The Nobel For Economics?

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What does the latest Economics Prize in honour of Alfred Nobel tell us about economics as a science?

Alfred Nobel did not endow a prize in economics. In 1968 the Swedish National (i.e. central) Bank founded a ‘Prize in Economic Sciences in Memory of Alfred Nobel’. The award’s announcement is coordinated with the annual Nobel Prize awards.

So are economists worthy of such an award? Before going further, allow me to join the general muttering that the awards can be erratic – just as ever so many such awards made in New Zealand reflect the idiosyncrasies of the panel rather than good judgments.

I learned this early in the case of Nobel Laureates. In its seventh year – in 1975, the International Year of Women – the prize was widely expected to be awarded to Joan Robinson, unquestionably the most outstanding women economist ever, who had made pioneering contributions to the theory of imperfect competition (including inventing the term ‘monopsony’) and many other branches of economics. However, one member of the committee blocked her nomination for political reasons and she did not get the award then, or ever. I have no objection to those the committee actually nominated in 1975 but her omission from the list  reminds me of the eccentricity of the selection processes – there are also disgraceful omissions from the literature list. (I still recommend Joan’s marvellous little book, Economic Philosophy to those who are concerned about the foundations of economics,)

Many object to the award being for contributions to economic ‘science’. If science means – as it sometimes does on the European continent – ‘knowledge’, then there can be little objection to the term. But what about ‘science’ in the Anglo sense of systematic knowledge based on empirical evidence? (Warning to readers: your columnist is greatly influenced by Karl Popper.)

In my view some economics is scientific in this sense, but much of what purports to be economics is not. Much is based on theories which have been not been empirically tested. Indeed, the holders of such theories do not care about the evidence, especially when it contradicts their beloved ideologies.

This is nicely illustrated by the work of this year’s economic laureates who were awarded ‘for their contributions to contract theory.’

Contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information, in which the parties are unaware of everything the other side knows. (There are further complications like ‘informal contracts’ – key notions are unstated and incomplete – which do not cover all the eventualities.)

One of the complainers about this year’s economic laureates opined that economists are only interested in markets, ignoring the award was for activities which need not be in markets; frankly they could give the prize to the family cat and the complainers would say exactly the same things. People think they can be expert on economics having spent a whole year studying it. All talk to one another, which is why economics as a science is so frequently misrepresented. (Economics is not an esoteric subject, but you have to work to master it; because you can count does not make you a mathematician.)

Contract theory and its related issues are not a new area in economics and a number of Nobel prizes have been already awarded for it. (The laureate you may be most familiar with is Joseph Stiglitz.) It is an evolving area, so characteristic of science with incremental developments as researchers identify new areas and new situations. Thus this year’s laureates.

Among the practical applications of their work was to understand privatisation better. Twenty years ago one of the new laureates (Oliver Hart), with some colleagues

            ‘showed that incentives for cost reduction are typically too strong. The desirability of privatisation therefore depends on the trade-off between cost reduction and quality. [They] were particularly concerned about private prisons. Federal authorities in the United States are in fact ending the use of private prisons, partly because – according to a recently released U.S. Department of Justice report – conditions in privately-run prisons are worse than those in publicly-run prisons.’ (here)

In the subsequent twenty years New Zealand has introduced privately run prisons despite the longstanding theory and evidence doubting their efficacy. Huh! It is not the only example where we have pursued particular ideological strategies ignoring the scientific evidence.

The long list reflects a failure to think carefully about issues using adequate frameworks. Where is there a centre in universities or government which is focused on developments in contract theory or utilising the developments to design better decision systems?

Are the powers-that-be up with the play? Recall they certainly were not when they introduced Rogernomics (although neither was Muldoonism). That is why our market liberalisation was such a botched job.

You can see why there is an ambiguity in the public’s mind as to whether economics is a science (in the Popperian sense). Yes there is scientific element to the subject, but too often we see a primitive form of economics – as if chemistry had not got past phlogiston – and ignore the scientific evidence when it suits us – as too many have done over global warming.

The Nobel citation concluded, ‘contract theory does not necessarily provide definitive or unique answers to these questions, as the best contract will typically depend on the specific situation and context. However, the power of the theory is that it enables us to think clearly about the issues involved.’

A salutary characteristic of science is that it progresses. The scientist has to be humble, because he or she knows that the current theories they hold will be developed and replaced. As Joan and Karl taught us, the significance of scientific economics is getting rid of bad theories. Alas some bad ones still dominate our public discourse.

Footnote Comment New Zealand’s first three-way

New Zealand’s first three-way kidney plant has just been announced. They arise because the characteristics of the kidney of the donor (perhaps a spouse) do not match those of the recipient. Instead, one looks for another donor whose kidney is more compatible. Sometimes a third pair is necessary; hence a three-way swap.

The technique was developed at the New England Program for Kidney Exchange over a decade ago. Among the economists – yes, economists – who developed the algorithm which identifies the matching was Alvin Roth who shared the economics prize in honour of Alfred Nobel in 2012, for the underlying theory which led to the algorithm. (They also showed it was efficient to do a three-way swap.)

This economist takes pleasure that three more New Zealanders have functioning kidneys – and looks forward to even more when we team up with Australia to deepen the pool; he greatly admires the skills of the surgical teams involved. But he also takes pride in that economists were involved, that one was so honoured, and that some economic theory has such a practical relevance.

 I greatly enjoyed Roth’s book Who Gets What and Why.

UNFINISHED BUSINESS

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Paper to the Fabian Society, 12 October, 2016

 

While we continue to chew over the carcass of the Fourth Labour Government – the Lange-Douglas one – we pay little attention to the subsequent Fifth Labour Government. Yet the Clark-Cullen one is greatly shaping the current Labour Opposition and the current National Government. It will, presumably, impact on the next Labour Government.

I am going to limit the topic by confining myself only to economic issues. And I am not going to talk about how to win elections; sometimes politicians are more obsessed with how to win office – how to command the LTDs – than how to use the power that office offers. This is a policy presentation.

I want to present a critical assessment of the Clark-Cullen government. In my judgement it was a modernising government, it was concerned about adapting the economy for changing social, technological and external circumstances. In that sense it was no different from the First Labour Government, the Third (Kirk-Rowling) one, and the Fourth (Lange-Douglas) one. I am less sure whether the Second Labour Government (Nash-Nordmeyer) was a modernising one – in many ways it was the fag end of the First Labour Government which had run out of puff. There is a sense that the Fifth (most recent) Labour Government also ran out of puff during its third term. The current National one certainly has.

Observe that I argue that the Lange-Douglas Government was modernising. Government policy, especially under Muldoon, had got grievously behind the evolving economy and society. What distinguishes the Lange-Douglas Government from the other Labour modernisers was that it was not concerned with sharing the gains and losses from the modernisation. Rather, it adopted an extreme neoliberal version of modernisation, which favoured the rich end of the income distribution. It was an odd political strategy because the rich were not going to support Labour governments and switched to supporting the more congenial National one in 1990, while Labour alienated its traditional – poor and middle income – supporters. It was an ideal strategy to destroy the Labour Party. All power to Helen Clark and Michael Cullen and those who stayed on to rescue it.

The Clark-Cullen Government was a modernising one, but one determined to repeal the extremist neoliberal measures. So it accepted the broad more-market strategy that came out of a post-Muldoon era and reflected the increasing diversity of society and the economy.

Yet it repealed only about two-thirds of the extremism, after which it seemed to run out of ideas. It was not entirely devoid of initiatives in its final term – neither was the First Labour Government. But it seemed to have lost interest in eliminating key neoliberal policies.

Why? Some say that as the government lost electoral popularity it became more cautious, some that it did not have the intellectual grunt to deal with the remaining challenges.

You can see this in the response of Labour in opposition. The incoming National Government has fine-tuned Labour’s legacy but has done little to progress or reverse it. Labour in opposition has largely agreed with them. Its characteristic criticism of the government amounts to saying that were they in government they would run the existing system better. Excluding a promise to be bigger spenders – fiscal generosity is the privilege of those out of power – it is rare for the Labour Opposition to set out a leadership position suggesting that the current system is not working properly and needs substantive changes.

Leadership has been sadly lacking. Have you observed how often when something goes wrong in the bureaucracy, a minister – often John Key – regrets what has happened and tells the bureaucrats to up their game? It is a shrewd strategy because it covers Key with Teflon. Labour usually responds by blaming him, but leaves no mark on the Teflon. The public is smart enough to appreciate that politicians cannot be responsible for every mistake bureaucrats make.

In particular, Labour offers no narrative of why it is the National politicians’ fault, just the not very plausible claim they could do better. There is little attempt to ram home the message that a goodly number of the bureaucratic failures are because the public sector is under-resourced – squeezed of funds without any reduction on the demands on it. (How often do you hear a complaint against the health system that mentions the huge squeeze on spending National has been doing?) The difference between just responding and offering an account – a narrative – of what is happening is the difference between office and power.

The major exception where Labour has shown leadership has been in housing, where it talked about what has to be done to the point that the National Government, in a policy panic, is reluctantly responding to their critique. It is salutary to recall that nine years ago John Key in opposition said there was a housing crisis, but how little was done when National became government. (We should acknowledge that the seeds of the current housing crisis were planted under the Labour Government. However the inflationary boom really got under way during National’s term.)

Before listing some of the modernisation issues which need to be addressed soon, balance requires mention of some of the Fifth Labour Government’s successes. I focus on the big one. Cullen and Clark did more to win the 2011 election for the National Government than any other two politicians. In 2008 Cullen left the government finances in such a sound condition that the incoming National Government was able to ease our way through the consequences of the Global Financial Crisis without too much hardship. If there is another one soon, we shall not be as well placed. Meanwhile the Clark leadership created the free trade deal with China which hooked us into a large prospering market when the rest of our external world was stagnating. Whether it was wise for their successors to be so oblivious of the resulting overvaluation of dairy land is another matter.

Although I shall shortly be drawing attention to some deficiencies of the Fifth Labour government, even in its third term it was gingerly responding to some issues. Kiwisaver is an example – it is just so sad that the National Government has not continued its development, particularly as the domestic savings deficit is one of the greatest threats to New Zealand’s sustainable prosperity.

There is not the time and space to go through every economic point which needs attention. Tonight I shall look at five big ones: monetary and fiscal policy, the environment, globalisation, economic inequality and market regulation. Each would justify more than a session in its own right. Instead I shall just sketch the argument.

Monetary and Fiscal Policy

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

However, the crude neoliberal – monetarist – position continues to dominate the New Zealand public discussion even though, if you follow it carefully, the Reserve Bank takes a far more sophisticated approach. Sadly the Fifth Labour Government left the framework largely in place, even appointing monetarists to the RBNZ board.

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

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

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

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

As I warned, I am going to have to be sketchy so I shall focus on a single problem which illustrates the interdependence between monetary and fiscal policy. Many people say, why cant the New Zealand government run a fiscal deficit? After all, the New Zealand government debt is low by international standards – very low actually. What the advocates do not connect is that the offshore debt of our trading banks is high by international standards. All that international banking debt could end up a charge on the New Zealand government.

That is because trading banks can go to their central bank if they get short of cash when access to international funds dries up. That may solve their immediate problem but the effect is that the central bank, and therefore in our case, the New Zealand Government, becomes liable for the international debts of the trading banks. Those liabilities are, of course, matched by assets, which are liabilities of the trading banks. The catch is that the Reserve Bank assets are in NZ Dollars, but its liabilities are in US ones.

That almost happened during the Global Financial Crisis. In the circumstances the Reserve Bank and the Treasury handled the situation brilliantly – much better than any business commentator could even understand. At one stage the government ended up owning, in effect, a chunk of the house mortgages of New Zealand – including, probably yours.

As sketchy as I have been, I think we can draw some lessons. First, the New Zealand government is exposed to substantial foreign exchange denominated debt. This is quite in contrast to the neoliberal position that private debt has no relevance to government affairs, which is yet another example of neoliberal economics crashing as forcefully as did the world financial system during the Global Financial Crash.

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

Third, New Zealand will not be so well placed if there is another local or global financial crisis as it was in 2008. The Reserve Bank is to be commended for the prudential measures it has taken but there is no longer the fiscal room we had then.

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

This is a serious caution; there will be a future New Zealand government whose agenda will be dominated by such issues. Those on the watch whose negligence has caused them will be out of power and hardly held to account.

The Environment

I could say more on the monetary and fiscal issues that challenge us but I move onto to discuss briefly some environmental ones, where the same issues face us. Those on the current watch have failed to tackle long-term challenges.

 

New Zealand is too small to have much impact on the aggregate of international emissions which are generating climate change, but we need to be a good international citizen. We could have been a world leader by introducing a taxation regime on the consumption of products which generate those emissions. But even had we had more modest objectives, we are failing to take measures to mitigate the rising sea levels which are a consequence of the climate change. We dont even have a national conversation.

We have more control over our national water system yet, again, we have been negligent about its quality and allocation. It is the repeated story that there has been little foresight in the management of the environment, just as we have failed, in a similar way, on the economy. Future generations will pay the price for that negligence.

Fundamentally we are being driven by Aesop’s grasshoppers enjoying summer; we need more ants who know there is also winter. Ants know that the current economic and environmental strategy is unsustainable; grasshoppers dont care.

Globalisation

Globalisation is proving to be a great challenge to the left as well as to everyone else. I think that is because it is the contemporary equivalent of nineteenth-century industrialisation, which was at the heart of the rise of the left in that century.

At first there were seen to be two broad paths. One, most evident in the writings of Pierre-Joseph Proudhon, was to abandon industrialisation and revert to a rural arcadia, albeit an idealised one. Instead the left accepted that industrialisation was one of the great driving forces of the world which could not be prevented but could be harnessed for social ends.

Social democracy was the left’s solution to that harnessing. Neo-liberals aside, most accept that much of their response was successful – although in practice considerable economic activity remained in the hands of the private sector. The left approach has been to use the market to regulate the economy.

Perhaps less obviously, a key element of the harnessing was the nation-state. The left, of course, is politically internationalist, but economically it has been more concerned with fostering a democratically controlled economy for the social good.

In contrast, the neo-liberal approach is to relegate the nation-state to a minimal role; you will recall that approach during the Fourth Labour (Lange-Douglas) Government. It was not entirely successful but the pressure to neuter the nation-state remains; trade deals can be a way of castrating it.

The independent nation-state was always an ideal rather than a reality. We were once a colony and then a neo-colony of Britain. As it lost its global dominance, we became dependent upon the wider international economy led by the US. We are not alone in this transformation. Other countries face the same challenge and everywhere we are seeing a considerable pushback against policy responses to globalisation which undermine the nation-state.

