How Does Immigration Benefit the New Zealand Economy?

This entry was posted in Growth & Innovation, Labour Studies, Pundit on by .

Answering that question proves to be challenging. This preliminary assessment suggests the economic benefits to incumbent New Zealanders may not be great.

During the Vogel boom, say between 1871 and 1881, the population of New Zealand doubled, as did real GDP (as best as we can measure). That means per capita GDP was much the same at the end of the boom as it was at the beginning. Was it a boom then?

The reason is instructive. Vogel’s strategy had involved heavy overseas borrowing. Some of the proceeds had been used to ship migrants. That is why the population grew so quickly. Vogel, rightly, had encouraged young women to migrate here in order to get a better gender balance. Although he did not get to one for one (something not attained until the 1920s if we include soldiers away during the Great War) the number of women rose faster than the number of men. While the population doubled, the employed male workforce increased by only 60 percent. So their productivity measured by market output rose at about 1.4 percent p.a., much like it has done for most of our post-1860 history.

Despite the lack o0f GDP growth, the men were better off. They had companions (who were productive in their homes, if unpaid) and they had children. This is a useful reminder that GDP may not always be a good measure of living standards. More generally, it alerts us that assessing an economy with high migration can be complicated.

Thus it is today. The proud boast is that GDP is growing at about 2.9 percent p.a. but since the population is growing at 2.3 percent p.a., GDP per capita is growing at only 0.6 percent p.a. (This is about half the long-term growth rate, something I need to come back to in a later column.)

But whatever the average increase, the increase for those who are not immigrants is lower because the immigrants are more likely to be in paid employment; the opposite of the Vogel era. It is difficult to calculate the real production rise for incumbent New Zealanders, but my stab at the figure is that it is between 0.0 and 0.3 percent p.a.

There was another major difference between the Vogel boom and this one. Vogel also used the proceeds from the borrowing to build infrastructure: telegraph, roads, railways, ports … Current international research often suggests that the rates of return on today’s new infrastructure are above 10 percent p.a. That of 140 years ago was probably even higher.

Today, we are not borrowing for infrastructure. It is true that there are major programs in the broadband rollout and in some roading. We are getting hopelessly behind in housing, and a lot of effort is being put into recovering leaky and earthquake risky buildings which is not so much additional infrastructure as replacing poor investment in the past. The best I can estimate is that national capital per head is not really keeping up with economic growth. Sitting in your car in yet-another-bloody traffic jam, you may agree.

So some benefit from immigration, some do not. Presumably the former include the migrants themselves, but it also includes businesses which make profits from their additional employees while not having to trouble themselves in finding suitable New Zealanders or upskilling them. Those who may not have benefited include New Zealanders who do not get the upskilling and don’t get the jobs, those who miss out on decent housing or suffer from infrastructure failing to keeping up with population needs.

A complication is that the additional workers probably contribute more in taxes than they use social expenditure, so from these dimensions the young, the sick and the old are better off (assuming the government uses the extra revenue for spending rather than cutting taxes).

In summary then, immigration seems to be of little economic benefit to New Zealanders in terms of raising their standard of living, especially if it is used as an alternative to policies such as upskilling the labour force and if we do not build the infrastructure that the expanding population and economy needs. This conclusion obviously applies more severely the greater the level of immigration.

That leads to two policy conclusions. The first is that we need a comprehensive and detailed economic review of immigration instead of flying by the seat of our pants as this column has been forced to do. Second, it is likely to conclude that we need to be more restrained about levels of immigration in certain areas. (There is almost certainly a third policy conclusion. That we should have carried out the policy analysis earlier – but that concluion generally applies to most policies.)

Let me make it clear that this is not an anti-immigrant column. One of the few things I am sure of is that I will not vote for an anti-immigrant party (even if they indicate their position only with dog whistles). What the column is arguing is that we need to be more sensitive to the impact of immigration on the economy and that it need not necessarily be a good thing in narrow economic terms (as the women Vogel’s scheme imported were not). It is rejecting the neoliberal approach that immigration policy should not be coordinated into comprehensive macroeconomic policy. In particular, I should not be surprised if we need to restrain immigration a bit more, pay more attention to upskilling domestic labour and get a better balance of infrastructural expansion.

The Death of the Media?

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If the Commercial Miracle of Newspapers is Over, What will Replace It?

Newspapers have been a commercial miracle. For a very small outlay one got access to a surprisingly wide range of news, opinion and information. Part of the explanation was economies of scale, but the trick was that much of the industry’s revenue came from advertising. The symbiosis was that advertisers attracted readers’ attention to their products by subsidising the paper’s news-gathering activities which attracted readers.

In recent years, much of the advertising – especially classified advertising – has collapsed or, more precisely, it has moved to other venues, most notably, locally, the TradeMe website. (Some newspapers once gained perhaps a third of their advertising revenue from small ads.) As it fell the cross-subsidy to journalism also fell and workers have had to be laid off. That means there is less news, or that it is more superficial and of poorer presentational quality – subediting has been especially heavily hit.

A poorer news service means the paper is less attractive to readers – especially as they can turn to news websites. So circulation has fallen, newspaper sales revenue has further fallen and they are less attractive to those advertisers who are left. It is not difficult to see newspapers, here and in much of the world, in a death spiral despite some innovative adaptations to reduce costs.

That means that their role as news collectors is diminishing too. Even those newspapers with paywalls on their websites generate insufficient revenue to employ a lot more journalists (or subeditors). The miracle is over.

If journalists, once our guardians and generators of verifiable facts, are diminishing, any gap is being filled by commercial and political interests, by opinions and by false news.

Recently the Northern Advocate of Whangarei published a story of a pseudo-historian who claimed that Celtic sailors reached New Zealand around 4000 years ago – circumnavigating the world before they could circumnavigate Britain. Once the stupidity of the article was pointed out, the paper dropped the article but it is there in cyberspace (if you must, here). What interested me, for this column’s purposes, was that the newsroom of the Advocate (circulation about 10,000) is so shallow that their journalists’ common sense did not stop the story before publication. How much bigger do you have to be to avoid being vulnerable to a more sophisticated hoax (including those sourced by commerce and politicians)?

 Broadcasting funded by advertising faces a similar challenge of alternative outlets and diminishing revenue. Meanwhile, what is loosely described as ‘social media’ (including Google) is proving to be extremely profitable from the advertising revenues diverted to it. They are natural monopolies, for their dominance is hardly threatened by competitors.

 People overuse the term ‘crisis’ – it is a word the media loves to use to grab your attention – but it seems to me that democratic society as we understand it is greatly challenged by the end of the media miracle. It was founded on the Enlightenment notion of rational debate leading to progress and improved wellbeing. I am not sure that has occurred during some recent political kerfuffles. For example, one of the requirements of a rational response to climate change is an understanding of the underlying science which deniers seem unaware of. (Reflecting, this economist has seen a similar phenomenon riddle through our economic discussions; he shares the bruising of climate scientist.)

 What can be done? It is no good hoping the trends will reverse themselves. Classified advertising is all but gone and there is not going to be a lot more display advertising. It still works in some areas because the web has not provided a viable alternative. Most of us use the property and travel supplements with a followup to a website. Community giveaways seem to work because they are focused on smaller communities (but their contribution to great journalism is likely to be limited). Many provincial papers are drifting towards community giveaways – they may prove viable. Sponsorship is a kind of advertising which may add a little to revenue.

 What about government funding? Yes, it can help but it should not dominate as authoritarian state-funding demonstrates. (The Soviet Union produced the state-owned Pravda (truth) and Izvestia (news). Its citizens knew there was no news in Pravda and no truth in Izvestia.) Yet we should not be completely dismissive. Both the BBC and RNZ (Radio New Zealand) provide great news services. (As an aside, plaudits to Minister of Culture Maggie Barrie, who managed to squeeze some extra money for RNZ out of her, no doubt grumpy, colleagues in the 2017 budget round.)

 There are also ‘angels’, people or trusts which subsidise the media. The Washington Post is owned by billionaire entrepreneur Jeff Bezos, the Amazon.com founder, who apparently sees this as a public commitment. The paper has recently changed its masthead slogan to ‘Democracy Dies in Darkness’. Even, so it needs revenue, including from a paywall on its news-site. The Guardian website has no paywall. It is owned by a trust which has been chewing through its financial reserves.

 The public is another source of funding. Subscriptions to hard copy help, but paywalls don’t seem to be big revenue generators. Yet the news-sites are becoming an increasing element of the media industry, either standalone or as a part of a hard-copy publication. I shan’t be surprised if they are becoming the preferred source for the younger generation rather than subscribing to papers. If the news-sites do not generate sufficient revenue there will be insufficient journalism.

 Many news-sites depend upon crowdfunding and donations. There is not the same tradition in New Zealand as in the US for such funding but my guess is that it will become more common. (I am not saying we are ungenerous; rather that we dont think about such things in the way many Americans do.)

 You will see at the top of this page an invitation to ‘become a supporter’ of Pundit. It would not be quite this column’s style to urge you to click on it, but unless sufficient people do the possibility is that the website will die. I am less reticent at encouraging readers to support financially all the free news-sites they value. Without that support there is a danger that our open democracy, such that it is, will descend into darkness.

Footnote: If you have doubts about the importance of good journalism look at this report on the collapse of the CTV building and the death of 115 people on 22 February 2011.Thankyou to the team of journalists and to the editors who thought it worth doing. One may wonder how many advertisements paid for it.

The Context of the 2017 Budget

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

Much of the commentary on the budget was shallow. What is really going on is that the changes are small but they reflect a particular political perspective. The financial threat was hardly discussed

Allow me to be irritated by the trivial discussion which surrounds the government’s annual budget. The budget is simply the government setting out its spending, revenue and borrowing plans for the year, as required by legislation and as has been a fundamental part of the constitution for three centuries. In most years – ones of benign growth without a crisis – any changes are incremental.

Over the long run, budget decisions can affect the quality of our life; in the short run they can have a large impact on particular, but typically small, interest groups who magnify any change (or lack of it) out of proportion to the overall significance. The government also has an interest in magnifying any favourable changes no matter how small, and it seduces commentators to do much the same thing. (Some commentators and the parliamentary opposition do the opposite, but they are playing the same game.) What is missing is the context.

Here I am going to use annual average changes from July 2015 to June 2019. I do this in order to smooth the fluctuations. The Treasury thinks that volume production (real GDP) will increase on average 3.5 percent p.a. over the four years. However, the population is expected to rise by 2.3 percent p.a., so per capita volume GDP rises 1.2 percent p.a.

The rapid population growth reflects high immigration. Because, given their ages, immigrants are more likely to work, the increase for the non-immigrant population will be less. I am afraid there are many such complicating details. I’ll concentrate on the big picture. I am not aware of any caveat that markedly changes the conclusions from the following analysis. (The calculations are in constant prices. Inflation (of about 1.5 percent p.a.) would add to the amount of data which has to be presented, but it does not affect the story.)

How much is a real rise of 1.2 percent in a year? The average annual household income is about $100,000. That is before tax (taxes will depend on household composition) and typically involves more than one earner in the family as well as social transfers (NZ Superannuation and social security benefits) and investment income. (The average wage is about $66,000 a year for men and $46,000 for women) So the average real increase for a household in a year is about $1200 or $24 a week. (This is before tax.)

Much of the annual increase comes from higher wages and social transfers. The Treasury expects real consumer wages to rise by about 0.6 percent annually. Thus much of the increase for an average household will come from a rise in market incomes.

