Māori Marches On.

This entry was posted in Growth & Innovation, Maori on 15th May 2018 by Brian Easton.

Speech for launch at Parliament of Heke Tangata, Māori in Markets and Cities on Tuesday 15 May 2018. The event is sponsored by Te Whānau o Waipareira, the National Urban Māori Authority and Oratia Media at the invitation of the Hon. Willie Jackson, Associate Minister for Māori Development.

Kia Ora Koutou Katoa.

I begin by apologising for my inability to speak Māori. My brain seems to lack the bit which enables multilingualism, not only in Māori but in other languages. I am not proud of this inability. I have tried to make up for it by using those skills I have to support Māori.

So I was delighted when Te Whānau o Waipareira invited me to write a report on the Māori postwar experience and I am proud that they thought my work was worth publishing, as we celebrate today.

It is said that you cannot tell a book by its cover. This book is an exception because its cover captures its central theme. On the back is Whina Cooper with her granddaughter starting out on a lonely dirt road in the Far North, a road which seems to be going nowhere. The front cover shows the 1975 Land March, which she led, passing through Auckland. So Māori got from the back of beyond to the big city. The book goes on to ask what happened then.

The answer turns out to be complicated. Māori got to the city but they did not settle easily. The first half of the book is a narrative of the heke (the migration). The second is an inventory of Māori attainment; on most measurable socioeconomic indicators Māori are about a generation behind Pākehā – that is, Māori today are about where their Pākehā equivalent were 25 years ago.

The book develops two reasons why this happened. The first is that while Māori were successful in their rural environment, it was not a good preparation for city living while our public institutions did little to facilitate any adjustment.

Additionally, as Māori arrived, the economy deteriorated, especially the labour market. Unemployment rose and generic skills became less in demand compared with specialised skills. A little later the neoliberal economic policies of the 1980s and 1990s exacerbated these labour market trends while their distributional policies were deliberately biased against the poor and therefore disproportionally hit Māori.

The story and the outcome are detailed in the book – you will have to read it. But this is the time to acknowledge those who helped me with producing it.

First, I pay tribute my intellectual tīpuna. The book’s whakapapa goes back to that marvellous collection of essays The Maori People Today: a General Survey, edited by Professor Ivor Sutherland and dominated by Sir Āpirana Ngata. It describes the state of Māori some 80 years ago. Every contribution is valuable, but as an economist I must also mention Professor Horace Belshaw.

More recently, I have valued greatly the hospitality of many Māori, most often in work involved with Treaty claims. There are too many to list today; some are here, some elsewhere, some have gone onto higher places, although one has only made it to the third floor. John Tamihere, and his colleagues at Te Whānau o Waipareira, deserves special recognition for their vision and support.

It is always a pleasure to acknowledge a good book publisher for a fine production. Thankyou Peter Dowling and his colleagues at Oratia Books. It is great to be able to once more thank publicly Elizabeth Caffin who is there for the first stumblings as I try to shape a piece of thinking into a coherent thought, right through its development to the final product.

Many will think that the book has a melancholy message; that most Māori have been in the cities and the modern markets for a couple of generations and they still have not really got there. Another way of presenting the same message is that they are keeping up, catching up and the book identifies policies which can speed up the catch up.

But there is another, stronger, message in the book. That remarkably, despite the huge transition and despite the pressures on them to conform – to assimilate, Māori have maintained their Māoritanga. They have done so by intelligently adapting rather than rigidly resisting change.

The book has many examples of this adaptation but today it is appropriate to highlight the achievements of Te Whānau o Waipareira and other urban Māori authorities which are an indigenous response to the needs of Māori struggling in cities isolated from their iwi and potentially from their Māoritanga, struggling in the market without all the skills that the market economy takes for granted. It is especially poignant that in neither case was public policy well suited to help them meet the challenge.

The book quotes the Duke in Giuseppe Tomasi di Lampedusa’s novel, The Leopard, saying to his nephew, ‘If we want things to stay as they are, things will have to change.’ Māori might adopt this as a motto to summarise the extraordinary success of their heke despite the hurdles and their ongoing development of adaption while maintaining their integrity. Except it would, of course, be in Māori. It would therefore be appropriate to end my remarks asking John to express the whakataukī:

‘Ki te hiahia he ao toitū nga tikanga o tēnei wā – me mātua whakarere ka aua tikanga.’

A review of the book in the NBR is here.

Maori have been trapped in a poverty cycle

Dale Husband | May 15, 2018 This was published in e-tangata.

Brian Easton is a 75-year-old economist, statistician, academic, historian, columnist, and author. For much of his career, he’s made a specialty of explaining to New Zealanders what’s going right and what’s going wrong in our economy.

In his latest book, Heke Tangata, which was commissioned by Te Whanau o Waipareira and is being launched this week, he turns to the post-war Maori migration to the towns and cities — and to the political and economic drivers that have shaped the experiences of Maori since then.

In this korero with Dale, he shares some of the observations he’s made from more than 40 years of studying the data on Maori.

Kia ora, Brian. We’ll get on to the subject of economics in a few moments, but would you first tell us something about your background and about the Easton clan?

We Eastons can trace ourselves back to a convict in Australia. He came to New Zealand, married, and had a family. That’s four generations ago now. Another line comes through in 1842, from one of the settlers in Nelson — that goes back five generations. And then there’s my mother’s side. She was born in England and came here at the age of about one or two. There is no Maori in my direct whakapapa.

There weren’t a lot of Maori in my upbringing, either. Even so, I was very aware of the issues. For instance, I remember debating the Hunn report in the 1960s. The argument then was whether Maori should integrate or assimilate. Assimilate meant becoming like non-Maori.

I was a supporter of integration, probably because I found the insensitivity to others’ differences intolerable. I’m pretty sure I didn’t expect, at that time, the extent to which all our lives would be enriched by a vibrant Maori element in our society, but even then I thought assimilation was a stupid idea.

I’m curious to know what drew you into the study of economics.

When I was a teenager, I was very interested in social problems, although most of my contemporaries were not. I was actually trained as a scientist. I went to university and did a degree in applied mathematics. Then I switched over to economics, which turned out to be a wonderful subject for an applied mathematician if you kept your feet on the ground.

When I came back to New Zealand in the 1970s — I’d been away teaching at the University of Sussex in England — I began working on the income distribution within society, with a special focus on Maori. For an economist like myself, Maori are an excellent group to study, because the data on Maori is separated out from everyone else.

So you can monitor what’s going on in Maoridom in a way you can’t with other groups in the community. Maori became an indicator of what was happening to people who were lowest in the income distribution.

Was it in your varsity studies that you first recognised Maori disadvantage?

I can’t remember. There were not a lot of Maori in the Christchurch of the ‘50s I grew up in, so you hardly noticed them. I do remember that in my class at secondary school there were three boys who, in retrospect, were criticised unnecessarily. One was Maori, one was Jewish, and one was Chinese.

At that stage, I was unaware of what you might call incipient racism. At university, it was things like the “No Maori, No Tour” campaign that got me thinking, along with the peace movement. There was a very strong Maori presence in that.

As for disadvantage, it wasn’t really until I began measuring it in the ‘70s, that it was just so evident. I used to use the three-times rule. Maori were three times worse off than non-Maori. We didn’t have a lot of Pasifika in those days. If you measured unemployment, poverty rates, a whole series of variables like that, you discovered that Maori were markedly worse off.

One place where the three-times rule didn’t apply was the mortality rate. Maori death rates were 50 percent higher, not three times higher.

Later, I was invited by iwi and related institutions to work on various Treaty claims. A salutary learning experience, but a heartwarming one. I am very proud of my contribution there.

What do you think has contributed to the perception of Maori financial incapability which seemed to be so prevalent during the ‘60s?

In the sort of circles I’m in, we don’t think of Maori as financially incapable. We think they’re poor. I explore this distinction in a report I wrote for the Waipareira Trust about what happened to Maori after the Second World War.

It’s more of a history book than a report. In it, I try to explain why Maori are poor, without using shortcuts like saying it’s the result of racism. My opinion is that Maori have been trapped in a poverty cycle.

Why do you think so many Pakeha commentators gloss over the dynamics that contribute to Maori underachievement, not only financially but also in health stats, educational stats. You’ve tried to explain some of why that might be, but many haven’t delved into the reasons behind it.

It’s a national characteristic that we tend to go for simple, superficial explanations. We tend to grab a number and talk about it rather than ask why. The phrase I use — and I’m not just talking about Maori issues, but generally — is that New Zealand commentators often use statistics the way drunks use lamp posts: for support rather than illumination and insight.

And I’ve always been a person who, when I see a difference, I ask why, rather than jump to an easy superficial explanation.

Heke Tangata Have government attitudes stymied Maori potential?

There are two points. For a long time, the government was not particularly sensitive to Maori issues, in terms of Maori being different from non-Maori. Very often there was no recognition of Maori aims and priorities. I remember the big row four or so decades ago over tangihanga leave. It was actually the unions that drove the provision to allow tangihanga leave. That was one example of becoming sensitive to a particular Maori concern.

The second issue is the one that I’ve written about in Heke Tangata, which is that Maori made a massive transition from a very rural life to a highly urban one in a very short time, and the country as a whole did little to facilitate that.

A key person in understanding that transition is Sir Apirana Ngata. In the 1930s, he said —and I’m not quoting him exactly — that the majority of Maori in the first half of the 20th century were living in a subsistence economy. They earned a little bit of cash, but essentially they lived off the land.

Now let’s think about the move from subsistence life to city life. A person who’s living on rural land has a lot of skills. They know how to hunt. They know how to fish. They know how to plant a vege garden, they have odd job skills, and so on. But that’s not what’s required in the cities.

And it was worse than that, because Maori rural education was poorer than non-Maori rural education, which itself wasn’t very good. So, what you had was people adapted for a lifestyle which was not where they were going to live, and lacking the educational skills to adapt. So, they flowed into the cities while the country did little to respond to the issues the migration raised.

Now, the awful thing that happened, just incredibly bad luck, was that as Maori began arriving in cities in really big numbers — which they had to do, because they couldn’t live on the land that they had — they hit a period of peak unemployment in the late 1970s.

They were totally stranded in the sense that, although they’ve acquired some on-the-job training, they’re still primarily working in unskilled jobs. It was in those jobs that unemployment rose sharply. That continued in the 1980s, and it was worsened by Rogernomics.

What Rogernomics did, among other things, was to eradicate a lot of jobs. And we know that Maori were affected more than non-Maori. Maori health deteriorated and Maori mortality rose during the Rogernomics era quite against the long term trend. Moreover the Rogernomic policies were deliberately biased against the poor and therefore disproportionally hit Maori.

So, when we get through that period, what have we got? We’ve got a large, young population — it’s younger than the national average — and it’s an unskilled population. It’s not ready for the high-skilled jobs that are being created in the economy. That’s the basic economic story I’m trying to tell.

There was a massive slump in wool prices internationally, too, which affected the Maori post-war urban drift, didn’t it?

It complicated it. Maori who were sheep farmers were, of course, screwed by the fall in wool prices, and they may well have been more screwed than most, being on lower incomes. But the structural wool price fall in 1966 triggered a traumatic structural change, which led to the rising unemployment in the ‘70s and Rogernomics in the ‘80s.

And low-skilled workers have borne the brunt of economic change?

Yes, that’s been a major trend in my lifetime. When I was young, it was relatively easy to get jobs which were not very skilled. So, in the university holidays, I got jobs which were not very skilled, but they just needed me. What’s happened in the modern economy is that we’ve moved out of those general-skill jobs to very specific, high-skilled jobs.

I use an example which doesn’t particularly represent Maoridom, but illustrates the problem. One of my holiday jobs was working on building sites. Now, I’m not very skilled at building, but I could help build an ordinary wooden-frame house. In the ‘80s, the building industry began to use more and more sophisticated technologies, and, unfortunately, many of those sophisticated technologies were being used by people who were not properly trained.

That led to leaky buildings. Part of the thing about leaky buildings is that if you used the new technologies right, then you didn’t get a leaky building. But if you didn’t, the whole house might have to be destroyed.

So you can see in the building industry a general upgrading of skills — from the likes of me working on a building site in the ‘50s, virtually incompetent, to a situation where people with quite reasonable old-style skills in frame housing, using the new technology, led to this disaster we’ve had around leaky buildings.

To give another example from the building industry. When the Canterbury earthquakes occurred, the government said, quite rightly: “We’re short of skilled people to rebuild these houses. We’re going to have to import people from overseas.”

But a more rational government would’ve also said: “We’re going to have to upgrade our building skills. So, we’re going to put in a programme to do this, which would include Maori, so that eventually we won’t have to depend on imported skills.”

What’s happened? We’re still bringing in foreign tradesman because we haven’t had that trade upgrading process. So, on the one hand we have Maori and non-Maori who are unemployed, but we can’t put them into the building programme because they don’t have the skills, and we failed to give them the skills. That’s been a persistent failure throughout New Zealand’s post-war history.

And this filters through to education underachievement and the low-skilled status that many of us have had to deal with. But you also suggest, too, that, in some ways, Maori are two decades behind Pakeha. Can you explain that?

If you look at current Maori social indicators and compare them with Pakeha a generation earlier — say 25 years — you’ll find they’re roughly comparable. That is, Maori are about a generation behind Pakeha. And so, while they’ve made progress, a Maori today has the situation of a Pakeha in 1990. You get a similar result with Pasifika.

Middle New Zealand, however, tends to say we’re all the same, and that we’ve all got the same opportunities. What you’re suggesting here is that subsequent political interventions and economic interventions still have some time lag before Maori and Pasifika catch up.

You need to remember that a lot of Pakeha have also suffered from the country’s failure to upgrade skills and from educational underachievement. They don’t stand out so clearly in the data, though, simply because they meld in with the rest of society. But, because we’ve separated Maori out in the data, we can actually see them.

I’ve always worried, say in educational achievement, about focusing too much on Maori, rather than saying we have a group of people with poor-quality educational and training achievement and we’re not doing enough for them. And, yes, a large proportion of those — far too large a proportion — are Maori.

Even so, we shouldn’t, in my view, be giving priority to upgrading Maori students while ignoring others who are in similar educational difficulties. We should have educational policies which upgrade across the board, and will benefit Maori in the process.

Are you hopeful that the Treaty settlements will change the economic landscape for Maori?

The truth is that the Treaty settlements aren’t that big. Initially, when the $1 billion fiscal cap for the settlements was announced, I calculated that what was needed was in fact around $100 billion. So Maori are getting a very small contribution. And although the settlements are strengthening the traditional corporate iwi, it’s not all that Maori collectively need.

In New Zealand, the government has always been near the centre of these issues. Trade training, which is really important, is an example. But the government has been very weak in dealing with that, and it was practically obliterated in the 1990s.

Then we need to bear in mind that the government programmes need to be not so much specifically for Maori but programmes that are highly beneficial for Maori.

There’s the recurring question of Maori underachievement in education. But one aspect of that is whether the system is producing enough Maori expertise in economics.

It’d be an enormous help if we had a cadre of well-trained Maori social scientists. There’s not enough of them. Our students aren’t getting the skills in statistics, mathematics, history, and English to be good economists. If we had many more of them, we’d be getting somewhere.

Waipareira asked you to cast your eye across the whole of society, not just economics — and so you touch on housing disparities, health, and educational issues and the like. What are the lessons we can take from that research?

The book explains how Maori got to the place they’re in today, and that provides a platform for thinking about the future.

