Some Published Articles on Behavioural Economics by Brian Easton


In the Abstract: Will Most Of Us Have an Impoverished Retirement? (June 6, 1998)

Richard Thaler’s Savings Principles (7 January 1999)

Two Styles Of Management (1 July 1999)

            This reviews

            Thaler, R.H. (1992) The Winner’s Curse: Paradoxes and Anomolies of Economic Life, Princeton University Press;

            Thaler, R.H. (1994) Quasi Rational Economics, Russell Sage Group, New York.

The Politics Of Retirement Incomes (1 July 1999)

The Ultimate Greeting: when Homo Economus Meets Homo Sapiens. (23 December, 2000.)

Lock into Savings ( 23 October 2004)

Look Back in Regret (5 May 2007)

Are Our Decisions Based on the Influence Of Irrelevant Factors? (12 May, 2012.)

Thinking Fast, Thinking Slow, Thinking Moral (19 May, 2013)

Are We Saving The Right Way For Retirement? (8 October, 2015)

What Are You Thinking, Stupid? (19 December, 2016)

Understanding Truthiness (2 January, 2017)

Past Rationality: The 2017 Nobel Award For Economics (24 October, 2017)

Commonsense Economics From Two Very Good Economists (7 August, 2020)

Are We Nudging Enough? (30 July, 2021)

How Rationally do Economic Actors Behave? (1 July, 2022)

Thinking Slow Or Thinking Fast? (4 August, 2023)

Economic Progress May Not Add To Wellbeing (December 2024)

Where Is the Health System Going?

Presentation to the 2021 Conference of Theatre Managers & Educators, Dunedin 5-7 May.

Today I am going to discuss the governments plans for the health system. Let me begin with an admission about my perspective. Many New Zealanders are more centralist in their view of the governance of society than I am. I come from the tradition that sees local autonomy as a critical part of a democratic society, not to mention that it has benefits in terms of innovation, responsiveness and dealing with diversity. While sometimes it is necessary to have collective and central solutions to public policy problems, when I am thinking about their design or evaluation I never forget a decentralisation perspective.

It is necessary to say this here because the current redisorganisation of the health system is a shift towards centralisation. I am not inherently opposed to such a shift but, as we shall see, I am concerned that we may be over-centralising.

Summarising Yesterday’s Presentation

To begin with the lessons from yesterday. I concluded that we should not be surprised if there are pressures to centralise the system further, even at the cost of the loss of local, and even clinical, autonomy and innovation. The conclusion was underpinned by four general propositions.

The first was that there is an inherent tension between the centre which funds healthcare, together with the complex organisations it charges to implement its plans, and what goes on at the clinical and local level of professionals dealing with patients. The tension is unavoidable in a publically funded system, especially if it seeks equity.

Second, the complexity of the sprawling health system is substantial. It has been described as a ‘disorganisation’. Plans to redisorganise it need to be humble, aiming for incremental improvements rather than the ambitiously neat, plausible and wrong.

Third, one of the sources of the sprawl in the health system arises from its historical development from the nineteenth century system. Despite the spectacular changes in the following 150 years there are still fossilised remnants of the old system.

Fourth, the centre has made errors, but it generally does not acknowledge them. It is easy to blame the districts for everything. Mistakes are inevitable but failure to acknowledge that they can happen will corrupt a planned redisorganisation.

A Critique of the Proposals

What I am about to analyse is based on a (released) Cabinet paper. It sets out a sevenfold justification for the proposed changes.

Maori Issues

The first two justification are about Maori issues. One is constitutional, arguing that the ‘public health system does not meet the Crown’s obligations to Maori’. The second is that the ‘overall system performance’ (which the Cabinet paper emphasises is ‘high’) ‘conceals significant underperformance and inequity, particularly for Maori and Pacific peoples’ (although there is little attention to the Pasifika needs).

This is an issue that requires a lot more teasing out – but not here. The danger is that if we characterise the problem as ‘Maori’, with little thought about what is actually going on, we shall have an expensive failure. One is already nervous because those who have welcomed the change have so many different views on what the new authority will do.

Note that the paper admits that there is significant underperformance and inequity for others who are not Maori (or Pasifika). It is not obvious that the paper addresses their needs. By focusing on the Maori dimension, the system may fail to identify general problems and continue to leave others behind.

Funding Issues

Justification 7 is that ‘funding has not increased in line with increasing costs and rising demand’. However, the redisorganisation does not address the funding issue. The transition will add to costs; if the 1990s redisorganisation is any indication they may be very large. Nor should we be surprised if the new system is more costly to run. Additional layers of management can reduce the productivity of those in service delivery.

Moreover, if we deploy more health resources for Maori healthcare, as the Cabinet paper argues, and we also, in parallel, provide more resources to the other groups which the paper mentions as not being adequately covered, then there will be less for the rest. Are we willing to accept fewer resources for the rest, perhaps compromising their health and wellbeing or pushing them into the private sector?

So the funding issues are not going to go away. At least nobody is making the stupid claim of the 1990s redisorganisation, that this time it will generate substantial cost savings.

Population Health Issues

I have little trouble with justification 6 that the ‘system does not routinely take a population health approach’. Twice in the past three decades there have been attempts to deal with this and twice the approach has been castrated because of powerful lobbies which profit by ignoring population-based health promotion. It is only insiders who appreciate how, despite the gutting of the relevant institutions, our public health profession has responded magnificently faced with the covid pandemic, performing well beyond what we might expect, given how they have been treated in the past.

It is easy to reduce the focus of population health policies to the big ones of alcohol abuse, tobacco use and obesity. But, for instance, David Skegg has drawn attention to the failure to provide quality water; we also need to prepare for the next pandemic. A wider perspective will reduce the leverage of the lobbies who want to close down advocacy of policies which will decrease their profits.

(I squeeze in here a criticism of a too common canard – that better prevention will reduce treatment costs. It may not. For instance, banning smoking increases costs because people live longer – perhaps an extra ten to twenty years – and will be a charge on the future health system during their longer life. From a health and welfare perspective we may celebrate that outcome, but from an accounting perspective the ideal is the cigarette which explodes on the day the smoker retires.)

The Provider Capture Issue

Here is justification 5 almost in full: ‘… services are too often built around the interests of providers, and not around what consumers value and need. Improvements in service design and adoption of new technologies have been sluggish, resulting in little shift of services from hospital to community environments, despite this having been government policy for more than 20 years. Virtual consultations only became common during the height of the COVID-19 pandemic; and since the lowering of alert levels, have retrenched again.’

The last sentence is particulary odd, (‘Ve vill make you Zoom!’) The entire passage is probably a signal they have something deep in mind.

What may be going on in the cryptic bureaucratic obscurity is the view that health professionals use their political power to divert resources from high priority to their less important practices – especially from preventative and primary care to treatments. (What that has to do with zooming I have no idea.)

It is true that some treatments are not as efficient as their proponents argue, while there is a phenomenon called ‘Supplier Induced Demand’, when a professional proposes a course of treatment which the funder would not choose if they were fully informed. (Often the SID treatment is to the financial benefit of the promoter, which is why it is a greater problem in the private healthcare sector.)

However, that account is only partial. The main reason resources are used in some areas and not others is that the public demand prioritises urgent treatments. It insists, for instance, that inflamed appendices be dealt with immediately.

Perhaps a plodding economist or bureaucrat would do an analysis which showed there were more valuable treatments than the urgent ones and that the higher priorities are being neglected. Perhaps the public, given the information, would agree. But that would lead to the conclusion that there should be more resources.

It is too easy to use such bureaucratic jargon as in the passage in order to divert attention from its real content. The writers ought to provide a jargon-free account of what they actually mean – on Zoom?

System Complexity Issues.

Justification 3 is that ‘the system has become complex and unnecessarily fragmented, with unclear roles, responsibilities and boundaries’.

Yesterday I argued that complexity and fragmentation is inevitable. It may be useful to make the traditional distinction between surgeons and internal medicine. The patient arrives at hospital with a severly inflamed appendix and the surgeon cuts it out. The patient arrives at hospital with an internal ache; in the course of the diagnosis the medical team finds that they have a host of other problems, including perhaps excessive drinking and not getting on with the spouse. There is no simple remedy even if the clinicians were certain about what is going on.

Centralisation policies for the health system are usually based upon the surgical model, ignoring the complexity and the fragmentation that physicians face, thereby missing the problems identified in justifications 2 (underperformance for certain groups) and 5 (the failure to integrate primary and secondary care). That was what happened in the early 1990s redisorganisation; even the promises of productivity increases reflected a view of healthcare as a series of a surgical operations.

Do People Have a Say in the System?

As for justification 4: ‘the public do not have a consistent say in the operation of the system’, the kindest thing to say about the proposed redisorganisation is that it provides consistency across the public by reducing everyone’s say to zero. It was never great, but under the new system it is going to be less.

We have a Health and Disability Commissioner, who does an excellent job of remedying a failure by a health professional after you are dead. However, if the problem is one of various services not interfacing, the Commissioner is unlikely to be involved. A stiff letter to the head of the proposed Health New Zealand, which is to supervise the running of the hospitals will get no remedy.

The proposals hardly elaborate how consumers of healthcare (and their friends and family) will have a voice. (The exception may be Maori.) Voice is required at the personal level. Consider those in hospitals (or a rest homes) who fall between the cracks because no one seems to be in charge; a problem quickly fixed with goodwill and an effective advocate – if there is one. (I do not think clinicians should fear a well-designed complaint system, especially if it is built around a no-fault but ‘fix it’ culture.)

Voice at the local level matters too. The likelihood is that rural and provincial communities will feel disenfranchised under the new system. When the folk in Whangarei have a community complaint, they will have to picket in Auckland (or possibly Hamilton) – or even Wellington.

Recall, too that the one of the reasons for the separation out of the Counties-Manakua CHE (later DHB) in 1992 was that thought that the Auckland AHB was thought to be underplaying the needs of South Auckland; a similar local concern generated the Wairarapa CHE/DHB. For a locality a regional centre can be over-centralised.

I have long been doubtful about the effectiveness of elected representatives on the governing boards. Friends with the best intentions who got elected would leave after one term because they felt they had no effect. But they did grumble and they were a part of a system which gave people a feeling they had some say. Because they grumbled, elected representatives were killed off by parliament one night in 1991; this time they have been neutered – told not to comment.

What I do know is that the public has to have confidence in those whom it asks to take up its cases. Centralised appointments will not be trusted, especially in the regions. There are a number of ways representation can be organised. All should require some local input in the selection.

While I would like to say that the 1990s redisorganisation collapsed because of the severe technical deficiencies of the underlying theories and the resulting implementation failures, probably far more important was the popular uprising by the imposition of what seemed to be a foreign culture of commercialisation (or Americanisation) by Wellington.

Back to the Inherent Tension

The usual reason for more central control is the demands of public funding which pushes the balance away from the patient, the clinician and the local. Thus, the decades-long efforts to increase central control of the health system. The abolition of the District Health Boards follows a logical continuation from the limitations of the local Hospital Boards of the 1950s when the central government took over total reposnsibility for funding.

Yet, as the central government has got involved, the increasing fiscal burden has not been resolved. A solution has been to offload onto private healthcare but that adds to the inequity of the system. This redisorganisation will not resolve them. The danger is that other strengths of the current system will be lost.

Centralisers Make Mistakes

A major weakness of centralisers is their tendency to design systems on the assumption they never make mistakes. Had they been more realistic, the planned redisorganisation would have observed that some part of the various failures can be attributed to the failure of the centre (Wellington).

You almost certainly know of such failures in your locality, and I went through yesterday the sad story of the Canterbury DHB fracas. I know the centre has never given its side of the story – perhaps it does not want to admit failure. But even a clean version of their story would be used to show the centre’s failure.

It is likely that such things will happen again under the new regime. Despite its brilliant handling of the Covid Crisis, there is little confidence in the Ministry of Health as one of our better government agencies (at a time when there is much pessimism about the quality of the public service generally). I have wondered whether a covert purpose of the redisorganisation between the Ministry and the Health New Zealand is to improve the functioning of the ministry. If it happens, it will be welcome.

The failure to acknowledge that the centralisers will make errors – grievous errors – is why the designers think there is no need to build the public’s involvement into the new system. Voice is unnecessary if you never make mistakes,

If one never acknowledges mistakes, one never learns from them. There have not only been poor appointments to DHBs but some of the appointments to the ministry itself have also been of poor quality (also true for some ministers). The system also needs to be designed for when a minister, unsympathetic to the principles underlying the system, undermines them – as has happened. Should we design a system so heavily dependent upon those at the centre?

Of course mistakes are made at the local level. Good design which accepts they happen makes a decentralised system more robust.

Local Innovation and Experiment

Centrally organised systems are not very good at genuine innovation. DHBs offered the promise of local innovation and experiment which could then be applied elsewhere (for instance in primary-secondary integration). Experiments may have happened but usually the learnings did not percolate through the whole system. The shortage of funds inhibited them as Boards focused on urgency. (It is difficult to get GPs to address alcoholism if you are desperately removing appendixes.)

Some of the ‘experiments’ are interestingly subversive of the current centralisation proposals. I have a personal interest in pediatric endocrinology. Quite large provincial DHBs may have work for only one specialist; professionally that leaves them isolated. Who can the sole endocrinologist consult on a particularly tricky case? Who provides cover when he or she is on holiday?

One answer has been to build up a collegial network across a number of DHBs. Sounds sensible to me. It suggests that to work properly one needed centres of advance health care excellence – in effect a tertiary hospital associated with medical schools – together with a a remit to support a set of identified secondary providers.

The role of medical schools in the system is hardly touched on in the proposed redisorganisation, in part because universities are allergic to central direction. But the schools are repositories of a lot of knowledge, not only about hospital medicine, but about public health, care of the elderly and disabled and primary care.

You may wonder whether the proposed four regional offices for Health New Zealand are such centres. That is not the intention. Their purpose is funding and governance, not providing healthcare. They are more an echo of the later discarded Regional Health Authorities of the 1990s redisorganisation.

I have deliberately not gone through the new structure, instead focusing on its design principles. However the diagram provided says it all. At the top is the Minister and Ministry of Health, power descending from the top. Patrients do not appear.

My perspective is the other way up, with the patients at the top. That returns to my opening remarks. I do not deny the necessity of central structures, especially given that the centre is the source of funding. But I start with the people and those treating and supporting them and build the structure with their wellbeing at the centre of our vision – not the dollar.

Where Has the Health System Come From?

Presentation to the 2021 Conference of Theatre Managers & Educators, Dunedin 5-7 May.

A few weeks ago, the government announced the next health sector redisorganisation. So I have scrapped the presentations I promised, in favour of an account of what is happening and where we might be going. Today’s presentation is centred on a history of New Zealand’s public health system; tomorrow’s on where we might be going.

Inherent Tensions in a Health System

I begin with an anecdote. About thirty years ago the government got into its head that if our hospitals were to be run like businesses there would be a major productivity boost. They promised 20 percent gains although they never happened. Part of the redisorganisation – I’ll explain why I use that word shortly – was to appoint businessmen and women to run what were then called Crown Health Enterprises (notice the weasel-word, ‘enterprise’) which evolved into what today we call District Health Boards.

The business-sourced chief executives knew little about healthcare. I was told of instances in which senior clinicians visited a CEO who showed much discomfort at their presence. One had twelve second-level managers reporting to him, only one of whom was a clinician.

Even so, chief executives sometimes had to front up to audiences of hospital clinicians. On one occasion, the CEO was saying how his task was to have everyone behind the organisation, metaphorically – perhaps actually – thumping one fist into the other hand. It was the sort of thing you might say to the staff if you were running a commercial company. Someone from the audience asked what exactly was the objective of the organisation. ‘It was’ he said – thumping fist in hand – ‘the bottom line’, but as he said it his voice trailed off.

For even this businessman could see that the clinicians did not give a fig for the organisation’s financial position. Fortunately it did not happen, but had someone in the room had a heart attack, we would have seen what the clinicians really cared about. Their priority would have been the patient’s health and survival; bugger the bottom line, or what it cost the system. Nor would they expected to be paid for an out-of-hours emergency; their professionalism meant ‘just do it’.

This bystander – heart intact, I add – saw the central tension of running a health system. On the one hand there is the complex, expensive organisation represented by the chief executive; on the other there is the clinician or clinical team attending to the intimate needs of a human being.

There is no ultimate resolution to this tension. With a bit of skill one can reduce it. Reconciliation of the tensions can never be perfect; there will always have to be compromises. That is why we call proposals to change the system a ‘redisorganisation’ – the organisation structure churns in the belief that this time they will get it right and there will be improvements in health delivery without significant increases in funding. But the change managers never recognise the inherent tension; redisorganisations usually fail.

That is what happened disastrously in the early 1990s. It was a classic example of the Mencken dictum: for every complex human problem, there is a solution that is neat, plausible and wrong.