At this point I could go into a confusing discussion of how households with different compositions of incomes and members are affected by ‘bracket creep’ (‘fiscal drag’), that is, as their nominal incomes rise the tax they pay rises more than proportionally. But I think you will have got the overall message by now: there is not a lot extra to go around.

When the government says its tax package is giving $10 or $20 a week additional to what the market will pay them, it is giving them a big share of the available additional income; the rest is public relations. When a household complains that there is not much in it for them, they are right; there isn’t. The economy isn’t growing enough to give a major increase in real incomes to a wide proportion of the community.

The government has been able to give a fraction more in tax cuts than the above calculations might suggest by restraining its own spending. Part of this restraint is that those on social security benefits will fall further behind average incomes. There is also restraint of wages in the public sector, cutting back services (mental health seems to be seriously underfunded) and cost-shifting so that users will be paying more for their education, healthcare and the like. (The tax and family incomes package is not implemented until April 2018. The government will explain it is an implementation lag, but because it is later, and represents more than one year’s growth, it can be bigger than if it was implemented this year.)

The budget projections have total government spending (adjusted for consumer inflation and population growth) at much the same level between 2009 and 2021 (as far out as projected). That means that spending is falling as a share of the GDP.

The flatness is a deliberate political choice. It was also broadly flat in the mid- to late-1990s under the previous National government (after falling sharply in the Richardson years). On the other hand the public spending share rose under the Clark-Cullen Labour government.

The balance between spending in the private sector and spending in the public sector is one of the few economic issues which is affected by electoral outcomes. Vote right and it is for lower taxes (on some) and fewer public services (for some), vote left and it is the other way around. I shall be surprised if that is the way it is presented to the electorate, but that is the reality.

The other big thing which needs mentioning is that the economic projections suggest that our prosperity continues to be funded by overseas borrowing. The Treasury forecasts say that not only will it be large but that it will increase. They think that the net international investment position is currently 59.8 percent of GDP and expect it to rise to 62.4 percent by June 2021. In the interim we would have borrowed $42.5 billion, almost $45 a week per person.

I would be more relaxed if the funds were being used to invest in activities which would generate earnings to service the debt. The reality is that much of the borrowing will leak into private consumption. (Households save hardly anything.) The cynic might think that foreign lenders are more generous than the domestic government, but in due course they will have to be repaid.

Such issues were hardly canvassed in the commentaries around the budget. They will be in the next financial crisis but few will link the two.

For an argument that the budget’s debt target is too austere, see here.

How Will Housing Prices Fall?

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

Following up my ‘AUT Policy Observatory’ report on ‘Housing Prices Relative to Consumer Prices: An Analysis’.

Last week the Reserve Bank reported stress tests to assess the ability of borrowers to cope with higher mortgage interest rates. Assuming 7 percent p.a. – close to the average two-year mortgage rate over past decades – the RBNZ found that up to 5 percent of current borrowers would be put under severe stress and would not be able to meet day-to-day bills for food and power.

Stress test are an internationally used system of assessing what might happen under certain assumptions. Of course reality is more complicated, but like many measures it provides some insight into possible futures.

I guess one lesson is that the RBNZ will be cautious about raising its Official Cash Rate by the two or so percentage points which would push up mortgage interest rates to near 7 percent but it may have little option if world rates rise. It probably will increase them cautiously if it has to in, say, eight steps of a quarter of percentage point each, taking more than a couple of, or more, years. (In certain kinds of financial crises it may have to bump them up much faster.)

That means that those who are particularly vulnerable to financial stress from high interest rates may have time to adjust. (Whether they will is another matter.) In any case banks have had a signal that they should not increase advances to such potential vulnerables.

The stress-test report is yet another indicator that the housing price boom may be coming to an end (despite the ongoing optimism of some spokespeople for real estate agents). A report I prepared for the AUT Policy Observatory puts what may happen in a historical context. 

I used the longest housing price series available, starting over half a century ago in 1962, comparing it with consumer prices. For most of the period – the first 40 years – house prices rose a little faster than consumer prices, at about 1.4 percentage points a year. There is nothing special about this. You might expect them to rise a little more because land nearer city centres is limited.

However, since 2002 the rise has been much greater at 8.2 percentage points annually (12.4 percentage points if we omit the period when the Global Financial Crisis was at its most intense.) This is so much higher than the past trend that it is almost certainly due to a speculative bubble financed by offshore borrowing. (There are other lesser factors such as the failure to build enough houses and there has been housing pressure from immigration.)

The statistics suggest that our house prices are now about two-and-a-half times higher than they would have been had they risen at their pre-2002 rate. Alternately, housing prices would have to fall 60 percent to be back on track.

Typical home owners might feel poorer (speculative bubbles always make one feel wealthier than one really is – before they pop) but a lower price for their houses would not make much difference. They would still get the same value from living in them and outgoings would be much the same. Even if they have to move, on average the new house price would be proportionally lower.

There are two big groups who would be markedly affected. One are those without their own homes. They would now find it easier to find the deposit for a house and also to service the mortgage, so they might be able to buy their first house.

On the other hand, many who have been investing in housing would be worse off. For example, if housing prices were to stabilise or fall, the investor who has bought a house with as much debt as they could get away with, relying on the tenant’s payments to cover the mortgage while getting their return from the capital gain, would be faced with a zero or negative return. (They are especially vulnerable to rising interest rates.)

(A third potentially large badly-off group is home owners who lose their jobs.)

So how likely is a house price stabilisation or a price drop? The answer is ‘almost certain’, although we cannot be as certain when. Speculative bubbles are always like that. It is possible the market has already peaked; if not it will. (The sooner it peaks, the easier it is for the economy to adjust, but those exposed when it stabilises or falls hope that it wont be yet.)

It is difficult to predict the course of the adjustment. There are so many possibilities, for so many things are going on. I looked at history to make an assessment. It turns out that the typical price fall relative to inflation is about 2 percent a quarter – or 8 percent a year. So we have had not had the price crash some have predicted, presumably based on what has happened in America. My report argues that our institutional arrangements are different from those in the US and they cushion a rapid fall. (It acknowledges that sharp drops are possible in some regional markets.)  So it expects that the housing price falls will be sluggish. However the historical record is that the relative falls have never lasted for longer than five quarters. In fact it is going to take six or so years to get back to the long-run trend at the 2 percent a quarter rate fall. Who knows what might happen over that period – especially if interest rates also rise?

There will be a lot of distress among those who have over-borrowed and among investors who had not realised they were actually speculating. On the other hand, more will be able to buy their first homes.

There is another phenomenon which will add to the pain. During a speculative bubble the housing market is ‘liquid’, in the sense that there is a lot of buying and selling. Speculation adds to the ‘depth’ of a market so that people who have to change their housing – for family reasons, jobs, life style (the garden is too big) or aging (need better access) – have a big range of choices which dry up after the ‘downturn’. Those who service the buying and selling of real estate – including lawyers, valuers, and removal firms as well as realtors – will have less business.

So it will not be easy; speculative bursts never are. History reminds us they happen, especially in market economies when governments fail to take prudent measures early enough.

Housing Prices Relative to Consumer Prices: An Analysis

This entry was posted in Social Policy on by .

This report was published by the AUT Policy Observatory. It’s abstract is

This is an update of a note I wrote in April 2007. It uses a longer housing price series that starts in 1962 (instead of 1980) and finishes in 2016 (instead of 2007). It shows that while historically housing prices have risen a little faster than consumer prices, the increase has been sharper since 2001 (except for the period when the Global Financial Crisis impacted). It goes on to use the historical record to speculate on possible patterns of future prices. The focus is on house prices for the whole of New Zealand. There can be considerable divergences between regions.
The full report is here.

 

 

Is National Stealing Labour’s Social Policy Clothing?

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

Or has Labour lost its clothes or forgotten how to put them on.

Some Labour supporters are disturbed that the government seems to be stealing their policies. Probably National is shifting a bit to the centre, perhaps for electoral reasons (although the party is almost certainly more concerned with New Zealand First than Labour) and because Bill English belongs more to a centre-right tradition than did his predecessor.

But are they stealing Labour’s clothes or is it naked anyway (at least in its economic areas)? In some policy areas Labour still has the initiative. I have been impressed by Phil Twyford, Labour’s spokesperson on housing since 2013, who has successfully led the opposition charge against the government’s lamentable housing record.

I puzzle why the government has made such a botch. Partly it is because housing policy is hard (some of the policy advice the government has been given has been pathetic); partly because there is no central agency in the government for housing policy – policy advisers are scattered all over the place with a plethora of ministers; partly because National seems to defer to developers whose interests do not align with good housing for the population.

Perhaps the housing situation has got out of hand, limiting effective policy responses. You can see the beginnings of it during the Clark-Cullen era. My guess is that had he been returned in 2008, Michael Cullen would have taken various effective initiatives which the following government took too late or has not taken at all. Some would have been an anathema to the right side of National. To be fair, dealing with earthquakes and leaky buildings has distracted attention, while high immigration puts pressure on the housing stock in the short term. Even so, the additional spending on housing in the 2017 budget, was  pathetically small, putting sticking plaster over a wound. After eight and bit years, the National government has still not got its head around the housing problem.

Whatever, Labour has certainly got the government on the run; witness their stuttering policy responses and hysterical reactions to anything Labour proposes. (One cannot help noticing that while in a recent package Labour said it would redeploy the revenue savings for housing purposes, the public dispute centred on the revenue gains with no attention to any expenditure offsets; thus has the New Zealand conversation become imbalanced.)

Labour has been much less successful over ‘social investment’, that is, policies designed to prevent (or ameliorate) social breakdowns before they occur. It is true that Labour has a long history of a ‘social investment’ approach, but I do not recall Labour making the case in the 2008-14 era, so they can hardly complain that National has gazumped them. (National only got the religion in 2014.)

I have a number of reservations about the government’s strategy, but this column focuses on the big one. Both parties have seen sound families as the basis of a sound society.

(There has been a bit of uncertainty as to what is meant by a family; the husband, wife and their three children living together is no longer a norm, except in certain ideological quarters. Forgive me if I skip definitions of what we mean by ‘family’ today, but practically it has to recognise many forms centring on a household living together with mutual commitments among its members.)

The foundation of the sound family was once seen to be a decent income, suitable housing and ready access to adequate health and education. Without these, families become dysfunctional and generate the sort of problems that the government’s social investment strategy is meant to be dealing with. This is not to argue that with adequate income, housing and so on there will be no dysfunctional families, but if these are inadequate there will be a lot more train-wrecks.

New Zealand abandoned the healthy families strategies in the early 1990s when incomes were cut, charges were increased for health and education and housing policy became fragmentedly neo-liberal. The train-wrecks did not start the following day but the conditions for them slowly built up. So we get the Ministry for Vulnerable Children with a big increase in their budget funding and the social investment strategy which is going to be spending a lot too.

We cannot really avoid this sort of expenditure. To reduce government spending and lower tax levels we have been undermining families for a quarter of a century and we are now paying the price for that additional stress.

But we can do something about future generations, reducing their proneness to train-wrecks. The policy is obvious enough. Ensure families with children have a decent income, do something about their housing, make sure they have appropriate access to health and education and other social support. Simple? Yes, but it may take a bit of time to get it in position.

Expensive? I’m afraid the answer is also ‘yes’. Yet doing it would boost the wellbeing of the poor (far more than any reduction of the wellbeing of the rich), reduce inequality, improve the efficiency of the education and health systems and lead to some early important gains as well as longer term ones. (Thankyou the Child Poverty Action Group and the NZ Psychological Society for a report on poverty and mental distress.)

