Brentry: How New Zealand Coped

This entry was posted in Globalisation & Trade, Political Economy & History, Pundit on 27th February 2017 by Brian Easton.

This is based on a note that I prepared for a journalist. It is a lead into the next column which is on ‘Brexit: How New Zealand Might Cope’.

New Zealand has an unusual situation in the world economy. Despite being among the affluent economies, its success is vitally dependent upon the export of some primary products (especially dairy and meat products) whose domestic production is brutally protected in many jurisdictions. Thus a considerable effort in its trade negotiations is aimed at rolling back the protection of food production in other affluent economies. (An additional complication has been the dumping from these protected markets into third markets. The 2015 Nairobi package prohibited such dumping but it will have to be policed.)

The widely held view at the time (and often today) by the general New Zealand population was that Britain entering the European Community (EC) in 1973 was an economic disaster for New Zealand. It was not a disaster. Rather a number of unconnected events meant New Zealand faced considerable challenges in the decade after 1966. It was easy to blame this all on Brentry, especially as there was much emotional dismay at the joining. I sometimes liken it to the attitude of a child to mummy rushing off with a continental gentleman, convinced that everything dreadful was caused by this elopement.

In contrast, some time in the 1960s New Zealand strategists concluded that it was almost inevitable that Britain would join the European Economic Community (EEC). It was based on a practical assessment that Britain had a diminishing role in the world both as its empire unravelled and as other economies became more important. In the New Zealand strategists’ judgement, Britain joining the EEC (it became the EC in 1973 and is now the European Union (EU)) would have greater economic strength and a greater role in the world; New Zealand would be a beneficiary. The view, I suppose, was an affectionate child wanting a new life for the widowed mother.

By the early 1970s the New Zealand position was that, as Bentry was in Britain’s best interests, it supported the United Kingdom’s entry into the EC providing the particular interests of New Zealand were not damaged. The logic of external policy, shaped by this belief, was export diversification.

New Zealand began diversifying its exports in the 1960s. There were numerous policy measures, the most obvious being NAFTA, the New Zealand Australian Free Trade Agreement, signed in 1966. But others included the export performance tax incentive, the 1967 devaluation and an increase in diplomatic missions to potential markets. Other markets, such as Japan and the US were opened up (often to a limited, but helpful, degree). There was also a change in attitude as the upcoming generation saw commercial opportunities offshore which were not available in the insulated economy.

There was also a bit of luck. The oil price shock of 1973/4 hit New Zealand, as it did other affluent economies, with higher energy prices. But the oil producing economies of the Middle East increased purchases of sheepmeats which proved to be lucrative.

According to economic historian John Gould, who died recently, New Zealand had the greatest external diversification in product and destination of any OECD economy between 1965 and 1980.

It was butter for which it proved hardest to find alternative markets. As a consequence New Zealand negotiators sacrificed its British cheese market in order to maximise its butter quota (often pronounced ‘budder quoda’) into the EC. (Older readers will recall TV advertisements for a ‘bigger block of cheese’ as we tried to sell more at home because we could not sell it in Britain.)

However, by far the most important economic shock of the time was the 40 percent collapse of the wool price at the end of 1966. At the time wool made up 40 percent of the export revenue so it represented a 16 percent loss of export revenue – virtually overnight.

The wool price temporarily recovered during the world commodity price boom in 1972/73. But the oil price shock of 1973/74 together with the collapse of the world commodity price boom took wool prices back to the level they had been in the 1966 to 1971 period. There has been no recovery.

Critical for New Zealand, wool and sheepmeats were joint products. The collapse of the wool price thereby compromised the sheepmeats industry. Fortunately farmers adjusted and lamb remains one of New Zealand’s largest exports, but today it is sold to many offshore markets in contrast to almost only to Britain before 1966. Today wool export receipts today account for only about 1 percent of New Zealand’s total earnings from goods and services export.

This required considerable adjustment of the whole economy. Not unexpectedly, New Zealand entered a period of slow growth for at least ten years.

Of course, New Zealand publicly said it was barely satisfied with the deal it got out of the EEC negotiations. Of course, the terms could have been better. But a reasonable quota for butter and lamb and a phasing out of the cheese quota (which was partly reversed under the Tokyo Round) was not a bad deal and could be coped with – with some difficulties of course.

The externals shocks of 1974 tipped the New Zealand economy back into the recession/slow growth phase of the 1966 to 1971 period. But it was not the British entry which caused this long recession. It could not have been for, insofar as they were binding, the quotas were phased out to lower levels over a longer period. Other external economic events were disrupting the economy.

So New Zealand was preparing for British entry to the European Community for almost a decade before it occurred especially by diversifying what it exported and where it exported to. The deal New Zealand got was reasonable and involved phasing the quota levels, thereby easing the adjustment. It could have been (or was) coped with but the wool price crash, in particular, and other external events were much more damaging and confused the impact of British entry in the popular mind.

A Social Democrat Assesses How is the Land Faring?

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History, Pundit on 19th February 2017 by Brian Easton.

Ill fares the land, to hastening ills a prey,
Where wealth accumulates, and men decay:
Princes and lords may flourish, or may fade—
A breath can make them, as a breath has made:
But a bold peasantry, their country’s pride,
When once destroyed, can never be supplied.
The Deserted Village: Oliver Goldsmith

This column follows on from ‘Whence Europe; Whither Europe’.

Less than a year before he died, Tony Judt, paralysed from the neck down by motor neuron disease, gave a much-acclaimed two-hour public lecture. Shortly after he extended it to a book, Ill Fares the Land: A Treatise on Our Present Discontents, setting out his commitment to social democracy.

He was mainly addressing an American audience, which tends to use the term ‘liberal’ as an alternative to ‘social democrat’.* Judt, an intellectual historian, uses liberal in its classical meaning, writing:

‘A liberal is someone who opposes interference in the affairs of others: who is tolerant of dissenting attitudes and unconventional behaviour. Liberals have historically favored keeping other people out of our lives, leaving individuals the maximum space in which to live and flourish as they choose. … Social democrats, on the other hand, are something of a hybrid. They share with liberals a commitment to cultural and religious tolerance. But in public policy social democrats believe in the possibility and virtue of collective action for the collective good. Like most liberals, social democrats favour progressive taxation in order to pay for public services and other social goods that individuals cannot provide themselves; but whereas many liberals might see such taxation or public provision as a necessary evil, a social democratic vision of the good society entails from the outset a greater role for the state and the public sector.’

Judt accepts that social democracy is hard to sell in the United States but he sees the European dilemma as different. While many European countries have long practised something resembling social democracy, he says they ‘have forgotten how to preach it’. Instead today’s social democrats are defensive and apologetic. His book is a feisty alternative in which he applies his principles to some particular examples.

I read some of the reviews of the book when it was published. What struck me was that his critics generally seized on one or other of his examples rather than engaging with the underlying philosophical issues. (For instance, as a train buff, Judt’s defence of a public railway system makes more sense in a British context than it does here.)

The book reminded me that my position can be a bit too economically narrow. I tend to assess the need for collective action in terms of economic ends so that I support public healthcare because it gives demonstrably better healthcare than private provision. Judt is arguing that we should also celebrate such collective action; that it is vital for an effective community and nation. Thankyou, Tony, for the reminder.

Yet Judt is deeply puzzled why social democracy does not get more public support – especially among the young. He can identify when the support collapsed: in the 1980s under Reagan and Thatcher (and Rogernomics). But why?

Part of the story might be found in his explanation of the collapse of the Soviet Union and its satellites. They had been governed by men born before the Great War, who clung to power rather than adapting to changing circumstances. Those who followed them could not work out how to transition to the new world of globalisation, rapid technological change and affluence (among other things). Their failure led to the ending of the regimes that ran the Soviet Empire.

Postwar social democrats were a generation younger but they too could not work out how to adapt to the evolving circumstances – in part created by the success of social democracy. The neoliberal revolution (including Rogernomics) simply swept the generation aside; Roger Kerr remarked (with pride) that the age of business chief executives had been cut by ten years. But it also swept aside many of the achievements of social democracy.

Why did social democrats not fight back? Many did, but it was from positions of weakness whereas once they had held all the political heights. More fundamentally, I think, most social democrats have tended to be backward looking, trying to resurrect the policies of the past rather than ask what had changed in order to renew policies for the changing circumstances – maintaining the principles of social democracy but applying them differently.

Suppose you asked a leftish or centrist politician – or an aspiring one – whether they were a social democrat. They would probably answer ‘yes’. Ask them what it means and they would, rather than a vision, probably nominate an incoherent handful of policies; few would be particularly well articulated; most would be backward looking. Ask them what caused Rogernomics, they would cite (wicked) people rather than the inability to adapt to underlying economic and social change.

Not surprisingly then, today’s politics is more focused on personality than on principles. (No, this is not only about New Zealand social democrats – it is about all politicians, here and abroad.) That leads to the identity and single issue politics which Judt is scathing about.

‘We are all familiar with intellectuals who speak only on behalf of their country, class, religion, ‘race,’ ‘gender,’ or ‘sexual orientation,’ and who shape their opinions according to what they take to be the interest of their affinity of birth or predilection. But the distinctive feature of the liberal intellectual in past times was precisely the striving for universality; not the unworldly or disingenuous denial of sectional identification but the sustained effort to transcend that identification in search of truth or the general interest.’ **

Not surprisingly, so much political criticism is grumbling about the current situation, implicitly accepting the system except that the grumbler thinks he or she could run it a bit better. What is almost invariably missing is a explanation of why the system is failing or how it can be significantly changed.

Ill Fares the Land is filled with shrewd insights. You would not expect Judt to have predicted Trump who only appeared as a politician six years after he died. But he points to the 43 percent of voters who endorsed Sarah Palin in 2008; it is only a small step to 48 percent for Trump in 2016. So Judt broadly got it right although I expect he would be as uneasy as are most social democrats.

From Whence Europe? Whither Europe?

This entry was posted in Globalisation & Trade, Political Economy & History, Pundit on 13th February 2017 by Brian Easton.

Although completed a decade ago, Tony Judt’s history of postwar Europe presaged some of the challenges that it faces today.

Shortly after the collapse of the Berlin Wall in 1989, one of our greatest contemporary historians Tony Judt resolved to write a book to sort his thinking out. It took fifteen years, but the resulting Postwar: A History of Europe Since 1945 is an (almost 900-page) extraordinary achievement.

It is not just that he covers sixty years in surprising detail, or refocuses Europe away from the west – the way we tend to think about it – to the centre which, until recently, was dominated by colonies of the Soviet Empire. He does so with style, wit and good judgement and with a very wide knowledge of the historical details. He is a ‘Romantic European’, although as much as loves the ‘Idea of Europe’ – a liberal prosperous community in which individuals resolve ancient tensions by adopting a European identity which transcends the traditional divisions – he is aware of the authoritarianism, the violence, the intolerance and the racism which have bedeviled it (as elsewhere). One of his many bons mots is ‘Silence over Europe’s recent past was the necessary condition for the construction of a European future.’

It is easy to say that the collapse of the Soviet Empire and, shortly afterwards, of the communist regime was inevitable, especially if you were not paying attention. (Judt remarks ‘Nothing in its life so became the Soviet Union as the leaving of it.’) But what was to replace it? Judt’s nicely balanced picture is that many of the characteristics of the succeeding regimes followed on from what had gone before. (Compare Putin with his Communist predecessors). Nor is it obvious that things were entirely better for the colonials after the Empire fell. Judt recalls that many celebrated the arrival of ‘European’ values of liberty but regretted the loss of economic security. (Despite the promises, not everyone was materially better off after the collapse.)

Although presenting a narrative history, Judt, who is also a fine intellectual historian steeped in European political thought (and literature and films), often adds a throwaway remark which leaves the reader pondering. Here is an extract which deserves a lot of consideration:

‘Britain’s Labour Party [arose] … from its origins [as] a labour movement rather than a socialist party, motivated above all by the concerns (and cash) of its trade union affiliates. It was thus less ideological—but more blinkered. If asked, Labour Party spokesmen would readily accede to the general objectives of continental European Social Democrats; but their own interests were much more practical and parochial. Precisely because of the built-in stability of British (or at least English) political culture, and thanks to its long-established—albeit shrinking—working-class base, the Labour Party showed little interest in the innovative settlements that had shaped the Scandinavian and German-speaking welfare states.’