For the nation-state, as we have traditionally understood it, is not well-adapted to the pressures which globalisation generates. In order to trade, it is necessary to give up some national autonomy; that is the nature of trade deals and, indeed, a myriad of other international obligations we take on – such as on climate change or human rights. Each limits the ability of the nation to pursue its own ends unilaterally.

Thus the notion of a nation-state which is independent and has total sovereignty over its economic activities is becoming increasingly obsolete. While this was always true for small entities such as New Zealand, increasingly large entities, such as the United States, are realising the limitations. Much of the Trump anti-trade rhetoric reflects the anger about this reality, although it does not offer a resolution other than the nostalgia of a retreat into an idealised past. The Brexit vote was a similar response.

I watch Britain with great interest as it struggles to square the circle of a nation-state in a globalised world. The challenge before us is to redefine the nation-state and its role in the world. Again it is a topic which is larger than I can deal with here, so I offer a few fragmentary remarks.

First, New Zealand is going to have to be an open economy (and open society). That does not mean total global subservience but we do need to engage economically with the rest of the world as long as we need to import products which we cannot realistically make ourselves and perforce export to pay for them. Offshore borrowing only further compromises our sovereignty.

Trade is a bit like marriage. One gives up some sovereignty for some other benefits. Pretending you can enter marriage or trade and not compromise your independence is a romantic notion. Practically you should ask whether the result makes you better off.

But we need not accept every trade deal on offer. The TPP involves pushing economic integration deep beyond the borders; I am not sure that is always wise. Others share those doubts. They will probably be sufficient to scuttle the TPP. That saves us facing the difficult tradeoff of better access for our farm exports in exchange for ridiculous extensions of copyright law and a clumsy investor-state dispute procedure. It is unlikely that some other deals we are negotiating – such as RCEP with 15 other Asian economies – need be as intrusive.

How deep should globalisation go behind the border? A good principle is surely ‘subsidiarity’, that decision-making should be left to the lowest practical level – where possible to the nation-state rather than to international arrangements, to the locality rather than central government and to the private individual rather than to public institutions. I hope the mayors of Auckland, Christchurch and Wellington hold the central government to the principle of subsidiarity rather than it trying to run localities through centralised bullying.

To finish briefly on a couple of issues leaving many others uncovered. We need to think about what it means to be a nation in a globalised world where factors and individuals are mobile. And yet we need to avoid chauvinism. The current government places a lot of emphasis on sporting achievement (especially men’s rugby) and war history. So did the Clark-Cullen Government although they also gave greater significance to culture and heritage, albeit more at the elite than the popular end. Even so, I never had a sense that either was conceptually grappling with the issue of identity in a nation-state.

While there is not the space to develop this here allow me a couple of minor points. First, I celebrated our national success at the Paralympics. I do not wish to diminish the achievement of individuals in it or the main Olympics. But that so many of our para-athletes did well, reminds us of a national commitment to enable those with difficulties to live as normal lives as is practical. It is an approach we should pursuing in many other dimensions of public policy.

Second, I remind you of the truism that ‘taxation is the price of citizenship’. Conversely, those who choose international mobility as a means of avoiding paying taxes here do not deserve the rights of full citizenship. There are obligations which go with it.

My final teaser on the globalisation issue is that the economic growth which the rich world has become used to may be coming to an end, and that there will not be substantial rises in per capita GDP over the next decades. I do not think this means improving living standards is coming to an end, but it means it is pointless pursuing conventional economic growth at any price.

It is a political fact that much economic rhetoric promises to increase the economic growth rate. It is an economic fact that there is no evidence that any New Zealand government has increased the sustainable growth rate. Closer analysis shows that the growth advocates’ policies usually promote their self-interests at the expense of others, and very often at the expense of compromising the quality of lives of those others.

We need to give a broader definition to living standards and not that it is just a higher per capita GDP. We should never forget that the government can influence the composition of output, including by public spending, in order to produce higher welfare. The neoliberal focus on individual spending is a promise of a life which is nasty, brutish and short.

Income Inequality

One of the central puzzles about the Fifth Labour Government was its failure to tackle inequality. The standard measures of income inequality showed little change during the nine years it was in power.

The puzzle is increased by the fact that every informed observer knew that the neoliberal changes of the late 1980s and early 1990s markedly increased poverty and that we had good scientific measures of the increase in inequality by the mid-1990s, before the Labour government was elected. Why did it not do something about it?

One answer is that the poor and depressed do not vote (children, the main sufferers from poverty, cannot vote). It is an interesting argument because it suggests that Labour’s strategic thinking has been reduced to who will vote for it. But the approach also has a neoliberal dimension; look after ‘number one’ and to hell with what is happening in your community – in your nation-state.

Another view is that the Fifth Labour government ignored inequality because of the very poor quality of advice it received. Whatever the individual merits of its advisers, they had outdated views of the welfare state, reflecting a world which no longer existed – for instance, the traditional welfare state was built on the assumption that mothers did not do paid work and that there was negligible unemployment.

In a curious way, today’s current National Government could claim to be a moderniser of the welfare state in the way that the previous Labour government cannot. I am not happy with the way it is doing it, but at least they are trying to grapple with the social changes of the last forty years in a way the previous government did not.

You may say ‘what about the Working for Families package?’ There is a view that this was the best piece of social policy that Labour introduced. The alternative view is that it was badly designed, clumsy to implement and socially inequitable – a view which the courts have come close to supporting.

Let me offer a compromise. Working for Families was the best thing that Labour did in the social policy area and it was a totally botched job which needs to be replaced by one which is better designed, easier to administer and understand and which is more equitable. I look forward to the plans the next Labour Government has for doing this. I just hope they have better advisers than they had last time.

Regulating the Market

At the heart of the neoliberal agenda was a belief that the competitive market should rule as far as was possible. Now it is true that Muldoon had very little faith in market mechanisms and frequently overruled them. Commonsense concluded that there had to be shift to more-market. But commonsense does not support moving to the neoliberal’s extreme minimalist version.

The Clark-Cullen government gingerly rolled back market extremism in some areas. It took eight years to address the Telecom monopoly which enabled what is now Spark to use its control of what is now Chorus to extort favourable prices and profits. Recall how Telecom’s share price fell when the two activities were directed to operate independently of one another, an implicit admission that Telecom was the beneficiary of monopoly profits. The subsequent poor performance of Telecom, now Spark, confirms the advantage of the monopoly advantage that Telecom once had.

We are still dithering on the regulation of monopolies, dealing with each on an ad hoc basis. Rather we should recognise that monopolies are much more common in a small economy such as New Zealand than in a large economy like the US or the ideal economy beloved by neo-liberals. We need a competition framework which thinks monopolies and oligopolies are normal and in need of social regulation.

Our slackness with regard to monopolies is an example of ‘light-handed regulation’, the belief that firms can be left to themselves to act in the interest of their consumers. (The Telecom experience indicates why it is sometimes called ‘light-fingered regulation’.)

The Clark-Cullen Government was faced with a major example shortly after it took over. The leaky building crisis arose because of changes to the building regulations in the late 1980s which assumed that builders would maintain a high standard of craftsmanship because home owners would monitor them. Yeah, right.

It has not been the only major catastrophe. The billions-of-dollars collapse of the majority of finance companies about the time of the Global Financial Crisis reflected the poor regulation of the industry. There have been many smaller instances.

Again we have responded in an ad hoc way, rather than asking how to regulate a market effectively. Sometimes we seem to over-react with onerous requirements which are not obviously effective but a consequence of policy by panic.

It would be wrong to charge the Fifth Labour Government with a failure to adopt an emerging approach in economics popularly called ‘nudge’ theory. It recognises that individual behaviour and decision-making is far more complicated than the crudities of neoliberal economics. Both the US and British governments have set up nudge units to try to incorporate the thinking into decision-making. The Key-English Government has not and its main adviser in the area, the Productivity Commission, takes a far more neo-liberal approach to market behaviour than current economic thinking would justify.

A related issue to be discussed only briefly is that of the burden of risk. The neoliberal changes aimed to shift the costs of the unexpected from the government – from the taxpayer and the community – to the individual. It would be foolish to design a system in which all risk was borne by the government – albeit the Muldoon Government was inching that way. In my view – and I am sure that of most social democrats – certain parts of risk should be borne by the community. That is what is meant by social insurance. The current policy stance needs to clarify this rather than remorselessly shifting the burden onto the individual. Again this is a major topic for a session in its own right.

The fact is that competition in even many-supplier markets need not lead to quality outcomes. I remain unimpressed by trying to do this in the education sector. The market remains a powerful means of regulating an economy for the social good, but to do so it has to be socially regulated not left to run itself.

What A Social Democratic Government Is About

That market regulation is by the government. The neoliberal economic tradition is that government is a hindrance to individual welfare; the social democratic tradition is that government is a means of the community harnessing powerful economic forces such as industrialisation and globalisation for a common good and higher individual welfare. ‘Harness’ you will observe, not oppose.

That has not always been true. Some governments assist one part of the economy, often business, to pursue its objectives at the expense of the rest. The role of business is to enhance our social objectives. Business is not the social objective itself; sometimes some businesses have to be restrained for the social good.

We too often forget the harnessing role of government, implicitly adopting a neoliberal agenda by default. In particular we think of individuals alone rather than individuals in their communities, how that a well-functioning community enhances individual welfare. Individuals may compete against one another; competition may be relevant in a social democracy but so is co-operation and trust.

The neoliberal changes did much to destroy trust, replacing it with contractual relations between individuals. The not entirely unexpected outcome was the need to impose costly layers of bureaucratic and legal regulation to enforce contracts (they call it ‘accountability’). That is one of the reasons for the failure of the neoliberal changes to improve economic performance – the transaction costs of managing the trust-less economy has gone up markedly. We are not getting any more output than in the trust economy, but a lot more output is devoted to monitoring people we do not trust.

We may not be able to return to the levels of trust that were once central to the New Zealand community. But we do need to reaffirm social democrat values – something which the Fifth Labour Government may have done by example – by partial example – but it never articulated a rhetoric. When it left office the community had no language – and hardly any other means – to defend itself against a government which was less imbued with social democratic values.

In particular, the squeezing of the public sector in favour of tax cuts for individuals – particularly the better off – is a denial of community and its need for the social regulation of the economy for a more effective and humane society.

I do not think anything I am saying is that far from most New Zealanders’ thinking. Their difficulty is that they cannot easily articulate it, with a consequent inability to implement their reasonable, practical desires.

There are many good things the Fifth (Clark-Cullen) Government did; sure, it would have done more had it been re-elected for a fourth term. Its most lamentable failure was to fail to articulate a social democratic vision which took up the challenges which face us – leaving those who inherited its mantle struggling about where they are going.

Do We Need Poverty Targets?

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No, but we need to address poverty. Focusing on poverty targets which are not to be achieved in the time of the government which sets them is wasting energy and opportunity. 

Despite being frequently ignored, Gilling’s Law is one of the most powerful social laws I know. Formulated by Don Gilling, a retired professor of accounting and finance, it states that the way you score the game shapes the way the game is played. A simple illustration is that when they increased the points for a try, rugby games became more attacking in order to score more tries.

Very often the scoring system distorts the intention. Most academics recognise that is true for the Performance Based Research Fund where, in order to get high grades according to the scoring system, many researchers found themselves changing their research strategy for the worse. (Additionally, there is a huge waste of resources that could be used for research which are used, instead, to achieve the points of the PBRF system, further reducing the amount available for genuine research.)

But not only universities suffer from this stupidity. Every so often the government imposes a target on officials. Before long the officials start thinking of ways around the target. For instance, there is a target for recidivism. One way to reduce the proportion of re-offenders is to incarcerate more people who will not re-offend.

This tendency for targets to distort policies is the reason why I am chary about pursuing specific poverty targets. The prime minister is quite correct to say that it is difficult to set good quality targets. Virtually every one I know of can be circumvented. That does not mean to say there is no poverty, nor that when we visit some very poor people, we are unable to see they are deprived. But there are many households where the judgement is more ambiguous. Poverty does not go away if we doubt our ability to measure it, nor should we stop trying to do something about the state of the poor.

I can claim a little expertise in this area, because in 1975 I wrote a paper on poverty in New Zealand which included an estimate of the proportion of the population that were poor – the  first attempt of its kind. It had the revolutionary conclusion that the majority of our poor were children and their parents and guardians; prior to that the conventional wisdom ignored child poverty. This conclusion is virtually independent of the precise poverty line which is chosen although, of course, the exact number of poor depends upon the particular line.

The poverty line I used was the level which the 1972 Royal Commission on Social Security nominated as providing an adequate income for beneficiaries. In 1990 the real benefit level was cut to below the Royal Commission recommendation. That is the level it remains at today (except for the small increase in family support last April). Beneficiaries have a basic income level which was judged by an informed panel to be inadequate 44 years ago and they have not had any share in the increased prosperity since.

Today the poverty line  favoured by the uninformed is a percentage of median household income. The median is the middle of the income distribution with as many above it as below it. Advocates argue over whether the percentage should be 50 or 60 of the median income, a gap large enough to warn you of the arbitrariness of the choice of level. (Today there are also material deprivation indexes. Space means I shall have to omit discussion on them.)

What I am about to say is so paradoxical to a non-statistician that I am going to have to explain it in a little detail. A median-income-based poverty line makes it possible for poverty to be reduced by taking income from those in the middle of the income distribution and giving it to those at the top (yes, I mean the rich). The income of the middle household would fall. So would the median-income-based poverty line. Thus numbers of those measured in poverty are reduced even though there is no change in the living standards of the poor, while overall income inequality increases. Absurd, you say? It is the definition of the poverty level which is absurd.

Here is an example which illustrates the absurdity. Suppose the median (middle) income is 100 units, and we use the 50 percent of median income poverty line, so anyone in a household below 50 units is in poverty. Now suppose the government rejigs the tax system in favour of the rich by raising taxes on those in the middle and using the proceeds to cut taxes at the top. For illustration, suppose the effect of the higher taxes on the middle was to reduce the median income to 80 units from 100 units. It follows that the poverty level has now fallen to 40 units and all the people in the 40 units to 50 units  income range are no longer deemed to be in poverty. Hallelujah!

This is not just a meticulous scholar generating a theoretical paradox. It actually happened. In the early 1990s, the government redistribution policy transferred income to the rich; the numbers deemed to be in poverty fell. Any objective observer saw plenty of evidence of poverty rising as a result of the government’s redistributive policies, but the poverty measure showed exactly the opposite. Both the Treasury and the right-wing think-tank, the Business Round Table, trumpeted the success of their pro-rich redistributive policies at reducing poverty. Hallelujah! Hallelujah!