Among a certain sort of Pakeha there’s a tendency to think that Maori haven’t changed, and they ought not to change. You hear that attitude in comments like a bloke saying to me: “Yes, Maori have fishing rights, but they should be confined to using the fishing technologies of 1840, like flax nets.” His was a headspace of Maori not changing and not having the right to change over time. Incidentally, Captain Cook remarked that he thought Maori had better fishing technologies than non-Maori.

What trusts like the Waipareira Trust prove is that you can adapt while maintaining integrity. You can choose a Maori way of doing things, adapted for new circumstances.

I’m rather struck by a quotation from a 1950s Italian novel called The Leopard, in which an uncle says to his nephew: “If we want things to stay as they are, things will have to change.”

Maori are a wonderful example of a group who have maintained their integrity as Maori, and yet have changed again and again and again, to meet changing circumstances.

This interview has been condensed and edited.

Submission to the Social Services and Community Select Committee on the Child Poverty Reduction Bill

This entry was posted in Distributional Economics, Social Policy, Statistics on 2nd May 2018 by Brian Easton.

Note that some of the original submission proved redundant. For ease of presentation they have been removed. An explanation of what happened is set out here. (I have not changed the numbering.)

Introduction

My name is Brian Easton. I have a doctorate of science from the University of Canterbury and hold other qualifications in economics, mathematics and statistics. I hold honorary positions in six New Zealand universities including an adjunct chair at the Auckland University of Technology.

I was among the first to recognise that the largest group of New Zealand’s poor was children and their guardians/parents. My first published paper on poverty was more than forty years ago. Since then, when resources have allowed, I have extended my research on the measurement of poverty and inequality and its implications. My very long publications list on the topic of the bill can be supplied on request.

This submission is on my behalf but it also reflects the views and interests of those in the inequality research community

Summary

This submission broadly supports the Child Poverty Reduction Bill, setting it in a wider context.

It is in four parts.

Part I points out that the Child Poverty Reduction Bill is an extension of the Fiscal Responsibility Act (now incorporated into the Public Finance Act) but that it also represents a different vision of the role of the Government.

Part II explains that a poverty line is a measure of inequality and one which is consistent with earlier New Zealand social policy thinking.

Part III argues that the current measures of poverty in New Zealand can be improved and that it is imperative to do so if we want the reduction the bill promises to succeed.

Part IV discusses changes necessary to the Bill to implement the findings of the earlier part.

The submission concludes with a summary of this submission’s recommendations, including suggestions on how the bill should be amended.

The overall conclusion of this submission is that the Bill should be proceeded with, but that it should be amended as follows:.

That all references to absolute poverty be eliminated from the Bill and that it be clear that the notion referred to in the Bill is relative poverty, perhaps as implicitly defined by the 1972 Royal Commission on Social Security.
That the current processes of setting targets in the Bill be replaced as follows:

2a. That each incoming government be required to table in the House a set of targets for poverty reduction.

2b. That the government establish an independent technical committee to provide measures of the wellbeing of children and other New Zealanders.

2c. That the government establish an independent representative committee to use the measures provided by the technical committee to make recommendations on a suite of poverty lines which the government may use is setting its targets.

Part I: The Child Poverty Reduction Bill and the fiscal responsibility approach.

1.1. Both past New Zealand governments and some overseas ones have promised to eliminate child poverty or substantially reduce current levels. Necessarily this requires time but the target date mentioned in the promise has always been so far out that the politician or government making the promise will not be in power. Thus they have not been accountable for achieving the target and have not been held to account. Practically, such promises have been valueless.

1.2 This bill also makes such a promise, but the effect of the statute is that it holds every government between today’s and that at the target date accountable to Parliament in particular and the public in general. As such it has parallels to the 1991 Fiscal Responsibility Act (now incorporated into the Public Finance Act).

1.3 In 1994 the New Zealand Parliament enacted a Fiscal Responsibility Act, which required the government to set future targets for government debt. The government chooses the actual benchmarks but it is required to publish them. There is no legislated penalty for a failure to meet the debt targets – it is accepted that events outside the control of the government can impact on the outcome. Instead it is left to public opinion and parliament to assess the government’s success or otherwise in meeting its targets.

1.4 The parallels with the Child Poverty Reduction Bill are obvious. Again the government is required to set future targets but this time for numbers of children below a poverty level. Again the government chooses and publishes the benchmarks. There is no penalty for a failure to meet the targets for again, events outside the control of the government can impact on the outcome. Again, it is left for public opinion and parliament to assess the government’s success or otherwise in meeting its poverty reduction targets.

1.5 The Bill introduces a further explicit concern for fiscal policy. The 1994 Act was in the (neoliberal) framework of the government budget administered as if it were a household. This had represented a winding back from the earlier tradition that fiscal policy was concerned with wider social ends. (I can elaborate this if requested.) The effect of the Child Poverty Reduction Bill is to direct that fiscal policy must be concerned with wider social issues and not just ‘balancing the budget’. In particular it introduces inequality as an explicit policy objective.

1.6 Recently there has been concern among the public about the degree of inequality in New Zealand. In my opinion that concern has been sufficiently widespread for Parliament to be concerned with the issue. Not to be concerned would amount to its failing to represent the people of New Zealand.

1.7 The public concern about economic inequality has not been carefully analysed. As best as I can judge there are three major public threads (in addition to the personal belief that the individual is not getting an adequate share of total national income):

(i) There is a concern that the existing income (and wealth) distribution is not fair. This is essentially an ethical concern but also reflects a vision of the sort of society which New Zealand should be.

(ii) There is a concern that the existing income (and wealth) distribution threatens social coherence and hence social stability.

(iii) There is a concern that poverty among children (the largest group of the poor in New Zealand) affects their opportunity and life choices by compromising their health and educational attainment. This is not only detrimental to them (that is, it is not fair) but it results in poorer future economic performance (from the loss of human skills and from the higher social costs of dealing with the consequences of the earlier failure) and, ultimately, the long-term social coherence and viability of the nation. (I am reluctant to comment on the impact of poverty on criminal behaviour as the research evidence I know of is limited.)

1.8 Enacting the Child Poverty Reduction Bill would show Parliament taking up this challenge of inequality, especially in regard to the third concern mentioned in the previous paragraph.

1.9 Poverty and economic inequality are inextricably linked. The next part of this submission elaborates the linkage.

Part II: The relationship between measured poverty line and measured inequality.

2.1 Public discussion assumes that inequality is a well-defined notion which may be readily measured by a single indicator. (The Gini Coefficient is often cited, frequently by people who could not define it.)

2.2 The research is clear: there is no simple notion of inequality nor measure of it. This might be illustrated by the way in which on occasions various measures of inequality can be in conflict with each other, some suggesting it is increasing, some that it is decreasing and some showing no change. I can provide a lecture (or a course) on this topic, but perhaps a single illustration will suffice. In the mid-1990s some measures based on median incomes concluded that the transfer of income from the middle of the distribution to those with top incomes reduced poverty. (Median income fell, and therefore the poverty line base on median incomes fell so the numbers below the line fell.) This was despite an evident rise in hardship well attested by those working with the poor (for instance the number of food parcels distributed increased). In fact most other measures of poverty and inequality rose despite income inequality on most measures increasing. Casual use of measures of inequality and poverty can be treacherous.

2.3 However, if the shift in the income distribution is sufficiently large (as it was between 1985 and 1995), all sensible indicators of inequality will show a shift in the same direction. It is where the distribution shifts are small and short term that the indicators can be contradictory.

2.4 The niceties of research precision are not always helpful for those involved in policy implementation, even though they should be kept in mind. Practically, though, policy may have to choose a particular measure (or a suite of measures) of inequality and poverty. What the research says is that the choice requires a value judgement which cannot be objectively provided. However, research can help the subjective decision-makers to make an informed choice.

2.5 By proposing poverty lines, the Child Poverty Reduction Bill proposes a particular measure of inequality. If the select committee decides it wants to look at alternative measures, I am willing to assist it. However a poverty line has a logic derived from older social policy traditions which were abandoned in about 1990.

2.6 While the 1972 Royal Commission on Social Security was nominally concerned with the social security system, it actually presented perhaps the most comprehensive view of the economic foundations of social policy of any official New Zealand body. In particular it said (original’s underlining)

The aims of the system, should be

(i) First, to enable everyone to sustain life and health;

(ii) Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community.

(iii) Third, where income maintenance alone is insufficient (for example, for a physically disabled person), to improve by other means, and as far as possible, the quality of life available.

(2.7 The Royal Commission used the term ‘participation in and belonging to’. The second part of the expression has sometimes been omitted. The reason for doing so is not always made clear but a possible one is that it is redundant – that participation in a community means one belongs to it. In deference to the original formulation this paper uses the full expression.)

2.8 The first aim of the Royal Commission is consistent with a notion of maintaining everybody at or above an absolute level of poverty; its second aim defines a notion of relative poverty. The rest of this submission has much to say about this distinction. The Royal Commission saw the second notion as the basis of New Zealand social policy.

(2.9 We will not pursue in detail here the third aim although it is very relevant for social policy. For instance, no amount of income will resolve poor access to a building for those with mobility challenges.)

2.10 Instructively, the Royal Commission did not say anything about the top of the income distribution. Perhaps it was because that lay outside the terms of reference of the enquiry but there may have been a deeper reason.

2.11 In 1971, about the time that the Royal Commission was completing its report, American philosopher John Rawls published his seminal Theory of Justice. He argued for ‘justice as fairness’, recommending equal basic rights, equality of opportunity, and the promotion of the interests of the least advantaged members of society. In particular he proposed a ‘maximin’ principle – that the system should be designed to maximize the position of those who will be worst off in it – which he derived by individuals choosing to improve the position of the worst off in society with the possibility they might find themselves in that position.

2.12 There is no evidence that the Royal Commission had access to Rawls’ thinking but there is an uncanny parallel between its conclusions and those of The Theory of Justice. Had the book’s arguments been presented to it, it seems likely that the Royal Commission would have comfortably and seamlessly incorporated the Rawlsian principles into its report.

2.13 In particular, the Royal Commission’s second aim of the system – that everyone should be able to enjoy a standard of living much like that of the rest of the community, and thus able to feel a sense of participation in and belonging to the community – is a reformulation of the ‘maximin’ principle. Note that Rawls does not say much about the top of the income distribution. His focus is on the providing an income floor.

2.14 So it is completely in keeping with New Zealand’s traditional social policy objectives to focus on providing a minimum income floor – in effect a poverty line – without too much attention to further up the distribution (other than as funders of the floor).

2.15 Thus the focus of the Child Poverty Reduction Bill on a poverty line is consistent with both New Zealand’s traditional approach to social policy and reputable philosophical thinking.

2.16 Given the size of child poverty – the exact numbers of those defined being in poverty depend on the choice of the poverty line (to the numbers should be added their guardians/parents) – I am confident that a significant reduction in the numbers below any sensible poverty line will show a reduction in overall income inequality on any other sensible measure.

(2.17 While well over half of the poor are children and their guardians/parents there remain others who do not belong to this category and are unlikely to be affected by any policy changes which reduce child poverty. Should their needs be addressed? For many of them – including the sick and the disabled – the answer is ‘yes’; it is to be hoped that their needs will be considered in due course. However, the RCSS/Rawls approach does not place an obligation to ensure that everyone below the poverty line should receive more income assistance. Aside from those for whom employment is a more appropriate solution, there are also those who choose low income life styles as the best way they can participate in and belong to their community.)

Part III: Setting a Poverty Line.

3.1 The way that the numbers in poverty are usually counted is as follows. An indicator of living standards is identified and measured for each household.[1] Most often this has been disposable income – market income plus benefit income less direct taxes paid – which will be used here to illustrate the measurement principles. Then the aggregate indicator (disposable income) is adjusted for household composition. (It is easiest to think of this in the case of being converted to per capita income but in practice children are weighted less than adults and there is an allowance for economies of scale.) The resulting aggregate ‘equivalised’ income is attributed to each member of the household (this assumes that the income/expenditure of the household is shared equally – it may not be). A poverty line which is an income level is chosen and the number of people (or children or whatever) living in households below the poverty level is the poverty count.

3.2 To summarise schematically for a household:

Market Income

plus

Benefit Income

less

Direct Taxes paid

equals

Household Disposable Income

adjust for

household composition (typically using ‘equivalence scales’)

equals

Equivalised Household Disposable Income (EHDI)

choose

a poverty line

count

the numbers in households whose EHDI is below poverty line

which gives

the poverty count

3.3 The method was devised in the 1970s based upon research overseas. It has hardly changed since, despite a number of obvious weaknesses. Most were known in the 1970s, but the data available was limited so that it was not possible to address the problems then. What is disappointing is that there has been hardly any improvement in the subsequent 40 years even as better data comes available. Here are some examples of the weakness of the method.

3.4 Is disposable income the right measure? For instance, if the government was to eliminate school fees it would make no difference to the poverty count, despite families being under less financial stress. On the other hand, if the subsidies to primary health care were withdrawn it would place families under greater stress but, again it would make no change to the poverty count. Childcare costs are not deducted from income; a family may be impoverished by them as a consequence of earning income, but it is treated in poverty count terms exactly the same as family which gets free childcare or does not incur such costs. The costs of housing raises a series of problems – contrast the family in their own mortgage-free home with one paying an onerous amount for their rent. (Deducting housing costs from income is obviously wrong, since it is subtracting an expenditure from income – apples from oranges.)

3.5 The equivalence scales used to adjust for housing composition are problematic. For instance it would appear that the household economies of scale which are typically assumed (the equivalence scales usually used are not estimated but invented) overestimate the effective income of large households and underestimate it for small households, affecting the composition of the poor (but probably not the poverty count by much).

3.6 These measurement failures in no way affect the actual poverty. They mean that our estimates are distorted and it seems likely that any consequent measures to reduce poverty are less effective – more expensive – than they need be.

3.7 The choice of poverty line is also deeply problematic when, as typically occurs, it is based on opinion with little empirical underpinning. The original level used was the one implicitly proposed by the 1972 Royal Commission on Social Security which was presented with considerable evidence of family economic circumstances. As emphasised earlier, choosing a poverty line involves judgment but, compared to today’s proposed levels, the Royal Commission’s was informed by actual evidence.

3.8 Given the unsatisfactory theoretical and empirical bases of the available poverty lines, including those mentioned in the Bill (Part 2), it may be wondered whether they are of any use or when policy weight should be placed upon them. The short answer is that they are the best we have got, and will have to do in the interim until we have a better one.

3.9 In order to overcome some of the weaknesses of the current measures and to enable easier comparisons as better measures are introduced, the published targets should be in terms of proportional reductions (e.g. half on the chosen measure by the given date) rather than a reduction in numbers.

3.10 Note that poor quality poverty measures will lead to inefficient targeting, especially of the wrong groups. An even greater fear is that they can be abused for policy purposes. For instance, reducing or restraining those on middle incomes reduces poverty according to measures based on the median income without necessarily having any effect on the living circumstances of the poor (as unintentionally occurred in the early 1990s). Raising the costs of school fees or health care will not effect the measured number of the poor although they will be in greater hardship. Changes in housing policy and circumstances are likely to have an erratic impact on the measures even if they reduce hardship. While this may not be the intention of this government, the legislation needs to ensure a less benign government cannot manipulate the faulty measures to avoid addressing actual poverty.

3.11 How might we construct and implement the monitoring of better poverty measures in the future?

Part IV: Setting a Better Poverty Line.

4.1 It is indicative of how superficial are current poverty lines that most commentators do not link the measure to any fundamental notion of poverty. The bill does attempt to do this.

4.2 But it does so by focusing on material hardship. This, in fact, is a notion of absolute poverty. For as the country prospers, a material hardship-based poverty line need not be adjusted. We would be consolidating the 1990 ‘Redesigning the Welfare State’ approach which has been to index benefit levels to consumer inflation only.