If this sounds a bit like the strategy of the First Labour Government, so be it. For all I know it is the approach of the current Labour Opposition but if it is, I do not hear them articulating it; not the way Twyford has hammered housing, the Greens environmental degradation and Peters his agenda. And if they have not, it is nonsense to say that the National Government has stolen their policy.

Think of it this way using an image from the Maoriland Worker, which was a left-wing journal that began before the Labour Party. National is concerned about the ambulances at the bottom of the cliff. Social investment is an attempt to put some measures halfway up the cliff to prevent the catastrophes falling quite as far (so reducing the need for ambulances). Giving families a sound economic base is putting a fence at the top of the cliff.

Austerians vs Fiscal Conservatives

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History, Pundit on by .

Managing the government’s fiscal deficit need not mean cutting social expenditure.

An economic Austerian is someone who advocates cutting government spending, particularly social expenditures, in order to eliminate a government’s fiscal deficits. (The name is a portmanteau of ‘austerity’ and ‘Austrian’ from the neoliberal ‘Austrian School of Economics’.)

While Austerian policies are currently most evidently being applied in Mediterranean Europe, they are not new to New Zealand. In 1932 the National Expenditure Adjustment Commission made recommendations to cut government spending. Alan Fisher, professor of economics at the University of Otago, satirised the outcome as :

     ‘We object so strongly to having our own incomes further reduced by taxation that we think the incomes of pensioners should be reduced instead. … In times of depression it is necessary to curtail the community’s consumption of many goods and services. Already people with large or moderate incomes have diminished their expenditure on many of the pleasant but unnecessary things which formerly they enjoyed. Most of them are, however, still tolerably comfortable. A great deal of money is spent on motor cars and holidays, on racing and other amusements. But rather than curtail further expenditure of this kind, we think it will become necessary to reduce expenditure on education, in such a way as will definitely handicap the children of poor parents, and make it more difficult than it has been in the past for them to develop their natural capacities in the way which would be advantageous to the whole community.’

Again in the Rogernomics/Ruthanasia era, the government squeezed its spending while giving substantial tax cuts to those at the top which maintained their real incomes while the economy stagnated and everyone else suffered. (There was no similar response from any economics professor.)

Austerians are concerned about diminishing the role and the size of the state and seize upon a fiscal crisis to pursue their political ends, claiming that their ideologically based actions are the only possible response. They are not. You can be a fiscal conservative, as I am, without being an Austerian.

An alternative, as implied by Fisher, is a balanced reduction in public spending and an increase in taxation so that the burden of adjustment is shared in proportion to how comfortably off people are. (It must be acknowledged though, that the Mediterranean economies do not have as sound a tax system as New Zealand has, which inclines them towards cutting expenditure.)

A fiscal conservative remains wary of building up too much government debt. There are a number of reasons.

First, high debt limits the room for manoeuver in a financial crisis. This was well demonstrated in the response to the Global Fiscal Crisis when the prudence of earlier governments enabled the Key-English government to switch from a surplus to deficit (it did by tax cuts) without too much trouble borrowing (the challenge the Mediterraneans, with their high government debt, face).

But note that while our public debt is low, the private sector owes a lot offshore. There is a danger of private debt shifting onto the government books (as happened during the GFC with the finance company crashes and almost did with the trading banks) so we need low public debt. (It is not only financial crises we need to provide for but also major natural catastrophes such as earthquakes, volcanos, tsunamis, epidemics.)

Second, the debt arises from fiscal deficits contributes to a shortage of domestic savings. The savings deficit drives up the exchange rate, making it more difficult for exporting and import-competing businesses to produce profitably, so that in the long term we have less capacity to service the debt. Thus a fiscal surplus may be necessary to offset the private sector’s lack of savings, especially if the borrowing is being spent on consumption goods (which is broadly true during a speculative bubble such as the one we are having on housing).

Third, a fiscal deficit today is a charge on the future which has to service the debt; it enables us to increase our consumption at the expense of our grandchildren. You may think that is a damned good idea or you may have some moral qualms about burdening them.

The third reason provides some guidance to what the additional spending should be on when it is necessary to borrow (say for business cycle reasons). The obvious answer is infrastructure because the grandchildren will benefit from it while they are servicing the debt its funding incurred.

Not on health and education? Are they not social investments? I am very supportive of such social investment but the logic seems to be that it should be paid out of current taxation rather than by borrowing. Consider X for whom the state borrows to fund their health and education spending. If X subsequently leaves the country, the debt servicing is borne by those left behind. The difference with borrowing for infrastructure is that it cannot leave the country.

Curiously, the logic suggests that such borrowing applies to other spending which remains forever in the country. For instance, if we are serious about a predator-free New Zealand (are we?), then it might make sense to borrow for that rather than for another motorway.

What I have set out here is a general framework. There are lots of caveats, for the devil is always in the detail. The takeaway lessons are that you can be a fiscal conservative who supports more government spending without being an Austerian; that a fiscal conservative generally funds the spending from higher taxes; that a fiscal conservative does not favour increasing public debt in the long run (compared to the economy’s capacity to service the debt); that on those occasions when it is necessary to borrow, the additional spending should be directed to what benefits the later generations who will service the debt.

The Price of Labour and the Value of Work

This entry was posted in History of Ideas, Methodology, Philosophy, Labour Studies, Pundit on by .

Do residential care workers deserve the big pay increase they are getting?

The recent historic pay equity deal for aged and residential care workers raises a tricky clash between quite different accounts of how the economy should work. Many people think that workers should be paid at a rate that reflects their social worth; others – mostly economists – think they are paid at their marginal product,  which I explain below.

It is easy to believe that your rate of remuneration measures your social worth – if you are on a high income. But is a person who earns $2m a year, say, a hundred times more valuable to a community than someone on $20,000? Are they even more valuable? Positive economics cannot answer that question; for it involves a value judgement which a scientist cannot make.

There is an economic argument which says that, under a particular set of assumptions, a person’s income equals their marginal product, that is the value their effort adds to the economy. While this can easily be explained in, say, a first year economics course, it turns out to be a circular argument. A wage may equal marginal product but how do we know what is the value of the marginal product? The answer is that it is measured by the wage the market pays.

It also ends up with paradoxes. We do not generally pay for parenting so is it valueless? Surely not. A couple of housewives take in each other’s washing and pay each other and suddenly their value to the economy increases. Again, surely not. Every time one gets a wage rise – as building workers are currently receiving because there is a shortage of them – does the same job becomes more valuable? Really?

Economics has a sophisticated theory of how prices and wages are set but it does not say anything about social value. (To confuse matters, when such things were more muddled in the nineteenth century the theory of price determination was called ‘value theory’ and it still is.) Hence the claim that ‘economists know the price of everything and the value of nothing’. To which they can justly retort that ‘we do know the difference’.

Despite the careful work of economists, the public continues to confuse the two. My guess is that were we to survey what people thought jobs were actually worth, the  sum total of their assessments would exceed the total market production of the economy (even though they may think some jobs are overpaid  – e.g. economists’, financiers’, journalists’, politicians’). They are talking about different things: value is not price.

You may be pleased that those residential care workers are getting a pay boost. It is, if I may say so, often a shit job and I am constantly surprised by the cheerfulness and commitment of those I meet doing it. But are they being paid at what they are socially worth? When I think about the question rigorously, my answer is that I do not know.

So is their pay hike, of between around 15 and 50 per cent depending on their qualifications and experience, justified? I am going to delve into another bit of economics to explain why I think it might be.

It involves the notion of monopsony, a kind of monopoly which is the sole purchaser of, in this case, labour. It can use their market power to depress the price (i.e. wage) of what is being purchased because the sellers have no alternative.

It happens that, for all intents and purposes, there is a monopsonist in the residential care industry. The bulk of the funds of residential care suppliers are provided by the government. Which is why the government has to legislate and fund the new system.

Frankly, I am embarrassed that my government uses its brute market power to suppress wages of those who are, in effect, it employees. Sure, as a taxpayer I have been a beneficiary – on average by $2 to $3 a week – but I have never got any pleasure by passing a false coin. (Okay, I have introduced a value judgement, but I have been open about it.)

Up to 1988 the government was scrupulous about not using its market power when setting the wages of its direct and indirect employees. There was a complicated system of benchmarking. For instance, the pay rates in New Zealand Railways were set by a comparison with comparable occupations in the private sector. (There was high inflation at the time and other public sector payrates – including those of university teachers – were indexed to the railway ones. But every five years or so they went through a separate benchmarking exercise.) The government then passed on to the relevant department (or whatever) the funds to enable the maintenance of the parity.

In 1988 the government switched to a system where it granted each department an annual sum and told them to set their own payrates. By squeezing the amount it provided, the monopsonist could squeeze the pay of those it employed. That was, in effect, the finding of the courts in the case of residential care workers.

Does this mean we are inching back to a benchmarking regime? I am not sure. There are, no doubt other occupations queuing for a similar treatment. (This issue really only applies to the public sector, not the private sector.)

There is one final bit of economics to add. A number of commentators have suggested that the new payrates for residential care workers will flow into other sectors. They may to some degree, but I would be cautious.

Equal pay for public servants was introduced in 1960. It was a response to a disgraceful case involving Jean Parker, an employee of the Inland Revenue Department, who having successfully appealed against a less qualified man being promoted ahead of her, had her salary cut. (Mrs Parker was then the sole earner for the household, her husband being a student.)

There is no evidence that the 1960 pay hike for women in the public sector flowed into the private sector. As a consequence an Equal Pay Act for the private sector had to be passed in 1972.

The economist’s explanation is called ‘balkanisation of the labour market’. which observes that labour markets are segmented and that people do not readily switch from one to another (thus there will not be too many railway workers – or university teachers – who are going to become residential care workers). That means that wage differentials between markets do not rapidly disappear by people moving between them.

Damn, there goes another neoliberal assumption. Actually the whole of this column is about labour markets being far more complex than we pretend. And that we certainly should not confuse a person’s value to society with how much they are paid.

The Productivity Commission tries to think about the Education and Training Sector

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

The report of the Productivity Commission on the Tertiary Education Sector “New Models of Tertiary Education” is complacent.

The report observes that in the decade from 2001 to 2011, the ratio of non-academic and academic staff in the public tertiary educational system rose from about equal to six non-academics to five academics. In fact the number of academic staff has fallen slightly between 2005 and 2011 while non-academic numbers have risen. That probably means that the amount of teaching has fallen because the amount of research funding – and hence research time – has risen.

The report’s figures seem to suggest that the number of students has been falling over the period. (Unfortunately the report makes little effort to provide a comprehensive database, which is a signal that analytic rigour is not a priority.) So perhaps teaching numbers should fall. But why the rise of non-academic staff? Rather than investigate this question – an important issue if you are concerned about productivity – the report concludes lamely that ‘[t]he Commission has been unable to find more detailed information about the particular changes in composition that underlie these data.’

Or take its coverage of the system of Performance Based Research Funding. It reports the unease many academics have about the scheme. Let me remind you of just some of the PBRF’s weaknesses.
            – it has resulted in quality teachers, deemed to have poor research records, being laid off;
            – it distorts research in some subjects away from the deep and penetrating to the quick and superficial;
            – it is administratively clumsy, involving high transaction costs;
            – the measurement system is gamed (academics often use the term ‘corrupt’);
            – it is misused to portray to students the impression of the quality of the teaching and of their degrees (which is another form of corruption).

I would have thought this was an appropriate area for a productivity commission to investigate and suggest improvements. The report does not.

