Claudia Goldin wins the 2023 Nobel economics laureateship

This entry was posted in Labour Studies, Political Economy & History, Portraits, Pundit on by .

She may have progressed our understanding of women in the economy but that has not resolved all the issues.

A woman who was once chief executive of New Zealand’s biggest company said ‘It is true that a large percentage of the [women’s pay] gap is unexplained and that’s where the issue comes about; could it be bias even if that’s unconscious bias? Regardless of how we’ve got a gap … the much more important thing is, what are we going to do about it?’

That is so characteristic of the way we tackle policy in New Zealand. We don’t worry about understanding a problem; we focus on solving it. We don’t even bother about trying to find out what is known about it. Just get on with the policy.

There is, in fact, an enormous amount of research on the different income patterns of men’s and women’s earnings – very little of it in New Zealand. (Some of the overseas research has been used in the better policy work in New Zealand.)

If this general neglect as been unacceptable, hopefully it cannot be justified any longer given the award of the Bank of Sweden’s economics prize in honour of Alfred Nobel to Claudia Goldin.

She was not awarded just for her work in women’s economics – which is, after all, also in men’s economics because they are interdependent. Goldin is a bloody good economist (as were the other two female Nobel laureates).

(It was repeatedly mentioned that she is the first women to have been awarded the economics prize on her own rather than jointly. The reason is that in about 1975 the award should have gone to Joan Robinson who made some major innovations in economic thinking. But one member of the selection panel had a snitch on her and vetoed the choice. Never underestimate the extent to which the eccentricities of a panel determine awards.)

Goldin’s many contributions have been mainly in (American) economic history, including on inequality. She was a student of Robert Fogel, the last economic historian laureate, who, like her, imaginatively investigated important questions – in his case, most notably the economics of American slavery – often finding data which no one else thought existed. But she also addresses contemporary issues.

She traced the pattern of American women’s employment over time. For the generation of women born between 1878 and 1897, a successful career typically required forgoing children and sometimes marriage. The choice women faced was ‘family or career’. For their granddaughters born between 1924 and 1943, it was ‘family then job’ for a college-educated woman: work after graduation, marry (soon), have children and drop out of the workforce, returning once her children were in school. But her prolonged absence from work meant she did not have the skills and experience necessary to thrive in the workplace. For Goldin’s last group, born after 1958, many women aspired to achieve ‘career and family’. The shift was aided by access to better contraception, which helped women delay marriage and childbearing and by more liberal social norms.

The research she did on the impact of contraception was with her personal and research partner Lawrence Katz, who is also a very good economist. Using an ingenious research strategy they found that the contraceptive pill gave women more control over decisions about children, enabling them to plan their career and develop their work skills, so the age of first birth increased.

Demographer Natalie Jackson identified an interesting New Zealand twist. Māori mothers have their children about five years earlier than Pakeha ones. What do the latter do in those five years? They add to their qualifications and their paid-work experience. They are much better placed when they return to paid work as the children grow up.

Despite these changes there remains a clear gender gap for these women, most notably with respect to pay. In a recent 2021 book, Career and Family: Women’s Century-Long Journey Toward Equity, Goldin argues that most women no longer suffer unequal pay nor is the gender pay gap driven primarily by women’s choice of occupation. She argues markets generously reward anyone, male or female, who is willing to hold down what she calls ‘greedy jobs’, those which demand long and unpredictable hours. Parents needing to be on-call at home in case a child falls ill and needs picking up from school, or needs cheering on at a concert or football match, cannot hold greedy jobs which require being available for last-minute demands from a client or boss. Typically, it is the mother who spends more time raising children; the gender pay gap tends to open up after a first child. Goldin says ‘Men forgo time with their family and women often forgo their career.’

Does it always have to be like this? I’ve had friends in which the parenting roles have reversed. But there is still the inequality, even if it does not appear as gender inequality. Goldin is optimistic that the ability to work at home will reduce the gap – it won’t eliminate it though.

She is not telling the full story. Some of my own research illustrates another dimension. Fifty years ago, I was interested in how non-market work affected the market economy. (This was well before the popular literature on the deficiencies of GDP as a measure of human activity. The long history of economists concerned about the problem before my work is rarely mentioned by the populists.)

I got blocked because there was no data. That led me to advocate an official time-use survey which Statistics New Zealand first implemented twenty-odd years ago. It is an extremely valuable resource although sadly few people have tried to exploit it. (Where are the Claudia Goldins when we need them?) My findings are reported in Not in Narrow Seas: The Economic History of Aotearoa New Zealand but here is a summary of some of them.

Time-use surveys ask individuals to keep diaries of what they did each hour. It turns out that on average men and women spend roughly the same amount of time on most things such as personal care (including sleeping) at 76 hours a week (out of 168 hours) and leisure (40 hours a week).

The big difference is in their working time balance. Both spend about 48 hours a week on such activities, but men’s paid labour force activity (including travelling to work) is 30 hours a week while women’s is 16 hours. (The male figure appears low because it includes the retired and students.) The remaining time is mainly work around the house; men do about half the amount women do.

So men and women work as long but men get paid for almost twice as many hours. Hence women have lower incomes from working, even if you adjust for age and qualifications.

Additionally they get paid less per hour. The reasons they get paid less are various. Goldin gives some, such as women having less work experience and being less into greedy jobs. What she does not pay much attention to is discrimination. I think that comes from her ‘Chicago School’ tendencies. (She is at Harvard University).

Neo-liberals argue that discrimination is insignificant, it’s the way the markets work. Others suggest that labour markets are fragmented and do not work as competitively as the neo-liberals assume. A particular issue arises if a single employer dominates a particular market. (The technical term is ‘monopsonist’.) They can screw down wages. (One of the pioneers exploring such non-competitive markets was Joan Robinson.)

We have had much legislation since 1973 to weaken the discrimination. The gap has diminished but it is still there. New Zealand’s most widespread monopsonist is the government. To give the Ardern-Hipkins Government some credit, it was reducing its monopsonistic discrimination. The consequence has been higher taxes with no real increase in services – just greater fairness.

Claudia Goldin would seem to give little weight to the last couple of paragraphs. Many economists would disagree. Even so they will celebrate her Noble laureateship. Her research has contributed markedly to the progression of the scientific part of economics even if some of her policy conclusions may be limited.

Even more, the award recognises an area where economists ought to be doing more work, rather than leaving non-economists to argue from ignorance.

Are Things Falling Apart?

This entry was posted in Political Economy & History, Pundit on by .

Coalition government reflects a nation’s diversity. Electoral arrangements show it.

               Things fall apart; the centre cannot hold;

               Mere anarchy is loosed upon the world,

               The blood-dimmed tide is loosed, and everywhere

               The ceremony of innocence is drowned;

               The best lack all conviction, while the worst

               Are full of passionate intensity.

                                           W. B. Yeats The Second Coming

The New Zealand Government is always a coalition of disparate interests. For its first 38 years – the first parliamentary election was in 1853 – there were no parties and the government was an unstable alliance of individuals. The 1872 Stafford Ministry lasted 31 days; the 1873 Fox Ministry lasted 36 days; the 1876 Atkinson Ministry lasted 12 days; the 1884 Stout-Vogel Ministry lasted another 12 days; followed by 6 days of the 1884 Atkinson Ministry. (Britain’s 2022 Liz Truss Ministry was 49 days from appointment to resignation – including 10 days of the national mourning period for Queen Elizabeth II.)

With the election of the Liberal Government 1891, New Zealand began party government. Even so, a number of Liberal MPs crossed the parliamentary floor to elect the Reform Government in 1912. In 1915-1919 there was a National Ministry of a coalition of Reform and Liberals. In 1930-1931 the Forbes Ministry was a minority government. His 1931-1935 ministry was a coalition between Reform and United (previously Liberals).

However, from 1935 to the arrival of MMP in 1996 there was single-party government. Since then there has been 18 years of coalition governments with the exception of the Ardern-Hipkins Government 2020-2023. All the coalitions since 1891 have been reasonably stable. Only the Shipley-Peters coalition of 1997-1998 had an untimely end.

Observe that there are broadly two kinds of coalitions. One involves more than one party having seats in Cabinet as occurred with National and New Zealand First in 1996-1998. More common has been minority single-party governments with other parties providing confidence and supply and Ministers outside Cabinet. (Between 2017 and 2020 there was a minority two-party government of Labour and NZF with the Greens providing confidence and supply and Ministers outside Cabinet.)

Coalition governments are common elsewhere. At the time of writing, Slovakia is negotiating a coalition government, with the lead party having won just 23 percent of the vote. There is talk that they may need another election soon.

Even our parties are coalitions. National is a merger of the country-based Reform Party and the urban-based Liberal Party. A way of thinking about the 1984-1990 Labour Government is that it was a coalition between the traditional Labour Party and the yet-to-be-formed ACT party in which the minority party dominated. As we ponder on what is going on in the US, we may think of the Republican Party as a coalition of traditional conservative Republicans and the extreme right. There are similar obvious, but not as public, tensions among the Democrats – they currently handle them in a more civilised way.

The reasons the tensions are not as visible in the US as they are in New Zealand (or Slovakia) is the different electoral systems. MMP does not create these tensions. It exposes them.

I puzzle over whether these tensions are greater today than they once were or whether they are just more visible. Once Māori were hidden in the countryside, women in the kitchen, homosexuals in closets. They would be much more visible today even if we did not have MMP.

Māori are an interesting example of how electoral arrangements change visibility. They were confined to four seats in 1868. National’s first Māori MP won general seats in 1975 (although James Carroll won one for the Liberals back in 1893 – he was twice acting Prime Minister, a Māori first). Even if parties are unable to win the Māori seats, under MMP they want to win as many list votes as possible and they put Māori on their lists. Today there are more than twice as many MPs of Māori descent as there are specific Māori seats.

Not all social diversity is evident in public discussion. We pretend there is no class in New Zealand. But class plays a role in both American and British politics – especially that the traditional working class sense they are being left out. It could happen in New Zealand.

(We confuse Māori with the working class, even though there are more non-Māori who belong to it. We talk of Māori as a unity. They are not. In class terms there is a Māori elite, a growing Māori bourgeoisie, and a Māori working class. There are other tensions within Māoridom which non-Māori only see dimly.)

Historically for logistic reasons, we have had electorates based on regions except Māori are separated out. If we had electorate based on all ethnicities, class, gender, income or religion, we would have a very different politics. MMP reduced the importance of regions.

One of the consequences of MMP is that political tribalism is fading. The number who vote ‘my party – right or wrong’, often with clenched teeth, seems to be diminishing. As a result the dominance of the two main parties is lessening. In the 1987 and 1990 elections Labour and National won 83 percent of the vote between them; this year they have been struggling to get 65 percent. (There is a sense that the 2023 voting outcome is the same as that of the 2017 election, except for smaller support for the main parties – and Labour’s and NZF’s unwillingness to cooperate.)

What has been unusual about the 2023 election was not that it will lead to a coalition government, but that the coalition negotiations have been going on in public before election day. (There were private ones between Labour and the Alliance in 1999.) It has been a bit weird really. Like everyone playing poker not knowing what cards they hold. After the election those with decent hands will play in earnest.

What struck me about the pre-election game was that every party – even minor ones – talks as if FPP still applies, as if they are going to win the election and will be able to implement their manifesto promises unconstrained by any other party. Yeah, right. Not one said much about respecting the wishes of voters. Not one set out their bottom lines which they will not negotiate nor what they were willing to negotiate. One hopes they prove better organised in the post-election negotiations.

Whatever party ‘wins’ the election, they will have been rejected by a majority of voters. That is one of the reasons we don’t like coalitions. As a rule, we prefer ones involving a minority government to a majority one consisting of representatives of two parties.

Underneath there are questions of how to manage the diversity in the nation which MMP, among other indicators, exposes. Is there anything we all have in common other than living in the same land? (There are even around 250,000 potential voters offshore.) The centralist solution is to impose some sort of national unity – in laws and rhetoric: ‘you will bloody well follow the All Blacks’. Bugger any minorities.

We are long past that possibility although there are authoritarian regimes overseas which pursue it, often crushing (ethnic, religious and sexual) minorities. What the growing affluence has meant is choice – of lifestyle as well as what you buy on the supermarket shelf.

It seems to me that we can only hold the nation together by tolerating this diversity – the only intolerance should be towards the intolerance. We need to make tolerance of diversity a proud national characteristic. (Up you, authoritarian regimes.) That means greater decentralisation.

Yes, governments will have to take decisions with which minorities are uncomfortable, but the decisions should be in a context of respect for them. I broadly accepted our anti-Covid strategy but was uneasy about its attitude to, and treatment of, those who disagreed. (Yes, many were nutters, but they had a right to be nutters, providing they impacted minimally on others.)

It is a feature of the last seventy-odd years that the one occasion we came together politically was in the war against Covid and the rejection of the views which caused the Mosque Massacres. It won the Ardern Government a majority in parliament in 2020 – despite National winning more votes than Labour in 2017.

But the mood of tolerance over diversity was not continued. The 2023 election campaign has certainly been divisive. Top of the post-2023 Prime Minister’s list has to be promote tolerance and think more about decentralisation.

               The darkness drops again; but now I know

               That twenty centuries of stony sleep

               Were vexed to nightmare by a rocking cradle,

               And what rough beast, its hour come round at last,

               Slouches towards Bethlehem to be born?

PS. An earlier column discussed the unthinkable of a grand coalition.

Comparing the Singapore and New Zealand Economies

This entry was posted in Globalisation & Trade, Growth & Innovation, Pundit on by .

Singapore and New Zealand have much the same population – a bit over five million people. They are both affluent economies – Singapore is more affluent than New Zealand although there are reasons to believe the data exaggerates the differences. Because of their resource base and location they have rather different economic structures. Yet the two small economies work together in the international political economy.

New Zealand’s land area is 368 times that of Singapore, so there is a lower population density and lower economies of agglomeration. (New Zealand’s EEZ is roughly 4000 times greater.)

The difference results in quite different economic structures. Compared to the typical affluent economy, New Zealand has a large natural resource sector based on the land and sea; Singapore’s natural resource sector is negligible. As a consequence, if Singapore was located as far away as, say, the Falkland Islands, it would be as poor and as unpopulated as they are.

But it is not. Singapore is near the centre of the world economy. Almost half of the world’s population lives in countries within 4000kms, producing over a third of the world’s GDP. Both figures are increasing. Australia is the only a country of any significant size within the New Zealand 4000km-circle. Australasia has 0.4 percent of the world’s population and 1.1 percent of its GDP.

(One OECD report estimated that reduced access to markets relative to the OECD average could reduce GDP per capita by as much as 11% in Australia and New Zealand. Conversely, a favourable impact of around 6-7% of GDP is found in the case of two centrally located countries: Belgium and the Netherlands. Singapore was not included in the study, but applying the latter figure to it, New Zealand’s GDP would be depressed relative to Singapore by 17 percent, probably more.)

The structural consequence for the manufacturing and tradeable services sectors is that Singapore is involved with the web of Asian supply chains, whereas New Zealand manufacturing mainly consists of primary-product processing or small, localised market supply where importing would be too complicated or costly. Its businesses are rarely in the middle of supply chains, which have been one of the most dynamic international developments in recent times.

(A nice illustration of the difference between the two countries is that New Zealand is a supplier of milk powder to Singapore, which converts it into infant formula which it distributes throughout its region.)

Not only is Singapore central but it sits on the Straits of Malacca, a critical link in the international transport network. It is the international hub for the countries which encircle it.

So the two countries have quite different economic structures. Historically, New Zealand’s main resource-based activity has been pastoral farming, with wool, meat and dairy products once making up over 90 percent of total foreign exchange earnings. A shrewd summary was that New Zealand was an ‘exporter of processed grass’ – processing through livestock and factory. Its comparative advantage was not so much its land – which is not particularly fertile – but a generous supply of sunlight and water. For a variety of reasons, there has since been a substantial diversification of the farm sector in the last decades into forestry, horticulture and wine over the last fifty years. Additionally, the fishing industry has boomed both offshore and with fish farming.

