• Unemployment? It’s The Fault Of The Jobless Themselves

    The latest figures showing higher unemployment may have dashed hopes that, in our fifth year of recession-induced stagnation, we have at last begun to recover, but we are still being offered the same old excuses. The problems arise, we are told, because of factors beyond our control – the Christchurch earthquake and the euro-zone crisis.

    No one would argue that these factors have been helpful; but the real reasons for continuing high unemployment are very much within our control. People are out of work because that is what free-market theory dictates.

    The theory takes a very simple view of how markets work. If the supply of a particular commodity exceeds the demand, the price will fall. So far so good; that is generally true of commodities, like sugar or coffee. Where the free-market ideologues part company with common sense, however, is in insisting that labour is just such a commodity.

    Unemployment happens, they say, because the supply of labour exceeds demand. This should mean that the price of labour will fall – in other words, wages should come down. The government takes the view that the remedy is therefore in the hands of the unemployed themselves; they can correct the situation by accepting lower wages.

    There are several points to make about this. First, bringing wages down is seriously at odds with the government’s declared goal of closing the gap, in incomes and living standards, with Australia. It is a little odd that closing the gap requires us to accept lower incomes.

    Secondly, the theorists are looking at only one side of the equation; by concentrating only on the supposed excess supply of labour, they take a completely static view of the demand for labour and of how a market economy really works.

    That demand could easily be raised. A more buoyant economy would mean that employers were keen to take on more people, but that could only happen with a change in policy – and that is negated by the government’s insistence that, as the theory requires, wages must be cut. If the government’s priority is to cut incomes and therefore spending, there is no hope of increasing demand in general and demand for labour in particular.

    The government, though, continues to pin its hopes on forcing down the price of labour, as though it were just another commodity. They refuse to recognise that labour is not merely a commodity, but is really another way of describing people’s working lives and their standards of life – that it determines the cohesion of families, the life chances of children, the strength of our society.

    In any case, after four years, we can say with some confidence that the policy has failed. Unemployment remains stubbornly high. The economy has stalled. But the government is not deterred. Ministers dare not say so publicly, but they use economists’ jargon to explain why unemployment remains high. Labour costs are “sticky” – that is, they have not fallen in order to clear the market, as the theory says should happen. Their conclusion is, therefore, that the market must be helped by “unsticking” labour costs to force them down.

    This explains so much of government policy. It is why workers’ rights at work have been weakened. It is why benefits are removed so that even solo mums with young children are forced back into the labour market, whether or not there are jobs. It is why the level of benefits is being cut and the minimum wage is held down while top salaries zoom upwards. It is why the government lends covert support to big overseas employers like Oceania or Talleys as they cut the real wages paid to already low-paid employees. It is why the government seems so relaxed about unemployment.

    The government has worked hard to put a euphemistic gloss on this policy. When the Prime Minister recently listed ten priorities in public policy, the first goal identified was to “reduce welfare dependency”. Few of those who no doubt nodded in support of such a policy would have stopped to understand that this is merely part of an overall strategy to force down wages.

    And the sad truth is that, even if the strategy succeeded in its immediate goal, it would still be bad news. Lower wages would just mean less purchasing power, and that would mean a more sluggish economy, tougher times for retailing, less money for investment – and it would mean the jobs market chasing its own tail downwards.

    If we are really concerned, as we should be, at our lack of competitiveness in international terms, there is a much more obvious, more effective and fairer way of dealing with it than heaping the burden on to the poorest in our society. A lower exchange rate would immediately cut costs across the board and ensure that everyone made a proper contribution to becoming competitive.

    But the theory doesn’t allow that. The exchange rate must be manipulated as a counter-inflation tool, whatever the impact on competitiveness. Isn’t it time that we kicked a theory that serves us so poorly into touch?

    Bryan Gould

    13 August 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.

  • Why Not for the Unemployed?

    Two South Island crises in the last couple of weeks have seen the government step up to the plate. The failure of South Canterbury Finance and the Canterbury earthquake were very different disasters but both required government – acting on behalf of all of us – to make good losses suffered initially by a minority but threatening to impact on the whole community.

    Despite their differences, the two crises shared common features. The initial bill in both cases will reach into the billions. The losses occurred through no direct fault of those who will bear the main brunt. The government quickly calculated that the cost of doing nothing would greatly outweigh the cost of doing what seemed necessary.

    It is of course the case that there will be many victims of earlier finance company failures who will ask why they were left without help while investors in South Canterbury Finance had their chestnuts pulled out of the fire. But the government correctly calculated that the economic black hole – if left unfilled –would do terrible damage to the South Island economy. And in any case, the expectation is that much of the government’s initial outlay will be recovered through an orderly winding up of SCF’s affairs.

    No such backward glances are warranted in the case of the Canterbury earthquake. Immediate emergency help and a prompt beginning on the task of reconstruction are clearly needed, and only the public purse is deep enough to get this underway. And, encouragingly, the longer-term consequences of a recovery programme might actually be beneficial in economic terms.

    No one should discount the immediate personal and social price that the earthquake has exacted. But the injection of significant new capital into the regional economy could prove to be a shot in the arm to Canterbury – and beyond. We need only think of the new jobs in construction, the boost to manufacturers of materials, the lift in services from transport to accountancy, to understand how this might work.

    In both cases, too, it is significant that – at a time when the current emphasis seems to be on smaller government – it is again to government, as at the time of the global financial crisis, that we turn for the kind of help that no other agency can deliver. It seems that no matter how often we learn this lesson – whether in wartime, or in economic crisis, or following a natural disaster – we are quick to forget it as soon as what passes for normality is restored.

    A case in point is our recent treatment of unemployment. The disaster that overtook tens of thousands of Kiwis in the aftermath of both the global and our own domestic recessions, when they lost their jobs or businesses, may not have had the dramatic impact of a single terrible event like the earthquake or even the SCF failure, but the consequences for individuals and families are equally destructive.

    And the parallels with the two South Island crises are clear. The victims of unemployment are equally innocent of responsibility for the calamity that has struck them. They did not cause the recession. The numbers involved are just as large. The economic consequences are equally serious, not just for those directly affected, but also for the rest of us.

    The loss of the productive capacity of tens of thousands of our fellow citizens makes us all poorer. The personal and social consequences for individuals and families make our society weaker and less cohesive. The longer-term impact – such as the renewed exodus across the Tasman – blights our prospects as a nation.

    Just as in recent days, action and investment by government would be a proper response to this disaster. A dollar invested by government now, just as in Canterbury, could be repaid not just immediately through the relief of distress but also in the longer term through more jobs and a stronger economy. If we can do it for earthquake victims, why not for the unemployed?

    Yet, in our response to unemployment, there has been no sense of the community pulling together to provide help to those who need it, no recognition that we will all benefit both economically and socially if we invest in the productive potential of all our citizens.

    Instead, we have turned and pointed an accusing finger at the unemployed. Not only can we not afford to help them with a crisis for which they are not to blame, we tell ourselves; they should bear not only their costs but ours as well. So we cut the minimal benefits on which they are forced to live, and salve our consciences by seizing on the occasional well-publicised anecdote about welfare cheats and scroungers.

    And instead of investing (as in Canterbury) in economic reconstruction, we give priority instead to getting a government deficit that is already one of the lowest in the developed world down a year earlier than it would otherwise be.

    Shouldn’t we step back and have a good look at ourselves?

    Bryan Gould

    7 September 2010

    This article was published in the NZ Herald on 8 September.