Was It All A Mistake?
As the euro zone’s long drawn-out agony staggers towards its inevitable conclusion, at least one issue is nearing resolution. Just as in the 1930s, it has taken a long time for the ideologues to accept that their nostrums do not counteract recession but make it worse.
Even the high-priestess of austerity, the German Chancellor Angela Merkel, has begun reluctantly to admit that what Europe now desperately needs is a strategy for growth. Without a change of direction, in other words, not only Greece and Spain and the whole of the euro zone, but the global economy as well, are staring renewed recession in the face.
We in New Zealand, of course, along with the rest of the world, are directly affected by the mistakes Europe’s leaders have made. But – fascinatingly – we have unexpectedly had our own domestic echo, in the words of our own Prime Minister, of the European debate.
Our own government is now well into its fourth year of grappling with the recession. Throughout that time, our leaders have relegated issues like growth, full employment, competitiveness, and investment to the back burner. The issue that matters most to them, it seems, is the government’s deficit.
Their priority has been to cut government expenditure – notwithstanding that, by international standards, the government’s finances (unlike the country’s) are in reasonably good shape, and that cutting spending to get the deficit down has actually, by depressing tax revenues, made matters worse.
The government has nevertheless preferred ideology over the practical evidence. Our economy continues to languish, and the deficit persists, because they take a Merkel-like view of what is needed to recover from recession.
They have placed their faith in what the Nobel Prize-winning economist, Paul Krugman, calls the “confidence fairy” – the belief that the money markets will respond positively if governments are seen to cut their spending. The markets are not, however, that easily distracted (and nor are the credit rating agencies).
As one economy after another looks in vain for the “confidence fairy” to appear, economic reality has a habit of intruding ever more insistently. That realism has now, it seems, even reached New Zealand.
The Prime Minister has over recent times begun to drop heavy hints that eliminating the deficit by 2014-15, which has up till now been the litmus test of his government’s credibility, may not be achieved. In one of those increasingly frequent moments when he appears to make policy off the cuff, he was even more specific last week on National Radio.
But it is the reason he gave for this shift in strategy that is really interesting. He would not, he said, stay committed to the 2014 deadline if that meant he had to “drag the economy back into recession”.
Here, at last, is a recognition that, in New Zealand as in Europe, there is a trade-off in our present situation between cutting the deficit on the one hand and economic recovery on the other. It may be doubted whether the Prime Minister was fully aware of the significance of his remark, but the rest of us should be in no doubt.
What it means is that we have wasted nearly four years pursuing the wrong strategy. That has unnecessarily cost us lost jobs and national wealth, and has meant we have had to increase our borrowing and make a painful fire-sale of national assets.
It remains to be seen what the Prime Minister’s Finance Minister, Bill English, and the Treasury Chief, Gabriel Makhlouf, will make of this admission and change of direction. The role of the Treasury Chief is particularly interesting.
He was recruited from the British Treasury presumably because his background there was seen as guaranteeing his commitment to austerity orthodoxy. He may well be surprised by the Prime Minister’s change of emphasis; or could it be that, having seen the damage done by that orthodoxy in the UK, his was one of the voices that brought about the change?
In any event, the Prime Minister’s change of heart might discourage the constant repetition, even by those who should know better, of the simple-minded mantras that “you can’t spend what you don’t have” or “if you have to borrow you should be declared bankrupt.”
These pearls of wisdom are constantly offered as justification for the austerity strategy which has proved so disastrous across time (the 1930s and the present day) and space (Europe and New Zealand). They rest on the false assumption that governments are no different from individuals and businesses – though have those giving this advice never heard of mortgages or bank loans?
But governments are in truth quite different from individuals and businesses. They have a wider responsibility to the whole economy and accordingly many more options for bringing about recovery, including adjusting fiscal and monetary policy, and – where appropriate – borrowing to invest or even printing money if that makes sense in context.
Decisions about those issues have to be made carefully and with proper regard for their consequences – there are no options of course without downsides. But that is what government is about. Even the Prime Minister now seems to have realised that continued cuts are not the path to recovery and that a different strategy is needed.