Or to go to the other end of the sector. It is clear that in a number of areas – most evidently for private institutions offering qualifications to foreign students – quality control is inadequate. It relies on students being able to make an assessment backed by the New Zealand Qualifications Authority (as an examination of websites portrays). Students starting a course are poorly placed to judge its quality, while the evidence suggests the NZQA has failed miserably to monitor standards, probably because its culture and focus is on secondary education. At the very least this suggests there is a need for a thorough investigation perhaps concluding that the tertiary sector needs a different agency for external quality assessment. There was no such consideration.

These are but some examples of how the Productivity Commission failed to do its job. To understand why, consider its remark that there is a need to avoid ‘false [and] outdated distinctions between “education” and “training” [and] between “academic” and “vocational” learning.’ Of course one should avoid falsehoods and outdated distinctions, but that does not mean there are no valid or universal ones. The report does not pursue this possibility.

One recalls the 1925 Reichel-Tate Royal Commission saying that New Zealand universities ‘offer[] unrivalled facilities for gaining university degrees but … [are] less successful in providing university education’, which is close to suggesting that they were good at providing certificates but not at teaching anything fundamental. You may think things have got better in the last ninety years but one wonders whether the tertiary education system is drifting back towards a focus on certification.

As far as I know, the lack of distinction between education and training was first proposed in the 1989 Hawke Report on post-compulsory education prepared in the Rogernomics era.

To understand what is going on, go back to Keynes’ ‘[p]ractical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.’

So what is the defunct economics? It is that the tertiary education sector should be run as a competitive industry, with the subtext that the highest performance occurs when businesses (here they are educational institutions) are privately owned and operated. The report quotes favourably a couple of academics who argue this, and is particularly revealing when it responds to the question ‘[i]s a university more like a workers’ collective than a hierarchy?’

For it dismisses the question without even discussing whether it is true. (Most academics would say that their institutions have become increasingly hierarchical and that today the so-called academic staff include increasing numbers of administrators who neither teach nor research which makes the evffective non-academic to academic staff ratio even higher and rising even faster.) The Productivity Commission favours a hierarchical model of governance, more like – as it says – that of a commercial business.

What strikes one is how unreflective the report is. Its writers were practical men and women enslaved to a defunct theory. (One might wonder, ironically, whether they had been educated to question the ideas they hold.)

Simple competitive models do not work well in the vocational training area and even less in educational ones. (This ‘even less’ generates the need to deny the distinction between education and training.) That is why the system has a plethora of government controls to try to make up for the defects in a competitive tertiary system. Given the imperfect underlying model, the government has to keep increasing its interventions. The Productivity Commission’s recommendations will breed further regulation which will require even more non-academic staff to manage them.

My view is that the report should be treated as a historic documen only. Such recommendations it makes should be treated with the greatest caution to avoid implicitly buying into support of the faulty ideology. Ideally, somewhere in the educational sector, a group of academics should propose alternative way of organising the system. They would, of course, risk their PBRF ratings and also of getting laid-off; we cannot have someone in a vocational training sector challenging the conventional wisdom.

Bolger and Neoliberalism

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

If Jim Bolger now opposes Ruthanasia, why did he preside over its implementation?

I quite understand Jim Bolger’s rejection of neo-liberalism. Bolger is an active Catholic (as is Bill English); neoliberal ideology is a long way from Catholic social teaching.

Ironically, there was a Papal Encyclical, Centesimus Annus, in 1991 as Bolger presided over the neoliberal policies for which he and Ruth Richardson are remembered. It was reaffirming the teaching in Rerum Novarum published one hundred years earlier with an approach not unlike that of Social Democracy. Another forewarning was that the New Zealand Catholic Bishops had earlier posted a pastoral letter in which they rejected the principles of the Employment Contracts Act.

 How is Bolger to reconcile his 1991 position with the opposite one he took in his recent interview with Guyon Espiner? Saying he has moved to the left is not helpful. (One right-wing commentator described him as now being to the left of Helen Clark.) He was an active churchgoer while prime minister and had campaigned in the 1990 election on a gospel of reconciliation following Rogernomics.

There are hints in the interview. One is a nonsense. Within hours of coming to office he learned that the Bank of New Zealand needed a large capital injection. True. But it could have been accommodated without burning the entire house down. It was used as a repeat of the currency crisis which seduced the 1984 Lange-Douglas government to panic into particular (neoliberal) policies.

Bolger admitted that he appointed Richardson as Minister of Finance because he was beholden to some party interests – ones which certainly did not respect Catholic social teaching. There was a widely held Wellington view that she out-manoeuvred him over the pre-Christmas 1990 Economic and Social Initiative which set off the first rocks of the avalanche. As I recall, he was out of the country when the statement was being settled, and came home to find a raft of decisions had been made which he could not reverse.

So he spent much time in his first term bridling in the neoliberals, sidelining Richardson and then sacking her after the 1993 election and sacking Simon Upton from the health portfolio when it became too clear it was on a disastrous course. His Mr Fixit was holiday mate and Catholic, Bill Birch who, however, continues to defend the Employments Contract Act (which we are certain was imposed on the government by some of its neoliberal and business ‘friends’).

Bolger is correct that the budget projections indicated a yawning fiscal deficit and that something had to be done. It does not follow that the measures taken were appropriate – certainly not in terms of the reconciliation message of the election campaign. Whatever you may think of the social impact of the measures, Bolger takes some pride in having fixed the unsustainable deficit (and adding to the flexibility in the labour market), albeit at the cost of withdrawing social protection from a lot of people in need of it.

He may well have expected his neo-liberal measures to work in the way his advisers promised. They did not. Hence his carefully crafted ‘neoliberalism has failed’, and the honest admission that he had learned from his mistakes.

But who told him the policies would work? There are not many today who would put up their hand and say ‘this was my advice’; failure is an orphan. When they do, they defend their failures with ‘alternative facts’. For instance, the ECA did not increase productivity. (It increased profitability, which is not the same thing.)

The health redisorganisation lacks any family support. At the point at which the new structure was put in place one minister, Paul East, said there would not be the promised productivity gains the measures were predicated on. A couple of years later, after considerable backtracking, the new Minster of Health, Bill English, announced that the health system was back on the track it would have been without the shambles of the ‘Americanisation’ of the  early 1990s. Sadly many people suffered unnecessary poor health and even death in the interim.

Anybody who had the least knowledge of how health systems function knew that the redisorganisation would not work. Not only were their concerns ignored, but they were completely shut out from advising the government. There were very eminent health economists from overseas visiting the country at the time and they were not consulted either. You were involved if you knew nothing about health systems; I recall seeing papers by the inexpert advisers which would have struggled to get a pass in a second-year health economics course.

The problem was more general. Bolger seems to have had only neo-liberal advisers without any leavening of sceptics. Surrounded by the true believers, Bolger became one, while gullible journalists passed the beliefs onto the public.

Crucially the sceptics proved to be right; hence Bolger’s current grumpiness about his policies. What had happened is that during the earlier Rogernomic period there had been a rooting out from the advice system of anyone who was sceptical, justified by their not being true believers and hence incompetent. Historical reflection tells another story. The incompetents were the neoliberals.

There is a well-established research finding of ³group polarisation²: when like-minded people get together, and speak and listen only to one another, they usually end up thinking a more extreme version of what they thought before they started to talk.

This was quarter of a century ago, but while we are less ideological today I see a similar pattern. Given a choice between a team player and a competent sceptic the system goes for the former, pretending that team players are the experts and the outsiders cannot be relied upon. Not only do the appointed incompetents bring the average down, but they have not the judgement to identify competence and so the appointments they make lower quality standards further.

Twenty-five years after Ruthanasia, its prime minister has vigorously expressed his doubts over the policies which were implemented then. Given our reluctance to go for competence, we should not be surprised if the pattern is repeated in another quarter of a century.

Redesigning the Reserve Bank?

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

Are Labour’s proposals for the changing the way the Reserve Bank operates sensible or nutty (as nutty as the current legislation)?

Section 8 of the 1964 Reserve Bank of New Zealand Act stated that ‘monetary policy of the Government … shall be directed to the maintenance and promotion of economic and social welfare in New Zealand having regard to the desirability of promoting the highest degree of production, trade, and employment and of maintaining a stable internal price level.’

A quarter of a century later, the section was replaced in the 1989 Reserve Bank of New Zealand Act by ‘the primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.’ This reduction of the purpose of the RBNZ in the later legislation is being challenged by Labour’s proposed changes.

One could point out that shortly after 1964 the New Zealand went into a two decade burst of inflation– the greatest the economy ever had – as well as a period of economic stagnation, so the charge under the old act proved ineffective. You may want to argue this was a consequence of events outside the control of the RBNZ. But to argue this is to conclude that monetary policy cannot operate alone to deal with inflation.

The section just quoted in the 1989 Act reflected that at the time monetarist (neo-liberal) thinking predominated (although other paradigms such as New Keynesian think low inflation is generally preferable too). This is nicely illustrated by the term ‘primary function’ in Section 8 and the almost grudging Section 31 which stated ‘the Bank shall, if the Bank considers it necessary for the purpose of maintaining the soundness of the financial system, act as lender of last resort for the financial system.’ It was this section which enabled the RBNZ to give a lower priority to price stability during the Global Financial Crisis in order to maintain financial stability.

I come from an older banking tradition which sees the primary role of a central bank as maintaining order in the money system, so I had no problem with their prioritising financial stability at the time. But what is a central bank to do in between financial crises (as well as trying to prevent them happening)? It sets monetary conditions. Again I have no problems with that. But what should it set monetary conditions for?

I am comfortable with an objective of setting them according to ‘promoting the highest degree of production, trade, and employment and of maintaining a stable internal price level’, just like the 1964 Act said the RBNZ should.

Monetarists are likely to counter that the best a central bank can do is to focus on price stability. I happen to disagree with them but, even so, they should have no problems with a clause like that in the 1964 Act. All it requires is that the RBNZ does its best and price stability, according to a monetarism, is the best they can do. However, suppose monetarism is wrong, and a central bank can do better. The 1989 Act precludes monetary policy from doing so. As usual, the Rogernomes were intolerant of any disagreement with their views.

Why monetarism is wrong is a technical issue even if we ignore the dynamics of monetary control. Monetarists assume there is a stable demand for money; many economists would contest that. The big reduction in inflation since 1989 was not only due to the legislation of that year. There were a number of other important factors: the breakages of the wage and price linkages, the reductions of international inflation rates, a disciplined fiscal stance and foreign borrowing which stabilised the exchange rate. Admittedly belief in the legislation helped reduce inflationary expectations, facilitating the transition to a low-inflation regime – beliefs in magic may be effective among the ignorant.

That is why I am not surprised at the difficulties of the RBNZ has had to get New Zealand inflation to the target of an annual average increase in consumer prices of 2 percent in recent years. (It has just reached it.) Nor would you, if you have doubts about the underlying monetarist theory.

So I am not uncomfortable with Labour’s proposal to include employment as something which the RBNZ should take into consideration in its monetary settings. In fact the Policy Targets Agreement between Governor and the Minister of Finance currently requires the RBNZ to take into account things other than inflation, particularly instability in output, exchange rates and interest rates. Which is why many think the proposed change in legislation will make very little difference except that it will break public thinking out of the monetarist straitjacket. (My impression is that the RBNZ’s thinking is not so constrained – its modelling framework is grounded strongly in the New Keynesian tradition, but the internal dialogue seems eclectic, empirical and draws on a much wider range of economic theories.)

