How far right is New Zealand?

This entry was posted in Political Economy & History, Pundit on 21st November 2017 by Brian Easton.

I prepared this for a US audience; hence its more American perspective.

Ben Mack’s ‘How the far right is poisoning New Zealand’ was such a distorted account of New Zealand politics that it was initially considered satire. That it was serious makes its many wild assertions difficult to deal with in a short response. One will do. He cites the new government slashing immigration numbers as evidence of its being ‘far right’. It is true it has agreed to a target of only half current levels, reflecting concerns about the ability of the economy to absorb the inflow. The annual target is now 0.85 percent of the New Zealand population, around three times higher than recent US levels. Does that make the Obama administration very far right?

American readers will be familiar with uninformed, unidimensional obsessives who litter the US political landscape, but they may struggle with situations with which they are unfamiliar. The American-based Political Compass scores the three coalition partners of the current New Zealand Government the Greens as 4 units to the left, New Zealand First as 1 unit to the left and Labour as 4 units to the right. National, the main opposition party and core of the previous government, is scored 8 units to the right so the new government has moved substantially to the left.

To give a sense of the scale, Hillary Clinton is scored 7.5 units to the right, consistent with the common claim by National Party supporters that their political approach is close to the Democrats. To describe either as very far right is ludicrous.

New Zealand has a far right party, ACT, with one seat in its parliament. It won 0.5 percent of the vote. While ACT is economically to the right, it is neither a fascist party nor racist. Three of the four cabinet ministers from New Zealand First, which Mack describes as racist, are in fact Maori, the indigenous people of Aotearoa/New Zealand.

Mack, an American living in New Zealand, is struggling to understand how the New Zealand electoral system works, for it is very different from the US one. It is a proportional system (based on the Mixed Member Proportional approach similar to Germany’s). Gerrymandering is almost non-existent and the current government was chosen by 49.2 percent of voters on a 79.0 percent turnout. The Opposition parties gained 46.5 percent; the smaller parties which did not meet the threshold for seats in parliament predominantly support leftish policies.

To describe the New Zealand voter or the New Zealand government as far right in American terms is preposterous.

PS. This is posted on the day in which it was announced that coalition talks in Germany are in tatters, 58 days after their election. It took the Dutch eight months to form a coalition government.

Mack grumbled about it taking 27 days for New Zealand to form its government. I think we have to accept that the elections only choose the composition of parliaments. A second stage is parliament choosing the composition of the executive. If Mack had had a broader perspective, he might have noticed that it took Trump 102 days after his election to announce the completion of his inner cabinet (and 27 days after he was inaugurated as President). Because of Senate approvals it took a further 71 days before they were all in office.

Reducing Child Poverty

This entry was posted in Distributional Economics, Pundit, Social Policy on 17th November 2017 by Brian Easton.

Despite many attempts, we have been remarkably ineffective at reducing child poverty. Can we expect the current government to do better?

Over forty years ago, researchers identified that children and their families were bulk of the poor It was not possible to do this earlier because there was not the data. The Muldoon Government began addressing the problem with income tax reductions for some families although the total effort was small. The Fourth Labour Government introduced Family Support in 1984 (the lead minister was Ann Hercus).

We are not sure about the exact impact of these measures. Data are sparse, high inflation devalued the sums involved, it was a time of social change (including earning mothers and changing family structures), while our measures of poverty are crude (for instance, they do not allow for childcare or schooling costs; the adjustments for housing costs are embarrassing).

In the 1990 Economic and Social Initiative, Ruth Richardson and Jenny Shipley cut benefits to families (they did not even increase them for the recent inflation). The effect of the measures was to more than double the number of children in poverty. (The exact figure depends upon the choice of poverty level and is complicated by the rise in unemployment at the time.)

Any commentator on child poverty should acknowledge this attack on children. If they do not, they are either bereft of technical competence or excessively timid, afraid that honesty will generate political wrath. That many fail to do so distorts the discussion and diagnosis. The clear message from the Richardson-Shipley cuts is that reducing child poverty involves income transfers (other measures, such as improving access to healthcare, can have a useful but secondary effect). Claiming that the chief cause of child poverty is drugs or whatever is not recognising that political decisions have been a major cause.

In 1996 National introduced the Child Tax Credit and in 2005 Labour brought in the Working for Families Package. Both targeted families with adults in employment, leaving families dependent on benefits to continue to rot. In effect they reinforce the notion of the deserving and undeserving poor – ignoring that the division makes no sense in terms of the best interests of children. There is more about these measures below.

In 2016 the Key-English National Government raised benefit rates for families with children by $25 a week after tax. It proudly claimed that this was ‘the first time core benefit rates ha[d] been increased – apart from inflation adjustments – since 1972′. (True, but it did not mention the Richardson-Shipley cut and that the real rates were still below the 1972 levels.) The effects on poverty levels of this measure are not yet known because the survey data is not in.

Coming into office, the new Prime Minister, Jacinda Ardern, has given herself the responsibility for child poverty reduction, a concern she had when she was in opposition. Thus far there has been no announcement of what is going to be done but she says she wants to take 100,000 children out of poverty by 2020. (Bill English made a similar commitment.) Presumably this based on a poverty line which suggests about 150,000 are poor, with the intention is that the other 50,000 will also have financial pressures on them reduced. To these numbers have to be added their parents/guardians, which adds to the magnitude of the task.

There is some divergence about how to attain this goal. Briefly, there are those who think we should scrap the current hotchpotch of measures and introduce a universal – perhaps taxable – family benefit at an adequate level to do the job. This would be a return to the tradition that Hercus and earlier Labour governments were pursuing of integrating the tax and benefit system and abolishing deserving/undeserving distinctions. (It would also be a(n expensive) step towards a Universal Basic Income, something the elderly already get.)

Others as concerned and informed about child poverty want to extend the existing system by addressing its anomalies. Their more selective approach would cost around $1.2b a year, which is a big hunk of the discretionary spending the government is likely to have available. (My guess is that the universal approach will be much more expensive, but it will eliminate more poverty while minimising the anomalies and administrative hassles to be discussed below.)

I belong to the first (universal) group but the likelihood is that the Government may be trapped into the mindset which led to the Working For Families (WFF) package.

This would be despite WFF being a botch-job. The Court of Appeal said that the part of the package that required paid-work was discriminatory and was thus inequitable; it did not rule it illegal, deferring to the Crown’s right to make policy. But the package is riddled with administrative complications and anomalies.

I will not detail the complexities – there are four separate tax credits – but illustrate them by one recipient who, faced with the end-of-year wash-up which confusedly involved a hefty tax bill, thought WFF would be better called ‘WTF’.

The anomalies in the system mainly arise from the harsh targeting of WFF and the criteria for the work status of the parents. Those who are not in enough hours of work miss out. It is meant to be an incentive to get beneficiaries into paid work (the research shows it had hardly any effect). But what happens to a low-income family which has to leave the full-time workforce perhaps after having been made redundant? As well as the drastic cut in its wage income, it also faces a brutal cut in child-related tax credits, just when it is most needed. WTF!

