Rethinking Labour

An interview with Bryan Gould
by Gordon Campbell

With its usual flair, the New Zealand Labour Party is doing what every dynamic left wing organisation has done when facing a threat to its very survival : it has formed a committee, headed by a former academic, and suitably weighted for age, gender and race. That’s not to say the inquest by Bryan Gould and his colleagues into Labour’s crushing electoral defeat won’t be useful. Due by year’s end, his review will doubtless have some valid things to say about leadership, positioning and marketing.

That may not be enough, if Labour is going to reach credible contender status by 2017. Its present malaise has to do with things beyond marketing, who’s wearing the leader’s hat, or the party’s undue attachment to the colour red.

To use John Oliver’s term, how is the Labour Party still a thing? For the last two elections, it has seemed to be merely that party that runs against National. To many centrist voters this year, Labour’s tacit embrace of orthodox neo-liberal economic settings made it look National-lite. To many left wing voters, its policies on social justice and the environment made it look Green-lite. Does its caucus even have an identity in common any more…or is it merely a loose and fractious group of individuals united only by ambition?

The more that Labour leaders talk of the party’s noble traditions, the more remote those past glories seem to be, and the barer the cupboard currently looks. That’s a concern, because Labour’s core vote now has other places it can go. Last year, David Cunliffe won the leadership on his promise to deliver a post-GFC, post-Third Way direction for Labour. It never materialised. In the absence of any other obvious starting point, the question that Gould and his colleagues might usefully be asking is – what would the social and economic policies of a new Labour Party actually look like, assuming it wants to be something more than neo-liberalism with a human face?

Currently, Labour’s misery in New Zealand has company. Labour is also out of power in Britain, and Australia as well. Its most immediate chance of re-gaining power is in Britain, where the Labour Party led by Ed Miliband is still narrowly ahead of the Tory government of David Cameron in the polling for the May 7, 2015 general election.

Miliband’s task of rebuilding Labour after the Blair/Brown era was essentially the same one that a succession of Labour leaders ( Phil Goff, David Shearer, David Cunliffe) have faced here, after the Helen Clark era ended. Faced with an electorate repulsed by the Blair /Brown term of office and then quickly repelled by the savage austerity measures that David Cameron championed, Miliband had room to forge a clear, left wing alternative, and during 2011-2012, he did rail against “predatory” capitalism, while advocating what he called the policies of “pre-distribution” – a set of priorities that would reduce the need for the tax and spend policies of re-distribution that have become such an electoral millstone for the centre left, worldwide. (Raising the minimum wage, pursuing full employment, and heavy spending in early childhood education all fall within the ambit of pre-distribution.)

Unfortunately, as the gap between Labour and the Tories has shrunk of late, Ed Balls, Labour’s shadow Chancellor of the Exchequer has been reverting to the neo-liberal orthodoxy. And as the two major parties bicker over who is the better, more reliable champion of neo-classical economic policy, the populist anti-EU, anti-migrant Ukip Party has been reaping the main benefits, including within Labour strongholds in the north of England.

For several reasons, the UK election result cannot help but influence the positioning efforts of Labour in New Zealand. One, David Cameron is the closest thing to a political mentor that John Key has ever had. His demise would reverberate here. Secondly, Miliband has been seriously engaged in what Goff/Shearer/Cunliffe have talked about – of re-positioning Labour as a genuine party of the centre-left as outlined in his excellent speech and in this one, as well.

Thirdly, Gould is a former shadow frontbencher from the British Labour Party, and his inquiry into Labour’s election performance will doubtless be drawing on the British example of the advisability of tacking left, and then heading back to the centre. Not by accident, Gould has just written a fascinating column on his own website urging the centre-left to renounce neo-liberalism, and attacking the apparent capitulation by Ed Balls [pictured left] and the UK Labour leadership to the economic orthodoxy.