Do I hear some wailing that the change will make the Governor of the Reserve Bank less accountable? What do we mean by that? Did we sack Don Brash when the RBNZ fouled up during the Asian crisis? Certainly not. He may have cost National the 1999 election, but they made him party leader a few years later. Is anyone saying ‘Thank God, Graeme Wheeler is going at the end of the year because consumer inflation has been below the target level on his watch’? Of course not. Can you name a single public sector chief executive who has been significantly penalised (or even incarcerated) because they failed. (You can probably think of a number who should, at least, have been sacked.) Accountability is another magical belief.

Because I am not hooked on this odd notion of accountability, I am not too fussed that the Governing Committee (i.e. the Governor, his deputy, the assistant governor and the chief economist) should formally decide the monetary settings. It already does so informally with the Governor seeking a consensus with his colleagues after robust internal debate. The change I would make is to have all four appointed by the Board of the Reserve Bank, the junior three on the recommendation of the Governor.

I am less attracted to the notion of adding three independent experts to the mix. The problem is finding them, as those with expertise are already engaged. Never forget we are a small country; three of our experts are equivalent to 15 Australians, 60 Brits and 200 odd Americans on a per capita basis – I doubt the US could identify 200 experts for their Federal Reserve Board.

What I fear is that we may dilute the operational independence of the Reserve Bank. Sure, it has made mistakes over the last quarter of a century but it would have made a lot more if there had been political interference, as occurred under Muldoon.

Subject to the previous paragraph, I am comfortable with the broad thrust of Labour’s proposals, although the devil may be in the detail. They are yet another example of winding back the neoliberal extremism of the Rogernomes. But practical policy creep over the years means the proposed changes may not make a lot of difference.

Have We the Right Approach for Regional Wellbeing?

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

Past policies of banging on about economic growth have failed. A new report argues we should strategise differently with more comprehensive goals.

The response by some regional leaders to Julian Wood’s Growing Beyond Growth: Rethinking the Goals of Regional Development while not unexpected was so typical of much public policy discussion. They had not read (or understood) the report but they would march on as though the issues it raises did not apply to them. 

At the heart of Wood’s report is the fact that in a nation of slow population growth there will be regions whose population will be stagnating or even falling. Complicating the story is that in these regions there will be an increasing proportion of elderly, more than elsewhere. Wood argued that faced with this reality the stagnating regions need to rethink their goals.

The regional leaders denied this, instead claiming that they would go on pursuing policies which stimulate economic growth in their regions. Not that they are doing anything effective; the slow growth of many regions has been going on for decades despite the promises from its leadership. There are two major reasons for this hollowing out of the working population.

First, the labour intensity using the regional resource base has been falling – farms are getting bigger but using less labour. This has knock-on effects since the fewer farmers, and other resource-based workers, the fewer there are servicing them in rural towns.

Second, improved connectivity and economies of scale and scope have shifted economic activity from townships to towns and thence to cities. Of course the connectivity is two-way. Many urban New Zealanders spend their weekends and holidays in rural locations because it is so much easier to get there.

Some would add a third: that rural regions do not offer the social and cultural diversity that the urban centres (increasingly) do. Perhaps, but they have their own attractions which the weekend visitors from the big cities value.

Is there a problem then? The character of rural life is changing, which the nostalgic may regret (while taking associated positive changes as ‘normal’). But that is true elsewhere. However the population aging in some regions presents an intense version of the challenge the nation faces. As the share of the working population diminishes – in absolute terms it may be falling in some regions – one has relatively more dependants in the population. Some of the costs of those dependants, such as New Zealand Superannuation, are shared nationally but other impacts are more regional. For instance, a greater share of the rates burden will be carried by the lower-nominal-income elderly, so that a whole range of locally funded activities will become harder to finance.

Almost as an aside, some of the legal regions of New Zealand are practically connected to urban centres as retirement suburbs; the Kapiti Coast has such a Wellington retirement community. If the region becomes too dysfunctional the retirees may move back to their city centres or amalgamate their local authority with it.

This is a reminder that there is considerable diversity among regions. Other regions may not have the retirement suburb role and will find themselves struggling with an imbalanced, and ultimately impoverished, population. Promising to increase the working age population is not really a solution as not every region can do it. For instance, every region sees part of its salvation in tourism. I do not question the case for improving tourist facilities (providing the subsidies are at a responsible level) but while that will be of benefit to visitors (and sometimes locals), not every region can increase its share of the tourist trade.

Wood argues that while regions talk about improving the quality of life, the goals of regional development are solely focused on maximising economic growth. He advocates explicitly developing regional wellbeing indicators and including them in regional development goals. He is reflecting a shift within economics which recognises that material economic output does not reflect wellbeing as much as it is too frequently assumed.

While the report talks about what these indicators might be, I sometimes think the economist’s approach can be too top down. An alternative would be to pay more attention to particular problems that regions face.

For instance, consider regional healthcare. Now we must accept that someone with a heart attack living next to a base hospital is going to get better care than if the same incident occurs in the wop-wops. Moreover, it is not clear to what extent rural healthcare grumbles are simply reflecting the general under-funding of public healthcare. Even so, we need to ask whether, subject to these limitations, we are providing adequate rural healthcare. Rural doctors claim that we are not. It is easy to say that this is not a local authority responsibility but a concern of the District Health Board. Surely though, this is where local councillors could make a difference by investigation and advocacy.

But we should not completely abandon traditional economic instruments. The healthcare challenge reminds us that the physical linkages – by road, broadband and air – to the urban centres are important for quality healthcare. They may be important for economic development too, by tying in the countryside better into booming cities.

There is a risk here, because better connections might encourage the population to move into the city and to relocate town activities there too. On the other hand, there are a number of services which are individually small but collectively large whose providers like to escape the cities. I come across consultants working overseas whose home bases are rural. Living in, or a little outside, a medium-size provincial city has its attractions, especially as congestion intensifies in the biggest cities.

What is required is some hard thinking at the national and local level along the lines Wood advocates. Better that than the piety of local leadership promising economic growth and failing to deliver. By the time their failure is evident they will have retired with a gong from the Queen.

The Changing World Economy; Four Themes.

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

Extracted from a paper delivered to Wellington South Rotary; 22 March

1. The US is No Longer The International Hegemon

There have been only two global hegemons – states with political, economic and military predominance or control over all others.. One was Britain in the nineteenth century. It was replaced by the US from about 1940. It was not just that the US military and economic power was the key to winning the Second World War. After there was a dollar shortage, because the reconstructing rest needed US goods and services but had little to offer in return. It was relieved by the Marshall Plan where the US provided dollars to Europe to help with its reconstruction. (A hegemon may use its power generously.)

That dominance is coming to an end. A key point in international trade was the failure to conclude the Doha (Development) Round in 2008. No longer was the US able to lead the world into a new multilateral trade deal. Instead it shifted to plurilateral deals such as the Trans Pacific Partnership. Intriguingly, President Trump is saying that in future the US will do only bilateral trade deals – which may indicate his assessment of the limitations of US economic power.

The loss of US hegemony is happening on other dimensions. A year or so back, the London-based Economist argued that the US economy may no longer be strong enough to be the banker of the world. It fears that come the next financial crisis (I don’t think the Economist expects one soon), the US, the IMF and others will not be able to bail the system out, even if the US policy response is more coherent than Congress would currently allow. Trump also seems to argue that the US is no longer strong enough to carry the military burden it once did.

What will replace US hegemony? Because over the last two centuries the world has had a hegemonic leader, it is natural to look for a successor. Many will jump to the conclusion that the next hegemon will be China. The more likely scenario is there will be not be one but five economies – China, EU, India, Japan, the US – which will struggle for dominance, with none able to dominate. It seems likely that such a future world order will be very disorderly, something to be much more anxious about than if there was a new hegemon.

 2. The Nature of Economic Globalisation Seems to Be Changing

We have taken it as a norm that international trade should grow faster than production. Between 1985 and 2007 global merchandise trade volumes grew at around twice the rate of global GDP. However since 2012 the rate of growth of trade in goods has barely kept pace with production.

There seem to be three main reasons for this. First, the rapid growth of merchandise exports and imports could not go on forever. Second, a major trade driver has been the falling costs of distance – transport and the related costs of shipping things around. We may have exhausted the productivity gains from, say, containerisation. Third, the growth of merchandise trade has been enhanced by reductions in border protection, but a few commodities aside – that includes our food exports – protection levels are now near zero.

This slowdown is evident only in merchandise trade. It may well be that the digital revolution, which reduces the cost of transporting information, has not exhausted international commercial opportunities and we may see a continued rise in the global trade in services and the dominance of the financial sector.

Additionally, the cost of moving people has come down stunningly. Consequently, migration is increasingly common, leading to rising social and political tensions.

 3 The Rich Economies May Be in a Period of Long-term Stagnation.

Many economists think that the rich world economies may have entered a period of secular stagnation so that their GDP per capita will not grow much in the long term.

The most likely explanation sees economic growth arising from technological innovation. The American economist who has studied this best, Robert Gordon, does not think that current innovations are nearly as significant as those which happened a century ago.

There may be a slightly different explanation of why Gordon cannot find productivity gains in recent years similar to those of a century ago. Many ICT applications seem to have no business case (that is, the owner cannot figure out how to make sufficient cash flow from the business). Yet their services are highly valued by users. In such cases their value may not appear in the productivity and growth statistics.

Low productivity growth and profitability means that there have been fewer opportunities to invest, so that interest rates (and hence profits) are driven down; hence today’s low real interest rates.

That does not mean there will be no growth in material wellbeing and choice; rather it will be different. Meanwhile, many poorer economies may experience rising standards of living as they catchup by implementing the known technologies already available in rich economies.

Business profitability seems likely to decline from past levels This could well mean a dramatic change to the nature of capitalism. It could, for instance, invalidate Thomas Piketty’s predictions of increasing inequality in the long run. But generally such low-profit economies are new territory and we cannot readily predict what exactly will happen.

 4. The Grumbling Populace Seem to Becoming More Politically Powerful.

Examples of the unexpected arising from secular stagnation may be the election of Donald Trump and the British vote for Brexit. In both cases particular circumstances enabled large chunks of the populace to express their displeasure with the ruling elite. Why are there many grumblers in the US, in Britain and, indeed, elsewhere in Europe?

One factor seems to be xenophobia directed towards the increasing international phenomenon of migration.

Meanwhile, the grumblers seem to have suffered a stagnant material standard of living for some time. In the case of some groups of Americans there appears to have been no increase for two and more decades. They blame their income stagnation on the arrival of migrants, although the research evidence does not support that inference.

The issue of opening up an economy to international trade draws a similar conclusion from the grumblers, although the research evidence is a little more complicated. Economic theory does not say that everyone is better off under free trade. What the theory says is that everyone could be made better off if the winners compensated the losers. But generally they do not.

We got away with this lack of compensation when real incomes were otherwise rising, so that most losers were, even so, experiencing a rise in material prosperity. Under secular stagnation there are no such overall rises.

There are always grumblers but they seem to be increasing, probably because of the secular stagnation. Their increased public prominence may be because there are more channels through which to express their discontents. 

Will the grumblers become more politically influential? Undoubtedly the elites – including the US Republican elite – feel badly wrong-footed,. History reports that the Western elites have proved remarkably adaptable to such challenges – which is why the West is democratic. How they will adapt this time and will  they will adapt quickly enough is the new challenge? During the interwar years, the transition sometimes involved authoritarian populist movements – fascism. There are those who discern the rise of fascism in some democracies.

How Much Should the Government Be Spending?

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

Is the fiscal pact between Labour and the Greens a defeat for the left?