4.3 However the proposed poverty measures seem to be based on the notion of relative poverty given that they imply that as prosperity rises so does the poverty line. I leave others to reconcile the contradictions.

4.4 The following explains how a less opinionated, more evidence-based poverty level might be derived. Without resiling from the earlier point that there has to be a value judgement, it suggests how the judgement can be considerably more informed than is the current practice.

4.5 This submission takes as its fundamental notion of poverty that set out by the 1972 Royal Commission on Social Security of those in (relative) poverty having an inadequate standard of living unlike that of the rest of the community to the extent that they are unable to feel a sense of participation in or belong to the community.

4.6 Observe that such poverty compromises the opportunity for the child to develop as set out by the Fraser-Beeby principle (updated, as Clarence Beeby would wish, to be gender neutral with the key notion underlined):

The government’s objective, broadly expressed, is that every person, whatever her or his level of academic ability, whether he or she be rich or poor, whether he or she live in country or town, has a right, as a citizen, to a free education of the kind for which he or she is best fitted and to the fullest extent of her or his power.

4.7 It would be possible to ask people to what extent they felt they were able to participate in and belong to their community. As far as I know, that has never been done systematically and, in any case, the response would be subjective and consequently subject to all the problems of policy using subjective measures.

4.8 Instead there are objective measures of standards of living. In particular New Zealand has a Living Standards Research program. The 2016 Household Economic Survey asked about 20 child-specific items as follows:

Does the household or child have

two pairs good shoes for each child

two sets of warm winter clothes for each child

waterproof coat for each child

all the uniform required by the schools

a separate bed for each child

fresh fruit and vegetables daily

a meal with meat, fish or chicken (or vegetarian equivalent) at least each second day

a range of books at home suitable for their ages

a suitable place at home to do school homework

friends around to play and eat from time to time

friends around for a birthday party

good access at home to a computer and internet for homework

mobile phone if aged 11+?

In order to keep down costs to help in paying for (other) basic items (not just to be thrifty or to save for a trip or other non-essential) has the household taken the following economising actions:

postponed visits to doctor

postponed visits to dentist

unable to pay for school trips/events for each child

had to limit children’s involvement in sport

children had to go without music, dance, kapa haka, art, swimming or other special interest lessons

children continued wearing worn out/wrong size clothes and shoes

made do with very limited space to study or play?

4.9 These items could be used to construct a wellbeing index for children. The index could be compared with the household income to help form a poverty line.

4.10 For instance, suppose it was decided that without at least two pairs of good shoes a child would have considerable difficulties participating in and belonging to their community and it was found that standard households (say two adults and two children) which had disposable incomes below $X per week lacked two pairs of shoes for each child. There follows a strong case for setting the poverty line at $X per week (or higher) for this household type. (Shoes here are the first item on the list and used only as an illustration. Historically, researchers used as an indicator when families did not take their children to their doctor because of financial hardship. This ‘economising action’ was a last or desperate resort. Such thinking has been a major factor behind the policy of higher subsidies for children visiting their GP. )

4.11 The exercise is more complicated than this, because all 20 items should be used (at least to some extent).[2] But in principle what can be done is that a tabulation could be constructed which gave the probability of a household being below each income level. An appropriate panel could then identify an income level below which they judged that the household was so deprived that the children were suffering poverty, thereby setting a poverty line. Observe that there is still a judgement to be made but that it would be an informed judgement and not just uninformed opinion.

4.12 This approach requires a major change to the monitoring and report sections in the Bill. First, it is necessary to define poverty more carefully. The bill defines it as ‘material hardship’ but there are other hardships. For example, being unable to invite friends around for a birthday party – reciprocating invitations to friends’ parties – is not material hardship, it is a humiliation. It can also be development threatening. If a schoolgirl cannot go with her friends to, say, a significant gig, it not only makes her an outsider in the class but is likely to turn her away from that community and undermine her educational performance. (That is why teachers have been known to provide the means to participate with the group for a promising pupil from their own pocket.)

4.13 The poverty targets need to be articulate in relationship to a coherent definition of poverty. The above illustrates how that could be done with a particular definition, but the method and process is quite general and could be applied for any other definition (providing the data was available).

4.14 While the current Bill makes no provision for a technical group or an advisory group to assist with the judgement this should be provided for in the revised Bill. Setting poverty targets requires greater technical skills than are currently in the public service (although there are some public servants whose work in the area is to be greatly admired).

4.15 Public servants are not well paced to advise directly on judging the poverty line without the intermediation of a consultative committee. In particular it puts the Government Statistician into an invidious position of making judgements which are not technical. In order to maintain the integrity of the statistical base the Government Statistician should be shielded from controversial decisions. The proper function of the Government Statistician in this context is as an adviser to ministers and the executive. It is a conflict of interest to have her or him also advising Parliament which is concerned with keeping the government accountable.

4.16 In any case the poverty targets should be shifted out of the main Bill to a schedule to the Bill. The government should have the option of revising the schedule, tabling the revision to Parliament for debate, as better measures become available. There should also be a requirement that an incoming government should submit its own (revised) schedule within six months of taking office.

Summary

6.1 The proposed Child Poverty Reduction Bill enables the people of New Zealand, especially through its representatives in Parliament, to hold the government to account in regard to two important issues:

(i) the level of economic inequality in New Zealand;

(ii) the hardship among children and their families not only effects their wellbeing but compromises the long-term development of New Zealand.

It should be proceeded with following the amendments set below.

6.2 The Bill adds a further responsibility to fiscal policy in addition to the (now merged) 1994 Fiscal Responsibility Act by explicitly adding a dimension of social wellbeing to narrower budget concerns. As such, it formally broadens the notion of fiscal responsibility.

6.3 Setting a target for reducing poverty among New Zealand’s children makes sense because:

(i) given its size and extent, child poverty is almost certainly the most serious issue of wellbeing in New Zealand;

(ii) reducing child poverty will have long-term benefits to New Zealand including improving the nation’s economic and social performance and its sustainability;

(iii) substantially reducing child poverty will also substantially reduce economic inequality in New Zealand.

Even so, the needs of smaller groups who are also in poverty through no fault of their own – such as from disability and sickness – should not be ignored.

6.4 The Bill is currently ambiguous as to whether it is concerned with absolute poverty – that is, individuals are in material hardship – or relative poverty, that is, whether they have sufficient to participate in and belong to their community and able to share in its progress. The Bill should make it clear that it is the second notion with which it is concerned.

6.5 The current measures of poverty levels and the numbers they report are imperfect. While they are useful for public discussion they are not robust for public policy or research. As such they need to be improved.

6.6 In the interim the flawed measures will have to be used for targeting purposes. It makes sense to choose a suite of targets, not only to reduce the inadequacy of each measure but to limit the ability of any government to manipulate policies to attain the particularities of the individual targets while ignoring the spirit of the exercise to improve the wellbeing of children. .

6.7 In order to replace the flawed measures with higher-quality ones the government should establish a working group of technically competent researchers. They should prepare improved measures (although they will be limited by data availability). However, the research working group should not make recommendations on the precise poverty line.

6.8 Instead, there should be established an advisory group to assess the research findings and recommend to Parliament and the government a suite of robust poverty lines. The advisory group should be representative by such social characteristics as age, ethnicity, family experience and gender. (However the chair of the research working group may be appointed to it in order give the lay group better access to the research findings.) Given a commitment, the work program and the decisions which evolve out of it should enable the incoming government in 2020 to set out revised poverty targets.

6.9 The import of these recommendations is that Parliament should not only pass the Child Poverty Reduction Bill, albeit with some improvements in the evaluation, monitoring and reporting, but it should also ensure that the measures necessary to implement it effectively are taken (including ensuring that there is enough funding to enable the research working group to work quickly and efficiently).

Recommend Changes to the Bill

7..1 The drafting of statutes involves specialist skills which I do not have. The following are intended to guide the those drafting the revised bill..

7..2 That all references to absolute poverty be eliminated from the Bill and that it be clear that notion is relative poverty perhaps as implicitly defined by the 1972 Royal Commission on Social Security.

7..3 That the current processes of setting targets in the Bill be replaced as follows;

7..3a That each incoming government be required to table in Parliament a set of targets for poverty reduction.

7..3b That the Government establish an independent technical committee to provide measures of the wellbeing of children and other New Zealanders.

7..3c That the Government establish an independent representative committee to use the measures provided by the technical committee to make recommendations on a suite of poverty lines which the Government may use when setting its targets. .

Endnotes

[1] Typically, the data source is the Household Economic Survey. This or other surveys are smallish samples and so the results are subject to error. Another source of error is that the income variables, in particular, are usually self-reported. And may not be very accurate.

[2] The construction of high-quality statistically robust indexes is a technical challenge. Currently all that is available are rather primitive versions. This is because of an unwillingness to provide the resources to do the analysis; New Zealand certainly has the statistical expertise to do better if the resources were available.

David Mayes: 1946–2017

This entry was posted in Portraits on 15th April 2018 by Brian Easton.

David Mayes, Professor of Finance at the University of Auckland, died on November 30, 2017, aged 71.

Asymetric Information No 61, April 2018, p.6

David studied for a PPE (Philosophy, Politics and Economics) at the University of Oxford, graduating in 1968, before completing his PhD at the University of Bristol in 1971. Much of his early work focused on European integration, with the European Union still youthful; the UK had not yet joined when he completed his doctorate, let alone considered leaving.

His earliest listed paper is entitled ‘The changing price of butter’ (1974). It models the impact of changing quotas on price, thereby assessing the impact on the UK of the EU’s Common Agricultural Policy. In later papers he examined the effects of European integration on trade, the implications of closer European integration on Australia and New Zealand, and the burgeoning rational expectations revolution, among many other topics. He is particularly remembered in New Zealand for his 1986 address at the NZIER AGM, Changes, which warned, appositely at the time of major economic liberalisation, that it was easier to close down businesses than to start them up.

During the 1980s Mayes worked at the University of Exeter, the NIESR in London and the now-defunct British National Economic Development Office. He was a visiting fellow at the University of Otago and was at the NZIER in 1985-6, including briefly being its director, before returning to NEDO After stints at the Centre for European Policy Studies in Brussels and a return to the NIESR, he became chief economist of the RBNZ in 1994, serving until 1997 before taking up the position of Advisor to the Bank of Finland’s Board in 1997-2008

A spell as a Visiting Professor at the University of Auckland, 2006-7, led to the position of BNZ Professor of Finance University of Auckland, as well as director of its Europe Institute and co-director of its NZ Governance Centre. There he taught at all levels, from undergraduate to post-doctoral, seeing many PhD candidates successfully through their studies. Following his death he received some warm tributes from his former doctoral students.

At times he held positions in many other research and academic institutions including adjunct chairs at the Universities of Canterbury and Waikato.

David’s most recent work, authored in the wake of the financial crisis, focused on designing effective banking regulation, including bail-in, deposit insurance, and other aspects of resolution frameworks. He was a prolific writer of academic works: papers, articles, book chapters, reports and books.

David Mayes died following being diagnosed with cancer just a few weeks earlier; he suffered a stroke from which he did not recover. His funeral was held close to his home on Waiheke Island.

Where Modern Macroeconomics Went Wrong

This entry was posted in Macroeconomics & Money on 30th March 2018 by Brian Easton.

I prepared this note on the contribution of Joseph Stiglitz of the same title to an important symposium in Oxford Review of Economic Policy, Volume 34, Numbers 1–2, 2018 (pp. 70–106). It is for economists. A shorter version is published in the AUT Briefing Papers series.

Stiglitz’s text is in italics:

I believe that most of the core constituents of the DSGE model are … sufficiently badly flawed that they do not provide even a good starting point for constructing a good macroeconomic model. These include

(a) the theory of consumption;

(b) the theory of expectations—rational expectations and common knowledge;

(d) the use of the representative agent model (and the simple extensions to incorporate heterogeneity that so far have found favour in the literature): distribution matters;

(e) the theory of financial markets and money;

(f) aggregation—excessive aggregation hides much that is of first order macroeconomic

significance;

(g) shocks—the sources of perturbation to the economy; and

(h) the theory of adjustment to shocks—including hypotheses about the speed of and mechanism for adjustment to equilibrium or about out-of-equilibrium behaviour.

I cannot review in detail all of these and other failings … so I am selective. So am I.

Many of these are related. For instance, the presence of imperfect and asymmetric information leads to credit and equity rationing. Thus, individuals in maximizing their lifetime utility have to take into account credit constraints and … this gives rise to a markedly different problem than that analysed in the standard DSGE model.

One of the reasons that the representative agent model doesn’t work well is that some individuals are credit constrained, others are not. Moreover, numerous studies … have emphasized the importance of debt for aggregative behaviour; but in a representative agent model, debt (held domestically) nets out, and therefore should have no role. At least at times, short-run to medium-term macroeconomic analysis needs to debt and real debt-dynamics … institutional details can matter.

More generally money is not an integral element of a DSGE model. In the traditional Arrow-Debreu GE model there is no substantive money. No transactions occur out of equilibrium so there is no need for a medium of exchange; barter is sufficient. Insofar as there stock of money, it is like any other commodity; presumably the market participants think it is, in some sense, fully back. There may be a standard of value, a numeraire, but it is of no great significance.

Stiglitz adds to this by observing if there are only representative agents in the model – as applies for DSGE models – noone can be in debt to anyone else because all agents are identical. (This applies for a closed model. In an open model each agent may in debt offshore – by the same amount.)

Debt raises another issue with which GE models cannot deal. Recall that all prices in a GE model are non-negative. It follows that nobody can have negative equity in their financial balance sheet. Were that true there would be no financial crashes.

For a theory which prides itself on its microeconomic foundations, the DSGE model’s are remarkably inadequate in regard to the role of money. Given the money is at the heart of macroeconomic behaviour – pre-monetary economies suffered only from external shocks – the DSGE model did not just fail to predict the Global Financial Crisis. It was not designed to predict a financial crisis any more than it was designed to predict the weather.

So are DSGE models are of any use? Stiglitz says acerbically ‘[f]rom a social perspective, whether the economy grows next year at 3.1 per cent or 3.2 per cent makes little difference.’ Perhaps for forecasting purposes they should be pitted against auto-regressive models. The structural vs auto-regressive forecasts is an old debate. The last time I looked at it, the auto-regressive forecasts were superior except where there was a novel structural change (such as an oil shock) as you could adapt a structural model using more economic analysis to allow for the circumstances outside the model’s range of experience. I suspect that still holds, but even so that only works if the structural model is not too rigid and the shock exists within the theoretical compass of the model. For instance most do not have balance sheets which play an integral part in the financial crises.

At this point we could dismiss DSGE models as irrelevant but I suggest that Stiglitz’s point is not about DSGE models per se, but the economics underpinning them and which underpin many macroeconomists’ thinking. So let us go on with his critique. Just to remind you, the ones I have yet to cover are:

(a) the theory of consumption;

(b) the theory of expectations—rational expectations and common knowledge;

(d) the use of the representative agent model (and the simple extensions to incorporate heterogeneity that so far have found favour in the literature): distribution matters;

(e) the theory of financial markets and money;

(f) aggregation—excessive aggregation hides much that is of first order macroeconomic

significance;

(g) shocks—the sources of perturbation to the economy; and

(h) the theory of adjustment to shocks—including hypotheses about the speed of and mechanism for adjustment to equilibrium or about out-of-equilibrium behaviour.