The need to dislodge neo-liberalism as the only model of capitalist realism is pretty obvious. Its manifest failures are doing too much damage to too many people. A few weeks ago, Bloomberg Business News – not exactly a left wing rag – ran a story about the zombie ideas of the neo-liberal orthodoxy that simply refuse to die no matter how often they have been shown to fail. Bloomberg’s short list of disproven ideas – ‘that originated from or were widely dispersed by think tanks and their benefactors’ include :

• Austerity as a virtuous policy during recessions

• The efficient-market hypothesis

• Tax cuts pay for themselves (ie supply-side economics)

• Self-regulating markets

• Homo economicus (that individuals are profit-maximizing economic actors)

With all this in mind, Werewolf editor Gordon Campbell spoke to Gould about the need for Labour here – and in the UK – to offer a clear alternative to the current economic orthodoxy. Gould stressed that these views were quite independent of his post-mortem on Labour’s election performance.

Campbell : Voters here don’t seem to like neo-liberalism very much and nor do they believe in it, particularly. Yet hasn’t neoliberalism’s great success been in convincing people that this is the only credible way to run a modern economy?

Gould : I think that’s absolutely right. Its a real puzzle as to why the lessons we thought we’d learned repeatedly for the last century or more, have been forgotten, or ignored. Or even why the shocking outcomes of the Global Financial Crisis and the recession, have not shaken people’s faith in neo-liberalism, or in neo-classical economics. Its partly a function of the fact that public opinion tends to lag…but it is also something more significant. The advent of the global economy has taught people that it is big business that really has the power, and that it can dictate even to elected governments, particularly so in small countries like New Zealand. So there’s a tendency for people to listen to and to simply accept the messages being purveyed by elitists, and by big business.

As in : you may not like these policies, but those in the know say they’re essential for the greater good?

Yes, and that it has to be like this. Even quite discredited doctrines – like trickle down – still have great resonance with a lot of people.

Or the belief that if you cut taxes, you will unleash a tide of entrepreneurial activity?

Yes, exactly. That’s the famous Laffer curve…[Arthur] Laffer drew this curve on a paper napkin in a restaurant once, and that became the basis of a whole range of Reagan tax cuts, and so on. The other aspect to all this is that all the easy and readily understood messages tend to come from the right. In the sense that most people agree that running a government, or running an economy is just like running your own family finances, or your own business.

And as a result, there’s a widespread belief that debt must always be a bad thing, and that a surplus is inherently virtuous?

Yes…It is believed that debt has to be a bad thing, because it is if you owe money yourself, or if your business is in debt. At least in principle, it is a bad thing. But the reality [for governments] is that debt has always been necessary, and borrowing and lending always have to match – they’re accounting identities. [As the ongoing Eurozone problems show, not every country can or should emulate Germany, and deliver export-driven surpluses at once. As Financial Times reporter Martin Wolf put it, if everyone’s virtuously running a surplus, who are they trading with – Martians?]

The political fallout for Labour from all this is that the public believes that the centre-right is better at running the economy. Is it really enough then for Labour to claim that well, we’ll ensure that the crumbs from the rich table are bigger, and we’ll share them around more fairly? For Labour, is that a sufficient political response?

I don’t think it is. First of all, the public perception is hardly at all borne out by the facts. If you review the history of the management of the public finances of the Helen Clark Labour government and the John Key National government – and while acknowledging that the Key government had to face a global financial crisis, although it had remarkably little impact on us – If you review the simple record, the Clark government repaid a huge amount of debt, whereas the Key government has run up lots more, and has built it all up again.

And you can show this in Britain, and in many other countries. This notion that “left” governments are profligate spenders is hardly borne out by the facts. But it is hugely important in setting political attitudes….

Right. As you say, Labour here and overseas is widely seen as the party of tax and spend, and as a spendthrift that’s a soft touch on welfare. Can it shed that millstone?

I think it can. It would require more nerve than most politicians have. The reason people accept [the stereotypes] is that they equate success in business with knowing how to run the economy. And if people in business say ‘Oh we support the National government, they can be trusted to run the economy’ that’s actually not an economic statement, its a statement of political preference. But most people interpret that to mean : ‘Yes, look at John Key. He’s made $50 million or whatever it was, as an overnight foreign exchange dealer, so he must know how to run the country. ‘

Now, if you look at what Labour leaders do in response to that – and this is very marked, both here and in the UK – Labour leaders appear to be so terrified of being labelled incorrectly, so, they go out of their way to say ‘Oh, we’re going to be just as tough and prudent and austere as everybody else.’ So you will have noticed that in the recent election campaign that David Parker absolutely saw it as essential that he should say ‘We will return to, and maintain a surplus.’ In reality what that does is immediately confirm that this is the real key test of the government – that it shouldn’t run a deficit at any point. Which is nonsense. The judgement should never be – at any given point – is the government running a deficit, or not. The question should always be – does running as deficit for this stage of the economy make sense? Will it help the economy to grow better? But that question is never really asked.