Perhaps the international tourist industry should be included among the ‘resource-based’ industries, given that scenery, as well as novelty, is a major appeal for one of New Zealand’s biggest foreign-exchange earning industries. If the isolation adds to the attractions, it also puts New Zealand a long way from where the tourists live. In contrast, Singapore tourism arises from it being at the centre of that large Asian population – its local tourist attractions are primarily urban.

Both economies have the large service sector characteristic of a modern affluent economy. But Singapore’s financial and business sector is a major Asian and world centre; New Zealand’s financial and business sector mainly services its domestic market. Singapore’s dominance arises from its location and a sound and robust domestic rule of law which has recently been strengthened by the weakening of Hong Kong with Beijing’s increasing involvement in its affairs.

Their external structures for goods are quite different. Singapore’s exports of goods and services (including re-exports) amount to around 176 percent of its GDP, while its imports are 148 percent (in 2019); New Zealand’s comparable figures are both 27 percent. The ginormous Singapore figure reflects its involvement in supply chains because of its near neighbours and location on the Malacca Straits. Its re-exports account for over two-fifths of Singapore’s total sales to other countries in 2000. This is evident in that Singapore’s principal exports are electronic components, refined petroleum, gold, computers, and packaged medications, while its principal imports are electronic components, refined petroleum, crude petroleum, gold, and computers. New Zealand’s re-export proportion was nearer 4 percent, although this does not include imports of inputs such as oil and fertiliser, which are vital in the production of exports.

In the nineteenth century, New Zealand’s cables from Europe came through Singapore. Its defence was seen as critical to New Zealand; the ‘fall of Singapore’ in 1941 resounded through our thinking for decades, so much so that until recently we maintained an army base there. Once it was our key Asian international air terminal, including when we were flying west to Europe.

Such links have become more tenuous in today’s changing world of communications, but New Zealand and Singapore work together on a variety of international issues. Singapore’s first international trade agreement still in force is the Closer Economic Partnership signed with New Zealand in 2001. It is our second; our first is the 1983 Closer Economic Relations with Australia, which replaced the 1966 New Zealand Australia Free Trade Agreement.

Evolving out of that partnership, the two countries have worked together on a range of other international deals including:

2005: Trans-Pacific Strategic Economic Partnership P4 – with Brunei and Chile;

2009: ASEAN-Australia-NZ FTA – 12 countries;

2018: Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) – currently 12 countries;

2022: Regional Comprehensive Economic Partnership (RCEP) – 15 countries.

Additionally, they are involved together in the following sectoral initiatives:

            Digital Economy Partnership Agreement (DEPA);

            WTO Joint Statement Initiative (JSI) on e-commerce;

            Small Advanced Economies Initiative;

            Singapore-New Zealand Declaration on Trade in Essential Goods.

(The last deserves special mention. It was signed in April 2020, just after the beginning of the COVID pandemic, to which it is a response, indicative of the warm and ongoing relationship between the two countries. Seven other countries have since made non-binding ministerial declarations.)

Some of these agreements are ‘open plurilateral’ – that is, they are designed to allow countries not involved in the original agreement to join (as happened with the United Kingdom joining CPTTP in 2023).

The commonality of the two countries arises from both being small. Each depends on a rules-based international trading order which favours unrestricted (or very limited restricted) trade. In a free-for-all world it is too easy for small nations to be bullied. Lee Kuan Yew’s comment that whether elephants make love or war, the grass gets trampled, is apposite for New Zealand too.

Has There Been External Structural Change?

This entry was posted in Growth & Innovation, Macroeconomics & Money, Pundit on by .

A close analysis of the Treasury assessment of the Medium Term in its PREFU 2023 suggests the economy may be entering a new phase.

Last week I explained that the forecasts in the just published Treasury Pre-election Economic and Fiscal Update (PREFU 2023) was similar to the May Budget BEFU, except that it showed weakening in the fiscal position.

What I did not discuss was the PREFU 2023’s medium-term outlook which presents the economy returning to track after wobbling last year and this. A serious forecaster always has a medium-term view although there is always a high degree of uncertainty (fan) around it.

I should not be surprised if Treasury is currently reviewing its medium-term outlook. A group of diverse macroeconomists with which I am associated are. Some of their issues are too technical for a column but here is my response to their discussion.

I focus here on the external sector, asking whether there has been some structural change in the last few years. The possibility is there in the PREFU 2023 forecast of the Net International Investment Position (what we owe overseas less what is owed to us) rising from about 50 percent now to near 60 percent in 2027. That suggests that a substantial element of our economic growth in the next few years will be the result of overseas borrowing.

The forecast rising net debt is largely driven by the current account deficit (i.e. import payments over export receipts). Currently they amount to about 8 percent of GDP. The deficit comes down but remains higher than in the decade before 2022, which is the arithmetic cause of the rising net debt. The high current account deficit seems to come from three causes:

First, there is some reduction in our export prices, especially for dairy products. The Treasury forecast expects no significant recovery. This suggests a structural change probably arising from the slowing down of the Chinese economy and their consumption of our food exports. Lower export prices mean lower export revenue, and that increases the current account deficit. It also reduces the prosperity of the farm sector.

Second, while the volume exports of goods has continued to expand, there has been a falloff in service exports, particularly tourist receipts. I have not seen a thorough account of what is happening here so I must be cautious. There are two major possibilities. One is that the post-Covid recovery has not worked through to the tourist sector yet. Rather, after two years of restrictions, Northern Hemisphere tourists are visiting nearby destinations, and when they have exhausted them they will move on to more distant ones. The other possibility is that there has been a structural change in the international tourist industry – perhaps airfares are going to be permanently higher – so our tourist industry is on a lower growth track. Given the importance of the tourist industry’s generation of foreign exchange, the latter scenario would represent a major structural change, as would lower export prices.

The third possible structural change is the fiscal stance. To go back to last week’s PREFU column, the big change seems to be the falloff in corporate tax receipts. PREFU 2023 gives no account of why this has happened and expects the receipts to be back on track in a couple of years. Let’s hope it is right.

Even so, public debt continues to rise faster than GDP. PREFU 2023 expects net public debt (excluding the NZ Superannuation Fund) to be near 40 percent of GDP over the next few years, in contrast to 20 percent or so before COVID, with no expectation of a significant fall.

(There are a number of measures in the PREFU 2023 forecasts. I am not fastening on a single one in the way the election ‘debate’ does, but looking at them all. As I said, the issue is technically complicated.)

If the government is borrowing more, then someone has to be lending to it. Generally that ‘someone’ is overseas, although the channel through which the loans flow  is complicated. As a rule, the New Zealand Government borrows in New Zealand currency, but further along, the lender to the government is, typically, converting foreign currency into New Zealand dollars. Suppose the public borrowing is used for diesel to fund capital investment. Ultimately, the diesel has to be paid for with foreign currency.

(This is a severe omission in explanations like Modern Monetary Theory when they ignore the foreign sector. The index of Steve Keen’s The New Economics: A Manifesto – which, by the way, is a much better exposition of MMT than his earlier book – does not mention the balance of payments, exports or imports. Were modern economies so simple.)

Forgive me if I don’t give here the details of the complex analysis. What seems to be happening is that we are not adjusting our economic behaviour for the expected reduction in the terms of trade. Over the next four years, consumption and investment are expected to grow more slowly than total production (GDP) – public consumption is actually forecast to decline – but the production is less valuable because imports are more expensive relative to exports, so what we can afford to spend is growing slower than consumption and investment. (PREFU 2023 does not publish sufficient tables to be sure of this.) Thus, to maintain our desire for growing national expenditure, we have to borrow more overseas so that foreign debt rises.

The good news is part of that borrowing is for business investment, which is expected to rise faster than consumption, and will, presumably, add to productivity. Even so, it is not obvious that national consumption should be rising quite as fast as expected. A neutral observer, observing that public spending is already constrained might suggest that the restraint should be on private spending, although those with political agendas might argue differently. (Remind me of the economic case for general tax cuts.) This conclusion is not the outcome I expected when I first began analysing the medium-term PREFU 2023; facts have a bad habit of getting in the way of preconceptions. Ultimately then, PREFU 2023 seems predicated on a structural change in our terms of trade with slower economic growth prospects in the medium term. Oh dear.

The ‘Recession’ Has Been Called Off, But Some Households Are Still Struggling

This entry was posted in Distributional Economics, Macroeconomics & Money, Pundit on by .

While the economy is not doing too badly in output terms, external circumstances are not favourable, and there is probably a sizeable group of households struggling because of rising interest rates.

Last week’s announcement of a 0.9 percent increase in volume GDP for the June quarter had the commentariat backing down from their confident predictions of a few months ago that the New Zealand economy was in recession. Presumably not all of them. It is the doomsters who capture the headlines (and will continue to do so, since those who choose the headlines want to use large type rather than a track record of those with sober forecasts).

In fact the Treasury was not among the doomsters. Its PREFU 2023 expected GDP to rise 0.6 percent in the quarter – in the right direction and within the margin of forecasting error.

In any case what does the term ‘recession’ mean? As I have explained in previous columns, the definition is based on one used for the US economy and almost certainly does not apply to New Zealand, were we to do the systematic analysis which underpins the US definition. But who cares about systematic analysis when the objective is to get a headline?

However, we should not be complacent about what is happening to the economy. Allow me to compare the June 2023 year with the June 2023 one, which reduces the noise – some of which is forecasting error, some is for timing.

It turns out that volume GDP per capita is higher this year than last, perhaps by 2.2 percent. I confess I was surprised at this and had to think through what was happening. (I am not seeking headlines, just clarifying my thinking – and yours, I hope.)

Volume GDP measures output and not spending power. The difference arises because some of the output is exported and the sales price it gets may go down, as it has just done, which reduces spending power. Adjust for that decline, the spending power for the June 2023 year was similar to that for 2022. So on average we seem to be about the same.

That is for the economy as a whole. That need not be the increase for the household sector part of it. The disposable household income account for June 2023 is not yet published; let’s assume that it too shows no change. (I’ve italicised ‘assume’ to emphasise we don’t know.) Disposable income is a measure of spending power.

(Even then, we need to take care about recent migrant households. I am guessing they have a greater share of disposable income, so it may be that with the immigration surge, the disposable income of those already here is down a little. This is not to say that new migrants are stealing income from the rest. They are adding to production and being paid for it.)

However, if average household spending power is steady, that will not be true for each and every household. Some must have above average increases, some below average. Probably many of the latter households are paying higher mortgage interest – and increasingly, as their interest rates come up for renewal. Presumably they are very grumpy.

But other households with savings are receiving higher interest so their disposable incomes are going up. I take it they are not so grumpy, unless they take the commentariat promise of a recession as gospel. (Additionally, with rising interest rates more of ‘spending power’ must be going offshore to pay for mortgage debt funded offshore.)

The conclusion from a more careful than usual analysis is that while the economy is not doing too badly in production terms, external circumstances are not favourable, and there is probably a sizeable group of households struggling because of rising interest rates when they were not a couple of years back. (Observe that I have not had to use the ‘R’ word; not once.)

Is this column breaking my usual rule of not commenting on election matters shortly before an election? Not really – there is no prohibition on informing voters.

Nor am I blaming the government for the state of the economy. You will notice the two main factors in my story of sluggishness are external – falling export prices (plus low tourist arrivals) and rising international interest rates. It is too easy to blame the government – whatever its colour – for things going wrong.

The government can temporarily boost the economy but that damages the medium-term prospects. According to PREFU 2023 it has not. The current fiscal balance is currently contractionary – in contrast its figure 2.18 (p.58) suggests that just before the 2017 election the balance was expansionary; before the 2020 election it was much the same as today.

That may not seem to be the way matters are seen in the commentariat headlines or the political debate, neither of which has been particularly constrained by the facts.

What is PREFU 2023 really telling us?

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What is PREFU 2023 really telling us?

Despite the headlines, things are not much worse than at the time of the 2023 budget, but fiscal management is always difficult.

The Treasury is required by law to publish a Pre-election Economic and Fiscal Update (PREFU) a few weeks before a general election, just as it is required to publish one before the (May) budget (BEFU) and a half (fiscal) year one in December (HEFU). The purpose of a PREFU is to minimise any surprises to the new government.

PREFU is an independent assessment by the Treasury. There is no input by politicians other than to advise the decisions that Cabinet has made which might affect it. That means that some of Labour’s election policy promises are excluded; in any case, the announced ones involved only small increases in government spending phased in over the next three years.

The reality is an EFU is usually a very boring document, as no doubt the Treasury officials who work on it think too. It is packed with detailed information of great interest to economic wonks, but there are rarely any headlines of public interest. So the politicians make them up, predictably exuding confidence if they are in government or claiming the EFU reflects a disastrous state of the nation if they are not. The media trawl through the detail to identify as spectacular a story as they can find, while the commentariat mixes in their political views. What is a straight-down-the-centre columnist to do, other than bore readers with a factual summary?

A PREFU is particularly difficult from this perspective, since it is published only four months after the BEFU, so there are only four months more data (often just one more data point if a series is compiled quarterly). Not surprisingly then, there is no great revision to the Treasury’s macroeconomic outlook.

The Treasury, bless them, provided a comparison with their previous BEFU forecast. Often it is very hard to see any difference, indicating that the new data was consistent with their May forecast. The biggest difference is that migration is surging more than was expected. Smaller differences, well within forecasting error, are that interest rates are fractionally higher and yet house prices will stop falling sooner (the effect of the migration?); the external terms of trade are fractionally lower and so the current account deficit is slightly higher but still coming down. Consumer prices are now thought to be falling a little more slowly than PREFU projected. But the GDP and unemployment tracks are much the same.

Yes, I am assessing the changes in terms of the margins of forecasting error. As I explained here, it would be better to provide ‘fans’ rather ‘point’ estimates. PREFU almost does, because it looks at alternative macroeconomic scenarios, reflecting the uncertainty of economic forecasting and various minority views within the forecasting teams. (A healthy forecasting team should have dissent and hard-fought arguments over the different scenarios.) The bands of uncertainty can be wide. For instance, the 90-day interest rate is forecast to be 3.9 percent per annum in June 2025. but the upper band is 5.4% p.a. and the lower one 2.4% p.a..

The PREFU also devotes more than a page to what is going on in the Chinese economy which it judges as weakening with some impact on our external terms of trade. I think what it is saying is that Treasury is concerned, they are monitoring China closely, but they don’t know enough to work how events will evolve there.

To summarise, there has been a tendency for the commentariat to highlight bad economic news, but things haven’t changed much since May (which is good news for all the political parties which have been using BEFU as the base of their election policies). Share prices dipped on the day before the PREFU was released. The reason given is that the share market expected a bad update. It wasn’t. (Mind you share prices often fluctuate for no rational reason; although the commentariat always has an explanation after the event.)

Treasury needs to forecast the macroeconomy to underpin its fiscal forecasts. To nobody’s surprise, these show some weakening. In particular, the Treasury has lowered its corporate tax forecast since the BEFU. As far as I can assess, if that had not happened the fiscal position would be much the same between the two EFUs. (There are, of course, numerous minor positive and negative changes.) Forecasting business profits is one of the most difficult parts of the macroeconomic forecaster’s job; I have never had to forecast corporate tax, but I know there is a long history of Treasury struggling with the exercise.

As widely reported, the forecast date for the planned budget surplus has been pushed out from the June 2026 year to the June 2027 year. Year measures are a bit coarse. The actual delay is probably about seven months rather than twelve. So with four months more data the surplus date has been delayed seven months, a sobering reminder of the volatility of a number which is a small difference between two very large numbers. (A one percent error in the forecast of revenue for the June 2024 year and an accurate expenditure forecast, could generate a 15 percent mistake in OBEGAl, the standard measure of the deficit.)