The current redisorganisation has parallels with the 1990’s redisorganisation. Fortunately, it is not being run by people as ignorant of the health system. Thirty years ago, they did not even want to learn. By coincidence the eminent British economist, Alan Maynard, who warning against the notion of redisorganisation when he articulated it, was visiting the country but he, and other experts who were over here, were not consulted.

The Sweep of History

I begin by reviewing the sweep of history to give a background to the current proposals. What was happening 150 years ago may seem arcane to today’s clinicians but we can learn a lot from the past. (I draw on it tomorrow too.)

In fact the medical professions were barely scientific in the nineteenth century. Surgeons had operated for millennia (so had barbers) but the practice of bloodletting was only abandoned in the late 19th century. The problem of infection was first identified in the middle of the 19th century, when pain control (anaesthetics) also began to be addressed. The first miracle drug, aspirin, was introduced in 1899. X-rays were only discovered in 1895.

Settler hospitals were established early in the settlements. They were very different establishments from today’s for the affluent sick were treated in their homes. Hospitals were for the indigent with inadequate accommodation. A not uncommon reason was mental incapacity; not surprisingly asylums occur significantly in the history of the hospital sector.

Pamela Wood reports, ‘in the early years a significant proportion of cases [in hospitals] were from accidents; people with infectious diseases were not admitted and some doctors considered that the incurable, the old or the chronically ill should not be kept in hospitals. … Surgical patients in particular came to be seen as representing a specific danger to others through their suppurating wounds and as sick bodies vulnerable to the dirt of the buildings surrounding them.’

Medicine did not advance quickly in New Zealand. Two decades after Lister’s seminal paper in 1867, surgery at the Dunedin Hospital, one of the country’s most advance hospitals, was described as being ‘in the transition state between the days of septic surgery and the development of antiseptic surgery’. Contrast how quickly today’s medics have adopted learnings from the covid pandemic.

Healthcare was not a national responsibility. Hospitals were local, funded from local authority rates and private donations (with doctors providing free services – subsidised from their private practices; Phil Bagshaw’s Canterbury Charity Hospital Trust is an echo of that past). However, in 1861 Governor Grey announced that the central government would pay hospital costs for Maori and approved indigents. Four were established in Auckland, New Plymouth, Whanganui and Wellington. The Wellington one was known as the ‘Native Hospital.’ It did not succeed because Maori cultural practices meant a place of death was tapu. Perhaps there is a lesson here: The purpose behind the best facility will be undermined if it ignores cultural and personal concerns.

Inevitably, the central funding led to central regulation and in 1880 the government appointed its first inspector of hospitals.

However, initially, the main central government concern was population-based health issues, especially water and waste-water, the control of quality of food and drugs (milk could be a carrier of typhoid fever) and dealing with infectious diseases.

It was the threat of a major outbreak of the plague coming from China via Australia which led to the passing in 1900 of the Public Health Act. A separate Department of Health was established in 1912. In that year, central government annual per capita spending on health cost around three-quarters of a labourer’s daily wage. Local body rates contributed the equivalent of two days.

Following the pandemic of November 1918, which killed over 8550 New Zealanders; the Maori death rate was seven times the non-Maori rate – death rates were even higher in Samoa – there was an increase in staffing and a new Public Health Act in 1920.

So governments slowly got involved in the provision of personal health care, but by no means generously. During the influenza pandemic, the Minister of Health pointed out that the government was spening more on the health of animals than on that of humans.

Medicine was changing from a craft to one driven more by applied science. It did not happen overnight, and it has not stopped as new knowledge and new techniques continue to transform the health providing professions. A more recent development has been increasing specialisation, which means that health professionals often have to work in teams. [Added in presentation: I was struck listening to other conference contributions how surgery is a team activity today.]

After the Great War, hospitals became widely used throughout the population by ‘patients of all classes’, as their quality and safety improved and as they provided an increasing range of effective treatments.

Personal healthcare became increasingly important. With a wider range of treatments and more expensive ones, ability to pay became an issue – a trend exacerbated by the poverty of the Great Depression. By the 1930s the pressures were for improving personal access to the healthcare system. Inevitably, New Zealanders turned to their government.

Under the First Labour Government, state funding of healthcare steadily increased. Whereas the public’s central purse was spending 0.6 percent of GDP on its health budget in 1935, by 1944 it was 2.0 percent. Today it is about 7 percent. (Including private spending, the total health spend is about 9 percent of GDP.)

Perhaps the greatest failing of the Labour scheme was the assumption that the total amount of required medical care would be limited, a limit that was not great compared to the state’s capacity to pay. But the rate of technical change was underestimated. Many innovations improve health but are extremely expensive. Add the increasing requirements of patient care and population aging, the potential cost of health care becomes near unlimited – certainly well beyond the budget of the average patient or the Treasury funding all patients. The expense has been compounded by the shift from saving lives – that is, prolonging them – to improving the quality of lived lives.

This general historical overview allows us to trace the organisational structure of the health system. In the nineteenth century hospitals were small, not very technically advanced and local and isolated. Medicine was primitive but not wholly ineffective. Many ordinary people today are more knowledgeable and able to apply more effective treatments than a doctor of 150 years ago.

How things have changed! Today hospitals are huge and expensive, involving technologies that no single person can master. Medicine is much the same. Typically our hospitals are no longer isolated, not just multi-campus but able to connect for patient care with hospitals at the far end of the country and for knowledge anywhere in the world. We have long moved away from local public and private charitable funding. The local authority rate contribution was abolished in 1952 and charitable contributions are not great; virtually all the funding of the public health system comes from central government.

However, there remain fossils from the past. For instance, have we the right configuration of hospitals? Do they coordinate enough? And why the localised governance structure, especially elections to the board?

(I mention that the 1990s redisorganisation by the National Government abolished local electees to the governing board by overnight legislation, ostensibly because the consumers (patients) have no role in running a business, but also because non-government appointees would have resisted the changes being imposed from the top. The Clark-Cullen Labour Government reinstated local electees to be about half the members of the governing board. The Key-English Government left them there, but now the Ardern-Robertson Government, successor to Clark-Cullen, proposes to abolish them again. We talk more about this in the next presentation.)

I have focused on secondary care because that is the concern of those attending the conference. We should not forget primary care, including general practice and pharmacies, the historical trajectory of which has been much more embedded in the private sector and has never really integrated with secondary care – despite efforts to do so going back for at least half a century. Note how this partly reflects that, historically, primary and secondary care developed seperately.

Another critical dimension is population-based health services – sometimes confusingly called ‘public health care’. Recall they were initially a central government responsibility; integration of them into health boards began about a quarter of a century ago.

Moreover when we think of hospitals we should not forget of care of the elderly in rest homes or supported by outpatient services. There is a disability sector as well, not to mention the voluntary sector which is both a service provider and advocate. Add in Pharmac and a few others and you can understand why the system is a disorganisation.

Lessons From the Canterbury DHB Fracas

All this reminds that the health sector is inevitably disorganised. Tomorrow’s presentation is about the current redisorganisation proposals. Before going to them, I want to illustrate some of the difficulties by the kerfuffle which recently occurred at the Canterbury DHB.

The essence of the problem was a conflict over funding – and over control. It resulted in the destruction of the DHB’s widely admired senior leadership team which had been a champion of its region’s communities and clinicians.

There is a problem over any account because the centre’s case – the Wellington perspective – is hardly available and we have to rely on those who are critical of the centre. I mention this not only because scholarship requires drawing attention to imbalanced sources, but because if the proposed changes weaken local involvement, we would have even less informed idea of what was happening during a future occasion.

Apparently the dispute – an example of that tension between the centre and the clinical I began with – arose from the Canterbury DHB overspending relative to its revenue. This is a regular feature of the DHBs, and their predecessor Crown Health Enterprises, and evidence that the system of financial controls is not been working properly. It arises because the clinical imperatives of treating patients in need override the financial imperatives of staying within budget.

The Canterbury DHB deficit, however, was unusually large. It arises, so the locals tells us, because of inadequacies in the DHB funding formulae. I was originally going to spend some time going over this but since a new regime will be introduced following the current redisorganisation, that is not a priority today. I expect the new structure will enable a revision of the current (population-based) formula.

Except to say that it appears that the Canterbury DHB suffered badly form the funding system because of the Canterbury earthquakes of a decade ago which destroyed a lot of its capital works. The population-based funding formula assumes that all DHBs capital structures are equally well off – or badly off. Clearly in the case of the earthquake-shattered Canterbury DHB that has not been correct.

(It is also argued that the Mosque Massacres imposed heavily on the DHB. I’ve not seen precise numbers and there was some sharing with other DHBs. Even so, it raises the issue of whether the population-based funding formulae should have included a reserve for exceptional circumstances, in addition to that it needs to make greater allowance for differences in capital structures.)

The complexity of the situation is well illustrated by the Canterbury DHB’s new acute services block which opened two years late and whose construction was over budget. Apparently the Wellington centre is responsible for the building phase and therefore – in principle – for the substantial additional costs (which include the overruns, capital charges and depreciation). However, the additional costs are not charged to the centre but to the Canterburt DHB, which has already been paying for more costly service provision before the building was commissioned. That, anyway, is the local critics’ assessment; I have seen no alternative account from Wellington.

The Canterbury DHB senior leadership team said they had a plan to pull back the deficit. However, central government appointed powerful advocates above them to implement the Wellington agenda overriding the the previous Board and its executive team. Whether this was justified or not depends on your perspective, but it reminds us of the power of the centre to control constructive developments in localities.

I should add, at a more general level local autonomy allows for innovation and experiment. It has happened and it has improved some of the disjunctions in the health system. You may be disappointed that there is still not enough integration between primary and secondary care, but there has been a lot of progress over the last few decades. We may ask, however, to what extent the innovative successes of one locality have been quickly transmitted elsewhere. In treatment practices the answer may be generally ‘yes’ but one is less sure in organisational practices.

Conclusion

This has been a preparation for tomorrow’s presentation on the government’s proposals to redisorganise the health system. I summarise its main findings.

First, there is an inherent tension between the centre which funds healthcare together with the complex organisations it leads and what goes on at the clinical and local level of professionals dealing with patients. The tension is unavoidable.

Second, the complexity of the sprawling health system is substantial. Plans to redisorganise it need to be humble, aiming for incremental improvements rather than the ambitiously neat, plausible and wrong.

Third, one of the sources of the sprawl in the health system arises from its historical development from a nineteenth-century system in which hospitals were small, not very technically advanced and local and isolated, in which primary care developed separately from secondary care, and in which medicine was primitive but not wholly ineffective. Despite the spectacular changes in the following 150 years there are still fossilised remnants of the old ways.

Fourth, the centre has made errors, but it generally does not acknowledge them. It is easy to blame the districts for everything. Ignoring this will inevitably result in failures in a redisorganisation.

In summary we should not be surprised that there are pressures to centralise the system further, even at the cost of the loss of local, and even clinical, autonomy and less innovation. That is what tomorrow is about.

Centralising the Public Health System

Centralising the Public Health System

The proposed health redisorganisation seeks to markedly centralise the health system. Is this grab for power justified; will it work?

The Cabinet paper’s justification of the proposed changes is sevenfold.

The first two are about Maori issues. One is constitutional, arguing that the ‘public health system does not meet the Crown’s obligations to Maori’. The second is that the ‘overall system performance’ (which it emphasises is high) ‘conceals significant underperformance and inequity, particularly for Maori and Pacific peoples’ (although there is little attention to the Pasifika needs). This is an issue that requires a lot more teasing out – but not here. The danger is that if we treat the problem as ‘Maori’ with little thought about what is actually going on, we shall have an expensive failure. One is already nervous because those who have welcomed the change have so many different views on what the new authority will do.

Justification 7 is that ‘funding has not increased in line with increasing costs and rising demand.’ True, but the redisorganisation does not address this. The transition will add to costs; if the 1990s mess is any indication they may be very large. Nor should we be surprised if the new system is costly to run.

I have little trouble with justification 6 that the ‘system does not routinely take a population health approach’. Twice in the past there have been attempts to deal with this and twice the approach has been castrated because of powerful lobbies which profit by our ignoring population-based health promotion.

I give justification 5 almost in full: ‘… services are too often built around the interests of providers, and not around what consumers value and need. Improvements in service design and adoption of new technologies have been sluggish, resulting in little shift of services from hospital to community environments, despite this having been government policy for more than 20 years. Virtual consultations only became common during the height of the COVID-19 pandemic; and since the lowering of alert levels, have retrenched again.’

It seems to be saying that the system still underplays primary healthcare (such as GPs) I agree. But the oddity of the last sentence may mean they have something else in mind. It’s a bit strange. (‘Ve vill make you Zoom.’)

Justification 3 is that ‘the system has become complex and unnecessarily fragmented, with unclear roles, responsibilities and boundaries’.

Perhaps complexity and fragmentation is inevitable. I am struck by the traditional distinction between surgeons and internal medicine. The patient arrives at hospital with an inflamed appendix and the surgeon chops it out. The patient arrives at hospital with an ache; in the course of the diagnosis the team finds that they have a host of problems including alcohol and not getting on with the spouse.

So it is easy to systematise health provision based on the surgical model and ignore complexity and the resulting fragmentation; thus the problems identified in justifications 2 (underperformance for certain groups) and 5 (the failure to integrate primary and secondary care).

The centralisation is likely to exacerbate this. It is like surgeons sitting in Wellington offices. DHBs offered the promise of local innovation and experiment which could then be applied elsewhere (for instance in primary-secondary integration). I have never been clear whether the experiments happened but, in any case, any findings were not percolated through the whole system. I suspect the shortage of funds inhibited them as Boards focused on urgency. (It is difficult to get GPs to address alcoholism if you are desperately removing appendices.)

As for justification 4: ‘the public do not have a consistent say in the operation of the system.’ The kindest thing to say about the proposal is that it provides consistency across the public by reducing its say to zero. It was never great, but under the new system when the folk in Whangarei have a community complaint, they will have to picket in Auckland (or possibly Hamilton) or even Wellington.

We have a Health and Disability Commissioner, who does an excellent job of remedying a failure by a health professional after you are dead. My concern is microsystems failure; we all know of instances with friends in hospital (or a rest home) who fell between the cracks because no one seemed to be in charge; a personal problem quickly fixed with an effective advocate and goodwill. A stiff letter to the head of the proposed Health New Zealand which is to run the hospitals will get no remedy.

The failure of the proposals to give consumers of healthcare (and their friends and family) a voice says there is something else going on. The usual reason for more central control is the demands of public funding.

The history of secondary care (hospital) is that it started off as a private system funded by fees, charity and doctors giving their services for free. (Phil Bagshaw’s Canterbury Charity Hospital Trust is an echo of that past.) Under the First Labour Government the central government began to take full responsibility, mainly for equity reasons. At the time, nobody expected the huge technical innovations which have prolonged life and the quality of life but which are increasingly expensive. So the central government got sucked in with an increasing fiscal burden which has not been resolved  – equity issues are important – by offloading as much as possible onto private healthcare

Thus[decades long efforts to increase central control of the health system. The abolition of the District Health Boards follows a logical continuation from the limitations of the local Hospital Boards of the 1950s.

A major weakness of centralisers is their tendency to design systems on the assumption they do not make mistakes. Had they been more realistic the planned redisorganisation would have observed that some part of the various failures, which irritate us all, can be attributed to the failure of the centre (Wellington).

You almost certainly know of such failures in your locality, but the most recent spectacular one has been at the Canterbury DHB where a first-class leadership team was unaccountably destroyed. Some of the factors driving the disaster seem to have been the failure of the centre’s funding of the earthquake-hit DHB, its responsibility for the new acute services block new building which suffered severe cost overruns (which were then dumped on the DHB) and the appointment of powerful advocates of the central government agenda to overcome the sustained resistance by the previous Board and its executive team to this agenda.

It is likely that such things will happen again under the new regime. Despite its brilliant handling of the Covid Crisis, there is little confidence that the Ministry of Health is one of our better government agencies (at a time when there is much pessimism about the quality of the public service generally). I have wondered whether a covert purpose of the redisorganisation between the Ministry and the Health New Zealand is to improve the functioning of the ministry. If it works, it will be welcome.

The failure to acknowledge that the centralisers will make errors – grievous errors – is why the designers think there is no need to build the public’s involvement into the new system. It is unnecessary if you never make mistakes,

If one never acknowledges mistakes one never learns from them. There have not only been poor appointments to DHBs but some of the appointments to the ministry itself (and of ministers) have also been poor quality. Not to mention that what happens when a minister takes over who is unsympathetic to the principles underlying the system and systematically undermines them, as has happened. Should we design a system so heavily dependent upon such people at the centre?

When mistakes happen, you wont even be able to picket your local DHB.