In fact the WFF (and the CTC) break the canons of good tax/income support design, obvious to anyone with a modicum of training in economics. How the designers made such a technical botch has never been explained. It may be the politicians set them ridiculous parameters in which to work; the political merit of the package is that it focused on a group of voters which Labour needed to win in 2005. One fears that the mistakes will be repeated.

This is a common problem in policy development in New Zealand, perhaps arising from the implicit neoliberal values that underpin past designs. (Many of those who worked on or supported the past packages will deny they are neoliberals; what they really mean is that they do not know what they are doing for they are not thinking clearly about the distinction between output and wellbeing.)

Moving 100,000 children and their parents out of poverty within three years is an enormous and expensive challenge. The temptation will be to cut corners, patching up the botch-job but yet again producing a Heath-Robinson unsustainable system of family support. Our children deserve better; so does our future.

How to Have More Coherent and Directed Child Policy and Support Services

This entry was posted in Pundit, Social Policy on 10th November 2017 by Brian Easton.

The new government may talk about paying greater attention to children, but it needs to change the advice and delivery institutions to achieve its goal.

One of the successes of the fourth Labour (Lange-Douglas) Government was the restructuring of the scattered environmental responsibilities of the bureaucracy into three agencies: the Ministry for the Environment, which provides policy advice (and without which there would have been no Resource Management Act which consolidated scattered law), the Department of Conservation which brought together a diversity of operational activities into one agency, and the Parliamentary Commissioner for the Environment (more below). The changes were not Rogernomics driven at all – they were led by Russell Marshall supported by Michael Cullen and Philip Woolaston – and they have been so successful that there are no demands to redisorganise them.

The fifth Labour (Ardern-Peters) Government could do the same for children. The Prime Minister has identified them as a specific responsibility (the Minister for Children is NZF’s Tracey Martin). Perhaps to match her the deputy leader of the Opposition, Paula Bennett, has children among her responsibilities.

The environment model may a good place to start. There could be a separate ministry for children which is the lead agency for policy towards them instead of relying upon responsibility for the policy being scattered diffusively among a number of agencies; the Ministry for Vulnerable Children which provides the support services, which already needs an overhaul even though it is only a few months old, while the Children’s Commissioner should become the Parliamentary Commissioner for Children.

A commissioner is an officer of Parliament, independent of the executive who reviews the activities of the executive government, reporting directly to Parliament. As well as a Commissioner for the Environment, there are also the Ombudsman and the Controller and Auditor General. They variously deal with complaints from the public and initiate policy and administrative reviews. Think of them doing what MPs or select committees might do, had they the expertise, time and resources – perhaps with greater discretion (since complainants are not so vulnerable to being mentioned in the House).

An interesting feature of the Commissioner for the Environment is that (currently) she represents something which otherwise has no representation or vote in Parliament; children are as bereft of such representation.

On the whole, we have had an admirable and successful succession of Children’s Commissioners. Upgrading the position’s status to a parliamentary officer would raise the status of children in the constitution and signal that the office was not subordinate to the executive.

The Ministry for Vulnerable Children has a dreadful title indicative of its faulty conception. It has tried to hide the stigma to the children with whom it is dealing by also calling itself ‘Oranga Tamariki’ (children’s wellbeing) and while that is a far better title and ambition, the use of the Maori term suggests the stigma is confined to them. (That it is sticking plaster, observe that the electronic address is ‘mvcot’.)

The Government has announced that it will change the name of the Ministry for Vulnerable to Children to the Ministry of Children. What a pity the new name does not match Oranga Tamariki. However it is critical that it is not in charge of policy for children which needs to be in a separate agency and not subordinate in another. I leave others to untangle the naming of things.

Having insulted children and Maori, the MVC went onto insult taxpayers, by forgetting to include its head office charges in its calculations. I know there is a touching tendency in New Zealand to give another chance to those who did a botch-job – think of the numerous ministers who have been kept on – but in this case all those involved in choosing the title and doing the costings should be redeployed – Corrections perhaps?

The direction of Oranga Tamariki needs to be refined. It describes itself as ‘dedicated to supporting any child in New Zealand whose wellbeing is at significant risk of harm now, or in the future’. Perhaps a better remit (implied in the Maori title) would be ‘dedicated to supporting the wellbeing of children in New Zealand’. It would deploy its limited resources to where it can make a significant difference.

The ministry for child policy need not be a large one. It – indeed all government agencies and the law – will need an overarching concept. My choice would be that government policy should always take into account the best interests of children.

I came across the phrase in the 1970s as the title of a book (a contributor was Hillary Rodham – now Clinton; the voteless American children suffered from the election of Trump). Through the decades it has informed my perception of what has been happening to our children. Too often I cringe.

Take, for example, the repressive measures imposed on beneficiaries over the last nine years. My impression is that the measures were designed without noticing the impact on the beneficiaries’ children, let alone taking their welbeing into consideration.

A more specific instance underlines the failure. I came across a beneficiary who was found guilty of having fraudulently obtained extra benefits and was incarcerated. (She still denies she did and I can see why, but the ham-fisted law decided otherwise.) She was promptly sent off to the cells, without even a chance for her to farewell her children who were put into care (where at least one suffered abuse).

Suppose there had been a statute requiring that the best interests of children had to be taken into account. At the very least, the judge would have required a report about her children’s situation and taken that into account when sentencing. (As an aside, the children were also beneficiaries of the monies being disputed over but that fact does not appear to have been noticed by the court. Perhaps that was a good thing; in the current repressive climate they might have been judged as living off the proceeds of crime and also jailed.)

The statutory requirement of concern with the best interests of children would lead to all the government’s policy papers and legislation being checked against the standard. The claim that it would take extra resources would be an admission that government agencies do not bother nowadays; I am not surprised.

The checking would be done by the agency putting forward the proposals based upon guidelines set out by the Ministry of Children with the office of the Commissioner for Children verifying to Parliament it had been adequately done.

This relatively simple and cheap extension of the existing system would result in quality improvement to the lives of children. However, it does not directly address the complex and expensive task of substantially reducing the level of child poverty. That is the subject of a later post.

PS. There is no history of the child welfare services agencies, which go back at least to the 1960s as a division in the Department of Education. I am no expert on social work, but I would expect a quality history to give me some insight into the continuing difficulties the various agencies have faced. It might do the same for those running the current service.

How Have We Changed?

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

Rogernomics wanted to change us culturally. Has it succeeded?

Prime Minister Jacinda Arden is younger than any member of the outgoing National cabinet and is the youngest in the new one, even if you include the Greens. In contrast, Deputy Prime Minister Winston Peters is older than any other member of the two cabinets. (The ages of the four New Zealand First cabinet members average 58, Labour’s are 47, the three Greens average 43; Nationals were 51.)

This may be trivia, but I came across it when pondering on the formative political experiences of cabinet members. We do not know the ages when they began observing the political scene reasonably closely, but two of National’s cabinet could not have voted in 1990 – the year when Ruthanasia took over – nor could have ten of the new cabinet. In 1984, when the Rogernomics government was elected, ten National ex-cabinet ministers and fifteen coalition ones were too young to vote.