The poverty advocates who chose the median based poverty line scored an own goal, putting back their cause by years.

Not having a poverty target does not prevent us from tackling poverty. Given current circumstances we could introduce a Universal Family Benefit (UFB) in September 2017 (just before the election). I’d make it taxable, so it was less valuable to high income families, and index it to wages, like New Zealand Superannuation (NZS).

In the longer term we need to do something about affordable quality housing; were I the government I’d be planning a package biased towards poor families to prop up the housing market when it goes phut. We also need to do something about the byzantine, inequitable and inefficient Working For Families program (WFF, although many think of it as WTF). I’d also treat as a tax deductible as an employment expense the cost of childcare for working mothers.

Fiscal prudence would mean that a September 2017 package would be insufficient. So we need to keep increasing the UFB up to, say, 70 percent of NZS (although there is a case for the proportion varying with the child’s age).

No targets, just practical policy initiatives based on the research. Instead, use the measures of poverty based on poverty levels to assess the degree of progress that the government is making. (Another set of measures are those which assess economic inequality. Child poverty is probably the greatest source of the inequality; the other great source is the favourable situation of the rich.) The measures are only available a couple of years and more after implementation so we need sophisticated means of making interim assessments.

Since there are a lot of measures, and the public is likely to have strong opinions, the government would be faced with addressing the poverty issue directly rather than setting a target which it can cheat on. (For instance, were it to abandon free primary and secondary education – something it seems to be doing incrementally – and give the cash to families (or even the rich), the numbers of poor below the conventional median-based poverty lines would fall while hardship went up.)

Measures for monitoring poverty are useful, but policy targets are to be avoided. Let’s get directly onto addressing the problem of child (and their parents and guardians) poverty. 

The Over-Representation Of Māori In The Criminal Justice System

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

A report explains why: small but accumulating biases together on top of adverse early-life social and environmental conditions.

To be frank, this column on criminology is not in an area of my expertise. But in the course of my reading to place economics in a social context – I do that a lot – I came across an old report which I suspect most people who care have not come across earlier either. So this column is really from a journalist telling about a report.

In 2007, the Department of Corrections published Over-representation of Māori in the Criminal Justice System: An Exploratory Report. While the report is about New Zealand Māori, it is a part of an international research program applied to New Zealand. So, to some extent then, its conclusions are not so much about Māori as about universal social processes illustrated by Māori in New Zealand.

The report summarises the over-representation of Māori in the criminal justice system as follows (noting that the specific numbers refer to about 2007 when the report was written):

     “Relative to their numbers in the general population, Māori are over-represented at every stage of the criminal justice process. Though forming just 12.5% of the general population aged 15 and over, 42% of all criminal apprehensions involve a person identifying as Māori, as do 50% of all persons in prison. For Māori women, the picture is even more acute: they comprise around 60% of the female prison population.

     “The true scale of Māori over-representation is greater than a superficial reading of such figures tends to convey. For example, with respect to the prison population, the rate of imprisonment for this country’s non-Māori population is around 100 per 100,000. If that rate applied to Maori also, the number of Māori in prison at any one time would be no more than 650. There are, however, currently 4000 Māori in prison – six times the number one might otherwise expect.

     “Further, a recent extraction of court criminal history data indicated that over 16,000 Māori males currently between the ages of 20 and 29 years have a record of serving one or more sentences administered by the Department of Corrections. This equates to more than 30% of all Māori males in that age band; the corresponding figure for non-Māori appears to be around 10%. At any given point in time throughout the last decade, fully 3% of all Māori males between the ages of 20 and 29 years were in prison, either on remand or as sentenced prisoners; again, the corresponding figure for non-Māori is less than one sixth of that.”

Wow! I knew it but not so quantitatively.

The report describes two different explanatory approaches as to why Māori are over-represented:

             – that bias operates within the criminal justice system; and

            – that a range of adverse early-life social and environmental factors put Māori at greater risk.

It concludes:

     “[T]he two perspectives are by no means mutually exclusive, and both approaches appear to offer part of the explanation for the current state of affairs. The evidence points to an interaction between the two processes, where the operation of one set makes the other more likely. …

     “There are indications of a degree of over-representation related solely to ethnicity, rather than any other expected factor, at key points in the criminal justice system. Although mostly small at each point, the cumulative effect is likely to be sufficient to justify closer examination and investigation of options to reduce disproportionate representation of Māori.

The report says that, controlling for all other factors, Māori offenders are more likely to:

            have police contact;

            be charged;

            lack legal representation;

            not be granted bail;

            plead guilty;

            be convicted;

            be sentenced to non-monetary penalties;

            be denied release to Home Detention.

The report suggests that the differences ‘often result not from deliberate discrimination, but from unconscious prejudice and stereotyping and as an unintended consequence of prima facie reasonable attitudes, practices, and decisions.’

In aggregate, the  disproportionality of Māori in criminal justice statistics may, to some extent at least, be a cumulative effect, whereby the interactions of relatively small individual effects produce significant disparities in totality at the national level. In other words, relatively minor biasing at each step may combine to produce, at the end point, quite substantial effects.

However the report concludes that it cannot realistically be suggested that current differences in the rate of imprisonment could arise solely from such bias effects.

So it goes on to argue that over the last three decades international and New Zealand research has resulted in a wealth of knowledge explaining why it is that some young people commence on a pathway that leads to persistent offending, while most do, or do so only trivially.

The childhood antecedents of chronic adult offending include the following key factors:

             – Family structure, context, and processes: examples include being born to young mothers, a lack of family stability, a family environment in which conflict and violence is common, and being exposed to harsh punishment.

            – Individual characteristics of the developing child and adolescent: these include factors affecting the child’s neurological development, and psychological temperament.

            – Educational participation, engagement and achievement: factors here include school absence, early leaving age and failure to achieve qualifications.

            – The emergence of developmental disorders: included here are childhood conduct disorder, early onset of antisocial behaviour, and abuse of alcohol and other substances during adolescence.

Māori are disproportionately represented for each of the factors. The case seems compelling that Māori over-representation in the criminal justice system rests on a foundation of early-life environmental influences, although these effects may be magnified by the small, but cumulative, biases.

Ultimately these accounts of Māori over-representation in the criminal justice system – and, indeed, of over-representation in poor economic outcomes – involve a process of cumulative circular causation through time of one event impacting on subsequent events both for the individual and through generations.

The report is a decade old. I do not know what measures have since been taken. (Experts are welcome to tell us in the comments.) This economist tends to think of improving the economic circumstances of families and better delivery of preventative services.

One anecdote in the report, well outside my expertise, struck me as ironic. Apparently a Pakeha is more likely to be fined while a Maori incarcerated, because the court judges they are too poor to pay their fines. Aside from the cost of incarceration to taxpayers, I am not sure of the wisdom of sending poor young Māori to the country’s finest finishing school for training criminals.

The saddest paragraph in the report was:

      “Over-representation in offender statistics is mirrored also by over-representation of Maori as victims of crime, a result of the fact that much crime occurs within families, social networks or immediate neighbourhoods”.

So there is racial discrimination in crime.

Rethinking Trade Policy.

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

We don’t need to refresh trade policy; we need to rethink how best to engage with the world in the context of increasing globalisation. 

The Government is ‘refreshing’ its international trade strategy. Refresh is a euphemism. It ought to overhaul it. Here are some guidelines; I begin with the overarching framework.

The context is globalisation which seems to be as great a driver of economic, political and social change today as industrialisation was in the nineteenth century. Many see it as threat – as conservatives saw industrialisation. I see it as challenge – how are we to harness globalisation to the betterment of mankind in general and New Zealand in particular?

New Zealand has to engage economically with the world – sometimes it is called the ‘open economy’ strategy. But it need not be equally open on all dimensions.

There should be a minimum of restrictions on information flows (which is why I object to the copyright provisions in the TPP).

Aside from phyto-sanitary restrictions and the like we are going to have to be open to imports; we are going to be a specialist economy in international terms. However, that need not mean we should never foster an infant industry. At issue is how we do it and that the strategy includes the weaning of the infant.

I would be more restrictive on capital flows, favouring new foreign investment (which is not the same thing as being equally favourable to foreign purchase of existing businesses) and discouraging overseas borrowing (which has fuelled the housing market). I accept that some overseas purchasers of our exports will want to integrate back into domestic supply. The import of this paragraph is that we need to save more domestically – in the terminology of the left-Liberals of a hundred years ago we have to be more ‘self-sufficient’ in savings for investment. (More here.) 

We need to restrict immigration to the level we can absorb socially. We should not be using immigration to stimulate the economy, nor to provide the skills in which we have failed to train New Zealand workers (except for very short-term shortages – like those which arose following the Canterbury earthquakes). We should not have specialist immigration programs for the rich. The social absorption criteria are necessary because migration will change the ethnic balances and diversity of New Zealanders; something we should welcome. (More here.)

While there are a lot of upsides for the open economy, we also become more vulnerable to the downsides when the world economy contracts or the international financial sector panics. We have to prepare for that eventuality – another reason for building up our domestic savings.

What then should be our trade negotiations stance? First, we need to pursue strongly the enforcement of the agreements we have made. (Successful examples include the apple dispute with Australia and the lamb dispute. The 2016 Nairobi agreement which eliminates agricultural export subsidies and imposes disciplines on measures with equivalent effect is going to generate new challenges.) That means coming to the table with clean hands – not having cheated in other areas; bigger countries do not need to be so scrupulous. (More here.) 

Second, we need to reduce the institutional barriers to the flow of goods (such as border documentation) – the kind of things that APEC is concerned with but which are also unmentioned but vital parts of most trade deals

Third, we need to play our international part in the consolidating of trade deals – trying to reduce what is called the ‘noodle bowl’ of bilateral and plurilateral deals to a set of fewer and more consistent ones. (Plurilateral is when there are a number of economies involve but not all of them.) Another multilateral (i.e. everyone that matters) ‘Doha’ round would be super; but we are not going to get one in the planning future.

Fourth, we should continue to pursue the currently proposed bilateral and plurilateral deals but not expect too much from them.

Fifth, we need to take more care about compensating losers when we do a trade deal.

The above is in the ‘refresh’ category. The ‘rethink’ is about moving away from a ‘comparative advantage’ approach to international trade, recognising that our model which underpins it is over-simple. It is partly that the standard caveats of free trade are becoming increasingly important: transition and adjustment costs are not negligible, the static gains are not sufficiently large to compensate losers. (These are the sort of issues which are causing so many in the US, including respected economists, to doubt the efficacy of trade deals.)

We also need to recognise that the standard models do not handle well any of the following increasingly important globalisation phenomena: competitive advantage, economies of agglomeration, the falling costs of distance, supply chains, tradeable services.

Comparative advantage has led us down a blind alley, where sometimes we get beaten up by thugs. Most conventional protection (such as import controls and tariffs) is becoming negligible. The major exception is foodstuffs – the sort of things we export. Many of New Zealand’s exports are cruelly discriminated against, not only to the detriment of the farmers but of the New Zealand economy as a whole.

It was the belief in comparative advantage which led to our unilateral abandonment of external protection in the 1980s and 1990s. It was a bit like taking all your clothes off at a picnic to encourage others to go nude. Others looked at what they saw and kept their clothes on – especially the agricultural tweeds – for it is really hard to show substantial gains from the nakedness.

Today’s consequence is that we have little to offer other countries in exchange for their lowering their foodstuff protection. That is why we had to accept the iniquitous copyright extension in the TPP in exchange for better access to the US and Japanese domestic food markets. (More here.)

So how are we going to get further reductions in the barriers our farm exporters face? We can, and probably should, continue to negotiate plurilateral (like RCEP) and bilateral deals (like with the EU) but we have not got much to offer and cannot expect much in return.

Instead, we need to think of new initiatives. Can we include in climate negotiation deals reductions in the barriers which face our farmers (but we need to resolve the belching cow problem). For instance, we are currently pursuing the elimination of subsidies on fossil fuels which will favour renewable energies and conservation measures – to New Zealand’s advantage.

But we are also pursuing the elimination of subsidies on fishing. That is an honourable green objective – even if it is against our long term interests because the world fishing out its ocean stocks will make our fish managed under a sustainable regime (sort of) so much more valuable. (Here are the minister’s views.) 

Something which is not currently on the international negotiating agenda, but in my opinion should be, is a world food security treaty. Many countries protect their farmers to give themselves food security. In fact self-sufficiency in supply is not guaranteed. It would be far better to liberalise international food trade so when there is a shortage in one country supply would be diverted from others or from stocks. We need an agreement which would ensure this among signatories (probably with an agreed food stock strategy). It should also include an agreement that signatories would not use food sanctions against one another. (A similar prohibition against pharmaceutical sanctions would be a welcome add-on.)

It is a long shot, and will take years to implement but it is more effective than taking your clothes off at a picnic.

Finally, we need to move public discussion of trade issues away from the narrow elite to the whole public. My guess is that improving the information to the public, and gaining their confidence over what we can do, will require an independent research group on globalisation. Pundit columns are not enough.

PS. Many readers will have been moved by Dani Rodrik’s Put Globalization to Work for Democracies. While we may well aspire to these objectives as a part of our total strategy, a small country cannot do much by itself but we can pursue the strategy with like-minded countries.

Developing Our Understanding Of Poverty

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

Last week’s report on wellbeing and the household income distribution told us some new things. Are we listening?

Sadly, the latest MSD report The Material Wellbeing of NZ Households, by Bryan Perry, released last week, passed by quickly. It said, broadly, that there is no obviously significant shift in the level of inequality in recent years. We all know that inequality is high but no change is no news. The usual suspects selected a particular statistic from pages and pages of findings (the summary report is 45 pages long by itself) to suit their narratives. 

What was bypassed was that this research project is steadily increasing our understanding of poverty – it is a complex phenomenon.

We knew this when the basic framework was developed forty years ago. At that time we had a limited data base and all we could do was conjecture, in a common sense way, that what we could measure was relevant. But anecdote is not always right, it rarely produces new truths as it is backward-looking and it does not provide quantitative estimates which tell us of the relative importance of causes or more-effective policies. Nor do anecdotes enable an investigation into the intricacies of the ways characteristics interact.

I am not ashamed of that work forty years ago but it needs to be progressed. Sadly, some of those who pontificate on the poverty measures are still locked back in the primitive framework of the 1970s. Here I want to report some results which do represent progress and need to be incorporated into our thinking.