Bryan Gould
24 June 2012
Opening Our Minds
Over the past four years of recession, we have seen a re-run of the debate that surrounded the Great Depression. In the 1930s, there were those, like Herbert Hoover, who insisted that austerity – by cutting government spending – was the way to beat recession. Others, like John Maynard Keynes, were convinced that the remedy was stimulus and expansion.
In the event, it was a no-contest – and so it is today. It is now clear that the austerity being inflicted on the benighted Greeks cannot work, but even the other “PIGS” – Portugal, Ireland and Spain – who have done everything required of them by the austerity disciplinarians, have found that they are going backwards, deeper into recession and with a rising ratio of government debt to GDP.
And while the British may have avoided the problems of euro membership, they chose to impose their own home-grown austerity. The result? They are mired in a recession that threatens to be worse for them than the 1930s.
In the US, by contrast, President Obama’s stimulus programme – bitterly opposed and relatively timid as it was – is pulling the US economy around. There can now be little doubt that stimulus is the key to beating recession. The time for austerity policies, after all, is when the economy is booming; in a recession, they are the last thing we need.
As that reality becomes increasingly difficult to deny or ignore, where do we in New Zealand stand? Sadly, we find ourselves with Herbert Hoover, down an ideological cul-de-sac with nowhere to go. The proponents of the current orthodoxy now don’t even bother to defend it; they promise merely a continuation of the long drawn-out stagnation – resorting, like school-kids in the playground, to challenging their critics to offer something better.
The critics seem increasingly ready to respond to that challenge. A recent example is Bernard Hickey’s interesting suggestion that we should consider “quantitative easing” (or, as it used to be called pejoratively, “printing money”).
It may not be the first option to come to mind but it is not as way-out as it seems. Many governments (including the current UK and US governments) have “printed money” from time to time – and banks do it all the time, lending money that they do not have, and thereby creating most of the money in our economy out of nothing. If it’s all right for them to make billions from doing so, why shouldn’t governments do it in the public interest, and so get the economy moving?
There are, of course, many other proposals that offer an alternative to the failed orthodoxy. Here, in 400 words, are a few suggestions, which – if implemented – would go to make up a coherent programme.
· Put beating unemployment centre stage by investing in much-needed infrastructure projects, so as to raise demand and create new jobs –a virtuous circle which would also help retailing, and private sector investment and productivity.
· Get the exchange rate down to improve competitiveness so that higher demand is met by New Zealand, and not foreign, industry; do so by ending the use of high interest rates and over-valuation as counter-inflation tools and focusing instead on the real cause of inflation – excessive and irresponsible bank lending for non-productive purposes. As soon as foreign speculators are denied an interest rate premium and an unearned capital gain, the dollar’s value will fall.
· Remove the balance of trade constraint on expansion by boosting exports through improved competitiveness, so cutting the interest and profits paid to overseas lenders and owners; this will allow us to expand while paying our own way, so reducing the need to borrow overseas or to sell our key assets to foreign owners.
· Encourage saving and exports rather than consumption and imports by promoting further saving through tax breaks, and – since imports will become comparatively more expensive than domestic production – reduce the incentive to spend on cheap imports at the expense of New Zealand jobs and production
· Tackle the government’s deficit by collecting a sharply increased tax take as a more buoyant economy generates much greater tax revenue
· Reduce widening inequality by discouraging excessive salaries, introducing a fair tax system (including a capital gains tax) and stopping the destructive insistence on inflicting the cost of the recession on those least able to bear it – the low-paid, the unemployed, and beneficiaries.
· Expect improved competitiveness, productivity and profitability in the private sector to stimulate increased investment, especially in skill training, education, and research so as to utilise fully our potential human capital and achieve an economy that reaches its full productive potential.
· Develop a close understanding of and support for Maori aspirations, given that Maori offer an important potential stimulus to new development and seem to have leaders with a better understanding than pakeha – on issues like asset sales – of what the country needs.
· Ensure that new investment is encouraged to develop advanced – and particularly environmentally friendly – industries based on green technologies.