Judt’s passage is distinguishing Labourism from Democratic Socialism (which is different from Communism of the Soviet kind and Social Democracy, which Judt supports – I’ll explain what he means in a later column). Aside from the institutional differences, I think what he is saying is that one strand of the Left gives a greater role to social delivery via the labour market and unions than do others but that the delivery is not always efficient; indeed it can discourage progressive developments.

For example, American healthcare is primarily delivered via employment entitlements. (Obamacare has been an attempt to provide for those without paid work.) The consequence has been that Americans get a very poor health deal. (They would have got an even worse one if the unions had not taken action.) Another is that trying to resolve inadequacies in the income distribution by labour market interventions such as minimum wages means that those without full-time employment (including children) will suffer.

(Of course a Democratic Socialist or a Social Democrat sees a role for a strong independent union movement but it is only as a part of a more holistic society.)

The book ends with some reflective chapters on the state of Europe at the time of publication in 2005. They are remarkably perceptive, setting out the challenges which Europe faces today. It does not include Brexit, Judt a Brit based in America after years studying continental history, could surely not have envisaged that – a romantic European would have been appalled by the thought. But he gets right the difficulties of the European Monetary Union, the tensions between nationalism and Europeanism and the incipient racism evident in the anti-immigration movements.

(The book does not predict Trumpism either; domestic US politics is for another book. I was surprised at the relative minimal role Judt assigns to the US in the development of postwar Europe. His vision is that were the US to fail in its international responsibilities, Europe should fill the gap. We shall see.)

Alas the book will not go into a second edition. Judt tragically died from motor neuron disease at the age of 64 in 2012. Before doing so he turned from narrative history to a polemic envisaging al vision of a social democratic future. My next column will be about Ill Fares the Land.

Big Data – Good?

This entry was posted in Pundit, Statistics on 6th February 2017 by Brian Easton.

Big data can be used for good and it can be used for evil. Some recent public research illustrates the former but there are doubts about some private uses.

It is not generally realised that Statistics New Zealand has a large research database – the Integrated Data Infrastructure (IDI) – containing microdata about people and households from a range of government agencies, SNZ surveys including the 2013 Census, and non-government organisations. It contains over 166 billion facts – and is continually growing.

Before you panic – you are probably in there – SNZ has very strict privacy controls to limit the abuse of the database. It is hard to think of any further controls without making it useless for researchers, although ultimately its security relies on their integrity and that of those who work at SNZ. (One is that the data is ‘de-identified’ that is personal identifying information, such as names and addresses, is removed and identifiers, such as IRD and NHI numbers, are encrypted.)

That it can be a useful research tool is illustrated by an analytical paper recently released by the Treasury: Using IDI Data to Estimate Fiscal Impacts of Better Social Sector Performance. To simplify, the study follows the IDI data of children born in 1993 through to their early twenties, exploring the association of various explanatory characteristics (such as gender, ethnicity, region, contact with CYF, family welfare history, caregiver details) with education, health, welfare and corrections outcomes as young adults.

You will not be surprised that the research found that those who were assessed at risk – had contact with the Children’s and Youth Service; had a caregiver who had a corrections sentence; whose family was supported by the benefit; who had an hospital event – were more likely to have had lower outcomes than those who were not.

But be careful. About 44 percent of those deemed at risk were classified as ‘on track’ when they were 21 – into level 4 education, on good wages or self-employed. Admittedly this is lower than 84 percent of the others who were on track. But the implication is that one can succeed despite these handicaps and one could fail without them.

What that means is that one has to be very careful in labeling a child as doomed because of some association with these risk factors or claiming there that there is no potential problem if there is no association. Indeed about half of those who are deemed ‘failures’ are not associated with the risk factors.

Perhaps that is because there is some other factor which is important and not in the database – say IQ, or how loving and supportive the family is, or they were born without a Fetal Alcohol Spectrum Disorder, or ….

(As a researcher I am always delighted by being surprised. One result is that children in Auckland, Wellington and Christchurch seem to be less at risk than those elsewhere. There is a tendency to see urban centres as wicked compared with the rural arcadia. Apparently not, but we do not know why.)

So we learn that big data can be only as good as what it is available. It allows us to test hypotheses and quantify effects but only about what is measured.

Moreover, we need to be very cautious about the ability to predict from the research – any research. This was amusingly illustrated by (American academic journalist) Sue Halperin who, in preparation for reviewing a couple of books on the private use of big data, checked her own status. She found she was classified as a ‘gay male’ by one database and considered single and not in a relationship by another because she liked the webpage for an organisation founded by the man with whom she has been in a relationship for thirty years.

What is happening here is that the algorithms (the numerical methods which aggregate the data) are making point predictions. But each estimate is subject to a margin of error. I suppose big data addicts will claim that as they get more data they will get more precise.

In which case they have misunderstood any statistics they were taught. Briefly, a statistical estimate can be ‘inconsistent’ (among other things) which means larger samples may not ensure greater precision.One of the problems is that anyone can run today’s statistical packages without the slightest understanding of the statistical method, the underpinning methodology or the ethical foundations. A degree in computer methods does not make one a statistician.)

But who cares? Apparently not the firms paying for the big data result, often to target you for advertising purposes. Supposing they are after gay males – an invitation to Sue Halperin is just collateral damage.

So one must worry about the files that they build up on you. Earlier I said I was comfortable with the rigorous protections in the IDI database, but it claims to have 166 billion facts. Does that mean it has more than 35,000 facts per New Zealander? (Are there 35,000 facts about me or you?)

Even so the conclusions that are reached from them may be wrong. I wonder just how many competent statisticians the proposed Ministry for Vulnerable Children has. They obviously had little counsel in setting up the ministry, because the conclusion that not all ‘vulnerable children’ are vulnerable and that almost as many children not classified as vulnerable are in fact vulnerable, seems to have been ignored.

Commercial big data miners pose a threat to our privacy and perhaps to our liberties. Moreover there are government databases which pose a similar threat – offshore ones which are not protected as rigorously as SNZ’s IDI.

Reading the Halperin review I concluded that my best defence is to bugger up the system. I keep getting invitations to put my face on the web by organisations who use face recognition algorithms. I don’t but if they are insistent I shall send them an image of Donald Trump. I learned too that those ‘free’ personality tests on the web are sometimes put up by commercial big data mining firms to get more information on you for their algorithms so they can better target you. Not my thing, but if I do I propose to respond at last three times with the extra ones being fake. (Further obscuring tactics can be reported in the comments below.)

(A documented example is Cambridge Analytica, a firm Halperin worries about, has been using quizzes it has put on Facebook to build up psychological profiles. Apparently its results were sold to the Republican Party and are considered one of the reasons Trump was more effective at targeting supporters than Clinton.)

And yet, and yet. I welcome the use of big data for research purposes. As usual for new developments the good and the bad get thoroughly mixed up. The bad damages the usefulness of the good and takes a long time to control.

The Data Futures Partnership is inviting New Zealanders to discuss how they feel about these developments. The relevant website if you would like to give an opinion is here.

The No Man’s Land of Studying Distributional Economics

This entry was posted in Distributional Economics, Political Economy & History, Pundit on 30th January 2017 by Brian Easton.

Economists and policy analysts have paid insufficient attention to the distributional consequences of change. Hence the rise of the angries.

In order to get to this column’s conclusion I am going to recall a little of my scholarly journey.

When I came back from England in 1970, I looked around for a research area. Distributional economics had begun to develop in Britain (under the leadership of Tony Atkinson) and there were lots of research opportunities in New Zealand. At the time I did not appreciate that it was a no man’s land to be avoided by most economists. Indeed, my status as an economist was diminished with the sneer of my being a ‘social economist’; I recall that those who made it spent more time in pubs than I did.

I suppose my work in establishing the foundations of today’s New Zealand statistical base for distributional studies, including poverty studies, is reasonably well known, but what is not always appreciated is that while the social statistician measures, the economist looks for explanations. That took me back into the trenches of the economic debate.

For instance, I found that the terms of trade (the price of exports relative to the price of imports) affected the income distribution because farmers’ incomes shifted up and down in the distribution as it changed. It is clear that the state of the labour market also affected the income distribution. I needed to think about investment returns to get from the wealth distribution to the income distribution (although I have been surprised at the general lack of interest in the profit rate).

That led to me back to macroeconomics but with a distinctive perspective. In particular I could not follow the macroeconomic behaviour I was interested in by ignoring the operating surplus, by pretending that the economy could be described by a single commodity, or by treating all workers as the same. (How to handle the inflow of mothers into the earning labour market was not a trivial issue.)

The same applied when I began to look at policy issues. I saw distributional impacts as fundamental and quite naturally assumed that the policy community did too. They generally do not.

Let me give a simple example which was critical to my thinking. An economist estimated the impact of a limited free trade arrangement with Australia. He found that there would be a very small (but positive) gain in GDP but a substantial reduction in wages. I did not trust the estimate but it drew my attention to the way small gains from trade could be associated with very large distributional shifts.

The paper was not alert to this effect; it was a part of the no man’s land that most economists stayed clear of. I became increasingly aware that policies were frequently advocated without attention to their distributional consequences.

You will not be surprised that the advocates of policy changes were often its beneficiaries. When I was able to measure the impact of a policy change, I found that the beneficiaries were far better off than the national gains they promised, which meant that others were markedly worse off, as the example illustrates.

Indeed one became aware that the economic debate in New Zealand was said to be about improving economic efficiency, but more often the equity (or distributional) effects were far greater. That is another no man’s land, isn’t it? Saying that the advocates of a policy were really seeking their own interests even if their rhetoric was in terms of the national interest does not get one invited to many cocktail parties. (We were told that ‘the task was to make the cake larger, not to share it out’, while the sloganeers jostled for a bigger share of the cake.)

The advocacy field is not flat. Some groups are far more vocal and better funded than others. I leave you to work out which – but there is a certain bias among the advocates which may be summarised by calling them the ‘elite’, although the elite often argues within itself over policies which amount to shifting the income distribution among the various groups within it.

What that means is that chunks of the polity not only get left out of the debates but that they are often made worse off. For instance, the austerity policies which occurred in Europe imposed on those with low and middle incomes while protecting the well-off. Remind me why one should cut government spending – say on health care – rather than raise taxes on the rich?

I became aware of the asymmetry thirty odd years ago, when the Rogernomics elite deliberately switched incomes in their favour, funding the switch by reducing the incomes of those lower in the distribution. The polity revolted in 1990 by voting out the Labour Government and again in 1993 by slashing the vote for the National Government after it followed even more repressive policies. (Because the polity did not yet trust Labour, it left National clinging to power by its fingernails.) But it also voted in MMP, which has sensitised the political process to many of those it had previously left out – not perfectly, but a whole lot more than in the decades before MMP. (Recall how the elite, including most MPs, fought against MMP.)

Elsewhere there is the same story but played out differently. Austerity is causing havoc to the political stability of Europe. In Britain the Brexit referendum gave disenchanted angries the chance to show their displeasure. (I am reminded of the story of the little old lady who after an election was told there was a ‘hung’ parliament. She responded that she did not know what that meant, but it sounded like a good idea. A lot of the angries do not know what they are voting for, but they know what they are voting against.)

The American story is complicated by the corrupted (in the sense of ‘distorted’) electoral system. Trump promised to save the angries from Washington, but he is in the hands of a Republican Party which dominates the place. Many of those who voted for him are going to be bitterly disappointed.

The message here is that distributional economics may be a no man’s land for most economists but we are being ineluctably sucked into it. There exists much economic analysis which is useful for finding your way around it with which most economists and policy analysts are not familiar. Neither are their critics. (If you are in doubt ask them what the Scitovsky criterion is about.)

As for those of us already holed up there, it may lower our professional standing, but we sure get a different view of the trenches from it.

What Do We Really Know about the Distribution of Wealth in New Zealand?

This entry was posted in Distributional Economics, Pundit on 23rd January 2017 by Brian Easton.

Far too much public commentary on wealth inequality obscures what is actually is going on.

This column is a grump about the poor quality of public discourse. It is illustrated by the recent outburst over the distribution of wealth in New Zealand and some rather inept public responses to the recent re-publication of some data, where people with little expertise used the opportunity to pursue their political and ideological goals while displaying, to the expert, their incompetence.