Remember too, that much of any borrowing is for capital spending. In 2027 the net worth – its assets minus debt – of the Crown will be higher than today. It is a proper economic discussion to debate how much of the government’s capital investment should be funded from current revenue and how much from borrowing. (I can hear a Treasury official grumbling ‘don’t forget we still have to borrow the bloody money’.)

What the PREFU is saying to the Minister of Finance after the election, is that the books are not in too bad a position (providing you have not promised anything stupid), but always – always – you will be under fiscal pressure. And you may have to deal with unexpected shocks.

The Treasury gives little guidance as to the particularities of the current pressures (other than the implications that politicians always want to reduce taxes and increase spending). Clearly the war resulting from the Russian invasion of Ukraine is among the big impacts on the world economy. China’s difficulties may be yet to come.

However, what I don’t think we have appreciated sufficiently is the impact of the Covid pandemic and the measures taken to reduce deaths. They had a substantial immediate economic impact – you can see it in the PREFU. But that is still unwinding three years later. It would be naive to think that those economic measures were a free lunch and almost as naive not to think about having to pay for the lunch. Trade-offs are central to economic management as the next government – whoever it may be – will find, even if in the heady days of election campaigning trade-offs are largely ignored.

Ignoring Tax Tradeoffs

This entry was posted in Pundit, Regulation & Taxation, Social Policy on by .

Public policy frequently suffers because we don’t look at alternatives.

Thus far the Labour Party’s only ‘new’ election (economic) policy is to remove GST from fruit and vegetables.

Even the accompanying promise of adjusting Working for Families is much in line with what it has being doing in the last six years. It is also an acknowledgement that the government has not been able to improve the scheme despite an almost universal agreement by the knowledgeable that the sixteen-year-old scheme is neither efficient nor equitable. The Key-English Government could not solve the conundrum either. The promise to offer free dental care for under 30-year-olds is also an extension of past policies.

That suggests that Labour’s positive campaign is that it has done a good job and promising to progress its policies, but that there is nothing new it needs to offer – except cheaper fruit and vegetables. Whether the electorate considers this a good offer will be revealed on election night.

Why GST off fruit and vegetables? Why not bread and milk? I am guessing it comes from the public health sector, which has been concerned that people do not eat enough fresh fruit and vegetables. It found that higher taxes on alcohol and tobacco contribute to restraining their misuse and use. The sector, assuming this success will as easily apply to other products, has called for increased taxation on what is damaging to health – like sugar – and reduced taxation (or subsidisation) on what should be promoted – like fresh fruit and vegetables. In its enthusiasm it has paid little attention to the practicalities of implementation or the effectiveness of the price alteration in changing behaviour.

There has been considerable criticism of the proposed policy, ranging from the practicalities of implementation – what would be in and out, how food businesses would cope since they would almost have to keep two sets of accounts – to the possibility that most of the reduced tax would be absorbed by food outlets and little would be passed on in lower prices to purchasers. It is also argued that any reduction is greater benefit to high-income households than to low-income ones. Little attention has been given to any health benefits; there is not a lot of evidence one way or the other.

One of the main attractions of GST is its uniformity, which makes its implementation simple. (I applaud the Labour Government’s various measures to broaden coverage.) Varying the rates on one product group tempts a free-for-all on everything else. Casual advocacy can think of reasons for more or less consumption tax on almost every known product.

I support targeted excise duties on specific products which can be shown to be administratively practical and beneficial for the purpose. Currently that includes alcohol and tobacco for health, fuel duties for funding the transport system and carbon taxes for aligning individual decisions to the real cost of the emissions they generate (but I do think our current emissions trading scheme is very muddled). However, most popular proposals do not bother with such careful analysis. That leads to a higgledy-piggledy mess like we had in the Muldoon era.

Labour’s response seems to be that whatever the experts say, GST off fruit and vegetables is a popular policy. Apparently, the party’s focus groups favoured it about two to one.

I do not know exactly how the proposition was posed to the groups. Did they ask ‘do you support the removal of GST from fruit and vegetables?’ or did they ask ‘do you support the removal of GST from fruit and vegetables even if it is difficult to implement and much of the benefit of the lower taxes may go to retailers rather than purchasers?’

You may think the second question is loaded but so is the first, offering a policy change as though it is free. Next time you see the response to a focus group or survey question, ask yourself whether putting the same sentiment another way would have resulted in the same answer.

I would have preferred that the focus group had been asked ‘do you support the removal of GST from fruit and vegetables or would you rather have the cost of the reduction used to give you an extra $140 a year?’ I am guessing that the two-to-one support for the GST reduction would near reverse.

The cost of the lower GST is about $500m a year. The same $500m could be used to cut the bottom income tax rate from 10.5 percent to 9.5 percent so that every taxpayer who earns at least $14,000p.a. would be $140p.a. in the hand better off. It would be proportionally more beneficial to the poor than to those on higher incomes. You might be able think of options to spread the tax reduction more fairly, but this is my guess about the option voters would best respond to.

Putting the policy choice this  way, many in the focus groups might be derisive of the size of the giveaway – less than $3 a week for most adults and nothing for children.  (National’s lowest offer is even smaller.) But that is true for the GST reduction. Do we really want that sort of transparency of policy in an election year?

My concern is wider. We usually discuss tax issues by looking at only one side of the story. I can understand people being opposed to a hike in income tax but it would be more popular if it was presented being used to increase spending on, say, health care, thereby reducing waiting lists and the need to go private. (In fairness, the Greens say they want to use the proceeds from their wealth tax to make dentistry free. I support both policies although there are some technical difficulties with free dentistry – did they consult anyone with expertise in dental economics before formulating their policy? But universal free dentistry is not at the top of my priority list for using any additional revenue.)

Regrettably, public discussion focuses on tax changes but not what their effect on public spending would be. That’s fine if one is opposed to all public spending, but it is hard to find anyone who is quite so rigorous. Even ACT MPs are happy to accept their salaries and expenses – once upon a time parliamentarians did not get much of either.

Economics is about tradeoffs. Sadly, these tradeoffs often get ignored in public discussion despite them being integral to public and private life. Even going without fresh fruit and vegetables trades off against your health.

PS. National’s tax package has been well covered by others, and hardly needs comment here. However, a broader point is that proposing new taxes to partially fund the reductions, breaks the consensus of ‘thou shall not introduce new taxes’, paving the way for a less hysterical discussion on capital gains and wealth taxes.

The Chinese Property Market and New Zealand’s Future

This entry was posted in Business & Finance, Globalisation & Trade, Macroeconomics & Money, Pundit on by .

Evergrande and Country Garden – two giant Chinese property development companies – are a portent of the turbulence before us.

The recent financial failures of two ginormous Chinese property companies, Evergrande and Country Garden, at various times ranked the second largest and sixth largest in China have implications for the New Zealand economy.

The Evergrande Group has been struggling since 2021 (here). It has just filed in a New York for Chapter 15, a bankruptcy protection in the US enabling it to restructure its debts. The debts – most are not American – are estimated to amount to an eye-watering US$300b (say NZ$500b). One assessment concluded that in February 2022 its liquidation would return only between 0% and 10% of principal to creditors.

Also in August 2023, Country Garden defaulted on the US$45 million with regard to interest disbursements linked to two offshore US dollar bonds. I won’t go through all the turmoil which has since happened, but summarise by saying that today Country Garden appears to be where Evergrande was two years ago. It may go down faster because Evergrande has undermined financial market confidence.

Moreover, while not so prominently in the news, there are many Chinese property companies – some comparably large – which are also in increasingly difficult financial troubles. China has many ‘shadow’ banks, that is banks whicch are not legally regulated in the usual way and which have the potential to collapse the entire financial system.

The immediate precipitant was that in August 2020, the Chinese government enacted a ‘three red lines’ rule which regulated the leverage taken on by property developers by limiting their borrowing based on the following metrics: debt-to-cash, debt-to-equity, and debt-to-assets. The rule’s purpose was to rein in the highly indebted property development sector. It has, but at the cost of undermining many of them. By October 2021, 14 of China’s 30 biggest developers had violated the regulations at least once.

More fundamentally, there had been a speculative property boom starting over a decade earlier in which the companies relied on inflating property prices to ‘balance’ their books. It was a kind of Ponzi financing, compounded by local authorities financing themselves by selling land to the companies, who financed the sale from the cash flow coming from new investors and banks.

Because of the local authority involvement the companies have been building accommodation in third and fourth level cities, where there is no significant demand. There are pictures of rows of apartment blocks which are said to be entirely empty. They will be in the company books at cost plus inflation, but there is little prospect that they can be sold at those prices, if they can be sold at all.

Observe too that a rapidly growing company – anywhere in the world – is unlikely to develop rigorous internal systems to administer and monitor itself. It is not until the receivers move in that we learn just how slack the failing company has been (and how much corruption).

I take it that the central authorities judged that the boom was unsustainable, and that the later the crash the bigger it would be. So they thought it better to act soon, even if that put China’s property and financial markets into turmoil.

There is much more that can be pieced together or guessed. But the issue for this column is the impact on New Zealand and the world.

There is a general agreement that  financial instability may politically weaken Chinese premier Xi Jiang. At the very least, it requires him to pay more attention to domestic issues. Among the issues which would surely worry Xi and the central committee is demonstrations outside Evergrande’s offices by investors who had partly prepaid for housing which has not been built or finished and by subcontractors who had not been paid. The demonstrators may turn on the government.

This does not mean that China will cease to be significant politically in the international system. It is too big and important for that. There is even the uncomfortable possibility that it will be more aggressive externally in order to take its population’s concern off failing domestic issues. (Putin’s Russia is a current example, but history records many others.)

Moreover, the property sector is said to contribute 24-30 percent of China’s GDP. The turmoil in its property market seems to be contributing to the slowdown in the growth of the Chinese economy, which gives Xi less room for economic manouevre; it may slow down its commitment to the Belt and Road Initiative.

(The other great Chinese growth driver has been exporting and that too is hiccupping, partly because the world economy is slowing down and partly because many countries are trying to de-risk their dependence on China. It is also possible that the gains from its thriving export sector are not increasing as fast as they have done over the last few decades.)

One assumes that eventually the government in Beijing will bail out the Chinese property sector (and the local authorities and the banks that have been financing it). There are various ways of comparing the size of the Chinese and New Zealand economies; one says it is about 70 times as big. So Evergrande’s NZ$500b debt is equivalent to about $7b here. (Double it for the other property companies also going under?) Our Treasury and Reserve Bank would blanch at a bailout of this magnitude. (I have more confidence in their expertise to do a bailout; they have had more practice. And they wouldn’t have to deal with a shadow banking system.)

Will the financial turmoil in China impact greatly on the world financial system? The conventional wisdom is that the exposure is not great. There may be some non-Chinese financial institutions which are overexposed and will suffer – even crash – but presumably they are a small proportion of the total.

Of greater concern to New Zealand is whether the slow growth of the Chinese economy will impact on our exports there. Our trade dependence on China is extraordinary. It is the biggest market for milk products, sheepmeats (for beef it is only second), fish, apples, wine and honey (for kiwifruit it is third). Thirty years ago, China did not make New Zealand’s top ten export destinations in any of these products. We may already be seeing an impact from the growth slowdown in international dairy product prices.

We have long been aware of our export overdependence on China, compounded by selling to other markets in East and Southeast Asia (including Australia) which are themselves very dependent on the Chinese economy. (Exports to these markets are about two-thirds of our total; China alone is a third.)

There have been considerable efforts to diversify; we have just settled free trade agreements with Britain and the EU. The big diversification could be with India, but the Indians have not been nearly as enthusiastic as we are. After all, compared to the others they are negotiating with we are a tiddler. A deal was a ‘priority’ for the Key-English Government, it has been for the Ardern-Hipkins one, and National has announced that it would be for them. There is a bit of a pattern here, isn’t there? When we finally get an FTA,  it is likely there will be little improvement for dairy access.

We are negotiating trade deals which will add to the diversification: with the ‘Pacific Alliance’ – the Latin American regional group made up of Chile, Colombia, Mexico and Peru – and with the Gulf states – Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain. Negotiations with the Russia-Belarus-Kazakhstan Customs Union are currently suspended, while a long-term ambition for an FTA with the US is hardly on the table.  Open plurilateral deals enable new members to join, as when Britian joined the CPTPP, adding to the diversification; existing bilateral trade deals are also being upgraded.

This probably means that China and its associated economies will continue to dominate the prospects for the New Zealand economy for some time to come. What is going on in China’s property and finance markets may be more important to us than the October 2023 election.

Bullying Politicians

This entry was posted in Education, Governance, Pundit on by .

Banning mobile phones in schools points to wider issues.

I don’t have enough information to evaluate National’s election proposal to ban mobile phones in schools, but something has to be said about how they plan to implement it. Compulsion from the top is characteristic of much New Zealand policy reflecting our centralist approach to government.

Many school principals are critical of the diktat. Presumably, they know a lot more about the issue than I do (or, for that matter, Chris Luxon does). Luxon claimed that ‘the ban was one of the ways National would lift “abysmal” achievement levels’, although there does not appear to be any evidence of a causal relationship between phone use and learning – correlation is not causation. (Evidenced-based policy will not be at the forefront during the election campaign.) As I understand it, the usual concern is misuse, especially for bullying, not academic achievement.

Some schools have already instituted bans without a Wellington-based direction. Apparently many principals think there is a problem with mobile phones in schools but that it should be addressed at individual school level, allowing for differences of opinions, circumstances and management styles.

I assume schools would recognise – even welcome – a recommendation from the centre, especially if it was accompanied by guidance about options prepared by an expert panel of school leaders. But it would be up to each school to implement a ban or not, including the practical details of how it would work. I should not be surprised if different schools chose different details in their approach, for circumstances differ from school to school.

This is an example of the application of nudging where the government has a view but rather than order it, it sets up a framework which encourages others towards the government view but leaves the final choice to them.

Perhaps a result of decentralisation would be messy decision-making in which each school – principal, teachers, council, parents and students – has to wrestle with what to do. (Have those schools which have a cell phone have a lot of trouble deciding?) But that is true whenever we have choice. There would be enormous ‘efficiency’ gains (and probably health ones too) if instead of giving superannuitants cash the government delivered its choice of groceries to everyone’s door. The elderly would not even have to decide on breakfast – nanny state would do that for them. Think of all the time and transport savings from not having to shop for food.

The nanny state trope is not mere rhetoric. One of the challenges parents face is how initially they make all the choices for their children and then have to slowly withdraw as the child evolves into an adult and increasingly makes their own decisions; sometimes parents are irritated or anxious by the decisions adolescents make – but you live with it.

What interests me about National’s policy is that it is top down. One usually thinks of National being the more decentralising party and that those to its political left are more prone to running the country by government direction. Recall John Key’s slogan in opposition that Labour was running a ‘nanny state’.

(National’s educational spokesperson is Erica Stafford – electorate East Coast Bays. Her adult background has no practical experience in the education system except that she has a couple of children.)

It would seem the culture of centralisation is so deeply embedded in the country that even National succumbs when it is expedient. Perhaps they are influenced by focus groups – apparently about three-quarters of those surveyed support a ban. I am astonished that so many New Zealanders thought they were informed enough to have a view – count me out. I wonder if the groups discussed how the ban would be implemented.

I agreed with the Rogernomes that, at the time, economic decision-making was too centralised and more decisions should be taken at lower levels.  I favour ‘subsidiarity’, a principle which is not prominent in New Zealand political thinking. (A leading Labour Party thinker, who honourably resisted neoliberalism, said he had never heard of it.) Subsidiarity is that social and political issues should be dealt with at the most immediate or local level that is consistent with their resolution.