The reason I focused on this period of neoliberal ascendancy is because it is one of change although its exact nature is unclear. Obviously there was a substantial change in the way we managed the economy, initially towards an extreme anti-government approach although much of that has been rolled back (and this government is promising to roll back more).

It may have been a revolution, but what kind of revolution? The political economist Ralf Dahrendorf, an outstanding public intellectual who also held positions of power, wrote there are

‘two quite different versions of dramatic change. One is deep change, the transformation of core structures of a society which in the nature of the case takes time; the other is quick change, notably the circulation of those at the top within days or months by highly visible, often violent action. The first might be called social revolution, the second political revolution. The Industrial Revolution was in this sense social, the French Revolution was political.’

There is no question that the 1984-93 period was a revolution in the political sense. Mind you, as Bernard Shaw pointed out, every election in a democracy is a (potential) revolution – including the one we had in October 2017.

The change of political leadership in the 1984-93 period was probably greater. Roger Kerr, a leading neo-liberal thinker, commented (in about 1990), ‘the average age of chief executives of major companies has dropped ten years’ as a result of the changes. The power balance between business and workers and their unions changed. The income distribution was shifted towards the rich and they became more publicly active and politically more powerful.

But the question which has greatly troubled me is whether it amounted to the beginnings of a social revolution. Economies and societies evolve over time. I can tell a story from a perspective in which what happened in the 1984-93 period was a temporary neoliberal blip on a long-run trend. The economy is an open market one specialising in the world economy, although arguably giving less social protection and support than one might have expected in, say, a perspective from the late 1950s. (I am greatly influenced here, by the thinking of Bob Chapman, one of our outstanding academics in political studies.) Socially, it is not surprising that we have become more diverse with severe tensions between tolerance (consider attitudes to the LGBT community; women and Māori have not got full equality but the change over the period is extraordinary) and repression (consider the Sensible Sentencing Trust or the state’s treatment of beneficiaries).

So while the neoliberal attack was presented as an economic transformation, its success required cultural change. Not all its advocates thought this through; I have long wondered if they knew what they were doing. They promised greater healthcare or whatever when their policies succeeded, the implication being that after the pain, the prosperity would allow us to get back on track. But Unfinished Business, written by Roger Douglas in 1993 (almost certainly with input from other Rogernomes), advocated further squeezing the scope of the state – the pure neoliberal objective.

The role of the state as an integral part of our lives has long been a fundamental part of the national psyche; Douglas’s book was a powerful attack on it. New Zealanders did not respond positively resisting, for instance, the proposed privatisation of the public health system. (The resistance in other areas was often less successful and the pull-back much slower.)

It is instructive how poorly ACT has been doing in elections – despite huge dollops of funding from the rich. Even so, today ACT’s policies are very weak versions of their founders’ ambitions.

What is someone who was not there in 1984-93 to think of all this? How much have they taken on the neoliberal approach; how much do they reflect the fundamental values that preceded them and which Rogernomics tried to overturn? Remember we are talking of half the current cabinet and the National alternative. My impression is that after allowing for evolution the new generation generally holds the views of its parents and grandparents.

Many older politicians still carry the traditional fundamental values, none more than Winston Peters. He must have been traumatised by the betrayal by Ruthanasia of what he campaigned for in 1990. (So, apparently, was the prime minister of the time, Jim Bolger, and I got the impression that Bill English was not too happy either.) When Peters was sacked from the National caucus in 1991, he suffered from the neoliberals mounting one of the most vicious character assassinations of a New Zealand politician that I can recall. (The assault was so successful that even today, many who would otherwise eschew neoliberal analysis have adopted much of its anti-Peters framework; that makes WP being the politician so many love to hate.)

That makes his attack on capitalism on the night he announced the coalition decision so intriguing. Jacinda Ardern and Grant Robertson have since expressed similar sentiments. (I have discussed what he might have meant and what might be done about it here.).

But have they got the troops to reinstate traditional New Zealand values – updated for evolving circumstances? It is not just a matter of cabinet and caucus. It is going to be very hard for officials, trapped in the ruins of a policy framework which still owes much to the 1984-93 period, whatever may be their personal views. Leadership out of the mess involves not just good intentions and rhetoric, but hard thinking and political strategy.

PS. While collecting the data I noticed that seven of National’s top 20 are list members. They average five years older than the other 13 with electorate seats and can leave parliament without a by-election. There are, however, some others who ought to move on, except the prospect of a by-election may discourage the process of renewal. (They could just drift down the rankings.) Of the 16 Labour cabinet ministers only two are list members and both are expected to be strong performers. All the NZF and Green ministers are list, of course.

PPS. I have been amused by the kafuffle over select committees numbers. It appears that National in government got its arithmetic wrong. In opposition they found out their error, and claimed the system was undemocratic. Thus the arrogance of power is reduced to a sensitivity towards democracy when one loses the power.

Remembering Holodomor; The Great Ukrainian Famine

This entry was posted in Political Economy & History, Pundit on 1st November 2017 by Brian Easton.

The connection between famines and democracy may not be obvious. but each sheds light upon the other.

The fourth Saturday in each November is Holodomor Remembrance Day which recalls the great Ukrainian famine of 1932-3 in which 2.4m to 7m died in a population of about 30m. The intensity of the distress and suffering was such that more than 2,500 people were convicted of cannibalism.

There is much debate about why it happened. In part it was a dramatic fall in the grain harvest of the Soviet Union following the collectivisation a couple of years earlier. However, there is a widespread view among scholars that Stalin’s actions intensified the Ukranian famine conditions, by diverting supplies to other parts of the USSR but also to quell the Ukrainian independence movement.

So the famine was not simply a shortage of food; it was also the result of human decisions. That is usual; famines can occur in situations where there are additional food supplies. During the Great Irish Famine of the 1840s (1m deaths in a population of 8m) livestock was being exported to England for killing and eating there.

The Irish Famine was a result of potato blight, which ravaged potato crops throughout Europe during the 1840s. The impact in Ireland was disproportionate, as one third of the population was dependent on the potato but the dire situation was compounded by social factors such as absentee landlords.

Nobel Prize laureate Amartya Sen, who as a 10-year-old observed the Bengal Famine of 1943, proposed Sen’s Law, that famines do not happen in democracies. Bengali food supplies actually rose in the period but they were in store and a distracted British Government did nothing to make them available to the starving. They would have, if it had been a British food shortage.

What happens in a market economy can be illustrated from the Irish experience. The potato blight did not just destroy the crop, it also destroyed the income of the farmers, so they were unable to purchase alternative supplies. The livestock exporters from Ireland or those with grain stocks in Bengal warehouses would have willingly supplied the starving in exchange for cash. Severe starvation is not just a shortage of food but also a shortage of purchasing power.

The Ukrainian story is complicated by the Soviet Union’s not being a market economy, placing an onus on the government to stump up with supplies. That makes its responsibility more evident. In a market economy the parallel responsibility is to ensure there is adequate purchasing power, although sometimes it is more practical to truck in supplies.