Book review: Brian Easton on Mary Holm

New Zealand’s most distinguished economist reviews New Zealand’s premier financial agony aunt

Newsroom 29 April, 2021

Because economists are believed to know the mysteries of finance, I am often asked to give financial advice. I advise that I would never take the advice of an economist without paying for it; that it is never worth paying for an economist’s financial advice (leaving, incidentally, a logical problem which stumped Bertrand Russell. One version of the Russell paradox is a card; one side of it says “the message on the other side of this card is wrong”. Flip over and the other side says “the message on the other side of this card is right”. I have just given the advice not to take my advice; are you going to take it?

Giving financial advice is skilled and dangerous. After all the advisor could be sued if the advice goes wrong, although an awful number of unlicensed – and in my experience incompetent – advisers got away with it in the run up to the financial company crashes in 2008. There has been more protective legislation since – I am not licensed to give financial advice – which is, no doubt, why there is the 114 word disclaimer on the verso to the title page of Mary Holm’s latest book A Richer You: How to Make the Most of Your Money. Basically it says that neither she nor her publishers are responsible if you try to follow her advice and the investment comes unstuck.

Holm has been writing a weekly column offering financial advice in the Weekend Herald since 1998. This book is a selection of 184 of her interchanges. Essentially she is an agony aunt who discusses financial issues rather than relationship ones. Not that, as some of the book’s letters show, they can always be separated.                                                                                  

A good agony aunt usually provides prudent, informed, commonsense, not without humour and with a compassion for those at the other end of the interchange. Holm passes this test well; I especially liked her occasional reminding that it might be the time for her correspondent to spend something on themselves. Savings are a means of spreading out one’s consumption – of having the fun – over time, not of being dutifully miserable always. Admittedly, we do not know the future – including the adverse shocks we will experience and our how long we will live – so it is always wise to have a reserve for such uncertainties.

Readers may be misled by reading too casually the book’s title. It is not promising to make one rich, but rather a little richer. The vast majority of correspondents are not rich and never will be. But if they follow the tenor of Holm’s advice (not the actual advice itself of course – see disclaimer) they will be a little bit wealthier and a little bit more materially comfortable. On average of course; there is luck in the investment game including bad luck – sometimes very bad luck.

One of the weaknesses of financial agony aunt columns – but not so much of personal ones – is that there is not a lot about disasters. Apparently people who suffer disasters do not have enough savings to require further investment advice. Yet, a central lesson in investing is that while one can inch up the return, it is avoiding the crash (and fraud) which makes the greatest difference  in the long run.

The book’s big limitation is the absence of a discussion on leveraged investing – of borrowing to leverage your asset to get a bigger return. Often it works for a while – booms go on but the bust which follows is bigger and more painful. All financial investment is on the brink of a Ponzi scheme; those taking their money out are obtaining the cash from those joining. (The difference is that shares, say, do pay dividends.) I do not recall the book mentioning Ponzi or a Minsky bubble. I am sure that Holm knows about both, but her correspondents generally do not. Perhaps an economist should write to her, under a pseudonym pretending ignorance, asking if Charles Ponzi or Hyman Minsky have any relevance to today’s investor – they do, they do.

That may be the difference between an economist and a financial advisor. The former looks for context. For another example, why are real interest rates falling; will the fall be permanent? There are not simple answers but the prudent investor needs a context in order to plan a consumption flow over their lifetime.

Lower real interest rates increase the temptation to leverage invest. I am not uncomfortable about Holm’s response to a query about investing in bitcoin: ‘I’ve read about bitcoin but it’s not really my cup of tea. But you sound braver – or if you don’t mind me saying – perhaps madder’. She finishes her discussion with ‘Please – only with money you can afford to lose.’ I would have added ‘and please, please – don’t borrow (or sell your house) to invest in bitcoin.’

(As an aside, you will notice that the recent change removing the tax exemption on interest on rental housing is a restraint on leverage borrowing, whatever the case for or against the change.)

A Richer You is a well-presented book with large type and generous spacing between lines (leading) but reads as well as you’d expect from a  a newspaper columnist. Some of the material is quite technical and requires some prior knowledge – such as a background on how kiwisaver works. My presentational grumble is that all the columns should be dated. When they were written may matter. For instance, one column assumes that safe interest rates are 7 percent p.a. – clearly not a 2021 column, but the naive reader might think that level normal.

An instructive insight is that even financial advisers occasionally make mistakes. Holm admits to one. She was asked about a family who had various high-cost debts and gave perfectly sensible advice about consolidating it. Except, the following week she admitted that she had overlooked the fact that the family had a mortgage-free home, and it would be better to take out a lower interest mortgage and use it to pay off the rest of the debts. Even Homer nodded.

Destroying Public Service Broadcasting

The recognition that there is a media problem is correct, but the chosen solution is likely to be disastrous.

Whether it intends or not, the government is embarked on a course to undermine Radio New Zealand. It wants to merge TVNZ and RNZ in order, it says, to strengthen the media. ‘Merge’ is a weasel word. Mergers involve one entity taking over the other. One does not expect RNZ to take over TVNZ. Even the Treasury warns they are two very different cultures.

The identified problems are twofold. First, the media advertising market – the main source of the commercial media’s revenue is in turmoil as social media have scooped up market share while using content taken from the traditional media. One would have thought the first step in a resolution would be to get the social media to pay for the traditional media’s stories that they use. Many countries are exploring ways to do this but it is a low priority for New Zealand and rarely mentioned.

How a redisorganisation contributes to resolving this funding problem is unclear unless it is to enable TVNZ to get its hands on RNZ’s public funding. (More below.)

Not incidentally, the claim is always made that a merger/takeover reduces costs by cutting overheads and the like. Experience shows it frequently adds to them. Never let facts get in the way of an enthusiastic merger proposal.

The other serious public problem is the convergence of media platforms. Like other outlets, RNZ has a website, podcasts and video presentations. No one envisaged this when TVNZ and RNZ were created back in the 1980s. The strategy of the previous Labour minister, Clare Curran, was ‘RNZ plus’ in which its video capacity would be strengthened. As sensible as it sounds, that does not resolve the TVNZ advertising problem.

Going back to the 1980s reminds us of the parallels of this redisorganisation with standard practices under Rogernomics, with the mushroom approach in which the public is stuck into a dark corner and covered with muck. Meanwhile, decisions are made without public involvement or honest consultation. It is happening again.

About a year ago the decision was made that the merger/takeover would proceed and the Ministry of Culture and Heritage outsourced the policy function to PwC, an accounting firm, to make a business case. (Note the term ‘business’. The framework is the commercialisation of RNZ – even had PwC much expertise in public policy, its advice will be trapped in a Rogernomic framework.)

Last March the government announced its next step. You, dear mushroom, suffering from delusions of a democrat, would have assumed that involved a public discussion on the PwC report. But the commercialisation momentum was under way. Deloittes, a new accounting firm as competent as PwC, has been commissioned to provide the business case (that word again).

The PwC report appears to recommend a hybrid in which the new organisation would depend upon both advertising revenue and public funds. (We don’t know why/how; see the endnote.) It ignores that this option was rejected in the 1980s when commercial radio was split off from public service radio. Just how fundamental the cultural difference is can be illustrated by Mike Hoskings who was a disappointment presenting Morning Report (with Geoff Robinson) but has been a jewel in the commercial ZB crown. The consultants probably did not know of the tensions between the TVNZ and the RNZ when they were both parts of the Broadcasting Corporation of New Zealand. Its exhausted chairman, Ian Cross, once argued for a government direction of how to split the broadcasting licence fee between them to reduce their financial warring.

Tensions would be worse today. The media market is much more competitive both for audiences and the advertising dollar. Even if there was a funding direction, it can be got around under current accounting practices by overcharging one branch for overheads to fund others. (The Department of Internal Affairs does this to Archives New Zealand and the National Library.)

The Deloittes development of the business case for the takeover/merger is being supervised by a ‘Strong Public Media Business Case Governance Group’ (count the weasle words). The board of seven are said to be experts in the media and public policy. Six of them are media experts – the balance of their experience is the commercial media. There is no expertise in public policy, especially one familiar with developments from Rogernomics. (The practice is to call anyone an ‘expert’ who is more knowledgeable than those who give the designation. In this case it is an indication of just how incompetent those driving the redisorganisation are.)

The chair of the seven is Tracey Martin with a reputation for ‘getting things done’. (Interesting that they did not go to Clare Curran.) Martin’s reputation is, actually, for doing what her advisers tell her; she was Minister of Internal Affairs and Oranga Tamariki (and Senior Citizens, although that never appeared much among her activities) and showed no leadership at all. That suggests that her job is to corral any of the other six who have doubts to endorse the Deloitte recommendations.

They are due in the middle of the year and are then to go to Cabinet. Minister Faafoi has said that ‘engaging with the public’ will be part of the new group’s job and went on that the Cabinet will make a decision without formally consulting the public or other political parties – how Rogernomic. So the fait accompli generates a bill, a select committee hearing (under Rogernomics they ignored any thoughtful submission which disagreed – we are still unwinding some of the messes the process left behind) and then the whiMPs – the government caucus MPs – will be whipped through the parliamentary lobbies to pass the bill. Sound familiar?

Any guarantees offered by the minister and ministry are worthless. Recall, that the Minister and the DIA promised to a select committee that they would maintain the integrity of Archives New Zealand and the National Library. A decade later the minister has retired and the officials gone. So has the integrity.

Following the implementation of the merger, TVNZ will steal the RNZ funding, which will force RNZ to seek commercial sources of funding – advertising on the website here, sponsorship there. Step by step public service broadcasting will be undermined. From Geoffrey Robinson to Mike Hoskings.

In the past we have had Ministers of the Crown committed to culture and heritage: Peter Fraser, Alan Highet, Jonathan Hunt, Doug Graham, Helen Clark, Chris Finlayson. Where are they today?

Given the disappointing – some would say disgraceful – cultural policy record of the current government – for example on Archives New Zealand, the National Library, the Public Lending Right – why should media policy expect any better?

Endnote: Dear Mushrooms,

An OIA request provided the PwC report with 50 pages – over half – completely redacted. The missing is all the analysis. We are told it has been omitted because it has not been finalised. Even so the minister announced that it recommended a mixed-funding case and was proceeding with it. We have no idea why. Sound familiar?

Remember that, as far as can be judged, no one on the (weasel words) consulting committee has the accounting or economic skills to assess the business case fully, and there appears to be no provision for public consultation until the decision is made. Sound familiar?

In the corner with you, Brian.

Introduction to Stout Research Centre Seminar

on Not In Narrow Seas: The Economic History of Aotearoa New Zealand 21 April, 2021

The most important thing I want to say today is to thank the Stout Centre for its contribution to Not In Narrow Seas. I had the privilege of a Stout Fellowship for a year which was crucial in the writing of the nineteenth-century chapters of the book. I can also thank the Stouties who contributed to the book and are gratefully mentioned individually in the book’s acknowledgments.

Despite my training in science, mathematics and statistics and in economics and other social sciences it was perhaps inevitable that, if I were spared, I would write a history of New Zealand. I had read history since childhood and written on various aspects of it – for instance there are over 300 items on my website, which probably amounts to another book of similar size to this one (although there is overlapping).

But I did not just want to write another history of New Zealand. I was aware of a major gap in almost all our histories, evident to anyone who had been trained in political economy. I put it this way in the book:

Many historians have told the New Zealand story before; but an economist uses a particular lens which, I would argue, helps us to see our nation’s history in a new way. Too often we take the hard economic core of our history for granted, or we give it merely fleeting attention. Sex is notably absent from the Victorian novel; the economy is almost as rare among recent novels and histories. To give an account of a society without paying attention to its economic underpinnings is about as sensible as telling a love story without sex. It can be done, of course, but certain vital facts of life are left out.

So I wanted to write a history in which the economy was an integral part of the whole story. Indeed I wanted an even broader perspective, indicated in the title of Not in Narrow Seas for the history strays from geology to poetry even if it is centred on the economy-society interaction.

You can get a sense of its ambition from the book’s ‘Epilogue’ which sets out 16 themes which are uncommon in other histories of New Zealand but are central to understanding where we came from, how we got here and where we are going. I wont go through them individually – each is elaborated in the epilogue and illustrated throughout the book – but the Stout Centre has kindly produced a handout of the 16 themes for distribution.

I am not saying that these themes do not occasionally appear in other histories of New Zealand, but I doubt that any other has been written which is as conscious of them.

As is perhaps appropriate given the title of the book, the epilogue begins with another poem by Allen Curnow:

And whatever islands may be

Under or over the sea,

It is something different, something

Nobody counted on.

—‘The Unhistoric Story’, Allen Curnow (1941)

(Incidentally, I love that reference to ‘under the sea’. Allen could not have known about the eighth continent, Zealandia, which was only identified while I was writing the book. Poets are sometimes farseeing.)

That poem captures the notion that scholars learn as they write. Setting down what you think does not just codify one’s thinking, but suggests new issues you had not counted on. So I thought I would draw your attention to an issue which is there in the book but is unresolved.

One is struck how the history of New Zealand is what might be called the ‘continuities of development’. Despite shocks there is a progression of change in which each generation is different and yet there is continuity from generation to generation.

The exception may be the shock of the Rogernomics revolution. Chapter 59, ‘The Aftermath of Rogernomics’, asks to what extent Rogernomics was a major disruption to the long term trends in the nation’s economic and social development, putting us on a completely different course. Instead of answering the question definitively, the chapter offers three accounts. Publishers’ readers of the book hated it, because they wanted THE answer. Mine is ‘I don’t know’.

Perhaps nobody today knows. Perhaps we will only know in decades hence. But the question is worth pondering over. The book should help.

AFTER PRESENTATIONS REMARKS

Thankyou to the three presenters. One of the objectives of my book – perhaps even the main one – was to set out a framework which would lead to a serious and informed open public discussion on some of the most important issues whch face Aotearoa/New Zealand, using the past to think about the present and even the future. Each of the presentations does this. I am thrilled that perhaps after years of somnolence the public discussion I hoped for is almost underway. Thankyou once more to the Stout, this time for contributing to that possibility.

Had we time, I would comment on each presentation, elaborating and responding. I promise I shall do so privately as soon as I can get the time, and publicly in such venues which may arise. But time is the essence. It will be best if we use the available time left to us to open up the public discussion to the floor. 

Will The 2021 Budget Be Focused on Wellbeing?

Now is about the time that the Government is getting its Budget Strategy together

In the week before the budget – the 2021 one is to be delivered on Thursday 20 May – there is a strange ritual in which all the commentariat and lobbyists (who are not necessarily distinct from one another) tell us what should be in it. This is long after the budget decisions are made by cabinet, and even after the date when it is printed, so the ostensible purpose for what is being said is irrelevant. But it entertains us and fills gaps in the media.

It is about now – mid April – that the strategic budget decisions are being made. Were the lobbyists serious, were the commentariat trying to keep the public informed, it would be about now they would be discussing the budget strategy.

The difficulty is that those making the strategic decisions – the Minister of Finance and the Prime Minister, the inner Cabinet and eventually the entire Cabinet – decide in great secrecy, because the making up of their minds takes time and involves reconciling conflicting demands. Complicating the decisions is that each minister has different priorities. So what they will decide no one knows. At this stage even insiders, including the ministers themselves, have only vague ideas. I certainly don’t know.

However, we might ponder what could be in the budget were the government to pursue its claim that the budget was framed by wellbeing.

 First, we know that, as a general rule, raising incomes does not by itself increase wellbeing much. Admittedly, if you raise my income relative to everyone else’s I will feel better off (a point much advocated in Budget Ritual Week).  However, there is one major exception to this finding. Those at the bottom of the income distribution are struggling, and will get a lift in wellbeing if their incomes are increased. So a wellbeing budget would be focused on raising the incomes at the bottom. This would also reduce child poverty and reduce income inequality, which are also government objectives. (Actually, these are related ways of measuring income wellbeing.)

Another gain would be that the income lift of the poorest would improve the health and education (which are dimensions of wellbeing) of children, which would in the long term make the education system more effective, reduce spending on health and justice, increase labour productivity and add to the prosperity of the economy.

Investing in children is kind of investing in social infrastructure but we do not give it the same priority as physical infrastructure, perhaps because there are no commercial lobbies which directly benefit, perhaps because children do not have a vote. In any case, our public or private strategies are not noticeably forward looking as distinct from addressing current urgent pressures.

Another aspect of wellbeing is quality jobs but I do not expect the budget to do much for them – smoke and mirrors aside. Strategic development there takes much longer. My understanding is that there are various working groups looking at these issues.

We are not going to make much  progress as long as we have the centre of the government’s labour market policy lost in the byzantine structure of the Ministry of Business, Industry and Employment (MoBIE), which necessarily treats workers as a commodity much the same as icecream.  One was not, perhaps, surprised at that attitude by the Key Government which merged the Department of Labour into MoBIE, but it is surprising that after four years a Labour Government has acquiesced to National’s approach. Labour supporters would be delighted by a budget announcement of the establishment of a Ministry of Labour and Employment (and immigration). They cannot even petition the minister for one; there isn’t a minister.