I guess that means I need to defend my expertise. Forty years ago I calculated New Zealand’s first distribution of wealth using the data reported for estate duty (a method, incidentally, pioneered by my University of Sussex mentor, Tibor Barna).

I knew it was a good quality estimate after Tony Atkinson reviewed it. Before he died recently he was the dean of modern economic distributional studies – theory, research, advocacy – as Thomas Piketty acknowledges. Tony went over it with me, asking why I did certain things; I explained that better data did not exist. (He was somewhat more brutal with another New Zealand calculation which did not seem to understand what the method involved.)

The estimates were for 1956 and 1966. Unfortunately a change in the early 1970s in the reporting of estates of the deceased precluded using the method after that. This did not stop the New Zealand Planning Council publishing as if there had been no change, despite an obvious cross-check showing the invalidity of their estimate and despite the error being drawn to their attention. Poor quality work in public discussion is not a recent phenomenon.

There being no alternative data, the research interest lapsed until about a decade ago when Statistics New Zealand began directly surveying households asking them about their assets and liabilities. (Recall, I was surveying, in effect, the recently dead, via their estate returns and then adjusting the sample for relative mortality by age.) Its most recent (just published) report was for the year ending June 2015.

It is a thoroughly professional report. Tibor and Tony would give it a tick. However it may require a bit of technical knowledge to read it; technical knowledge which none of the public commentators seemed to have. The following few remarks will get you ahead of them.

First, be careful about whom you are talking. It may be household data or individual data (SNZ collects both). The individuals may be adults or the whole population, including children.

Second, because it is from sampling we cannot get very refined estimates of ownership at the very top. (In particular there is not the data to use the method I used for the top of the income distribution.) In fact SNZ gives most of its distributional data only by fifths or tenths of the population (although there are hints that it can go down to hundredths). Ten percent of the adult population (i.e. over 15 years) is about 360,000; one percent involves 36,000 odd people.

Trying to refine the top of the distribution by anecdote is not very intelligent. The recent outburst, chose a couple of billionaires, Graeme Hunt and Richard Chandler, neither of whom would have been covered, even implicitly, by the household survey. They may hold New Zealand passports as well as other ones, but I am confident that neither reside here for tax purposes. Moreover, very little of their wealth will be invested in New Zealand despite what some commentators said.

It would have been just as sensible to have used Bill Gates for the comparison. He owns ten times more than Hunt and Chandler together, probably earns more from New Zealand (via his Microsoft holdings) than they do, and pays us as little tax here.

Third, never forget that older adults own a lot more wealth than younger ones. That should not surprise you, since most individuals own just about nothing when they are under the age of 30 – many are in debt from student loans. Instead, the young have heaps of human capital which generates earned income some of which is saved. (Incidentally perhaps as much as half of our wealth is inherited on average – that is what the data in the 1950s and 1960s suggested. Fortunately, most of us are not orphans before the age of 30.)

As we get older, our human capital declines because our ability to earn into the future diminishes. But it is offset by our savings, so our wealth rises. As a result, about three-fifths of all New Zealand net wealth is held by those over the age of 55 although they make up only a third of the population. Comparisons between the poorest and richest wealth holders are contaminated by comparisons between the young and old.

The published SNZ data does not enable an evaluation within each age group,* but my earlier estimates suggested that wealth inequality was much the same within each cohort (except those under 25). I do not know if that is true today. And, of course, the inequality within each age group is much less than inequality across all age groups.

While what we know is helpful for some purposes, the SNZ and my data is too coarse to be of much use if one is interested in the very, very rich. They are not captured in the wealth data and most are not significantly in the tax data.

One may well be outraged by the group avoiding paying taxes on their income but that is an international problem. Certainly we should not contribute to it; the Panama Papers say we do. (Typically though, New Zealanders did not appear among them, and they seem to be more about money laundering than avoiding paying New Zealand taxes. I am told that the Singapore Papers will be more revealing about our lot – if they are ever released.)

Should we be outraged by wealth inequality in New Zealand? Personally, I am more outraged by income inequality. But let me finish with a couple of further thoughts.

First, about third of New Zealanders’ net wealth is held in home ownership and it is relatively equally distributed. One might resent some people having bigger and better houses than others, but surely we should be really concerned with the distribution of wealth excluding housing. That is much more unequally distributed. (Incidentally, while attention is drawn to a fall in the rate of home ownership, the outraged do not seem to have noticed the big fall is among the under-thirties, reflecting later settled family formation. The distributional economics of housing is a big topic which I must write about in detail some day – when I have done more research.)

Second, I do think we need to think carefully about how influential the rich and their money should be in our political life. I have made some suggestions in relation to those who are not resident for tax purposes.

So, yes, there may well be a problem with the distribution of wealth in New Zealand. But that is no reason for our misrepresenting the situation using data we do not understand.

In terms of the theme of this column, though, the previous sentence applies to far too many issues we go on about in public.

* Were there the resources, the SNZ data could be used to generate more insights.

Will Many Americans be Healthcareless without Obamacare?

This entry was posted in Health, Pundit on 16th January 2017 by Brian Easton.

What can we learn about health care systems and the US from the muddle that America is getting into over Obamacare?

Donald Trump is not particularly interested in policy. When he promised to replace Obamacare – the current US health system – with something which would be better, he was responding to the conflicting demands of his supporters and certainly did not have a plan. It will be the Republican-dominated Congress which will lead the way with a bill for him to sign.

I read a detailed account of Republican ambitions and concluded that most could be attained by simply amending the title of the ‘Affordable Care Act’ to the ‘This is not the Obamacare Act’ and leaving the rest. Not that they will, for not only are the Republicans all over the place about what they want to do, they are also vulnerable to powerful (well-funded) interests who will want to manipulate the legislation for their private gain. It is not impossible that many Trump voters will find themselves markedly worse off.

Not that Obamacare is a good healthcare system; America still has the worse one in the rich world as measured by their health outcomes, despite having some of the world’s best hospitals and physicians; it certainly the most expensive. Its one merit is that Obamacare is better than the system that went before and, if the Republic extremists and their lobby groups have their way, the one that comes after.

It is hard for a New Zealander – or for that matter anyone else in the Western world – to appreciate how bizarre the American health system is. It arise from the inability of the progressive forces representing ordinary Americans to get their government to act in their interests.

Instead, the healthcare requirements of many Americans have been met by unions negotiating healthcare cover as a part of employment conditions. However, if you did not have a job, or were laid off and lost the accompanying healthcare cover, you had to pay for yourself. Yes, you could buy private health insurance, but what if you had a pre-existing condition which meant that insurance companies turned you away? What happens if the condition limits your ability to get a job?

Another complication is that an employment-based health system discouraged employment. Employers found that when it came to choosing placing a car factory between, say, the US or Canada, the latter was considerably cheaper because employers had to pay for the US workers’ health insurance whereas the newly-employed Canadian worker was already getting it via the Canadian national health system. (Many US firms – some of them very big – would be bankrupt if they properly valued the costs of future health care and pensions in their accounts.)

Over the years the US Congress laboured to cover some of these problems (especially for the elderly) but Obamacare attempted to provide comprehensive health care in a way we take as normal in New Zealand. Despite being limited by the mishmash that was already in place and lobby groups seeking their self-interests – the advisers to Obama would have preferred a simpler, more comprehensive system – Obamacare has enrolled another 20 million Americans – over four New Zealand populations – who are at risk of losing the cover if the most extreme Republican proposals are adopted.

(Not quite an aside, but a long one. American workers were forced into this form of health care coverage because their government failed them. It is a ‘labour’ rather than ‘social democratic’ solution to the funding of the healthcare. New Zealand avoided it because we have a social democratic national health care system.

However, sometimes our left seeks labour rather than social democrat solutions to national problems, with the same difficulties of coverage. The living wage as a solution to poverty is an example. Not everyone has sufficient paid work for the living wage to sustain them so whatever its raising of some’s standard of living, others will be left behind, just as we see with the employment-based US health system.

Another major weakness is that when the living wage was first envisaged in 1908 it could, probably reasonably, be assumed that all households were much the same (over a life cycle) with an earning man, a woman working in the home and a number of kids – contraception was primitive. Nowadays there are a much greater variation of household forms. Many have one-and-a-bit or two earners; others have zero or just one earner with a greater diversity of dependents (children). And, of course, they are much more fluid over a lifetime.)

One cannot predict what will happen to Obamacare. It is a classic public policy problem, It is imperfect – probably all healthcare systems are imperfect from some perspective – so there are grumblers, some of whom supported Trump. But as in the case of Brexit, it is one thing to be agin the current system, it is a lot harder to replace it with a better one.

There are other things going on in Trump’s world on which I hesitate to comment upon because there is likely to be more revelations. In any case the US president has only considerable discretion in international affairs before Congress gets its oar in. So the abolition of Obamacare may not be the most important policy challenge the new president and Congress face, even if it is one of Obama’s greatest achievements. Even so, the Republicans risk incensing their voters. It is not an accident that they are talking about putting off the actual abolition date until after the mid-term elections in 2018.

New Zealanders observing US politics closely will be watching the twists and turns of the healthcare proposals although, as the opening sentences of the previous paragraph say, there will be other things to watch (while the economic directions remain a mystery). For our own health we may conclude that whatever our system’s defects, we are lucky to have a national health system with a unified funder and broad entitlement.

And yet, and yet. The squeezing of public funding here is undermining these strengths, pushing us towards an incoherent American version. The irony is that if the current policies continue, the unions and employees generally will start demanding employment-based health cover – employers may get thoroughly pissed off.

Our Education System Seems to Be Struggling

This entry was posted in Education, Pundit on 9th January 2017 by Brian Easton.

International comparisons suggest that New Zealand secondary students are not doing well. It may even be that recent policy measures have worsened their performance.

The 2015 results for the triennial OECD PISA (Programme for International Student Assessment) evaluation were reported just before Christmas so they did not get much coverage. We need to think about them. Many will jump to a conclusion that the current government’s education policy is failing. Certainly the international evidence does not suggest it is succeeding.

Every three years, the OECD surveys the science, mathematics and reading skills of 15-year-olds from across the world – some 540,000 pupils in 72 countries or regions of a country.

New Zealand is, and has been, among the top countries in the world. In 2015 it was 21th in mathematics, 10th in reading and 12th in science knowledge – 16th across the three. Rankings tend to jump around from year to year; it is the levels which are the concern They seem to suggest that our absolute attainment has been falling.

The worst fall has been in mathematics. In 2006 the average score for New Zealand was 522. In 2015 it was 495. Not only does that mean New Zealand is falling towards the ‘world’ average of about 490, but a 27 point fall is almost equivalent to having lost a year of schooling; an increase in score of 30 points is roughly akin to completing an extra year of schooling.

The falls for reading of 12 points (say 5 months) and for science knowledge of 17 points (say 7 months) are not as great but certainly perceptible. Across all three subjects the fall averages 18 points so that, I suppose, the 15 year-olds could have left school in 2006 six months earlier and yet attained the levels of those 15 year-olds in schools in 2015. Alternatively the data suggests that in 2015 they had to stay on an extra six months or so to attain the levels of their peers born nine years earlier.

I would have thought that indicates a big fall in the productivity of the schooling system. (This assumes that the only purpose of education is those three subjects; sometimes the rhetoric of those making the changes seems to suggest they believe that.)

Even more disturbing, the falls have not been even over time. To simplify, one might conclude that while there was no significant fall between the 2006 and 2009 surveys, it has been downhill since then.

Many will jump to the conclusion that this is the impact of the Key-English Government’s education policies. I am cautious about such a conclusion, only being willing to conclude that the PISA data suggests that the policy changes the government has made have not resulted in any obvious gains.

Warwick Elley, a retired professor of education with experience in leading international surveys of school achievement (and far more qualified in the area than this social statistician could ever be), takes a stronger line, attributing the decline to NCEA. He points out that Australia, Britain, Sweden and the US, the only countries in the PISA survey with a clear system of standards-based assessment, have also experienced declines. In contrast the attainment levels of ‘countries such as Norway, Portugal, Spain, and Poland that rejected this system and league tables have risen steadily in PISA.’

Elley suggests that assessment systems like NCEA distort teacher behaviour, that they are so busy aiming for the official targets that they fail on the wider goals implicit in the international assessments. PISA does not measure knowledge so much as the application of knowledge and critical thinking for solving novel problems. It cannot be so easily ‘coached’ for.