I have never forgotten Nobel Laureate Tjalling Koopmans’ Three Essays on the State of Economic Science, probably the first book I ever read as an economics undergraduate. It contains an elegant account of general equilibrium economics and how the price mechanism leads to an efficient competitive equilibrium. Koopmans dealt succinctly with the complication of inadequate income:

‘One “hard boiled” alternative would be to assume instantaneous elimination by starvation of those whose resources prove insufficient for survival…’ The shock of this limitation of one of the workhorses of economics was moderated by Koopmans adding ‘an alternative … would be to recognise the existence of income transfers through taxation and social insurance.’

So from my earliest days I have been aware that the market is incapable of delivering an adequate income to all. As Koopmans says, there will be people with insufficient physical, financial and human resources who will starve if dependent upon the market. Famines are an extreme illustration of the principle that capitalism can only have a human face if there is public redistribution of income to support the poor. That is not what happened in Ireland, Bengal and Ukraine or in other instances.

Famines leave psychic scars for generations. Recall that Stalin seems to have used the holodomor (to kill by starvation) to deal with the Ukrainian independence movement of the 1930s. It reappeared recently, memorably in the ‘Euromaidan’ protests throughout Ukraine in 2013, especially at Maidan (Independence) Square in the capital, Kiev. The popular uprising was a rejection of a proposal for closer relations with Russia; it favoured turning west towards the EU. The Holodomor Commemoration Day, instituted in 2006, is a part of the same ambition.

President Putins’ concerns appear to be that Russia does not want to lose an ally or to have a democracy-friendly country on its border. Ukraine is also a deep part of Russia’s history. Kiev was its first capital (although many in the Russian ruling elite today are said to look on Ukrainians with the same visceral disdain that certain English looked on the Irish.) An alternative name for Ukraine is ‘Little Russia’. (Recall the nickname of Tchaikovsky’s Second Symphony which uses Ukrainian folk songs.) Perhaps even deeper, Putin and the Oligarchs who surround him must be terrified of a Euromaidan outbreak from the Russian middle class threatening their power, wealth and comfort.

What is protecting Putin, even more than practice and threat of military adventurism, is that Ukraine is finding the transition to a liberal open-market democracy exceedingly difficult. No one expected the extent of the growth of corruption and crony capitalism after the fall of the Soviet Union in 1991. Many assumed that public ethics were higher under communism than they were under capitalism; they were not. Sadly that has been as true in Ukraine as much as in Russia.

Nineteenth-century Britain, from which our public institutions descended, was not as corrupt as Russia and Ukraine are today. It has taken a long time to get to where we are. (Nor should we forget that the London and New York financial centres are complicitly supporting the Oligarchs.) While we may have hoped that the ex-Soviet Union countries would have turned into our sort of liberal democracies at the witching hour of the fall, the reality is that any transformation will take generations. We can but wish them well, recognising that what we can do – short of war – is very limited. (That said, there are things we can, and should, do to support the development of democracy in Ukraine.)

Symbols have a role. The terrible story which underpins Holodomor – that the autocracy of Stalin could be so brutal (Hitler also tried to starve Russia) – is a reminder of Sen’s law and the benefits of that imperfect institution we call ‘democracy’.

Whither Coalition Government?

This entry was posted in Governance, Political Economy & History, Pundit on 30th October 2017 by Brian Easton.

Coalition governments are a consequence of MMP. They may better reflect us and our democratic aspirations than the Winner-Takes-All ones of the past.

The public understanding of election outcomes remains dominated by a misunderstood account of the old electoral system which was not based on proportional representation. One commentator said confidently that the party with the most votes should form the government. That certainly did not happen in 1911, 1928, 1978 or 1981 when the party with most votes ended up in opposition.

Then there were concerns of how long the negotiations took. In this case it was 13 days. On the same day as the Labour-NZF coalition announcement. the Dutch said they had got a coalition agreement after 7 months and the Germans, who voted a day after New Zealand, said that three parties would come together to see if they could form a coalition government by December.

The process involves two separate activities. One is that voters elect a parliament which passes legislation and the like and which holds to account the executive (Prime Minster, the cabinet ministers and the officials who serve them). The second is that it chooses the executive. This need not be necessarily true; for instance, the United States elects its executive (the President) separately from its legislature (Congress – the House of Representatives and the Senate).

New Zealand introduced MMP to better restrain the arrogance of the Executive. After the 1987 and 1990 elections the party which became the executive (Labour on one occasion and National on the other) ignored the manifesto it campaigned on and implemented policy which contradicted it and was an anathema to the electorate. Under MMP this is less likely to happen; the government typically has a smaller majority and that so far only by including another party or more. Were neoliberal policies to be again attempted, the coalition would break up and, in any case, MPs of honour can cross the floor to greater effect.

This is all routine to afficionados but most public commentators seem to have overlooked the actual situation. Some were not really around during the neoliberal era.

What I had not noticed until this round of negotiations was that it involved each party’s manifesto promises being put under scrutiny. In truth some components of each of them are nutty or unworkable. Because one has to vote for the whole package, one ends up swallowing some very dead rats – irrespective of whichever party you voted for. (In my experience, public servants, who are loyal advisers to a man and woman, look at some of the manifesto commitments and deeply despair.)

As a result of the negotiations the manifesto commitments of each party are subject to close scrutiny by all the negotiating parties and the most uncomfortable can be renegotiated or fudged. The superficial will point to the parties breaking some of their manifesto promises; were they as outraged in 1987 and 1990?

Moreover, every policy will be evaluated by the coalition parties independently. I am not saying there will be no dud policies implemented but that there will be fewer.

An earlier column pointed that, whichever coalition became government, its political beliefs would be rather different from the public’s. (That would be even truer for single-party government.) I finished with what may have seen as an aside or counsel of despair.

‘Perhaps the logic of an MMP parliament is a minority government. … In principle when there is a minority government, parliament, which is more representative of what voters want, would be driving policy more. That is a bit like some governments we have had in the post-MMP recent past. They seemed to be anomalous, but they may only seem so from a Front-Runner perspective.’

Some people commented to me wondered how this interesting point might work out. I hinted, but had not fully realised, that we already have it. I illustrate with the current arrangement of Labour and New Zealand First as a minority government which is given supply and confidence by the Greens.

That means that policies will have to be tested in three independent (and somewhat eccentric) caucuses (plus sub-caucuses and, as I shall explain, sometimes the National Caucus). There will be considerable compromising but even if Labour and New Zealand First always obtain a unity (phew) that does not give the Greens a veto. Sometimes National will vote with the Government, as they did in the early 2000s over a trade deal which the Alliance was unwilling to agree to. Sometimes a statute could be passed by the National and Greens coalition. A possible example is the recent threat in regard to the Kermadec Sanctuary, although my expectation is that Labour and NZF will work their way through to a compromise – after consultation – which everyone can grumble about.