The notion goes back to at least Thomas Aquinas in the thirteenth century and is prominent in Christian Democrat political philosophy, the European Union where it is a general principle in its law, and in the United States. The principle is not increasing efficiency – sometimes its application may – but reducing the power of those at the top of the hierarchy.

The economy the Rogernomes took over had suffered detailed intervention under Robert Muldoon, the dominant tradition of economic management since the Second World War, compounded by his personality and the wretched fight against inflation. The Rogernomes, rightly in my opinion, wanted to leave more decisions to lower levels where personal choices are co-ordinated by markets.

They did the decentralisation badly for at least three reasons. First, they did not pay enough attention to the need to regulate the market. The list of their failures is long; it includes building leaky buildings and allowing Telecom to be a monopoly.

Second, the market requires a fair income distribution to work properly. The Rogernomes increased inequality by cutting the incomes of those at the bottom. Most people think the resulting distribution is not fair.

Third – this is what this column is about – they saw the only valid agents in the economy as being the central government and private voluntary arrangements – which include businesses and households. Social institutions between them which required some regulatory support were downgraded – hence the Employment Contracts Act, which undercut unionism.

It is true that in places the Fourth Labour Government made some changes supportive of those institutions. It consolidated local government which could have given locals greater autonomy, but they did not address the funding issue and they continually bullied localities – for instance, directing them how they were to run their trading enterprises; we continue to do so today.

Labour also consolidated the health sector into what was then Regional Health Boards and later District Health Boards (interrupted by National’s neoliberal-driven attempt to commercialise the public sector in the early 1990s). Again there has been more bullying – the worst example was the treatment of the successful Canterbury DHB (described here and here). The system is not now subject to central government bullying of locals, because of its centralisation into Health New Zealand (Te Whatu Ora), with local input stripped out. (However, at least one local authority is seeking ways to monitor their local health system; good on them, may others join their effort.)

In David Lange’s post-Picot restructuring of the schooling system was decentralising with the intention of increasing the power of teachers and parents and reducing the power of Wellington bureaucrats and Rogernomes. Although presented as cost-saving, it was not. The Secretary of Education in charge of the transformation, while explaining to me how it was designed to hold off the Rogernomes, said that to make it work properly it needed another $60m p.a. (say $120m in today’s prices). But we still see the kind of bullying that National is practising.

Not that this Labour Government is exempt, despite the record of its 1984 predecessor. In a number of areas its approach has been centralist. (I have also mentioned in previous columns the media merger – now abandoned – the polytech merger and the three waters merger.)

The temptation of politicians to bully is inevitable; Muldoon was just the most prominent in my lifetime, but even the Rogernomes were dreadful bullies, especially if you did not agree with them. It is said that voters are more affected by moods than by specific policies. I shan’t be surprised if an important defining mood in 2023 is about the balance between centralisation and decentralisation.

Credit Ratings and International Financial Standing

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The recent reduction in the US credit rating signals that market lenders are not happy with the US fiscal arrangements. New Zealand’s lower rating is a warning that we could do better too.

Fitch recently lowered its long-term credit ratings rating of US government debt from the top grade of AAA to AA+. Financial markets hardly moved – they had already incorporated Fitch’s reservations in their thinking.

Borrowers, including the New Zealand government, pay credit raters (the other main ones are Moody’s and Standard and Poor) to assess their credit worthiness. The raters also give an indication of how they may change their rating next time. New Zealand’s Fitch long-term credit rating is AA and ‘stable’, just below the US one which is also stable. Countries above the US at AAA include Australia, Denmark, European Union, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland – all are stable too. (For a list of country ratings see here.)

Lenders require a rating to assess the risk of investing in sovereign bonds; some may not even be allowed to hold the bonds unless the rating is above a particular level. The higher the grade, the more willing they are to invest; usually the higher grade bonds pay lower interest rates. Credit ratings also reduce the costs of monitoring for lenders. I guess a country acquiring a credit rating is a kind of penance for borrowing; not having one reduces a country’s ability to borrow.

Ratings below AAA do not mean that the credit rating company or the lenders expect the country to go into meltdown soon. But there could be a hitch. I take it that Fitch’s US downgrade arises from an inconsistency in US laws. Congress approves the US government’s additional borrowing (spending more that its revenue) but it also sets a debt ceiling which total debt may not exceed. The two figures may not reconcile – inevitably so, if the government keeps borrowing in the long run.

As total US government debt nears the ceiling, the political parties in Congress play a kind of ‘chicken’ of who yields first. On the last occasion this year, the Republicans, who are not in the executive, refused to raise the ceiling, while the Democrats, led by President Biden, refused to restrain spending. After much political argy-bargy, which included the president cancelling an important overseas trip, the Republicans agreed to suspend the ceiling in exchange for the Democrats making some spending concessions. The next round of chicken is expected in 2025, when there will be a new Congress and possibly a new president. (The last round was in 2021.)

No one is sure what exactly would have happened if no agreement had been reached. The US government would not have melted down, but certainly there would have been turmoil in the US market for treasury bills, which underpins the entire international financial system. The Fitch downgrade was intended to signal that it was time that the US got its financial arrangements into order. Others in financial markets would say ‘hear, hear.’

More fundamentally, the crisis arises out of the structure of the US constitution – the oldest functioning one in the world. It was greatly influenced by the British arrangements of the time in which the king still had a lot of power. Instead of a king the US constitution provides for an elected president who still has a lot of the eighteenth-century royal powers. Meanwhile the British system, which we follow, evolved until most of those royal powers became held by a prime minister appointed by parliament and commanding its confidence.

The US has no such prime minister. It is quite possible for its president to not have the confidence of either its House of Representatives or its Senate. (The British parallel of the House of Lords has been largely neutered; New Zealand’s – the Legislative Council – was abolished in 1950.) This can happen – and has happened – when both arms of the US Congress are dominated by a party different from the President’s. In any case, US political parties are not as well-disciplined as the British and New Zealand ones – and you may think even those are a bit shambolic.

Why does New Zealand get an AA rating? Are not our public debt-to-GDP ratio low and our public accounts transparent by international standards? Yes, but Fitch does not look only at our public debt. It looks at private foreign debt and the indirect public exposure to it. After all, during the GFC bailout, the New Zealand government ended up, in effect, owning a large proportion of private housing mortgages, when they were used to underwrite the support commercial banks, heavily exposed to offshore debt, needed. The crisis was handled so smoothly that the public was largely unaware of the achievement. Had there been a hiccough, the economy’s financial markets would have been in deep trouble and so would have been the economy.

Our overseas debt, denominated in foreign currencies – most often subject to exchange rate risk – is almost all private, while New Zealand public debt is denominated in New Zealand dollars – it has overseas investors but they take the exchange rate risk. (Will they always?) But the private overseas debt is interlinked with the public debt as the GFC crisis demonstrated. The credit rating agencies (and our Reserve Bank and Treasury) understand that, even if not everyone does.

Very often the commentators’ monetary theories ignore the foreign sector of the economy. I read the books and other accounts which explain their theories, look up the index and too often there is not a single reference to the exchange rate, foreign capital flows, exports and imports. It is not sufficient to say that under a floating exchange rate attention to the external sector is unnecessary, because financial capital flows are very influential on exchange transactions, the exchange rate and the domestic monetary situation.

I can understand how the theories apply better to the US economy, because it issues the international currency. (Even so, most American economists are wary of the theories for technical reasons.) But, for heaven’s sake, the New Zealand dollar is not the US dollar. Haven’t those commentators noticed?

So the credit rating agencies look at New Zealand’s substantial private foreign debt and downgrade our standing accordingly. It’s a warning to us, and to anyone lending to us, just as Fitch was warning the US about its financial arrangements.

There Are Wider Lessons to be Learned From the Failures in the Management of the Health System

This entry was posted in Governance, Health, Pundit on by .

It is the professionalism – competence and integrity – of the doctors, nurses and technicians who provide the care which obscures the managerial failure.

The column-blog, Otaihanga Second Opinion is compulsory reading for anyone interested in the health sector. It is written by Ian Powell, who was Executive Director of the Association of Salaried Medical Specialists, the professional union representing senior doctors and dentists in New Zealand, for over 30 years (until December 2019) and he has an intimate knowledge of the sector and excellent judgments.

One column, Trust Relationships and Health Systems, had much wider implications than just the health sector. It draws lessons from the extremely successful leadership team at the Canterbury District Health Board (CDHB). In an earlier column I reported its demise from excessive and insensitive interference by centralised Wellington. Powell’s column provides more background as to why it was successful.

He summarises the ‘standout’ performance of the former Canterbury District Health Board (CDHB) from the mid-2000s to 2020, when integrated health pathways between community and hospital were successful in constraining acute patient demand. They occurred because they were

… clinically developed and led by health professionals working in both community and hospital care. It would not have happened without a strong focus on relationships leading to trust in order to enable an engagement culture to develop that was previously missing. Decisions were based on what made best clinical sense in many different branches of medical care. The engagement culture that led to this outcome, and was strengthened by it, provided the basis for CDHB’s outstanding response to the post-2011 earthquake health crisis.

Powell’s column was agreeing with an article by Ian McCrae, who was founder and former CEO of Orion Health: Bugger, I’m the New Minister of Health, which also drew lessons from the CDHB experience.

It then reports an insightful comment to McCrae’s article by a prominent Canterbury surgeon, Saxon Connor:

This is spot on. But what it doesn’t allude to is that the approach didn’t happen by chance. There was almost a decade of ‘trust building’ that allowed a system network to develop which embraced change based on underlying values of respect, empathy and psychological safety.

However my observation is since the change we have seen loss of those networks, trust and respect. People are now disengaging on [a] daily basis. The old way of working cannot simply be turned back on. It will require starting from scratch to rebuild trust. Paraphrasing David Meates [former Canterbury chief executive] “Change can only happen at the speed of trust”. I don’t think people quite yet understand what they have lost from the Canterbury health system over the last two years.

The trust did not occur overnight. Powell says it took longer than a decade. The turning point was the 2006 arrival of a new, very experienced, chief executive, Gordon Davies, who knew the health system well and understood the importance of both relationships and good engagement with health professionals. His work was built upon by his successor, Meates, whose leadership finished in 2020, when the Wellington approach made it impossible for him and his senior leadership term to continue.

Powell places trust at the centre of his diagnosis, but lurking underneath is the professionalism of those involved; you trust your healthcare because of the competence and integrity of the doctors and nurses treating you.

Critical to this analysis is the notion of the ‘principle of subsidiarity’, that is central government should only perform those tasks that cannot be performed at a more local level. That does not only apply to central government. Anywhere in a hierarchy, subsidiarity says activities should be delegated to the lowest possible level. Sure, they are going to make mistakes down there, but so do those higher up – bigger bogups.

It is a cultural issue. You cannot impose trust and good working practices. They develop from the bottom. Centralisers have tried; Stalin and his goons did not succeed at all. Our central institutions have done little better.

The above discussion is about the health system. It leaves one very gloomy about the success of Health New Zealand (Te Whatu Ora). If it does succeed, it is going to take a long time, longer than the tenure of any Minister of Health or Chief Executive. It will involve subsidiarity, having faith at the local level. That is almost exactly the opposite to the ambition which led to the creation of HNZ, and the destruction of the DHB system.

Certainly there are things which need to be done nationally, like developing a national IT system (which the DHBs had already been trying to create, but at a snail’s pace). Ultimately the task is about creating a culture of professionalism and trust at the grass roots. The centre cannot deliver it by itself.

The lesson should not be lost in other sectors of government, especially given that the approach based on generic management is almost exactly the reverse, with its appointments of chief executives from outside who have virtually no competence in the activities of the institution they are to run. As well as in the health system, this column has detailed examples of Archives New Zealand, the Ministry of Local Government and Statistics New Zealand; there are many other instances. (Yes, there have been some successes but they are few and hardly offset by the failures.) We explicitly appoint them for a shorter period than the time it needs to evolve a culture, even if they had understood the job they were taking over. By the time a conscientious generic manager masters the underlying culture of the institution they had taken on, they are moved to another one.

This is not a cheerful conclusion. I was struck that when Meates left his job at the CDHB he was not immediately recruited by the Ministry of Health for his expertise; neither has he been involved in Health New Zealand. We have a system which rewards conformity rather than achievement.

Given the number of low talent generic managers that tells you a lot about how the centre works. Generic management is too entrenched to admit its failures and seek a better way focused on culture, professionalism and trust.

Thinking Slow Or Thinking Fast?

This entry was posted in Environment & Resources, Governance, Maori, Pundit on by .

It is too easy to react to a problem rather than to tackle it thoughtfully.

It’s Friday night. You plan to have a couple of drinks with friends. Saturday morning you can’t remember how many you had – was it seven? – but you wish you hadn’t. What you are showing in economic terms is ‘time inconsistency’ in your decision making. Each step seems rational and yet, with hindsight, you made decisions which don’t seem rational in total. (And yes, you will do it again the next Friday.)

What appears to be happening is that there seems to be two parts of the brain making your decisions – remember Daniel Kahneman’s Thinking Fast, Thinking Slow? – and they make decisions through time quite differently. The ‘thinking-fast’ bit reacts in the very short term as when you chose to have that extra drink; the ‘thinking-slow’ bit is more concerned with the long-term consequences – like the possibility of a hangover the following morning. Too often short-term thinking dominates. It appears rampant among adolescents; some adults seem never to grow out of it.

I am not an expert on a psychological research so I offer this explanation of the source of time-inconsistent decision-making very tentatively. The point for this column is that sometimes we seem to operate with a short horizon when a modicum of reflection or hindsight suggests a longer-term perspective might be more sensible. We grab the cookie now rather than wait to get two cookies in the near future.

The same seems to apply for society as a whole. Time and time again we see the focus on the short term without reflecting on the long-term context.

Oh, you say, ‘what about greenhouse emissions? We are thinking long term there, aren’t we?’ Are you sure? It took decades to take action after we were alerted to global warming and climate change. Even today, that action is short term; we focus on trees as carbon sinks ignoring that they cannot be a long-term solution because eventually that has them covering the entire land. Meanwhile, we are doing little about the emissions from transport, which build up in the warming cloud for a hundred and more years.

Some of you will say ‘well, I am a greenie; I always think and vote long term’. Are you sure? The Green Party advocates rent controls. They receive much criticism from economists. The issue is that rent controls work in the short term; in the long term they cause havoc to the rental housing market (economists more politely say they ‘distort’ the market). In this case the Green Party are thinking fast; economists are thinking slow.

(In my view, rent controls may make sense to deal with a short-term shock but they make no sense for long-term management. A big issue is when and how to unwind them. Short-term thinkers – and adolescents – rarely pay attention to exit strategies.)

It is not only on economic issues that we think fast. The national reaction to a spate of crimes is to punish the criminals with little attention as to why the crimes are happening. If there is any account of the reason it amounts to ‘it’s the government’s fault’; a strange argument given that similar outbreaks are happening overseas under different sorts of governments.

I was moved by Tony Blair’s ‘tough on crime; tough on the causes of crime’. I have no background in criminology, so I must be cautious. But I don’t see any serious national discussion on the causes of crime. I was impressed by a paper by retired Government Statistician Len Cook, which showed dramatic reductions in incarceration rates by more recent Māori cohorts. Because older generations who have been to prison, tend to be repeat offenders – are our prisons training grounds for criminality? – the fall-off is not yet so evident in the aggregate prison population. (Cook’s paper Insights from Statistical Trends and Patterns Relating to Youth Justice:1911-2021 is here. Notice that he explores over a century of data.)

Before you jump to the conclusion, dear fast thinker, that the Māori decline is the result of changes in sentencing practice, observe that the teenage Māori incarceration rate has fallen from eight times the non-Māori rate for those born between 1946 to 1970 to thrice for those born between 2001-2005, which suggests that there is a social structural change going on among Māori.