OK, and here’s the 64 dollar question. Under Labour, what would a post GFC, post Third Way economic policy actually look like?

Well, the last two or three decades have been characterized by the belief that inflation is the main danger…And it was agreed that the best way to [control inflation] is to manipulate interest rates. But what is not recognised in New Zealand or other Western countries is that the main inflationary impact comes from the banks. As the Bank of England has recently recognized in a major paper earlier this year some 97% of all the money in circulation in the case of Britain – and its similar here – is originally created by banks, out of nothing. And they create it in order to lend it out on mortgage. Most people think that banks take in savings from depositors and then they lend that out again, to borrowers. No, not a bit of it. The amount that the banks lend has got nothing to do with the money that people deposit with them. But the banks find it very profitable, very easy and very secure – for them, it is risk free – to lend on mortgages. Almost always they’ve got adequate security and can lend to their hearts’ content. The only thing that constrains them is the absence of willing borrowers, and usually there are plenty of them, willing even to pay high interest rates.

So the first point I want to make is that the whole focus of our monetary policy is wrong. We think that somehow, by putting up interest rates, we are going to solve inflation. All that does is increase the return to the banks on the lending side, on money they create out of nothing.

While not constraining their capacity to lend?

No. And all that money being pumped into the housing market is causing huge increases in asset values –

OK. But the political problem here is that if and when governments do exactly the same thing in order to meet social goals, that’s derided as ‘printing money’

Exactly….

And as the US has shown that you can do that – they called it ‘quantitative easing’ – when you’re bailing out the banks. But you’re regarded as being beyond the political pale if you do this for any social purpose, right?

Absolutely. You’ve got it.

So how then, does a centre-left party engage with the politics of this situation, beyond poking holes in it from a distance? In the current circumstances, what you’re saying simply isn’t a viable political programme – it sounds like Social Credit.

Yes, and that’s the central dilemma I believe, for the left. Oddly enough though, the relatively new Japanese Prime Minister Shinzo Abe has reverted to the – this is getting a bit esoteric , but its relevant…there was a famous in Japan, unknown in the West, economist called Osamu Shimomura. He was a Keynesian economist, and he realized, as Keynes had said, that there is no intrinsic reason for the scarcity of capital…and as Keynes also said, you can create money to invest in productive capacity even in advance of that productive capacity being available, provided it comes on stream within a reasonable period. So in other words, if you create money for productive investment – and it works – that’s not inflationary, but you’re growing the economy.

[Editor’s note : this brief bio of Shimomura contains this passage relevant to Gould’s argument:

‘Shimomura’s 1961 theory of economic growth was, and is, masterly, arguing that real investment can exceed saving by about 15% of GDP through credit creation at the Bank of Japan. One of his favourite requests to Japanese economists was that they should abandon the ‘static concept of investment-saving equilibrium’ and replace it with a more dynamic ‘Investment exceeding saving through central bank debt/credit creation.’]

…And that was the basis of the huge Japanese success of the 1960s, 70s and 80. Until they abandoned the policy for other reasons, and began to stagnate. The Chinese are doing the same. The Chinese simply write cheques on themselves when they want to buy something…. But we won’t invest, or borrow, or do anything that suggests growth, because we’re terrified of inflation.

Fine, but let’s get back to the political environment. Even if this is all true, is there really any political future for Labour in heading down this road – given that from memory, the candidate in the Rongotai electorate who was saying much the same thing about banks and credit creation, got only 89 votes in the last election. Its simply not a political runner, is it?