If you believe in Winner-Takes-All executive government you are going to be disappointed. (Such believers are more vehement when their party is the winner.) For the rest of us, we may take some comfort from the fact that policies will be more thoroughly scrutinised than in the past. Moreover, the scrutiny will be from a perspective closer to the population as a whole; the 2014 National government had an even less representative executive. (Some of the dreadful dead ends that the previous government had gone down will be backed out of.) My doubts about the current system are that it may not provide the forward-looking leadership that we need for the future.

What then is happening, aside from the exact outcome of the election, is that post-MMP government is evolving differently from the old ways. We should not use the habits of thinking from the past when we think about what is now happening.

Past Rationality: The 2017 Nobel Award for Economics

This entry was posted in History of Ideas, Methodology, Philosophy, Portraits, Pundit on 24th October 2017 by Brian Easton.

Paul Krugman, the 2008 winner, tweeted ‘Yes! Behavorial econ is the best thing to happen to the field in generations, and [Richard] Thaler showed the way.’

Good science is essentially a subversive activity. Most scientists work within the existing paradigm – the framework of the basic assumptions, ways of thinking, and methodology commonly accepted by the discipline. The better ones keep an eye out for anomalies which require some adaptation of the paradigm. The great ones identify anomalies which cannot be so readily accommodated and transform the paradigm to account for them. However, it can be a long path to beat the existing conservative scientific establishment.

This is true in economics-as-science (but not in economics-as-ideology), as the 2017 Nobel Memorial Prize in Economic Sciences to Richard Thaler reminds us. In the late 1980s Thaler wrote columns in the Journal of Economic Perspectives, each identifying an ‘anomaly’ in human behaviour. (They are published in The Winner’s Curse.) To be precise, the anomaly is not in human behaviour but in the economic paradigm which was underpinned by the notion of Homo economicus – rational economic man. (Yes, women were to be embraced by men.)

I was enthusiastic about the book because it seemed to characterise human behaviour as more like the way that people I knew behaved (including me). Thaler says he once explained the difference between his account of human behaviour and Robert Barro’s (an eminent economic rationalist), by saying that Barro assumes that people are as smart as he is, while Thaler portrays them as being as dumb as he is. Barro agreed.

Economics is a very old science, older than psychology-as-science, so it is perhaps inevitable that its initial behavioural assumptions would be primitive. But the paradigm got stuck on them. Partly they were simple (and greatly simplified the mathematics). But economics-as-ideology was attracted because they seemed to support the minimalist state; since people made optimal decisions, there was no need for state involvement, it would only make things worse. Economic scientists knew there was a problem and a Nobel Prize went to Herbert Simon in 1978 for trying to modify the narrow rationality assumption with the notions of satisficing and bounded rationality.

Because it is subversive, a science progresses. Psychologist Daniel Kahneman was also awarded an economics Nobel in 2002 (you may have read his book Thinking, Fast and Slow). The economist who particularly drew upon Daniel Kahneman was Thaler, joining the illustrious two Nobel laureates this year.

You can read more about Thaler in his book Misbehaving: the Making of Behavioral Economics, A History of the Development of Behavioral Economics, which he describes as ‘part memoir, part attack on a breed of economist who dominated the academy – particularly, the Chicago School that dominated economic theory at the University of Chicago – for much of the latter part of the 20th century.’ (Thaler is a Chicago professor.) You may have seen him on screen in a cameo performance in The Big Short (about the 2008 global financial crisis) in a scene alongside pop star Selena Gomez. He explained the ‘hot hand fallacy,’ in which people think whatever’s happening now is going to continue to happen into the future.

Supporting behavioural economics has not been an easy path. When I first came across Thaler’s work a quarter of century or so ago, I found little enthusiasm or interest in the New Zealand profession. Some just did not get it, others were unwilling to abandon the habits of a lifetime and, of course, ideologists saw it threatening their policies.

Even though there has been the occasional (and lonely) behavioural economist here, we have got a bit behind the frontier. Admittedly Kiwisaver conforms to some of the Thalerian savings principles, but its designers do not seem to have consciously drawn on them (and much of the criticism of the scheme assumes rational economic man).

It is instructive that we have never promoted a ‘nudge’ approach inside government. By way of background, Kahneman and Thaler recognise that the way a choice is set out can determine the decision. For instance, once Austrians had an opt-out provision for organ donations; Germany had an opt-in. Almost all (99%) Austrians agreed to donate after their death, but only 12% of Germans did

Thaler, with eminent lawyer Cass Sunstein, wrote Nudge: Improving Decisions About Health, Wealth, and Happiness, which discusses how public and private organisations can help people make better choices in their daily lives. They said, ‘people often make poor choices – and look back at them with bafflement! We do this because as human beings, we all are susceptible to a wide array of routine biases that can lead to an equally wide array of embarrassing blunders in education, personal finance, health care, mortgages and credit cards, happiness, and even the planet itself.’ They suggest that the public sector should design its choice systems to ‘nudge’ people to make decisions which reduce these biases and blunders.

By now many right-libertarians will be crying ‘paternalism’; although they seem less concerned that businesses use the principles of the architecture of choice to pursue profit. Thaler and Sunstein describe their approach as ‘libertarian paternalism’ (also ‘soft paternalism’). ‘The libertarian aspect of our strategies lies in the straightforward insistence that, in general, people should be free to do what they like – and to opt out of undesirable arrangements if they want to do so.’ The paternalistic portion of the notion ‘lies in the claim that it is legitimate for choice architects to try to influence people’s behaviour in order to make their lives longer, healthier, and better.’ I am more pragmatic; when business starts tossing a coin to set choice as an opt-in or opt-out then so should government.

A number of governments – including conservative ones – have set up ‘nudge’ units to develop this architecture, but not New Zealand. (Instructively the social investment literature which is our current fashionable innovation goes back to developments in the 1950s; the pioneers were dead by the time it was their turn for a Nobel.)

While the nudge units are a useful policy response, behavioural economics is much more subversive (hence Krugman’s endorsement of its importance). Who can tell where it will lead economics? Recall that Rutherford thought his research on the composition of the atom had no practical use; only a few years later he recognised the possibility of nuclear energy. (That is real subversion for you.) If I had to make a guess behavioural economics probably means a less mathematical economics, one which draws on a wider range of the other social sciences but in a less imperial, more empirical way and one which better represents human behaviour.

Many years ago, I summarise the critique of Thaler’s research as economists trying to impose on the public our their narrow self-conception of the human condition. Their behaviour is not of ordinary men and women, who may be economically irrational but do wonderfully human things like laugh and cry, show curiosity and awe, love, care, and create beauty.

Sue Bradford: Constant Radical

This entry was posted in Political Economy & History, Portraits, Pundit on 16th October 2017 by Brian Easton.

How effective are those who pursue change outside the parliamentary system?

My first memory of Sue Bradford is a feisty speech she gave to the 1984 Economic Summit Conference pleading for a greater commitment be given to the people she worked with – those on the margins of society: the unemployed, the poor, the mentally and physically disabled. It was so impressive that some businessmen offered Sue a job. She irritatedly replied that they had missed the whole point of her speech for the businessmen were not offering anything to those she represented.