Forty years ago, we used income as a measure of poverty. It was all we had. A more sophisticated argument, which applies even today, is that income is one of the few significant policy instruments we have to alleviate poverty.

Yet we all know people on low incomes who choose to live frugal but comfortable lives. Then there are people who are on high incomes with much of their spending wasted and living pretty awful lives. And what about those who are but temporarily on low incomes or on high incomes?

The MSD study reports that there is now a material wellbeing index (MWI). It involves asking households about how they live; for instance they are asked whether they are able to afford two pairs of shoes in a good condition and suitable for daily activities. (The complete list is an appendix to the summary report; you can even score yourself on the scale.).

We can compare the MWI of a household with its income. The match is not perfect, but there is a correlation. (An econometrician with a social conscience might want to refine this analysis, especially looking for interactions.)

To make an obvious – if frequently overlooked point – a dollar is worth more to the very poor in lifting their material wellbeing than it is to the rich. Our standard measure of incomes ignores this.

The eminent economist, Amartya Sen, argues that we should compare percent changes of incomes rather than dollar changes, so that $20 given to (or taken from) a persons on $20,000 a year (i.e. 1 percent) has the same social value as $200 given to (or taken from) a person on $200,000 a year. Sen proposes an alternative measure of ‘real national income’ which allows for this. His approach implies that it is less socially costly to transfer from the rich to the poor than the well-off would like you to believe, Applied to New Zealand (here), it suggests we are not doing as well as the GDP per capita measure suggests because more of the additional income is going to the rich than the poor.

New Zeaalnd’s MWI is part of an international comparison in an EU study. (Australia, Canada, ,Japan and the US have not joined in.) It turns out we are tenth among the 28 countries involved, ranking behind the Scandinavians, the Netherlands, Austria and Spain and above – among others – Britain, Belgium, Italy, France and Germany. It is an intriguing result, because the mentioned latter are ranked higher by GDP per capita than New Zealand, again warning that per capita GDP is not nearly as compelling a measure of wellbeing as its popular use assumes.

While New Zealand ranks well on average, it does poorly on deprivation among children. (This is because our provision for the retired is generous compared to most EU countries where we rank 5/28.) Only Germany among the rich EU, ranks (just) below us. Yet another confirmation that we treat children badly in economic terms.

A second major limitation of the current analysis is that it tends to look at poverty at a point in time and does not explore longer-term consequences. A further dynamic complication is that while the total number of poor at any point in time is known, for a given poverty level, the incomes of individual households move above and below the threshold over time.

The, alas discontinued, SoFIE (longitudinal Survey of Family Income and Employment, and some other things too) found that the longer a family was below the threshold, the more severe was its material deprivation.

There is a lot of evidence of poverty being associated with poor health at the point in time, but another study gives us insights into the long-term impact of poverty on health. The Wellington School of Medicine Health Inequalities Research Programme matched individual mortality with census characteristics to measure life expectancy. It found that in 2001 non-Maori females could expect an additional 4.1 years if they had ‘higher’ incomes than ‘lower’ incomes; the male figure was 5.7 years. (Maori differences were 5.3 years for females and 7.1 years for males.) So poverty does not just result in poor health – it kills.

I have seen no similar longitudinal work for the impact on education. Teachers, often with tears in their eyes, will tell you of bright students from poor backgrounds who never had the opportunity to flower. But we do not know how many suffer nor by how much (nor what are the related costs of such lower national productivity). Even so, the anecdotes prod us to investigate such issues – we don’t.

The burden of the research is carried by Bryan Perry of the MSD. There are more insights in the report which can be mined but that requires intensive work. Had we the resources, the experienced researcher could identify some potentially revealing extensions of the work. There are probably other  (longitudinal) data bases which could be integrated into the story. But, sadly, available funding is restricted and, with a few noble exceptions, academics have not generally been very interested in pursuing the intriguing questions. The quality of the resulting public discussion suffers; our poor – especially our children – suffer more.

PROGRESSING THE FASD CHALLENGE

This entry was posted in Health and tagged , on by .

FASD Policy and Research Forum, 9 September, 2016, as a part of the observance of International FASD Awareness Day.

In 1920, the Maoriland Worker, said that ‘the politician is like the person who would build an ambulance at the bottom of the cliff, instead of constructing a good fence at the top.’ In many ways our ambulances are panic measures. We ignore what is happening at the top of the cliff, but when we see the human misery tumbling from above we think we should do something – although even then we can be reluctant to take action below.

Thus it has been with FASD, Fetal Alcohol Spectrum Disorders, the consequences of a mother drinking while she is pregnant. The permanent cognitive and behavioural damage to the child impacts on their wellbeing and social functioning, on the wellbeing of their families and on society as a whole in terms of higher health care and judicial costs, less effective education and lower tax receipts.

Extraordinarily, we have known about this problem for along time. I first came across it about two decades ago in a paper by an American colleague, economist Ric Harwood. Admittedly the paper was only on the most extreme condition on the FASD spectrum (sometimes called Fetal Alcohol Syndrome). It showed the costs of the condition to the US state were horrendous; around $1 million per person. That did not cover the other costs to society, nor the suffering to those who have the condition. Teina Pora, who as at the more extreme end of the spectrum is a terrible example. He was unable to understand the nature of a confession; because we were insensitive to his FASD, he spent 21 years in jail.

We think that each year about 60 children are born with the most extreme form of FASD. That means that since I learned about this extreme condition we have had 1200 born with it. Subsequently, I learned there are probably ten times as many with the wider condition of a FASD, which includes those without the physical signs and facial features of FAS. That means in the twenty years we have had 12,000 who have fallen off the top of the cliff. They are scattered through New Zealand but were they to come together they would fill a town the size of Te Awamutu, Hawera or Gore – all three towns if you add their immediate family.

You would not expect economists to be on the research frontier of medical conditions; physicians had identified The FASD condition earlier. What is extraordinary, though, is that it has taken two decades since I learned of it for the government to articulate a policy position and it will take even more time to implement it.

Building the fence at the top of the cliff is not difficult. It simply requires women who are pregnant not to drink, to immediately stop drinking if they have been drinking and where they find themselves unable to stop, to cut back as much as they can. Because it may take some time to learn she is pregnant, women who could get pregnant – those not using contraceptive – should not drink either.

It would be very easy to stop at this point heaping blame on mothers. But there is evidence that some health professionals are not always alert to FASD. They need to build in the advice to stop drinking as a routine part of their support. They need to reinforce their message by pointing out that humans evolved before they imbibed alcohol, that the placenta is not designed to filter out alcohol, and that a drinking pregnant woman has a drinking child inside her.

But the whole village brings up a child. It is not a matter of men and older women washing our hands of the problem. We know that the fight against alcohol misuse requires a broad community involvement. We all need to be aware of the dangers and to be supportive to those in danger. Not in a hectoring way, but appreciating the challenge for the women at risk. Personally I won’t drink alcohol in the presence of a pregnant woman. I’m not a wowser; I enjoy a pinot with a meal. But solidarity and commitment come first.

Nor should we deny there is a problem. A year ago an Auckland waitress was criticised for refusing to serve alcohol to a pregnant woman, despite having the spirit of the law on her side. It says not to serve minors – you cannot be much more a minor than before you are born; alcohol drunk by a pregnant woman goes straight into the bloodstream of the fetus. It was extraordinary the waitress was criticised. In a more informed, caring society she would have been applauded. Let’s look forward to developing such a society.

But even if we are more successful at building fences at the top of the cliff, we must not forget those, and their families, who have already fallen over. The person with FASD suffered collaterally from the decisions of other people when he or she was a fetus and had absolutely no control over the damage that befell them. I leave others to decide whether there is a case for accident compensation (or even criminal compensation since the law against feeding liquor to minors has been broken). Whatever, in the social policy framework that the Maoriland Worker was presaging and which the Woodhouse Commission, which founded our accident compensation system, set out; we accept that society has a duty to address such victims instead of ignoring them.

I remind you, though, that Woodhouse Commission said that the first priority should be prevention, the second should be rehabilitation and only when we have failed in these two should there be compensation. I mention this because if public policy were to focus only on compensating those who suffer from FASD, it would make very slow progress. Better to go with the Woodhouse Commission and give priority to prevention and, when that has failed, to rehabilitating those with FASD as best we can.

At this point an economist gets nervous about the costs of an effective program dealing with FASD. I begin by pointing out that compared to the pattern in the 2000s, we seem to be underspending on the public health system by a whopping $1.7 billion a year. There is no point of advocating more spending on this health program or that one, without stating very firmly that we should be spending more on health care and prevention generally. That means, of course, higher taxation; if we are not willing to accept the higher taxes that the additional spending requires, then we cannot have that spending.

But an economist has to go through another hoop. Even if there were the additional funds available for more healthcare and prevention programs, should they go on FASD prevention and rehabilitation?

Some work on the costs of FASD to society, which some North American colleagues and I did, just published in the New Zealand Medical Journal, suggests ‘yes, certainly’. Unfortunately we do not have all the key parameters to make a comprehensive estimate. (What is required are attributable fractions – such as the likelihood that a person with FASD needs additional health care – which are not available for New Zealand.) But we could estimate the productivity loss to the economy from FASD – how much bigger would that economic production if there was no FASD.

Our estimate ranged from $49m to $200m in the 2013 year. Let us use the lower one, and yet not forget that it is a very conservative figure because it does not include the costs to the education, health or justice systems nor to families carrying the burden of FASD dependants. (For an illustration as to how much someone with FASD can cost, consider Teina Pora. As well as the costs of his not contributing to the labour force plus the compensation he got for wrongful incarceration, there is the costs of policing, justice and 21 years in jail together with education and health costs.

Even ignoring these other social costs, the study says we could spend $49 million a year on prevention and in the long run break even on the productivity gains alone. Now no one is suggesting we need to spend $49 million a year on a prevention program. Indeed in my view, once our society has got our head around the FASD issue, prevention would be eventually near costless; just a part of the health routines we do automatically and barely notice. Initially though, we need to put a real effort into building into our lives those automatic routines – recognising that there is a problem and we (society as a whole) can deal with it. However such a startup program is certainly not going to cost $49 million a year even if the productivity gains alone could justify such an outlay.

What about rehabilitation? A report by New Zealander Dr Tanya Skaler suggests that rehabilitation can be effective. We don’t know whether it can be cost effective. Ambulances are much more expensive than fences. Probably it is cost effective, but it may not be quite there. That is the reason why I drew attention to our compensation system. If something happens to a person which we have not prevented, we rehabilitate them with a treatment program which is quite generous relative to others, such as those whose needs arise from sickness. My argument is that we should rehabilitate those suffering FASD on the basis that we rehabilitate those suffering from accident and criminal injuries.

I guess we can say with last August’s Government working party report we are on the way to a coherent policy towards FASD compared to 20 years ago. But we have a long way to go. May I suggest a goal of one day not having an FASD day on 9 September, because the condition is no longer the curse it is today.

 

Are New Zealanders Anti-Intellectual?

This entry was posted in History of Ideas, Methodology, Philosophy, Literature and Culture, Pundit on by .

Is it possible to have sensible discussions in public?

Last June there was a kerfuffle in the online magazine Spinoff over attitudes to intellectual activity in New Zealand. It was precipitated by an extract from Auckland retired academic Roger Horrocks’s recently published collection of essays, Re-inventing New Zealand.. The excerpt came from ‘A Short History of “The New Zealand Intellectual”’ which originally was a contribution to Lawrence Simmons’s book, Speaking Truth to Power. In its imitable way Spinoff’s heading was ‘Why are New Zealanders so fucking intolerant of anyone with a brain, i.e. intellectuals?’; I doubt that Horrocks chose it; his essay is remarkably moderate.

A few days later Paul Litterick responded. (He is an ‘Auckland-based blogger, cultural critic’ and PhD student.) Its intemperate headline, catching the tone of the response, was ‘Stick this in your pipe, Roger Horrocks, and smoke it: your ‘anti-intellectual’ essay sucks’.

I am not sure the two were engaging with one another. Litterick makes much play with the French intellectuals Derrida and Foucault, neither of whom gets much coverage in the original essay by Horrocks. (Understandably, for New Zealand is much more influenced by Anglo-American intellectual traditions.) Litterick seems more concerned with portraying a particular group of people attending (or not attending) a book launch than engaging with the issue of the anti-intellectual climate which Horrocks was discussing.

Are New Zealanders anti-intellectual? It depends what one means by ‘intellectual’. It is already used in this column in (at least) two ways. The adjective (usually in front of ‘activity’) refers to thinking and understanding things, especially complicated ideas. Reading this column is an intellectual activity (alas, this cannot be said for all blogs and certainly not of followers of Donald Trump).

The second use of ‘intellectual’ is the noun which refers to a person who places a high value on and pursues things of interest to the intellect in the more complex forms and fields of knowledge, especially at an abstract and general level. In my experience there would be many New Zealanders – not necessarily a majority – who are intellectuals in private, at least some of the time, and there is another – not entirely distinct – group who are occupationally intellectuals.

New Zealand’s anti-intellectualism is largely about intellectuals who go public. What we do in our bedrooms is our own business; when we choose to come out of the closet (bother, a mixed-metaphor) it becomes a matter of public concern.

Not all of them of course. Much public pseudo-intellectual activity is a bit like muzak. It is so fashionable and platitudinous that we hardly notice it but it provides a pleasing, comfortable background while we get on with our lives. It is only when the public intellectual challenges us that we become irritated.

Any response to the challenge tends to be ad hominem, typically creating a persona for the public intellectual which is abused while ignoring the message. Sure, there are some who are ‘up themselves’ but so too are those who criticise them – perhaps the mirror for the reflection is jealousy. But in my experience the public intellectuals I really value do not match the image at all.

Take Bruce Jesson who was the epitome of modesty. Yes, he could be firm over stupidity and judgmental over dishonesty, but always courteously. Nor does Horrocks match the straw man abused by anti-intellectuals. He begins his collection with a biographical essay which, I suppose, reports what anti-intellectuals hate. They would say he keeps changing his mind but it is really that his thinking is progressing as it is stimulated by new ideas and new circumstances.

This progression of thinking and of drawing out the implications is the central role of the public intellectual. And why, ultimately, they are so disliked, because they are pushing us out of the comfort zone of the certainty that what we know is true while things aint going to change (The one exception of affectionately respected public intellectuals are our cartoonists; perhaps because they are not taken seriously.)

Think how unpopular it was thirty years ago to say that Rogernomics was largely founded on false premises and would fail. Today this is the conventional wisdom. Just ten years ago we were warned there was a housing crisis acoming; now it has arrived. Who wants to be reminded that the conventional wisdom they once held was wrong? Who wants to honour those who told them a long time ago they were wrong and who got it right, especially if they are still talking about future difficult prospects?