The government separated out housing from  MoBIE into a Ministry of Housing.  Rightly in my judgement,  for the neoliberal view that housing is like anything else and administration and policy can be scattered around government agencies reflects a misunderstanding of how difficult the economics of housing is and how central it is to wellbeing.

Were I a government adviser, I would be counselling that given the big housing package a month ago, we should be waiting to see how it works out, so housing should not be a focus of the May budget; we may expect another package  towards the end of the year. In the interim any further measures to increase the supply of housing would be welcome. No doubt there will be some in the budget. Every minister is entitled to a budget press release.

Health is another wellbeing area which the budget can progress. Every year there is an increase in public spending on healthcare although new demands keep appearing. I am not always impressed by the effectiveness of these claims. Frequently I am reminded of H. L. Mencken’s ‘every complex problem has a solution which is simple, direct, plausible — and wrong.’ What is needed is setting a standard for making these claims and a funding program for advocates to bring together the evidence that their proposals meet that standard. (But keep away from the Key Government’s social investment ‘experts’ who seemed to be totally unaware of the  detailed, sophisticated and rigorous evaluation procedures developed in the health sector.)

Health policy is going to be dominated by the government’s decision to  redisorganise the health sector. I doubt that it will make any contribution to improving wellbeing. They will claim it will – they always do. It seems to be more about centralisation and financial control than delivering better health outcomes. Why do it now when the Ministry is at war against Covid? Can you imagine the First Labour Government redisorganising the armed services in the middle of the Second World War?

Mind you, the war against Covid has demonstrated how misguided the Key Government was to run down the population-based services within the Ministry of Health. (It is a miracle that the fragmentary system has functioned so well in such difficult circumstances – the key players deserve sainthoods.)

That is a quick run though about what may be some of the key strategic issues the government might thinking through in a run up to a wellbeing budget. In addition it will be fighting a whole lot of fires – the largest is the Covid crisis. There are also opportunities in other portfolios  to improve wellbeing at the margin, including some I really care about. That I haven’t listed them shows why I am not a proper member of the commentariat or a lobbyist. I cannot even participate in the budget rituals properly.

A Proposal for an Earnings-Related Redundancy Insurance Protection.

1          Summary

1.1       This short paper sets out a scheme for reducing the shock of lost income from redundancy.

2          Preliminaries: Dealing with a Private Market Failure

2.1       This proposal arises because the private market has not been able to provide adequate income protection for those who become unemployed from redundancy. In particular there is a need for short term coverage to reduce the shock of the loss of income following termination of employment.

2.2       I have no problems about proposing public solutions where the market fails to deliver, or its delivery is very expensive. Moreover, I would support such interventions in areas even if they resulted in increased inequality. (An example is the government subsidising the NZSO which most benefits an elite). There are other policy instruments to compensate for the change where it was desirable to deal with such equity effects. (E.g higher income taxes at the top which enables the funding of the NZSO.)

2.3       The view that the state should never operate in the interests of the ‘middle class’ is a favoured neoliberal position (much honoured in the breach). It comes from a belief that there are no significant ‘market failures’ – except where the minimalist state is (grudgingly) involved. My view is that the market often does not provide adequate outcomes and that sometimes well-designed public interventions may add to wellbeing – including for the middle class.

2.4       To be clear, if the scheme is to remedy an inability of the private market, progressing with it requires that workers desire such a remedy. If they did not, I would not progress it.

3          Tiers and Piers

3.1       I have long pondered over how to integrate the flat-rate social security system which began, say, with Seddon’s Old Aged Pension in 1898 with Bismarck’s earnings-related social security system which was introduced into New Zealand with the 1903 Workers Compensation Act (Seddon again).More recently it is the contrast between Social Security (as codified by Thaddeus McCarthy) and Accident Compensation (as proposed by Owen Woodhouse).

3.2       The solution to which I am attracted, was the ‘Henry Lang’ one of a flat-rate first tier, plus an earnings-related second tier (and a third tier of private provision). This is discussed more fully in Chapter 5 of The Whimpering of the State: Politics After MMP.

3.3       The advent of Kiwisaver introduced the three-tier principle into the provision of retirement incomes. (There is a sense that there may be another tier of home ownership.)

3.4       If a worker is to be provided with earnings-related support, then the scheme has to be contributory, not only for equity reasons, but because the contributions define the level of protection. (A person with a record of part-time, short week, or intermittent employment is going to get less coverage. But the shock from her or his income loss is smaller too).

4          Design Parameters

4.1       Having established the framework of the proposed scheme, it is necessary to put the cladding on the structure. Here I set out some possibilities, although were different parameters chosen I would not be fussed. (Where they are comparable I have tried to use the ACC parameters.)

4.2       First, to set the proposed rate of compensation. Median weekly earnings from wages and salaries was $1,060 in the June 2020 quarter. A target of 80 percent (before-tax) compensation means the level of short-term compensation for the median worker following a redundancy would have been $850 a week. (The benchmark income for the redundant would be earnings over the last year, or whichever the ACC uses.)

4.3       At that time the unemployment benefit (job-seekers) for a single adult was $281 per week. (See para 5.2) That leads to the calculation that were the redundant to receive 54% of their previous wage topped up by the unemployment benefit they would reach about 80 percent of their pre-redundancy earnings. (I would happily settle for 50% with the proviso that the benefit be set at 30% of the median wage.)

4.4       The effect of this measure would be that those on below median wages would receive more than 80 percent compensation (if they were over 25) and those above less. As for ACC, the level of compensation would be capped.

4.5       The compensation would be paid for up to six months (although this could be changed). The evidence is that most workers find a job within that period. What happens if they do? This involves a long and complicated argument about the interface with an active labour market program (see para 6.2). We can wrestle over the exact arrangement.

4.4       The scheme would be funded by a levy on employers and employees. The balance is a political decision I leave to others.

4.5       The levy would be calculated to cover a couple of business cycles. – say ten years. In prosperous times the scheme would build up a reserve to run down during downturns. (There would be a proviso that in particularly severe times when the reserves run out, funding would be supplemented by the government – a sort of overdraft facility – to be recovered when the economy returns to prosperity.) The reserves should probably be held in government bonds (anything to keep the madness of the ACC and the actuaries out).

4.6       A difficult issue is how much of the burden should go onto employers (including what happens to current redundancy arrangements). There is a temptation to try to load as much as possible. Whatever the political wisdom of this, the ultimate impact is that it will affect worker take-home pay either from levies or from employers setting lower pretax wages to maintain overall employment costs or a one off price rise.

4.7       There is a lot of fine tuning to be done. For instance, what constitutes redundancy? (Consider employers requiring layoffs and asking for volunteers.)

5          Interfaces

5.1       I have not thought a lot about how the scheme interfaces with Accident Compensation (the complication is that this scheme provides for permanent income loss). However, wherever possible the assumptions and parameters of the two schemes should be consistent with the possibility that one day there could be some merging.

5.2       It is probably necessary that in order for the scheme to work it will be necessary to convert entitlement in the flat-rate social security system from a household basis to an individual basis. (The current system, based on a distant past, assumes that there is only one earner in a household and that the household can be easily identified.)

5.3       The impact of the scheme on child poverty would be small because the causes of child poverty are different (as my work from the 1970s explored). That requires a very different approach.

5.4       Note that the scheme contributes to an automatic fiscal stabiliser, especially in a major downturn, since spending goes up (and reserves run down) as the economy slows down.

6          Extensions

6.1       I have been mindful of devising a scheme which could be extended to short-term sickness coverage. It might be best to introduce the sickness scheme at the same time.

6.2       This scheme is designed to deal with the shock of an income loss from an unexpected event (redundancy or sickness). It is separate from an active labour market program which, among other purposes, aims to facilitate the redundant’s return to quality employment. If we ever get around to introducing such a program, interfacing will be necessary but it would be fine tuning.

7.         Conclusion

7.1       Were this scheme for redundancy coverage to be extended to short-term sickness it would represent the greatest extension of the welfare state since 1938, especially by integrating the two modes which is operate – say Woodhouse and McCarthy.

Trading Red Tape

Whatever the damage, especially to the British economy, Brexit has done us a service by illustrating the complexity of trade.

Brexit is the only example we have of two closely integrated sophisticated economies severing trading ties. The European Union and Britain still do not have tariffs or import quotas between them – the stuff of standard trade theory – while the problem of regulatory alignment has been temporarily shelved. (Without the latter, one country could introduce policies which amount to de facto protection. The Norwegian and Swiss experiences signalled the issue. They are outside the EU but frequently have to adopt regulations introduced by Brussels – to protect consumers, workers or the environment – which affect what the outsiders want to export to the EU.)

Even so, the break has illustrated the complexities of managing the economic border. We knew about them, but we did not know how complicated they were.

For instance, in December 2013 members of the World Trade Organisation agreed to the Bali Package including the Trade Facilitation Agreement (TFA), which aimed to reduce red tape at borders, increasing transparency and taking advantage of new technologies, especially to reduce border inefficiencies and complex customs rules. It was not news headline material but it was thought that implementation of the TFA would have a greater impact on international trade than the elimination of all the world’s remaining tariffs, reducing average trade costs by up to 15%. (That does not include the impact of quotas of course.)

Earlier, the 1986 Single European Act (SEA) had created a single market within the European Union – it took till 1992 to get there – by removing non-tariff barriers to cross-border trade and investment. From 1985 the Schengen Agreement (largely) removed barriers to people moving between most European countries. ‘Europe Without Walls’ they called it. Brexit makes the English Channel (La Manche) a wall.

However, Brexit has illustrated a whole range of problems at the border which were hardly envisaged when the British people voted by a slim majority for Brexit.

Most of us will be aware of the queues of lorries near Dover and Calais because documentation takes longer. (Lorry drivers into France had their ham sandwiches confiscated because of phytosanitary rules. Cough: a source of road accidents is drivers not having eaten.) Even where the lorries can move, red tape documentation can result in them having to return home unladen.

Delays can be disastrous where fresh foods are involved. The British fishing industry suffers. Less smelly are the disruptions to supply chains especially if the delivery is to a factory which has been minimising storage costs by practising just-in-time management of its supplies. (An indication of the significance of smooth supply chains is that the blockage by the Ever Given of the Suez Canal had consequences as far away as China, half a world away.)

Then there was the English garden which found its Northern Ireland market cut off because there could be soil on the plants it was providing. (Northern Ireland is a part of Britain but its regulatory regime is behind the EU – the wall is at the Irish Sea.)

Such muddles are being sorted out. Michael Gove, who was the British Minister in Charge of the Brexit negotiations, said that in ten years all the difficulties will be overcome. In the interim, British businesses are relocating their production and storage to the Continent. Jobs will move with them, and so will some workers – perhaps those who came from the continent during the boom years. (There is also relocation of jobs in London’s finance industry to Amsterdam, Frankfurt and Paris, but that belongs to another column when the total impact is clearer.)

Because the products which cross New Zealand borders tend to be at the beginning or end of supply chain, we are not as sensitive to many of these chain issues, although our fish exporters need minimal barriers for their fresh products. However, I have been struck when talking to diplomats how often ‘border problems’ crop up. (For instance, a trade commissioner explained that he was trying to get some New Zealand fish species treated as belonging to EU categories with lower tariffs.) Even if we gave up negotiating trade deals – not government policy, but opportunities are few or sluggish – we still require a massive diplomatic effort to keep our export effort running. In recent year the government has had to put increasing effort to deal with non-tariff barriers.

My Globalisation and the Wealth of Nations explained how the costs of distance have been central to New Zealand and international economic development. Falling costs of transport, of storage and of communications drove international economic growth; reductions in tariffs and import quotas were another factor. I knew that other border costs mattered, welcomed the Trade Facilitation Agreement and was not surprised by the estimates of the promised gains.

But Brexit has opened whole new insights. With sadness I am grateful for the experiment, but my book and a host of other studies predict that the British people will be worse off in material terms as a result, as will the rest of the world on average, but not by nearly as much.

Notes on ‘Rentier Capitalism’

I have been dipping into Brett Christophers’ Rentier Capitalism: Who Owns the Economy and Who Pays for It? Economists should be warned that his use of the term ‘rentier’ is ‘heterodox’ (his term). I have no difficulty with Humpty-Dumpty’s ‘When I use a word, it means just what I choose it to mean – neither more nor less.’ but the book is a challenge to a trained economist, because one keeps having to remind oneself that Christophers’ meanings are different.

A consequence of his casualness with orthodox economics is that Christophers misrepresents Keynes; this is what this note is about. In The General Theory Keynes refers to ‘entrepreneurs and rentiers’, distinguishing between the returns to ‘risk’ and the returns to ‘waiting’ which traditionally are described as ‘profit’ and ‘interest’. Interest, then, is a payment to those who defer consumption. (Historically ‘waiting’ was called ‘abstinence’ but the term went out of fashion because it seemed odd to say that a rich bloated capitalist was ‘abstaining’.)

Christophers gets it quite wrong when he writes ‘Keynes … famously called for the euthanasia of the “functionless investor” that was the financial rentier.’ Keynes was more subtle. He did not ‘call’ for the euthanasia of the rentier but predicted it:

[when] capital has become sufficiently abundant. … I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

His mechanism for the euthanasia is that capital would become so ‘abundant’ that opportunities for investment would become so limited that the rate of interest would fall to zero and the rentier class would disappear.

It is a matter of record that Keynes’ 1936 prediction was been wrong. (He joins a vast range of the profession, from Malthus and Ricardo to Schumpeter, who made similar stagnationist predictions.) The reason he was wrong is that new technological innovations created additional requirements for capital investment so that capital has not become relatively abundant. This shortage of savings meant that there was a premium for waiting.

(Part of my interest in this question is that if we enter a period of secular stagnation as a consequence of markedly reduced tchnological innovation then the stagnationist theory becomes relevant because interest rates will fall to zero. But let’s keep to Christophers’ concerns.)

Does this mean that Christophers’ book is irrelevant? The real focus for me was its drawing attention to monopoly capitalism. Keynes pays little attention to monopolies – mainly mentioning them in the context of price stickiness – in part because the work of Edward Chamberlain and Joan Robinson was just underway when he was writing. Christophers is not the first to focus on monopoly capitalism – strangely he does not mention Paul Sweezy and Paul Baran’s 1966 book Monopoly Capital: An Essay on the American Economic and Social Order.

Here is my rough take on the Christophers’ story of monopoly capitalism if we ignore some of his casual economics.

While technological innovation and creativity are (often) rewarded by the market (there may be public intervention such as intellectual property rights in order to stimulate them), those who command monopolistic power are also rewarded by ‘super-normal profits’. The sources of this power include innovation and creativity but it may also arise temporarily from being first mover in a competitive market. But another major source is genuine (permanent) monopolies arising from public licensing (the East India Company), barriers to entry and natural monopolies (common carriers). There also seems to be a phenomenon where oligopolies generate supernormal profits. (Any others?)

What happens to these supernormal profits? Initially, they go to the monopoly owners, but eventually the owners sell the profit flow to what Christophers calls ‘rentiers’ (most notably by IPOs). While these rentiers, in his definition, contribute to the economy by ‘waiting’, some take on some risk to obtain a higher return. (Another group of rentiers who don’t quite fit into the model are superannuitants whose pensions come from the government coffers.)

So Christophers is challenging the standard economics model which explains factor prices in a competitive economy. Chapter after chapter reminds us that often the reality is of monopolistic markets and the like which are far from temporary. From this perspective the book provides orthodoxly trained economists with a valuable and sobering service.

Taxing Questions About Taxing Housing

The government’s recent housing package may work; will it do enough?

Trick Question: Does New Zealand have a capital gains tax on housing?

If you ask the Prime Minister she will say not. It is true that her government is increasing the scope of the ‘bright-line test’ on non-family homes to ten years. That means that any financial gain made on the sale of the property within the specified period is treated as income and can be taxed.  The Prime Minister promised her Labour government would not introduce a capital gains tax so this change cannot be one, can it?

The Leader of the Opposition would have to agree. A bright-line test was first introduced by a National Government of which she was a member. National would never introduce a capital gains tax would it?

Harder Question: Should the Government subsidise investing in capital gains when there is not a capital gains tax?

You may not see the logic of such a subsidy, but there was. Purchase a house for capital gains, borrow to maximise the leverage, let it out to cover the cost of holding it, and you were allowed to deduct the costs of interest against your net income. The government is changing that (although the legislation is yet to be passed).

Seems reasonable, but is that not going to put up rents to tenants? Does that mean the deduction is really a subsidy to those leasing? If so, it is a funny subsidy because it only applies where the landlord has borrowed. Someone in a house whose landlord has not borrowed gets no such ‘subsidy’ from the government.