I have very tentatively suggested that the first generation of Māori who migrated to the cities were unprepared for urban life and experienced severe social disruption but that as they settled in, later generations have become better adapted to living in cities – including by evolving specific Māori institutions. (Here.)

What is sad is that we don’t seem to have sufficient anthropologists, criminologists and sociologists to lay the foundations for a think-slow, analytic, public debate about being tough on the causes of crime. So we think fast and react.

Without those foundations, matters of major public concern get reduced to trivia. There is a proposal for a $13.7b pumped hydro-scheme at Lake Onslow. It is essentially a way of storing electricity in good times for use when the standard production is low – a kind of national battery. I have worked in the economics of energy for many decades and would love to understand what is going on – even write a column about it. But there are so many related issues – such as the rise of intermittent wind and solar provision, local battery storage, the role (or not) of the aluminium smelter, better coordination of the existing system to use existing hydro-storage (which may involve renationalisation of some kind), reducing the use of coal, climate change … – that we cannot have a serious discussion without a system model. We are flying blind, yet again.

You may say, aren’t you proposing a covert ‘plan’, Brian? Depends what you mean by ‘planning’. I am reminded of the chairman of the Beattie Commission on science policy in the 1980s asking a Treasury official about a science plan. He stuttered, and stumbled and mumbled and I realised that p*** was a four-letter word that you did not use in polite Treasury circles at that time. The role of p***ing in public policy had collapsed, and we were left with short-term thinking and the faith that the market will provide.

You see the same problem elsewhere. For instance, we gave up thinking systematically – what I mean by ‘planning’ – about the future labour force at about the same time. Now we are in labour force muddles all over the place – especially in the health sector. I am comfortable with the government’s announcement of increasing the number of places in medical schools but, for heaven’s sake, it takes up to 13 years to get a fully trained doctor. We should have been thinking about the issue in 2010.

I am not arguing that we should have another Planning Council or Commission for the Future which Muldoon’s government established in the 1970s. Neither was particularly successful, in part because governments have a propensity to stack boards with the politically correct and politicians’ pets rather than the competent and thoughtful. Instead, we need a change in the nation’s culture to move away from thinking fast to thinking slow. I doubt you will see any such move in the run up to the election. It will be more like Friday night’s drinkies.

The Future Structure of the New Zealand Economy

This entry was posted in Business & Finance, Globalisation & Trade, Growth & Innovation, Political Economy & History on by .

I was asked by a Spanish journalist the following two questions (particular with attention to a historical perspective):

How likely do you see (if at all) a transition from an economy based on primary products towards an economy where digital services exports might play an important part?

I would also like to ask about the economic relationship with China: how much do you think it is going to suffer because of geopolitical reasons?

The Future External Structure of the New Zealand Economy

The search for product diversification of the external sector began with the first settlements in the 1840s – they needed to find something to export, especially as the quarries, such as whales for oil, began to run out. (Market diversification is dealt with in the second part of this article.) By the end of the nineteenth century, the export sector became very concentrated upon wool and refrigerated meat and dairy (‘processed grass’), where New Zealand had a comparative advantage which was turned into a competitive advantage by innovative scientific technology and sophisticated social organisations based on the family farm and collective post-farm processing.

By the middle of the twentieth century, there were increasing concerns with the long-term viability of this strategy. Suitable farm land was running out. (There was virtually no further land to be broken in from the mid-1950s; water resources were largely fully utilised by the 2010s.) Pastoral farming was not creating enough jobs for the burgeoning population.

New Zealand turned to ‘Import Substituting Industrialisation’ (ISI), as did many other economies. It was realised that would not generate enough jobs by itself and by the 1960s New Zealand was seeking export manufactures – notably, there were tax incentives for exporting manufactures and a free trade agreement with Australia. There was also a recognition of the need to diversify the farm sector – including to forestry, horticulture and wine – given the pastoral price experience New Zealand had during the 1930s Great Depression. Additionally, there were potential exports from the fishing resource (New Zealand has one of the largest EEZs in the world, and better fishing management than most) and from tourism. At that time, service exports were mentioned but, except for tourism, they were not near the centre of the public discussion.

The ISI strategy has fallen over in most affluent countries, including New Zealand, which, like most of them, has experienced a major decline in the share of the manufacturing sector and is now heavily dependent upon imported manufactures. As a gross generalisation, New Zealand manufacturing consists of primary product processing or small localised market supply where importing would be too complicated or costly.

When I was studying this – written up in my Globalisation and the Wealth of Nations – I concluded that New Zealand suffered from the major limitations of location and size.

New Zealand is located far from most other countries, in the middle of nowhere. The direct distance from Auckland to Sydney is similar to the distance from Madrid to Warsaw (and there is only water, not people, in between). International transport costs – and sometimes time – are a considerable burden. One consequence is that New Zealand is rarely in the middle of supply chains, which have been one of the most dynamic developments of manufacturing in recent times. There was a fashion for saying New Zealand should be exporting about 40 percent of its GDP, comparable to many other OECD countries, instead of its current 30 percent. What that overlooked was that most of the additional 10 percent were supply-chain ‘re-exports’, which are not really an option for New Zealand, which is only at the beginning or end of supply chains.

New Zealand is small with only 0.06% of the total world population. It ranks 123rd in the list of countries by population. Its largest city, Auckland, has a population of less than two million, even if Hamilton is included. There are more than 300 cities in the world which are larger on the Wikipedia list.

Urban size is important for the economics of agglomeration which lowers the cost of production and increases economic dynamism by competing multiple suppliers, greater specialisation and thicker labour markets. These are key to high productivity, high rewards manufacturing and services. They were judged to be of such importance that from the late 1990s New Zealand has given special attention to getting Auckland to function as effectively as possible. (Economies of agglomeration are offset by economies of congestion; unfortunately Auckland, located on a narrow isthmus, generates the latter.)

New Zealand’s size makes one pessimistic about there ever being enough agglomeration to make it a major international centre for manufacturing and services. Here are some examples of its strengths and weaknesses.

Fisher and Paykel were an Auckland-based, exceptionally innovative, provider of ovens, electric cooktops, dishwashers, dryers, freezers, ranges, refrigerators and washing machines. Unfortunately, transporting whiteware is expensive. The firm increasingly moved production offshore and eventually was taken over by Haier Group Corporation, a multinational home appliances and consumer electronics company based in China.

An offshoot from the innovation was Fisher and Paykel Healthcare, which designs products for respiratory care, acute care, and the treatment of obstructive sleep apnea. Because their shipment is less expensive, the company is still based in New Zealand, supplying more than 120 countries, with just 1 percent of revenue coming locally. However, since 2010 it has also been manufacturing in Mexico, supplying the United States.

Over a decade ago, I looked into the potential for a major biotechnology, pharmaceuticals and related research industry in New Zealand. I observed that there was no such an industry in the United States, but rather, it existed in about a dozen US cities, because the economics of agglomeration were powerful. All these locations were larger than Auckland, although if nearby Hamilton with its major interests in related animal biotechnology is added the city was near enough to the threshold. There is today a lot of such research activity and some internationally significant findings, but the industry has not taken off as much as one might hope. It may be because there is not the depth in local venture capital.

Xero is a technology company that provides cloud-based accounting software for small and medium-sized businesses, with more than three million subscribers and offices in Australia, Britain, Canada, Hong Kong, New Zealand, Singapore, and South Africa, and the United States. (It also has connections with Infosys in India.)

Sometimes a particular person’s choice of home can create an industry. Thus it is with ‘Wellywood’ because international filmmaker Peter Jackson (best known for The Lord of the Rings trilogy) chooses to live in Wellington. One feature which helps makes the film industry cluster viable, is that it sends its processing to Hollywood via cable. There will always be eccentric reasons for some industry location.

New Zealand has a ‘nice little earner’ in translation services arising from Europeans completing agreements in the evening, cabling them to New Zealand with its 12-hour difference, and having the translated texts available the following morning – the New Zealanders having worked on them while the Europeans were sleeping.

What then are the prospects for New Zealand’s industrial structure? Compared to other affluent economies it will always have a large resource and resource-processing sector. But their growth is constrained by resource availability. Tourism will remain important. New Zealand is likely to have a modest manufacturing sector much like other rich countries. The domestic service sector will be large and there will be service exports (including consulting and educational services). Weightless exports are likely to become a larger proportion of foreign exchange earners, as they will elsewhere.

But I do not expect weightless exports to become a particularly dominant New Zealand activity for two reasons. First, it will be limited by the lack of economies of agglomeration. Second, it is a labour-intensive industry involving skilled professionals. New Zealanders are very internationally mobile; there are even sizeable communities of Māori in Australia. While the country offers some attractive lifestyle choices – a bach at the beach and a hut in the hills near a ski field – there is the real possibility of key personnel migrating.

The Economic Relationship with China

There are two major dimensions to New Zealand’s relationship with China: economic over-dependence and the security tensions in relations between China and the United States and its allies.

New Zealand is haunted by the dangers of economic over-dependence on a single economy. As recently as 60 years ago, around two-thirds of (mainly pastoral product) exports went to Britain. A decade later Britain joined what became the European Community, which at the time was commonly seen something like Mummy running off with a continental gentleman – or rogue.

For the record, the official and informed view was that Britain should join the community providing New Zealand’s special interests were not compromised. New Zealand had been aware of British accession since at least 1961 and had made (successful) efforts to diversify. Between 1965 and 1980, New Zealand exports had shifted from being one of the most concentrated in the OECD by both markets and products to being near the middle.

Today China takes almost a third of New Zealand’s exports of goods and services but it is so deeply interconnected, especially by supply chains, with East and South East Asia, that in total the wider group probably takes near two-thirds of New Zealand’s exports (depending on how it is defined, but including Australia).

The dominance of China in New Zealand’s trade is extraordinary. It is the biggest market for milk products, sheepmeats (for beef it was only second), fish, apples, wine and honey (for kiwifruit it was third). Thirty years earlier, China did not make New Zealand’s top ten export destinations in any of these products. Significantly, each presents particular political problems in the international economy – most notably, widespread barriers to entry for pastoral products. These products make up a significant share of New Zealand’s exports. They can be particularly difficult to manage, as Australia’s recent tensions with China illustrates.

New Zealand has welcomed the opening up of China’s markets which have been important to its recent prosperity. However, the ghost of the British experience remains. New Zealand went through periods of stagnation – notably in the 1920s and 1950s – because the British economy, and hence its imports, stagnated. Chinese economic growth is slowing down; that could well have a similar impact on New Zealand.

New Zealand has vigorously pursued opening up markets elsewhere. Hence the recent trade deals with Britain and with the European Union. Others are on the table, especially with India. (One with the US is an ambition, but hardly on the table given Congress’s attitudes; in any case the political price may be unacceptable to the New Zealand public.) Existing deals are being upgraded. New Zealand has 14 free trade agreements with around three-quarters of its trading partners by value, including one with China and two big open plurilateral agreements: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership  (CPTPP) of 11 countries and the Regional Comprehensive Economic Partnership (RCEP) of 15 countries (including China). They are of varying quality and often involve limitations to the access of key New Zealand export products.

As when Britain joined the EC, the stumbling block has often been dairy product access. Protecting its dairy farmers seems to be a sine qua non of a sovereign nation.

While improved market access will continue to be pursued and may grudgingly happen, the key to reducing over-dependence on particular markets may be new products sold elsewhere.

The other issue is the security tensions between China and the United States and its allies. The horror scenarios for New Zealand would be a collapse of the Chinese economy or a military conflict between China and the US which involved economic sanctions against China. (There are, of course, gradations below either scenario which would be difficult enough.)

The security horror scenario results in the very careful path New Zealand has trod in its relations both with China and the US – ‘tippy toe’, one might call it. It wants to condemn some of China’s actions, but not so forcefully that it will have trading repercussions, as has occurred with Australia. It wants a security relationship with the US which is not too close because of the China dimension – its public would probably not support a formal alliance – but close enough so that were tensions to rise, New Zealand would have its submissions respected, especially if there were trade sanctions on exports important to New Zealand. (The US unwillingness to offer adequate trade access to New Zealand compounds the question of loyalty.)

Lee Kuan Yew once remarked about small nations, that whether elephants make love or war, the grass gets trampled upon; especially true for a country which will continue to depend upon processed grass.

Governing a Region Far Far Away.

This entry was posted in Environment & Resources, Governance, Pundit on by .

The Chatham Islands may offer insights on to how to govern New Zealand better.

It is said that our first minister of regional development – in the early 1970s – claimed that he wanted all our regions to have above average incomes. Duh! You would expect that there would be some variation in regional incomes. They are probably not large (partly because ours is a small country). They are not measured but we do have estimates of per capita regional domestic production (similar to GDP) which in March Year Ending 2022 ranged from 17 percent above average for the Wellington Region to 34 percent below for Northland. Because of income tax and social security benefits, the income range will be narrower. (Another factor which narrows the income range is that some of the profits of a region will go elsewhere; for instance Taranaki does well on the GDP measure but much of its profits from its hydrocarbon resources do not stay in the province.)

Should we worry about these disparities? There is a simple answer if the disparities arise out of central government prioritising the richer regions over others, as it often does with its infrastructural spending. But what if, for any of a number of reasons, the region is less productive on average?

One could argue that this is a question of fairness to be resolved by the tax and benefit system. However, that ignores the effects on social structure. People tend to migrate out of low productivity regions because there are fewer opportunities and poorer pay. That means that those left have to struggle with the costs of infrastructure, civic amenities, education and health services spread across fewer people, which makes them more expensive on a per capita basis and more limited, with lower quality. The effect is compounded by those more likely to migrate being at the younger end of working age, which undermines the local tax base as well as the social structure and balance.

(A friend recently wondered whether it was ‘racist’ to observe that our two lowest productivity regions – Northland and Gisborne – are more Māori. It is nothing to do with race. Māori are more likely to live in their rohe, while non-Māori are less likely to be attracted to low productivity regions.)

These meditations form a background to Hugh Rennie’s recently published Chathams Resurgent: How the Islanders Overcame 150 Years of Misrule. Rennie, a greatly respected lawyer, has connections to the Chathams going back almost 60 years to when he began to give legal advice to the Chatham Island Council. His book focuses on constitutional issues and gives little room to environmental and conservation history, fraught Moriori-Māori relations, or economic development. Constitutional issues tend to be a bit dry and, so, initially is the book. Don’t let that put you off; once it gets to the postwar era it is a fascinating read.

At the heart of the problem is that the Chatham Islands are an anomaly – some 0.3 percent of New Zealand’s land area and 0.02 percent of its population sitting 800kms plus to its east. (For the record, we are 0.2 percent of the world’s land area, 0.06 percent of its population and pretty isolated too.)

Whether the Chathams is inherently a low productivity economy, its great handicap is its occasional and expensive transport links (almost New Zealand and the world again), which lowers its ability to generate effective income. The islands’ governance hardly existed in the nineteenth century which left the Wellington government greatly troubled about its legal status; the easy solution was neglect. It was not until 1926 that the Chatham Islands County Council was established, some 50 years after the introduction of councils for the rest of New Zealand. Even then, there was much travail getting it to be effective. Today, central government administrative responsibility rests with the Ministry of Local Government, which is part of the Department of Internal Affairs. On Rennie’s account it has not done a very good job. Very often, decisions were dominated by insensitive officials who had never been to the Chathams.

Instructively, Rennie describes a 1985 official options paper for the future of the Chathams as ‘offensive’ to islanders. It was certainly not designed to engage with them and would end in a stalemate. The subtext was that the market would set the right level for effective regional development; that social considerations were irrelevant. In any case, the government was blind to its past failures, and refused to take them into consideration in future policy settings. This was Rogernomics as it seeped into all our thinking.

Not much later, a Treasury paper by Treasury when it was out of control – or at its Rogernomics peak which was much the same thing –  proposed to pay Chatham Islanders to relocate to New Zealand rather than continue to subsidise core utilities and other services that made livestock farming viable (like keeping the meat works going).  