The International Association for the Evaluation of Educational Achievement runs a four yearly survey – Trends in International Mathematics and Science Study. (TIMSS is more about testing curriculum knowledge.) It covers the mathematics and science of students at Year 4 (mostly 10-year-olds) and Year 8 students. Of the 19 countries which were in both the 1995 and 2015 survey of Year 4, New Zealand was in places 15 to 16. In the case of Year 8 there were 31 countries and we were in the 15 to 21 range. (Most of the 12 additional countries would probably rank below us at Year 4). There is little evidence of a wholesale improvement over the years – but that is generally true for many other countries.

There is a strange story behind this apparent deterioration. The general view is that the quality of teachers is critical to our educational performance. It is hard to believe that their quality has fallen that quickly. But if targets are changed, good quality teachers will adapt to the targets. (Gilling’s Law – the game is shaped by the scoring system.) Apparently there is a lot of systematic evidence to explain how responses to the new standards are related to the deterioration.

The government appears to be driven here – and elsewhere – by over-simplistic notions and ideologies which do not connect with reality rather than by the evidence. It introduced charter schools because they seemed to be a good idea, fitting its ideological predisposition. There has been hardly any subsequent systematic monitoring; ideologues have no difficulty picking a few irrelevant facts to buttress their prejudices.

What is puzzling is that the Government seems relatively complacent, describing the PISA outcomes as ‘pleasing’. Yet even a Tertiary Education Commission study concluded that 40 percent of Year 12 students who met official NCEA literacy and numeracy requirements fell below the OECD minimum for a knowledge economy.

Later in the year we are getting a new Minister of Education, Nikki Kaye, when the current one, Hekia Parata,who has presided over these not very satisfactory outcomes, retires. One wishes Kaye well, and hopes she will begin her tenure with a thorough evidence-based review of the sector.

Parata’s achievement has been to get education stories off the front page. I’d like to see more there – evidence about our doing better.

Understanding Truthiness

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History, Pundit on 2nd January 2017 by Brian Easton.

How does a post-truth world work? Some psychological findings may be useful. (The Oxford Dictionary definition of ‘post-truth’ is ‘Relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief’ The Dictionary labelled it the word of the year 2016.)

This columnist is greatly perplexed by how in today’s post-truth world people hold views or which are not true, which may be contradictory but which are held with a tenacity which belies their falsehood. This is sometimes called ‘truthiness’; the views are believed to be true because they confirm beliefs. But that is a label, what is going on? This is a followup of some earlier writings of mine (and others).

To help me understand I have described below some of the psychological findings of cognitive bias important in behavioural economics.

As far as I know, all have been demonstrated in tightly controlled experiments. It is, however, a leap from the laboratory to application in a post-truth world.

Anchoring: describes the common human tendency to rely too heavily on the first piece of information offered (the ‘anchor’) when making decisions. Once an anchor is set, there is a bias toward interpreting other information around the anchor. Example: A subject is given a random number (say the outcome of a spin of the chocolate wheel) and subsequently asked to estimate a fact (say the number of countries in Africa). The estimate is affected by the random number. Comment: That means that the information that one is given may influence one’s beliefs about another matter, even though it is misleading or irrelevant. By choosing seemingly related information the presenter (often a politician) can greatly influence belief even more.

The endowment effect: People ascribe additional value to things merely because they own them. Example: Experiments involve mugs which people are given randomly; subsequently the owners value their mugs more than those who did not receive them. Here is a more complicated example as set out by John Key in John Rougham’s biography. ‘Most people take their profits too early and cut their losses too late. If they buy a house for $500,000 and a month later somebody offers them $600,000, it is human nature to take the money and dine out on their good fortune. Conversely, if they put that $500,000 house on the market and the best offer it brought was $350,000, they would hold onto it. A good dealer would not. As soon as he realised the asset was losing value he would get what he could for it and put the money into a new, hopefully better, investment.’

Framing: When one seeks to explain an event, the understanding often depends on a frame of reference. Example: The way a willingness to donate organs is asked affects responses. Austrians have an opt-out provision; Germany has opt-in. Almost all (99%) Austrians agree to donate after their death, but only 12% of Germans. Another example is a VUW earthquake study in which participants judged more risky 1600 dead in 500 years over a 10% chance of 1600 dead in 50 years, despite the two being logically equivalent. Comment: Those who structure the reference frames – the way the choices are offered – influence the responses.

Loss aversion: The tendency to prefer avoiding losses to acquiring equivalent gains. Some studies have suggested that losses are twice as psychologically powerful as gains. Example: People judge it better to not lose $5 than to find $5. Comment: In their evaluation of the impact of policy changes, economists value losses offsetting a gain at one-for-one. Many favourable policies under this tradeoff might be unfavourable if the two-for-one ratio was used. Thus trade deals without compensation may not be as overall favourable as is claimed.

The planning fallacy: Predictions about how much time will be needed to complete a future task display an optimism bias underestimating the time needed. Comment: One hardly needs examples.

Heuristics: Simple rules which people often use to make decisions when optimal decisions require complicated calculations. These rules work well under most circumstances, but they can lead to systematic deviations from logic, probability or rational choice theory. Comment: Economists tend to assume the heuristics are near optimal They are not always. Presumably heuristics are more important when one is ‘thinking fast’ (as Daniel Kahneman described it).

Hyperbolic discounting: In economic terms it leads to time-inconsistent decisions: that is, with no change in information the individual changes their decisions through time. Comment: This is for a column in its own right.

Prospect theory brings together many of the above phenomena. It is complex, but people make probabilistic decisions in a systematic way, but not in the way that is assumed by rational economic man. Comment: Kahneman won the 2002 Nobel Memorial Prize in Economics for his work, with Amos Tversky, developing prospect theory.

The following list is of cognitive biases which may not seem particularly relevant to economics, but may be relevant to understanding what is going on in politics. (They also have relevance in commerce. For instance share traders who were over-confident do worse on the long run in making profits.)

Confirmation bias: The tendency to search for or interpret information in a way that confirms one’s preconceptions.

Hindsight bias: Sometimes called the ‘I-knew-it-all-along’ effect, is the inclination to see past events as being predictable and even inevitable, including events that they previously saw as unlikely; the US election result is an example. .

Self-serving bias: The tendency to claim more responsibility for successes than failures. It may also manifest itself as a tendency for people to evaluate ambiguous information in a way beneficial to their interests.

Status quo bias: An emotional bias preferring the current state of affairs. Comment: Since the state of affairs is changing it means people tend to adjust too slowly to a change.

Belief bias: When one’s evaluation of the logical strength of an argument is biased by their belief in the truth or falsity of the conclusion. Comment: Truthiness.

Some of the above apply strongly to the angries. Most obviously, if there is loss aversion they may be twice as angry as the beneficiaries feel pleased about a policy change.

Second, the endowment effect, loss aversion, hyperbolic discounting, prospect theory and status quo bias suggest that people are inherently conservative. Yet the status quo is being continually undermined; we are often ill prepared to cope with that change.

That is where the political rhetoric comes in. Use of a number of the above ideas such as anchoring, framing, confirmation bias and belief bias can be used to shape views into a way which is not necessarily coherent. (While our interest here is political debate, there are few in marketing who do not use these principles.)

Does this progress our understandings of the state of populist reactions? The puzzle is, though (to adapt the Red Queen slightly), how can some people – Trump supporters are an obvious example – believe as many as six contradictory things before breakfast?

Media in a Post Truth World

This entry was posted in Business & Finance, Literature and Culture, Pundit on 29th December 2016 by Brian Easton.

A recent decision by New Zealand on Air in response to the changing media technologies raises a range of issues about how the platforms are used.

The announcement by New Zealand on Air that it was changing its mode of funding is a reminder of the current turmoil in the media from the convergence of platforms (delivery systems).

NZOA is to adopt a ‘platform agnostic’ approach including moving to a single public media fund which will have four new streams: factual, scripted, music and platforms. That means television loses its place at the centre. While there will still be big budgets for free-to-air TV broadcasters, online and on-demand services will also be able to bid for funds. ‘Cultural or social value, innovation and potential audience size’ will be taken into account in deciding allocations.

The change is illustrated by the rebranding of ‘Radio New Zealand’ to ‘RNZ’ because it is now more than radio channels. That is evident from its website. Across the masthead is ordered ‘News, Radio, Series & Podcasts, Topics’ so that radio now comes second to news. Indeed nowadays you don’t need to have a radio to keep up with RNZ news. Even the concert program is streamed.

However you need a battery-powered radio for national emergencies: RNZ will be the nation’s main national source of information. It has put considerable thought as to how to handle such crises. Those who thought that it may have over-reacted on the morning of the Kaikoura earthquakes should remember that no one is sure at the beginning of an emergency how serious it is and, in any case, this was an opportunity to practise for the really big one.

When there is not an emergency, public broadcasting plays a critical role in the setting of national media standards. RNZ has a charter which does not quite say this but does say it is required to ‘provide comprehensive, independent, accurate, impartial, and balanced regional, national, and international news and current affairs’. However TVNZ’s charter with a similar provision was abandoned in 2011 in favouring of giving it commercial only objectives with no public service ones.

However it is kept on the straight and narrow by the Broadcasting Standards Authority and the Broadcasting Act which requires all broadcasters to be individually responsible for maintaining the principle that ‘when controversial issues of public importance are discussed, reasonable efforts are made, or reasonable opportunities are given, to present significant points of view either in the same programme or in other programmes within the period of current interest.’ (The notion of balance has changed over the years. In the 1960s a government response was required to immediately follow any criticism; if the government refused to offer one, then the criticism might not be broadcast. It was a very effective form of censorship which has broken down by ‘we asked the government for a comment but it has not provided one’.)

The bigger challenge is coming from the social media and the rise of fake news and uninformed opinion which is believed because it is thought to be true: truthiness.

Any media platform is vulnerable to these developments. The difference for the conventional media is they have journalists trained and disciplined to weed out such lapses. (There is some protection in New Zealand from the law of defamation, but many untruths are not libelling any individual; they are just wrong.)

One worries that as the numbers of journalists are cut back, more of the untruths will slip through or, as I too frequently see, one side of an issue will be presented without much effort to obtain the other side.

For instance, there are stories complaining about how the government has failed someone. The natural reaction is to ask ‘how can the government be so stupid (or uncaring) on this matter?’ The thoughtful reaction is ‘what is the government’s side of the story?’ Sometimes it trickles out and you find the government has a reasonable case.

An example is the demand for new expensive drugs made by those in desperate health circumstances (although the drug firms supplying them are never far behind each story). In some cases the drugs have not been demonstrated to be effective; frequently they are not cost effective in that the funds could be deployed elsewhere to give more healthcare. (Ah, but is this not an indication that the government is not spending enough across all healthcare? It may be, but that point rarely gets made in the clamour.)

A fundamental part of the journalists’ discipline is C. P. Scott’s ‘comment is free, but facts are sacred’. Yet I occasionally see even news media websites which lead with opinion (frequently of not very high quality) or fail to mark clearly that the item is somebody’s (often not very informed) opinion. The problem may arise because the internet turnaround is faster than new facts turn up; so opinions are used to keep refreshing the site.

A media issue which is not so big with journalists is conflict of interests. However we saw from Dirty Politics how pernicious this can be when commentators pretending to be independent get paid by lobby groups to argue their case.

Yet the country is so small that one cannot avoid conflicts of interests (the US is going to have the same problem with its president next year). My view is that editors should require contributors to identify to them any potential conflicts of interest, and anything other than very minor conflicts should be mentioned in the contribution. Commentators who breach the rules would be banned from making further contributions.

The ‘traditional media’ – even though it may be using new platforms – are being challenged by the new social media. I doubt that the latter can maintain the standards we expect of the former, but we must keep pressing it to do so, while adopting an acceptance that social media is more unreliable. Quality blogs are probably going to evolve although how they will be funded will be a challenge. Many belong to the Online Media Standards Authority – others do not – which will come be under the jurisdiction of The New Zealand Press Council, from 1 January 2017, in effect accepting the disciple of the traditional print media. (Pundit has long been subject to the NZPC.)

NZOA is not going to avoid such issues. The new policy approach will exacerbate them, as it is likely to have new providers asking for funds. A good start would be for all requesters to have a set of ethical standards preferably subject to an industry-wide supervising body. Nor should we neglect the role of quality professional journalists. And all of us should remain alert to the evolving challenges.