Stiglitz makes numerous reference to expectations in his paper but it seems to me his basic point is captured by ‘analyses of expectations were (correctly, in my view) not based on what those might be if it were assumed that individuals had rational expectations, or acted as if they did, but on survey data of what expectations are and have been.’ Resorting to survey data is an admission that economists do not have a useful theory to predict actual expectations or how they are formed. He rightly, in my judgement, rejects the theory of rational expectation. It is a strong theory with precise predictions which are frequently wrong to the point of useless.

I was disappointed by Stiglitz’s paper’s discussion on the potential of behavioural economics. Perhaps there was not space, perhaps he thinks the theory is yet too primitive to play a major role in macroeconomics. I am more optimistic.

I think his point about investment is that, like consumption, it suffers from credit rationing. This seems to have been particularly relevant because financial institutions seem to have been reluctant to fund business investment , since the GFC.

His doubts about aggregation on the production side are summarised as:

Long ago we learned the difficulties of constructing an aggregate production function. The ‘putty-putty’ model provides great simplification, but one should not claim that any analysis based on it is really ‘microfounded’. While earlier analyses provided a critique of the use of the standard model for equilibrium analysis, e.g. when there is production of commodities by means of commodities or when there are production processes involving capital goods of markedly different durability; the use is even more questionable for analyses of dynamics: the dynamics of putty-clay models and vintage capital models, for instance, are markedly different from those of putty-putty models.

Capitalism is fundamentally about turning putty into clay and being rewarded for the loss of flexibility by a higher return.

Even more important is perhaps the aggregation of the whole economy into a single sector, particularly when the underlying stress on the economy is one of structural change, requiring the movement of resources from one sector to another (say agriculture to manufacturing). I, of course, heartily agree with this last point. Single commodity thinking has been the bane of too much of New Zealand economic analysis.

He goes on [m]onetary policy is typically presented as an efficient tool. But monetary policy has disproportionate effects on interest-sensitive sectors, thus inducing a distortion in the economy that simply is not evident in a one-sector model. I would add that one of our most interest-sensitive prices is the exchange rate.

Stiglitz is also concerned with aggregation of households which raises parallel mathematical problems. Assuming a representative agent goes too far, because it eliminates any possibility that distribution matters. Again I add ‘hear, hear’.

He has a lot about shocks. I suspect much of this is an attack upon real business cycle theory. Stiglitz says that in (most) DSGE models, downturns are caused by an exogenous technology shock. In agriculture, we know what a negative technology shock means—bad weather or a plague of locusts. But what does that mean in a modern industrial economy—an epidemic of some disease that resulted in a loss of collective knowledge of how to produce? By contrast the shocks giving rise to economic fluctuations in many, if not most cases, is clearly endogenous. The 2008 shock was endogenous, caused by the breaking of the housing bubble. This is really an argument about the meaning of exogenous and endogenous. ‘Exogenous’ means outside the model where it is unreasonable for the modeller to deal with but. Endogenous are things that are – or should be – inside the model. Real business cycle theory said that endogenous shocks did not exist or were unimportant. I agree with Stiglitz that economists ought to be able to analyses endogenous shocks like those which generated the GFC, even if (by definition) they cannot predict them with any precision.

The final point in Stiglitz’s list is that he has doubts about the theory of adjustment to shocks. I found the section both rich, dense and lacking detail. Here are some extracts from the key section. One of the reasons that downturns with high levels of unemployment persist relates to the process of adjustment. … the super-smart individual simply thinks through the consequences of choosing any other set of current wages and prices [but] it is not apparent how that is to be done in the context of a world without common knowledge. If there were a full set of markets extending infinitely far into the future, the problem … would not occur. But there are not—this is one of the key market failures. …. [The models assume] a decentralized process of wage and price adjustment, with wages and prices in each market responding to the tightness in that market (in the labour market, that is the simple Phillips curve, asserting that wages rise when labour markets become tight). In the short run, … adjustment processes may be disequilibrating: the fall in wages as a result of unemployment may result in a decrease in aggregate demand, increasing the level of unemployment. … What matters is, of course, real wages, and that depends on the adjustment of wages relative to prices. Wages and prices may both be falling at the same rate, resulting in real wages being constant, a kind of real wage rigidity. … Moreover, the deflation itself has a depressing effect, since it increases the real interest rate (holding everything else constant). Similarly, adjustments of prices have balance sheet effects of the kind already discussed, with large macroeconomic consequences.

My selection may have made Stiglitz’s argument even less transparent than he presented it. Let me put it this way. Should not the econometrics in a DSGE model get the right adjustment path – after all it claims to be ‘dynamic’? (There is an implicit assumption that the adjustment path is short, which helps the econometrics.) He says DSGE models … simply assume that the economy jumps to the new equilibrium path. However if adjustment processes are asymmetric (wage and price rigidities are an example) then current econometric techniques will lead to poor representations of actual adjustment paths. If the adjustment processes take a lot of time they will be poorly estimated. Add in this all Stiglitz’s other criticisms and the so-called ‘dynamic’ DSGE models are not going to have very good dynamics.

There are other criticisms of DSGE in the Stiglitz paper – most are elaborations of what has been already discussed – but space demands I do not detail them. I finish with two general points.

First, most of Stiglitz’s criticisms – of assumptions which are not robust – were well-known shortly after the flowering of the first developments in GE theory – the Arrow-Debreu model. Stiglitz reminds us of them, for most economists seem to have forgotten them. Instead they have been ignored in the main analysis in their economic paradigm without the caveats which weaken the robustness of their models. It is true that Stiglitz refines and sharpens our understanding of the caveats. In my case I am now more alert to the importance asymmetries, the complication of heterogeneity in the household sector (I was well aware of it in the production sector) and I am even clearer about the role of money (or the lack of the role) in general equilibrium theory.

Second, while Stiglitz paper focuses on the use of the limited paradigm in DSGE models, he clearly intends the criticism to apply more widely across economics. There are many economists who struggle with general equilibrium theory or who have only the vaguest notion of DSGE modelling but whose own account of the economic world is subject to the criticisms in the Stiglitz paper.

In the last half of the paper – there is not the space to discuss it here – Stiglitz proposes an advance on the DSGE standard model which deals directly with the criticisms earlier in the paper. There is both a verbal exposition and mathematical one. The latter is but a set of equations which are not solved and offer no new insights. They may well be to complex too do so. (For example, it would be nice to know whether his model has a unique equilibrium which is another common GE assumption which wrecks havoc if it is not true.)

I finish with one of my heroes comments of mathematics in economics. Alfred Marshall wrote

[I had] a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules – (1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). This last I did often.

Paul Krugman, who also gives a paper in the symposium, illustrates this style well. He is one of Marshall’s great successors.

Politics Makes Strange Bedfellows

This entry was posted in Political Economy & History, Pundit on 25th September 2017 by Brian Easton.

What follows is a series of quantitative thoughts on the election outcome. It is based on the 2017 election night vote. Specials are likely to change precise voting shares and even seats. However potential changes do invalidate the column’s overall conclusions.

Summary (which is less numerically challenging)

– The share of the left has returned to its long-term average after the disastrous 2014 election. National’s share is only down a little. The centre was cannibalised.

– The big change 24 years after the 1993 election is that National seems to have got 10 percentage point from, essentially, Alliance voters. The other party shares are much the same

– By ruling out a Grand Coalition, National is only as strong in negotiations as (or even weaker than) NZF, despite having many more seats.

– The threshold rule for entitlement to parliamentary seats (an electorate-seat or 5 percent of the list vote) generates paradoxes.

– The Epsom deal with Act, enabled National to filch a seat from Labour or NZF.

Long-term Trends

Basically, the left (Labour, Greens, Top) got the same share of the votes as about its long-term average (44.0%) over all the MMP elections (since 1996). The right was up 2 percentage points (46.7% over 44.4%). It has done this by cannibalising the centre.

Compared to 2014, the 2017 voter share of the left is up 6.7 percentage points, Labour share is up 10.7 percentage points at the cost of Greens. The right voter share (National, Act, Conservatives etc.) is down 6.4 percentage points since 2014 but National is down by only 1.0 percentage points.

2014 was the worst year for the left since MMP began. In some ways 2017 is to Labour as 2005 was to National – the unwinding of a disastrous earlier election performance.

The 1993 Election

My recent work in this area has focused on the MMP regime which began in 1996. Previous to that there was a Front-Runner system (often misleadingly called ‘First-Past-the Post’; there is no electorate post). Voter share under FR, which comes only from electorate counts, may reflect tactical voting. That applies today in the electorate vote – a voter may prefer A but vote for B who has a better chance of getting rid of a loathed C. However such tactical voting is less likely to happen for the list vote. (Some may switch their list vote from a preferred main party to a small party struggling to exceed the 5 percent threshold.)

I could not help noticing that Sunday’s German election is scored for a win to Angela Merkel even though her CDU/CSU party got only 32.9% of the vote. (Less than NZ Labour’s 35.8%.) The SPD got 20.6% and Die Links (a party to its left) got 9.1%. The Greens got 9.1%, the centrist FDP got 10.6%, the far right AID 13.0% and others 4.09%.

That led me to reflect on the 1993 FR election in which National got 35.1% of the vote, Labour 34.7%, the Alliance 18.2%, NZ First 8.4% and the rest 3.7%. So the left won the voter share but because of the way the system worked, National became government by itself.

The big change in the subsequent 24 years is that National seems to have got 10 percentage points from, essentially, Alliance voters who were considered to be on the left of Labour (it included Greens). The other shares are much the same. Quite an achievement. Perhaps many Alliance voters of 1993 were actually covert National voters fed up with Ruth Richardson and neoliberalism and were protest voting – in the expectation that their vote would not matter?

The Banzhaf Analysis

Another feature of the German election outcome is the expectation of a ‘Grand Coalition’ between the centre right CDU/CSU and the centre left SPD – comparable to National and Labour. That option is never discussed very much in NZ.

I turned to the Banzhaf Index (sometimes coupled with Penrose or Coleman, who independently discovered it). It is used to evaluate coalition possibilities and the consequential power of the parties’ involved. I’ll avoid the mathematics and go straight to showing how it is calculated for the New Zealand 2017 election.

Given the outcome there are only four possible minimalist coalitions (in order of their parliamentary seats).

National-Labour 103 seats

National-NZF 67 seats

National-Greens 65 seats

Labour-NZF-Greens 61 seats

(These are minimalist coalitions. ACT for instance, could join them but it would not affect that the coalition’s domination in parliament.)

In the case of three of these four coalitions, National is necessary. But Labour, NZF and Greens can each prevent only two of the coalitions by withdrawing from them.

Add up the 3+2+2+2 = 9. The Bazhaf index is calculated by noting that of these 9 possibilities National involved 3 so its power score is 33.3% while the other three parties each have a power score of 22.2%. So National remains ahead but by not as much as its voter share. Moreover NZF and the Greens with much smaller voter shares are as powerful as Labour.

You can complicate this by assuming some coalition options are not acceptable. (Famously National was ruled out as a possible leader of a coalition in 2005 because the Maori Party considered Don Brash too racist – recall the ‘iwi vs kiwi’ billboard.)

For instance, if a Grand Coalition is ruled out, instead of

N = 33.3; L = 22.2; NZF = 22.2; G = 22.2

You get

N = 28.4; L = 14.2; NZF = 28.4; G = 28.4.

So that by ruling out a Grand Coalition, National weakens its bargaining power against NZF and Greens.

English hinted that National might be open to an approach from Greens. Were National to rule that out, they would be actually weaker than NZF for they would have only one option while Peters would have two – which is the way the public commentary presents it.

(Act is as relevant to any coalition forming as is the Maori Party.)

The Threshold Effect

To understand the actual composition of parliament it is necessary to look at the eccentricities of the threshold effect which says you have to win 5 percent of the vote or an electorate-seat to be in parliament.

The current expected composition is

Act 1, National 58, NZF 9, Labour 45, Greens 7.

Now suppose United Future had won Ohariu (which would have been an overhang electorate) and the Maori Party had won Waiariki. The outcome could well have been

Act 1, National 57, Maori Party 1, United Future 1, NZF 9, Labour 45, Greens 7 = 121.

Instead National may have to form a government with NZF despite the latter having lost, apparently, some of its vote to National. Moreover this became more possible because Labour won Ohariu and Waiariki.

Strategic Voting and Act

Had Act not won Epsom the outcome would have been:

National 58, NZF 10, Labour 45, Greens 7 = 120.

So, in effect, National filched a seat from NZF.

Suppose National had not done the deal with Act, but United Future had won Ohariu and the Maori Party had won Waiariki, the outcome could have been:

National 57, Maori Party 1, United Future 1, NZF 9, Labour 46, Greens 7 = 121.

In this case the Epsom deal with Act, enabled National to filch a seat from Labour.

(Note in all these calculations the swing (or last seat) is sensitive to particularities and to special votes.)

An Alternative to Neo-liberalism?

This entry was posted in Macroeconomics & Money, Pundit on 18th September 2017 by Brian Easton.

Is public spending stuck in the vicelike grip of the austerity of our quasi-Austerian economic policy?

Are we at a turning point in our politics? I don’t mean whether we have a new government. That is a matter for the voters; the polls say that either they are very volatile or that the polls are very unreliable – probably both. What I am interested in is whether we will have a new approach to the economy.

I don’t mean an intensification of neoliberalism. Jim Bolger has said that neoliberalism has failed. The other parties – ACT excluded – have been making the same point for some time.

Nor do I think it helpful to accuse the Key-English Government of being neoliberal (unless you are among those who describe anything to their right by that term). Certainly it had some elements in its approach, but John Key was predominantly pro-business and business is not especially neoliberal in the sense of wanting to leave everything to the market. Admittedly they use neoliberal rhetoric when they are under threat, but they will demand handouts from the government when it suits them. (Observe the alacrity with which industries reject any levy to cover taxpayer-provided services; better that the taxpayer should subsidise them?)

Bill English is probably more like Bolger. He is not anti-business, respecting the need for business to be one of the central drivers of the economy. But he is more centre-right, willing to use government to support people’s collective aspirations. (On the other hand, Steven Joyce is more pro-business.)

English seems to have shifted the National Party’s stance. Some may argue that he has been subtlety doing it since he became prime-minister. Others say they dont see any difference and that, even if there was a shift, it is a pretence and that it will be reversed as soon as they are back in power (assuming New Zealand First will let them).

This is all preliminary to the main issue that the column is addressing. It is not predicting who will be in the next government; its focus is whether economic policy could change if the next government wanted change.

Any new government will come with considerable baggage. National will not be able to entirely abandon its business allies; Labour has made promises it may regret (as, indeed, has National) and it too is beholden to interest groups. Let’s leave that aside since we do not know which baggage will be in the new government. Here the concern is broader picture.

Crucially the issue is the extent to which private market decisions meet the nation’s aspirations and to what extent there need to be collective decisions via public agencies (notably central and local government). It is only possible to change the economic balance towards public decisions if the government can spend more.

Labour has a number of proposals to increase taxation. I have seen exaggerated estimates of how much it might raise, based on extreme assumptions and estimating procedures reminiscent of those Joyce used for guessing additional spending under Labour. (Ironically if he was right the spending would be covered by the equally wild revenue estimates.)

My guess is that if Labour’s tax proposals are implemented the total amount for central government will be in the order of $100m to $300m a year; recall that the National Government is promising about $200m a year by tightening up tax avoidance by foreign corporates. A useful amount, but a pimple on $100 billion per year of Crown spending.

I add I am more supportive of these taxes and levies insofar as they reduce avoidance, eliminate subsidies to industries and improve the quality and sustainability of overall spending. (Some of Labour’s proposals increase revenue to local bodies rather than central government, probably more than justified given the limitations they face from a dependency on rates revenue.)

The alternative would be for the government to borrow more. National has said that it would do so through public-private-partnerships, which appear as ‘below-the-line’ borrowing, but still require future spending to service the debt. Instead I take the issue head on: should the government borrow more?