Perhaps not surprisingly, an independence movement was triggered. When the independence proposal was put to a later Prime Minister, ‘pleasantly and firmly’ advised that ‘declare independence one day, and there would be soldiers on the Island the next’. (Jim Bolger had more confidence in their speed of response than I have.)

Some islanders seemed to think that the Chathams would be economically viable without central government financial support if they controlled all the fishing quota that arose from the oceans around them. They overestimate the fiscal value of the quota and the capacity of the Chatham Islands navy to enforce its use.

Slowly and tortuously a solution was found. (Secretary of Internal Affairs, Perry Cameron, played a very honourable part.) The Rogernomics solution of a commercial Local Authority Trading Enterprise (LATE) was rejected in favour of the Chatham Islands Enterprise Trust. (Rennie was chairman for its first 11 years.) Its responsibilities include the airport, sea port and transport connections plus electricity generation and meatworks. In June 2022 the Trust was worth a net $63m (almost $80,000 an Islander).

You can read the book for the details but I was struck that the Trust handled its responsibilities far better than these same responsibilities had been previously handled by central government. They knew more about what was going on, were more focused and the locals had confidence in them. There were still some government grants, even though the Trust reduced some of the previous waste because of its greater focus. I get the impression that central government could trust the integrity and competence of those who managed the Trust despite the small pool of talent it drew upon – given there were only about 800 people.

While you might read Rennie’s book for its insights into the Chathams, it also shows the possibility that we could have a stronger, more decentralised system of New Zealand local government.

Hugh Rennie (2022) Chathams Resurgent: How the Islanders Overcame 150 Years of Misrule. (Fraser Books)

Footnote: For an earlier (affectionate) column on the Chathams see here.

How Effective is Monetary Policy for Fighting Inflation? A Memoir

This entry was posted in Macroeconomics & Money on by .

Do I detect increasing uncertainty as to the effectiveness of monetary policy to deal with inflation? It may be helpful for an understanding what is going, to recount the conventional wisdom before ‘monetarism’; that term was coined in 1968 so I was there before it and recall some of the debate leading up to it. (To keep this to a reasonable length I have simplified both some of my subtleties and those of others. In particular it does not cover types of inflation triggers – in the early days they were classifieds as ‘cost-push’ and ‘demand-pull’.)

Before Monetarism

When I was an undergraduate, the theory of money was more British based. (Almost as an aside, that means I watched the switch over to an American framework, which may explain why I am more alert than some to the aspects of monetarism which arise out of the particularities of US institutional arrangements.) The Radcliffe Committee, which had reported only a few years earlier, was influential.

It, and other such considerations, led one to be pessimistic about defining monetary stock in a rigorous way for analytical and policy purposes. The ‘M’ in the conventional Econ101 was useful for teaching purposes but which of a host of measures – M0, M1, M2, M3, DCE …. – it refers to was unclear. One interpretation of Goodhart’s law is that any monetary stock measure doesn’t work.

The Demand for Money Equation (DFME)

At the heart of the debate at the time was whether there was a demand for money equation (or to what extent it was stable). I recall an argument in the early 1960s in which Friedman claimed that the demand for money was independent of interest rates and someone else (alas I have forgotten his name) showed it was not.

Econometricians were able to get reasonable DFMEs – after all there were plenty of independent variables to choose from. But they proved not to be very reliable forecasters. Try another independent variable and indeed dependent variables such as the multitude of price indices and income measures, while fiddling around with the time response structure adds to opportunities to torture the data until it confessed; another trick is choice of estimation period.

(An interesting issue is why we have not paid more attention to what price in the economy the RBNZ should be targeting. There are a number of possibilities: the GDP deflator, the Producers Price Index, wages, various asset prices, the exchange rate … as well as the Consumer Price Index – of which there are number of possible measures. The targeting of the CPI is a carryover from the earlier system when it was important in wage setting, but it may also be important when exhortation is being used to affect expectations.)

The estimated equations were also not very precise. High R-squares may still leave a lot of noise – too much for precision management.

Even so, the pure Econ101 demand for money equation got established in the economists’ standard macro-paradigm. I suppose it was because no one can think of an alternative which is as clean mathematically. Radcliffe certainly was not.

The Neutrality of Money

One further assumption was slipped in before the DFME could be used for policy management – that the stock of money has no impact on the level of (real) production in the medium (policy-horizon) period. I was never convinced of this neutrality of money unless we are talking about the very long run. It is a standard controversy as to how quickly an economy adjusts to a shock: monetarists tend to assume quickly; Keynesians, more slowly.

The issue of speed of adjustment is both critical for policy purposes and contested. Before 1984 monetary policy was assumed to take a decade to work through. (In the 1950s, Carl Christ proposed something like: since monetary policy works slowly and fiscal policy quickly, while the Federal Reserve works quickly and Congress slowly, the Fed should be in charge of fiscal policy and Congress in charge of monetary policy. It is not incidental that the way Congress limits fiscal management greatly influences how American economists think about macro-policy; we follow them despite our macro-interventions being more flexible; it would be fair to say, though, that it may have become less flexible since the neoliberal framework took over.)

Then, almost overnight, the conventional wisdom switched to the view that monetary policy impacted more quickly – say, two years. I know of no evidence to justify this change in fashion although I accept that the market liberalisation of the 1980s may have shortened the response time – but I doubt it would have cut it 80 percent.

Going back to the DFME, it follows from the limited version that the stock of money determines the price level in the short-to-medium run. And so monetary policy was assigned the task of targeting inflation. Again, I don’t think there was much empirical evidence for this assignment. But the law is the law, and so the RBNZ has conscientiously pursued this objective. I leave others to judge whether it has been effective.

Interest Rate Management

In fact the RBNZ could not pursue inflation control through controlling the stock of money – there was too much disintermediation going on at the time the new regime was introduced. (I have been told the RBNZ economists had come to this conclusion before 1984.) Instead it used interest rates (especially the OCR), resulting in the RBNZ pursuing a kind of Keynesian policy in the monetarist framework of the RBNZ Act.

My objection to this approach is that interest rates target only certain parts of the economy – inventories, investment, mortgagees – rather than the economy as a whole, so the burden of adjustment was deeper on these sectors than if it had been shared across the whole economy. I argued that fiscal policy should share the burden. This was not a popular view in the 1990s. I argued it both publicly and privately with the RBNZ. (I inferred from their response that they were nervous about saying anything publicly because it might compromise their independence; I found cryptic support in footnotes.) Today, even the Governor of the RBNZ has articulated my sentiment.

So I am not saying that the RBNZ cannot influence the price level through interest rates. Rather I am saying that it is a clumsy, inefficient and painful way of doing so without an accompanying fiscal policy supporting it.

The Exchange Rate

I did not mention the exchange rate in the previous para. That too. I got into a (public) argument with the RBNZ in the 1990s about the role of the exchange rate, with them trying to fob me off with an index which purported to be a measure of the real exchange rate but had the nominal exchange rate in both the numerator and the denominator. Having said that, I have been surprised that the nominal exchange rate has not moved more than it has (which would impact greatly on inflation). One might argue, as I did in the 1990s, that monetary policy covertly targeted a stable exchange rate because if it had fallen, inflation would have been boosted. It is a bit more complicated than that because a current account deficit reflects a deficit in domestic savings relative to domestic investment. The relationship between net savings, interest rates and the exchange rates needs more attention.

Most external transactions have forward cover which goes up to about six months out, so I am told, so one would not expect high short-term volatility. I expected more long-term movement, particularly in a downward direction. I think what has happened is that the monetary regimes I was brought up on had considerable restrictions on capital flows. Following the Smithsonian agreement there was considerable liberalisation so it is easier to borrow offshore. That may be a short/medium run phenomenon; in the longer run the exchange rate may still crash, although the comparative indicators suggest that there are other economies likely to go sooner and that we are most likely to go down during a global financial crisis. Perhaps 2008 was a near miss.

The Great Inflation of the 1970s

A major issue is what was going on during the Great Inflation of the 1970s and how we broke out of it. The conventional wisdom views monetary policy being too loose under Muldoon with the tightening after Rogernomics bringing down the rate of inflation.

My view is more complicated. It gives much greater weight to inflation as distributional conflict; recently Oliver Blanchard articulated a similar perspective.

In the early 1970s, there was high inflation internationally. When it cooled in the mid-1970s New Zealand continued with its high inflation – in the end our prices about doubled compared to our trading partners’. I expect international inflation to transmit into New Zealand under a fixed or near-fixed exchange rate. That explains the early 1970s.

After that I see the high inflation as a consequence of a distributional contest. (The story is detailed in my 1996 In Stormy Seas.) The 1966 wool price collapse had reduced New Zealand real incomes. Who was to take the hit? The tension was there in the early 1970s, obscured by the international inflation and volatile terms of trade. With those both settling down from the mid-1970s, the conflict became more evident. It was compounded by the formal and informal linkages which pervaded the pre-Rogernomics economy. (It was kind of ‘pass the parcel in a Belfast pub’; each actor could temporarily maintain their income by passing their loss on to others who, through the linkages, did the same.)

Certainly, monetary policy was permissive. The tighter stance necessary to kill inflation would have collapsed the economy. In the late 1980s and early 1990s the linkages were broken with labour and beneficiaries taking the income cut required by the wool price collapse. (Holders of wealth invested in fixed-rate interest assets, especially pensioners, suffered more in the 1970s, when interest rates were controlled to well below the rate of inflation.) Thus we were able to follow the disinflation the world economy was undergoing in the late 1980s and early 1990s.

I don’t discount monetary policy, especially the exhortation. If everybody was convinced of the effectiveness of monetary policy on the price level, then expectations managed by exhortation would have some effect. But witchcraft can also have some effect if enough people believe in it.

Since the 1990s, inflation has on the whole been benign up to the last few years. But it was benign between the mid-1950s and mid-1960s, even before monetarism was articulated.

What Next?

I take the view – that British tradition coming to the fore – that the primary role of a central bank is to maintain order in the monetary system. (I accept that initially the Bank of England financed the king’s wars and whores.) Major interventions for this purpose are required only occasionally, although there are prudent measures to be taken in between (and the RBNZ takes them).

One of the ways that order is maintained is by shaping interest rates. Currently the short-term ones are set through the RBNZ operating on the OCR as it targets inflation.

One way of interpreting the 1989 Reserve Bank Act is that the RBNZ should manage short-term interest rates to control inflation independently of fiscal policy. The above analysis indicates I am sceptical that it can do so with the precision and ease expected of it. But one acknowledges that if enough people believe the claim, irrespective of whether it is empirically valid, it will modify their behaviour – especially their expectations – which would have some impact on rising prices. It seems likely that as current doubts evolve, this channel will weaken.

If the RBNZ cannot target prices with any precision then how is it to set its interest rates? I have not been able to observe the Monetary Policy Committee nor are its minutes and discussions public. Here are the issues which may influence their operational decisions (as well as the rate of inflation).

1. If the primary responsibility of a central bank is order in the money markets then they have to set interest rates with this in mind. During a crisis, such as the GFC, this becomes a major consideration. Arguably then, the interest rate settings were to maintain monetary order, even if they promoted inflation. (As an aside, what happened to the Silicon Valley Bank is instructive. My impression is that it would not happen here because of the close supervision of the RBNZ over our commercial banks.)

2. In more normal times interest rates cannot diverge too far from international rates, since that could lead to domestic monetary turmoil as financial entities change their portfolios.

3. I suspect that lurking behind the policy thinking has been the stability of the exchange rate which, of course, affects the level of prices. (In the first part of the postwar era, in an era of fixed exchange rates, the Bank of England used to change the bank rate to deal with runs on the pound.)

4. The RBNZ takes into consideration the capacity utilisation of the economy. It could be justified by a kind of Phillips Curve in which underutilised capacity (in the original Phillips curve it is  measured by unemployment) affects prices changes (in the original Phillips curve the price of labour – wages). The first economists to use prices changes on the vertical axis, were Paul Samuelson and Robert Solow; their version was once known as the Samuelson-Solow curve.) However, managing capacity utilisation could also be interpreted as the countercyclical macro-management of Keynesian economics, except that in the past it was done by fiscal policy and odd interventions (such as hire-purchase regulation) rather than monetary policy. Muldoon referred to it as his ‘fancy footwork’; it is now the Governor of the RBNZ who dances.

My suspicion is that in practice all of these dimensions plus inflation are taken into consideration in the setting of monetary policy. The balance between them probably changes at various times.

If this is correct, the performance of the RBNZ needs to be judged not just by how well it attains the inflation targets set by the Minister of Finance.

For those who are horrified that the RBNZ is not following the remit of the 1989 Reserve Bank Act that it should focus on price stability (there is a clause in the act, though, which also charges the RBNZ with maintaining order in the monetary markets), I remind them that the earlier (1964) RBNZ Act required the Reserve Bank to maintain price stability and full employment. It failed miserably in the 1970s and early 1980s. No governor was sacked or incarcerated for this failure. At the time it was accepted that the RBNZ was being directed by law to do something it could not achieve. I am casting similar doubt on the 1989 act.

Final Thought

In the 1950s and the early 1960s macroeconomic management had as an credible outcome as it had in recent times. But it certainly did not use the overt paradigm on which the 1989 framework was based – it did not exist then.

How New Zealander’s Health Compares to the OECD’s

This entry was posted in Health, Statistics on by .

This is an exploratory study and may be of little value.

            By way of background, I observed a Kings Fund study which ranked the British health system with a group of other affluent OECD countries. I thought it would be interesting to do this for New Zealand. I got deviated when I found an OECD data base it used with more than 10,000 lines of data. (Actually bit too many from my PC RAM to handle comfortably. It was not the only data source the Kings Fund used although often New Zealand was not in the others (nor in every area of the OECD data base). So I concentrated on the OECD data base.

            Another concern was that ranking has its limitation. It does not discriminate between a couple of athletes with a millisecond between them and a couple with an hour. So, I have used the proportion of the mean of those OECD countries with records.

            I am not sure whether what I have done is useful. In fact, I have only used about 40 percent of the entries – the calculation is rather tedious. If the tabulation of any use, I could do the remaining 60 percent which are more health conditions.

The source articles are:

Anandaciva, S. (2023) How does the NHS compare to the health care systems of other countries?

OECD (2023)  Data catalogue. https://data.oecd.org/

The Kings fund reference is here

This paper explores the New Zealand dimension of an OECD health data base. It takes each item and locates New Zealand in the population of OECD countries who report on the item – not all of whom doing (including, sometimes, biggies like Britain and the US) – by its proportion of the mean of the group.

Note that while the OECD does its best to have comparable data, individual data points may be idiosyncratic reflecting reporting standards and practices. For instance, the Netherlands reports a dementia rate of 1.6 per 100,000, well below the 34 per 100,000 for the group; its Alzheimer’s rate is 1.0 against 12.6 so it does not seem to be a categorisation difference.

Note that New Zealand does not report for some categories such as for colorectal screening. (Does the MoH not having the data?) Nor some resource utilisation rates (such as doctor consultations).

There is data going back to 2002 but it is not always as complete (and probably beyond my RAM).

I’ve tabulated about 40% of the table below, stopping because I am not sure how useful the exercise is (it is certainly time consuming). The remaining 60% reports other health conditions – the last are about pregnancy.

As I computed, I became increasingly unsure about the significance of the data, especially for the health conditions. Most show the New Zealand proportion below the OECD average, but it could be due to

            – recording failure (although less likely for death records);

            – categorisation differences;

           – differences in age structures between the countries (NZ being younger than many reduces prevalence of conditions associate with aging);

            – differences in treatment (and treatment success);

            – differences in prevention programs (note for instance NZ is low on uterine cance and high on cervical screening);

            – we are under diagnosing relative to OECD average (less likely for deaths);

            – other differences I havn’t thought of.