An earlier related discussion about the print media is here.

What Are You Thinking, Stupid?

This entry was posted in History of Ideas, Methodology, Philosophy, Pundit on 19th December 2016 by Brian Easton.

A book about two psychologists who have altered the way we think about the way we think.

For many people, Michael Lewis is best known for his 2010 book The Big Short and the follow-up film, which describes the carryings-on of the financial sector in the American housing market which underlay the Global Financial Crisis. In fact he has written over a dozen books beginning with Liar’s Poker in 1989 which, by describing the culture in the New York finance industry, presaged the crash a decade later.

Many Americans know him best for Moneyball (2003), in which he describes how one of the poorest professional baseball teams was able to achieve high performance compared to richer teams. Oakland Athletics, which spent $US40m on salaries in 2002, outplayed the New York Yankees with their $US120m spend. Essentially Oakland selected their team by systematically purchasing undervalued players rather than by relying on the judgements of its talent scouts and managers.

There is an economic story here. It is normal to assume that businesses – like the All Blacks, big league baseball is a business – operate (near) efficiently, getting the maximum return on outlays. But Moneyball showed that the baseball industry did not. Perhaps this is a widespread problem throughout business; in which case quelle horreur! A fundamental assumption of how the capitalist economy is ruptured.

But Lewis did not appreciate then that lurking behind this failure was an even more fundamental question: why people were making poor quality decisions. Traditionally economics assumes that people act rationally. Do they?

In his latest book The Undoing Project Lewis explores this by tracing the lives of a couple of Israeli psychologists, Amos Tversky and Daniel Kahneman (who wrote Thinking, Fast and Slow), Kahneman was awarded a 2002 Nobel Memorial Prize in Economic Sciences. Tversky had died from cancer six years before and was not eligible – like Rosalind Franklin of the double helix. Had he survived he would certainly have joined his co-worker – as she would have.

In fact there are similarities between the Watson and Crick team and Kahneman and Tversky. Two very different personalities with differing backgrounds worked together brilliantly. I am not sure which team made the more profound discoveries.

(Lewis portrays the psychologists’ relationship as if it was a marriage – with no sexual overtones. It went through difficulties as marriages do, ending in a ‘divorce’. Three days later, Tversky rang Kahneman to say he had been told he had terminal cancer. Kahneman gave the eulogy at the funeral six months later – all very romantic.)

The book describes the research which led them to the conclusion that people do not always choose optimally and that the heuristics they instead use are not always near-optimal. They can even give contradictory answers. For instance, told that a particular surgical operation has a 90 percent of success one is likely to take it up; told that it has a 10 percent rate of failure the same person is likely to turn the opportunity down. The two statements are logically equivalent but the way the logic is presented affects the decision.

Because it is scientific research the experiments may seem artificial, but that is because they are designed to avoid ambiguity. Astonishingly, even experts can give poor answers. In an early study some surveyed statisticians gave wrong answers to elementary probability problems; how you, dear reader, can expect to get them right is uncertain. But by the end of the book you should be convinced that any rationality assumption for homo sapiens has to be used with the greatest caution.

This does not mean that it can never be used. For simple choices – such as oranges or apples – the assumption may be useful. For complex ones which involve future uncertainty – such as consuming and saving over time – the assumption of pure rationality is almost certainly misleading.

Lewis claims that the findings of Kahneman and Tversky and the other developers of behavioural economics are now well incorporated into economics. I am not sure this is true – at least not in New Zealand. For instance, there is no ‘nudge’ unit here which tries to apply the lessons to the practical interactions between government and the public. There are New Zealand university economists working in the area, but I do not get the impression that the majority of economics graduates are well trained in behavioural economics.

Some economists reject the approach. The older ones may not be up to speed. Keynes wrote that ‘in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.’

Other economists have too much of their research invested in the rationality assumption to change their mind when the evidence says they should.

Some are ideologically fearful that abandoning the assumption of rationality justifies paternalistic interventions by the state. It need not, since those operating on behalf of the state are as prone to irrationality as those they are operating on.

We all suffer from the irrationality. Both Kahneman and Tversky admit that they make errors like everyone else. Tversky remarked that ‘[m]y colleagues study artificial intelligence; me, I study natural stupidity.’

Nor should we confine the impact of the findings only to economics. Kahneman has said that ‘[n]o one ever made a decision because of a number. They need a story.’ He is reporting on tightly designed experiments, but I think we are allowed to adapt his maxim to ‘no one ever made a decision because of a fact. They need a story.’

As the research shows the story need not be particularly attached to the fact(s) nor need it be coherent or consistent. Sounds like a lot of the support for Trump does it not?(To be balanced, those in other parts of the political spectrum can be equally irrational – the way some once supported the Soviet Union for example.)

If you read Thinking, Fast and Slow you would want to read The Undoing Project to enrich your understanding of the themes of the first book (plus there are some jolly good biographical stories – including their involvement in the Israeli military). And if you have yet to read Kahneman’s book you should, if you want to understand one of the major sources of unrest in public policy thinking – and why you and others (and I) sometimes make very stupid mistakes. Then on to Michael Lewis’s book.

Letter to Bill

This entry was posted in Political Economy & History, Pundit on 12th December 2016 by Brian Easton.

Your In-tray is piled high.

Dear Bill,

I recall when you first entered Parliament 26 years ago, it was widely thought you were prime-ministerial material. You’ve made it. Congratulations.

National was going through the extremist phase of Ruthanasia and Jennicide at the time. You were marked as someone who came from the great National progressive center-right tradition of Harry Atkinson, Bill Massey, Gordon Coates, Keith Holyoake and Jim Bolger.

Now that you have made it, you are going to be sitting at the premier’s desk with a stacked in-tray. Your predecessor had a lot of merits but dealing with looming problems was not one of them.

Take the issue of an inquiry into historical abuse of children in state care. The current government position is that an inquiry is not going to resolve anything. (I think; things do slip and slide around.) It is, of course absurd. We’d never have murder trials if we believed that.

It has been true for bigger things too. Your predecessor said in 2007 there was a housing crisis, failed to do anything for seven years, announced there was no crisis, and then instituted a series of panic measures.

Incidentally, Bill, I have no idea why you are keen to offload state houses onto the community sector. Not that it has been successful, although you have spent an awful lot of money pursuing the failure. I’d have thought that if you wanted the central government to get out of housing supply the obvious alternative was local government. Many local authorities would do a far better job at managing the housing stock for, in truth, central government has been a bit of a failure. Locally each would be under pressure to perform, there would be competition between local authorities, while central government would act as a regulator.

The current policy seems to have come from David Cameron’s English initiatives. (Who he? A failed British prime minister.) But circumstances are different here (as you have found).

We have this bad habit of copying overseas fashions, providing the countries they come from speak a form of English, without allowing for fundamental local differences.

True in the education sector where we try to imitate the Americans, oblivious to the fact that theirs is a failing system while ours is not. Even if their initiatives work, they would only get their students up to the standard we think of as normal.

There is considerable doubt that they do work; the evidence is all over the place but it is not, in sum, compelling. Come to think of it, Bill, if you really wanted to transform New Zealand public policy, insist on evidence-based policy. That would eliminate a lot of nutty fashionable policies that do not work. Save a lot of money too.

Pursuing fashionable policies developed in different circumstances also applies to our penal policies – taking them from America. (Did you know the inmates of New York prisons are black but the warders are white?) Again the evidence points to private supply not working, other than by lowering standards. You’ve said our approach is a ‘fiscal and moral failure’. True, but imitating even greater failures is not going to solve it.

Your baptism of parliamentary fire was the Americanised health redisorganisation. When you became Minister of Health in 1997 you said that many of the changes had been reversed so that the health system was developing the way it would have before the crazies took over. (Well, not entirely.)

The country is facing difficulties in the public health system because the National Government has been restraining spending in order to pay for tax cuts. Some estimates suggest you may be under-funding by $1.7 billion a year. Some people are being forced to go into the private sector, some are living in pain and distress while critical services are being inadequately supplied. You will remember from your time as minister in the late 1990s the accumulating backlog of health problems caused by the under-funding of the early 1990s.

The aging sector seems to be under particular health pressures with lengthening waiting lists and inadequate residential care. How about incrementally raising the age of eligibility for New Zealand Superannuation (say by three months every year, as we did in the 1990s) and using the savings for better healthcare for the elderly in need? Do you realise that life expectation has increased by about five years, since the age of eligibility was established by the Accord in 1993? (Your predecessor was an ostrich with his head in the sand.)

I would not worry too much about the income inequality problem as it is usually portrayed, although certainly you do not want to exacerbate it with further tax cuts. The priority has to be increasing the incomes of families with children (which will reduce the inequality rather effectively).

I have been a bit puzzled by the ‘investment approach’ to social policy that you endorse. The current approach is about improving the ambulance services at the bottom of the cliff. Why not invest in families, which your political tradition puts great emphasis on? Far too many families need is a decent fence at the top; that is a good financial foundation which discourages household cost cutting with its consequences of poor health, poor educational attainment and, in many cases, subsequent interfacing with the criminal justice system.

Actually, Bill, you hiked family finances after you first became Minister of Finance in 1998 (I recall getting a rocket from your office for underestimating the impact). You gave them another boost this year. Not enough, but your heart was in the right place. Centre-right, I think; hope it still is.

This list is getting long. There is much more to be listed, like climate change policies. I agree that there is little New Zealand can do to reduce global warming – although many would argue that we have a moral duty to take effective measures. But we also need to think about policies to mitigate the effect of the inevitably rising sea levels.

Nor should we forget that the economic boom of recent years is the result of heavy overseas borrowing, much of which has been for consumption via housing speculation rather than for investment. When it all turns to custard, Macavity wont be there. New Zealand is really going to have to save more.

I had better stop. I’ve made the point that the prime minister’s in-tray is piled high – so high you will not be able to see everyone in a delegation which comes into your room. It has become a ‘too-hard’ basket; your predecessor must be please to be escaping it.

There is a curious feature of many of the papers in the in-tray/too-hard basket. They are signed ‘Bill English; Minister of Finance’. Now it is up to ‘Bill English; Prime Minster’ to address them.

Best wishes, the country needs a bit of policy development rather than stasis,

Brian.

Angries and Mangries

This entry was posted in Political Economy & History, Pundit on 5th December 2016 by Brian Easton.

Could the alienated grumpies have a greater effect on New Zealand political life?

This was written before John Key announced his resignation. Other than perhaps the tense I think there is no need for revision.

Unfortunately most analysis on the American elections focuses on who voted but, as Bob Chapman pointed out, the Non-Vote Party plays an important role. This is yet another example of Gilling’s law of how you score shaping the game; in this case pollsters tend to score voters and pay little attention to those who do not vote.

In fact the American NVP gets more support than either the Democrat or Republican parties. It just does not elect presidents or Congress representatives.

The New Zealand NVP is (proportionally) smaller than the American one, gaining far fewer ‘votes’ in the 2014 election than National, but slightly more than Labour, although less than Labour and the Greens together.

Why is the voter turnout rate higher here than the US? It has been falling. It was over 90 percent immediately after the war and is now below 70 percent. Clearly the NVP is a growing force in the political landscape.

What I am curious about is the extent to which it covers what I called in an earlier column the ‘angries’, people who are alienated from the political system and angry about what it is doing for them, feeling politically impotent. Overseas they typically seem to be older, lower-income, poorer-educated and less well-informed workers. Usually they tend to support authoritarian solutions to social problems, dislike markets and prefer central decision-making which overrides them (and yet they are angry when the decision-making overrides their interests).

Another group of angry New Zealanders is those involved in the political process but angry about Key’s style and his government’s failure to address issues they think important: climate change, healthcare, inequality and poverty … it is a long list. The ones I meet are well-educated middle class who vote and participate in other political ways. Let’s differentiate them by calling them ‘mangries’.

There are angries in New Zealand. I first became aware of them in public life from talkback radio. (Paul Henry is a current public voice for them.) My impression is that many vote, often for minor parties. Those who are successors of Rob’s Mob in the 1970s are likely to support Winston Peters today. But many, I guess, belong to the NVP, although it has other large blocks of supporters such as beneficiaries, Maori and the young.