There are a group of landlords who say this argument does not apply to them. They are not there for the capital gain – that will be reaped after they die. They have invested in housing to get a better return than putting money in the bank and the new tax regime will cut back their return. True, if they have supplemented their purchase with borrowing, which would happen if they do not have enough to buy the dwelling they are going to rent without borrowing. Is that fair? Perhaps if they agreed to pay a capital gains tax out of their estate, that would be even fairer. Ooops.

In effect, the new tax range is a hike in borrower’s interest rates on second houses. The difference is the additional costs go to the government (which may or may not use the funds to build more houses or subsidise renters and first home purchasers). If the hike came from higher market interest rates, then investors would get more from their bank. Hmmm.

Will the withdrawal of the subsidy result in higher rents and by how much? Who knows? But better to deal with this by increasing the rental subsidy for housing rather than the erratic impact of allowing interest to be taxed as a cost against income. (The government is threatening rent controls; at best they work temporarily.)

Actually, it looks as though it would be more rational to have a capital gains tax on non-family housing. Wash your mouth out, Easton! There are lots of accountants and lawyers beaming at their fees for advice under this new regime.

The background is that there are two processes driving rising housing prices. One is the shortage of housing; the other is a speculative (Minsky) boom. The government package included measures to increase the supply of housing, but that will take time.

However, the main thrust of the package is to make the speculation less attractive, which will dampen the house prices for a while. We don’t know for how long; they may stagnate or fall briefly. But under current circumstances, assuming there are not massive increases in the stock of housing, the boom is likely to return some time in the future.

That is because householders have funds to invest. New Zealanders have a penchant for investing in housing. Where else are they going to invest?

No doubt many will get into collectables and cryptocurrencies. You do not make a capital gain out of bitcoin and the like until you sell – in effect your capital gain is the purchaser’s capital loss. Collectables are similar but if they are tangible you may enjoy the pleasure of possessing them. (There will also be some very risky schemes and even scams.)

The other big opportunity might be in shares. At least the company being invested in makes a profit (one hopes) higher than the return on bonds or bank deposits. Most New Zealanders do not have much experience investing in shares. Recall how quickly they gave up their shares during the Rogernomic privatisations; the intention was to get people into the habit of share market investment. Perhaps this time more will learn.

There is an interesting possibility here. Allow me to speculate (with ideas rather than money). The Reserve Bank is requiring the trading banks to increase their capital in order to make them more robust to financial shocks. (Some argue that is not necessary, but the decision has been made and relitigation is unlikely to change the decision markedly.)

Where are the additional capital reserves to come from? Ultimately it is the public. For example, suppose the (usually) Australian owner was to set up a separate New Zealand bank which it listed on the sharemarket while holding the majority of the shares. The minority would be sold to the public and, presumably, (most of) the funds would be used to add to the bank’s capital – thereby meeting the RBNZ requirement. (There have been suggestions that Westpac – our third biggest trading bank – may do something like this.) 

Would enough New Zealanders stump up the cash? Again one says ‘who knows?’, but investing in a bank is likely to be more profitable than a fixed interest deposit in it, although the shares will be riskier. It is probably not as profitable as investing in a housing bubble before it pops. Mind you, given the recent changes to the bright-line tax and income tax rules, investing in housing will not be as attractive as it has been recently. The advantage of the share investment is that management is not nearly as troublesome as being a landlord.

In summary then, the recent package will increase the stock of housing, but probably not by as much as needed – in the short term anyway. It will reduce the return of investing in housing, but we cannot be sure by how much, nor of all the consequences. However the overinvestment in speculative housing is unlikely to go away in the long-run until new investment opportunities are taken up.  One possibility would be investing in trading bank shares where they use the cash to increase their capital reserves,

If you are more certain about the future course of the investment market, you have not been following closely enough, Yet, if you have funds to invest, or already have them invested in the housing market, you are going to have to make decisions. Best of luck.

Open Modelling Climate Change Policies

The Climate Change Commission should immediately publish the details of its economic models and enable the public to access them.

There is something strange going on with the Climate Change Commission. In its draft report the CCC said

                ‘We have looked at the impacts which our budgets could have on the economy and society over the next 15 years. The overall costs of meeting the country’s targets and our proposed emissions budgets are likely to be less than 1% of projected GDP. This is significantly lower than what was estimated when the 2050 targets were set.’

My intuitive response is that I am surprised that the ‘overall  costs’ are estimated to be only 1 percent lower in projected output in 2050.* The policies almost seem to be offering a free lunch; that ultimately the cost of reducing our carbon emissions to reasonable levels is minimal.

To make it clear, I personally support New Zealand cutting our carbon emissions, but I have always assumed that we will have to make some sacrifices to do so. Apparently the CCC thinks not.

The immediate response is to look at how the CCC calculated the number – which for an economist is the most crucial number in the report (not that there are a lot of economic numbers).

The report mentions some economic models but their details are not published. Even more strangely, they are not going to be published until after the CCC gives the Government its final version in May in June or July 2021.

The story gets even more bizarre. The CCC reports that they consulted a number of experts who supported the model. All but one was overseas. I do not want to seem parochial but overseas experts often do not have a good grasp of the New Zealand economy. I recall having to explain to one that the reason he could not get the grain price to explain New Zealand agricultural output was that our livestock was grass-fed not grain-fed; I do not think he ever really grasped the distinction. Or recall the two who calculated that the tax structure introduced in the 1980s was detrimental to the economy. Their modelling assumed that the rise in unemployment was due to the tax changes and ignored the macroeconomic mismanagement and the structural changes. ‘Fifos’, as we call the fly in, fly outs (after grabbing their fees), often make fools of themselves. Whatever the grasp of a theory, it takes skill and local knowledge to apply it.

The one New Zealander who was consulted was Dr Adolf Stroombergen of Infometrics. Now I have the highest respect for Adolf in this modelling area. (I have to, I suppose. I was one of his doctoral examiners and he has done nothing since to persuade me that we made a bad recommendation.)

As you would expect, his review is professional but troubling in various ways which a couple of economists would probably sort out over a vigorous cup of coffee.

Before reporting the crunch statement, allow me to note that Infometrics are not the only New Zealanders with modelling capacity. Admittedly it is top shelf, but there are others also up there. Why were they not approached as well, instead of going to the uninformed offshore?

The crunch statement is that on 20 December, 2020 – three months ago – Adolf wrote, ‘I haven’t seen anything so seriously suspect about the modelling that it would prevent the Commission from publishing the work done to date.’ Yet, the CCC has ignored this recommendation,

The CCC says it needs to refine the data inputs – Stroombergen mentions the problem – but if it really believes that, it should never have published the claim of a minimal reduction.

Even under the urgency of the covid pandemic, scientists have not been so casual about publishing their findings. One hopes that the rest of the Commission’s scientific work is not so sloppy.

So lots of people are making (often heartfelt) submissions on the draft report in a cloud of economic ignorance. It is not just that the figures may be wrong, but close analysis might provide insights. For instance, it may be that some proposed policy changes are particularly painful and others are relatively painless. Would that not be helpful to know?

Another issue is that effective income seems to be reduced more than output, although no estimate is given. (Who would have guessed that the greenies on the CCC were more concerned with output than wellbeing?)

Ideally, the public should be given access to the model the CCC is using – after all we paid for it – and run their own simulations.

Note too, there is a strange inconsistency in what the CCC is saying. On one hand, they are suggesting that the costs of their recommended policies are negligible while Rod Carr, the chair of the Climate Change Commission, has stated that the shifts required to run our economy without fossil fuels will make the economic changes of the late 1980s ‘look like a trial period’. Both those statements cannot be right; perhaps neither is.

The danger is that the CCC will make its final recommendations following a consultation, the economic contributions of which will largely be irrelevant because, without access to the model, nobody will be sufficiently informed.

The government will then be stuck with the proposals even if further analysis shows they will generate serious economic problems. There would be an outcry which would undermine the integrity of the report and the overall strategy. The government would be stuck with  either going against widespread public opposition, which would probably compromise its political support, or it would abandon the CCC and have to start afresh. Those of us who think some action should be taken would find that eminently sensible policy changes are delayed. 

These are not scenarios that I would look forward to, were I the Minister of Finance. Yet he is trapped because the Climate Change Commission is independent, even when it does stupid things.

* The handout says the one percent reduction refers to 2035, but Stroombergen refers to 2050. I’ll go for the economist. It is probably another example of a journalist/public relations writer not understanding what they were writing about. (I found the report very clunky to read.)

Why Don’t We All Live in Australia?

Migration patterns provide further evidence that wellbeing is not simply measured by income.

New Zealand’s GDP per person is about 20 percent lower than Australia’s. Some think that the difference arises because our economic policies have been inferior. They then leaps to arguing for new policies based on ideology rather than evidence. Frequently those policies are neoliberal. Their advocates ignore that during the Rogernomics era our extremist policies, compared to the more centrist Hawke-Keating ones, cost us about 15 percent of GDP. Yes, the ideologues are ignorant of history; but Rogernomic failures aside, the historical record offers quite a different explanation of the difference.

The levels were much the same in 1966 when two major differences arose and the Australian economy powered ahead of New Zealand’s. First, there was the wool price shock, which set back New Zealand but not Australia because they produced fine wools for fashionwear rather than crossbred wools for carpets. But second, 1966 was also when the Australian minerals boom, which has been at the heart of Australian economic success, took off.

Why do we not have the same mineral resources? I explored the answer in the opening chapter of Not In Narrow Seas which concludes that it is because Zealandia is a young continent, whereas Australia is an old craton so its minerals have risen to the surface from the extra 450 million years of evolution. (However, there may be substantial minerals in Zealandia under the sea yet to be found; New Caledonia, at its northern end, has nickel.)

So countries have different resource bases and that greatly impacts on their economic prosperity. You would hardly have heard of Saudi Arabia had it not been sitting on the world’s biggest oil reservoir, while Russia would not be nearly so bolshie had it been bereft of its hydrocarbon reserves.

However, it is not just resources. There are also economies of agglomeration. Intense industrial centres produce high productivity, so Europe started off with a lead partly based on their coal resources but created an industrial base that reaped agglomeration and its productivity gains. New Zealand is too small to succeed on that path. Australia tries but may be too small too. The big centres of industrial agglomeration involve hundreds of millions of people and often cross national boundaries.

If Australia is doing so much better than New Zealand GDP-wise, why don’t we all go and live there? Before we consider the particularities, observe that Tasmanian Gross State Product is more than 20 percent below that of New South Wales. Why do not Tasmanians move to Sydney? Despite the relatively open labour markets between the two countries, trans-Tasman migration has additional complications, but that interstate migration is sluggish within Australia means we need to look for a more general explanation than just income.

For that is the hidden assumption in the above discussion; that GDP per capita, or a variation of it, reflects wellbeing. As an earlier column pointed out, this assumption is inconsistent with the evidence on subjective happiness. Supportive of this conclusion is that happiness is lower in countries with incomes well below the level of rich countries. We are not surprised that people from such countries take great risks to sneak past the border restrictions of the affluent – especially Africans to Europe and Latin Americans to the United States. (Another source of migration flows is refugees, reminding us that political instability is ruinous to wellbeing.)

I looked at the migration issue at the beginning of the twentieth century in Chapter 19 of Not In Narrow Seas. The evidence from the economic indicators of the potential source and destination countries of migrants to New Zealand is mixed. Sufficiently chauvinistic, you could argue New Zealand was a smidgeon ahead. But the migrants did not have the data base and there would be numerous personal caveats. So why did they come here?

I concluded that a key element was they saw opportunities that were not there in Europe. The economic ones ranged from the possibility of owning one’s farm to the perception that in the early 1900s New Zealand was a workingman’s paradise (hence Michael Joseph Savage and Peter Fraser coming here). Julius Vogel argued that women came for better marriage prospects – they were probably more adventurous than the sisters they left behind.

Opportunity still drives permanent migration between affluent countries. (Temporary migration may be the adventure of OE; for some it becomes permanent.) Ernest Rutherford and Kiri Te Kanawa could not have made it in New Zealand. Ed Hillary would never have reached the heights he did had he stayed at home. Contrast Katherine Mansfield with Ronald Hugh Morrieson buried in the country churchyard of Hawera. (The Bloomsbury set were a kind of centre of cultural agglomeration; Morrieson worked almost alone.) As a rule, those that leave forever are going to do better than our permanent inflow – although there are many exceptions to that generalisation.

There is no simple policy conclusion to this reality, unlike the prescriptions offered by neoliberals and many at the other end of the spectrum. But clearly, we have to be cautious about the rhetoric which depends upon GDP and its associates. For instance, it is laziness or stupidity to justify many activities in terms of their alleged financial benefits, when there is a more fundamental wellbeing justification (but, of course, we need to be aware of the resource cost).

We need to think through the whole issue of migration; both the outflows and the inflows, instead of leaving it in that muddle called MoBIE with its focus on the economy. Can we improve how we bind our expatriates to New Zealand? (KEAS – the Kiwi Expat Association – is an example of doing this.) Have we been too casual on who we let in? The gift of a passport to a billionaire who has hardly ever lived here was a disgrace.

As my writing shows, I am not xenophobic. (For instance, Chapter 37 and 49 of Not in Narrow Seas.) But I do not think that cultural policy should be driven by the market, just as we should not judge our wellbeing by per capita GDP.

Do We Really Care about the Marginalised?

Social philosophy in New Zealand is muddled and incomplete.

This year, 2021, is the fiftieth anniversary of John Rawls’ The Theory of Justice, described as the most important book on political philosophy written in the twentieth century. As you might expect it is a big book (587 pages with a follow-up one of 464 pages) and its arguments are complex. This column focuses on just one insight.

It raises the ‘minimax’ principle which says that policy should focus on maximising the situation of those at the bottom, that a society should be judged by how well it treats the most marginalised. (There are many dimensions of marginalisation; for instance how easy is access for the disabled.)

Rawls belongs to a long line of thinkers including Immanuel Kant with his prescription ‘to behave as if what you do would apply to everyone’. Kant himself goes back to Jesus with the injunction to ‘do unto others what you would have them do to you’.

Rawls has had surprisingly little impact on New Zealand. He nearly did. Almost simultaneously, the Royal Commission on Social Security (the McCarthy Commission) published in early 1972. It could not have had access to Rawls’ book, but its principle that the aim of social security was, as far as possible, to enable everybody to participate in and belong to their community comes from the same ideological stable. After all,. Michael Joseph Savage described his social security legislation as ‘applied Christianity’.

The minimax idea was once deeply imbedded in the New Zealand psyche as a part of the social contract. A way of characterising it is that the role of the state is to provide a reasonable minimal living for all and enable everyone to achieve above this if they wished. (This hardly applies to today’s poor children, who with inadequate nutrition, health care and schooling are not going to be able to achieve their full potential in adulthood.)

You might have expected the 1988 Royal Commission on Social Policy (the Richardson Commission) to have picked up the Rawlsian ball and explicitly integrate it into its account of the social security system. No such luck. Insofar as it had any conclusions, they were an intellectual shambles. The purpose of the RCSP was to provide an alternative to Rogernomics, but it demonstrated that the opponents could not get their act together and gave a carte blanche to the neoliberals to ‘redesign the welfare state’, as Richardson (a different one) and Shipley put it.

‘Redesigning’ was a slogan rather than a coherent policy. Much of it seems to have been about privatising and commercialising social security towards an idealised version of the American system – as idealised by the American right. It does not work there either, which is one of the sources of our clumsy shambolic system. Very typically, when we make a policy mess we try to solve it by adding more to the mess, rather than going back to the beginning and analysing why it happened. The result is a Heath Robinson system.

One thing was clear. The ‘redesign’ dramatically cut social security benefits (by over 20 percent in some cases) to pay for tax cuts for the rich. In effect they switched the 1972 RCSS’s approach of minimax to maximax – the aim was to maximise the incomes of those at the top. Not only were the benefits cut but since then they have been usually increased in line with inflation, not with overall prosperity. A way of thinking about this is that the redesign of the welfare state replaced the 1972 RCSS’s approach of a relative poverty with an absolute poverty one.

The 1999-2008 Clark-Cullen Labour Government did little to redirect or recover the social security system. It seems to have been dominated by the same muddled thinking of the 1988 RCSP. A nice illustration is that one of its leading thinkers described Working for Families as the best thing that the government did. Critics who want a more extended and coherent welfare state think it is a muddle which put back the development of welfare. Perhaps they are both right.

The 2008-2017 Key-English Government, under fiscal pressure after giving generous income tax cuts to the rich, continued National’s earlier approach and pressed down on beneficiaries. Maximax rules, OK.

Perhaps it is too early to judge the Ardern-Robertson Government’s approach. But it seems to remain in thrall to the muddle of the 1988 RCSP. There is little evidence of the influence of Rawls or the 1972 RCSS in its policy making.