APOLOGIES FOR THE TABLE LAYOUT

NEW ZEALAND 2021 (unit) OECD NZ % of OECD

Immunisations
Diphtheria, Tetanus, Pertussis (% Children) 94.5 97%
Measles (% Children) 94.2 97%
Hepatitis B (% Children) 74.3 99%
Influenza (%>65) 53.6 136%

Breast cancer (females% 50-69) 53.0 126%
Cervical cancer (females% 50-69) 51.1 136%

Hospital

Inpatient care discharges (all hospitals per 100,000) 12943 98%

Inpatient care stay (all hospitals average days) 6.3 74%

Curative care (discharges per 100,000) 12452 94%

Curative care bed days (per capita) 0.78 64%

Curative care stay (average days) 6.6 67%

Infectious parasitic diseases (per 100,000) 320 95%

Intestinal except diarrhoea 46.5 125%

Diarrhoea and gastroenteritis 49.4 17%

Tuberculosis 9.0 49%

Septicaemia 76.6 154%

HIV 2.9 3%

Other 132.7 87%

Neoplasms (per 100,000) 1224 59%

colon rectum anus 115.8 63%

trachea bronchus lung 97.7 46%

skin 33.5 113%

breast (females only) 170.0 62%

uterus (females only) 63.3 60%

ovary (females only) 42.4 39%

prostrate (males only) 104.7 61%

bladder 58.1 39%

other malign neoplasms 466.5 67%

carcinoma in situ (females only) 17.1 125%

benign colon, rectum, anus 20.9 46%

leiomyoma of uterus (females only) 76.0 38%

other benign neoplasms or uncertain unknown 162.4 46%

Diseases of blood and blood forming organs (per 100,000) 114.7 83%

anaemias 80.6 77%

other 32.5 101%

Endocrine, nutritional and metabolic diseases (per 100,000) 282.7 87%

diabetes mellitus 108.4 95%

other 174.4 81%

Mental and Behavioural Disorders per 100,000 600.7 81%

Dementia 34.5 125%

Due to alcohol 102.0 55%

Due to pyschoactive substance 44.7 81%

Schizophrenia etc 117.0 105%

Mood (affective) disorders 117.0 80%

Other 177.0 77%

Diseases of the nervous system 384.7 89%

Alzheimers 12.6 38%

Multiple sclerosis 12.5 27%

Epilepsy 68.4 77%

Transient Cerebral Ischaemic Attacks & related 49.0 131%

Other 239.4 90%

Taxing Issues

This entry was posted in Regulation & Taxation on by .

A canter through some of the issues facing tax policies.

The Treasury experienced vigorous internal debates before Rogernomics. One was over the purpose of taxes. Eventually, a senior economist, notorious for his common sense, settled it. There it is in the 1984 Economic Management: ‘The purpose of of any tax system is to raise revenue.’ (Of course there are other purposes of taxation such as redistribution and changing behaviour – the Treasury debate had substance.)

Fair enough; the level of taxation is the main determinant of the balance between community and private spending. There is a strong right-wing lobby arguing taxes should be lower, which means lower government spending – more private, less community. That is its political judgement, although I wish its advocates would not contradict themselves by pointing out failures of the public sector arising from inadequate funding.

Of course there are inefficiencies in government spending (as there are in private spending). Most are like the fat in prime steak: difficult to get at without destroying the texture of the meat. Even so, there is a view that this government has been sloppy over monitoring the effectiveness of its spending, but whether it is that Treasury is not doing its job or whether cabinet is ignoring it is unclear.

There are programs which might be abandoned, but usually the advocates of the cutting ignore the consequences on people. I was heartened by ACT, who when opposing free prescriptions – I don’t – went on to say the funds could be better spent in reducing GP charges – I hope they remember the tradeoff when they get into power.

What strikes me is how feeble left-wing advocacy has been in contrast to the right-wing message. The dominant rhetoric is for tax cuts; there is never the same clamour that it means public expenditure cuts too. Perhaps the left’s failure explains Labour’s unwillingness to contemplate new taxes.

The case for the taxes is not well made. Here follow some notes.

Like the Treasury, the Reserve Bank, the IMF and the OECD, I support a (real) capital gains tax (while acknowledging it is administratively difficult). The concern is that the tax system is currently distorting investment decisions. I’d favour using the revenue from a capital gains tax to reduce tax rates on interest income; we should not be taxing interest’s inflation component.

I would apply the capital gains tax to second houses and very expensive first houses – say, those worth more than twice the price of an average New Zealand house. They are distorting investment too.

When I looked at wealth taxes back in the 1970s, I concluded that they were really a requirement that the rich should get a higher nominal return on their investments than others to get the same after-tax return. I am not uncomfortable with that proposition (except I concluded that income from assets on which wealth tax was levied should not also be taxed). Historically, it was common to tax investment income differently from labour income; presumably the economic logic was that the supply conditions are sufficiently different. An important effect of a wealth tax is that it would cover assets which do not earn taxable income such as houses and yachts. (Administering a wealth tax is not simple.)

When we had inheritance taxes, I supported a lifetime capital accumulation tax which is a progressive tax (with a substantial exemption) based on transfers – estates and gifts – over an individual’s lifetime instead of estate duty. Its effect encourages a wider spread of wealth since the rich can reduce their tax burden by sharing their wealth around, making wealth ownership less unequal. Estate duty was abandoned by Ruth Richardson in 1992, partly for ideological reasons but also because Queensland had already abandoned it, so one could escape death duties by migrating across the Tasman. The revenue loss was made up by reducing the state support for those in residential care.

I agree with the proposed change on taxing trusts, aligning their tax rates with the top income rate to reduce tax avoidance. However, I would treat trusts similar to corporations, where the taxation is essentially a withholding tax, so that New Zealanders who receive disbursements from a trust are not taxed, while those who pay below the tax rate would get some tax remission.

There is a fashion – even in right-wing circles – to argue for a land tax on the basis that land is immobile while labour and investment can avoid taxation by going overseas. However, most of the discussion I have seen does not cover the impact on the farm sector, which remains a key element in New Zealand’s prosperity. The proposal is usually dismissed because we already have a kind of land tax in local authority rates.

A minor issue in terms of revenue, but important politically, is that non-residents pay income tax only on their New Zealand income. (A non-resident is someone whose permanent place of abode is here or who spends not more than 183 days a year in New Zealand.) That seems sensible, except I would restrict the notion of ‘non-doms’ (not domiciled here) also to those who do not participate in political life in New Zealand by voting or funding political lobbying. Taxation is the price of citizenship.

(While chasing up the nuances, I discovered that the IRD made special provision for the non-doms who were forced to overstay their 183 days because of the COVID lockdowns. On the other hand, the MSD made no similar provision for New Zealand Superannuitants trapped overseas during the lockdown. I leave others to explain the different treatment.)

I like the proposal to have an income exemption from income tax. The exemption was removed in the 1970s because there was no GST. When GST was introduced in the 1980s, the income exemption should have reintroduced but the priority was reducing taxes on the rich so the poor were forgotten. Introducing an income exemption is very expensive and almost certainly requires higher taxes elsewhere. Even so, when consideration is given to the next round of income tax cuts, consideration could be given to reducing the bottom rate (currently 10.5%). The effect of a 1 percentage reduction would be to give almost everyone a $2.70 a week reduction, peanuts to the rich but much appreciated by the poorest. (It would cost about $500m p.a.)

There are other taxes we might consider. I am comfortable with indirect taxes which reconcile private behaviour with the public good, as we do in the case of alcohol and tobacco. I am not quite so convinced of the effectiveness of a sugar tax. Our greenhouse emissions strategy needs a total overhaul; it needs to fund the retreat from the coast because of sea-level rising and making infrastructure more robust to storms. There is also a role for user-group pays taxes where it is not easy to charge for individual behaviour. An example is the road taxes to pay for road maintenance and extensions. (Proposals for charging motorists individually go back at least 60 years but, except in special cases, implementation has proved impractical.) I am not unsympathetic to a financial transactions tax (a.k.a. Tobin tax) as a substitute for the sector not paying GST. But we should wait for others to implement it first, in order to reduce avoidance. It will, however, not generate the enormous revenue its proponents claim, since the financial sector will be smart enough to find (legal) ways to avoid paying, demonstrating that perhaps they are smarter than the FTT’s proponents.

This column has been about getting the tax structure right rather than the levels which shape the fairness of the system. It is no secret that I am concerned with child poverty. That involves a better system of child support than the current Working for Families.

This canter though some of the taxation possibilities indicates some of the complexities which the general public discussion tends to overlook. I have been explicit about my own values. Yours may be quite different. But I hope this column contributes to a public discussion which is sober and rational – rather than uninformed and hysterical – despite our differences.

Do We Want a Regulatory Standards Act?

This entry was posted in Pundit, Regulation & Taxation on by .

Its principles may involve outcomes which are not in the public interest.

The ACT party election manifesto will propose to introduce a Regulatory Standards Act to set a higher bar for new regulation, and test regulations against the key principles of the Regulatory Standards Act.

To make my position clear I have had doubts, going back to Muldoon’s time in the 1970s, about the casual way we introduce regulations. Since then we have made a number of improvements to how they are introduced. But I am uneasy about the proposed legislation; at the very least, I think it requires a wide public debate before it is enacted.

We know roughly the content of what legislation ACT has in mind because in 2021 it introduced a Regulatory Standards Bill to Parliament – it did not get past the first reading. It said its purpose was to improve the quality of Acts of Parliament and other kinds of legislation by

‘(a) specifying principles of responsible regulation that apply to new legislation and, over time, to all legislation; and

‘(b) requiring those proposing new legislation to state whether the legislation is compatible with those principles and, if not, the reasons for the incompatibility; and

‘(c) granting courts the power to declare legislation to be incompatible with those principles.’

The heart of the proposal is the ‘principles of responsible regulation’. Perhaps the most troubling is principle (c) which reads that legislation (or regulation)

should not take or impair, or authorise the taking or impairment of, property without the consent of the owner unless

(i) the taking or impairment is necessary in the public interest; and

(ii) full compensation for the taking or impairment is provided to the owner; and

(iii) that compensation is provided, to the extent practicable, by or on behalf of the persons who obtain the benefit of the taking or impairment:

Let me explain by example. When in 2006, the Government announced it would force Telecom to unbundle its operations separating the copper network from the ‘value-added’ services it delivered over the network, the market capitalisation of Telecom fell by about $3 billion; Telecom shareholders had their property (the shares) ‘impaired’ by that amount.

It is not difficult to favour principle c(i). Telecom was a monopoly, as a consequence of the botched privatisation in 1989 which did not go through a select committee while the cabinet committee did not even have a paper reviewing the regulatory (i.e. monopoly) issues the privatisation raised. The purchasers of the business made big monopoly profits. However, Telecom was unable to work out how to do a commercial broadband roll-out, and New Zealand was internationally way behind in electronic connectivity.

A main purpose of the separation was to improve that connectivity. Chorus – which evolved from the Telecom network – together with a lot of government funding and some competition has got our network up to speed. So much so, you think of what is provided today as normal. But reflect how much more difficult the Covid lockdowns would have been had we still had the Telecom network. Working from home would be a joke. So we may take it that the separation of Telecom was in the public interest if it was necessary for the broadband roll out.

The downside for the holders of Telecom shares was that having lost its monopoly, their company would not be as profitable. That is why the share price fell so dramatically. Here is where principle c(ii) applies. Under the Regulatory Standards Bill the government would have had to compensate the shareholder for their $3b loss.

It didn’t. Should it have compensated? At which point the argument gets tortuous.

You could say that the shareholders did not deserve their monopoly profits. That may be true for the first purchasers of the privatised company, as they used its market power to extract higher prices (often with poor services) from consumers. But most sold their shares at favourable prices, so many of the 2006 shareholders paid a higher price for their holdings because the monopoly returns were built into the price of the shares they bought.

On the other hand, you could argue that they should have bought into the company knowing there was regulatory risk – that at any time the government could change the regulatory framework which might be detrimental to their share value. Certainly, the Labour Government had signalled that in 1999 it established a review of the industry.

You might argue that regulatory risk is an integral part of a market economy. Higher profit rates partly reflect this. However, there are economies in which that risk is so high, that investment and innovation are distorted and those economies function poorly, often with low formal employment and negligible economic growth.

The Regulatory Standards Bill cuts through this complex argument by setting a standard that any change in the regulatory framework should result in anyone who suffers being compensated. I am not sure how pervasive the principle is intended to be. For instance, would those who suffer from the introduction of a capital gains tax or a higher income tax rates have to be compensated?

As I understand it, the bill does not require the compensation in regard to parliamentary statutes. Rather, the courts could declare that principle c(ii) was infringed but the government could still go ahead with the policy. The Bill of Rights Act works like this. The effect of the principle is to give property rights a similar status to human rights.

Much of the literature goes back to a provision in the US Bill of Rights which is an integral part of their constitution. The Fifth Amendment includes that no person ‘shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.’

At first, the last part was concerned about the government taking land without paying for it, but over the years economists and lawyers realised that the notion of ‘property’ could apply to many other things. There has been an ongoing discussion about the application of the notion. Some US states have passed related legislation. A particular pressure has been from neoliberals for it would reduce the range of interventions available to a government.

You can get a sense of this by imagining the principle applying in the past. I leave others to describe what might have happened when the government was interfering with Māori land rights. But suppose it had applied in 1984 when Muldoon left office. Virtually every regulatory change made since then infringed principle c(ii) in regard to someone or some institution. For instance, unions would have a grievance from the Employment Contracts Act, as would have had many workers. Perhaps it would not matter so much if Parliament set out the change in statute but most such statutes require supplementary regulations. Social security benefits are set under regulation.

An irony is that some of the advocates of a regulatory standards act were closely involved in those regulatory changes. They were acting in good faith then, if breaching the principles they now want to enact.

My view of the post-1984 regulatory changes is mixed. Some I supported, some I opposed, some I was uncomfortable with. (I think a degree of regulatory risk is inevitable in a thriving modern economy, but that it should not be excessive.)

I was, and am, particularly concerned with the massive change to the income distribution. (We don’t have data to tell us what happened to the wealth distribution.) In particular, child poverty about doubled, while the rich had marked increases in their income (those on middle incomes were worse off too).

 The effect of implementing a regulatory standards act would be to consolidate the existing income distribution, stalling the government from changing it. Do we want to do that? What is special about the current income distribution? Why not the 1984 distribution, or any other year you might choose?

There may be two caveats to the proposal. First, the courts would only be able to declare a legislated change was against the principles of the act; they could only strike down changes under regulation. Do I trust lawyers and judges to have a sophisticated understanding of how such economic regulation works? Do I trust economists?

But second, the 2021 Regulatory Standards Bill had a provision that it would not come into force unless it was endorsed by a majority in a referendum. I don’t know whether ACT still has that provision in mind. It might argue that ACT’s election to government (when that occurs) is such a referendum, but it is likely to have only 10 percent or so of the vote, which hardly constitutes a majority.

I regret that Parliament did not send the 2021 Regulatory Standards Bill to a select committee where these issues could have been properly debated. Many of the brief contributions during its first reading were hardly coherent. We really need a proper discussion on ACT’s proposal before it gets into office and tries to implement it.

PS. I have not covered principle c(iii) here because of space. It seems to imply that the beneficiaries from the detriment may have to be taxed to compensate those who suffer detriment.

Notes on Tāone Hapū – Māori Gangs

This entry was posted in Maori, Social Policy on by .