Much of Sue’s life has been working in agencies supporting the marginal at a personal level but, in parallel, she has also been involved in a wide range of community actions and protests demanding better government policies for them. Reading her biography, Constant Radical by Jenny Chamberlain, one is struck by their number but might conclude they have had little effect. (For instance, the Labour Government appears to have totally ignored her ESC speech.) As much as the agencies she has been involved with have improved the lives of the individuals who approached them, arguably, the group as a whole are, 33 years later, worse off. Is this too harsh a judgement?

In a recent paper, historian Malcolm McKinnon, challenged the standard view that the unemployed protests during the Great Depression of the 1930s had no subsequent impact on economic policy. McKinnon points out there were policy changes after the disturbances, which moderated the pressures on the unemployed. One might argue they were insufficient, but New Zealand was in a headlock from Austerian policies because of its overseas debts. However you could argue they would have happened anyway; it is always difficult to identify what changed policies; rarely is there a smoking gun.

It is certainly true that some protests have had some influence. The list includes the peace movement’s which in the early 1960s made demands such as withdrawal from SEATO and ANZUS and a nuclear-free New Zealand that few protestors would have thought achievable in their lifetime. The anti-Vietnam movement probably helped the National Government towards its minimalist response to the US request for us to send troops. The women’s marches of the 1970s emphasised to politicians that not only are women strong but there were an awful lot of voters among them. Anti-apartheid protests may have added a little to the pressures on South Africa to change and they certainly lifted imprisoned Nelson Mandela’s spirits. These were all centred on the middle class whose political leverage can be considerable. But you would hardly describe that way the marchers on the Great Maori Land March of 1975. It seems to have strengthened Maori resolve and drawn the Pakeha middle class’s attention to the injustices towards Maori, thus contributing to resolutions addressing (in part) the grievances decades later. (There may be a lesson here for demonstrators; don’t expect an early effective response to your demands.)

However, I find it harder to think of many similar successes for actions on behalf of the marginalised with whom Sue was involved. Perhaps she might argue that without the protests, their plight would have been even worse.

For the ten years from 1999 to 2009, Sue gave up the community agencies and barricades to be a Green MP in parliament. Although she was never a cabinet minister, the book reports much useful activity, especially her famous shepherding of the ‘anti-smacking’ law though parliament in 2007. This involved repealing Section 59 from the Crimes Act 1961 which gave the legal defence of ‘reasonable force’ for parents prosecuted for assault on their children. (Given there is still a rump that believe civilisation is about to end unless you can do physical violence to your child, it is well to remember that parliament voted 113 to 8.)

Sue left parliament in 2009 when she failed to replace Jeanette Fitzsimons as a co-leader of the Green Party. (The successful candidate was Metiria Turei.) The biography has a description of this and the related struggle within the Greens as to the direction the party should take. It is complicated story which I have not seen written up in as much detail anywhere else. Among the dimensions was the extent to which the party should be exclusively concerned with the environment or whether it should also pursue social justice and a better deal for the poor. A related issue is the extent to which it should shift towards the centre to increase its voter share or remain a party of steadfast principle.

I found the biography particularly helpful as a pointer as to why, during the recent coalition negotiations, the Green’s leadership ruled out joining a National-led coalition government despite many non-Greens’ enthusiasm. The Greens are the party which is most consultative with its membership and, whatever its MPs might have thought, it is clear there would have been unbearable tensions among members had the caucus shacked up with National.

After leaving parliament, Sue returned to her community activities but she has also sought, or considered seeking, further positions in the formal political system. I doubt she is interested in the baubles of office. Perhaps she has come to the conclusion of many New Zealand radicals that to make a difference one has to command the power of the state. Perhaps the reason that the marginalised have done so badly over the decades is because there have been insufficient in parliament who have really cared about them in the way Sue has.

Why Voters Will Be Disappointed by the Election Outcome

This entry was posted in Governance, Political Economy & History, Pundit on 5th October 2017 by Brian Easton.

New Zealand’s electoral system gives it a parliament which represents voters. Its winner-takes-all executive government, however, remains unrepresentative.* (This is a follow on from the earlier column on coalitions.)

This paper tries to evaluate various coalitions on the basis of their political ideologies. It uses the scores given to parties by the TVNZ website Vote-Compass, which identifies two dimensions: Right-Left and Social Conservative-Social Progressive. The party scores are derived from coding the party positions over the thirty attitudinal questions by a combination of interpreting the party statements and after dialogue with the parties.

(Note that I have carried out some simple transformations of their scores which means the average New Zealand voter is 0 on the right-left dimension and 0 on the conservative-progressive dimension and that the standard deviation across all scores is 1 in each case. These are trivial changes and do not affect the results.)

Table I: The Ideological Positions of the Parties

<> +Right/Left- +Conservative/ Progressive- Seats National Party 1.02 0.87 58 Labour Party -1.03 -0.86 45 New Zealand First Party -0.40 0.79 9 Green Party -1.29 -2.05 7 ACT New Zealand 1.97 1.26 1 The Opportunities Party -0.30 -1.73 Maori Party 0.13 -0.15 Mana -0.93 -1.81 United Future -0.10 -0.08 Conservative 0.86 1.89 All Voters 0.00 0.00 120

Table I gives the Vote-Compass (transformed) scores for ten parties together with the score for All Voters. **

It shows National at 1.02 on the right-left spectrum which means it is 1.02 standard deviations to the right of the average voter. National’s score on the conservative-progressive dimension represents 0.87 standard deviations more conservative than the average voter. In contrast Labour is -1.03 and -0.86 which makes it to the left of average voters and also more socially progressive. Intriguingly it is almost exactly as extreme as National but in the opposite direction.

On the right-left dimension, Vote-Compass thinks the right-wing parties are ACT (the most extreme), National, Conservative and the Maori Party. The other six are to the average voters’ left: UF (very slightly), TOP, NZF, Mana, Labour and Greens (the farthest left).

It thinks that socially conservative parties are Conservative, ACT, National, and NZF. United Future is again near the middle. The socially progressive parties are, the Maori Party, Labour, TOP, Mana, and the Greens (the most socially progressive).

The numbers are calibrated so that the average voter is (0,0) but that need not be true for parliament. In fact it is almost, at (0.03, 0.08). The small differences are because parties which did not win seats were, on the whole, slightly more left and slightly more socially progressive.

(If parliament had no list seats and had the same electorate seat allocation as in the recent election it would be 0.20 standard deviations to the right and 0.17 standard deviations conservative. So it would be unrepresentative of the population. Because voters change their choices in a Front-Runner election, this is hypothetical, but it illustrates how unrepresentative a parliament can be under the FR system.)

Coalitions

TABLE II: Governments

<> +Right/Left- +Conservative/ Progressive- Seats All Voters 0.00 0.00 Parliament 0.03 0.08 120 National-Labour 0.18 0.16 103 National-NZF 0.78 0.81 67 National-Green 0.71 0.51 65 Lab-NZF-Green -0.83 -0.65 61 WTA in a FR election 1.02 0.87

However, Table II also shows that while the next parliament may be representative, any of the four coalitions will not be.*** One, L/NZF/G, would be strongly to the left and socially progressive; the other three, dominated by National, would be strongly to the right and socially conservative. (The closest there is to the population average would be the Grand Coalition of National and Labour.)