Rawls’ thinking is surprisingly absent from New Zealand’s. For example, Jonathon Boston’s Transforming the Welfare State: Towards a New Social Contract has no reference to The Theory of Justice. He is not alone.

Why do we not include Rawls is our public discussion? It is not as if he gets mentioned and the writer then explains why they reject Rawls’ approach. Perhaps they object to its Christian foundations, perhaps they are maximax neoliberals, or something in between. I dont know.

It is almost as if all 1051 pages of Rawls is too much to get one’s head around. Have you noticed that in New Zealand we tend to ignore anything we disagree with, rather than address why there is a disagreement? The standard way to deal with quality intellectuals is to dismiss them as unsound and misrepresent their arguments. The consequence is that so much of our thinking is mechanical, shallow, unoriginal and colonial.

Perhaps a speech could be written for the current Prime Minister, Minister of Finance or Minister of Social Development pointing their government’s shift towards a minimax approach. But it would be delivered without conviction and received without comprehension by the commentariat sated with maximax, while the minister’s officials and advisers would be confused and puzzled.

So we are stuck between the muddle of the 1988 RCSP and the 1990 redesign of the welfare state. It might be worthwhile reading the 1972 McCarthy Commission (or the 1966 Woodhouse Commission on Accident Compensation) to see how one can think (and write) clearly. On the evidence, suggesting that our policymakers and commentariat read The Theory of Justice may be too big an ask.

Are We Really Budgeting for Wellbeing?

How Can We Make Wellbeing at the Centre of Public Policy If We Dont Measure It?

When the Minister of Finance announced in the 2018 budget that in the future economic policy would focus more on wellbeing, many saw a glimmer of hope that we were moving away from the mechanical thinking which underpinned Rogernomics/neoliberalism. Thus far, the promise has been aspirational with little sign of a significant change to the policy framework.

Ironically, though, the government was confronted with the issue with arrival of the covid virus. Unlike many countries, it chose to emphasise wellbeing over the economy and with good management, attention to the science and a bit of luck, did much better than many others did, both in terms of dealing with the virus and, to the surprise of many, in terms of narrow economic performance.

You may recall that there were naysayers critical of the lockdown, which they evaluated by its impact on GDP. Many made assumptions which proved to be wildly wrong, but even had they been right, the naysayers were judging the policy by a quite different criterion from wellbeing or, as they might put it, they equated wellbeing with economic output.

The equation does not make sense. To clear away some debris, GDP measures output not income (which differs if there are changes in the terms of trade and border transaction costs). GDP measures gross output including capital depreciation. It measures output in a country, not the income of those in the country. (One ambiguity is to what extent temporary visitors and recent arrivals should be included. It is possible that all the output gains in the Key-English decade accrued to the recent arrivals.)

Adjust for these, and the relevant national accounting concept is National Income (NI). The naysayers are likely to say that GDP and NI follow the same track (but beware of the issues mentioned in the last sentence of the previous paragraph). What they really mean, but forgot to tell us, is that they think income equated to wellbeing.

Income is no longer a good measure of wellbeing. This is a recent research finding which has surprised the economics profession. Historically, economists assumed that higher income resulted in greater wellbeing. That no longer seems as true in affluent economies. Age, employment status, gender, health, marital status and (even) ethnicity are all more important.

Economic policy has little impact on most of these variables; perhaps that tells the profession it should be humble. However, the evidence is that employment status (such as being stressfully unemployed) is more important than income.

It is true that people with higher incomes than others report higher wellbeing (measured, say, by happiness) but not by much. However (and surprisingly), raising across-the-board incomes in an affluent economy does not raise across-the-board wellbeing.

What seems to have happened is that when the paradigm was being fashioned in the early nineteenth century with its were much lower levels of affluence, a rise in income did improve wellbeing; that remains true in poorer countries – much poorer than New Zealand.  Which means that anyone who thinks GDP is an overall measure of wellbeing is stuck back in the nineteenth century.

It also seems from the research that there are significant immediate wellbeing gains from income increases for those on the lowest incomes in New Zealand. (There are likely to be other longer-term gains in health and education for children.)

Even if we stick to income, aggregates measured by GDP or NI are not equity-neutral but favour the rich. When economics tried to avoid interpersonal comparisons, it shifted to a ‘Pareto’ criterion that an increase in output was a good thing because the output could be allocated as the distribution authority saw fit. However, practically, we operate on the principle that any redistribution will reduce output because of the deadweight loss from taxation. Practically, redistribution is discouraged.

Amartya Sen pointed out that this approach assumes that a dollar to a rich person has the same social value as a dollar to a poor person. (That is an assumption which has been sneaked in, despite the alleged avoidance of interpersonal comparisons.) He suggests that a better assumption would be to treat a one percent increase in income to a rich person the same as a one percent increase in income to a poor person, and he proposed a measure which he called ‘real national income’.

I made an imperfect attempt to calculate changes in RNI. It suggests that real private incomes based on the dollar-is-a-dollar measure rose 1.2 percent p.a.  between 1982 and 2018. But because of the rise in inequality (which means incomes rose faster for the rich than the poor), on a percent-is-a-percent basis the annual increase was 1.0 percent, a sixth lower. We should not be surprised that a pro-rich distributional policy shows a lower increase in wellbeing than GDP according to the Sen measure.

There are other weaknesses from focusing upon GDP and its allies when we are assessing the economy. For instance, since wellbeing is substantially reduced by stressful unemployment (which is a different notion from the conventional unemployment measure and probably includes dire underemployment) the amount of stressful unemployment should be included in any aggregate measure of wellbeing.

Does it matter? We could construct a better measure of wellbeing but – well – doing that has not been a priority. The consequences is that public discussion inevitably defaults to another measure – GDP, which is a very poor measure of wellbeing. Most users will forget – if they ever knew – its limitations.

This is not really a prediction. It already happens. And whatever the aspirations of this government – which need not be followed by a successor government – that is how it will happen until we introduce a superior measure of aggregate wellbeing and place it firmly in the centre of macroeconomic policy and discussion.

Addendum: Any measure of the current state of wellbeing for macroeconomic policy purposes applies at a point in time. Trying to include sustainability in it will destroy any meaning. Instead, two supplementary indicators are needed.

First, there is a need for a measure of financial sustainability, more robust than the government-debt-to-GDP ratio. (You dont really think that the credit rating agencies arrive here, check the ratio has been calculate correctly and go home. They do a thorough review of the entire financial situation.)

Second, there is a need for an indicator of environmental sustainability, especially as reducing carbon emissions impacts on macroeconomic policy. This is quite different from the (usually uninformed) attempts to extend GDP to cover the environment. (The trick which determines the measure’s outcome is how the environment is valued. If the value is high, then the indicator goes down, if it is low the indicator rises – funny that.)

Designing a The Primary Macropolicy Wellbeing Indicator

Introduction:

The focus of this paper is on macroeconomic management and not on the entirety of economic policy. There are many issues which macroeconomic interventions cannot address. To use macroeconomic instruments, rather than the relevant targeted instrument, will blunt the effectiveness of macropolicy interventions.

Reflecting, this paper is really a critique of the current primary macropolicy indicator – GDP. Economists are too much creatures of habit for one to expect it to be replaced. At least we need to remember its limitations. While it dominates, macropolicy will have little to do with wellbeing.

Evaluating Wellbeing

There are two major problems concerning wellbeing that this paper is dealing with. The first is what determines an individual’s wellbeing.

Once upon a time economists equated wellbeing with ‘utility’, but the discipline has moved past that. (One methodological problem was that utility could not be defined independently of the theory which it is being used to justify.)

Instead, thinking has moved towards focusing on answers to subjective questions such as ‘are you happy?’ or ‘rate yourself on life satisfaction’. There is evidence that an individual’s objective physiology tends to be consistent with subjective responses, although it is not conclusive (and probably cant ever be).

Numerous studies have found consistent patterns with the subjective responses, most notably that age, employment status, gender, health, marital status and (even) ethnicity all seem more important.

(Note that it has been difficult to test/measure some obvious potential influences on wellbeing. For instance one’s wellbeing is likely to be higher if the wellbeing of close associates (such as immediate family) is also. It also seems likely that one’s wellbeing may be influenced by that of the society as a whole – an implicit idea behind the ‘team of five million’.)

People with higher incomes than others report higher wellbeing (measured, say, by happiness) but not by much. (Even here, it is possible that the effect is from being higher in the rankings of a society which measures status by income, which has quite different policy implications from if the wellbeing lift comes from the actual goods that the income can purchase.)

However (and surprisingly) raising across-the-board incomes in an affluent economy does not raise across-the-board wellbeing. (In contrast, in traditional analysis .economic growth was expected to raise wellbeing. It does, however, raise choice, especially in respects to Sen’s notion of ‘capabilities’, which also undermines traditional economic analysis.)

Historically economists assumed that higher income resulted in greater wellbeing. However, that no longer seems as true in affluent economies.

Economic policy has little impact on age, employment status, gender, health, marital status or ethnicity, which all seem more important for determining wellbeing. However, the evidence is that employment status (such as being stressfully unemployed) is more important than income.

The research does hint that there are significant gains from income increases for those on the lowest incomes, but the effect is not well measured. (There are likely to be other longer-term gains in health and for children’s prospects.)

In summary then, income is only marginally relevant in an affluent economy, yet the main paradigms have hardly been modified by it. This is as true as aggregate wellbeing, which might be the objective of macroeconomic policy interventions.

That raises the second issue. How to aggregate individual wellbeing for aggregate policy, such as macropolicy.

With the above background we consider how wellbeing might be incorporated into macropolicy, knowing the exercise is difficult, but is not as treacherous as relying solely on GDP.

(It could be added that economics is in even greater flux. The subject is older than psychology as a science and had to adopt simplistic assumptions about behaviour. However psychology has been testing those assumptions and found many are inconsistent with actual behaviour. Again, the findings have not been really incorporated into the standard paradigm, although at least six Nobel laureates in economics have contributed to the revolution. As far as I can judge, the findings do not generally impact on macroeconomics although their impact on microeconomics is likely to be great.

Below I add Maslow’s hierarchy of needs to the analysis.)

Summary: The Key Propositions

1. The way the game is scored shapes the way the game is played. (Gilling’s Law)

2. This paper is about macroeconomic policy – fiscal, monetary, and exchange rate interventions (alternatively it may be defined as aggregate demand management).

3. The easy way to lose a game is having multiple scoring systems.

4. Menus and pantries are checklists not ultimate indexes of performance.

5. GDP per capita is not a very good measure of wellbeing.

6. Income is no longer a good measure of wellbeing for most people.

7. GDP and related aggregates are not equity-neutral but favour the rich. A better measure is Real National Income (RNI).

8. Government spending needs to be included at a proper value to the recipients rather than cost.

9. The calculation of the RNI should include government services provided to the individual

10. Employment Status is a part of Wellbeing.

11. There is no evidence that price stability or inflation impacts directly on wellbeing.

12. The Primary Macropolicy Wellbeing Indicator will not contain much about sustainability.

Proposition 1: This paper is framed by Gilling’s Law: The way the game is scored shapes the way the game is played.

Proposition 2: Different games have different scoring rules. This paper is about macroeconomic policy – fiscal, monetary, and exchange rate interventions. (An older view, or perhaps a newer view, is that it is about aggregate demand management.) It is not, for instance, about the concerns of a productivity and wellbeing commission.

Proposition 3: The easy way to lose a game is having multiple scoring systems. Faced with them, there will be a default to a particular dimension. In the case of macropolicy this is likely to be GDP which, as we shall see, is not a very good measure of wellbeing. (Proposition 5). Thus the objective here is to identify one scoring regime (a single objective), although supplementary assessments are briefly explored. (Proposition 12)

It is argued that perhaps there should be a number of indicators with policy aiming to locate the economy within set bounds for each one. (E.g. consumer inflation between 1 and 3 percent p.a.) I am not uncomfortable with that approach (assuming the bounds are sensibly wide enough, and consistently obtainable). However the reality is that while the macroeconomic managers may have little difficulty with that approach, the public discussion will fixate on one particular indicator (GDP?). That will influence the politicians and in turn compromise the macroeconomic management. (An example of this sort of fixation is the net-public-debt-to-GDP ratio – more at Proposition 12.)

Proposition 4: There may be a role for menus (or pantries) but as checklists not as objectives. For instance, the Treasury has a wellbeing framework of five dimensions, useful for a Treasury official who, when finishing a paper, checks whether Treasury’s main concerns have been covered.

(My objection to the five dimensions is that there should be a sixth one of ‘quality’. It is an extraordinary omission given that many economic interventions are about quality. I assume that the oversight occurred because the Treasury adopted a limited neoclassical paradigm which says quality is not a problem in a market economy.)

Proposition 5: GDP per capita is not a very good measure of wellbeing.

It measures output not income (which differs if there are changes in the terms of trade and border transaction costs).

It measures gross output gross including capital depreciation.

It measures output in a jurisdiction, not the income of those in a jurisdiction. (Another ambiguity is to what extent temporary visitors and recent arrivals should be included. It is possible that all the output gains in the Key-English decade accrued to them.)

Because of these considerations, a better national accounting measure would be the SNA measure of National Income.

(Some of the other weaknesses of GDP, such as its treatment of externalities, non-market activity and resource depletion, are not so relevant for macropolicy. See however, Proposition 12 in regard to the last.)

Proposition 6: Income is no longer a good measure of wellbeing.

This is a recent research finding which has surprised the profession. Historically economists assumed that higher income resulted in greater wellbeing. However, as discussed in the introduction, that seems no longer as true as it once was.

What is happening may best be explained in terms of the Maslow hierarchy of needs (from bottom to top: physiological needs => safety needs => love and belonging needs => esteem needs => self-actualisation needs.) The economy’s primary contribution is to the bottom one (physiological needs). It is not quite true that the economy does nothing towards the higher one (for instance economic stabilisation may contribute to safety and security needs; possessions to status-esteem needs, but generally the role of conventional economics measures such as income become very less relevant in the way the research reports.

(Some economic measures may impact badly on the higher needs. For instance, pursuing greater economic output may decrease employment stability and reduce the ability to obtain safety needs.)

Proposition 7: GDP and related aggregates are not equity neutral but favour the rich.

When economics tried to avoid interpersonal comparisons it shifted to a Pareto criterion that an increase in output was good, because the output could be allocated as a distribution authority saw fit. However practically, we operate on the principle that any redistribution will reduce output (See Proposition 8). Therefore redistribution is discouraged.

Amartya Sen asked why we assume that a dollar to a rich person has the same social value as a dollar to a poor person. (That is an assumption which has been sneaked in, despite the alleged avoidance of interpersonal comparisons.) He suggested that a better assumption would be to treat a one percent increase in income to a rich person the same as a one percent increase in income to a poor person and proposed a measure which he called ‘real national income’ (RNI).

RNI is difficult to calculate given the current data base but one can use the standard household equivalent income calculations from the HYES data (i.e. not the national accounts). Between 1982 and 2018, real private incomes based on the GDP/Pareto measure rose 1.2 percent p.a. but because of the rise in inequality (incomes rose faster for the rich than the poor) the annual rise on a RNI/Sen basis was 1.0 percent. The cumulative difference was 6.0 percent. In effect, the RNI level was in 2018 where the GDP level was the same in 2013/5; growth had been retard by a month a year as a result of distributional policy.

While I have taken a Sennian approach here, at the distributional policy level the Atkinson approach (the Atkinson index, also known as the Atkinson measure or Atkinson inequality measure). Proposition 8 is relevant to it. (For an extension, see Proposition 9)

Proposition 8: Government spending needs to be included at full value rather than cost.

Government services are measured in the SNA framework at cost, whereas private production is measured in terms of the value to the consumer. We know something about the value of government services – or at least the Treasury thinks it does.

It takes that $100 of government spending (as measured conventionally) displaces $112 of private production. The logic which follows is that the government commits itself to spending only what it values the service at 112 percent of the nominal cost.

It is not hard to see why this might happen. For instance, the provision of public healthcare is considerably cheaper than private provision via, say, insurance. The additional cost of private insurance is thought to be more expensive than (12/112 =) 11 percent of total costs (which is a reason why US health care is so expensive but relatively ineffective).

Moreover, when some New Zealander receives $100 of public healthcare the other five million are likely to be pleased that the expenditure has happened because it gives them some comfort that if we need the service they will get it too. (Were they each to pay .01 cent for that comfort, the value of the $100 of care would be $150 to the nation.)

To add a premium of 12 percent to government services to convert from production costs to value would not necessarily change our international GDP ranking, since the same adjustment would be made for other countries’ GDP (although their premium might be different and the proportion of aggregate production devoted to government services also varies).

However, it would change the the growth of GDP when there was a change in the private to public expenditure balance. For instance, the share of public consumption (excluding public investment) was 19.7 percent in the 2009 year but only 18.0 percent in the 2017 year. Allowing for value rather than cost, the effect of the Key-English Government squeeze was to reduce effective GDP by 0.2 percent.