Better to cling to the anti-intellectualism of the platitudes and fashions of the conventional wisdom abusing those who make us uncomfortable. Prepare to be astonished when the predictable surprises one – you may have to, ever so reluctantly, change your mind (but dont admit it).

Will Housing Prices Crash?

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

What are the possibilities for the future housing prices? What can we do?

Two eminent but retired Reserve Bankers, Don Brash and Arthur Grimes, have argued that house prices should halve. I am not sure whether they actually mean it or are just vividly pointing out that house prices are about double the sustainable level. I probably use a different method of calculation but have come to a similar assessment. (See here for an earlier attempt at the exercise when the imbalance was not as great.)

But while housing prices may be too high, will they crash? My 2007 exercise thought they might stabilise until consumer inflation caught up with them. Nine years later, inflation is negligible and house prices are even further out of line. A reconciliation through this inflationary mechanism is unlikely.

Could house prices collapse to half their current level in the way that some people have interpreted Brash and Grimes? If they did, the impact on the financial sector would be disastrous. For the vast majority of owner-occupiers, a halving of house prices would have little effect. They would get up each morning in the same house, pay the same rates, insurance, maintenance and mortgage and live much the same life with the same cash flow. Things might be a little trickier if they decided to change houses, but that difficulty would not compare with those faced by the minority of house owners – occupiers and investors – whose mortgages now exceeded half the current value of their houses.

If house prices were to halve, they would be, in the American jargon, ‘under water’, with the temptation to walk away from house and mortgage. Many owner-occupiers might not, but the pressure on investors would be to get out, dumping the house and mortgage onto the bank which lent the cash. Very quickly the banks would find themselves with a portfolio of houses they owned whose value was not matched by what they had borrowed to fund them.

In the well-oiled world of simple economic theory, this would not matter but in advanced economics and the real world it does for at least two reasons. First, the transaction costs of dealing with the investor bankruptcy are large. Second, the balance sheets of the banks would likely be so screwed up that, in order to prevent their failing, the government would inject large quantities of taxpayers’ money into them – effectively nationalising them.

However, I do not think a rapid fall in housing prices is likely. I am not ruling out a 10 percent fall or even a 20 percent fall for distressed selling. But I think a 50 percent fall is unlikely (although the Reserve Bank is prudent to take that possibility into account in its settings).

The reason for my scepticism is that there is a phenomenon called ‘nominal price rigidity’ in which general price levels do not fall even though economic analysis says they need to in order to clear the market. It arises because where people’s attitudes about monetary values are such that they are reluctant to reduce their offer prices.

That makes zero or negative inflation so difficult to handle, because so prices have to fall. But it is best studied in ‘nominal wage rigidity’; when workers refuse to cut their remuneration as unemployment rises. I am anticipating that home owners will be similarly unwilling to lower the price they want for their houses markedly and would not put them on the market. (Investors have to, when their mortgage is costly.) The net effect would be that the housing market would have few houses for sale, which would be tough on those who want to purchase or need to move; that seems to be already happening in some localities.

At this point we reach an impasse. Houses prices are markedly out of balance with the rest of the economy’s prices and wages. Consumer price inflation is unlikely to resolve the imbalance, while a slow decline in house prices will take ages and ages with the damage from the imbalance continuing. A major house crash will cause financial chaos. So how does the mess unwind?

I do not know, but my intuition is that any resolution is going to involve taxpayer money. Ouch! Exactly how that will happen depends on contingent events and political decisions. (I would hope that if taxpayer money was to be used, a good chunk would go to enable the purchase of first homes; although that would reflect a different political ideology from the one which has dominated the last three decades of ‘the boats are for the well-off’.)

We have got into this muddle because there has not been the political foresight to see it coming or to take action to prevent it. As too often it has been ‘full speed ahead and damn the torpedoes’. When they strike many will find themselves under water. 

An AUT Policy Briefing paper I wrote, Over-investing in Housing, which looks at the impact of taxation concessions on housing is here.

THE NOTORIOUS CAPTAIN HAYES by Joan Druett

This entry was posted in Literature and Culture and tagged , on by .

For launch at Ekor Bookshop and Café, Wellington; 25 August 2016.

 

I have just received the following email. It is from William Henry Hayes. The email address is ‘underworld’. I tried to reply but the lines are clogged by politicians getting advice. It reads

 

Another buccaneer by the name of Voltaire – I havn’t been able to find him, he seems to live in a different part of the resort – said ‘to the living we owe respect, but to the dead we owe only the truth.’ What he did not say was, how could you respect the truth when all that is left are lies? No one ever gave me a chance to defend myself; they all pretend they are honest and I am not.

 

Consider the tailor suing me for$US15,000 (in today’s prices) for my clothing, and $US1200 for each member of my crew. Me, spend that amount on my scurvy crew? Don’t be ridiculous. The silly old fraud is grossly exaggerating; no wonder I refused to pay. The chandlers and other suppliers were always overcharging; why should one pay for poor quality over-priced goods?

 

The courts of the Pacific were all crooked so I avoided them. As for claims I often sailed early to avoid courts and debts; had to – winds and tides wait for no man. I was a good sailor – nobody says I wasn’t – and I could be courageous as some reliable reports tell. Yet one of the stories about me says I learned my seafaring skills in Cleveland, Ohio, where I grew up; for heaven’s sake, it is 400 miles from the sea.

 

So how can your respect the truth, when all that it left is lies? Joan Druett’s done a good job. She has had to report the falsehoods, but she does so judiciously, and gives the alternate accounts – far fewer but, if I say so myself, truer.

 

I am not surprised. She is a noted marine historian but I have to add she is quite attracted to me – been chasing me for 15 years. Not bad for a 180 year old, but a gentleman like me attracts the ladies. The stories my critics tell about my liaisons are not fair on the women either.

 

Take my nickname. ‘Bully’. Nobody ever said it to my face; they wouldn’t dare. It came from an old term for ‘a fine chap’ – as in ‘bully for you’. Not that my detractors would admit that.

 

The truth was that I was an entrepreneur in the Wild West of the Pacific. Some entrepreneurs have luck, I had less. The lucky get knighthoods, and then defame the unlucky as notorious to hide the fact that they got up to the same shady activities.

 

In truth I was much the same as other trader-captains of that time and ocean. I’ve been made the scapegoat for their sins. The stories in the book aren’t about me; they are about the Pacific in the mid-nineteenth century. Taken that way the book makes a jolly good read.

 

So thankyou , Joan, for doing your best to rescue my reputation. You wouldn’t like to visit me in my cabin, would you – as many ladies have done in the past? I’m afraid it is a bit hotter than usual.

 

And for the rest of you, entrepreneurs move on. I have some stunning high-return bonds in very secure enterprises for sale. If anyone has the cash to invest, just contact me through my email.

 

Oh, and vote for Donald Trump.

 

 

 

 

 

Another Ministry Of Silly Walks?

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

As the proposed Ministry of Vulnerable Children shows, we do not take prevention seriously.

In 1920, someone wrote in the Maoriland Worker, ‘The politician is like the person who would build an ambulance at the bottom of the cliff, instead of constructing a good fence at the top.’ The image seems to have been coined in a late-nineteenth-century poem by the English temperance activist Joseph Malins. It has stuck around in New Zealand ever since, although we do not take much notice of it.

The Maoriland Worker quote is particularly apt because of its focus on politicians. I completely understand the concerns of ambulance drivers struggling with the broken bodies and spirits at the bottom of cliffs and demanding more resources. They dare not look up to see more tumbling down and certainly not to the top completely lacking effective fences.

Last week I was involved in publishing an article in the New Zealand Medical Journal about the costs of Fetal Alcohol Spectrum Disorders, (FASD), which are caused by the permanent damage to the baby’s forming brain when the pregnant mother drinks alcohol. We think about 1 percent of the population suffer from the resulting loss of cognitive competence, although the severest cases, like Teina Pora, are only about a tenth of these.

The article estimates the costs to society of the loss of productivity from FASD. We do not have the data to be able to add the costs of additional health services, ineffective education services, additional social security and pressure on justice and corrections services. But even ignoring these, we got a figure in the range of $49 million to $200 million for 2013. You may think this is small but, to put it in perspective, think of the figure if everyone had FASD. It would cost us between $4.9 billion and $20 billion a year (plus all those other costs).

What the research is saying is that we can spend up to $49 million a year on an effective preventive fence and society would be well ahead. Prevention is amazingly simple: a woman who is pregnant or might get pregnant should not drink, although the whole village has to support her. 

By coincidence, last week the government released an ‘action’ plan to deal with FASD with the princely annual spending of $4m. It is not all on prevention, some of the parents with FASD children desperately need ambulance support. The good news is that it is a start; we’ve acknowledged that we have a real problem and we are beginning to do something about it – including at the top of the cliff. 

Elsewhere we are obsessed with the bottom. Last week also saw the announcement of a new Ministry for Vulnerable Children to be broken out of the Ministry of Social Policy – a redisorganisation of CYPS, the Child and Young Persons Service.

The new Commissioner for Children, Judge Andrew Becroft, says he will not be using the name. ‘To be immediately confronted with a badged official – someone from the Ministry for Vulnerable Children – it’s a big load to place on families that struggle and it’s a big label to put on children.’

Hear, hear. I’d go a bit further. In my experience all children are vulnerable. Fortunately, most of the vulnerabilities are dealt with by parents at the top of the cliff. Sometimes the fences fail; some of those who fall down are picked up by the public welfare services – others by the health, education and justice service; some hardly at all.

Becroft went on to say that he will only use the ministry’s Maori name, Oranga Tamariki because its Maori translation ‘the wellbeing of our young’ better shows the vision of the new ministry. I appreciate his point but am still uncomfortable, since it will be too easy to associate vulnerable children with Maoriness.

There appears to be a deeper problem captured in the name. What on earth were those who designed the ministry thinking? You have a sense that they are completely out of their depth and should be moved on. Whatever the ministry is to be called, those involved in designing it will make a hash of managing it. Perhaps they should be assigned to constructing fences. (Yes, I include the Minister, Anne Tolley. Too many of our cabinet ministers lack political antennae.)

The underlying problem is that ‘vulnerability’ – whatever it means – exists on a spectrum. The ambulance drivers carve off one part of the spectrum as the problem and ignore the rest. They may talk about prevention, but their concerns are limited – fences on the last rocks the kids tumble off. They don’t have a holistic view of the whole spectrum and especially the role of parents at the top of the cliff. Shouldn’t that be in the ministry’s remit? If it were, it would be a Ministry for Children and be concerned with strengthening all families and not just filling in for them.

That is why it would be better to abandon this potential train wreck and leave the services in the Ministry of Social Policy, commissioning a new, more sensitive team to design a comprehensive approach to supporting children. One which pays a lot more attention to strengthening families and sees ambulances as indicative of – perhaps inevitable – failures to have built totally secure fences.

What Are Universities Really For?

This entry was posted in Education, Pundit on by .

A Professor of Education challenges universities about their purpose.

What are universities really for? was the topic of a recent lecture by Hugh Lauder, professor of Education and Political Economy at the University of Bath (previously on the Canterbury and VUW faculties). His answer may not be what you think; this is an economist’s response.

New Zealand universities, like many elsewhere, are increasingly seen as a part of the mechanism for stimulating economic growth. So much so, that students are encouraged to attend to increase their future incomes; they even take out loans as an investment in the course which, they are promised, will give them a high return.

Lauder warns that high returns may not occur in the future. The indications are that for many graduates the days of sufficiently high incomes to justify the investment commercially are over or may soon be over.

If he is right, we are entering a new era in technological evolution. Historically the jobs that were undermined were those at the bottom of the skills ladder. By climbing a bit higher, you got a decent income. That seems to be changing.

To give an illustration, there is a claim that there are computer programs (‘algorithms’) that are better at diagnosing you than your GP. Maybe it is not true – developers of new technologies are always making excessive claims for their babies – but I don’t see why in principle such programs may not be possible one day. Before then, there may be computer assisted diagnosis programs which a GP uses to assist her or him. Since they would also be online, an individual could use them before going to a doctor, which would change the GP’s role in medical management. The point here is that we are envisaging a change a long way up the skills ladder. Instructively, it does not threaten practice nurses as much although they are further down the skills ladder; it may even empower them.

Other professions are also experiencing similar revolutionary changes. A lot of routine work done by lawyers may be outsourced to computers. Lauder, who has been working closely with corporates, says that business practices are changing so that their career structures give fewer opportunities to new entrants.

Even more tellingly, Lauder asks what is the evidence that universities enhance economic growth. He points out there is not a single German university in the top 25 of the Times Higher Educational Supplement’s world ranking of universities – the only one on the European continent is Swiss – while there are five British ones. Yet the German economy far outstrips the British economy. Looking at the whole of the rankings, after adjusting for population, you would get a similar inconsistency across the board. (Germany does well, it is generally thought, because of its strong middle-level technical education which enables workers to contribute to the high-productivity, expensive, technologically-advanced exports.)

Universities are very expensive to the public purse, so a growth generating university system is a convenient bit of rhetoric to justify public subsidies, just as universities claim you will get much higher lifetime incomes earnings with a degree in order to encourages students to pay fees. Lauder is challenging these assumptions.

Suppose they are not true – or insufficiently true to justify the rhetoric. That does not mean you should not get a tertiary education after school or that you should discourage your younger friends and relations from attending tertiary institutions. I suppose a certificate proves to a future employer that you have stickability so that the credential becomes a filter for identifying an underlying ability.

(Some of the postgraduate university courses I know about are of very poor quality in terms of content and teaching, but I still might hire a graduate based on the evidence that they survived. Some employers can be very sophisticated. I recall when I was hiring we gave weight to graduates from departments which did not have high research profiles but which we knew gave a sound training.)

Some go to university because they are interested in the subjects they study rather than to generate a career path. Their education may not add much directly to GDP but may enhance the nation’s (and personal) wellbeing. Crucially, who can tell? Certainly not big brother in Wellington. That is why we give students choice.

How much of the tertiary system should central government fund? We have not really had a serious discussion on that, especially as it might require a careful analysis of the role of the tertiary institutions in economic growth.  An alternative is that some tertiary education – say three years – is an entitlement of every New Zealander. Costs matter though. While the changes to tertiary education of the early 1990s, which are the foundation for today’s system was shaped by neoliberalism, it was driven by the rising costs to the exchequer as we increased the proportion of each generation going to universities and polytechs.