This is all just common sense; none of it is revolutionary. It would rescue us from recession and set us on the right course for the future. It would optimise the market’s strengths and minimise its weaknesses. Don’t let anyone tell you there is no alternative.
Bryan Gould
27 February 2012
This article was published in the NZ Herald on 29 February.
Leadership for A New Crisis
When Anne Tolley disclaimed responsibility last week for misleading Parliament, blaming her department instead, those with long memories might conclude that we have come a long way from Crichel Down.
Crichel Down was a tract of land that had been compulsorily acquired for the war effort by the British government, on condition that it was returned to the owners when the war was over. After the war, the government broke that promise by retaining the land and leasing it to new tenants. The Minister, Sir Thomas Dugdale, who was personally unaware of the error, resigned when it was discovered because he believed that was required by the doctrine of Ministerial responsibility.
Modern governments seem to recognise no such doctrine. Public servants enjoy so little esteem, so it seems, that they are cheerfully thrown to the wolves when Ministers are asked to take responsibility for mistakes made by their departments.
It isn’t just the former Education Minister who rejects any responsibility for misleading Parliament. The Prime Minister, too, seems remarkably insouciant. His attitude suggests that, whereas it was the Prime Ministerial smile that was the leitmotiv of his first three years, it will be the Prime Ministerial shrug that characterises his second term.
We will see less of the affability he showed while basking in the public approval of his first term, and much more of the somewhat grumpy dismissiveness and impatience that we saw during the election campaign when he came under pressure. The task of an effective opposition, under its new leadership, will be to ensure that there are many more such moments.
David Shearer made a good start in appointing his new front bench. He struck a good balance of old and new, and made effective use of the considerable talent available.
He now has to show what he himself is made of. He won the leadership with the claim that he represents a fresh start, but freshness alone is a rapidly wasting asset and is not enough by itself.
He also has a claim (though it should be made by others rather than himself) that he can match, if not out-do, John Key in the niceness stakes. Indeed, he could re-define niceness to mean more than just a ready smile and a glib answer but rather a genuine concern for all our fellow-citizens, including the most vulnerable and disadvantaged. His own personal record of humanitarian service helps to give substance to that claim.
But what he now has to show is that he has the stuff of which leaders are made. Re-connecting with voters, and listening to what they say and want, is commendable, but leadership is about leading and not just following. We are entitled to expect from our potential leaders a view, if not a vision, as to where the country – and even the world – are or should be heading.
So far, our political leaders have shown no real grasp of the dangers we now face. We cannot expect a John Key government – content as it is to just go along for the ride – to face up to the challenges that confront us. Yet it is now clear that business – or politics – as usual will not cut it.
The last time we faced comparable risks was in the non-nuclear world of the 1930s. World leaders then failed abysmally to deal with the Great Depression. The consequent economic strains were not only disastrous for millions of people, but produced an international climate which led directly to the Second World War.
The risks this time are even greater. Today’s leaders, particularly of what we used to call the West, are repeating the mistakes of the 1930s; it is now virtually certain that the euro-zone’s crisis will drive us into renewed and prolonged recession. This time, though, in a nuclear world, a major international conflict would not have a happy ending – and our self-inflicted economic wounds would in any case leave us in a state of permanent weakness.
We desperately need leaders who can see wider and further than politicians usually do. We need to recognise that the world has changed, that the extreme “free-market” global capitalism that has prevailed for three decades has shown itself to be fundamentally flawed, economically and socially, and now threatens to impoverish and enfeeble us. We need to understand that others, less burdened by this same ideology, are doing much better than we are.
New Zealand, it may be thought, is no more than an observer of this unfolding tragedy. But that is not quite true. We are one of the most credible and at the same time most exposed proponents of Western values and the Western way of life. We have both an interest and a duty to propose the changes that are needed to avoid their destruction.
In the 1930s, our leaders led the world in striking out in a new direction to lead us out of recession. For David Shearer, winning the next election is of course a top priority. But winning elections is not enough. We need far-sighted leadership that will set the country on the right course.