Recall that the government accounts show current revenue exceeding current spending. The surplus is used to fund infrastructural investment. The government aims not to do any net borrowing. In effect, PPPs aside, all the new infrastructure is funded out of current revenue.

It is not clear that this is a rational strategy, especially when a largish chunk of the additional infrastructure arises because of substantial net immigration. (For instance, would we need to extend the Auckland roading network as much if the immigrants were not using the roads too?)

So there seems to be a case for some additional borrowing for infrastructure development. How much? I dont really know; but let’s talk about $1billion a year. In which case the government debt-to-GDP ratio would be steady rather than rise or fall.

Would potential lenders respect such borrowing? I cannot be sure, but I would have thought a number of potential lenders would be happy to have more good quality New Zealand debt in their portfolios. So I would expect there to be some room to move but only some. Whether we like it or not New Zealand will be heavily constrained by those from whom we borrow – always has been.

Personally I’d use any additional fiscal freedom for more public social investment spending – on education, health care, housing and reducing poverty to give better opportunities to the poor. (It is not obvious that the poor should be making income sacrifices on behalf of high-income immigrants.)

We should also spend a bit on upgrading the skills of the workforce as an alternative to sourcing skills from immigration. I would not be antagonistic to improving the quality of output either. I have commended the Minister of Culture, Maggie Barry, for finding a bit more for RNZ and am pleased to see that other parties have even more ambitious plans.

So even those who are not neoliberals face borrowing constraints. We can reduce them generating a bit more public spending to give us a better New Zealand.

(There are other constraints to abandoning the antagonism to the public sector. Not least is the ideological lobby which is neoliberal (well out of proportion to its support in the population), the business lobby which sees any increase in spending on the public sector as less for itself, and the many people who while not direct supporters of neoliberalism, but who have benefited from it. That is for another column – after the election.)

Pressures to be Selfish

This entry was posted in History of Ideas, Methodology, Philosophy, Pundit on 11th September 2017 by Brian Easton.

The last column described the philosophy of economist James Buchanan as it applied to the United States. What is its relevance to New Zealand?

When I looked at James Buchanan’s theory of public choice, I was struck by how it reflected an American institutional setting; Our political system is different. Even so, our colonial mentality meant his economics and social philosophy was influential on ‘Rogernomics/Ruthanasia’ in the 1980s and 1990s generating patterns of thinking which persist to this day..

A critical assumption of the theory is that individuals use the political system to pursue their self-interests and do not have altruistic goals such as the public good. When the assumption is used to evaluate market behaviour, it suggests self-interest can produce reasonable social outcomes in certain circumstances. Buchanan showed that when self-interest is applied in the more-monopolistic political system it leads to poor quality outcomes. The theory has very little empirical evidence to support it. Believers just know it to be true.

In fact the evidence shows that we are a mix of self-interest and altruism and that the latter is involved in many human interactions including commercial ones. You trust your doctor to act in your best interest even though you pay her. The vast majority of doctors do not exploit you (sadly a few do). Some time in your life you probably met teachers for whom you had the greatest respect. Yet the theory says that when a doctor claims that the health system needs fixing or a teacher says the education system is failing, their lobbying is entirely in their self-interest and should be disregarded. Better to have the system run by generic managers, who are not beholden to professional interests disguised as ethics while their ignorance is transparent.

The theory has one exception. The Rogernomes regarded themselves as philosopher kings who acted in the interests of society. They assumed they were not beneficiaries of their policies or were so only by accident, so they were not driven by self-interest. Yeah, right.

Besotted by public choice theory and certain of their wisdom, the Rogernomes restructured many of our public institutions, assuming that those who operated them acted only in their self-interest, thereby shifting the way we regulated society from less professional responsibility to more accountability.

The consequence has been to increase the degree of selfishness in society. Self-interest drives out altruism. Institutions based on self-interest encourage that sort of behaviour. And they reward with promotion those who exhibit the greatest selfishness.

Friends constantly draw my attention to managers who behave badly towards those they manage (and obsequiously towards those who manage them). Unfortunately we have no systematic evidence, but there is a belief that such thuggery was much rarer forty years ago. There is also a view that the fraud and misbehaviour we see is more frequent today because of the change of the public ethos towards selfishness, although perhaps it existed then but was not so obvious. We certainly are a more litiginous.

The oddity of the Rogernome’s approach is that while they said they were diminishing the power of the state – and their privatisations did to some extent – the core state has become more powerful and repressive. The philosophical underpinnings of Buchanan explain why.

The last column described the importance the theory gave to (US) state rights, which turned out to be concerned with protecting property with the expectation that this gave greater freedom to those with capital. However, such freedom has to be enforced by state power; in America they use state troopers to break up a strike or a human rights demonstration. To protect property-power, it is necessary to weaken people-power.

The new institutional arrangements make it harder to change the pro-property course of the government, while at the same time undermining popular confidence in government. As the state withdraws its support and protection roles, people see it increasingly imposing on them without any offsetting gains. An easy resolution is the social conservative one of repressing behaviour that is not widely approved, ranging from punitive (if ineffective) measures against criminal behaviour to punitive (and effective) measures against beneficiaries (and certainly avoiding addressing inequality).

In the 1990s, the ACT party chose to extend its mandate by promoting social conservatism. It was an admission that there were not a lot of people who truly support their core values and they have to look for allies. Even so, many thought this was odd because market liberalism is usually associated with social liberalism. However, right-libertarianism makes no such connection. Its purpose is to defend property by any means available.

Did the Rogernomes understand the course they were embarking us on? I can identify a handful who were right-libertarians and I suspect another handful were too. But the vast majority of Rogernomes were probably not. They just did not understand what they were doing, captured by the latest fashion just as they adopted economic policies which failed. Some Rogernomes were, of course, pursuing their self-interest by joining with the powerful.

Are we irredeemably committed to the path that the right-libertarians have set us upon; one which could take us to the Hobbesian ultimate of a society in which life is solitary, poor, nasty, brutish, and short? As long as we retain some altruism and associated decencies perhaps not, although it may be that selfishness will eventually overwhelm such virtues.

On the other hand, it is proving very difficult to reverse the trend, notably in the public services. (That talk about ‘state services’ says that the role is serving the state rather than the public.) When the public demands some action to address a social failure or need or to make a better society it is invariably told that the additional taxation needed to fund it is not available.

I am struck how so much of the election campaign is about offerings to encourage targeted groups to vote for the parties in their self-interest. This is exactly what the Buchanan school feared, although it is their policies which have driven us towards such behaviour.

Oh, for someone with the vision expressed by John F Kennedy: ‘ask not what your country can do for you; ask what you can do for your country.’

Wealth’s Political Stealth

This entry was posted in History of Ideas, Methodology, Philosophy, Pundit, Regulation & Taxation on 4th September 2017 by Brian Easton.

A new biography of James Buchanan, a founder of economist’s public choice theory, suggests he was not only anti-democratic but was working with others to revoke democracy in America.

The work of economist and social philosopher James Buchanan (1919-2013) came to prominence in the mid-1980s when he was awarded the Economics Prize in honour of Alfred Nobel and when his thinking was impacting on Rogernomics (more of that next week).

So I eagerly read the just published Democracy in Chains by Duke University historian Nancy McLean which is based on Buchanan’s extensive papers. As its subtitle – The Deep History of the Radical Right’s Stealth Plan for America – implies, it turns out to be more than a biography but also an account of how private wealth has been used to influence American thinking and affect the course of American politics.

McLean starts with the 1954 US Supreme Court decision which outlawed racial segregation in schools. The elite of the state of Virginia, which had triggered the case by dumping blacks in inferior institutions, mounted rearguard actions which were to delay the effective implementation so that another generation of blacks grew up poorly educated.

Virginia had ben restricting voter registration so that a small rich white elite dominated its government. They said ‘state rights’ had been over-ruled by the Supreme Court but the principles they were seeking were not of subsidiarity – the principle that decisions should be taken at the lowest possible level – but about the rights of capital to rule untrammelled by human rights.

Buchanan is among those who place the rights of capital ahead of human rights. Freedom for property, they argue, is a better means of achieving human objectives. It is a very seductive vision if you are wealthy; much less so if you are broke. It can be very dismissive of common people. Buchanan wrote that those people who fail to foresee and save for their future needs ‘are to be treated as subordinate members of the species, akin to … animals which are dependants.’

His first significant work was to argue for the privatisation of schools. One solution to the Virginian’s elite’s dilemma was to establish private schools which were not subject to the anti-segregation ruling. I have long been aware of the American right-libertarian’s aim to dismantle public schooling because it reflects and promotes the public values of American life I so much admire. But I had not realised that the Charter Schools, which we imitate, in part came out of racism.

Later Buchanan would publish jointly Academia in Anarchy which argued for a roll back of publicly spirited tertiary education, much like what has happened but not, I am sure he would say, far enough.

For Buchanan had a wider objective. He wanted to reduce the role of government substantially – across the board – and was closely involved in various attempts to do this, including the failed privatisation of US social security. (The attempt to prevent the introduction of Obamacare is another example, although Buchanan was too old to be deeply involved.)

Buchanan’s key work is The Calculus of Consent, published with Gordon Tullock in 1962. They show that under certain assumptions, democracy leads to poor quality outcomes. A later work, The Limits of Liberty, concluded chillingly that ‘despotism may the only organizational alternative to the political structure we observe.’

I am with Winston Churchill, among others, who said that ‘democracy is the worst form of government except for all those other forms’. Even benign despots can be oppressive – think of racial segregation in Virginia – and they are more likely to makes mistakes by being intolerant of the alternatives. (Buchanan was very intolerant of anyone who disagreed with him and stacked the institutes he ran with acolytes; his students were not particularly liberal thinkers either.)

His analysis led him to conclude that politicians could not be relied upon to deliver the outcomes he desired. (Among those who let him down were Goldwater and Reagan, each of impeccable right-wing credentials.) Instead rules which limit the democratic process have to devised. McLean says he was deeply involved in the development of Pinochet’s Chilean constitution (there is a despot for you).

Buchanan’s contributions to economics are not without value. As someone who welcomes insights from debate, I can live with them (although, as I shall explain next week, I disagree with some of their basic assumptions) while disagreeing with his political objectives. This liberal democrat tolerates diversity. What is disturbing is the political approach he took.

Throughout his life he was generously funded by private foundations and people with a right-libertarian zeal which disguises their primary concern of protecting their wealth. Again in principle I do not find this unhealthy except democracy really requires that private funding should reflect a diversity of philosophies and not be biased towards a handful. Because the poor cannot easily fund their preferred thinktanks, practically private funding screws the intellectual debate in favour of the rich.

Buchanan’s funders eventually included the billionaire Koch brothers, who fund right-libertarian causes (and sympathetic politicians) by over $US100m a year. (Dark Money by Jane Mayer is a recent exposé; the oil magnates are particularly notorious as climate-change deniers and funding compatible pseudo-scientists,) They gave the James Buchanan Centre $10m with the promise of more if it delivered.

It is said, perhaps exaggeratedly, that Trump got the Republican presidential nomination because he was the only candidate not in thrall to the Kochs and their allies. However he has populated the White House with right-libertarian ideologues, not all of whom have been dismissed. (The vice-president is a committed right-libertarian.) Their difficulty is that, even with Congress heavily funded by right-libertarian interests, the electorate is not so enthralled. When it came to Obamacare Congress buckled.

It is this unwillingness of the public to pursue policies antipathetic to the right-libertarian cause which has led the American believers into a strategy of undermining confidence in democracy – something which helped Trump. The strategy was deeply cynical – one strategist wrote they should focus on men who are more likely to think like economists than women who tend to anticipate the downside of economic liberty and so support government intervention. (Note by ‘economics’ is meant their particular ideology.)

The aim has been to capture the power by stealth, after undermining faith in good government, and introduce constitutional changes which would favour wealth and be difficult to reverse (as occurred in Chile). The effect would be to empower the rich minority against everyone else. Perhaps this could be the outcome of the Trump administration, which is testing severely the checks and balances in the US constitution.

Buchanan and Charles Koch became joint chairs of the centre. One should sup with the devil with a long spoon. Koch took over the centre turning it from an academic venture to a lobbying group. Buchanan said he was ‘pissed off’ and faded away. Koch did not attend his funeral.

Ironically then, Buchanan got trapped by the rich in exactly the same way as less ideological thinkers expect and as the general population fears. His freedom was significantly curtailed by those with more wealth than he had.

Bob Dylan said ‘money doesn’t talk; it swears.’

Frances Robinson (1943-2017)

This entry was posted in Portraits on 2nd September 2017 by Brian Easton.

Contribution at Funeral Service

Tena koe kotoa. My name is Brian Easton. I live across the road from the Robinsons. Over the last few months I have often looked at their house with its lonely hall light and thought how it was so lived in by a family full of love and how they were struggling with France’s condition.

In the nature of neighbours, one is most likely to bump into them on the street. Always a cheerful smile; a friendly discussion if you are not in a hurry, especially about the boys as they scattered around the world. Of course, one saw them in other places including in the home where, on occasions, we plotted or celebrated the street’s interests or had dinner together – with Frances benignly presiding over the vigorous table discussions. Or, especially, bumping into them in musical events around town.

In truth, I find it very hard to talk about, or think about, Frances without thinking of David at the same time. It is going to be even harder to think of him now without that faithful, gentle, smiling companion of all those years I have known them. So, as much as I will miss her – the street will miss her – and her boys – now fine young men – will miss her, my thoughts are most with David. Kia ora.

He’s Spent It All

This entry was posted in Macroeconomics & Money, Pundit on 29th August 2017 by Brian Easton.

The just published PREFU, Treasury’s assessment of the economy, raises more important questions about our fiscal stance than what the election is talking about. Have we the right borrowing strategy?

It was amusing how the Minister of Finance, Stephen Joyce, had to present the PREFU (Pre-election Economic and Fiscal Update) as both an optimistic account of how well the economy was doing, and yet caution that it was not doing so well that the opposition parties could spend or cut taxes big.

The PREFU arises from the statutory requirement that the Treasury report on the state of the government accounts shortly before the election so that all contestants have a common account of the state of the economy. It is the Treasury’s assessment independent of the minister. More bluntly, he is stuck with whatever the Treasury decides.

The Treasury sees volume GDP at an annual rate of 3.0 percent for the four years to June 2021. That may seem not too bad, as the population is growing at 1.6 percent p.a., so per capital incomes are increasing at 1.4 percent p.a., about the same as the long run grow rate for the economy.

A caution. Some 57 percent of the population growth can be attributed to net immigration. Since they are more of working age than the New Zealand population as a whole, they will get a greater share of the production increase, so the incomes of those who already live here will, on average, rise more slowly. Not that the Minister mentioned this, but to be fair, there are many countries in the rich world which would be very happy to have the PREFU figures.

If the future economy is looking good, why is there not room for a party either by government spending it up or by tax cuts for private consumption or both? Joyce said that there could be more government spending, either by increasing taxes or by borrowing more on which I focus here.

Each year the government has to borrow around $7 billion a year, but this is mainly to rollover maturing debt. This year and next, however, there is expected to some borrowing in addition to debt rollover, while for the following two years the budget forecasts a cash surplus and debt will be retired. The net effect is that the level of government debt is expected to be roughly the same in June 2021 as it was in June 2017.

But, you say, was not the government projecting a falling level of its debt? Not exactly. What it is projecting is a fall in the government debt to GDP ratio. If the net level of debt remains constant and (nominal) GDP rises the ratio falls.