Perhaps, ironically, the coalition outcomes look about as extreme as a Front Runner parliament. However if there had been such an FR parliament, it is probable that National would have been elected to govern alone as winner-takes-all. In which case the executive government would have been even less representative of voters.

In summary, while New Zealand democrats may be satisfied with the MMP electoral system which gives the public a parliament which reflects their values, they must be uncomfortable about the resulting executive government. It may not be as extreme as the one the Front-Runner system would g1ve them but it still does not reflect the populace.

Perhaps the logic of an MMP parliament is a minority government. (It might be buttressed by minor parties which provide supply and confidence but no guarantees on individual policy.) Such minority governments have occurred more often in parliamentary systems in other countries than you might expect, but as far as I know they have never been dominant in any one of them.

In principle when there is a minority government, parliament, which is more representative of what voters want, would be driving policy more. That is a bit like some governments we have had in the post-MMP recent past. They seemed to be anomalous, but they may only seem so from a Front-Runner perspective.****

* The results here are based upon the election night outcomes and could change following the inclusion of special votes.

** Vote Compass does not give scores for very minor parties which together obtained about 0.6 percent of the vote.

*** The calculations assume that the elected MPs reflect their voters. In fact they may not.

**** The same calculations using the Political Compass scores give very similar conclusions.

The Future of New Zealand Capitalism?

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History on 1st October 2017 by Brian Easton.

AUT Briefing PapersOctober 31, 2017

‘Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe. And they are not all wrong. That is why we believe that capitalism must regain its responsible – its human face.’ Winston Peters.

Announcing that he was going with Labour, Winston Peters said that he was committed to making capitalism in New Zealand more human. One could write a book on possible meanings of ‘capitalism’ and libraries on the potential, or not, for improving it. We must be briefer.

Suppose Peters means that the current economic, political and social life (i.e. capitalism) has been captured by neoliberalism. He intends to maintain the market economy with its private property arrangements and liberties but he does not accept the neoliberal antagonism towards public initiatives. He is intending to return to the liberal track that was being followed before the Neoliberals took over in the 1980s. This does not involve a return to the Muldoon management era; perhaps he has in mind what men and women of good faith hoped for from the 1984 Labour and the 1990 National Governments.

Housing Policy (illustrating Neoliberal thinking)

Neoliberalism deeply frames public thinking, even though there are is only a handful who still openly profess that ideology. Take housing policy, one of the marked failures of the previous government. It is not accidental that responsibility for the policy was fragmented among three portfolios (and National had at least three other ministers who were also ‘responsible’).The neoliberal approach, implemented in the early 1990s, does not see any need to manage the housing sector as a coherent whole nor for some governing framework or plan. What is needed is a unified Ministry of Housing which can coordinate the various parts of an exceedingly complex sector and which does not implicitly adopt a neoliberal framework. (I recommend this reservedly; new agencies take time to establish.)

Profit Seeking and the Public Service

The neoliberal framework is remarkably persistent and pervasive. Why is it necessary for so many public activities to make a profit? Commercial targets distort their purpose. Take RNZ (Radio New Zealand). Obviously it must operate within the resources it is given. But what is the point of receiving a government grant, some of which is paid back in tax? There are a lot of government agencies like this, including hospitals, research institutions and universities. They are not capitalist enterprises but pursue the public good by other means. The Clark-Cullen Labour Government may have blunted the distortion but the rotting carcass of neoliberal thought remains.

Is competition always necessary? In some sectors – education for instance – it distorts behaviour. But doubts can also apply in the market sector. Does it make sense to regulate a network industry like the postal service by competition? Perhaps New Zealand Post should buy out competing services and offer a unified mail service?

The Fetish of GDP

Behind this commercial approach is the fetish for GDP. The market output of the economy is not the same as the wellbeing of its people although it is not uncommon to confuse the two notions. The neoliberal approach is even more pernicious because its policies focus on the growth of real GDP. (Whether they achieve that goal belongs to another venue.) It argues that without immigration, GDP growth would be lower. But an increase in GDP does not necessarily increase New Zealanders’ command of material output. It seems likely that any recent growth in their real incomes has been lower than the reported growth in GDP per capita, with the difference going to the arrivals.

I am sure there is no single index which can displace GDP. Better if we have a portfolio of measures reflecting the complexity of the human condition. If we insist on equating GDP with wellbeing, we need to think about its distributional implications.

The measure of material output treats every output dollar the same. But is that true for incomes? Amartya Sen, one of the truly great economists of the late twentieth century, suggests we should measure income increases in percent terms instead of absolute dollars. Take away $1000 from an income millionaire reduces their income by 0.1 percent. Give the $1000 to someone on $10,000 increases theirs by 10 percent. He proposes a measure of ‘real national income’ which recognises this.

Focusing on Sen’s real national income would revolutionise tax and distributional policy analysis. Many economists might respond that Sen is introducing an ethical judgment. But what Sen is showing that the practice of treating a dollar received by a millionaire as valuable as the same dollar to the poor is also an ethical judgement. Value judgements have already been slipped into the analysis of those who treat GDP as a measure of wellbeing. The judgement is pro-rich and is used to discourage redistributing income to the poor.

Government Spending

Moving from the neoliberal approach may involve additional government spending which neoliberals reject. But a fiscal conservative (that is, the government needs to prudently manage its finances) need not be an Austerian (there is no case for additional government borrowing or additional taxation). Cautious borrowing may make sense if removing anomalies in the tax system does not generate sufficient additional revenue; perhaps tax rates may have to be raised.

Does it make sense to fund the additional infrastructure needed for immigrants out of current taxation? Surely that part of the public building program should be funded by additional public borrowing. Admittedly the need will be less if immigration levels come down a bit, as the new government promises (but there will still need to be some construction for additional immigrants and to catchup the backlog).

Decentralisation

Another useful step would be to decentralise political power. Neoliberals support decentralisation to individuals. The consequence is that the power of one-person-one-vote is replaced by one-dollar-one-vote, which has uncomfortable social outcomes if the income distribution is very unequal. But New Zealand neoliberals do not contemplate decentralisation of power to collective entities such as local bodies. Central government is not enthusiastic either; strong local bodies are a check on its power. (The combination in the Rogernomic and Ruthanasia years of neoliberals in command of central government proved exceptionally brutal; ironically so, given their belief in decentralisation. One of the few centres of resistance was at the local level.)

What inhibits decentralisation is the lack of an adequate local funding base; local body rates tend to be clumsy and inequitable. Among the possible additional sources are giving power to local bodies to levy a tax on petrol and to levy water usage to fund the mitigation of the consequences of the water draw-off and re-injection. Revenue sharing from GST proceeds also makes sense.

The Idea of Neoliberalism

Rooting out neoliberalism (which is not the same thing as an inquisition on those who sincerely hold the belief) is not just a matter of changes in institutions and policies. We need to deal with it in our thinking, to avoid being unconsciously dependent upon these defunct economists.