Bryan Gould
21 December 2011
Europe’s Disaster
New Zealand observers of the long drawn-out death throes of the euro-zone might be excused for finding it hard to understand what is going on. They will have lost count of the number of times that Europe’s leaders have proclaimed that they have yet again found a permanent solution to the euro-zone’s ills.
The difficulty is compounded by the determination of Europe’s leaders – born of either self-delusion or a deliberate intention to deceive – to describe the worsening crisis in deeply misleading terms.
As Brian Fallow explained in these pages last week, the talk in Berlin and Paris is all about deficits. The crisis is caused, we are told, because euro-zone governments have irresponsibly spent like drunken sailors and have allowed their deficits to spiral out of control. This narrative is of course very congenial to fiscal conservatives.
The facts, however, tell a quite different story. Virtually all of the euro-zone governments, with the exception of Greece, have maintained a generally prudent stance, either staying in surplus or running deficits well within the 3% limit dictated by the Maastricht Treaty.
There have been of course occasions when individual governments have, for a short time and for good reason, temporarily run deficits above the 3% limit. And interestingly, these supposed miscreants have included those governments that are now leading the charge to tighten the rules yet further.
Even the Greek deficit is to be explained in terms that do not correspond with the story told by Merkel and Sarkozy. Greece is as much a victim as a culprit. Greece was never going to live with the monetary regime required by membership of the euro-zone and imposed from Berlin. It was the attempt to do so, without being allowed the usual remedies for lack of competitiveness offered by exchange rate and monetary policy that led directly and predictably to Greece’s current woes.
What was true of Greece is also true – to varying degrees – of many other euro-zone countries. It is the futility of the attempt to require so many diverse economies, at different stages of development and with such different interests, to subject themselves to a single and largely inappropriate monetary policy, that is the true explanation of the euro-zone’s difficulties. The deficit contagion is the result and not the cause of the crisis.
Not surprisingly, the mis-diagnosis of the malaise has led to a succession of misplaced remedies and, worse, a failure to grapple with the problem that demands and is susceptible to an immediate solution – the need to ensure that Europe’s banking system does not grind to a halt for lack of liquidity. That failure has placed the global economy in extreme danger of a double-dip recession.
But it is the longer-term outlook for Europe that is even more depressing. The so-called “solution” agreed in Brussels will simply make matters worse. Far from releasing member countries from an economic straitjacket, Europe’s leaders have decided in their wisdom to give the lock a double turn.
If the new arrangement holds, which seems doubtful, this would simply condemn Europe to an economic policy that makes it inevitable that half the European economy will, in effect, have to close down. Without access to exchange rate and monetary policies suited to their own circumstances, many euro-zone countries will collapse under the burden of policy dictated from Berlin. And just to make doubly sure, the new arrangement will tighten the rules and impose severe penalties for any breaches.
Committing Europe’s diverse economies to a one-size-fits-all blueprint would be bad enough. But the dangers are compounded because the blueprint is in fact a recipe for increased austerity across the board, whatever the needs of individual economies. Germany may prosper in conditions decided in Berlin; others will not be so fortunate.
The remedy for threatened recession is apparently that euro-zone governments must retrench, and achieve a fiscal balance at whatever cost, even if it means running their economies into the ground and thereby making their deficits worse. Such policies applied across Europe will simply drive the European economy into depression.
Democracy, of course, has played no role in any of this. The people of Europe are required only to bear the burdens of policy failure, not to express an opinion. In implementing the Brussels agreement, no consultation with democratic opinion across Europe is to be countenanced. Elected governments are to be supplanted by a political elite who, pinning their hopes on a political mirage rather than economic reality, are perfectly prepared to defy experience and common sense.
Does any of this matter to us? A failure of the European banking system, and a renewed financial crisis, would certainly hurt us. Our overseas borrowing, for example, would become much more expensive and difficult – and a prolonged European recession would also depress our major export markets.
But we should also be aware that the issues being played out in Europe have their echo here, albeit on a much smaller scale. The attempt to outlaw steps that elected governments in future might wish to take, for example, to get people back to work is not limited to Europe. Our own newly elected government has, it seems, signed up in its agreement with Act to do just that.