I do not want to make a comparison between John Key and Donald Trump. You don’t have to be very clever to find plausible similarities between any two politicians. However I want to consider how Key deals with the angries and their political kin, which explains, I think, some of his widespread popularity and why the mangries particularly do not like his style.

While Key has usually got good political instincts – in the short term anyway – he seems to depend greatly on opinion polls and focus groups. (Have you noticed how he will dramatically change a policy stance over a weekend, presumably when he has had a chance to consult the surveys?) They keep him in contact with middle New Zealand and the angries.T hat he has to form coalitions on policies – with Act, the Māori Party and United First — also keeps him in touch with particular groups in society.

This explains his incremental policies towards their demands, which makes him appear to be a centrist politician. Of course you can’t do that for everyone. Hence the way many mangries feel excluded and the grumbling coming from the business sector.

Two other factors support Key in keeping the angries less prominent. First, New Zealand is smaller with a better electoral system so one can feel there is more opportunity to influence outcomes.

Second, while the income of angries – and most New Zealanders – stagnated for over a decade following Rogernomics and Ruthanasia, they have been experiencing mild increases in material affluence in recent years. Some of the overseas angries appear to be especially grumpy after a long period of income stagnation while the one percent in their countries has done very well.

Could the angries become a greater political force? The overseas experience suggests that it requires special circumstances combined with demagoguery for that to happen. Even so, the rising strength of the NVP is a worry.

If I had to make a bet the most likely immediate source of their irritation would be the failure to adequately fund the public health system. We could see a strange coalition of angries and mangries expressing that concern. But the opinion polls and focus groups would soon alert Key to finding some cash for health, perhaps even before the opposition parties have tried to lead a charge.

However, the angries and mangries do not have a lot in common. Angries dislike diversity, mangries tend to celebrate it; angries are social conservatives, mangries are more liberal.

For the economy it would appear that angries have a relatively short-term outlook, mangries a longer-term one – arguably they can afford to. As Key finds – and no doubt Trump will too – it is easier to govern in the short term, disregarding a multitude of long-term issues like an effective climate change policy, healthcare, housing, inequality and poverty, the water resource, the age of eligibility for New Zealand Superannuation and …. well that is just the beginning of the list.

Key’s government may be less admired by the voters in the long run than it is today. But as the Trumpites say – ‘we won’.

Footnote: In the earlier column on the angries I said the 2016 turnout in the US presidential was higher than in 2012. It appears to have been only marginally higher. However it is said to be significantly higher in states where Trump won and lower in Clinton states. I await a full analysis and will report if there is anything to learn from this.

What Is Technology?

This entry was posted in Growth & Innovation, Pundit on 28th November 2016 by Brian Easton.

A new book leads to ponderings on our technology strategy.

Technology is an ambiguous notion. Its most common use in economics arises in the following way.

The laws of thermodynamics mean that there exist production functions which relate inputs to outputs. The most familiar ones have a single output generated by inputs of labour and capital, although there can be other inputs such as land, energy, intermediate goods and imports.

When economists measured production functions they found that they shifted so that, over time, more output was produced by the same inputs. This shift was attributed to ‘technology’ but here it is but a term with no independent existence to explain the phenomenon – there are many similar instances in physics. When economists and others use ‘technology’ in an economic context they are usually referring to this vague notion; so vague that a couple of economists described the measure of technological progress as the ‘coefficient of ignorance’. (That leads to the thought that those who want to increase its rate are trying to increase the coefficient of ignorance; many of the advocates are well qualified to do so.)

I like to think of technology as plans of how to produce things. The plans are stored in a huge warehouse, only parts of which are accessible. Over time, and often using resources, we can hunt around and find new plans, some of which tell us how to produce more for the given inputs. We can implement the plans; economists call more output for the same inputs an increase in ‘productivity’.

(If I had room I would say more about the outputs, observing that there may seem to be new ones, although they are simply better ways of doing past things; when cars replaced horses; the fundamental outputs would be travel times, distances, comfort and convenience. Another output issue is changing consumer preferences.)

Some flesh to the bones of this story will be found in Alan Wylde’s Technological Innovation and Economic Growth in New Zealand: 1918 to ‘Think Big’. The warehouse of plans is so enormous that no book could cover the entire the topic. This book gives concise summaries of technical change in railways, the meat industry, grasslands, aerial fertiliser, dairying, wool, flaxmilling, hydroelectricity, geothermal power, the Cook Strait cable, the steel industry, and the hydrocarbon-based major products.

I shall not review the book but instead share the ponderings which it precipitated.

Most importantly, the vast majority of the technologies we use are generated overseas – 100 percent to the nearest percentage point. Sometimes we import the plans, or experts knowledgeable about them, but often they come embodied in a product – like the computer this is being written on.

However, there is very often a challenge to adapt the foreign technologies to local conditions. The first example in Wylde’s book is that because our terrain is very different from England’s, we had to adapt their railway technology to local conditions. Tasman found the Scandinavian pulp and paper plant they installed was not designed for radiata pine and spent a lot of time fine tuning it.

The list could go on, each item illustrating that while we often get the technologies from overseas we had to rummage around in the plans warehouse to tweak them.

The rummaging may be done by our engineers and scientists, but sometimes the key adapters are others. For instance, monolithic cladding can be a very effective means of shielding a house. Applied badly it can result in a leaky building. I would never trust the cladding unless the building workers were trained in its application.

We can be very sloppy, more like the Brits than the Germans, whose secondary schooling and technical training makes more effort to ensure their workers are properly skilled.

The sloppiness happens at all levels. A union organiser told me of management calling in their process workers and demanding to know why the downtime of a new expensive machine was far higher than the German manufacturer’s specification. The answer was that the workers had never been trained to use the machine.

The perspective I am offering is pretty obvious – Wylde’s book is rich with examples illustrating it. But it is not the way that public policy thinks. In particular we are pouring resources into an ‘innovation strategy’ which aims to generate technological plans which can earn royalties by being sold overseas. Undoubtedly this will sometimes happen, but Wylde’s book has very few such examples; when it happens the earnings are often the consulting fees our technologists earn.

I doubt total external sales will earn an acceptable return on the public outlays. Does the balance in our innovation strategy make sense? To what extent should we placing more effort on improving the importing, adaptation and implementation of world technologies?

This does not mean spending any less. Our chance of making a major breakthrough in cancer treatment, say, is very small. The effort, surely, should be to ensure that what is available internationally is applied quickly and effectively to those who suffer cancer. Probably a key element in this transfer process is high quality scientific teams who are involved in research near the world frontier so they understand what is going on and can pass it on. But let us not pretend their purpose is to make the country a fortune by an international breakthrough (we could be lucky).

At the aggregate level of the production function, technology may be mysterious. At the micro-level of the descriptions in Wylde’s book, it is far less so. Whether New Zealand can accelerate the world’s rate of technological change is doubtful. But thinking practically at the micro-level could lead to better economic performance and, I would hope, to our environmental and social performance too.

The Future Of International Trading.

This entry was posted in Globalisation & Trade, Pundit on 23rd November 2016 by Brian Easton.

Can Trump wreck the world trading system?

New Zealand is such a small country that it is very easy to be internationally bullied. Much of our diplomatic effort aims to minimise such bullying, but fear of it lurks behind concerns about what a Trump administration might do, not only to us but the rest of the world. Could the US, big enough to be hard to bully, disrupt the world trading system? The answer is, ‘of course’, but it is unlikely.

At the heart of the international trading order is a rules-based system embedded in the World Trade Organisation. Membership of the WTO requires conforming to a set of rules and agreements that regulate international trade.

For example, in 1999 the US slapped a tariff of at least 9 percent and up to 40 percent on our (and Australian) lamb exports despite an agreement that it was bound to (could not be higher than) only a few cents per kilo. The surcharge was entirely for domestic political purposes, and it may have cost New Zealand farmers up to $45m over three years. Our redress against the bullying was to follow WTO procedures, which eventually found that the agreed bindings had not been kept. The US, accepting it was bound by international trading rules, reduced the tariffs to the bound levels.

These sorts of disputes happen all the time; on occasions the US has been the plaintiff. (Another example was when we took Australia to task over excluding our apple exports; again we won.) It seems likely that there would have been many more disputes which have been avoided because the offending country expected to lose.

So could a Trump administration refuse to observe the various bindings previous administrations have committed the US to? The short answer is ‘yes’, but it would then face the dispute resolution procedures of the WTO. Not just from New Zealand, for a host of other countries would also be litigating.

Could a Trump administration withdraw from the WTO? To do so would mean US exporters losing their preferential access to others’ markets. They would be very angry and the Trump administration would come under severe political pressures from business. Knowing this, it is unlikely to withdraw from the WTO.

I am less sure about individual trade agreements. Some the US has negotiated are for political purposes as well (as with Israel and some Latin American states) but Trump has threatened to abrogate the North American Free Trade Agreement with Canada and Mexico. It has been there for a while and many American businesses, representing powerful lobbies, would be deeply damaged. I suppose he could demand a renegotiation, but the Canadians and Mexicans are likely to want concessions in return.

Trump is not expected to go ahead with the Trans Pacific Partnership (TPP); he probably could not get it through Congress if he was keen – he is not. The TTP may proceed among the other 11 participants following renegotiation. But TPP11 would be less ‘ambitious’ and we would not get the improved access to the US market we had hoped for.

In a wider context, we seem to have reached a new phase in globalisation for exports are no longer growing faster than domestic production. This probably arises because the falling costs of distance which drove that growth seem to be exhausted (services aside).

In any case, most of the traditional opportunities in international trade deals have largely been implemented. The TPP was intended to be ‘ambitious’, a term intended to indicate a new stage of coverage. Without ambitions, all that is left is tidying up.

New Zealand is currently negotiating traditional deals with 14 Asian nations plus Australia (RCEP), the EU (probably delayed because of Brexit), the Gulf States, India (probably done as a part of RCEP) and Russia (strictly the Eurasian Economic Community), Each could be a tidy little earner, but none is ‘ambitious’.

Actually, New Zealand has a secret ambition. Tariffs on manufactures under the WTO are near zero. (Work still needs to be done on trade facilitation, eliminating administrative barriers, and on services.) But there remains severe restrictions on access for many agricultural goods, especially meat and dairy.

There is a conflict in WTO principles between free trade on industrial goods and services and protection of domestic agricultural sectors which many countries practise. Others demand freedom of access for their exports, just as for manufactures; among them New Zealand is a leader. Our strategy has been to use international forums to make explicit demands for comprehensive free trade in agricultural products while using particular trade deals, including the TPP, to nibble away at the restrictions as much as we can.

The US has been ambivalent, wanting international market access for its farm exporters but also wanting to protect its domestic-oriented farmers. Sometimes it has been helpful to New Zealand’s general case but only grudging about American market access. It may well be more battened down under a Trump administration.

We cannot expect US leadership for more ambitious deals under Trump, nor as much attention as we would like to the fight against agricultural protectionism. Meanwhile New Zealand will have to continue to put considerable efforts into maintaining a rules-based WTO. But we need not expect a disaster. I’m afraid I cannot say the same on other dimensions of international affairs.

Restoring Fiscal Responsibility

This entry was posted in Macroeconomics & Money, Pundit on 16th November 2016 by Brian Easton.

The times are a’changing, as recent macroeconomic fashions are being abandoned and old verities are being restated.

Alan Blinder, an American economist, described as ‘one of the great economic minds of his generation,’ was an economic adviser to President Clinton and was a Vice Chair of the American Federal Reserve (central bank). He is known to many as the co-author of an extremely successful textbook.

He recent monograph Fiscal Policy Reconsidered is an important statement by a saltwater economist contrasting with the failure of the freshwater Austerians (those who advocate fiscal austerity). It argues that it is possible to have an effective fiscal policy (that varying government taxation spending and borrowing can be beneficial for the economy) and that monetary policy (what central banks do) may not be effective.

His position is summarised in a rejection of two standard neoliberal propositions.

– that sensible fiscal policy is impossible because Congress is too slow and too political;

– that fiscal policy is superfluous because monetary policy can always do the job.

I explain what this means by the New Zealand experience. Even so, some readers may find the column all a bit technical. Sorry. If anyone can simplify without losing the rational economics, please have a go.

Once Were Macroeconomics

In the 1960s and 1970s both propositions that Blinder rejects would have been thought odd. It was quite usual to change fiscal settings in order to change the direction of the economy – to protect the balance of payments, to change employment levels and to restrain inflation.