I’m afraid what this tells us is that you can’t sell this sensible policy. What you said before is right. The UK and US governments have been perfectly prepared – the UK government produced 350 billion pounds worth of quantitative easing. It made not the slightest bit of difference to the inflation rate, but it was thought to be perfectly OK to save the banks. [Incredibly, the US spent $NZ5.77 trillion on its QE bailout programme ]

But if you did it to invest – to lend through the banking system in the ordinary way, for good investment to create jobs and increase output – that would be thought to be terribly dangerous. What I think politicians have to realize – and this will sound very suspect and devious – is that policy matters, in the end, when its done. If you simply talk about it in advance, as a promise to do something, people will either believe the promise or pick it to pieces. But what matters is what you’re ready to do in government. And governments do these things – as Shinzo Abe is doing right now…

Or as Roger Douglas did in the 1980s?

Yes, as Roger Douglas did – in my terms, in the wrong direction. If you promise for example, to put full employment at the centre of policy, and to make full use of the economy’s resources – and then you got into government, and made the funding available, provided it was properly directed [or]if there was an agreed industrial strategy. For example, if you made that money available, at no cost to anybody –provided it was matched by increased employment and increased output – then you would be setting the economy on a completely different track, and onto a path of sustainable growth.

And presumably, you could expect to be rewarded by the electorate, accordingly.

Yes, although our three year term is dangerously short. But after three, four or five years, the electorate would see the advantages of that approach. One very important aspect of this…. is that by virtue of running our current monetary policy resting as it does on high interest rates, we – as everybody now sees – force up the value of the NZ dollar and literally, price our goods out of international markets, including our own. Our domestic producers can’t face up to cheap imports, and nor do they make us much on the exports as they could make. If you followed a more sensible policy, then the value of the dollar would come down in the short term and would begin to rise again when the strength of the real economy made that possible.

OK, if that’s the real programme – once the centre-left is elected in both the UK and in New Zealand – should Labour really be still trying to get into office by more or less promising the reverse, and to retain the current settings ?

I think you would have to proceed step by step. I think the current governor of our Reserve Bank understands a lot of this. I think central bankers – and particularly following the Bank of England paper – are increasingly aware they’re on the wrong track. I think Graeme Wheeler’s efforts to concentrate more directly on bank lending as a means of controlling inflation – I think they’re very interesting [efforts.] He’s on the track of dealing with inflation by means that don’t put the real, productive economy, at risk.. A new Labour government, say with David Parker – who I rate, despite my earlier criticism of his undertaking to get into surplus, come what may – I think that he understands quite a lot of this. He and Graeme Wheeler between them wouldn’t produce an overnight revolution, but they‘d start to shift policy towards the interests of people working, earning and making their living out of real production.

Leaving that aside…one of the slogans Ed Miliband raised in that crucial speech he gave in 2012, was where he talked a lot about Labour focusing on policies of pre-distribution. The ideas being : that if you give people a bigger stake in society upstream, then you have less need downstream for the tax and spend policies of redistribution. Do you think that Labour here can get some mileage by tacking in the same direction?

I think so. I think re-distribution is always a tough ask. It runs into all sorts of political and psychological problems. People just don’t like paying taxes, and they say – all the time – why should I pay for those people who can’t work, don’t work, whatever. I think the pre-distribution ideas are excellent ones, and it is the central issue in politics. The whole point of democratic politics – and this is the same point Thomas Piketty makes in his great book – is to restrain what is otherwise an inevitable concentration of wealth and power in fewer and fewer hands. That’s the end to which the economy would normally proceed.

And the central political question is – what do you do about it? Do you say that’s fine, that’s how it should be or that there’s nothing we can do about it, anyway? Or do you say, no – there are things you can do, to mitigate that. No one is talking about absolute equality. They’re simply saying: lets share it out a bit more fairly and evenly, because we’ll be better off if we do.

One of the central ways we can do that is by making sure there are well-paid jobs for everyone. At present, our policy settings make that impossible. There is a built-in margin of unemployed who are there, primarily, to hold wages down. Shinzo Abe in Japan is saying to firms who want to avail themselves of the credit that is he is making available to them at no cost to the government…Abe he is saying if you want this, you must show me you are paying your workers a fair wage. Now, no New Zealand politician or employer would currently recognise that as a sensible thing to say. Because the one thing employers know that they don’t want, is for their labour costs to go up. So, if there’s a pool of unemployed, and policies directed at driving down wages – then they feel happy. And a lot of government policy at present is geared exactly that way.

So if in the long, long term the policies of pre-distribution are going to be part of how an enlightened government reverses back out of this dismal spiral – give me a few examples so we know what we’re talking about. What do you think are the main elements of pre-distribution ?