While there may well be a case for tertiary institutions screwing as much out of the exchequer as they can, using not very robust arguments of their value to commerce, I am uneasy about the same argument being used to attract students, especially if Lauder is correct and the commercial demand for graduates is changing.

But even so, the commercial case for public funding has its limitations. It tends to be very short term, a means of subsidising business taking on new entrants at the cost of the long-term contributions that a good university can make. Business does not give a lot of credit to the enquiring mind, to thinking critically and outside the square, to the willingness to challenge the status quo, to being civic minded, all of which create the resilience necessary to cope with economic, political social and technological change over a lifetime; attributes vital for sustainable survival and which – apparently – do not come naturally to New Zealanders (nor, probably, to everyone).

Perhaps the most important attribute is to engender in maturing adults a commitment to lifelong learning.

Productivity losses associated with Fetal Alcohol Spectrum Disorder in New Zealand

This entry was posted in Health on by .

N Z Med J . 2016 Aug 19;129(1440):72-83.

A detailed version of paper.

With, Larry Burd, Jürgen Rehm, Svetlana Popova

Abstract

Aim: To estimate the productivity losses due to morbidity and premature mortality of individuals with Fetal Alcohol Spectrum Disorder (FASD) in New Zealand (NZ).

Methods: A demographic approach with a counterfactual scenario in which nobody in NZ is born with FASD was used. Estimates were calculated using (Census Year) 2013 data for the NZ population, the labour force, unemployment rate and average weekly wage, all of which were obtained from Statistics NZ. In order to estimate the number of FASD cases in 2013 and the related morbidity, the prevalence of FASD, obtained from the available epidemiological literature, was applied to the general population of NZ. Assumptions made on the level of impairment that would affect the ability of individuals with FASD to participate in the workforce or would reduce their productivity were based on data obtained from the current epidemiological literature.

Results: In 2013, approximately 0.03% of the NZ workforce experienced a loss of productivity due to FASD-attributable morbidity and premature mortality, which translated to aggregate losses ranging from $NZ49 million to $NZ200 million – that is, 0.03% to 0.09% of the annual gross domestic product in NZ. These costs represent estimates for lost productivity attributable to FASD and do not include additional costs incurred by governmental and private entities including social costs, such as both higher costs and or less effective spending by the education, health and justice systems.

Conclusion: The estimated productivity losses associated with FASD further reinforces that effective FASD prevention as a primary public health strategy may be of significant value.

Similar articles

Easton B, Burd L, Sarnocinska-Hart A, Rehm J, Popova S.J Popul Ther Clin Pharmacol. 2015;22(1):e3-8. Epub 2015 Jan 2.PMID: 25594934

Easton B, Burd L, Sarnocinska-Hart A, Rehm J, Popova S.J Stud Alcohol Drugs. 2014 Nov;75(6):1011-7. doi: 10.15288/jsad.2014.75.1011.PMID: 25343659

Productivity Losses due to Morbidity and Premature Mortality of Individuals with Fetal Alcohol Spectrum Disorder in New Zealand

This entry was posted in Health on by .

Brian Easton, Larry Burd, Jürgen Rehm, and Svetlana Popova

Abstract

Aim To estimate the productivity losses due to morbidity and premature mortality of individuals with Fetal Alcohol Spectrum Disorder (FASD) in New Zealand (NZ).

Methods A demographic approach with a counterfactual scenario in which nobody in NZ is born with FASD was used. Estimates were calculated using data for 2013 on the population of NZ, the labour force, unemployment rate, and the average weekly wage, all of which were obtained from Statistics NZ.

In order to estimate the number of FASD cases in 2013 and the related morbidity, the prevalence of FASD, obtained from the available epidemiological literature, was applied to the general population of NZ. Assumptions made on the level of impairment that would affect the ability of individuals with FASD to participate in the workforce or reduce their productivity were based on data obtained from the current epidemiological literature.

Results Around 0.03% of the NZ workforce experiences a loss of productivity due to FASD-attributable morbidity and premature mortality, which translates to aggregate losses ranging from $NZ69 million to $NZ200 million in 2013. This amounts to between 0.03% and 0.9% of annual GDP.

These costs represent estimates for lost productivity attributable to FASD and do not include additional costs incurred by governmental and private entities including social costs, such as both higher costs and or less effective spending by the education, health and justice systems.

Conclusion The estimates of productivity losses further reinforce the value of FASD prevention as a primary public health strategy.

Text

Across the world, alcohol is the fifth leading contributor to disability and mortality. Alcohol accounted for over 5% of worldwide mortality and for nearly 4% of disability adjusted life years.1 Furthermore, alcohol consumption often results in harm, not only to the drinker, but also to individuals associated with the drinker. One example of such harm is the harm caused by drinking during pregnancy. Prenatal alcohol consumption is an established cause of Fetal Alcohol Spectrum Disorder (FASD). While no safe level of alcohol exposure during pregnancy has been identified, it is widely accepted that heavy drinking seems to confer the greatest risk of FASD.2,3 Among individuals diagnosed with FASD, prenatal alcohol exposure results in a highly variable expression of adverse outcomes, the term encompasses a group of disorders where alcohol exposure can affect any organ system.3

FASD is comprised of four categorical disorders: Fetal Alcohol Syndrome (FAS), Partial FAS (pFAS), Alcohol-Related Neurodevelopmental Disorder (ARND) and Alcohol-Related Birth Defects (ARBD).3,4 The FASD phenotype is variably expressed and comorbidities are common.3,5,6,7,8,9,10 These are highly variable disorders with age and development dependent changes in phenotype.11,12 However, FASD is considered as a ‘hidden’ disability and a complex diagnosis.13 Damage to the central nervous system is a unifying concept for nearly all of the FASD diagnoses.4,12,14,15

Although no research has confirmed the prevalence of FASD in New Zealand, it is generally taken that the prevalence is approximately 1% of live births, which is reported in multiple prevalence studies.16,17,18 More recent prevalence studies have reported prevalence rates well above 1% of live births in some locations across the world using a screening protocol for school-age children.19 Also, high risk populations with higher drinking rates have increased likelihoods of alcohol-exposed pregnancies.20,21 These rates are well above prevalence rates for autism spectrum disorder or Down syndrome .22

In a recent review of mortality in individuals with FASD, the two leading causes of death were malformations of the central nervous system and congenital cardiac abnormalities. The three other leading causes of death were sepsis, kidney malformations and cancer.23 This study also revealed that over half of the reported deaths (54%) occurred in the first year of life. Other studies have demonstrated that FASD is associated with a vast number and wide range of health and behavioural problems including increased premature mortality rates compared to the general population.3,5,6,7,8,9,24

The phenotype for FASD is highly variable and as affected people age, the rates of comorbidity tend to increase which increases phenotype complexity and severity.6

Because of difficulties ‘fitting into’ mainstream life, the attempted suicide rate is reported to be higher among persons with FASD (22%) as compared to the rate of the general US adult population (3%), and among persons with intellectual disabilities (8%).25

Thus, since FASD begins in the prenatal period, the disorders cause a large burden of lifelong duration on society. The costs change across age groups and only recently have costs incurred by adolescents and adults been considered.  The costs in this age group are incurred primarily through the health care system, mental health and substance abuse treatment services, criminal justice system, and the long-term care of individuals with intellectual and physical disabilities.2,3,26,27,28,29,30,31,32,33,34,35,36,37,38

A significant portion of the societal economic burden from FASD results from lost productivity and decreased participation in the workforce including that resulting from early mortality. Surprisingly, given its significance, the existing cost estimates of FASD have neglected to examine the productivity losses caused by reduced participation in the workforce .27,30,39,40,41

FASD has not yet emerged as a public health priority in New Zealand although the Ministry of Health is paying more attention to it. Canada already has placed importance on this issue.17,26,31,32,33,34,35,36,37,38,42,43 The Canadian approach is due in part to the recognition of the costs associated with the care and services required by individuals with FASD, but also due to the increased awareness of the potential to reduce these costs by implementing effective prevention programs.40 Prevention efforts need to focus on reducing the number of affected individuals, the severity of the resulting impairments, and the premature mortality due to prenatal alcohol exposure.6,8,26 These efforts could be accomplished by eliminating prenatal alcohol exposure or, at the very least, by reducing the number of women who drink heavily during pregnancy.

The purpose of this study was to estimate the productivity losses of individuals with FASD due to morbidity and premature mortality as one aspect of the total costs of FASD in New Zealand.

Method

The Counterfactual Scenario All cost estimates involve a counterfactual scenario, which compares the actual state of affairs with an alternative one, the costs reflecting the economic differences between them valued at appropriate prices.

This report adopts a counterfactual scenario in which no individual in the population was born with FASD. It uses the ‘demographic’ method,44 and focuses only on the impact of market production (the productivity loss) from the morbidity and premature mortality of individuals with FASD.

This counterfactual scenario was chosen because it is readily understandable and because it and its consequential estimation method involves fewer – often contentious – assumptions. It avoids some of the issues, which bedevil the estimation of social costs such as how to deal with inflation, economic change and time discounting. It produces a spot estimate for a particular year (2013) as the result of effects back through time, instead of the outcome through time (possibly discounted to a single aggregate) of the effects in a particular year. A consequence of this particular counterfactual is that the total will vary through time as a result of economic and population change, and it takes into consideration the business cycle (unemployment) and price changes (inflation). However in the medium term these will not change the order of magnitude.

An alternative approach to the ‘demographic’ approach is the ‘human’ capital one, which would be more applicable if the alternative scenario involved a phasing out of FASD (say as an effective prevention program was introduced over time). In effect the counterfactual scenario used here assumes an effective program was introduced many decades ago; the estimate represents the long-term equilibrium. It may be taken as an indication of the eventual long term productivity gains from effective prevention.

Population estimates of individuals with FASD New Zealand data on population of the labor force, unemployment rate, and the average weekly wage were obtained from Statistics New Zealand for the most recent available year (i.e., 2013).45

For the purpose of this analysis, three groups of individuals with: 1) Fetal Alcohol Syndrome (FAS; the most recognisable form of FASD); 2) other-FASD (pFAS, ARND and ARBD); and 3) FASD overall (FAS, pFAS, ARND, and ARBD) were analysed separately.

In order to estimate the number of individuals with FAS and other-FASD, the most commonly cited prevalence of FAS (0.1%)17 and FASD (0.9%)18 in North America was applied to the general population of New Zealand in 2013.

All cost figures are presented in New Zealand dollars for the 2013 year.

Severity levels of intellectual impairment attributable to FASD As described in Easton et al.,45 population estimates of individuals with FASD can be stratified by the severity levels of intellectual impairment attributable to FASD, in order to account the impact of the severity on the level of participation in the workforce and productivity of individuals with FASD. Please note that the disabilities attributed to birth defects, vision or hearing problems or any other physical disabilities were not accounted.

The individuals with FAS and with other-FASD will have multiple areas of brain impairment when measured on standardised tests.  For the purposes of this study, the relevant impairment will be represented by the domain of intellectual impairment.  The individuals with FASD can be classified into four groups according to severity level of impairment.47

            1) Broad cognitive impairment (does not meet criteria for intellectual disability). The term minimal brain dysfunction (MBD) has also been used previously to describe this population. This category might include individuals with learning disabilities, speech and language disorders, attention deficit hyperactivity disorder, and other similar disorders.

            2) Mild intellectual disability. Previously known as mild mental retardation and includes individuals with an Intelligence Quotient (IQ) and adaptive behaviour scores between 50-75. Individuals under this category can often acquire academic skills up to the 6th grade level. They can become fairly self-sufficient and in some cases live independently, with episodic or ongoing community and social supports.

            3) Moderate intellectual disability. Individuals who have an IQ and adaptive behaviour score of 35-49. They can typically carry out work and self-care tasks with ongoing supervision at moderate levels. They typically acquire communication skills in childhood and are able to live and function successfully within the community in a staffed and supervised environment such as a group home.

            4) Severe intellectual disability. Individuals with an IQ and adaptive behaviour score below 35. Such individuals may master very basic self-care skills and some communication skills. Their intellectual disability is often accompanied by neurological disorders, and they most commonly require continuous supervision, assistance and high levels of structure.

The distribution of the levels of mental impairment severity among individuals with other-FASD was assumed to be the same as that for individuals with FAS [50% with broad cognitive impairment; 33% with mild intellectual disability; 12% with moderate intellectual disability; and 5% with severe intellectual disability.

Further, it was assumed that 100% of individuals with FAS are impaired and only about 25% of individuals with other-FASD are impaired. As a result, it was assumed that these individuals would have different levels of reduction in productivity due to their intellectual impairment.

The percent reduction in productivity of individuals with FAS and other-FASD was adapted from Harwood et al.47 and modified based on experts’ opinion.

Mortality As described above, individuals with FASD have higher mortality. The effects can be measured by using cause-of-death data combined with a pooled prevalence estimates of the major disease conditions associated with FASD obtained from a recent meta-analysis conducted by Popova and colleagues.10 For a detailed methodology on estimation productivity losses due to premature mortality of individuals with FASD please see Easton et al.48

However it is unnecessary to add a separate assessment for the purposes of this paper. Assuming that the rates at birth are the ones assumed (i.e. 1 percent of the cohort), then the rates in the labour force will be smaller (because of the higher mortality rate). The counterfactual requires the addition of those who die to the labour force. Subject to a very small effect, this is equivalent to assuming that the rate for the labour force is the same as the rate for the birth effect. Ignoring this small difference means the estimates provided here are slightly on the conservative side.

Results

Population estimates of individuals with FASD Using data on the general population in New Zealand – 4.43 million in 2013 and assuming a prevalence of 0.1% for FAS and 0.9% for other-FASD, the number of individuals with FASD was estimated as follows: 4,400 individuals with FAS, 39,900 with other-FASD, for a combined total of 44,300 individuals with FASD in New Zealand in 2013 (Table 1).

– Please insert Table 1 about here –

Approximately 54.4% (2.41 million) of New Zealand’s general population participated in the paid labour force in 2013. By applying this percentage to the number of individuals with FASD, it was estimated that about 24,100 individuals with FASD were in the New Zealand labour force in 2013. Based on the assumption that all individuals with FAS and 25% of individuals with other-FASD have some level of intellectual impairment, it was estimated that 7.800 individuals with FASD who are in the work force have decreased productivity (Table 2).