The parliamentary left seems cowed by the neoliberals if the fiscal pact between Labour and the Greens is anything to go by. This column focuses on their fourth promise which observes that ‘Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.’ (On the other hand their deficit and debt paths are not so unorthodox; I’ll deal with them in later columns.)

To put the proportion in perspective, the December 2016 Half Year Economic Fiscal Update reported that this Government’s Core Crown spending for the current fiscal year (to June 2017) would be $78.3b, while GDP was $264.8b, a ratio of 29.6%. Were Labour and the Greens in power today, their promise amounts to their spending an extra $1.1b this year.

The list of what additional spending they might desire almost certainly exceeds a $1.1b. (Don’t argue that there will be additional spending in future years as the economy grows; National will also be spending more too. You can fiddle around with phasing but this single-year approach catches the essence of the challenge.)

Here are some of the big items on the list of desires.

  • Labour has pledged to eliminate tertiary fees – oops, that is about $1.2b a year by itself.
  • The public health system is struggling and desperately needs more cash – one estimate is about $2b a year.
  • If the housing crisis is to be addressed the state has to build more affordable houses; I do not see any alternative, the existing approach of leaving it to the private sector having failed over the last eight years. That will require a substantial equity injection even if it is primarily funded by off-balance-sheet borrowing.
  • It is easy to nominate a variety of items in the social services vote which desperately need additional cash. I have seen a list which comes to over an extra $1b a year – it was incomplete.
  • If we want to reduce income inequality in an effective way it cannot be done solely through the tax system (higher tax rates at the top would help, of course) or hiking the minimum wage. It requires substantial transfers of income to families with children. The Child Poverty Action Group thinks about $1.2b a year is required to get rid of the appalling anomalies in Working for Families and restore its effective levels to those of 2010. That would be a start. (I have wondered whether such transfers could be sneakily set up as a negative income tax for that is what they should be.)
  • Helen Clark would want more spent on the Arts, Culture and Heritage portfolio, and most Greens I know want to spend more on the environment, including the Department of Conservation, on public transport and dealing with rising sea levels.

 The list is already long enough to indicate that the target of government spending limited to 30 percent of GDP will strangle most of the leftish initiatives – even if Labour reverses its zero student fees pledge. I add that there may be some areas where government spending might be cut as not being of high priority or as really a hidden subsidy to friends and relations. But that will make only a tiny contribution to funding the above list.

What is a social democrat to think? Recall their view is that the balance between public and private spending is a pragmatic one. Sometimes private delivery manifestly fails as it has done in the environment, health and housing; sometimes the resulting private outcomes are antagonistic to social cohesion and life chances, and the income distribution has to be altered to be fairer. In such cases the social democrat supports government spending.

As an economy evolves one would expect public spending to rise faster than private spending because our demands for these public goods, services and transfers rises relatively faster. A social democrat might expect the ratio of public spending to GDP to increase a little over time (with the burden of taxation going up to pay for it).

As far as I can judge, Labour and the Greens have abandoned such an approach or perhaps they just do not want to distinguish their social democracy from that of National’s. Why vote for them then? The answer might be that, having sealed off any difference between the two sides on economic grounds, one might vote on the basis of non-economic issues, competence or charisma – matters outside this column’s scope.

This unwillingness to increase substantially government spending on, say, health explains an odd feature of the Opposition. You would have thought that when it complains about a particular instance of a (too frequent) failure in the public health system, their grumble would placed it in the context that it is (usually) a consequence of inadequate funding. But they cannot because they are not committed to spending a lot more on healthcare – perhaps a little bit more than the current government, but not enough to make a real difference.

Such whining is not exclusive to the Opposition. Last week the Minister for Children said that there was a serious shortage of child psychologists, therapists and other professionals for her new ministry. Wait a moment! This is the ninth year of her government and they have only just discovered this? Should they not have been doing something about increasing supply over the last eight years? (As tempting as it is, the solution is not the importation of foreign-trained specialists, many for whom English is a second language and who know little about Pakeha culture – and less about Maoritanga.)

There is one other factor in the balance: New Zealand First. I am not certain that they are as much committed to austerity as the other bigger parties. Recall that in 1996 they went into coalition with National partly on the basis of the government spending more, especially on healthcare. It would be easy for them to campaign on ‘a vote for NZF is a vote for more free healthcare’. We shall see.

Why did I start off provocatively arguing the neoliberals are winning? You may recall that at one stage they were arguing for government spending to be restrained to 18 percent of GDP. The spending plans of National, Labour and the Greens are well above that level. But the basic neoliberal approach holds. Government spending is to be discouraged. The fiscal framework of the Rogernomes and Ruthanasia – and the income inequality they have left us with – is not to be challenged.

Congratulations David Seymour. To most people you may seem to be laughingly ineffective. But you appear to be terrifying the parliamentary left.

International Rankings of New Zealand University Subjects (2017)

This entry was posted in Education, Pundit on by .

How do New Zealand’s university departments rank internationally?

Once a year the QS World University Rankings on individual subject areas are published. This reports on the 2017 rankings for 46 subjects. 

Each of the subject rankings is compiled using four sources. The first two are QS’s global surveys of academics and employers, which are used to assess institutions’ international reputation in each subject. The second two assess research impact, based on research citations. Obviously there is a bit of judgement in the rankings but, on the whole, the results at the top are not too different from what a casual observer might expect. Note however, there is little in the assessment of the quality of teaching other than, perhaps, the implicit conclusions of employers.

This note is interested in the extent to which subjects in at least one New Zealand university rank well. It would be, of course, unreasonable to expect every New Zealand university to rank well in every subject it teaches.

Appendix I reports on the places of the 45 subjects which New Zealand universities teach (the missing 46th is Mineral & Mining Engineering). It shows that there is a local university department in the top 50 in almost half, 22, of the subjects. I see no obvious pattern as to which subjects appear. They range from the practical, such as Hospitality & Leisure Management, to the liberal, such as English Language & Literature, and include a number of professions which universities have traditionally taught, such as Law.

Being in the top 50 is not a bad achievement in my opinion. Most New Zealanders in university education can think of, say, 50 overseas universities which they admire, so for a New Zealand department to be up with them is satisfying.

Most of the remaining subjects, 17 of them, are in the 51 to 100 ranking range (the survey does not give precise rankings above 50). There is no immediate pattern evident but look at the residual six. They are all in science and applied science while companion sciences appear somewhat more predominantly in the 51 to 100 range too.

I was surprised, for it seems to suggest that New Zealand fundamental science is not generally doing well internationally. One is not surprised we do well in Agriculture and Forestry and Veterinary Science, both in the top 50, (one might say ‘I should bloody-well hope so’) but Environmental Sciences was only in the 51-100 ranking and I was shocked at the low ranking of foundational Biological Sciences, Chemistry and Physics.

Are we too complacent? For instance, there have been claims of our success in nano-technology, which I take to be covered by the physics and/or material sciences subject groups. Now I know as little about nano-technology as their advocates know about economics and I simply assumed that the advocates of that area were broadly correct when they said they were world class. What are we to think, given this evidence?

Again, I was astonished that earth and marine sciences did not do well. After all, they sit upon one of the greatest earthquake laboratories in the world surrounded by a huge sea.

Three final points. First, looking at the top department ignores the fact that the other departments are not as good. For instance I looked at one of my own disciplines, economics, and while there is a department in the 51-100 range (I was of course disappointed there was none in the top 50, but I was not surprised), the average ranking is just over 200.

Second, the subject rankings may not correspond to the Performance Based Research Funding scores (PBRF). The latter are widely thought to be unreliable because of the gaming that goes on. However, perhaps surprisingly, the QS and the PBRF rankings for overall New Zealand university performance are almost exactly the same. (The exception is VUW which does far better on PBRFs than its ranking in the international pecking order.) Given the amount of academic and administrative resources which goes into calculating the PBRFs, one might wonder whether the exercise is worth the effort.

(The PBRFs do not purport to assess the quality of the teaching of an institution. Teaching quality can vary a lot from research quality, although I notice that university advertising aimed at recruiting students can try to confuse the two. The advice to an undergraduate student who is choosing a university is to use other criteria – ask around about their teaching and student support. The QS rankings may be more relevant to the student choosing their graduate university; if they have had a reasonable undergraduate education they should have a pretty good idea what matters, anyway.)

Third, despite the neoliberal’s aim to intensify competition between universities there is, in my experience, cooperation between colleagues from different departments so that a scholar may not be in a top department but he or she may be a part of a world-class research program.

Finally Appendix II shows the overall rankings for the New Zealand universities (together with their local PBRF ranking). Note that the survey gave all of them a five star rating – in the case of Auckland and Otago it was a five star plus (which is all the internationally top university – Massachusetts Institute of Technology – gets).

I Rankings by Individual Subjects

  • 22/45 are in the Top 50:
  • Places shown in brackets
  • Sports-related Subjects (7 OU)
  • Archaeology (16= AU, 40= OU)
  • Education & Training (20 AU)
  • Veterinary Science (23 MU)
  • Anatomy & Physiology (24 OU, 34 AU)
  • Hospitality & Leisure Management (24 UW, 45= AUT, 48= LU)
  • Agriculture & Forestry (27 MU, 39= LU)
  • Dentistry (29= OU)
  • English Language & Literature (29= AU)
  • Psychology (33 AU)
  • Geography (34 AU)
  • Law (36 AU, 46 VUW)
  • Accounting & Finance (37 AU)
  • Engineering – Civil & Structural (38= AU)
  • Modern Languages (42 AU)
  • Anthropology (44 AU)
  • Development Studies (44 OU)
  • Social Policy & Administration (45 AU)
  • Nursing (50 AU)
  • Sociology (50 AU)
  • Statistics & Operational Research (50 AU)
  • Linguistics (50= AU)

17/45 are 51-100

  • Architecture
  • Art & Design
  • Business & Management Studies
  • Communication & Media Studies
  • Computer Science & Information Systems
  • Economics & Econometrics
  • Engineering – Electrical & Electronic
  • Engineering – Mechanical, Aeronautical & Manufacturing
  • Environmental Sciences
  • History
  • Mathematics
  • Medicine
  • Performing Arts
  • Pharmacy & Pharmacology
  • Philosophy
  • Politics & International Studies
  • Theology, Divinity & Religious Studies

5/45 are 101-150

  • Biological Sciences
  • Chemistry
  • Earth & Marine Sciences
  • Engineering – Chemical
  • Physics & Astronomy

1/45 151-200

  • Materials Science

Not taught in New Zealand

Engineering – Mineral & Mining

 II Overall QS Rankings of Universities

(Bracket shows PBRF ranking in NZ)

  • Auckland                      81 (PBRF = 2)
  • Otago                         169 (PBRF = 3)
  • Canterbury                 214 (PBRF = 4)
  • VUW                           228 (PBRF = 1)
  • Waikato                      324 (PBRF = 5)
  • Massey                       340 (PBRF = 6)
  • Lincoln                        343 (PBRF = 7)
  • AUT                            441-450.(PBRF = 8)

The Changing World Economy; Four Themes.

This entry was posted in Globalisation & Trade on by .

Paper to Wellington South Rotary; 22 March, 2017

Thankyou for the invitation to talk about contemporary world economy. I am not going to give a blow-by-blow account of the challenges New Zealand currently faces; instead I am going to place them in a broad context. What I am arguing – I am uncertain, of course – is that the world economy is entering a new phase.

Because my time is limited I am going to confine myself to four themes about how the world is changing from the one we grew up in.

First, I shall argue that the US is no longer the international hegemon it once was. That issue is so important that I shall stray into the wider issue of what follows.