(One may be doubtful about the 12 percent premium, but it is the Treasury estimate. In the context of the above analysis, those on the left may think the premium was too low and those on the right think it too high.)

(As an aside – or is it? – the Atkinson approach has been around for about 50 years, but I have never seen it applied in New Zealand. (I have never had the resources to do this; others have.) Given its relationship to Rawls’s Theory of Justice which has also been around for fifty years and also has had little impact on New Zealand social policy, perhaps one is not surprised.)

Proposition 9: The calculation of the RNI should include government services provided to individuals (e.g. health and education – social transfers are already including in the RNI calculation).

They contribute to a person’s wellbeing Any increase or reduction of such services should be monitored.

I am not sure we currently have a database to do this on an annual basis.

(This adjustment is likely to reduce RNI growth relative to GDP growth even further, especially when big public spending cuts were made in the early 1990s.)

Proposition 10: Employment Status is a part of Wellbeing

A standard research finding is that wellbeing is reduced by stressful unemployment (which is a different notion from the conventional unemployment measure and probably includes dire underemployment).

There is a linkage here to Maslow’s hierarchy together with Jahoda’s latent functions of work. (Not in Narrow Seas: 410-1) The central insight is that work does not just provide income but has other personal and social benefits.

The logic of the research is that there is a tradeoff between higher output and higher unemployment. For instance, before 1984 there was a conscious policy of job creation to reduce unemployment even if it reduced productivity. After 1984 that policy tradeoff was abandoned, with the prioritisation of high output/productivity (the goal may not have been achieved) even though that raised the level of (stressful) unemployment. Wellbeing was diminished.

The tradeoff needs to be incorporated in the PMWI. Left among subsidiary indicators, as the unemployment rate is today, relegates its significance and means the primary indicator is not a comprehensive measure of economic wellbeing.(Note the stress from lower income is covered by a RNI measure; the concern here is the loss of the Jahoda/Maslow benefits.)

Proposition 11: There is no evidence that price stability or inflation impacts directly on wellbeing. While the inflation rate is a relevant concern for macroeconomic policy as a part of ensuring the market economy works properly it is not a part of a PMWI.

(In passing, the ‘Misery Index’ of adding together the unemployment rate with the annual inflation rate is an obvious mathematical nonsense – since the components are measured in different units – it also lacks conceptual foundations.)

Proposition 12: The Primary Macropolicy Wellbeing Indicator will not contain much about sustainability.

The PMWI is a measure at a point in time, the current state of wellbeing. Trying to incorporate sustainability over time will destroy any meaning. Instead, two supplementary indicators are recommended.

There is a need for a measure of financial sustainability. Currently the government debt to GDP ratio is used. Its defects are obvious. (Credit rating agencies look at much wider sets of indicators.) Financial sustainability also needs to include the overseas financial position and private balance sheets. To progress this to something meaningful requires a national balance sheet.

There is also a need for an indicator of environmental sustainability, especially as reducing carbon emissions impacts on macroeconomic policy. This is quite different from the (usually uninformed) attempts to extend GDP to cover the environment. (The trick, by the way, which determines their outcome is how the environment is valued. If the value is high relative to output, then the indicator goes down, if it is low the indicator rises – funny that. A related trick is to fiddle with the time-discount rate.)

Conclusion

The paper points out the humbling (for an economist) proposition that many of the greatest influences on wellbeing may no longer be particularly influenced by economic management.

Instead it explores the development of a Primary Macropolicy Wellbeing Indicator. The focus has been on the construction of a single indicator because multiple indicators will be misused – typically by defaulting to an inappropriate one. But because a macropolicy indicator is at a point in time there is also a need for two supplementary indicators to assess sustainability to add a time dimension.

In particular the paper explores the replacement of the current primary indicator – GDP – by something which takes better into account key elements in our understanding of wellbeing. Thus the paper reviews standard economic criticisms of GDP/output as a measure of social wellbeing.

Any alternative has to be able to be measured and able to be forecast to be useful. The paper does not propose a detailed PMWI but suggests how one might be constructed.

Among the issues the analysis has raised are

            – net income rather than gross output (Proposition 5)

            – what is the relevant population? (Proposition 5)

            – distributional considerations (Proposition 7)

            – how to value wellbeing enhancing government services  (Proposition 8 )

            – unemployment (Proposition 10)

            – sustainability (Proposition 12)

By playing down each of these and giving primacy to the GDP as the macropolicy indicator results in a bias against wellbeing in outcome. Arguably that has been a feature since GDP became the dominant indicator, say, four decades ago and as a result wellbeing has suffered.

In particular, there are many instances of when ignoring these wellbeing effects in favour of GDP has damaged wellbeing. There are may instances during the period of Rogernomics/Neoliberal dominance but there are also examples from the receny Key-English period.

The rough estimates in the paper suggest that moving towards a PMWI makes significant but not great differences to the current measure. What is important it changes the way we think about the impact of macroeconomic policy on wellbeing.

I do not expect New Zealand policy to replace GDP with something more suitable in the near future. Our policy framework is conservative, both in the sense of intellectual inertia and in favouring a pro-rich status quo. In any case the current framework is colonially subservient to overseas fashion. However, we might make a little progress – pay a little more attention to wellbeing – if we keep the critique made here of GDP more in the forefront of our thinking.

We Must Avoid Treating Māori As Living Fossils.

There are times when tikanga needs to be broken for tikanga to survive.

I recently gave a presentation on Māori economic history based on my Not in Narrow Seas. Its most important message was that Māori proved to be a very adaptable people continually evolving as new opportunities arose. The European tradition recalls the Duke in the novel The Leopard, telling his nephew ‘If we want things to stay as they are, things will have to change.’ Māori have a parallel whakatauki ‘Me whati te tikanga, kia ora ai te tikanga’; there are times when tikanga needs to be broken for tikanga to survive.

The presentation discusses the great Māori postwar urbanisation (also covered in my Heke Tangata). In the earlier part of the twentieth century, many Māori were living in rural subsistence conditions. As Apirana Ngata described them in 1940:

‘There are Māori communities which are satisfied to live on minimal reserves, where they grow the vegetables they require, from which they make seasonal excursions into the labour field to obtain the minimum resource for the purchase of clothes and food, and where they rusticate [live a country life] between periods of employment.’

The urban transformation has been dramatic. Māori were 71 percent rural in 1951; by 2013 only 15 percent of Māori lived in the countryside. Around 10 percent of Māori lived in the main cities in 1926; by 2013 this proportion had grown to 66 percent, not too different from the non-Māori figure of 75 percent, which had crossed the 50 percent threshold before 1926.

Māori were ill-prepared for the urbanisation They had little wealth to bring with them and they lacked education. Rural education tends to be inferior to urban education, but Māori rural education was even worse. The required skills for countryside farming, fishing, hunting and labouring are not those which schools teach easily. Modern education arose because industrialisation and urbanisation required literacy and numeracy. (Interestingly, Māori women seem to have adjusted to the urban economy better than men – presumably reflecting different skill sets and demands for female labour.)

Because a critical element in educational attainment and employment prospects is the transmission between generations, underqualified and underemployed parents means underqualified children who as adults have lower incomes and poorer employment prospects. Society needs to make an enormous effort to break the vicious cycle. New Zealand did not.

I could go through, as my books do, the sad indicators of the resulting outcome – for instance the higher unemployment rate. The evidence is that there has been a very slow socioeconomic convergence between Māori and Pakeha. (If the trend continues it will be decades before they will be close to equality.) But in the course of the presentation I was struck by another phenomenon which is discussed in the book and also my Heke Tangata.

What do we mean by Māori, for it no longer has the meaning that it had when they were primarily a rural people?

We have even changed the statistical definition of Māori. Up to the early 1980s, Statistics NZ had used what was jokingly called a ‘hydraulic’ definition: the proportion of Māori ‘blood’ (or descent) compared to proportion of non-Māori ‘blood’. This objective descent measure has been replaced with a subjective ethnicity measure of how an individual wishes to describe themselves. People often mix the two notions but formally, data is usually collected on an ethnicity basis. (The Population Census asks a question about people’s ethnicities, although there is also a question about Māori descent – but for no other descent group. This is necessary for calculating the number of Māori electorates; subjective ethnicity would be impracticable for legal purposes.)

Presumably someone with one of their thirty-two great-great-great-grandparents Māori ticks the ‘Māori descent’ box in the census, but what might they do to the ethnicity question: ‘Māori’? ‘Pakeha’? or both? About half of those who give a Māori ethnicity also give a second one. Let us call those who tick both boxes ‘Māori-Pakeha’ to distinguish them from sole Māori who tick only one. (A few tick other ethnicities such as Māori-Pasifika.) In which case those of Māori-Pakeha ethnicity would be our third largest ethnic group; they may be second largest in 2023.

A person of Māori descent may choose to register on the Māori electoral roll or he or she may not. Only about a half do.

Once we move outside the statistical data base, our knowledge is even murkier about what – and how – people classify themselves. Some may do so differently in different circumstances and their classification may change over time. For instance, the Health Inequalities Research Programme at the University of Otago’s Wellington School of Medicine found that the ethnicity on a death certificate did not always correspond to the census-reported ethnicity. The discrepancy was sufficiently large to modify some of their findings.

One further research finding (from the HLFS) which adds to the puzzle is that comparing socioeconomic status between those who report ‘sole Māori’ and those who report ‘Māori-Pakeha’ shows major differences. Here is an example using employment participation rates by ethnicity and gender. (The female participation rates are just over 10 percentage points below the male ones for all ethnicities.)

Employment Participation Rates by Ethnicity and Gender (Percentage), 2007/17

                                    Female             Male

Pakeha                         64.0                 75.1

Māori-Pakeha             65.7                 75.8

Sole-Māori                  57.9                 69.7

Strikingly, those who classify themselves as ‘Māori–Pakeha’ have employment responses similar to Pakeha. (They may be slightly higher because of different age profiles.) One is left with the uneasy feeling that subjective ethnicity may be influenced by objective socioeconomic characteristics.

What we cannot be sure of is how these definitional issues play out. But evidently there is a disconnect between the public perception, which is still too dependent upon the rural Māori of a century ago, and the reality of a socially and economic diverse urban population, as survey responses show.

The full paper and the books relate a story of Māori economic development evolving; of tikanga being broken in order for tikanga to survive. Māori have adapted to new opportunities in difficult circumstances,. But the urbanisation of the last half century has proved a challenge which has not been fully met, in part because it has happened so rapidly but also because the nation was so unprepared for it.

The message of this column, and the books and presentation, is that too often we impose our uninformed prejudices on Māori; prejudices which are based on historical misunderstandings and do not allow for Māori adaptation. Māori are not living fossils but, like Pakeha, evolving and adapting. We need to keep our thinking evolving and adapting too.

Excess Deaths in the Covid Era: A Note

I have been gripped by the World Oddometer’s daily reports tracking the covid statistics. In a way it was a rejection of Stalin’s ‘one death is a tragedy; a million is a statistic’; I have watched with agony the paths of various countries.

But this statistician knew that the data reflected reported deaths from covid, and that there is considerable variation among countries’ diligence at collecting their statistics and definitions vary too..

A way around these problems is to use ‘excess death rates’ which is to look at the deaths above past trends. Until recently nobody did the exercise systematically and comprehensively enough to give a reasonable overview.

However, last week The Economist published figures for about sixty countries. There are some disappointing omissions – particularly China and India*.

It turns out that many countries are woefully under-reporting their covid deaths. But surprisingly, the excess deaths in some countries are substantially below the reported covid deaths and in some case (including New Zealand) they are negative. I shall not comment on the latter because it is outside my statistical skills; it is easy enough to think of reasons but one has no idea about each effect’s magnitude. My focus here is on the statistics..

Here is a tabulation of the top 25 countries ranked by their excess death rates but also showing their reported covid death rates and the ranking. (Note that the method/tabulation assumes that counties accurately count their dead; alas not always true. I have vague memories of grumpings about Brasil.)

One conclusion is that countries we tend to track – the UK and the US – report more rigorously than others. So they report 4th and 7th on the covid death measure, but on the excess death measure they are 17th and 23rd, a salutary reminder that for all the pain we have shared with them, there are countries who are suffering even more.

Excess and Reported Covid Death Rates to 18 February 18 (rates per 100,000)

Country* / Excess Death Rate/ Ranking/ Reported Death Rate/ Ranking
Bosnia & Ha 5100 1 1518 8
Bulgaria 2720 2 1415 13
Peru 2610 3 1338 15
Lithuania 2580 4 1166 19
Russia 2520 5 564 41
Serbia 2330 6 492 44
Mexico 2270 7 1372 14
Romania 2060 8 1026 26
Bolivia 2030 9 964 28
Ecuador 1990 10 867 32
South Africa 1890 11 815 33
Poland 1840 12 1099 24
Slovenia 1820 13 1806 2
Montenegro 1800 49 1474 9
Belgium 1770 14 1878 1
Portugal 1700 15 1548 6
Czechia 1670 16 1764 3
UK 1600 17 1753 4
Spain 1600 18 1426 12
Italy 1570 19 1571 5
N Macedonia1460 20 1449 11
Croatia 1460 21 1320 16
Hungary 1410 22 1455 10
USA 1380 23 1521 7
Moldova 1340 24 923 29
Kyrgyzstan 1270 25 220 48

If there is a conclusion it might be that there are ‘lies, damned lies and statistics’. More constructively, a statistician always needs to be cautious  with sources – particularly cross-country comparisons.

Footnote. New Zealand. The Economist estimates New Zealand’s excess deaths at minus 200 in the covid era (in contrast to plus 26 reported covid deaths). The conclusion was earlier found by a team led by Nick Wilson of the Wellington Medical School. As I recall they conjectured that the greater flu vaccination roll out, greater personal hygiene and fewer car deaths because of less motoring during the lockdown may have had a role, but as far as I know detailed evaluation is not yet published 

* The other countries/regions reported in the study were as follows. (The order reported here is the rankings by excess death rate from highest to lowest. The break between South Korea and Norway is to show those countries which have negative excess death rates.)

Switzerland; Kosova; Netherlands; Sweden; Austria; Brazil;  France; Latvia; Slovakia; Chile; Ukraine; Germany; Egypt; Colombia; Belarus; Luxembourg; Uzbekistan; Istanbul; Estonia; Albania; Jakarta; Israel; Malta; Greece; Canada; Oman; Montenegro; Denmark; Finland; Qatar; South Korea;

            Negative Excess Deaths

Norway; Singapore; Japan; Thailand; Iceland; Costa Rica; Cyprus; Philippines; Australia; Taiwan; Mongolia; New Zealand

A Brief History of the Māori Economy: How Things Change

Presentation to a Statistics New Zealand Seminar, 23 February, 2021.

Māori involvement in the economy has been an integral part of New Zealand’s story, even if we ignore the first 500 years when there was only a Māori economy. Unlike many of our histories, Not in Narrow Seas does not. There are about 40,000 words on the topic – a book in its own right – beginning with the societies that our first Polynesians came from. My book does the same for the British and Pasifika immigrants, because each migrant wave brought its cultural baggage; for instance, the first proto-Māori shelters were modelled on their island equivalents.

The book calls them ‘proto-Māori’ because the first arrivals were not Māori but evolved into what today we call ‘Māori’. The answer to where Māori came from is ‘Aotearoa-New Zealand’. Their ancestors came from East-central Polynesia – say near Tahiti – and can be traced back to near Xi’an in inland China. No, they were not Chinese, but a different people who worked their way to the coast about 5000 years ago, learned how to sail and eventually explored most of the Pacific.

There is a lesson here central to the book. Māori proved to be a very adaptable people continually evolving as new opportunities and challenges arose. The European tradition recalls the Duke in the novel The Leopard, telling his nephew ‘If we want things to stay as they are, things will have to change.’ Māori have a parallel whakatauki ‘Me whati te tikanga, kia ora ai te tikanga’; there are times when tikanga (practices) needs to be broken for tikanga to survive.

Adapting means the present and future will be different from the past. We should not impose our current preoccupations onto the Māori past, a particularly tempting exercise where there is no written record.

The Origins of Māori

For instance, we do not know how the first arrivals 700 years ago, reacted for they came to a land mass far in excess of anything they were familiar with elsewhere in Polynesia. Yes, they ate moa but the evidence from the middens is they depended on fish, as had their Pacific Island ancestors, and continued to do so for the next 500 years.

In their sort of economy, about 80 percent of economic effort was devoted to feeding themselves – compared to, say, 10 percent today. Then the seas and shores were rich in fishes. The nutritional challenge was adequate energy – not protein. In the north it came from kumara, in the far south it came from seal blubber. That is why there were fewer Māori in the middle of the country.