– Please insert Table 2 about here –

Productivity losses of individuals with FASD due to morbidity It was assumed that the level of intellectual impairment was directly related to the magnitude of productivity losses of individuals with FASD. Table 2 presents the proportions of individuals with FASD by the levels of intellectual impairment, as well as the lower and upper boundary for their percent reduction in productivity by categorical level of impairment. In order to estimate a weighted average of the lower (24%) and the upper (50%) boundaries, the percent reductions in productivity were combined across severity levels and weighted by the number of individuals in each respective group (Table 2).

Since 6.2% of the labour force was unemployed, the estimated loss of productivity by the effective workforce was applied to only 93.8% of those with FASD who were assumed to be in the labour force (the workforce equals the labour force minus? those unemployed).

Estimating the effect of the counterfactual scenario of no FASD in New Zealand If there were no cases of FASD in New Zealand (the counterfactual scenario), then the effective workforce would increase by the equivalent of 1,760 to 3,660 workers (these numbers are derived by applying a weighted average of reduction in productivity (24% and 50%; Table 2) to the number of individuals with FASD with compromised productivity within the workforce– i.e. the labour force minus? the unemployed: about 7,300 people (Table 1). The additional (effective) workers represent a boost to the workforce of 2.26 million individuals in 2013, which account for an increase in the New Zealand workforce between 0.08% and 0.16% (if, as the counterfactual scenario posits, there were no cases of FASD in New Zealand) (Table 3).

– Please insert Table 3 about here –

Estimated value of the productivity losses of individuals with FASD due to morbidity The estimates of productivity losses resulting from decreased labour force participation can then be converted into dollar value by multiplying the effective reduction in the number of participating workers with FASD by their marginal dollar product. The standard assumption is that a worker’s marginal product is comparable to the average wage.44

The average weekly wage (ordinary plus overtime) in New Zealand was $1,066, which is equivalent to $55,600 per year. However, it could be argued that the average worker with FASD comes from a more socially deprived background with a lower average wage than a typical member of the labour force. In order to provide the most conservative estimate, it was assumed that, as a ‘low’ estimate, the actual wages for a person from a background that generates FASD is 29% lower than average, or $39,500 annually. This discount was calculated by noting that the New Zealand minimum wage is approximately 42 percent of the average wage, and by taking the midpoint between the two (71% of the average wage).. This amounts to an average annual reduction of $3.200 to $9.230 for each worker with FASD (including those unemployed). This represents 7.8% to 16.2% of the wages they would earn if they did not have FASD. When this wage is applied to the difference in the effective workforce, the estimated national income of New Zealand would increase between $69 million and $200 million, if New Zealand had no cases of FASD.

Discussion

Conservatively, around 0.03% of the New Zealand workforce experiences a loss of productivity due to FASD-attributable morbidity and premature mortality. This markedly reduces their remuneration and, consequently, the overall productivity of the New Zealand economy. The immediate effect of FASD-attributable morbidity and premature mortality is confined to a small proportion of the population; the estimated aggregate loss ranged from $69 million to $200 million in New Zealand in 2013.

These estimates of productivity losses due to morbidity and premature mortality attributable to FASD are, by design, equally conservative in terms of the total social costs of FASD. They do not include the additional productivity losses of those caring for individuals with FASD who are unable to work in the paid labour force due to their caregiving or from inefficient or otherwise unnecessary expenditure in the education, health or justice systems. Without these cost pressures from FASD, these resources could be diverted to other areas of private and public spending in order to benefit New Zealand as a whole.

Policy makers could utilize the estimates of productivity losses due to FASD-attributable morbidity and premature mortality in order to evaluate the potential benefits of FASD prevention programs. An effective prevention effort to eliminate FASD in New Zealand which costs less than $20 million a year would produce an economic benefit from productivity gains alone, over the long term. However, the benefits would not accrue in total immediately, because the newly born do not immediately enter the workforce. Prevention efforts need to include reducing the severity of the resulting impairments of those born with FASD, and the premature mortality due to prenatal alcohol exposure.

While these estimates likely underestimate both the total actual costs of FASD and the potential cost savings from effective prevention efforts, there is some level of confidence that the estimates of the aggregate productivity losses from FASD are within the correct range.

In terms of the productivity losses alone, New Zealand could ultimately spend up to $190,000 per day on an effective prevention program to prevent new cases of FASD. However the benefit to cost ratio would be considerably higher than 1, because of the reduced (or more effective) spending in other parts of the economy such as reduced health related costs, cost reductions in special education, and reduced burden on corrections systems..43,49,50,51,52

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Table 1.Model parameters for the calculation of productivity losses due to FASD-attributable morbidity and premature mortality in New Zealand 2013

<> Parameters Number of individuals Source Total population in New Zealand 4.43 Million Statistics NZ Population participating in paid labour force in NZ (54.2%) 2.41 Million Statistics NZ Population with FAS (0.1% of the total population of NZ) 4400 PHAC, 2003 Population with other-FASD (0.9% of the total population of NZ) 39900 Roberts and Nanson, 2000 Population with FASD (1% of the total population of NZ) 44300   Population with FAS participating in paid labor force (54.4% of the total population with FAS) 2400   Population with other-FASD participating in paid labor force (54.4% of the total population with other-FASD) 21700   Population with FASD participating in paid labor force (54.2% of the total population with FASD) 24100   Compromised productivity of the workforce with FAS (100% of the population with FAS participating in paid labor force) 2.4 Expert opinion Compromised productivity of the workforce with other-FASD (25% of the population with other-FASD participating in paid labor force) 5400 Expert opinion Compromised productivity of the workforce with FASD (sum of population with FAS and other-FASD participating in paid labor force with compromised productivity) 7800  

FAS: Fetal Alcohol Syndrome

FASD: Fetal AlcoholSpectrum Disorder

Statistics New Zealand from Infoshare: http://www.stats.govt.nz/infoshare/50

Table 2. Percentage and number of individuals with FAS and other-FASD by level of intellectual impairment and their percentage of reduction in productivity in New Zealand in 2013.

<> Impairment Category Percentage of individuals with FAS and other-FASDa,b Estimated number of individuals with FAS and other-FASD in New Zealand Percentage reduction in productivity of individuals with FAS and other-FASD Lower Boundary c Percentage reduction in productivity of individuals with FAS other-FASD Upper Boundary d Broad cognitive impairment 50% 3900 10% 40% Mild intellectual impairment 33% 2575 25% 50% Moderate intellectual impairment 12%  935 50% 70% Severe intellectual impairment 5% 390 100% 100% Total   7.,800     Weighted Average     24% 50%

FAS: Fetal AlcoholSyndrome

FASD: Fetal AlcoholSpectrum Disorder

aEstimated based on expert opinion (Drs. Larry Burd and Albert Chudley)

bAssumption was used that 100% of individuals with FAS are intellectually impaired and only about 25% of individuals with other-FASD are intellectually impaired (Dr. Albert Chudley, expert opinion)

cBased on Harwood et al. (1984)

dEstimated based on expert opinion (Drs. Larry Burd and Albert Chudley)

Table 3.Model of potential increases in wages using a counterfactual scenario (no one is born with FASD) in New Zealand 2013

<>   Lower Boundary Upper Boundary Equivalent number of productivity-compromised individuals with FASD in labour force 1880 3840 Equivalent number of productivity-compromised individuals with FASD in work force (i.e. allowing for unemployment) 1760 3600 Average annual wage in relevant population of New Zealand $39,480 $55,660 Loss of annual income per person with FASD in labour force $3,200 $9,230 Loss of annual income per productivity-compromised person with FASD in labour force $9,850 $2,840 Productivity losses due to FASD-attributable morbidity and premature mortality  (additional economy-wide income) $69 Million $200 Million

FASD: Fetal Alcohol Spectrum Disorder

Lower bound based on weighted average reduction in productivity of 24%; upper bound 50%

Numbers are rounded

What Are Universities Really For?

This entry was posted in Education on by .

A Professor of Education challenges universities about their purpose.

What are universities really for? was the topic of a recent lecture by Hugh Lauder, professor of Education and Political Economy at the University of Bath (previously on the Canterbury and VUW faculties). His answer may not be what you think; this is an economist’s response.

New Zealand universities, like many elsewhere, are increasingly seen as a part of the mechanism for stimulating economic growth. So much so, that students are encouraged to attend to increase their future incomes; they even take out loans as an investment in the course which, they are promised, will give them a high return.

Lauder warns that high returns may not occur in the future. The indications are that for many graduates the days of sufficiently high incomes to justify the investment commercially are over or may soon be over.

If he is right, we are entering a new era in technological evolution. Historically the jobs that were undermined were those at the bottom of the skills ladder. By climbing a bit higher, you got a decent income. That seems to be changing.

To give an illustration, there is a claim that there are computer programs (‘algorithms’) that are better at diagnosing you than your GP. Maybe it is not true – developers of new technologies are always making excessive claims for their babies – but I don’t see why in principle such programs may not be possible one day. Before then, there may be computer assisted diagnosis programs which a GP uses to assist her or him. Since they would also be online, an individual could use them before going to a doctor, which would change the GP’s role in medical management. The point here is that we are envisaging a change a long way up the skills ladder. Instructively, it does not threaten practice nurses as much although they are further down the skills ladder; it may even empower them.

Other professions are also experiencing similar revolutionary changes. A lot of routine work done by lawyers may be outsourced to computers. Lauder, who has been working closely with corporates, says that business practices are changing so that their career structures give fewer opportunities to new entrants.

Even more tellingly, Lauder asks what is the evidence that universities enhance economic growth. He points out there is not a single German university in the top 25 of the Times Higher Educational Supplement’s world ranking of universities – the only one on the European continent is Swiss – while there are five British ones. Yet the German economy far outstrips the British economy. Looking at the whole of the rankings, after adjusting for population, you would get a similar inconsistency across the board. (Germany does well, it is generally thought, because of its strong middle-level technical education which enables workers to contribute to the high-productivity, expensive, technologically-advanced exports.)

Universities are very expensive to the public purse, so a growth generating university system is a convenient bit of rhetoric to justify public subsidies, just as universities claim you will get much higher lifetime incomes earnings with a degree in order to encourages students to pay fees. Lauder is challenging these assumptions.

Suppose they are not true – or insufficiently true to justify the rhetoric. That does not mean you should not get a tertiary education after school or that you should discourage your younger friends and relations from attending tertiary institutions. I suppose a certificate proves to a future employer that you have stickability so that the credential becomes a filter for identifying an underlying ability.

(Some of the postgraduate university courses I know about are of very poor quality in terms of content and teaching, but I still might hire a graduate based on the evidence that they survived. Some employers can be very sophisticated. I recall when I was hiring we gave weight to graduates from departments which did not have high research profiles but which we knew gave a sound training.)

Some go to university because they are interested in the subjects they study rather than to generate a career path. Their education may not add much directly to GDP but may enhance the nation’s (and personal) wellbeing. Crucially, who can tell? Certainly not big brother in Wellington. That is why we give students choice.

How much of the tertiary system should central government fund? We have not really had a serious discussion on that, especially as it might require a careful analysis of the role of the tertiary institutions in economic growth.  An alternative is that some tertiary education – say three years – is an entitlement of every New Zealander. Costs matter though. While the changes to tertiary education of the early 1990s, which are the foundation for today’s system was shaped by neoliberalism, it was driven by the rising costs to the exchequer as we increased the proportion of each generation going to universities and polytechs.

While there may well be a case for tertiary institutions screwing as much out of the exchequer as they can, using not very robust arguments of their value to commerce, I am uneasy about the same argument being used to attract students, especially if Lauder is correct and the commercial demand for graduates is changing.

But even so, the commercial case for public funding has its limitations. It tends to be very short term, a means of subsidising business taking on new entrants at the cost of the long-term contributions that a good university can make. Business does not give a lot of credit to the enquiring mind, to thinking critically and outside the square, to the willingness to challenge the status quo, to being civic minded, all of which create the resilience necessary to cope with economic, political social and technological change over a lifetime; attributes vital for sustainable survival and which – apparently – do not come naturally to New Zealanders (nor, probably, to everyone).

Perhaps the most important attribute is to engender in maturing adults a commitment to lifelong learning.

How Much Migration?

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

Free movement of labour is often described as one of the four fundamental economic freedoms. Putting it into practice is somewhat more difficult.

To make the intentions of this column clear, I am generally in favour of migration. I am a descendant of immigrants and live in a country in which virtually everyone admits to a migration heritage and which has one of the highest proportions of foreign-born in the world. I am also very aware that future migration will dramatically change the country I love, especially by the Asian inflow. It will happen and the country will benefit from it.

For migrants bring with them a vigour and vitality which a small conservative country with a tendency to stasis needs. I am astonished at the impact of the thousand-odd Jewish refugees in the 1930s and 1940s. I am delighted at the contribution of our Pasifika people. And, if I may characterise it as a ‘migration’ albeit an internal one, we are a richer community for the Māori move from country to town.

Immigrants can also ease the pressures of population aging which the country faces. Our rest homes seems largely staffed by them; we may not judge these carers skilled, but the ones I have met are so endowed with aroha.

However, accepting all these gains, this column is about the appropriate rate of migration.

First, the economics. In summary, the research shows that immigrants tend to give a boost to net demand in the short run and net supply (and hence sustainable economic growth) in the long run. That is because initially they put more pressure on resources (especially housing and infrastructure) than they add to them. But once their contribution to investing is sufficient, the effect subsides. It is strong enough for past Australian governments to increase assisted migration when the economy was depressed in order to help get an expansion underway.

Now you know one reason why this government is so keen on a migratory inflow. It is contributing to economic expansion (although that need not mean that real per capita incomes for everyone are rising).

The government will add that it also increases our supply of skills. True, but allow me a grumble. Relying on migrants for required skills is cheaper than training up New Zealanders. The consequence is that we have too many unskilled and under-skilled locals and inadequate training institutions. When the Christchurch rebuild was first talked about it was recognised that we would be short of builders. Rather than putting training schemes into place, it was decided to import workers with the required skills. Five years later we are still short of builders and no doubt we will again go offshore to provide them.

So, yes, there can be economic downsides to migration, but locals generally benefit. Curiously, the evidence does not say that local workers always suffer job losses or depressed wages. The explanation requires a theory a bit more sophisticated than the obvious Economics 101; in any case faced with a contradiction between 101 theory, which says it will happen, and actuality, that on the whole it does not, which should you adopt?

Why then the antagonism to migration? It occurs not just here but throughout the world, evident in the Brexit referendum, distress on the European continent and from many Trump followers.

The above discussion, like much of the public debate, has framed the immigration issue in economic terms. It says nothing about the cultural impact. The sociological literature I have read on the topic is not very helpful. There are numerous fascinating studies of immigrant impacts on localities, but I have not read any comprehensive overall (society wide) studies like those that exist on the economic impacts.