What the Minister is saying is that if we are set on the falling debt-to-GDP track and there is no rise in taxes, then there is no room for more public spending. Joyce could have echoed of Rob Muldoon’s ‘I’ve spent it all’ in the 1972 election campaign . (He backed down a little, saying there might room for a family support package in 2020. So he has only spent it all in the next two years.)

Are we locked onto this debt track? The Minister pointed out that New Zealand had to keep its debt down to maintain room to manoeuver for a shock, citing the Global Financial Crisis and the Canterbury earthquakes as examples of the unexpected. So how low should one go? Are we in a sort of game of limbo in which the bar keeps being lowered?

The issue is not how much we want to borrow. It is how much the international lenders are willing to advance. Aside from our being a small economy, a bit vulnerable to erratic export price shocks (and earthquakes), we must look a good proposition to those lenders. We have prudent and robust fiscal controls and proven political leadership (not only Joyce but his predecessors such as Bill English and Michael Cullen). Even so, they are unlikely to lend to us if we say that we have decided to borrow to fund a party.

We could present the argument in a more attractive way. We run a substantial operating surplus (current revenue less spending) but most of it is invested in public capital projects. That is why at the end of the day, after deducting investment outlays from the operating surplus, we have only a small cash surplus (or deficit). We might ask our potential lenders whether we should finance all of our capital spending out of current revenue.

We need a thoughtful public discussion on such a tricky question. I think there is a strong case for funding a lot of the government’s capital outlays from current revenue. But there is one area where this may not apply.

When a migrant arrives in the country, he or she gets automatic access to the benefits of New Zealand including its public capital. (Also education and health spending and the like, but they pay their fair share of taxes – I hope.) Their share of the net central government capital comes to about $25,000 a migrant. It is, in effect, a free gift with the rest of us sacrificing public and private consumption (spending by government and paying higher taxes) for them. I am not sure that we should be quite so generous

Is there a case for our borrowing offshore the capital demands immigrants generate? What would our potential overseas lenders say if we argued that we were borrowing to match the migrant inflow? That would amount to about an extra $1 billion or so a year at current rates. Our debt-to-GDP ratio track would still be downward but not as fast as the PREFU projections.

We could use the extra fiscal room the $1 billion a year on poverty reduction, more health and education or so on, tax cuts (and more private spending), more government infrastructure or whatever. The balance between them is a political one, to be settled by an election – if our lenders are willing

That is the point of the PREFU: it provides a framework for a serious discussion about the direction of the country; the election cacophony may drown it out.

Grumpiness and Government Spending

This entry was posted in Governance, Macroeconomics & Money, Pundit on 21st August 2017 by Brian Easton.

The policy dimension of the election appears to be about the concerns with past restraints on government spending and the consequential social failures. But whatever the rhetoric, implementation of campaign promises is going to be much harder.

Last Saturday, the Minister for Social Housing, Amy Adams, admitted her government had a poor record on social housing but promised to do better. On the same day, the Prime Minister said the government would (might?) spend $1.2billion on the Dunedin Hospital which was a similar admission of poor past performance on capital funding for DHBs. (Apparently the promise was also made three years earlier.) There have been parallel admissions; I spare space and your patience by mentioning only mental healthcare. There will be further such implicit admissions.

The National Government has got the message from the public. While it has not pursued austerity as vigorously as, say, the Tories in Britain, there is a grumpiness which, in the more extreme form, led to the Brexit vote in 2016 and crippled the Tories in 2017. National is admitting that over the last nine years it has been stingy on public spending; it wants to do better.

Many of these promises are party policy rather than government policy, so they have not been approved by cabinet and wont be included in the pre-election forecasts and update (PREFU) to be released this week. To what extent they will actually be implemented if National is re-elected I cannot say (and they really cant either).

Of course the opposition parties not in government are making the same point. Government spending has been inadequate and there is a substantial social deficit. People are suffering as a result and of course they promise to address the deficit if they become the government. The previous paragraph’s caution about any government’s capacity to implement their promises applies here too.

Given current political thinking one is pessimistic. The National Government has given considerable priority to reducing taxes and public debt, which constrains their ability to spend more. Labour and the Greens have a memorandum of understanding with slightly more elastic parameters but I doubt that will give them much room to manoeuvre, especially after they have funded unrelated promises to groups such as students and the elderly to obtain their votes. (I am not sure about New Zealand First.) In any case whether the promises are made by the incumbent or alternative government there are fudge factors which may mean they are not as generous to their voters as they sound.

Whatever, the government after the election faces a challenge if it wants to reduce the stinginess. How can it pay for additional government spending especially if it remains committed to the lowering public debt track and is unwilling to increase taxes?

I am not as enthusiastic as the conventional wisdom’s desire to aggressively lower the level of public debt. Certainly we should have one of the lowest debt-to-GDP ratios among rich countries. And we have. On an OECD measure the New Zealand ratio was 38 percent compared to the OECD average of 111 percent in 2015 (the latest year available). Only Australia and Estonia were lower.

So it is not obvious we should get it lower. The issue is complicated by a number of economic wrinkles which are hardly discussed. For instance, the government net worth – assets minus liabilities – comes to about $23,000 per head. That means every migrant gets a gift of $23,000 on arrival. (An alternative is the government has to spend an extra $23,000 on them; a simple illustration is that migrants use roads putting pressure on the overloaded road-building program.) Given the current rates of permanent net migration, that means that each year we share $1.5 billion with the new arrivals. Should we fund this by taxation or borrowing offshore?

The economic analysis is more complicated, of course. The general message is that we need to think more carefully about the debt track, rather than unthinkingly adopting neoliberalism. The potential gains may be significant. Were we to keep to the current ratio, then each year there would be about extra $2-3 billion which could be spent on worthy public causes or used to cut taxes. (Multiply this figure by four to compare it with budget expenditure statements which refer to spending over four years.)

(A naughty way around the restrictions placed on public investment by a falling debt track is public-private-partnerships which National keeps mentioning. In effect, the private sector does the borrowing so the debt does not appear on the government books, although it is still responsible for the debt servicing. I am reluctant to pursue this strategy because there are so many overseas examples of projects which have gone desperately awry and proved very expensive. (‘Think Big at home is another instance.) The problem has been to get the private incentives to align with the public requirements, particularly the sharing of risks. I am sceptical that we have the skills to manage the deals in the public interest; many better placed countries prove not to have them.)

Another means of financing more spending to quell the grumpies is higher taxes, again challenging the neoliberal framework. The Minister of Inland Revenue, Judith Collins, has announced some measures to reduce corporate tax avoidance worth $200-300m a year – enough to fund an effective mental health program? (Who were the nonentity ministers of the past who could have initiated the change years earlier?)

Labour has promised to investigate the feasibility of a capital gains tax; we have had 18 years of Labour governments since I recall the issue first being raised. Labour also supports a resource levy on water and a higher petrol tax. However the revenue goes to local authorities and will not contribute to central government coffers. (I am a fan for such levies not least because I support a more decentralised governance of New Zealand. Greater fiscal independence for local bodies levels is a part of that. However the local authority must initiate the levies; all central government should do is make it possible for a lower tier agency to introduce them.)

So there is considerable grumpiness by the population about the inadequacies arising from government-spending stinginess. Both the incumbent government and the opposition seem to recognise it. They are going to have a lot more trouble responding after the election, unless they are willing to rethink the current fiscal framework with its Austerian (neoliberal) tinges. It is to be hoped that if they do, they will combine increased social sensitivities with an ongoing commitment to fiscal discipline.

Two Billion Dollars of Tax Money is Going Up in the Air.

This entry was posted in Environment & Resources, Macroeconomics & Money on 18th August 2017 by Brian Easton.

The following is a ‘pundit column’, which was never published because the 2017 election swept it aside.

Our carbon emissions regime is costing us a fortune; why are we not doing something about it?

Suppose an item of government spending blew out from virtually nothing a few years back to more than $400m a year in the future. If the blow-out was, say, on social welfare, there would be much wailing and measures to haul it in, no doubt imposing heavily on the wicked miscreants who are causing the additional spending. But when it is the fiscal cost of the emission trading scheme, the silence is almost deafening.

This spending arises from international commitments New Zealand made to reduce its carbon emissions. To be clear, we are a very small part of the world. Whatever we do will have little effect on global warming (but we need major measures to deal with the expected changes including rising sea levels). However, because we are small it is vital that we work with the rest of the world for common objectives; we are neither big enough to bully, nor are we as isolated as North Korea. (A particular need is to show solidarity with small Pacific states who will greatly suffer from sea-level rises and climate change.)

A part of the international deal is to meet emission targets, which would lower the amount of carbon we inject into the atmosphere. But we are not within cooee of those commitments; our injections are rising, whereas we agreed that they would decrease.

Our current commitments means the Treasury expects, that we shall be spending more than $2 billion in the next five years to purchase to fund forestry, emissions-intensive, trade exposed and other sectors. (Budget forecasts only go out so far; experts tell me that the cost after 2020 is expected to be even greater; one estimate I say was15 to 25 billion dollars over ten years from 2020 to 2030 – say five times as much annually.)

That is an awful lot of moolah which, if we were to meet our emissions commitment, could be used for more health spending, reducing inequality, lowering income taxes, having an even lower government debt path or whatever your (or the government’s) fancy takes you (or it).

How did we get into this expensive mess? Part of the issue is that when we made the commitment we did not understand enough about our methane emissions from belching cows. They have proved difficult to reduce per cow, while the number of cows have increased as the dairy industry has boomed. We also seem to have been over-optimistic in regard to our forests as a carbon sink; they have not been expanding enough. Lurking behind this is the fact that our electricity system is not so dependent on coal-fired stations; many countries are meeting their targets by closing theirs down, switching to less carbon-emitting power sources.

While the previous paragraph is true, you cannot help thinking that we have been too afraid of the producers of carbon emissions to tackle the problem. Instead we have timidly avoided taking effective measures.

From this perspective, the outlays on the outlays are subsidies to the producers of carbon emissions, spreading their costs across the entire economy by, in effect, higher taxes. Shades of Muldoonism! We pretend we do not subsidise farming and industry, but we do.

The producers can come back and point out that the issue is really the consumption of products which produce carbon emissions. The current regime is misleading, they might say, because we measure carbon emissions at the point of production and we take action (or not) at that point, rather than focus on consumers. (It’s a neat piece of first year economics; see here.)

It is true that in a closed economy, or the world as a whole, it does not matter much whether the problem is tackled from the production or consumption side, but it may matter a lot in an open economy like New Zealand.

For instance, suppose we were to tax dairy farmers to cover the costs of their contributions to emissions which generate the need for carbon credits. They could rightly point out that most of their product is sold overseas. The tax would make them less competitive in the international market and so the world might switch to other dairy producers whose cows belch just as much as ours do, or even more. The world would be no better off in terms of carbon emissions; probably, the New Zealand economy would be worse off (measured by GDP – the short-term measure of material output).

What we could do then, is rebate any taxes on carbon-emitting producers when their products were exported. The same logic says we should also tax imports for the carbon emissions they generated when they were in production.

Although it appears to involve export subsidies and import levies, the taxation regime it is, apparently, permitted under the international trading rules. Indeed were we to introduce such a regime successfully I am confident that many other countries would follow. However, I am told that such a tax is just too complicated (the introduction of a new tax is always complicated).

But the real point of this column is not to argue that we should introduce a tax regime penalising consumers of goods whose production generates carbon emissions, using the revenue to cover the cost of international carbon credit purchases. (For a more detailed proposal of what we should do see here and here.)

It is to say firmly that we should be doing something about the two billion dollar and more bill. Rather than, as we have been doing, farting (I suppose I mean ‘belching’) around and charging our failure to the taxpayer.

When is Lying Justified?

This entry was posted in Political Economy & History, Pundit, Social Policy on 14th August 2017 by Brian Easton.

Equivocation and dissembling have been integral parts of political life. How should we judge them?

Among the sinners the drunk porter in Macbeth welcomes into hell is the ‘equivocator, that could swear in both the scales against either scale’. Equivocation is a theme of the play; Shakespeare is thought to have been influenced by the recently written A Treatise of Equivocation by Jesuit priest Henry Garnet. It told other Catholics how to deal with dangerous questions from Protestant inquisitors for, if they admitted that they were Catholics, they could be in serious trouble. Yet to lie under oath was a sin against God. His solution was ‘equivocation’. A Catholic equivocator could lie and tell inquisitors what they wanted to hear, but God would know that what the Catholic said was really the truth in another sense.

The problem arose following the death of (Catholic) Mary I, with a Religious Settlement of 1559 which made (Protestant) Elizabeth I Supreme Head of the Church of England. Senior church bishops then faced the difficult task of stamping out support for Catholic practices. The Catholic and Protestant accounts of what happened remind me a bit of Labour’s and National’s quite different perspectives of some event. Protestants emphasise that the approach was mild if the Catholics were not brazen, that Mary’s previous regime was no better, and that the nation was threatened by invasion by Papist forces, Catholics say that the approach could be very repressive and cite martyrs and other horror stories.

Equivocation did not end (nor begin) in Elizabethan England. I am frequently moved by Shostakovich’s music which picked its way through the bloody repressions of Soviet Russia, bowing to the authoritarian state although underneath was a powerful personal critique if you knew how to listen. He was not alone, of course; others face the same challenge even today. I salute the courageous.

But when is lying justified? Not just being ‘economical with the truth’ but mendacious. Some would say ‘never’; others would say there are circumstances …

So how are we to think about Metiria Turei’s admission that she lied about her welfare entitlements some 24 years ago? Recall her circumstances.

In April 1991 welfare benefits were cut viciously; in the case of the Domestic Purposes Benefit she was on by 16.6 percent – a sixth – (allowing for inflation). This was one of the major sources of the marked increase in income inequality at the time. That the past levels provided an adequate income for the beneficiaries had been determined by a Royal Commission. Where the new rates came from is unclear but, whatever, there had been no attempt to assess them against the actual experiences of beneficiaries.

Contrast Metiria’s situation with that of a welfare beneficiary on whose living circumstances I did some careful investigation in 2012. At the time she was living on the same (real) income that had been set for 1991 (and hence markedly below the Royal Commission’s assessment). Meg, as I have called her, did not lie but struggled on what was officially available.

She went to a budget advisory service which concluded that by the time she had paid for her food, housing, household energy, medical and educational expenditure, transport and phone she was left with just $19 a week for everything else including clothing and footwear, entertainment, recreation, OTC medicines and personal care, household cleaners and the like, dental care, consumer durables, insurance and a variety of things you probably think of as normal – haircuts, presents, school trips and pets. (Certainly there was no provision for alcohol or tobacco, or even buying a lotto ticket.)

To cope, she cut back on her food budget, usually spending $40 to $80 a week, well below the recommended level of $130 a week that she and her daughter needed for a simple but nutritious diet (as recommended by the University of Otago Department of Human Nutrition). I suspect too, that she skipped some on her health care but that was harder to calibrate.

The result was that she and her daughter ate badly. Unquestionably it was a factor affecting Meg’s and her daughter’s health. It probably also affected her daughter’s education. (In the long run there was additional pressure on public resources as a result.)

So she did not lie but almost certainly she has shortened her life expectancy and damaged the life prospects of her daughter. She was honest, but perhaps some of you will have some sympathy for Metiria’s equivocation, especially as her actions had the happy outcome of her acquiring a law degree followed by an exemplary and socially useful life since. (I am assuming that is also true for her daughter but, rightly, her privacy has been protected so I don’t know.)

I am not saying that Metiria’s circumstances were comparable to those in Elizabethan England or Stalinist Russia, but is there a case for equivocation to deal with the repression from Ruthanasia and Jennicide? Are we being hypocritical condemning her and ignoring Meg?