One step would be to withdraw implicit government support of neoliberal thinking. We allow some to avoid paying full tax by being non-residents for income tax purposes. Yet they may still participate in political life by funding political activity and research. Since taxation is the price of citizenship, paying partial tax does not entitle one to full citizenship. We should take into consideration when determining an individual’s residential status their political involvement in New Zealand. Too much, they become citizens and pay tax on all their income. Since neoliberalism tends to be most common among the rich, that would discourage a current bias in political funding.

It is not for the government to direct intellectual activity outside the public sector. But it can foster it. Removing commercial incentives from universities is a way. Or consider the case for extending the role of RNZ which Labour has promised. RNZ is not anti-neoliberal; rather it provides a broad balanced platform where public issues may be discussed. Generally advocates of neoliberals do not do well there because their funding does not give them additional leverage; they work best where it is one-dollar-one-vote not one-person-one-vote.

Appointments matter. Astonishingly the Clark-Cullen Government appointed neoliberals to positions of authority; in at least one case it set back good policy evolution many years. (In fairness it must be added that its appointment of muddled thinkers with warm hearts also got the government into some dreadful policy muddles.)

Reducing the influence of neoliberalism in our thinking does not by itself lead to the kinder, gentler and more egalitarian society which Peters seems to seek. But the neoliberal assumptions which underpin so much of policy need to be replaced by something which is both closer to economic reality and more consistent with the human condition. If that does not happen, many will conclude in three years’ time that the new government is still a foe rather than a friend.

Politics Makes Strange Bedfellows

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

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

Summary (which is less numerically challenging)

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

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

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

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

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

Long-term Trends

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

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

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

The 1993 Election

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

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

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

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

The Banzhaf Analysis

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

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

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

National-Labour 103 seats

National-NZF 67 seats

National-Greens 65 seats

Labour-NZF-Greens 61 seats

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

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

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

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

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

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

You get

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

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

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

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

The Threshold Effect

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

The current expected composition is

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

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

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

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

Strategic Voting and Act

Had Act not won Epsom the outcome would have been:

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

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

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

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

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

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

In Praise of Public Servants

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

This was written before the election outcome is known. It looks at the part of the executive which is not elected: the public servants and advisors.

Steven Joyce, National’s campaign manager, must have thought he had Labour out cold when he claimed that its spending plans announced during the election were enormous and unsustainable. He proved to be very wrong, as economists – of a variety of political persuasions – have said. Indeed Joyce’s claims bounced back on him, for the public’s conclusion was that Labour had a credible fiscal program. (Labour subsequently lost the advantage by its dreadful presentation of its tax policies.)

What intrigued me was that this was a very different Joyce from the Minister of Finance I saw at a briefing on the Treasury’s Pre-election Economic and Fiscal Update. He was in command of the material and easily dealt with journalists’ questions. Yet a fortnight later he was flailing around like – er, um – a politician. What had happened?

Part of the explanation is that the column’s opening paragraphs followed standard journalistic conventions and focused only on the politician. In actuality each is surrounded by a team. In the case of the Minister of Finance he (or she) is in constant dialogue with the public servants in the Treasury. However, the constitutional convention is that during an election campaign the officials withdraw and the politician becomes more dependent on a small personal office team.

If the minister is lucky or shrewd, some in this office are very good. (Take H2 – Heather Simpson – in Helen Clark’s office; Wayne Eagleson played a similar role in John Key’s.) But often many in the offices are politically ambitious time servers, as average as the politicians they serve and are not nearly as experienced or competent as officials in the ministries.

I assume one of them did the calculation of Labour’s spending plans for Joyce; you don’t think he did it himself do you? He seized on it believing that it must be true since politicians tend to think the worst of their opponents. The projection was certainly not done by an expert team of officials.

A documented example is that when Prime Minister Geoffrey Palmer announced he would halve unemployment, economists were astonished, thinking that the Treasury knew something they did not. They asked for the officials’ papers. There were none. Someone in the PM’s office, presumably bereft of any economic understanding, had made the claim up; the PM had innocently adopted it.

The relationship between politicians and their advisers is not well documented and poorly understood. Public servants expect to be anonymous and so their activities are mysterious (but that does not mean ‘improper’). Most of the formal accounts tell you little about what actually goes on. Yet it is critical to the way a government functions. One picks the little one knows from documents, gossip, occasional leaks and history.

Not all departments are functioning well. Typically newly established ones do not. But a long established one may not be too impressive either if its remit is poorly specified and it is staffed by generic managers and time-servers or by officials with political agendas greater than their competence.

Leadership is important. The majority of cabinet ministers are like the people who elect them – average to struggling. A cabinet is fortunate to have as many as five ministers of quality. Usually the Prime Minister and Minister of Finance are; the up-to-three others may hold a diversity of portfolios or be moved between them patching up failures of their less able colleagues. Famously, George Gair kept shifting to sort out troublesome spots in the Muldoon administration.

Good departments love a good minister because they cannot make overall strategic decisions by themselves. One senior official asked me to approach his minister and ask for more direction. (Fat lot of good asking me; I could not budge him.)

Another well-known example arises from John Shewan’s report, ‘Government Inquiry into Foreign Trust Disclosure Rules’. Without derogating from Shewan, its quality and timeliness suggests that officials in Inland Revenue were well acquainted with the problem but had been unable to move a string of ministerial nonentities to taking any action.

Many of the less-able ministers are run by strong departments but are found wanting when promoted above their Peter level. Others cruise along with their department doing much the same. When a crisis occurs, the minister looks inept. The best recent example is housing policy, which is split between a number of what appear to be dysfunctional agencies. Recall ten years ago, the then Leader of the Opposition, John Key, said we had a housing crisis; what is the bet we will still have it in ten years’ time unless there is institutional change and better political leadership? Even then it will take some years for a new agency to settle in.

This is a relatively benign account of the public service. It is under threat. Among the challenges is the shift from professional competence to management has often been accompanied by increased politicisation. Ministers, especially weak ministers, love that until the crisis happens.

When I wrote this we were struggling with the broken fuel line from the Marsden oil refinery to Auckland. My (uninformed) view is that the operational response was impressive. But was it necessary? Earlier assessments had identified the vulnerability. Is this yet another example of something on the to-do list which weak leadership has ignored?

It is not a defence to say this is a private-sector foul-up; nothing to do with the government. In this case the privately-owned sole pipeline is a monopoly. The public sector has its responsibilities one of which is to regulate monopolies, a second is to provide backups against the unexpected; the army and navy were called in to help shift the fuel.

To deal with crises (better still, to prevent them before they happen) we need a quality public service with quality political leadership. The failure of the minister over Labour’s spending projections tells us something about what happens that it is not available.

An Alternative to Neo-liberalism?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pressures to be Selfish

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wealth’s Political Stealth

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Frances Robinson (1943-2017)

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

Contribution at Funeral Service

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

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

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

He’s Spent It All

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Grumpiness and Government Spending

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

When is Lying Justified?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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