Second, the process of economic globalisation seems to be changing, with less emphasis on the growth of merchandise trade, more on digital-based trade and greater population mobility.

Third, the rich economies may be in a period of long-term stagnation.

Fourth, the grumbling populace seem to be becoming relatively more politically powerful. I’ll focus on the implications for international trade policy.

 

  1. The US is No Longer ‘The’ International Hegemon

An international hegemon is a state with political, economic and military predominance or control over all others. There have been only two global hegemons. One was Britain in the nineteenth century but its power began to wane in the early twentieth century to be totally replaced by the US from about 1940. It was not just that the US military and economic power was the key to winning the Second World War. After there was a dollar shortage, because the reconstructing rest needed US goods and services but had little to offer in return.

Now a hegemon may be dominant but it can act with generosity as the US did with the Marshall Plan which provided dollars to Europe to help with its reconstruction following the war. One could list other areas – such as human rights – where the US sacrificed its immediate interests to what it judged to be the interests of the world.

That dominance is coming to an end. A key point in international trade was the failure to conclude the Doha (Development) Round in 2008. No longer was the US able to lead the world into a new multilateral trade deal. Instead it shifted to plurilateral deals such as the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership. For a number of reasons, including the loss of hegemonic power by the US, both have fallen through. Intriguingly, President Trump is saying that in future the US will only do bilateral trade deals – which may indicate his assessment of the limitations of US economic power.

It is happening on other dimensions. A year or so back the London-based Economist argued that the US economy may no longer be strong enough to be the banker of the world. It fears that come the next financial crisis (I don’t think the Economist expects one soon), the US, the IMF, Old Uncle Tom Cobley and All will not be able to bail the system out, even if the US policy response is more coherent than Congress would currently allow. Trump also seems to argue that the US is no longer strong enough to carry the military burden it once did.

What will replace US hegemony? Because over the last two centuries the world has had a hegemonic leader, it is natural to look for a successor to the US – perhaps following the sort of difficult transition we saw as dominance shifted from Britain to the US in the early part of the twentieth century.

Many will jump to the conclusion that the next hegemon will be China – and contemplate such a shift with anxiety. I do not think that is going to happen. Rather, the likely scenario is there will be no future hegemon but five, say, major economic powers – the China, EU, India, Japan, the US – will struggle for dominance; yet none able to dominate the others. It seems likely that such a future world order will be very disorderly. It is a world to be much more anxious about than if there was a new hegemon.

 

  1. The Nature of Economic Globalisation Seems to Be Changing

The second disruption is that the nature of economic globalisation seems to be changing. We have taken it as a norm that international trade should grow faster than production. Between 1985 and 2007 global merchandise trade volumes grew at around twice the rate of global GDP. However since 2012 the rate of growth of trade in goods has barely kept pace with production.

There seems to be three main reasons for this. First, the rapid growth of merchandise exports and imports could not go on forever; if it did, countries would eventually be exporting more than then they produced.

Second, a major driver of this trade has been the falling costs of distance – transport and the related costs of shipping things around. We may have exhausted the productivity gains from, say, containerisation. It is instructive that in the interwar period the costs of distance did not fall as fast as costs of production, and the growth of international trade stalled.

The third reason is that the growth of merchandise trade has been enhanced by reductions in border protection, but a few commodities aside – sadly that includes our food exports – protection levels are now near zero.

I have been careful to emphasise this slowdown is only evident in merchandise trade. It may well be that the digital revolution, which reduces the cost of transporting information, has not exhausted international commercial opportunities and we may see a continued rise in the global trade in services.

One place where this is particularly important is the financial services industry, but that is a separate issue for another occasion. More pertinent for today’s presentation is that the cost of moving people has come down stunningly. The nominal cost of air travel is much the same today as it was forty years ago, despite major consumer inflation. Consequently, migration is increasingly common, leading to rising social and political tensions. That raises the future of the nationhood – again a topic which has to be left to another day.

 

3 The Rich Economies May Be in a Period of Long-term Stagnation.

There are a number of economists – including the eminent Larry Summers – who think that the rich world economies may be in a period of secular stagnation and that GDP per capita will not grow much in the long term. Why?

The most likely explanation sees economic growth arising from technological innovation. The American economist who has studied this best is Robert Gordon. He does not think that current innovations are nearly as significant as those which happened a century ago, He cites, for instance, the consequences of the introduction of electricity with any of today’s innovation.

There may be a slightly different explanation as to why Gordon cannot find the productivity gains in recent years that he found a centruy ago. Recall that there is no business case for many ICT applications (that is, the owners cannot figure out how to make sufficient cash flow from the businesses) which provide services which are, however, highly valued by users. There are some huge web-based corporations that have never made a profit. In such cases their value may not appear in the productivity and growth statistics.

It is this profitability issue which worries Summers and all. Low productivity growth and profitability means there have been fewer opportunities to invest, with the consequences that interest rates (and hence profits) are driven down. Perhaps today’s low real interest rates are not just a part of the cyclical adjustment to the Global Financial Crisis but arise from the fundamental consequences of long term technological change which cannot be easily accommodated by private market transactions.

That does not mean there will be no growth in material wellbeing and choice; rather it will be different. Moreover, many poorer economies may be expected to experience rising standards of living as they catch-up by implementing the known technologies already available in rich economies. But there will be limitations; instructively the Chinese economy continues to grow as it catches up, but the rate of economic growth is slowing down from the double digit rates of the past to about half of that.

It also does not mean that commerce will stop. Some businesses will grow, many will stagnate, more will fail; the plodding disciplines of good business practice will remain necessary. As I have said, business profitability seems likely to decline from past levels This could well mean a dramatic change to the nature of the world economy – to capitalism. It would, for instance, invalidate Thomas Picketty’s predictions of increasing inequality in the long run. But generally such low profit economies are new territory and we cannot readily predict what exactly will happen.

 

  1. The Grumbling Populace Seem to Becoming More Politically Powerful.

Examples of the unexpected arising from secular stagnation may be the election of Donald Trump as the US president and the British vote for Brexit. In both cases particular circumstances enabled large chunks of the populace to express their displeasure with the ruling elite – in the one case it was social media, in the other it was a referendum. Looking forward, the issue is why there were, and are, so many grumblers in the US, in Britain and, indeed, elsewhere in Europe. Are they a new phenomenon?

One factor seems to be an xenophobia towards migrants, which – you will recall from the second theme about globalisation – is an increasing international phenomenon. Typically, the immigrants that are grumbled about come from poor economies and are delighted to seize the opportunity the richer economy offers and the resulting rise in their material standard of living.

On the other hand, the grumblers seem not to have had a rise in their material standard of living for some time. In the case of some groups of Americans there appears to have been no increase for two and more decades. They blame their income stagnation on the arrival of migrants, although the research evidence does not support that inference; the grumblers have made the classic mistake of thinking that correlation is the same thing as causation.

The issue of opening up an economy to international trade draws a similar conclusion from them, although the research evidence is a little more complex. Economic theory does not say that everyone is better off under free trade, despite the rhetorical claims of the advocates. What the theory says, is that everyone could be made better off if the winners compensated the losers. But generally they do not.

We got away with this lack of compensation when real incomes were otherwise rising, so that most losers were, even so, experiencing a rise in material prosperity. Under secular stagnation there are no such overall rises, even if the dominate rhetoric bangs on otherwise. Incomes may well be rising for the advocates and their retinue, but by depressing the incomes of the rest; that is where the rising income inequality comes from.

It seems likely that the grumbling is increasing. There were always grumblers but they seem more vocal, possibly because of the secular stagnation – possibly there are more of them. And they appear more vocal, probably because there are more channels to express their discontents. concerns.

Will the grumblers become even more politically influential? Undoubtedly with Brexit, Trump and some of the things going on in Europe the elites feel badly wrong-footed – I include the Republican elite. History reports that the elites in Western democracies have proved remarkably adaptable to such challenges – which is why they are still democracies. How they will adapt this time and whether they will adapt quickly enough remains to be seen. In the past – during the interwar years – the transition sometimes involved authoritarian populist movements – fascism. There are those who discern the rise of fascism in some of democracies.

 

To Conclude

The point about the contextual approach of this presentation is that it places some recent upsets in a context. Trump, Brexit, the attacks on immigrants and the losing of enthusiasm for free trade are not isolated events but are responses to underlying changes, to whit:

  1. US is no longer the international hegemon it once was.
  2. The process of economic globalisation seems to be changing

3 Rich economies may be in a period of long-term stagnation.

  1. The grumbling populace seem to becoming relatively more powerful compared to the elite.

The subtext, especially to the last point, is that elite thinking has not incorporated these changes into its thinking. It is still largely complacent, expecting things to continue much as they have over the last decades – or even earlier as it was when they grew up.

That is what justifies such presentations as this. It will not be exactly right – even if it has avoided predictions – but it is likely to be more right than the mindless conventional wisdom. If it has shaken some of us out of that complacency, it will have achieved its purpose.

Is the Government Expecting a Migration Boom?

This entry was posted in Growth & Innovation, Labour Studies, Pundit on by .

A recent government report projects huge increases in employment but at least 72 percent of those jobs are to go to immigrants.

I was a bit startled by a report recently released by the Ministry of Business Industry and Employment which forecast an extra 480,000 jobs over the next ten years. Those with a memory will recall that the 1981 ‘Growth Strategy’ promised a similar number of jobs over a decade but proved to be more a public relations exercise than a serious analysis.

That would be an unfair assessment of the Mobie report, which is forecasting – thinking about – the occupational structure of the future labour force.

The big ‘take’ for me is from a table on page 7, which says that 57 percent of the job growth will be in highly skilled occupations whereas only 11 percent will be in unskilled ones. In contrast today the unskilled make up 16.5 percent of the labour force and the highly skilled 43 percent. Perhaps you are not surprised, but I do not see a lot of serious consideration of the implications. Hopefully, the report will encourage Mobie to think about the problem of upskilling. (There are also useful projections of the future employment structure by industry and a list of those occupations which will experience the highest growth.)

However, there is an easy solution to the problem of our failure to upskill our labour force to which the report’s publicity handouts draw attention. The forecasts are predicated on very high rates of migration with, presumably, the implicit assumption that we can get the skills from overseas while New Zealanders fill the unskilled jobs.

The report’s forecast is based upon about 460,000 net arrivals over the decade. (‘Net’ migration is total immigrants less total emigrants.) The figure is not actually stated so I have had to match it with the official New Zealand labour force projections. (They only forecast up to 250,000 net migrants so I have had to extrapolate.)

But wait a moment. According to Statistics New Zealand, if there were no net migration, the labour force would increase by only 136,000 in the decade. So what the publicity handout was saying was that at least 72 percent of the 480,000 promised jobs are for migrants, not for New Zealanders.

I remind readers that I am not antagonistic to migrants although we are seeing a rise in such antagonism in many parts of the rich world, including among some New Zealanders. Recall I argued that the anti-economic case against immigration is not compelling, even if it is easy to make. (I acknowledge there may be housing problems in the short-term.) But the positive case does not include the argument that migration gives us additional economic growth of output, even though it may not generate per capita growth for New Zealanders. What immigration offers is a more vibrant and open society. (For a thoughtful contribution to the economics of immigration by Julie Fry, a Treasury official, see here.)