There are many intricacies in their story – climate change has a role in at least two ways – but the basic economy was affluent; there was probably a lot of leisure time except in the peak season. Hapu were largely self-sufficient. There was trade among them but generally it was for what amounted to luxuries. Their life expectancy was lower than today, but similar to the most robust European societies,

The rules for this exchange were rather different from today’s commercial format which focuses on the value of the product being exchanged, not those involved in the exchange. In traditional gift exchange economies the focus was on those involved in the exchange rather than the product.

The First European Impacts

Yet when outsiders turned up, Māori proved adept at bartering. The very first exchange – between Cook’s Endeavour off the Hawkes Bay shore and the waka that came up to investigate them – is instructive. Māori at the time were neolithic – that is, they used stone tools and gardened – although, as I have indicated, they were a sophisticated society. They proved much less interested in the iron nails Cook’s officers offered for fish, and more in the tapa cloth that the seamen did. However, by the time Cook got ashore, Māori had got the hang of metals and the spikes had become very attractive. We’ve just seen two adaptations. First, from gift exchange to barter and second, the introduction of new technologies.

Exchange involves two sides – two perceptions. In the early exchanges between Māori and visitors, the differences were large, quite unlike the equilibrium market transactions of economic theory. For instance, ‘the natives [were] eager to exchange a 10lb fish for a ten penny nail’ in 1815. The report has a European perspective that Māori were exchanging something valuable for something cheap. But they would have seen the value imbalance the other way around: as a part of a normal day’s catching, the fish probably cost them minutes rather than hours of labour. A metal implement was far more efficient – labour saving – than a stone one.

One of the complications of trying to understand the Māori economy is the very rapid change following the European impact. For instance, the missionaries brought literacy for Bible reading; by the middle of the nineteenth century Māori were probably more literate than the Europeans. Europeans also bought diseases – dysentery, influenza, measles, STDs, whooping cough – to an immunologically virgin population. The resulting mortality and infertility seems to have resulted in a greater reduction of the Māori population than the fighting of the nineteenth century; certainly it had a greater impact than the 1918 influenza or today’s covid pandemics.

The impact of new technologies was also mixed. To focus on just one – the musket – to illustrate how we can misleadingly impose a contemporary frame on a historical event. The Musket Wars – from 1820 to 1835 – were devastating and caused considerable death and turbulence to Māori society. It is from them that the latter-day perception of Māori as warriors arises. But it is not obvious that, before the musket, the inter-hapu fighting was particularly vicious. The fighting would have been hand to hand and the weapons not too destructive; perhaps they were a bit like rugby matches, with similar injury rates and exaggerated memories of conflict.

The musket transformed the affray; it was a bit like arming one team in a rugby match with flick knives, although hand-to-hand fighting became less important. Eventually, both sides became armed and by the mid-1830s Māori were looking for ways to reduce the tensions – that was a role of James Busby, the first British resident.

So were Māori a warrior culture? Possibly not, unless you think rugby is about war. While I do not want to minimise their warrior contributions in the twentieth century, recall that it is said of all New Zealanders – brown and white – that they were slow to wrath but stern in battle. Does that make us a warrior nation?

For another example of how easy it is to impose the wrong framework, consider how early relations between wahine and European males have been described as ‘prostitution’. However, the contemporary reports – and indeed most subsequent comment – evaluate the exchange from a (typically judgmental) European perspective. Almost certainly, Māori had a different account. We have very few indications of what the women’s attitudes were but one wahine had tattooed on her arm the name of each seaman she stayed with, which is hardly what a conventional prostitute would do. Perhaps the notion of ‘seasonal wives’ may be a better place to begin.

So the two peoples struggled to come together often with misunderstandings. Perhaps the greatest one was over land. It is a long story and takes up some space in the book. To summarise, after a generation of Māori bartering food and other resources for their commodities, it might have seemed obvious to Europeans, coming from their commercial backgrounds, that Māori would treat the exchange of land rights in the same way. But for Māori, land was very different from fish or nails; it was a taonga. Cook regretted that he was unable to acquire other taonga, a greenstone mere. In return, Cook refused to give Māori guns.

Land belonged to this latter non-tradeable category. This may seem antiquated today; or does it? If someone wants to export – that is, exchange with a foreigner – food or manufactures, we applaud their enterprise. But if someone wants to exchange (sell) land to a foreigner, as likely as not they will require permission from the Overseas Investment Commission.

To summarise thus far the two salient lessons. First, Māori proved remarkably adaptable to the new circumstances although they did not always get it right at first. Second, we must be careful not to impose our understandings – and misunderstandings.

The Arrival of the Commercial Economy

Māori proved adept at getting involved in the commercial economy, supplying settlers and provedoring visiting ships. Initially they kept some Māori ways of doing so, working in community groups and distributing the proceeds according to customary practices, say the way they allocated fish from an expedition.

However, there were various economic problems in the early exchanges. One was that the new technologies could require management outside their experience. For instance, they were horticulturists and not agriculturists. So they failed to introduce new seeds each season and so over the years the grains they harvested became infested with weeds. A second was that they built up stocks to supply ships, but when the ships did not come because of a commercial downturn in Europe, they found themselves overstocked with no buyers.

More subtly, they became major suppliers of European settlements. But the Europeans were borrowing offshore to establish their settlements and fund purchases from the Māori. This was unsustainable and the settlements had to turn to supplying themselves, thus reducing the demand from Māori.

At a very early stage then, the New Zealand economy faced today’s problems – the vagaries of the global economy and the risks of depending on overseas borrowing. Welcome to the globalised world.

I skip through the New Zealand Wars, except to mention a major misunderstanding. I was taught that they, then called the ‘Māori Wars’, were a conflict between ‘them’ and ‘us’. In fact Māori fought on both sides. It is not helpful to describe those on the Crown side as ‘loyalists’. There were deep political divisions in Māoridom and sometimes that led to warfare in which the Crown was involved almost as an adjunct.

Even so, the wars are an uncomfortable period in New Zealand’s history. They are associated with the confiscation of land but the whole story is more complicated.

The settlers were hungry for land; recall Edward Gibbon Wakefield’s advice: ‘Possess yourself of the Soil and you are Secure.’ Before European arrival, Māori had possessed all the land but eventually most of that land came into European hands by fair means and by foul. Forgive me for skipping the details – the book does not – but as important as the change of ownership was, the mode of land tenure also changed; Māori and English land tenure regimes were quite different.

English common law on ownership of land is based on William the Conqueror’s feudal doctrine that the sovereign was the absolute owner of all land and all others held interests directly or indirectly from her or him. The Saxon regime before him had been allodial (absolute) ownership; those who owned the soil had no obligations to any higher authority. Māori ownership was closer to the Saxon doctrine. The British settlers, not understanding this, insisted on imposing the feudal regime which applies in today’s New Zealand.

Because land is integral to a society, the transfer of regimes – usually involving the individualisation of title – disrupted Māori society, changing it from a communal one to one which was more individualistic. Such a change may have happened anyway. The market economy is a ruthless individualiser, an issue with which Not in Narrow Seas is preoccupied.

The End of the Nineteenth Century

By the end of the nineteenth century, then, the typical Māori was on their own bit of land although they would have continued a rich social life based on whanau and marae. Little of their land was of high quality but, even more important, it was poorly connected to the market economy, since roading development was skewed towards linking up Pakeha farmers with ports.

Even more disastrously, the land was in the wrong places. We have to go into Pakeha economic development to explain this. Increasingly, from the middle of the nineteenth century the economy was founded on sheep – first wool and then, from 1882, frozen meat. (Dairy became important at the beginning of the twentieth century.)

The indications are that Māori could have become successful sheep farmers. However, the majority of them did not live on land where sheep prospered. In about 232CE – before there were any humans here – the Taupo super-volcano erupted. It was a huge one, the most violent known in the world in the last 5000 years. The caldera is Lake Taupo. Its ash, which fell mainly to the east and the north, lacked key trace elements needed for livestock to thrive, while the new course of the resulting Waikato River left swamps through the Waikato basin.

Because of bush sickness and footrot, sheep farming was not practical north of Taupo. It was incredibly bad luck that the majority of Māori lived in this area and so they were cut off from the sheep boom to the south. Thus they did not go though the economic transformation that Pakeha did.

For the early parts of the nineteenth century European small farms – excluding the great sheep stations which were almost feudal estates – were largely in a subsistence mode of production and consumption. They sold a little produce from the farm but largely consumed what they produced; often their cash flow came from the men labouring off the farm so it was the women who ran the farm assisted by their men doing the heavy lifting.

Refrigeration changed this. You can track it in farm diaries. As the opportunity of farming crossbred sheep arose, the men moved back to the farms, which became more productive and more commercial, fully joining the cash economy. Thus evolved the family farm which was at the core of New Zealand’s political economy for a century.

Where they were on land where sheep could not thrive, Māori farms did not have that transformational opportunity. Six decades after the advent of refrigeration, Apirana Ngata observed that

‘There are Māori communities which are satisfied to live on minimal reserves, where they grow the vegetables they require, from which they make seasonal excursions into the labour field to obtain the minimum resource for the purchase of clothes and food, and where they rusticate [live a country life] between periods of employment.’

That was in a book, The Māori People Today, which is both an invaluable description of the state of Māori in 1940, and yet fails to forecast their future. For while its contributors were some of the most informed people of the times, they included no demographer and so did not see that while Māori were then mainly a rural people, the land they were on could not sustain their burgeoning population, especially if Māori farm productivity rose to Pakeha levels. After the war, there would be the great Māori migration into the cities, which is described in Not in Narrow Seas, and also in my Heke Tangata.

Heke Tangata: Māori Urbanisation

There had been some movement of Māori to the cities in the interwar period but it was a trickle compared with the flood of urbanisation after the war. Māori were 71 percent rural in 1951.By 2013 only 15 percent of Māori lived in the countryside. Around 10 percent of Māori lived in the main cities in 1926; by 2013 this proportion had grown to 66 percent, not too different from the non-Māori figure of 75 percent, which had crossed the 50 percent threshold before 1926.

There was both a push and pull to the great migration. Māori were pushed by the lack of opportunities in the countryside and pulled by the opportunities in the cities. Typically, those urban opportunities involved low and general skills but as the economy evolved towards high and specific ones – a trend which seems to have accelerated from the mid 1960s – opportunities for Māori became less available.

Māori were ill-prepared for urban living. They had little wealth to bring with them and they lacked education. Rural education tends to be inferior to urban education, but The Māori People Today was adamant that Māori rural education was even worse. The required skills for countryside farming, fishing, hunting and labouring are not those which schools teach easily. Modern education arose because industrialisation and urbanisation required literacy and numeracy. (Interestingly, Māori women seem to have adjusted to the urban economy better than men – presumably reflecting different skill sets and demands for female labour.)

It was a vicious cycle. Because a critical element in educational attainment and employment prospects is the transmission between generations, underqualified and underemployed parents means underqualified children who as adults have lower incomes and poorer employment prospects. Society needs to make an enormous effort to break the economic cycle. New Zealand did not.

You see this in the unemployment statistics where, even today, Māori do worse. I report the inferior employment a little differently from the conventional approach which looks at the unemployment rate; an unemployed person is without a job but actively seeking one. That excludes the discouraged who are jobless but do not seek work because hard experience has shown that they are never successful. One of the ways of avoiding the psychological trauma is to give up looking.

To allow for such discouragements, my Heke Tangata looked at the employment participation rate: the proportion of those in a group who are in employment. Its complement provides a measure of all those who are not employed but might be, whether they are actively seeking work or not. (Various caveats and complications are reported in the book.)

Because of the different age structures of the various ethnic groups, it is better to compare the employment rates by cohort. Here is a tabulation: (Unfortunately there is no data by gender and age together.)

Employment Participation Rates by Age and Ethnicity (Percentage), 2013

Age Group                        All                   Māori

15–19 years                               33.7                 29.7

20–24 years                               65.0                 55.8

25–29 years                              73.6                 59.1

30–34 years                              75.2                 63.6

35–39 years                              77.3                 67.8

40–44 years                              80.2                 70.0

45–49 years                              81.7                 70.7

50–54 years                              81.1                 70.7

55–59 years                              77.4                 67.5

60–64 years                              67.8                 61.2

65 years and over                   22.1                 26.2

TOTAL                                      62.3                 56.5

(Source: 2013 Population Census)

The table shows that the employment rate for Māori is almost always lower than for everybody. In total it is about 10 percent lower – allow for age composition and it would be higher. This is a better indicator of the difference in relative unemployment rates between Māori and the population as a whole. The census reported rates were 10.4% for Māori and 4.8% for all, a difference of only 5.6 percentage points. However, if we allow for lower employment participation of Māori the difference is not quite double that. (The higher participation rate for Māori over 65 years old probably arises because they have lower levels of occupational superannuation and retirement savings, and Māori elderly are younger.)

The evidence is that there has been a very slow socioeconomic convergence between Māori and Pakeha. If the trend continues it will be decades before they will be close to equality.

The Meaning of Māori and Pakeha

However the meaning of Māori and Pakeha will be very different by then. Indeed, as a consequence of urbanisation, that is already happening. ‘Māori’ no longer has the meaning that it had when they were primarily a rural people.

This is nicely captured by a decision that Statistics New Zealand made in the early 1980s. Up to then, it had used what was jokingly called a ‘hydraulic’ definition: the proportion of Māori ‘blood’ (or descent) compared to proportion of non-Māori ‘blood’. This objective descent measure has been replaced with a subjective ethnicity measure of how an individual wishes to describe themselves. People often mix the two notions up but formally, data is usually collected on an ethnicity basis. (The Population Census asks a question about people’s ethnicities, although there is also a question about Māori descent – but for no other descent group. This is necessary for calculating the number of Māori electorates; subjective ethnicity would be impracticable for legal purposes.)

New Zealand artist, Peter Robinson, confronts us with the problem when his works displays ‘3.125%’ That is one thirty-second and referred to the fact that one of Peter’s thirty-two great-great-great-grandparents was Māori. At the time – he was in his late twenties – Peter was being provocative about racial issues, ethnicity and identity. Not wanting to be pigeon-holed as an identity artist he has moved on, but the figure leads one to muse about how he, or someone like him, might classify themselves.

Presumably Robinson ticks the ‘Māori descent’ box in the census, but what might he do to the ethnicity question: ‘Māori’? ‘Pakeha’? or both? About half of those who give a Māori ethnicity also give a second one. Let us call those who tick both boxes ‘Māori-Pakeha’ to distinguish them from sole Māori who tick only one. (A few tick other ethnicities such as Māori-Pasifika.) In which case those of Māori-Pakeha ethnicity would be our third largest ethnic group; they may be second largest in 2023.

A person of one thirty-second Māori descent may choose to register on the Māori electoral roll or he or she may not. Only about a half do.

Once we move outside the statistical data base, our knowledge is even murkier about what – and how – people classify themselves. Some may do so differently in different circumstances and their classification may change over time. For instance, the Health Inequalities Research Programme at the University of Otago’s Wellington School of Medicine found that the ethnicity on a death certificate did not always correspond to the census-reported ethnicity. The discrepancy was sufficiently large to modify some of their findings.

One further research finding which adds to the puzzle is from comparing socioeconomic status between those who report ‘sole Māori’ and those who report ‘Māori-Pakeha’. Here is an example using employment participation rates by ethnicity and gender. The female participation rates are just over 10 percentage points below the male ones for all ethnicities. The ethnic differences are much the same as in the earlier table although the data comes from a different source.

Employment Participation Rates by Ethnicity and Gender (Percentage), 2007/17

                                    Female             Male

Pakeha                            64.0                 75.1

Māori-Pakeha                65.7                 75.8

Sole-Māori                     57.9                 69.7

(Source: Household Labour Force Survey, average 2007Q4–2016Q2)

Strikingly, those who classify themselves as ‘Māori–Pakeha’ have employment responses similar to Pakeha. They may be slightly higher because of different age profiles. (The database does not allow us to explore this.) One is left with the uneasy feeling that subjective ethnicity may be influenced by objective socioeconomic characteristics.

What we cannot be sure of is how these definitional issues play out. But evidently there is a disconnect between the public perception, which is still too dependent upon the rural Māori of a century ago, and the reality of a socially and economic diverse urban population, as survey responses show.

Conclusion

This paper has travelled over some 700 years. It is a story of Māori economic development evolving; of tikanga being broken in order for tikanga to survive. Māori have adapted to new opportunities in difficult circumstances extremely well. But the urbanisation of the last half century has proved a challenge which has not been fully met, in part because it has happened so rapidly but also because the nation was so unprepared for it.

Too often we impose our uninformed prejudices on Māori; prejudices which are often based on historical misunderstandings and do not allow for Māori adaptation. Māori are not living fossils but, like Pakeha, evolving and adapting. We need to keep our thinking evolving and adapting too.

‘Me whati te tikanga, kia ora ai te tikanga’.