The prime minister commanded parliament so he did not have the difficulties that the US president has, but there were implementation lags; it took about six months to set up a change in income tax. Formulating the right policy response is not easy either.

One of the tricks in the fiscal system was that the tax system was progressive so that a rise in incomes from economic growth or inflation meant that tax revenues rose proportionally faster than the economy – a phenomenon called ‘fiscal drag’. That meant the main tax changes usually involved cutting rates, which are easier to get through parliament. The flattening of our income tax scale has reduced this progression with the consequence of less fiscal drag and a loss of the ‘automatic stabilisers’ which we thought important at the time, as does Blinder does today.

Spending changes were harder. I recall once in the late 1970s when Treasury officials had been instructed to increase infrastructural spending and were scrambling around to find projects which could be implemented immediately. Was that the time when the government gave a one-off increase in the family benefit because it could be done very quickly? An additional worry is how to wind spending down when there was too much expenditure pressure.

The difference between spending and current revenue has to be borrowed. Looking back all those years, I think we were a bit sloppy in our thinking. Debt is a burden on future generations. Today we might say that current spending and revenue should be equal over the business cycle but that the government may borrow for long term for investment. Nowadays, infrastructural investment is the big thing, but once a lot of government borrowing was for investment by state owned enterprises. In either case, assuming the investment is effective – it was not always – future generations had its benefit to offset the burden of debt.

The role of monetary policy in this macroeconomic framework was to support fiscal policy, not an alternative to it. Generally monetary policy was thought to take a long time to be effective; I recall about ten years. Moreover it worked through interest rates impacting on investment and consumer borrowing, not through the quantity of money, which Monetarists like Friedman thought. (One trouble was there were so many definitions of money and if you targeted one all the others moved differently.)

I’ve set down as briefly, and as non-technically, as I dare the standard macroeconomic framework of the times. There is no question that Muldoon misused it. The conventional macroeconomists of the day criticised him; so did the Monetarists.

Then Came Monetarism

In the mid-1980s, the Rogernomes abandoned the standard macroeconomics framework and imposed a monetarist one based on principles not unlike the two which Blinder criticised. It substantially reduced the significance of fiscal policy and put the weight of macroeconomic control onto monetary policy.

I recall that at the time it was suddenly assumed that monetary policy worked quickly – in months rather than years. I do not recall any empirical evidence to support that conclusion. We seem to have simply adopted the American monetarist framework including the idea that parliament could not manage fiscal policy. It was colonial cringe, taking over the imperial ideology with little thought of its local relevance.

One of the strange results was that the Treasury in charge of fiscal policy and the Reserve Bank in charge of monetary policy did not talk to one another, a matter not addressed until the late 1990s.

That said, a close reading of RBNZ statements indicates that their economists thought fiscal policy important – certainly more important than the public rhetoric. I think what was happening was that there were still conventional macroeconomists in the institutions who, while not dominant, continued to use the standard framework.

The Monetarists claim the great success of their framework was the squeezing out of inflation from double digits (above 10 percent a year) to very low levels. But the story is more complicated.

First, much of the inflation of the mid-1980s was from government policies (such as introducing GST, raising State Owned Enterprise prices and hiking the exchange rate). Once the new initiatives stopped you would expect inflation to fall.

Second, world inflation was falling so there were not the same external pressures on domestic inflation.

Third, Rogernomics and (later) Ruthanasia (deliberately) broke the linkages and protective mechanisms which enabled a price rise in one part of the economy was transmitted through the rest.

Fourth, inflationary expectations were reduced. This reduction could be attributed to the new monetary policy but equally Muldoon could say that his price freeze reduced expectations too. It was not so much the policy itself but that the public believed the policy.

Thence was the GFC

If you look at the economists who predicted something like the GFC would happen – they got neither the exact timing nor the magnitude correct, of course – they were using the conventional rather than the monetarist framework. The conventional framework has proved more helpful since the GFC. Indeed Monetarists have repeatedly said policies which involve enormous increases in the stock of money will generate inflation. They have not in the short run (although they may in the long run, as the conventional framework allows).

However, stimulation from monetary policy by itself has not led to a strong economic recovery. Again holders of the conventional framework are not surprised and there have been increasing calls for a fiscal stimulus, typically by government borrowing to spend on (infrastructural) investment.

This is the context of Blinder’s paper. Let me finish by saying that there is nothing in the conventional framework which says that fiscal and monetary initiatives should be ill-disciplined. They have to be applied with care and thoughtfulness and with a pragmatism rather than ideological fervour.

Angry People

This entry was posted in Growth & Innovation, Political Economy & History, Pundit on 11th November 2016 by Brian Easton.

The alienated Angries who supported Brexit and Trump are not going to go away.

If any question why we died,

Tell them, because our fathers lied.

Arch-imperialist Rudyard Kipling’s bitter couplet, written shortly after the death of his son at Loos in September 1915, is an alternative view to the current commemoration – even celebration – of the events surrounding the First World War. It has a kind of eternal verity, does it not: Johnson in Vietnam, Bush and Blair in Iraq, Putin in the Ukraine?

But as angry as the couplet is in a military context, it is also about today’s upheavals in domestic politics and its interaction with the international economy. For the basic message of the Angries, supporting Trump, Brexit and a host of similar movements in other countries, is that the elites are lying to them.

It is not quite as simple as this, but I was struck by a recent lead editorial in the London Economist of October 1. As you would expect, the publication was staunchly supportive of the open economy and opposed to the ‘anti-globalists’, as it describes them. However the editorial was so busy talking to the elite who read the magazine that it was not listening to the grievances of the dissenters who don’t.

It is all very well listing the Angries’ demographic characteristics but, unfortunately, most of the surveys do not ask about what they actually think. One report said that a widespread view among Brexit voters was they did not trust experts; there must be a similar attitude among Trump supporters.

It is all very well the elite saying ‘you are not listening’. The Angries’ response is ‘you lied to us’ or more temperately, ‘you are not listening either.’ A Brazilian colonel captured it, after having taken the expert advice of neoliberal economists: ‘how come the economy is doing well but the people are not?’

Of course the elite may be doing well. Recall that the top 10 percent recovered their previous disposable income levels after a couple of years of Rogernomics; it took the bottom 30 percent two decades to get back to their pre-Rogernomics levels, by which time, the elite had experienced considerable income growth. (Even the second-to-top decile took over a decade.) How can the majority support Rogernomics and its successors given that its promises to the majority were not met?

There are similar stories elsewhere – the majority are not going to listen to those who talk about how well the economy is doing. How are they going to believe that globalisation is beneficial? (To make my position clear, I do not think trade deals need be neoliberal, but it hard to get this across.) It is easier to think, and say, the elite are lying.

The same applies to many Brexiters and Trump supporters. For them the elite – ensconced in London and Washington – have not been acting in their interests.

Practically, democracy is not a rule of the people. Rather, it tries to put constraints on the ruling elite so that they act in the interests of the people. The practice does not always work well, especially when the elite does not listen and when institutional arrangements blunt the ability of the wider population to express themselves and influence the rulers. Those who are angry become alienated. But institutional oddities have enabled the Angries to finally articulate their anger in public. Unlike on early occasions they turned-out to vent their alienation.*

How often have you heard the view that Cameron should not have allowed the Brexit referendum? (Though it could have been better organised.) The way American parties choose their presidential candidates plus the US electoral system itself let Trump bolt through.

The Angries are not going to go away as long as the elite ignore them rather than listen to them. Sure, much of what they say suffers from truthiness – that truth is determined by belief rather than by facts. But is that not also true for the ‘truths’ of the elite?

I do not know where this goes. One possibility is a retreat into the sort of neo-feudalism – as it is sometimes called – of Putin in Russia and Xi in China. To avoid it, or some equally unpleasant fate, the elites are going to have to surrender some of their privileges, to listen to those whose interests they profess to rule, to describe the world in terms which are not biased towards themselves, to stop ‘lying’. Or rather, to understand their truthiness is seen by others as lying. A big ask.

In the interim the Angries in charge may cause havoc. The best will in the world is finding Brexit hard to unscramble. Trump may find himself much more limited than he expects (even though he has a Republican Congress).

Shakespeare – as so often – got it right. In his Cymbeline, Princess Imogen (Innogen) is lost in a wood. She says:

Two beggars told me

I could not miss my way: will poor folks lie,

That have afflictions on them, knowing ’tis

A punishment or trial? Yes; no wonder,

When rich ones scarce tell true. To lapse in fulness

Is sorer than to lie for need, and falsehood

Is worse in kings than beggars.

Absolutely; kings need to set a standard. If they and their courtiers do not, given the chance the underlings will rebel.

* Among the things that Bob Chapman taught us was the importance of the Non-vote Party. Not only in New Zealand but elsewhere. The outcomes in both in the Brexit referendum and the American presidential election depended on the Non-vote Party losing a lot of support.

JAFA Inequality

This entry was posted in Distributional Economics, Pundit on 7th November 2016 by Brian Easton.

While overall income inequality may have been relatively stable over the last two decades, it appears to be increasing in Auckland (and perhaps in our other big urban centres).

This column honours Bob Chapman (1922-2004), professor of Political Studies at the University of Auckland, remembered for his mentoring of many students including Helen Clark. He was an early New Zealand social scientist who did not just study elections but used the results to explore the social development of New Zealand

In particular, in a 1962 Landfall article* he argued that New Zealand’s egalitarian society would be stressed by urbanisation. Over 50 years later I am going to report some evidence for his prediction; not just anecdotes – we all have those – but statistics. As you might expect, Bob was not quite right, but he was prescient.

This column is conversational, not clouded by the impenetrable rigours of academia. My conversation is based on a chapter by Omonlyi Alimi, David Mare and Jacques Poot, ‘Income Inequality in New Zealand Regions’, in a recent book.**

The only available data to assess regional income inequality is gross income (market income plus benefits before-tax) reported in the New Zealand Population Census since 1981. It is not an ideal measure because it leaves out housing. Moreover, the researchers report only the figures for adult males. Excluding females means the measure is not comprehensive, but it avoids the complications of women’s unpaid work. It will serve for our purposes.

It has long been known that average incomes differ by region – I reported on this in 1983*** – so I shall largely skip over this. For the record, in 2013 Wellington has the highest average incomes – about 15 percent above the national average, while Northland is 20 percent below it. Auckland was 9 percent above. A major factor examining the difference is different regional industrial structures; Te Awamutu does not have the large financial sector that Auckland has.

The new insights from the research is the income distribution within regions; The researchers find a familiar story for the whole of the economy. Gross-income inequality – measured in a number of different ways – was roughly constant from (census years) 1981 to 1991 and from 1996 to 2013. There is a marked jump in inequality between 1991 and 1996. This is the result of the benefit cuts and (probably) the liberalisation of the labour market (the Employments Contracts Act) which took place shortly after the 1991 Census. (The familiar indicators which also show a big increase before 1991 are after-tax with the big inequality-driving tax-change in the late 1980s. This study uses a before-tax measure.)

To avoid the impact of the benefit cuts, which do not seem to have had a differential regional impact, I focus on the 1996 to 2013 period. The basic conclusion is that, with one or (possibly) two exceptions, there is not a lot of differences in the internal income inequality among the different region. In general, too, the degree of inequality within each region is similar to the overall inequality in New Zealand.

(I have suppressed a long discussion on the minor variations, the problems of measurement error and the statistical tests I have done to give me some confidence in this assessment.)

The exception is Auckland. On the whole, in 1996 its income inequality looks much like other regions. But by 2013 it is evidently an outlier. That means that income inequality has risen in Auckland even if it has not risen elsewhere and it is now out of line with (just about) everywhere else. (Again I’ve suppressed the details.) Our largest urban centre has become more unequal in recent years even if the nation is not.

The sharpest rise in Auckland (income) inequality appears to be a growing gap between the middle and bottom incomes although top incomes are growing faster than middle incomes but not quite as rapidly. This has not been characteristic of elsewhere in New Zealand. Note this is not directly the effect of the Auckland housing boom; were we able to incorporate the implicit incomes from owning your own homes the inequality would probably be rising even more.

What about the other large urban centres? The definitions of regions do not quite correspond to cities. Wellington’s region contains a bit of rural Wairarapa. Even so, if you squint you can see a similar pattern to Auckland – rising internal inequality to above the typical regional level but not as much. Were there no Auckland, Wellington would be the outlier region.