Bryan Gould
11 December 2011
This article ws published in the NZ Herald on the 13th of December
Travelling Further Down A No-Exit Road
By the time of the 2008 election, New Zealand had already been mired in our own home-grown recession for nearly a year. A response that would get the economy moving again quickly was clearly needed.
That urgency was reinforced by the global financial crisis that shook the world in the later part of 2008. Our Australian-owned banking system was mercifully affected only mildly by the turmoil, but the increased recessionary pressures across the economy as a whole made it all the more imperative that our new government should act decisively.
We waited in vain for that decisive action. Apart from a largely abortive “jobs summit” in early 2009, the government seemed content to sit out the crisis, waiting for others to bring the recession to an end – and this, despite the buoyancy of our main export markets and a rise to record levels in our main commodity prices.
The government’s main preoccupation was not –so it seemed – to get the unemployed back to work, so that incomes, purchasing power and demand would rise. They focused instead on government debt – surprisingly since, at just 23.4% of GDP, New Zealand’s government debt was one of the three or four lowest in the OECD.
They asserted that – successful though the Labour government had been in bringing that percentage down – it was now their main focus to get it down further. Only in that way, they believed, would confidence return, recovery from recession be achieved, a credit downgrade be avoided, and interest rates be held at low levels.
In expressing such faith in what the Nobel prize-winning economist, Paul Krugman, calls the “confidence fairy”, our government was following down a track mapped out by the leaders of other Western countries – those same leaders who had presided over the global financial crisis in the first place.
Let’s be clear. Manageable levels of government debt are clearly desirable. The question is not whether that should be the goal, or at least one of them, but rather whether the government’s chosen method of achieving the goal has been effective.
Three years later, how have we done? Did the “confidence fairy” appear and work her magic? The answer is sadly disappointing.
Despite the priority they had, the government’s finances remain in a parlous state. As Brian Gaynor pointed out recently, the government’s cumulative deficit over three years will rise to $35.5 billion, compared to a surplus of $35.6 billion under the Labour government. As a result, government debt will rise to 37.7% of GDP. Why has this happened?
The answer is really a matter of common sense. The main drag on government finances is the loss of revenue in an economy that refuses to grow out of recession – and, as this week’s figures show, still does. You don’t solve that problem by slowing the economy still further, by cutting what could have been a sensible investment in getting the economy moving again.
The government, in other words, backed the wrong horse. If they had concentrated on getting people back to work, so that they earned and spent more, the economy would not only have been more buoyant, but so too would government revenues. The deficit may have been higher in the short term, as the investment in our future was made, but it would not have been so persistently high now and over the longer term. Cutting government deficits does not promote recovery; it is the other way round.
Not only has the government failed to control its own deficits and debt. It has also increased the country’s debt, with the result that we have suffered the credit downgrades the government warned against, while the interest rates we pay to overseas lenders will rise.
It is cold comfort to know that we have not been alone in making these mistakes. In many other Western countries, the expected appearance, in response to austerity and cutbacks, of the “confidence fairy” has not materialised. The Conservatives in Britain, the eurozone’s leaders, the Republicans in the United States, have all pinned their hopes on austerity – and, as those hopes have been dashed, their only self-defeating remedy is to inflict yet more pain.
The “confidence fairy” seems unimpressed by more blood-letting, to which the nearest analogy is the use of leeches by medieval doctors to bleed their sick patients.
We may feel sorry for the Greeks or Italians, but we have suffered the same dead-end policies that they have had to endure – albeit, given the size of the eurozone economy, on a smaller scale.
We, too, have been driven by ideological tunnel vision down a one-way, no-exit road, unable to go forward or back – not a comfortable situation with a second recession bearing down on us.
And, in case the we try to blame our lamentable performance on the global financial crisis or the Christchurch earthquake, let’s be clear that our government blew its best chance of pulling us out of recession well before the full impact of those factors was felt – a point not depending on hindsight but made by me and others at the time.
If the exodus across the Tasman is to be stemmed, we surely cannot afford another wasted three years.
Bryan Gould
5 December 2011