However, there is a limit to the ability of a community to absorb immigrants. I’ve not been able to find any estimates of that social capacity. It is clear that depends upon the community’s attitudes (ours are generally positive) and its willingness to adopt policies which integrate the new arrivals. That is not the same as assimilation, for it welcomes the newcomers’ cultural differences and works to incorporate them holistically in society. (If I might dislocate a shoulder by patting ourselves on the back, I reckon we have done pretty well with Muslim migrants compared to some countries.) My guess is 460,000 net in a decade is too many unless we make a huge effort.

That does not mean I welcome all immigrants in the way that this government does. I remain baffled by the story of Peter Theil, the German-American who was given New Zealand citizenship under unusual circumstances, even though he hardly ever comes here. (The failure of the parliamentary opposition to elicit more information tells us something about either them or about parliamentary procedures.) Theil may now be a citizen but I would be surprised if he was a resident for tax purposes. Someone who resides here for less than half a year has to pay tax to New Zealand only on their reported income from New Zealand activities, but not on their entire income. (Details here.) It is said that tax is the price of citizenship. Our price seems to be low.

In fact most migrants pay tax. To get New Zealand citizenship one usually has to live in the country 70 percent of the year, which means their status is as a resident for tax purposes, paying tax on all (declared) income (less any tax paid elsewhere).

Some of our politicians are very aware of the grumbling against migrants. That does not mean that we can expect a significant anti-immigration party since to govern it would have to form a coalition with parties with more benign views towards immigrants. But expect dog whistles; the Mobie report’s migration assumption is a gift to them.

Footnote. The Mobie report seems to have reached its migration forecast by starting with projections of the rate of annual economic growth of 2.8 percent. Given the labour productivity growth of 0.9 percent a year, the forecast needed a substantial increase in the labour force, which could only be supplied by migration. Although not given, the implicit conclusion from the report is that New Zealanders cannot expect a high growth rate of their material consumption in the future. You would not expect them to unless there was a substantial improvement in the quality of the labour force.

Destabilising New Zealand Superannuation

This entry was posted in Pundit, Retirement & Savings on by .

Regrettably, the government’s recent announcements on the public provision for retirement have added to the uncertainty the young face. 

The Government’s announced proposal to raise the age of eligibility for New Zealand Superannuation (NZS) is a real botch job. I’ll leave others to write about the political botch; here the focus is on the policy.

Focusing on affordability confuses matters. Certainly NZS is affordable at whatever age you choose if it is a higher priority than other government spending (such as on healthcare) and one is prepared to pay the tax to fund it. In my view the relevant issues are fairness and adapting to new circumstances, especially increasing longevity.

When 65 was introduced as the age of entitlement of the Old Age Pension in 1898, life expectancy at that age was about 13 years. The latest estimate (for 2012-4) was 20.1 years. The age has been rising quite quickly recently. When the current age of entitlement was set (by a consensus between the National and Labour parties) in 1992 the life expectation at 65 was 16.8 years. With that rise of 3.3 years in 11 years goes improved health and greater ability to work (although not every one of the extra years will be healthy ones).

Projecting this increase to 2040, the average life expectation at 65 may well be over 28 years. At 67 it may be over 26 years. What the government is proposing is that the average elderly will spend a quarter of their life on New Zealand Superannuation.

It may be not be a high-quality life because, inevitably, their healthcare will be squeezed. We are promised that 90 percent of our rivers will be swimmable in 2040 (providing you don’t put your head under water). However many of the elderly won’t be able to swim because they will be on waiting lists for hip and knee operations.

This rising life expectancy among the elderly is at the heart of the age of eligibility policy. Suppose we all lived to a hundred. Would it make sense to provide us with a retirement pension from the age of 65?

That suggests that we should set the age of eligibility in terms of the life expectation of retirees. As the elderly’s longevity increases the age should rise – probably at a rate of about three months every year starting NOW – not so far in the future that the decision is irrelevant. (I acknowledge, as I did earlier, that not all the additional years will be of good quality health and there might need to be a refinement taking this into account.)

More subtly, we are not thinking about the difference in the needs of the younger elderly and those of the older elderly. It is not a question of cash income but the latter typically need more social support. It is easy to claim that the healthcare system should look after them, but the evidence is that the public system is underfunded and struggling to do so. The struggle is likely to intensify as there are more older elderly (and they on average are older). Is adequate healthcare for the old elderly ‘affordable’? In my judgement it is far more important to support the older elderly with healthcare than the younger with income.

So the policy issue is not simply a matter of choosing an age of eligibility for the state-provided retirement pension. Whatever the age is, we need to think about social support for the elderly, we need to think about what happens to those in need below the set age and we also need to think about the private savings which top up the public pension – although currently, housing aside, the additional income is not a lot for most people. (There are also problems with the regime in relation to those with overseas entitlements.)

(I puzzle over whether we should have compulsory private retirement savings. Liberals like to leave people to make their own decisions; behavioural economics suggests that many will make poor-quality ones about the long term – as they will judge for themselves later in life.)

We did not get a comprehensive package in the recent proposal from the Government; all it did was change in the age of eligibility. Admittedly the Government cannot easily admit that it has been skimping healthcare funding, while it has shown little enthusiasm for Kiwisaver. The Retirement Commissioner’s report has some useful suggestions for improving Kiwisaver but it does not really address the big one of whether it should be made more compulsory.

(The announcement included the proposal to switch back to 20 years ‘residence for eligibility for the universal benefit. Ironically it was Muldoon’s National Government which shortened the period to ten years in the mid-1970s. It may be only a small saving but it is a sensible signal that NZS is an entitlement by citizenship. It was 25 years residence in 1898.)

What is most disturbing about the Government’s announcement is that while pretending to settle the question of the age of eligibility it has actually politically destabilised the issue. Passing a parliamentary bill – as it plans next year– does not mean that the scheme will be untouched for 23 years.

(A particular worry is that when we have some major financial crisis a part of the international bailout deal will be cutting the levels, conditions and eligibility of NZS; this is what happened in southern euro-zone countries after the 2008 Global Financial Crisis. The thought is too horrible to contemplate in detail, but I can say that a lot of public policy is driven by the need to make the economic and financial system robust to such a threat.)

The only way to settle that instability is by a political consensus (as there was in the early 1990s when the age was raised from 60 to 65years). But while each party knows in its heart what has to be done, the temptation will always be to undercut the other parties. It is not a coincidence that when Labour supported raising the age of eligibility, National opposed it and now it is the other way around. My guess is that the way to stability is a Royal Commission with (almost) everybody accepting its recommendations – while, of course, grumbling about them.

What we can be sure of is that the age of eligibility will remain on the political agenda and we can be pretty sure that anyone 50 or younger (i.e. born after 1968) will not get their New Zealand Superannuation at 65. Otherwise in the current political environment all else is uncertain.

Footnote: It is sometimes argued that there should be an earlier age of eligibility for Maori,given their shorter life expectancy – which, incidentally, is steadily catching up to the national average, but is still some way behind. However the same logic would lead to Maori being paid a lower rate since Maori wages are lower than average. In 1938 the Labour Government decided that there would be no racial discrimination in the public provision of state retirement support although there was fiscal advice to the contrary. They made the right decision.

A similar logic says that women should get their NZS later. Yeah right.

Brexit: How New Zealand Might Cope

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

This is a follow up ‘Brentry: How New Zealand Coped’, setting out some of the challenges which face New Zealand today.

The strategic view that Britain needs to be in the EU remains universal among New Zealand strategists. However the Leaves did not vote geopolitically but on domestic considerations including, apparently, resentment of immigration and of the unequal gains from trade. New Zealand has little alternative but to accept the direction the Brits are taking, albeit with regret.

Withdrawing from the EU is proving more difficult than anyone anticipated. Almost every week there is a revelation of an additional complication. Two years to negotiate the deal is just absurd, indicative of how little David Cameron, the previous British prime minister, had thought things through.

I do not think any informed person – anywhere in the world – takes seriously Theresa May’s view that Brexit represents no retreat, but rather that it will be the making of a ‘truly global Britain’ and that as a result the country will be ‘more outward-looking than ever before.’ The hard fact is that, as every New Zealander working in the international sector knows, being a small country isolated from the big trading blocs is a huge challenge. Sure, Britain is bigger than New Zealand but small compared to China, the EU and the US.

New Zealand’s interests will be challenged by Brexit. A couple of examples. We are currently in early negotiations with the EU over a free trade agreement. Almost certainly they will be delayed because the EU will be focusing on the Brexit negotiations; in any case they were going to be tortuous because they involve every member of the EU agreeing to the deal which, if it is of any significance to us, is going to affect their key farm interests.

Second, because of Brentry and subsequent multilateral negotiations, such as the Tokyo and Uruguay rounds, we already have various trade deals with the EU. However they are not with its individual members. What happens to them when one leaves?

For instance, there is a New Zealand sheep meats quota for the whole 28 countries; about two fifths of our lamb goes to Britain. That quota is ‘bound’, in effect it has a standing in international law and cannot be unilaterally abrogated. What happens to it if Britain leaves? We could insist that we will continue to have access for the whole quota to the remaining 27 countries and then negotiate a separate one with Britain outside the EU in exchange for trade concessions here. I imagine the EU will want us to agree that the quota be divided between the EU27 and Britain. The permutations are enormous; it will be a miracle if they are settled within two years, given there are many other examples like this involving other commodities and other countries.

So tiny New Zealand will be directly involved in some aspects of the Brexit negotiations even if we find it hard to get the EU 27 to focus on an FTA. Meanwhile, according to EU rules, Britain cannot begin negotiating trade agreements on its own behalf until after it leaves the EU.

During the Brentry negotiations, half a century ago, New Zealand’s negotiating strength included some ‘moral’ weight. At that time more people living in New Zealand said they were British-born than said they were Maori, underlining emotional attachments between the two countries. But those attachments have become attenuated with the external and internal diversification.

I won’t say we had a veto on Brentry in 1973, but undoubtedly the British government of the day wanted our support because it feared the anti-Brentry forces would use New Zealand to intensify their campaign.

That won’t happen this time. Instead of moral considerations we are going to have to depend upon the WTO rules. In principle that should mean that we will be no worse off – except where we have better deals than the legal bindings. And undoubtedly, we will suffer if the British economy suffers, as it is expected to. (However, except for some products, ties of sentiment mean New Zealanders tend to overestimate the importance of the British economy to us today.)

Moreover with a few exceptions, such as the RCEP (the Regional Comprehensive Economic Partnership of 14 Asian nations and Australia and New Zealand), other international trade deals are going to go be put on hold. That particularly affects our campaign to reduce world food protectionism in the interest of consumers and efficient farmers.

Of course, Brexit may not go ahead. A possible scenario is that when the deal is agreed, Britain will have a second referendum offering a real choice between the specific Brexit terms and Remain. May’s ‘hard-Brexit’ is designed to meet the demands of the extreme Brexiters, especially over migration, but it sacrifices a lot to do that. The softer Brexiters may reject the hard-Brexit terms. Already there is a growing group of doubters – Bregretters.

Although there are hard liners among the other 27 EU, who will not offer Britain an easy deal, one hopes commonsense will mean the 27 will leave open the option of Britain abandoning Brexit when the terms are settled and it becomes evident (to just about everyone) how painful the exit option is.

What may be crucial may be this year’s elections in France and the Netherlands, where immigration issues are expected to play an important role. Supposing that the electoral outcomes do not totally disrupt EU unity, it seems likely, nonetheless, that the EU will soften its commitment to free movement of labour. That would make it easier for Bregretters to change their minds.

Whatever, New Zealand’s global trading ambitions – especially over better access for its farmer products to protected markets – are going to have to be put on hold. But we will still pursue quality trade deals whenever the opportunities arise even if there are less of them.