These are very difficult question to answer honestly. But I could not help noticing a recent headline in the New York Times ‘Many Politicians Lie. But Trump Has Elevated the Art of Fabrication’.

(Metiria registered her address for electoral purposes at a place where she was not living in 1993. When I was teaching at a university with personal tutors we went to a lot of trouble to protect our students from the brainless things they did, arguing that the stupidities of adolescence should not compromise their future adulthood. Yes, Metiria was bloody stupid and what she did was illegal. I am not sure, though, whether we should hold it against her. Those who had a blameless adolescence might – if any exist.)

I Have a Little List

This entry was posted in Governance, Political Economy & History, Pundit on 7th August 2017 by Brian Easton.

With most parties having announced their lists for the next election, we need to think about how the system works.

As some day it may happen that an MP must be found

They’re put upon the list – I’ve got a little list

Of political offenders who are always safe and sound

And who never would be missed – so I put them on the list.

There’s opinionated graduates who always are around

Who’ve done absolutely nothing but are legislature bound

Who know absolutely nothing but think it’s so profound

Who don’t connect with anybody, staying underground

Who in any other job would be speedily dismissed

They’d none of ’em be missed – I’ve put them on the list.

There are those at all the meetings whose expertise is pissed,

With certainties of facts that never did exist

Who never help with anything but rush off to a tryst

They never would be missed – I’ve put them on the list

There’s the idiots who criticise with enthusiastic tone

While talking very loudly on the mobile telephone

Who speaks with sound and fury and dwells upon the past

Who enters a revolving door behind and exit unsurpassed

There’s a wireless jock, a salesman of tobacco, a proctologist,

I don’t think they’d be missed – I’m sure they’d not be missed!

There’s the political adviser and others of that race

The party loyalist – I’ve got them on the list!

Who stab you in the back while smiling to your face.

They’d none of ’em be missed – they’d none of ’em be missed

And there’s one who I have kissed, I’ve got HER on MY list.

There’s apologetic statesmen of a compromising kind

Such as – What d’ye call him – Thing’em-bob, and likewise – Never-mind

And What’s-her-name, and You-know-who, and some may not exist.

But it really doesn’t matter whom you put upon the list

For they’d none of ’em be missed – they’d none of ’em be missed!

I supported MMP. The previous electoral system – often called ‘First-Past-the-Post’ but better, I think, ‘Front Runner’ – exaggerated the mandate of the government which rarely won even half the votes but often ended up with a vast majority in parliament. Our parliamentary system has been described as an ‘elected dictatorship’. From 1975 to 1993 (and perhaps earlier) the government used that excessive mandate to pursue policies which ignored those who voted them in.

Since 1993 governments with much smaller majorities – a coalition of parties – have been much more sensitive to the public. Jim Bolger, Helen Clark and John Key all deserve praise for the way they have responded to the management challenge.

Even before it was introduced I, like many others, saw a weakness of MMP was how the party lists would be composed. A centralised party, such as Labour, could foist their party hacks on their voters; even the more decentralised party, such as National, ends up with a list on which there are people who hardly represent quality or the populace. (But then again under FR, there were some very unattractive electorate choices.)

I do not think we have really got our head around MMP. I shant discuss here the wrinkles which distort the proportionality and have directly benefited ACT, United Future and the Maori Party. However, they have indirectly benefited National; when the Electoral Commission recommended removing a key one (the way the threshold works) the government did nothing.

My interest here is how the system generates different outcomes for the two significant parties of the right (National and New Zealand First) from the two of the left (Labour and Greens); NZF would say it is a party of the centre but precise labels do not matter for these purposes.

First, observe the difference between National and Labour, using the 2014 election. National got 47.0% of the party list vote but only 46.1% of the electorate vote. In contrast Labour got 25.2% of the party list vote (not too different from the levels reported by recent polls) but 34.1% of the electorate vote.

This is because almost a third of voters split their vote between who they vote for in the electorate and who they vote for on the list. The proportions for National and Labour list voters who do so are considerably less (about a sixth of their list voters). But over half of list voters for NZF and the Greens (and ACT, UF and the Maori Party, just) give their electorate vote to another party.

Much of this is tactical voting. Suppose you were in the Nelson electorate, bitter about the National Government’s environmental policies. It might make sense to reserve your party vote for the Greens but to vote for the Labour candidate against National’s Minister for the Environment (Nick Smith) in the hope of toppling him.

The toppling did not happen in 2014 but suppose it did. Then Labour would have had one further electorate seat but would have lost one list seat (Andrew Little’s, as it would have happened) while National would have won one more list seat which, lo and behold, would have been given to their ousted Nelson candidate (who was high enough on the party list).

Thus the tactical voting which favours Labour electorate seats undermines its list seats. The example shows there is a sense in which Labour’s list seats are to be found in the Green Party’s seats.

The pattern is different on the right where a lot of supporters of the minor parties do not vote tactically to ensure the National candidate wins. Indeed many NZF party voters probably vote for Labour candidates in electorates. (Which is one piece of evidence that NZF may cite for their party being of the centre rather than the right; an alternative reading is that they are grumpy populists voting against the government).

Thus NZF wants to recruit voters from National and Labour, while the Greens mainly recruit additional voters only at the expense of Labour. This broadly explains why there is a different outcome between National and Labour in the balance between their electorate and list seats.

It may not be a good thing for the two largest parties to have this asymmetry. Others are likely to conclude there is a delicacy in the electoral outcomes for Labour and the Greens. How they handle – or mishandle – their electoral relations may be critical for each party’s survival.

Footnote. Suppose Labour had beaten the Māori Party in the Waiariki seat (Te Ururoa Flavell’s seat). That would have set the MP seats to zero and reduced the total of parliamentary seats to 120, since there would have been no overhang seat. Labour would have swapped a list seat (Andrew Little’s) for an electorate seat. The list seat would have gone to National who now with 61 seats, would have been able to govern alone. Huh?

(Help with the words of the song came from W. S. Gilbert and Elizabeth Caffin.)

Two Economists: W. J Baumol (1922-2017) and M. H. Cooper (1938-2017)

This entry was posted in History of Ideas, Methodology, Philosophy, Portraits, Pundit on 31st July 2017 by Brian Easton.

The lives of two outstanding economists who died recently illustrate just how diverse the profession is.

I first came across William Baumol when, as a student, I valued greatly his two textbooks: Economic Dynamics and Economic Theory and Operations Analysis, both lucid, intellectually challenging and with a gentle humour. (Rather than the conventional tradeoff of guns versus butter, he illustrated the principle with cummerbunds and zabaglione.)

I also read his Business Behavior, Value and Growth with its insightful notion that firms maximised revenue subject to a profit constraint. Neoliberal economists got very agitated and constructed elaborate explanations to show he was wrong – they were used in the 1980s to justify privatisation. They have been largely discredited since but the profit maximising firm is the standard assumption if not always evident in reality. (J.K. Galbraith used Baumol’s insight in his New Industrial State)

Baumol continued to do path-breaking work, not least in environmental economics and the economics of the arts. Later he contributed to the literature in which entrepreneurship has a central role in economic growth.

He (with some colleagues) almost made a major breakthrough with contestability theory, which showed that if there were no barriers to a firm entering or exiting a market, even a monopoly behaves as if it was in a competitive industry. It was very popular among Rogernomes who ignored the caveats. In particular, it is not a robust theory in which deviations from the rigorous assumptions left the conclusions intact. For instance, the theory of competitive markets assumes an infinite number of firms but in practice an industry with only a handful behaves as if it were competitive. In contrast, minor barriers to entering or exiting ruin the result that a monopoly behaves as if it is competitive and there are no monopoly profits.

A related issue was the Baumol-Willig pricing rule which suggested how prices might be set in a market dominated by a firm. It was used to protect Telecom’s monopoly for it locked in existing monopoly profits; I doubt Baumol would have been as enthusiastic as were Telecom’s defenders. Eventually the long (and expensive) legal dispute was resolved by the Telecommunications Act 2001, which specifically rules out the use of the Baumol-Willig rule. Apparently Baumol and his colleague, Robert Willig, are the only two economists mentioned in a New Zealand statute.

Baumol is best known for the ‘Baumol cost effect’ (a.k.a. ‘disease’ but that puts a judgmental dimension on an empirical phenomenon). It points out that the costs of many services will rise faster than the costs of goods because they do not experience the same productivity gains. The original illustration was that the same number of musicians is needed to play a Beethoven string quartet today as was needed in the nineteenth century so the productivity of classical music performance has not increased. On the other hand, the real wages of musicians have increased greatly since then, so the relative cost of concerts have gone up.

The Baumol effect particularly applies to government activities which are almost entirely services. I once mentioned this to a group of economists working on projecting government spending, pointing out that (with a few extra assumptions added) this meant that tax revenue would have to rise over time to cover the rising costs. There was a stunned silence and the meeting quickly moved onto other matters – raising tax levels, even to supply desired public services, is not high on our agenda.

Baumol’s innovative research covered an extraordinary range of economics and other issues (he had a minor career as a creative artist), illustrating Hayek’s ³nobody can be a great economist who is only an economist.’. Master all his writings and you would have a good training in economics. Yet, he never was awarded the Nobel prize in economics, illustrating the limitations of the prize and the eccentricities of the selection process.

Mike Cooper was one of a group of British economists who pioneered health economics in the 1960s. (There were American contributors, including Ken Arrow, whose seminal 1963 paper ‘Uncertainty and Welfare Economics’ appeared to be unknown to the Rogernomes who were redisorganising the health system three decades later. Had they known it, they would have seen how deeply flawed their approach was. Incidentally, Arrow’s paper cites an earlier work by Baumol as foundational.)

Mike first came to my attention in 1968 when he published, with Tony Culyer, The Price of Blood, arguing that blood-donors should be paid, thereby making it a market commodity in which supply balanced demand. (Yes the booklet had a blood red cover.) Richard Titmuss replied in 1970 with his brilliant The Gift Relationship: From Human Blood to Social Policy, one of the great social policy books of the twentieth century, pointing out that commodifying blood leads to a deterioration in the quality of its supply. (That is why we don’t pay blood donors). To Mike’s credit he recognised he was wrong – a humility which is not common enough in other professions either.

Mike wrote many other books including Rationing Health Care which some health economics teachers still use such is its ‘exemplary clarity’, as one reviewer said. In 1975 the notion was revolutionary, for the conventional wisdom assumed a public health system could meet all the demands on it. Today we accept that there have to be restrictions, although while waiting lists may be acceptable providing the wait time is not too long, the current practice of the not-on-the wait list – that is, having a need which the system does not recognise – is not, even if it is increasingly pervasive.

In 1976 Mike took up the senior chair in economics at the University of Otago which he held for two decades while actively working in a range of health areas; he was an applied economist. (He held many other positions but they are not relevant to this column except that he was at one time the chair of the Otago Area Health Board.) His tenure laid the foundation of the successful department we know today. For despite Mike’s international reputation in health economics, he worked in many other economic fields. (On retirement he took up cooking and producing award winning olive oil from trees on his and Joy’s estate in Martinborough.)

As befits a strong department led by a strong head, he inspired many graduates. Perhaps the jewel was Nancy Devlin who, I regret to report, holds senior positions in Britain Her tribute at the funeral service included ‘I would not have had the career I have enjoyed if it hadn’t been for Mike. …. [His] lectures were inspiring, challenging, and always thought-provoking. Theory was effortlessly mixed with examples, issues and applications to real life problems in health care. Mike gifted to me a life-long passion for health economics.’

Surprisingly Mike was never made a distinguished fellow of the New Zealand Association of Economists. I am not sure why. Perhaps the Baumol explanation will do: the limitations of the award and the eccentricities of the selection process. Such failures by selection committees are an inherent part of many of the awards in New Zealand.

Are Markets Free?

This entry was posted in Pundit, Regulation & Taxation on 17th July 2017 by Brian Easton.

Effective markets are underpinned by the government. The interventions may be sophisticated and well-thought through or they may be clumsy and ineffective. The neoliberal rhetoric of ‘free markets’ leads to the latter.

In a recent Metro article, Matthew Hooten wrote ‘globalisation combined with free markets has been the most successful economic and social system of the world’. I do not propose to discuss whether we can describe as successful a social system which is riven with mental health and addiction problems or whether we can attribute them to globalisation and free markets. As a previous French prime minister, Lionel Jospin, said (in French) ‘Yes to market economy, no to market society.’

Nor am I going to spend much time discussing globalisation in this context. Adam Smith argued that specialisation (with its economies of scale and learning-by-doing) were crucial to economic development. Globalisation facilitates this, but never forget it has its downsides.

This column focuses on the pernicious rhetoric of ‘free markets’. Whatever the expression sounds like, markets are not typically ‘free’ but are regulated by a host of laws (imposed by governments) and other interventions.

It is unfortunate that the usual introductory economics course pays little attention to the government regulation of markets. Apparently neoliberals having struggled through Economics I (in a famous case obtaining a C pass) miss the point and end up using uncritically the idea of a ‘free market’.

The amount of government regulation varies. In the typical Economics I example, say apples, the transaction is repeated, you soon find out if you made a bad decision, and the loss from one mistake is small. Even so, you might contemplate when you next purchase some apples, how you are protected by the Fair Trading Act (among other interventions). You make the purchase with a degree of confidence in the quality of supply and that knowing there are remedies in the unlikely event that something goes wrong.

Compare that with purchasing a house. As the leaky buildings saga illustrates, you make the decision rarely and it may take considerable time – years – to find out if there is a defect, which may be very expensive and extraordinarily costly to remedy (but very profitable to lawyers). The failure arose in a period when belief in free markets was strong under the slogan of ‘light-handed regulation’. As a result, we have moved to much more heavy (local) government regulation; I am not sure we have got it right.

For once we move away from the naive neoliberal slogan, things get very tricky. I illustrate this with the ‘open bank resolution’ policy. It arises because it is possible – many would judge unlikely – that your bank may fail. There are a number of ways it can, but for these purposes consider the possibility that it has difficulties paying all its depositors either immediately or ever. You don’t think a lot about this when you place some of your savings in a bank but, golly, you would get angry if it were to happen.

Who covers any financial deficit? The easy response is ‘not me’; a slightly more sophisticated version is ‘the government’ which means the taxpayer – in effect someone else.

Why should the government worry? Aside from the political pressures, the banking system is key in the economy’s payments system so a bank failure could compromise the very basis of an effective market economy. (There are some splendid examples of responses. One of my favourites is that when one happened in Ireland, the local hostelries ran a credit system for their customers; it would not work here because most New Zealanders do not have such an intimate relationship with their pubs.)

The open bank resolution policy states how the government would deal with the situation. It reserves the right to suspend, for a period, depositors’ access to their funds during a temporary crisis and to haircut (that is reduce the value of individual deposits) if there is a permanent deficit. It is only a policy framework, because no one knows the details of an actual incident – the devil is always in the details.

At the same time the Reserve Bank has instituted a number of requirements for the banks which aim to reduce the likelihood of a bank collapsing and that, if it does, buffers – shareholders’ funds and other sorts of investment contributions – will be used first if there is a deficit. This gives greater protection (a lower likelihood of the haircut) to ordinary depositors.

New Zealand is not alone is such strategies. The Global Financial Crisis exposed the failure of the light-handed regulation that had existed throughout the world’s financial system. When things got strained it was the taxpayer who bailed it out, by literally billions of dollars.

Chief financial neoliberal in the era preceding the GFC was Alan Greenspan, Chairman of the American Federal Reserve (i.e. their central bank). Questioned afterwards by a congressional committee after the collapse, he said, referring to his free-market ideology, ‘I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.’