I’d certainly say things like raising the minimum wage. And improving peoples’ rights at work, so that the downward pressures on wages are reduced. Making housing more affordable is of huge importance. And we have just got to act on the irresponsible behavior of the banks, who will just go on lending until Kingdom Come, and will go on inflating the cost of housing. What else? Pre-distribution is made much more difficult within the global economy. I don’t think there’s much future for instance, in putting a ceiling on salaries. At present, we’re constantly bidding up top salaries because we say we’ve got to match what’s paid overseas. But most top salaries these days are set by consultants who specialize in these salary rates, and they’re employed by people who want to see their own salaries rise. So there’s a huge mechanism for raising top salaries, while [the global consensus] is that you must drive wages down, to keep your wage costs low.

One final thing : If Labour is to win office, the whole centre left bloc has to do well. Yet in recent years, Labour seems to have been better at fighting its own allies than at fighting National. How do you think Labour can better manage its contribution to the centre left, so that the whole boat gets lifted, rather than sunk in the crossfire?

Ideally, what you say is right and its what we should be aiming at. One of the difficulties I think is that the Greens – who are the other obvious major party – have remedied one of their traditional weaknesses. So instead of just saving we want to save the planet but we have no analysis of how do that apart from not doing certain things – it is now well understood by them that if you want to save the planet, you have to intervene in the market. They’ve developed an economic policy hard edge that they used not to have. And inevitably, that has brought them into the space traditionally occupied by Labour…and that means [the Greens] are more and more seen as a left party, instead of potentially taking votes from the National Party. And, as I say, it brings them more and more into conflict with Labour. How do you resolve that? I don’t know. I think you could try to bring about a longer term identity of interest – and therefore of policy – that didn’t just come together after the election in order to form a coalition government. Perhaps there could involve campaigning on different aspects of a more or less common policy.

Which raises the obvious question about the wisdom of campaigning as a bloc – rather than competing head on with each other ?

Well, I wouldn’t want to get into that, at the moment. Because of the review.

Yes, but its interesting that you raised it in the way you did. Because it suggests you think the Greens should butt out of the social justice area.

Yes. And the problem then of course, is there may well be elements in the Greens who see themselves as replacing Labour. So its not easy sell for them either, to say….to tell them to butt out.

And so presumably then, you’d also think Labour shouldn’t be farming out its more activist, more polarizing positions to its junior partners, while it concentrates on winning the centre-ground ?

No. I think Labour has to recognize that it is, or should be as broad church. And what unites it is its sense of priorities, and the values that it sees as important…

Yes, fine. But in the UK, it seems Labour has chosen to tack back towards the centre, and is opening up ground for Ukip as it does. Presumably, this isn’t in Labour’s long term interests, or even in the short term?

Its not a question of being in Labour’s interests. Its not in the country’s interest, or in the interests of sensible government to do that. I think that Labour – in both the UK and New Zealand – has allowed itself to be positioned on a linear right to left spectrum. I don’t think politics is like that. It certainly suited John Key to say that anything that differed from his policy was ‘far left.’ It was absolute nonsense. There’s nothing far left about raising the superannuation age. I’m not sure that I necessarily agree with it – but at least it was supposedly a response to a legitimate problem…Do you see what I mean ? The suggestion that you move back to the centre is wrong. What you should be doing is putting forward policies that you think will work, and that will address the major issues, and be more successful than the current lot. If your opponent wants to call that’ left’ well, you can’t stop them. But I don’t think we [those in Labour] should go along with that. Otherwise, you get pushed by your opponents more and more leftwards, along this linear spectrum.

And if you do try and counter that pressure by looking more and more like your opponents, then you’ll fail electorally. Because surely, there’s no way a modern Labour party can practice neo-liberalism with more conviction than the Tories ?

Absolutely not. As soon as you say: we’ll also apply the policies of austerity, or if you say whatever happens, the government will be in surplus…Well, as soon as you say that, you immediately validate the whole analysis of your opponents. And you also suggest to the voters that you are almost certainly not as good, or as committed, practitioners as your opponents will be. So you’re not gaining anywhere. And you look shifty and easily pushed around. Its just a disastrous thing to be doing.