Commentary: Aotearoa New Zealand Journal of Social Issues, Vol. 3 No. 1 (2023)

Abstract

This paper aims to promote discussion on the complex issue of Tāone Hapū (Māori Gangs), recognising the substantial literature which already exists but adding two further directions which tend to be downplayed:
– while it is accepted that the urban Māori migration was traumatic, that Māori have been adapting successfully to their new circumstances is frequently overlooked;
– one of those adaptations was Tāone Hapū – Māori Gangs.
The paper argues that there is a need to reframe the analysis of Tāone Hapū towards a sociological and anthroponomical perspective as a social form responding to the trauma of Māori urbanisation and the resulting social pathologies rather than to focus only on their own difficulties – especially criminality.

Keywords

Māori urbanisation, Gangs, Tāone Hapū, crime.

The Urban Migration of Māori

Heke Tangata (2018) records the postwar Māori migration from the rural outback of New Zealand to the large urban centres. The analysis is extended in Chapter 36 of Not in Narrow Seas. (2020). While I have continued to explore the issue, my thinking was accelerated recently by the statistical work of Len Cook on incarceration rates of Maori and non-Maori cohorts through time.

Cook (2023) found that the rates of Māori imprisonment peaked in the 1970s and 1980s but have fallen dramatically for more recent cohorts. Māori rates are still higher than non-Māori rates but the relativity has also fallen markedly. (The aggregate rates remain high because older cohorts have high imprisonment rates.)

The peaking and recovery suggests the following. Māori were ill-prepared for their migration into the urban centres. Their rural lifestyles were different, their skills were appropriate for country living but not particularly relevant for urban employment, their education attainment was not high (there is a long history of criticisms of Māori rural education), their health indifferent (as indicated by life expectation) and they were poor, lacking assets (which affects access to housing). Institutions central to their rural life did not exist in the cities. Indeed, the move often broke up existing social networks.

To compound the difficulties, about the time or shortly after when many Māori arrived in the cities, the New Zealand labour market moved from its exceptionally low levels of unemployment in the postwar period – with its high demand for unskilled workers – to more moderate levels, which would impact most on demand for the unskilled. (The structural shift in unemployment seems to have occurred in about 1968, shortly after the 1966 wool price collapse, and became more serious in the late 1970s.)

The inevitable consequence of such a migration was social disruption and dysfunction, evident in high youth pregnancy (especially outside stable families) among Māori women and high criminal behaviour among men. I have not been able to find a suitable data base to explore the former (or, better still, find someone who has done it already). But Cook’s work on Māori incarceration rates is very useful for exploring the latter.

It points to rising Māori criminality as a consequence of the disruption from urbanisation. Crime was attractive to Māori not just because of the social dysfunction but because it offered a more remunerative form of employment than poor quality work in the formal labour force with its intermittent unemployment. (The rising availability of drugs at this time added to opportunities.)

As Cook shows, shortly after the migration was in full flight Māori imprisonment rates rose. On the whole it continues to be relatively higher than that of non-Māori as the cohort ages, apparently because the experience of prison leads to further imprisonment later in life.

Post-Migration Adaption

Even more intriguingly, the Cook data shows that Māori incarceration rates have been falling for recent cohorts. It is also true for non-Māori, but the fall is not as fast as for Māori, which suggests that their (relative) fall may not be entirely due to changed penal policies.

While Māori may have arrived in our cites into disrupted and dysfunctional living conditions, we might expect some adaptation over time and generations. In which case, social malfunctioning such as criminal behaviour would decline, which would (partly) explain the falling relative incarceration rates.

While it might be obvious that urban Māori would adapt to their new circumstances, the degree and rapidity of adaptation is not so predictable. At the very least, there would be new social networks as they settled into urban life, their children would receive better education than their parents had in rural areas, and in employment they would obtain on-the-job skills to replace rural ones.

There has also been the development of various Māori-specific institutions including urban marae, some refocusing of the Māori Women’s Welfare League to urban issues (when it was formed in 1951 it was conceived as rural support), kohanga reo, the Māori broadcasting network, Māori Urban Authorities … (Recent initiatives for whanau to take over responsibilities from Oranga Tamariki may be another instance.)

Another adaptation was the creation of what are known today as ‘Māori gangs’.

Gangs in An International Context

Newbold and Taonui (2011) place New Zealand gangs in an international context:
The modern gang is often linked to urban poverty, and social exclusion on the basis of class, religion, or ethnicity. Gangs usually form among groups of young men who lead otherwise uneventful lives, but are denied decent job prospects, have poor parental role models, and have lacked structured adult involvement during their developmental years. The youth gang is a form of demonstrative rebellion by young men who feel excluded from mainstream society. Gangs provide these men and their female associates with a sense of family and belonging that has frequently been absent from their childhoods. Membership gives meaning to life, shelter in times of need, and protection from other gangs and from abusive or predatory adults. Gangs also provide cheap drugs and alcohol, parties, and involvement in various forms of criminal activity.

There has been a tendency – especially by the general public – to compare gangs with foreign groupings such as the mafia. Local gangs drawing inspiration for overseas counterparts have chosen foreign names for themselves – such as ‘Mongrel Mob’ – thereby reinforcing the public perception of them as being alien. But we need to see Māori gangs as an indigenous response to indigenous situations.

Māori Gangs – Tāone Hapū

The informed literature on Māori gangs tends to focus on their criminal and related aspects. (An excellent summary is Gilbert (2013) – although there have been numerous smaller studies since; see also Prime Minister’s Chief Science Advisor (2023).) They mention the urbanisation but do not develop its implications.

An urbanisation framework might see the gangs as urban forms which evolved to substitute for the rural networks that Māori left behind. Typically, the rural networks would be hapū which were genealogically connected communities of up to about 150 living in close proximity and offering social and economic support within the group. Their urban equivalents are unlikely to be as genealogically connected. (Not quite as an aside, during the Musket Wars it was not uncommon for two hapū from the same iwi – i.e they were related – to clash.)

This suggests that we might treat Māori gangs as urban (or town) hapu – tāone hapū. (They exist in localities but have connections with other tāone hapū elsewhere. Perhaps these broader coalitions of chapters – such as the Mongrel Mob’s – might be thought of as tāone iwi.)

There is a hint of how the conventional urban forms – nuclear families – can fail and gangs be an alternative from a series of interviews of women who joined gangs. Dennehy (2000) observed that
For many, gangs were an escape from the traumatic family circumstances. Gangs provided a form of protection from domestic/family violence, and physical/sexual abuse. For others, gangs offered excitement, fun and adventure.
(Dennehy concluded that ‘[f]or most of the women interviewed, however, their escape from abuse or drudgery turned into a cavern of despair.’)

This approach is not to ignore that many tāone hapū have been involved in criminal activity (and inter-hapū strife). As already explained, that too was a consequence of conditions resulting from the urban migration. What we do not know is how important crime has been in the life of the gangs; the importance probably varies between tāone hapū and has varied over time.

Unfortunately, their criminality has become most prominent in the public mind and it characterises the majority view of tāone hapū. The public might well be astonished by the report of Winter (2000):
In 1992 the Mongrel Mob Advisory Panel (MAP) was formed to provide Mob members with the means of pursuing ‘legitimate channels to success’ through better access to social services, employment, recreation, education, and vocational training. MAP provided assistance even to Mob members who were in prison. While the MAP ‘positive development’ initiative has had some success in reducing offending and improving the quality of life for its members, desistance from crime by gang members is dependent upon their being allowed the opportunity to find a place within society. Reconciliation and healing require a commitment on both sides.

In contrast the public tends to see gangs only in terms of crime and violence. For an example the leader of the opposition, Christopher Luxon, who is both a significant opinion former and sensitive to public opinion, stated ‘that’s not an excuse for saying you don’t be tough on crime and tough on gangs, you need to … have both stick and carrot, it can’t just all be carrot.’ (5 July, 2023) To see the inherent mislogic, observe that there are criminals in the National Party (and in all the other political parties). It does not follow that in order to be tough on crime, we should be tough on National.

The Parliamentary Library (2019) reports ‘Historically, suppression and intervention strategies have been used to combat New Zealand gang problems.’ Newbold and Taonui (2011) add ‘prevention’. The strategy closest to that reported by Winter hardly appears.

In 2014 the Government announced the Gang Action Plan with four initiatives:
– A multi-agency Gang Intelligence Centre led by Police to collect and combine intelligence on real-time gang activity to support investigation, prevention and enforcement, while identifying vulnerable children and family members who may need social service support;
– Work to refocus existing social initiatives, and develop new programmes, to address inter-generational gang life, to support families and members turn away from the gang lifestyle, and to help support communities with a large gang presence, by reducing gang tensions;
– Establishment of two multi-agency dedicated enforcement taskforces (the Outlaw Motorcycle Gang Border Protection Taskforce and Criminal Asset Confiscation Taskforce);
-Strengthen legislation.

Even the second initiative, which is the most ‘interventionist’, fails to recognise the possibility that gangs are a ‘legitimate’ social form fulfilling social functions where other social institutions have failed. Basically, gangs are seen as social pathology, rather than seen as a response to social pathology. The focus is on their suppression.

The same issues occur in Toward An Understanding of Aotearoa New Zealand’s Adult Gang Environment. (Prime Minister’s Chief Science Advisor 2023) There is much in the report to be commended. However its what to do list only considers prevention (discouraging children and youth from joining gangs), suppression (attempting to stop gangs from existing), supporting exiting from gangs, and what it calls ‘desistance’ (discouraging young people from joining or taking up criminal activity). The perspective is that the gangs are a bad thing with little attention as to whether they are an integral urban form and the extent and role of criminal behaviour involved with them.

The approach involves the underlying assumption that other urban forms are functioning satisfactorily and do not need attention. That is not what the young women which Dennehy interviewed reported.

What Next?

The inevitable conclusion is that we need to know more about tāone hapū, particularly approaching the issue from a sociological and anthropological rather than a criminological perspective. We especially need to know a lot more about their non-criminal activities and its relative balance with criminal activities. Moreover, we need a breakdown of those activities. While not condoning mild violence it is very different from, say, drug dealing.

In the interim, it might be worth attempting to change general public perceptions, as I have done here by referring to ‘tāone hapū’ rather than ‘Māori gangs’, although effective rebranding is not easy.

For unless the public perception changes, we are left with a distorted view of what tāone hapū/Māori gangs are, which is of little value to a healthy society or addressing the real issues.

Selected Bibliography
Cook, L. (2023). ‘Insights from Statistical Trends and Patterns relating to Youth Justice: 1911 – 2021.’ Aotearoa New Zealand Journal of Social Issues, 3(1).
Dennehy G. (2000) Troubled Journeys : An Analysis of Women’s Reality and Experience Within New Zealand Gangs.
Dennehy, G. & G. Newbold (2001) The Girls in the Gang.
Easton, B. (2018) Heke Tangata.
Easton, B. (2020) Not in Narrow Seas.
Gilbert, J. (2013) Patched: The History of Gangs in New Zealand.
Newbold, G. & R. Taonui (2011, revised 2018 and 2020) ‘Gangs’, Te Ara – the Encyclopedia of New Zealand.
Parliamentary Library (2019) Youth Gangs in New Zealand.
Prime Minister’s Chief Science Advisor (2023) Toward An Understanding of Aotearoa New Zealand’s Adult Gang Environment.
Winter, P. (1998) ‘”Pulling the Teams Out of the Dark Room”: The Politicisation of the Mongrel Mob’ in K. & C. Hazlehurst, eds, From Gangs and Youth Subcultures: International Explorations.

The original publication is here.

Is a Recession the Worst of Our Worries?

This entry was posted in Macroeconomics & Money, Pundit on by .

Are we evaluating the economy on the right criteria? Perhaps we should be paying more attention to rising overseas debt.

The commentariat’s announcement last week that the New Zealand economy was in an ‘official recession’ by March 2023 – two quarters of output/GDP decline – was greeted with white faces by officials in the Reserve Bank and Treasury. There was queuing for the lavatories; some of the forecasters handed in their resignations to the Minister of Finance; one or two tested the windows to see whether they could jump out.

OF COURSE NOT. The officials would have been puzzled by the term ‘official recession’, since neither institution nor Statistics New Zealand (SNZ) use it. Later the commentariat changed the term to ‘technical recession’; I doubt any serious economist has the foggiest idea what a ‘non-technical recession’ is.

Instead, like me, the officials would have turned to their forecasts. The Treasury quarterly track in their Budget Economic and Fiscal Update (BEFU) forecast had a March 2023 increase of 0.3 percent instead of the 0.1 percent fall, so the economy appears to be tracking lower than they expected.

However, there is measurement error. One source of the error is that numbers inevitably bump around in a small economy (not to mention the complications from Easter being a moveable feast); another is that in order to publish the data early enough some, of the data input are estimates which will be updated when better figures come in. Based on the evidence of recent revisions, the March quarter could turn out to be mildly positive.

Unquestionably the economy is neither booming nor troughing; the cautious judgement – unlikely to be headlined by the media – is that the economy is flat or stagnating. If performance is measured by per capita output, the fall is somewhat larger since population has increased by about 1 percent in the two quarters.

Perhaps more important about the SNZ release was the contracting industries. Because of quarterly measurement and volatility, I looked at the year-on-year change. Negative growth is largely confined to agriculture, forestry, and fishing, mining and manufacturing – the tradeable sectors. That is not really good news because, some services such as tourism (which is not doing very well either) aside, they are the main contributors to foreign exchange earning and saving (import substitution).

I imagine there was a vigorous discussion within the Reserve Bank and Treasury between those who thought the data indicated the economy was contracting faster than expected, those who thought it was contracting earlier than expected, and the wait-and see-faction (which I probably would have belonged to). Some of the discussion would have been about the extent to which the RBNZ’s measures were working – perhaps faster than expected.

There may well have been more discussion in informed quarters on the previous day’s SNZ release on the balance of payments. It reported that in the year ended 31 December 2022 the current account deficit of $34.4 billion (9.0 percent of GDP) compared to $24.2 billion in the year ended 31 March 2022. It is the biggest deficit for the 20 years that SNZ reported.

SNZ attributed the main components of the deficit to a $6.4 billion widening of the goods deficit and a $2.2 billion widening of the primary income deficit. The primary income deficit indicates that New Zealand investors earned less overseas than overseas investors earned from New Zealand.

The above has focused on sectoral flows. Combining them, last year we borrowed more than in any year for two decades. Our net international liabilities have been rising.

Back to the BEFU forecast. There are some complications in interpreting their figures, but my reading is that the current account deficit is bigger than Treasury was forecasting – more than one could explain by data problems.

That means that in various places in the economy, sectors and households are borrowing to sustain their expenditures. We do not have the comprehensive investment and savings account to identify exactly where. We know that some of the borrowing is in the public sector, but that is only a partial explanation. Some will be for productive investment, some for residential housing purchases, and probably there are households who are borrowing or running down their savings.

Part of the worry has to be that with the economy stagnant or depressed, one might expect the savings deficit to increase as the economy begins expanding again – perhaps in early 2024.

However, as I worked through the data I was struck by the SNZ graph which showed the net international investment position – how much we owe overseas (net). We owed $90b odd, in March 2003; as we borrowed more, the debt increased to $160b just before the Global Financial Crisis. After that shock the overseas debt stabilised and was $150b in March 2018. Since then, it has begun increasing again and is about $190b today. (There was some recovery in 2021. COVID?)

It is all very well saying that most of this debt is private and not a matter for public policy. We saw how in the GFC, the private debt of the commercial banks became a public concern. I have no doubt that at our next credit rating review, officials will be pressed by the credit rating agencies. The resulting rating guides the international investors who are lending to us. If the officials don’t have a satisfactory response, the interest rates at which we borrow internationally will be higher, including feeding through to those on residential mortgages.

One of the lessons from New Zealand’s economic history is that our big economic crises have usually been associated with our overseas debt. Of course, I may be wrong next time; the ostriches do not expect another major crisis here or globally. But it seems to me that the debt level issue is far more important than the commentariat wittering away about whether we are in a recession, be it ‘official’, ‘technical’ or just an old-fashioned downturn.