A congressman responded, ‘In other words, you found that your view of the world, your ideology, was not right, it was not working.’ Greenspan replied, ‘Absolutely, precisely.’

So much for the ‘free market’ in practice. This will be water off a neo-liberal duck’s back, but I want to draw another conclusion. It is one thing to criticise the shallowness of the free market ideology, it is a far greater challenge to design effective interventions.

I have illustrated this column with the open bank resolution policy and the other measures the Reserve Bank has instituted (and is instituting) because they seem very well-designed. (Of course there is grumbling from those who have to respond to the measures. Following the next financial crisis they will not apologise as Greenspan did; by then they will be retired on handsome incomes.) On the other hand, I see intervention frameworks in other markets which would be struggling to justify a C grade.

An unfortunate consequence of the free market and light-handed (I almost wrote ‘light-hearted’) regulation rhetoric has been to destroy our capacity to design quality interventions. A few exceptions aside, we may be drifting back to a Muldoon era regime of poor-quality market regulation.

When the Water Runs Out.

This entry was posted in Environment & Resources, Globalisation & Trade, Growth & Innovation, Pundit on 17th July 2017 by Brian Easton.

The growth of farm output may be slowing. Specialty cheeses show an alternative strategy of further post-farmgate processing.

Land for farming ran out in the 1950s. Farm production intensified. We shifted from more dollars of farm output by using more land to getting more dollars per unit of land. Among the challenges we had was to replace the nutrients we were depleting from the soil – notably phosphates. Fortunately the world’s reserves of cheap phosphates have not yet all gone.

Less fortunately, our water resources seem to have run out. Fresh water is limited and wastewater is polluting the sinks we use of our rivers and lakes. (Urban use is compounding the problem.) Perhaps we should replace the opening sentence with ‘water for farming ran out in the 2010s’. Unlike land and fertilisers, though, and despite the RMA’s system of resource consents, the water resource is not subject to a commercial property rights regime, so it is harder to follow exactly what is happening. Probably we are reaching the limits of total farm production although there may be some tweaking from using more water-conserving technologies and crops.

That bodes ill for the future of the New Zealand economy. Admittedly, farm production is no longer the dominant foreign-exchange earner it was in the 1960s when it supplied 95 percent of our external funds that were not borrowed. Today the ratio is less than half but it is not obvious that our other export industries can carry the deficit that a broadly stagnant farm sector would generate.

(Once upon a time we would make careful projections of our export potentials. Today we are much more casual; we borrow to make up any deficit – but that is not sustainable.)

So a challenge has to be how to earn more dollars per unit of farm land when farm output stagnates.

(One approach is to get better prices for our farm export products by reducing trade barriers. That is a major concern in our trade negotiation strategy but, except in farm newspapers, I see little reference to the gains. So, for instance, the public debate over the TPP focused on the downsides – the concessions we made – but rarely referred to the wins from better trade access for our primary products.)

One way of increasing dollars per unit of farm output is by value adding after the farm gate. Yes, we do further processing but often it is the minimum necessary to be able to export the stuff. Let me give an example with cheeses.

Historically we have exported cheddar cheese. In the early days of refrigeration we found that cheddar best survived the long sea voyages. In key markets today New Zealand cheddar has a reputation for good quality at reasonable prices. I’ll come back to the issue of market access shortly. However cheddar is an example of minimum necessary processing.

Apparently we make some world-class specialty cheeses and export a little of them. (I am concerned here with table cheeses similar to blue, brie, camembert, feta, gouda and the like; there are also local specialty cheeses such as Kahurangi. We also export specialist cheeses for industrial processing such as mozzarella for pizzas.) They involve more post-farm-gate processing. So why do we not do it more?

In contrast we have over the last sixty years switched our wine industry from producing plonk – they had the temerity to call it ‘sherry’ – to export wines with international reputations (despite some rather unfair tariffs against them). Why not the same for specialty cheeses?

Regrettably cheese is heavily discriminated against at many countries’ borders. (Often the definition of allowable cheese imports is very prescriptive, which limits opportunities for alternatives.) When we finally persuade another country to allow us to sell them more cheese (typically by increasing the tariff-free quota) we prioritise exporting cheddar. That is perhaps understandable if farm output is unlimited, but what happens in the new era we seem to be entering?

If the wine parallel is relevant we have to be able to export the specialty cheeses into highly discriminating markets such as France. Their connoisseurs then begin to admire our cheeses, as they did our sauvignon blancs; French tourists would taste it here and buy it back home. (It would help if our restaurants charged more reasonable prices for their cheese boards.) The international reputation would flow on to other markets and, for instance, we would have increased demand and prices in China, where we already sell a little specialty cheese. (It would also help if restaurants and the like identified the sources of their cheeses; imagine serving wine without mentioning the vintner.)

Of course it is more complex than that – trade deals always are — and it requires a lot of private initiative too. But the essential principle that we increase value adding of our exports of cheese is not. And the principle applies to other primary products, although each may differ in detail.

Otherwise with the water running out (or becoming insufferably polluted) farm production will stagnate and we will have greater difficulties generating sustainable foreign exchange. Borrowing is only a short-term measure – be it borrowing offshore or depleting the water resource.

PS. The EU and Japan have just announced a Free Trade Agreement (JEEPA), although the details are unclear. It is a strategic agreement intended to offer an alternative to Trump’s short-sightedness on trade. As well as the first mention of the Paris climate accord in an FTA, the deal includes Japan making major concessions on barriers to cheese, wine and other agricultural products. Bother, we have been trying for a deal with Japan too (and with the EU). The TPP11 will give us better access.

Being a New Zealander.

This entry was posted in Macroeconomics & Money, Pundit on 9th July 2017 by Brian Easton.

By exploring the multiple worlds she grew up in in New Zealand, Helene Wong’s memoir ‘Being Chinese: A New Zealander’s Story’ tells us much about our worlds too.

Economists have a predilection for the open economy because, I think, openness to trade tends to be associated with openness to ideas, to technologies, to people, to opportunity, to the future. So the import controls on carpets in the 1960s meant New Zealand was unprepared for the rise of synthetics which decimated the market for coarse wools, crashing their prices in 1966. On the other hand, at about the same time it was agreed to relax the restrictions on imports of speciality cheeses to generate a public taste for them. The success of the strategy is not only evident in the domestically produced speciality cheeses displayed in our supermarkets but that we now export some.

I was reminded of this sentiment when I came across a scabrous letter reproduced in Helene Wong’s memoir Being Chinese: A New Zealander’s Story. But first some background. Helene was born in New Zealand, as was her Chinese mother, while her father came here from a Cantonese village when he was seven. Born in 1949, she is best known as an actress and film critic.

Much of her memoir will resonate with anyone who grew in New Zealand at about the time she did, for her public life was much like everyone else’s. (She suffered some nasty jeering over her ‘Ching Chong Chinaman’ status, although gangs of children tend to be cruel to anyone they deem outside their circle.) Her home life was particular – everyone’s is. Her parents were green-grocers and she spent a lot of time in the shop and helping Dad down at the wholesale markets. Her social life was enriched by many Chinese community celebrations.

She was not a banana – yellow outside, white within – as a white stepfather once described to me his adopted and assimilated Chinese son. For while outwardly she was like other Pakeha, inside there was a Chinese foundation. (She married a Māori, but that is a private story, which does not feature prominently in the book.)

Her integration proved to be a journey exploring the worlds to which she belonged. Ultimately the trip was about what it means to be a New Zealander and yet to have other cultural elements in one’s makeup. Since we all do, her challenge was not much out of the ordinary, although perhaps it is bigger for Asians; we are probably more tolerant of some backgrounds than others.

That is where the dreadful letter comes in. The New Zealand Chinese practice has been to take a low profile, but with growing confidence arising from her success in the New Zealand public world, she spoke out against the presentation of Chinese stereotypes, receiving in response an abusive letter, anonymous of course, which was, to use the mildest terms available, ignorant, intolerant and racist.

Sadly, there are some of us like that – Helene has the grace to suggest the writer may have had a bad Asian experience, perhaps in the military. My immediate reaction was to think what a closed mind the writer had, unable to engage with something different except with abuse – probably still only eats cheddar cheese.

That led to me to ponder on Trump supporters. People often say ‘isn’t it obvious he is a fake?’ Well not to a closed mind. Perhaps one day the accumulating evidence will change their minds, but a poll had 25 percent of the population supporting President Nixon on the day he resigned in disgrace.

There is an interesting row in Canada arising from Hal Niedzviecki, the editor of a literary journal, writing that everyone ‘should be encouraged to imagine other peoples, other cultures, other identities’; seems to me be a very appropriate sentiment. However Niedzviecki used it to defend ‘cultural appropriation’. I am not so politically correct as to reject all cultural appropriation but it should be done with respect; it may be hard to do it well.

Recall Gordon Walters, who as an educator did much to promote Maori art. His elegant koru paintings were described by the politically correct as ‘cultural appropriation’. A better response was a retrospective of his Maori students at Porirua’s Pataka Gallery acknowledging their debt to him with works based on the koru.

Helene’s description of her Chinese background provided a perspective to engage with my being a New Zealander, something which has been greatly puzzling me as globalisation seems to compromise national identity.

You’ll have to read the book to find how Helene satisfactorily resolved to think about being a Chinese New Zealander but to give a hint, her family values (which an open-minded person would not grumble about) were anchored in Confucianism and Taoism which she only learned about while studying at Harvard in her thirties. Her family did not seem to know their ancestral culture’s great thinkers, but it practised their values.

Reading the book, you will also learn of a different perspective on the world and even a little Chinese history. For instance, Chinese resistance to the Japanese invasion in the 1930s delayed the fall of South East Asia. The book reinforces the unease I feel about interpreting the Chinese leadership using our values. There is also material on the history of the Chinese in New Zealand. I am embarrassed that some of it reflects attitudes as ugly as that letter.

You will enjoy the numerous anecdotes about being the New Zealander that Helene evidently is. My favourite is that in her thirties she had some public business in China and took a side trip with her parents to the village where her father was born. Because she was a member of the Prime Minister’s Advisory Group, Chinese officialdom provided an official car. I imagine that the villagers expected their visitor would be in a suit, probably a man. Instead the representative of the New Zealand premier stepped out of the car in a floral skirt and jandals – which any respectable New Zealand woman would have worn in the circumstances.

PS. I have just read David Galler’s Things That Matter. David is an intensive care physician and public health specialist. The book will be valued reading by anyone involved in the health system. He was the child of two immigrants – David’s mother survived the Auschwitz concentration camp, his paternal grandfather was Chief Rabbi of Poland. The memoir is another illustration of how migrants from ‘minority’ ethnic backgrounds can make extraordinary contributions to New Zealand.

Middle Class Welfare

This entry was posted in Political Economy & History, Pundit, Regulation & Taxation, Social Policy on 4th July 2017 by Brian Easton.

Jenny Shipley says the middle class has captured the welfare state. But did she understand what the welfare state actually meant before she began attacking it?

In her interview with Guy Espiner, Jenny Shipley regretted that the ‘middle class’ were still beneficiaries of the welfare state. Now the term ‘class’ is a summary of a lot of complex ideas useful in social discussions, but I cannot recall it being used by such a senior politician – at least not since Harry Holland. Indeed some commentators on the interview choked on the expression, quickly switching to ‘middle incomes’; which was both more precise and more in keeping with New Zealand’s political rhetoric.

The idea probably came from an English economist, Julian Le Grand, who passed through in the mid-1980s. I recall two takeouts from his presentation. One was that surveys reported that the public was willing to pay more than it cost for an iconic structure – double in the case of the vastly over-budget Sydney Opera House. (Reflect on the cost and the value of restoring ChristChurch Cathedral.) The message was promptly forgotten – presumably because of the fiscal implications.

The other message was that the middle class had ‘captured’ the welfare state. Julian was a student and, later, colleague of mine, but I do not think he then had it quite right. It is true that the modern welfare state provided some support for those on higher incomes. It was never intended solely to be vertically redistributive – that is, only transferring income from those on high incomes to those on low incomes. It was also horizontally distributive providing social insurance; the main source of funding of public healthcare for those on middle incomes is others on middle incomes; if you are unlucky in health (or whatever) others like you who are luckier would contribute to your treatment.

This illustrates another issue. Private market delivery is not always efficient. An even starker example – one of Julian’s examples – is the enormous subsidies to London public transport commuters. Remove them, as is Shipley’s apparent wish, and London traffic would come to a halt.

Geoff Bertram provided a good critique of the middle-class capture thesis in a report to the 1988 Royal Commission on Social Policy but it was ignored. Instead, the neo-liberals seized upon the notion to justify the stripping out of subsidies, and the minister – in this case Shipley – adopted it without apparently understanding the argument.

Indicative of this was her claim to Espiner that ‘[t]he middle class has had, and continues to capture, a welfare state that was never designed for them.’ Just who said it was not designed for them? While there were numerous threads in its design, I would have said that a key notion was that it was designed for all of us – that it was never intended to be only vertically redistributive.

Even more confusingly, Shipley promised in 1990 and 1991 to ‘redesign the welfare state’. Now she is talking about design as if that did not happen. Did she or didn’t she do it? Does she know what she is talking about? I would be surprised if she has ever read, for instance, the report of the 1972 Royal Commission on Social Security, and I expect her knowledge of the history of the welfare state is even thinner. (Happy to report a correction.)

Mind you, she was no more ignorant than her neoliberal advisers. They knew no history or only very recent, and not always accurate, versions of it. (A bit like Trump, really.)

David Seymour, who represents the neoliberals in parliament, claimed that the 2017 budget demonstrated that National was ‘abandoning its roots’. But the budget was in the tradition of National and its predecessor parties. The only time it has had a neoliberal prime minister was for the two years of Shipley’s term (December 1997 to December 1999). You will recall she started off shifting the government to the right, quickly found the move was thoroughly unpopular (and impractical) and trimmed back towards the centre.

Indeed after 1991, minister or prime minister, Shipley hardly pursued the policy she professes today. That was because it is undeliverable. Recall Welfare that Works. The booklet had lots of vague promises backed by impressive diagrams, but when the taskforce tried to implement them it quickly found they were but fantasies. You would have thought those with neoliberal inclinations might have learned from the exercise that you cannot target welfare without very high effective marginal tax rates. But they were too committed to targeting to learn from the failure.

Without effective targeting the promised redesign could not work and the actual package collapsed into vicious cuts of the incomes of the poor, used to pay for the tax cuts to those on upper incomes (or perhaps as Shipley would say, ‘the upper class’). Ironically, while Shipley seems to think the welfare state is essentially a vertically redistributive system, she contributed to markedly reducing the degree of vertical redistribution from the rich to the poor.

Were social policy in New Zealand an evidenced-based disciplined we would have concluded that the 1990s ‘redesign of the welfare state’ was a failure on virtually all its promised dimensions other than cutting the cost to the state. Instead we keep pretending it is a success while adding another patch to deal with yet another leak.

The patching of more and more increasingly targeted programs which are increasingly expensive to administer keeps generating demands for further patches because they do not work other than temporarily. Remind you of Muldoonism? So be it.

By the time the failed patches become evident, ministers and administrators have moved on, so no one is responsible or remembers and another patch is applied. The poor the patches are meant to be helping are left coping with a myriad of targeted programs which are confusing (the take-up rates are embarrassingly low) and which take an awful lot of the supplicants’ time (a short interview may involve them hanging around in a waiting room for hours – see here).

The redesign of the state may have increased the incomes of the rich but it has also created jobs for the middle class administering its complexities. The poor work hard to support them; perhaps they deserve a reward. Perhaps this is the middle-class welfare that Jenny Shipley should be really concerned with.