We might expect a similar story for Christchurch. However, its region includes rural Canterbury and Timaru. Moreover, the urban boundaries have changed because of the Canterbury earthquakes. I can but report that income inequality in the Canterbury region looks much like the rest of New Zealand excluding Auckland (and possibly Wellington). It is both near the average and hasn’t changed much.

What do these statistical results mean? Oh, we do need Bob Chapman.

Here is my guess. The rising income inequality in Auckland and in Wellington (probably) and Christchurch (possibly) presages a different New Zealand, a less egalitarian New Zealand much as Bob expected. Perhaps a little later than he predicted, although arguably the processes were going on earlier but could not be statistically detected.

Will the different New Zealand be a better or worse New Zealand, and in what ways? I am sorry we have not Bob to help us think the answer through. We shall have to do it ourselves.

* R. Chapman (1962) ‘New Zealand since the War (8)’ Landfall (63) Vol 16, No 3, September republished in E. McLeay (ed) New Zealand Politics and Social Patterns: Selected Works by Robert Chapman

** P. Spoonley (2016) Rebooting the Regions.

*** B. Easton (1983) Income Distribution in New Zealand.

Who Was Accountable For The Shambles?

This entry was posted in Health, Pundit on 31st October 2016 by Brian Easton.

A novel about an historical event reminds us of the health redisorganisation of the 1990s, raising issues remaining relevant to today.

I puzzle at how politicians and advisers can make giant mistakes but are never held accountable. The notion of accountability became fashionable in the neoliberal changes of the 1980s and many people further down in the system now work under tighter surveillance than they did then. But others, especially those higher up in the hierarchy, completely avoided accountability despite having been deeply engaged in, and supportive of, policies which proved disastrous.

I was once more faced with the puzzle when reading Ian Cowan’s novel, Not Our Problem, based on the health redisorganisation of the early 1990s. Cowan is a consultant radiologist working at the Canterbury District Health Board. However the novel’s hero, Stephen Cassidy, is a talented surgical trainee. He suffers burnout and takes a year off, joining the managers trying to implement the redisorganisation in Paxton hospital, a thinly disguised Christchurch one.

Note I increasingly avoid the word ‘reform’ with its overtones of ‘improvements’. Too often, despite the hype of the advocates, their changes do not improve the situation much – often making things worse. Such it was with the health redisorganisation, a neoliberal attempt to impose commercial practices without any understanding the reasons why the public sector organisations existed; their purpose cannot be summarised in a single output variable such as profit.

By joining those involved in the implementation, with responsibilities for staff liaison, Stephen is nicely – for the novel – placed as the ham in the sandwich between the two sides of the controversy which is at the centre of the novel and which occurred at the time. The confrontation is reported in one form or another in page after page. It is nicely captured in this passage (Claudia represents the funding agency, a Regional Health Authority (RHA), one of the institutions deeply involved in the implementation.)

‘And you think I’ll tell somebody with a new cancer that we can’t treat him because of an externality do you?’ Cassidy laughed. ‘I don’t think so. No Paxton doctor would do that’.

‘Why not.’

‘Because it would be immoral. And unethical. And unfair … don’t you agree?’

She chewed for a moment . ‘I don’t have an opinion on it.’

“What? How can you not have an opinion on something as important as that?’

My job is to make sure the RHA is protected from risk,’ said Claudia, ‘and that’s what I do. If they had employed me to debate ethics I would, but they didn’t so I don’t.’

The clash here is between two different approaches to one’s job. Stephen is a professional steeped in an ethic which places responsibility at the centre of an individual’s performance; Claudia is a manager who is accountable for what she is contracted to do.

Actually Claudia is a ‘generic’ manager. That is, she knows nothing (or very little) about what she is managing and so is unable to take into consideration the particularities involved. She, like most of the other managers in the novel (and, in my experience, in practice), constantly stumbles against the realities of what they are managing. An example, not used in the novel, is that managers insisted that bed usage in wards be increased, without understanding that the more intensively they are used the more likely there will be cross-infection. Doctors tell me that people died as a result. I’ll leave you to read the novel for many other examples.

Yes, people died as a result of redisorganisation, many more experienced greater discomfort, and – as the novel details – resources were wasted. Managers rarely take into consideration the resources they are using in order to save resources. I think Cowan is broadly correct in that the additional resources used by the managers to govern the professionals roughly outweighed the ‘gains’ in efficiency the managers made, while quality deteriorated.

The novel’s portrayal of the medical profession is much as I recall them at the time. Totally committed to their profession and hence to their patients but baffled by what was going on; Stephen, though, is well informed – the book is backed by numerous references. The portrayal of the generic managers is of people who are arrogant and obsessed by a theory which proved wrong while ignoring contradicting evidence; occasionally their humanity breaks though. My memory suggests the picture is a bit harsh, although that is certainly the way that most came across in public.

The novel chronicles the collapse of the redisorganisation (it actually took longer than the story’s span), as time and again reality stopped the plans of the managers. In summary, no gain; plenty of pain. But the reality was supplemented by stout resistance from professions in the health sector – who the managers describe as ‘vested interests’ – and the public.

This happened two decades ago but the novel, as well as being a contribution to the historical record, remains pertinent today. The clash between professionals and managers occurred not only in the health service, but also in the universities, in science and in many other parts of the public sector. The point is that a properly regulated private sector business can contribute to our welfare, but many activities cannot be so regulated and it is better to make use of professional responsibility. As we undermine professionalism, we get an inferior job done.

The central problem is captured in the novel’s title. The managers thought the delivery of health care was not their problem while the health professionals tended to ignore the resource restraints which the managers faced. When, before the redisorganisation, I used to teach health economics sixth-year medical students I would write on the board in large letter ‘either doctors take responsibility for the resources they use or accountants will make medical decisions’. The message glared, making some of the students profoundly uncomfortable, for they saw their job was to save lives – not to worry how much it cost.

Cowan nicely captures the shambles of the redisorganisation. Despite its almost total failure, the novel describes managers totally captured by the neoliberal ideology and totally confident they could deliver although a few are doubters by the novel ends (including Claudia).

It is unlikely one of the committed managers will write a novel defending what they did; I guess they would say in the dock, as they do in the novel, they were only doing what they were contracted to do. (As the trial of Adolf Eichmann, an SS officer and organiser of the Holocaust, reminds us, following orders is not a defence.) I suspect few recall their contribution with pride, if they remember at all. Stephen Cassidy will; thankyou Ian Cowan for reminding us.

Can Te Awamutu Have Its Own Independent Central Bank?

This entry was posted in Macroeconomics & Money, Pundit on 24th October 2016 by Brian Easton.

Pretending it can, or that the Reserve Bank of New Zealand can function independently from the rest of the world, could generate a financial crash.

The very joining of monetary policy and fiscal policy into a single phrase is a criticism of the neoliberal macroeconomics. The reconfiguration under Rogernomics assumed that the two could be administered independently of one another, and gave an authority and power to monetary policy beyond what any reasonable analysis would conclude. It did exactly the opposite to fiscal policy, assuming that the management of taxation, public spending and public debt can do little to sustain the economy or contribute to public welfare, except by keeping each as low as possible. That is not the view of today’s serious analysts who have become much more vocal since the Global Financial Crisis.

However, the crude neoliberal – monetarist – position continues to dominate the New Zealand public discussion even though, if you follow it carefully, the Reserve Bank takes a far more sophisticated approach.

The fact is that the Reserve Bank has much less power than the monetarists think, especially when two key prices – consumer prices and housing prices – have quite different inflationary trajectories.. But even were they in sync, the Reserve Bank’s influence over the economy is limited as long as New Zealand is a small part of the international economy.

Imagine Te Awamutu establishing its own central bank with the belief it would have a massive effect on the local welfare, independently of what the Reserve Bank of New Zealand was doing. As absurd as that assumption is, New Zealand has about the same relative size in the world economy as Te Awamutu has in the New Zealand economy.

The fact is that Te Awamutu cannot issue a currency which operates independently of the New Zealand dollar and monetary conditions. The New Zealand dollar has about the same independence of the international currencies used in the world economy.

Yet much New Zealand commentary ignores such obvious facts, pretending that our Reserve Bank has the same power and influence as has, say, the US central bank. The Federal Reserve has the power to issue an international currency, which New Zealand’s central bank has not.

This column focuses on a single problem which illustrates the interdependence between monetary and fiscal policy. Many people say, why shouldn’t the New Zealand government run a fiscal deficit, spending more than its current revenues and borrowing the difference? After all, the New Zealand government debt is low by international standards – very low actually. What the advocates do not consider is that the offshore debt of our trading banks is high by international standards. All that international banking debt could end up a charge on the New Zealand government.

That is because trading banks can go to their central bank if they get short of cash when access to international funds dries up. That may solve their immediate problem but the effect is that the central bank, and therefore in our case, the New Zealand Government, would in effect become liable for the international debts of the trading banks. Those liabilities are, of course, matched by assets, which are liabilities of the trading banks. The catch is that the Reserve Bank assets are in NZ dollars, but its liabilities are in US ones. Its balance sheet becomes vulnerable to changes in the exchange rate and a substantial depreciation – a likely part of this scenario – would cost the taxpayer hugely – among other things.

That almost happened during the Global Financial Crisis. In the circumstances the Reserve Bank and the Treasury handled the situation brilliantly – much better than the business commentator and other self-appointed monetary experts seem to be able to even understand. At one stage the government ended up owning, in effect, a chunk of the house mortgages of New Zealand.

As sketchy as I have been here, I think we can draw some lessons.

First, the New Zealand government is exposed to substantial foreign-exchange-denominated debt. This fact is quite in contrast to the neoliberal position that private debt has no relevance to government affairs, which is yet another example of neoliberal economics crashing as forcefully as did the world financial system during the Global Financial Crash.

Second, there is not nearly as much room for running a fiscal deficit as it might seem. In my view any additional spending causing a deficit should be on investment, especially income generating investment such as (affordable) housing or some types of infrastructure so it is less of a burden on future generations.

Third, New Zealand will not be as well placed if there is another local or global financial crisis as it was in 2008. The Reserve Bank is to be commended for the prudential measures it has taken (which shift some of the risk from the government to the private sector) but there is no longer the fiscal room we had then.

Sadly, and worryingly, much of the overseas borrowing has gone not into income-generating investment but into the transaction costs of housing speculation – on real estate agents, valuers, conveyancers and the like – into gambling really, with the croupiers making tidy profits. When housing prices turn soggy, or worse, it will not be possible to recover that spending because it is not an investment; it will also be difficult to levy those who benefited from the capital gains from the speculation.

This is a serious caution; there will be a future New Zealand government whose time will be dominated by the problems of high overseas debt (not for the first time in our history). Those on the watch whose negligence caused the high debt will be out of power and hardly held to account.

This column is a revised extract from Unfinished Business – What the 5th Labour Government Did Not Do and the 6th Should a paper to the Fabian Society,.

Comment Dear Antoine,Why is the

Dear Antoine,

Why is the Reserve Bank required to lend foreign currency to NZ’s banks? I could see why they would be required to lend NZ$s at a specific rate, but other currencies…?

It is very hard to predict exactly what would happen.

It is true that the RBNZ would lend in NZ currency to the trading banks. The trading banks would then convert the NZ currency into foreign currency to pay off the debts they owed. (Recall we are talking about a situation where there has been a seizure in the foreign exchange markets and they can neither borrow nor roll over debt in foreign currency markets.) That would probably collapse the exchange rate, inducing rapid inflation, unemployment and impoverishment. (This assumes, as is almost certainly true, that the supply-side responses from exports would be slow.) A further complication is that trade credit would probably dry up so that it would be difficult to export or import.

At least that is what we fear but it is difficult to be sure because there would be so much chaos elsewhere in the world economy too.

What the RBNZ did during the GFC was arrange a ‘swap’ with the US central bank (possibly also with the British, European and Japanese central banks). In effect the RBNZ would have been able to borrow US dollars from it. (Remember that borrowing from any central bank is costly.)

And why do NZ banks borrow large amounts from overseas?

Much easier to answer, Antoine. Trading banks make their profits (largely) from charging a margin between what they pay for borrowing and what they charge for lending. The more they borrow/lend the bigger their profits.