcome of three years in office, it would not look good.

    The government would surely not want to face the voters with a record that shows that nothing had really changed. Changes to the tax system, a renewed and welcome emphasis on research, and largely administrative fiddling with the delivery of education and health services may have their proponents but are hardly the stuff of fundamental economic reform.

    The Prime Minister is nothing if not a pragmatist. As he approaches the election, he will figure that he has most bases covered. He would be uncomfortable, therefore, with any vulnerability on his government’s economic record. Can we expect that he will understand the need – however belatedly – for an “agonising re-appraisal” when something isn’t working and to strike out in a new direction?

    Bryan Gould

    18 January

    This article was published in the NZ Herald on 24 January.

  • Good Government Matters

    Government over recent times has got itself a bad name. Politicians are of course always regarded as fair game, particularly by media whose proprietors often see themselves as competitors for power, but the critics’ task was of course made immeasurably easier by the expenses scandal. The damage suffered as a consequence of that self-inflicted wound has cleared the way for a renewed assault – by right-wing politicians and media alike – on the whole concept of government.

    The notion that government is the problem, not the solution, is of course not new, and was famously and explicitly asserted by Ronald Reagan. It has never been strictly true of course that the right have disowned government as such; what they have wanted is government that serves the narrow interests of a privileged minority rather than a wider society. So, right-wing governments (including New Labour) have generally overseen an expansion of government in areas like security, law and order, defence, and – in economic policy – maintaining the value of assets and preserving the privileges of the wealthy.

    It is nevertheless a surprise that the new coalition government should feel so clearly mandated by what was at best a confused election result to commit to smaller government as the central element in its programme. The major task faced by the coalition after all is to lead the country out of a financial crisis that, having been created by the failures of the private sector, was only just averted by the government doing what only government could do – using its authority and legitimacy to underpin the banking system and guarantee the value of the currency.

    It is surely one of the miracles of the modern world that a private sector meltdown whose malign consequences are still with us, and against which the only defence proved to be the power of government, should have led to savage cuts in the role of government.

    It is to be expected of course that – in tough times – the powerful should try to shift the burden on to the less powerful whose diminished voice means that they are less able to complain. The speed with which the lessons of the crisis have been re-interpreted in favour of less government rather than more is testament to the ability of the powerful to defend their interests. What is a surprise, however, is the readiness of other elements – including the junior partners in the new coalition government – to abandon government as the major means of achieving economic recovery and re-asserting the need for social justice.

    A loss of faith in government seems now to have infected opinion across most parts of the political spectrum. Even on the left, there is a marked tendency to look for salvation anywhere but government. It is almost as though the left has concluded that – so disappointing was the experience of being in government – there is nothing more to be gained from that quarter. Nothing more clearly demonstrates how thoroughly New Labour let down its supporters.

    Much political activism on the left now takes the form of community-based initiatives of one kind or another – whether it is support for a local currency or various forms of collective self-help or the development of local power schemes. The common factor in all of these small-scale projects is their conviction that ordinary people should take responsibility for changing society, or at least their bit of it, and that government is just another part of the conventional power structure – along with the bastions of capitalism – that has to be overturned.

    There is much talk of the need to engage “civil society” as the essential element in changing society. Government, it seems, is to be by-passed as a snare and a delusion. There is an almost romantic sense that ordinary people possess an innate wisdom and goodness that are somehow sullied and rendered ineffectual by the formal and structured processes of democratic government.

    No one, of course, who wants to see a better and fairer society could object to the impulses that drive these initiatives. But it is distressing to see the efforts of earlier generations to achieve universal suffrage and democratic government so casually set aside. Our forebears saw the power and legitimacy of representative and elected government as the essential safeguard against the overwhelming power of the capitalist and boss, the one guarantor that the interests of everyone and not just the powerful would be properly protected and advanced.

    Community-based initiatives have their value but, as a means of changing society, they are too small-scale, fragmented and dispersed to make much impact. Nothing will better serve the status quo than the concession that government should be limited to protecting the interests of the powerful and that proponents of change should look elsewhere. A new Labour opposition leader can best confront the coalition and restore the faith of Labour supporters by re-asserting that good government matters.

    Bryan Gould

    22 August 2010

  • 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)