My second paragraph summarised the micro-studies but at the end of the day I have little idea about the rate at which a society can absorb migrants culturally. That is the nub of where the strains are. Undoubtedly there will be tensions when the migrants first arrive, but how long before things settle down? How do the locals adapt to the challenges the newcomers pose and adopt some of what they have to offer? What are the critical mechanisms? (Anecdotally, intermarriage seems to be important.)

I was struck that regional outcomes in the British Brexit referendum do not seem to have been affected by the level of migrants but that a higher vote for Brexit seems to have been affected by recent increases in the level of migrants in the locality. (here) That suggests the Brits do adjust to migrants but it takes time for them to adapt from a low level to a higher one. Like us?

The abandonment of free labour mobility is likely to be a key element of any deal Britain does with the EU. I shan’t be surprised if the EU moderates the principle of unlimited freedom of movement too. You can see related struggles in the US between dealing with illegal immigrants and not encouraging more of them.

What about New Zealand? There is an economic case for moderating the current inflow of immigrants especially as the high levels are putting pressure on us to borrow offshore. Cannot we be more self-sufficient in supplying skills; ‘more’ not ‘totally’ of course. That would mean building up our internal training programs – by no means a bad thing for New Zealanders with unrealised potential. The fetish for encouraging rich migrants probably needs to be restrained. The capital they bring with them is not nearly as valuable as the rhetoric says it is.

But we also need to think more about the cultural impact of the migrants. We should not be saying ‘no’ to those who are culturally different; all immigrants are!

The government’s decision for a modest increase in our refugee numbers was wise, given that the facilities can only be increased slowly. I should like to see a further increase in the quota three years on when the reception facilities can be extended again.

Could not localities be more supportive to arriving immigrants? Our local authorities could learn from the more welcoming Canadian practices. Perhaps the points system which determines who may be let in could incorporate a reward for those who go to the areas with the best welcomers.

 This column is not an anti-migrant tract. Rather it is an attempt to encourage a dialogue which steers between xenophobia and a free market view that only the impact of migrants on the economy matters.

Frexit For New Caledonia?

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

Our nearest neighbour, New Caledonia, has a very different political economy. Will it vote for full independence from France in 2018 – also leaving the European Union?

New Zealand shares a continent with the European Union. Admittedly 93 percent of Zealandia is submerged beneath the Pacific Ocean but at its most north-western are the islands of New Caledonia with a total area about half the size of Canterbury. Technically the country is a department of France and so is the closest part of the EU to us.

There appears to have been no human contact between New Zealand and New Caledonia before the arrival of Europeans. Their tangata whenua are Melanesians; extraordinarily the 40 odd percent of the population who describe themselves as ‘Kanak’ – about 100,000 souls of the 270,00 who live in New Caledonia – had at least 28 (Wikipedia say 40) languages which, so I am told, are ‘mutually unintelligible’. This makes French the unquestionable lingua franca of the islands. In contrast, the Maori language was universal – although there were regional dialects – and even so, it is struggling to survive. But it gives an indigenous unity which neither New Caledonia nor Australia has.

French political theorists talk about ‘colonies of settlement’ in contrast to ‘colonies of exploitation’. New Zealand would be an example of the former, and the British Raj an example of the latter with a handful of Brits governing millions of Indians, exploiting the economy for their and Britain’s benefit.

New Caledonia straddles the two categories. The economy is driven by vast nickel resources – they have about a quarter of the world’s reserves. It is estimated that GDP per head is higher than New Zealand’s, but I suspect – I could not find a comprehensive economic data base – that it is important here to distinguish GDP from GNP. GDP is the value of domestic production in a country’s region; GNP (a.k.a. GNI) is the market incomes of those (‘nationals’) who live in the region. The difference between the two in New Caledonia’s case would be that most of the profits from the nickel sector go offshore.

In any case the ranking may be misleading because the world price of nickel has collapsed since the Global Financial Crisis. The French government is pouring huge subsidies into the sector in addition to giving budget support – some 15 percent of GDP so it is said. Presumably the support is the source of the generous public facilities I saw in Noumea, the capital where two-thirds of the population live.

The very strong nickel sector discourages other tradeable sectors flourishing. Much of the land is unsuitable for agriculture; food accounts for about a fifth of imports (we make a tidy profit here). Tourism is underdeveloped. Aside from the usual Pacific attractions it is a good place to practise your French. I found it expensive.

While foreigners may exploit the nickel, the islands have 70,000 odd who are of French origin and another 20,000 plus who describe themselves as ‘Caledonians’ (much as Pakeha might give their ethnicity as ‘New Zealander’ or ‘Kiwi’ ). There are also about 20,000 who are of ‘mixed race’; the remainder are other Melanesians, Tahitians and some Asians. Many of those of French or Caledonian ethnicity were born in New Caledonia.

New Caledonia is not an independent nation like, say, Samoa but is a department of the French Republic sending two senators and two deputies to the French assembly and voting for the French president. There is considerable devolution but France controls the military and foreign policy, immigration, police and the currency.

Following severe agitation from Kanaks demanding independence, the 1998 Noumea Accord led to constitutional changes which gave the Kanaks greater political control over their lives and set a referendum for 2018 to determine whether the territory remains within the French Republic. That is only two years away.

It is a bit like our approach to Samoa in which, rather than giving them immediate independence, we worked with them to develop the civil institutions which would provide the stable independence they desired. (After our dreadful treatment of their independence movement in the inter-war period, I reckon our postwar record with Samoa was not too bad.)

But the demographics are very different; Samoa’s population is almost entirely Samoan; New Caledonia’s is much more diverse. Will New Caledonia choose independence in 2018? Those of French origin I spoke to do not expect the country to vote that way. (However, only those who were living in the territory in 1998 can vote, which dilutes ‘French’ support.) Many Kanaks take a different view seeing the Noumea Accord as codifying a decolonisation process. I am left with the uneasy feeling that whichever way the vote goes it will be close and leave much unresolved. (A bit like Brexit.)

Does it matter to us? Of course we have goodwill to all, but it is also our nearest Pacific neighbour and we hardly want instability in our backyard.

As a part of my preparation for my trip, I read the relevant chapter in Pacific Ways: Government and Politics in the Pacific Islands edited by Stephen Levine. (The second edition is just out.) Curiosity led me to read others of the 28 country studies. What struck me was the extraordinary variety of governing arrangements. History, colonial experience, demography, geography and the economy have led to diverse governing arrangements. That led me to conclude that is going to take a lot of goodwill to resolve New Caledonia’s future peacefully. Bonne chance!

Policy by Panic

This entry was posted in Distributional Economics, Environment & Resources, Health, Political Economy & History, Pundit, Regulation & Taxation, Social Policy on by .

In too many areas the government is avoiding taking policy decisions. When it has to its panic measures are knee-jerk and quick-fix.

Just nine years ago, John Key, then leader of the opposition, spoke to the Auckland branch of the New Zealand Contractors Federation about housing affordability which he described then as a ‘crisis reached dangerous levels in recent years and looks set to get worse.’

             ‘We now have what has been described as the second worst housing affordability problem in the world. Make no mistake; this problem has got worse in recent years. … This problem won’t be solved by knee-jerk, quick-fix plans. And it won’t be curbed with one or two government-sponsored building developments. Instead, we need government leadership that is prepared to focus on the fundamental issues driving the crisis. National is ready to provide that leadership’ and not just ‘rinky-dink schemes.’

A month ago – nine years later – under pressure from the Labour Party the government had knee-jerk, quick-fix reactions to the continuing deterioration of home affordability. A policy reversal was literally announced on Twitter. Such was the panic that the Minister for Business, Steven Joyce, said Labour’s policies were very similar to the government’s policies, while the Minister of Finance, Bill English, said Labour policies would be ineffective. (They may not be disagreeing.)

Another instance of policy panic appears to be the bowel cancer screening roll-out. The problem – our death rate is much higher than Australia’s, which has long had a screening program – was identified over a decade ago, and the Labour government instigated pilot programs. However, when a national roll-out was announced, again under public pressure, the Treasury grumbled there was no business case. Probably if it were made, the case would more than justify the roll-out. The point here is that the government seems, as in the case of housing, to have no coherent policy development strategy other than reacting to pressure.

There are many other long-standing policy issues which the government has not addressed and on which it seems to have no coherent approach. They include

            The aging population, with life expectation rising but no corresponding adjustment to the age of entitlement for New Zealand Superannuation, one consequence of which is that health and residential services for the aged are underfunded.

            Capital gains tax and tax avoidance.

            Our response to climate change is promise without delivery of emissions reductions and neglect to planning on how adapt to the rising sea levels. .

            The lack of a coherent and comprehensive freshwater strategy that deals with both existing quality and quantity pressures and prevents them worsening, while giving away precious water to commercial users.

            The very high and rising level of private household debt, reflecting the inadequacy of household savings.

            Economic inequality and its impact on social coherence and our long term economic performance.

            Energy sustainability.

            The failure to make a public case for the open economy. Instead, those against it (such as those who oppose the TPPA on grounds of principle rather than having pragmatic doubts) have led the public discussion without challenge.

            We are still lagging on investment in public urban transport.

            The regulation of the quality of the building industry remains inadequate despite the problem first appearing (as ‘leaky buildings’) fifteen years ago. (The most recent example is the debacles about the quality (and testing) of steel from China and elsewhere, used to reinforce concrete so that the building (or road tunnel) is reasonably earthquake proof.)

            The failure to build up reserves to meet another global financial crisis.

Others may add to the list, but these are examples I recall discussing a decade and more ago. In each case progress since has been, at best, patchy but very often just sound and fury, signifying nothing.

To be honest, we were grumbling a decade ago because the Labour Government of the time seemed to be taking its time to address the issues. But generally, it eventually got around to them without panicking and there was some progress. In each case such progress has largely since come to a halt.

What is going on is twofold. First, this is not a government with a vision – even less than the Clark-Cullen Government. Second, it has been squeezing resources out of the public service and that, together with its erratic or quiescent leadership, has meant that the policy development process has broken down.

Nine years ago John Key identified housing affordability as a major issue for his government but, apparently when faced with a political crisis, there was no policy waiting to be proposed and implemented and all we got was rinky-dink schemes.

I would not want to make exact parallels, but I am reminded of the Muldoon Government which was so short term, so political, that it deferred difficult decisions hoping they would go away or they would be dealt with by the next government (which often got them wrong). I shant be surprised if future historians judge the Key-English Government similarly.

PS. I am grateful to Bernard Hickey for reminding us of Key’s 2007 speech.

Housing And Monetarism

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

The Reserve Bank cannot deliver affordable housing by itself. Its actions have to be coordinated with the government’s. Unfortunately the monetarist framework of the Reserve Bank Act obscures this.

The tensions between the Reserve Bank and the Government over housing policy go back to the mistaken economic thinking in the 1989 Reserve Bank Act. Monetarism ruled and it is that underlying monetarist approach which is creating the tensions.

I have no quarrel with the governance provisions which gave the Reserve Bank independence in the operating of its monetary policies. Many commentators, imbued with the tradition of the centralised governing of New Zealand, do. They forget the time when Prime Minister Muldoon used to ring the Governor secretly telling him what had to do. The Prime Minister can still do that, but to have the force of law it has to be done by a letter tabled in parliament so that any direction is transparent. So while the operating of monetary policy is today the preserve of the Reserve Bank, the Government still directs its goal.

I chose not to make submissions to the select committee considering the bill: parliament was not listening to critics of Rogernomics. However I checked that the proposed legislation did not rule out what in my, and others’, opinion is the primary function of a central bank – to maintain order in money markets. Fortunately there was a clause which allowed the Reserve Bank to take action, in tandem with the Treasury, to settle the New Zealand money markets as they went into turmoil during the Global Financial Crisis. Other central banks did too, implementing policies which are difficult to justify in a monetarist framework.

My objection to the Act was the requirement that the Reserve Bank be responsible for price stability. This has (at least) three implicit assumptions.

First, it assumed the notion of price stability can be rigorously defined. In fact an economy has numerous prices, many of which do not move together. Currently house prices are on quite a different trajectory to that of the majority of consumer prices. I’ll come back to that, but share prices, land prices and the exchange rate all move differently too (as does do tradeable prices from non-tradeable prices).

Second, there is the assumption that monetary policy can target effectively any chosen price index. The fact of the matter is that throughout the world central banks, including the RBNZ, have been unable to prevent the current world disinflation – falling or excessively low increases in prices. Monetary policy has only some effect and it is heavy handed or slow or even ineffective.

Third, the Reserve Bank Act assumes that effective monetary policy can be run independently of fiscal and other government economic policies. We shall see it cannot.

(I read the official papers which backgrounded the Act. Not one addressed these issues. The papers simply took the monetarist approach which assumed that its underlying economics was not problematic. The lacuna is reinforced in the recently published history of the Reserve Bank which also ignores the issues.)

The relevance to the current situation is that, first, the RBNZ is, rightly, concerned with (at least) two kinds of price inflation – consumer prices and housing prices (which threaten the long-term sustainability of the economy). Second, it can use monetary policy to target one or the other but not both, so it has been hunting around for ad hoc instruments (like loan-to-value ratios) to target the other. Third, its interventions are going to be ineffective unless they are supported by other policy settings which are the direct responsibility of the government. These include contributing to increasing the supply of housing, say by building more itself; reducing the demand by an effective capital gains tax and easing back migration.

Altogether this means that the RBNZ cannot adequately restrain house prices as long as it is also concerned with consumer prices. If it were directed to primarily target housing prices, its impact would be high interest rates, a brutal deflation and a long time to be effective, especially if the government did not play its part.

For reasons which partly reflect a monetarist ideology and partly because any effective decision is politically uncomfortable, this government is unwilling to play. The Reserve Bank Act becomes a nice little excuse for it doing hardly anything except facilitating the private supplyside, thereby avoiding uncomfortable policies (in the short term).

Meanwhile, that epitome of politeness, the Governor of the Reserve Bank, has indicated that the government has to take more responsibility for the unsatisfactory state of the housing market. Hence the tension between the Governor’s and the Prime Minister’s pronouncements.

Just to be clear, there is nothing in this column’s analysis which would upset an orthodox economist. Monetarism is not nearly as popular among them as it is among do-nothing politicians and pop-commentators.

Misleading Pop-Economics And Populism

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

Too much of pop-economics is misleading to the point close to being lying. No wonder there is a widespread rejection of it by the populace.

Journalists and other populisers get away with an economics which does not quite lie, but is often very misleading. This applies to Brexit, but let’s start off with the TPPA (Trans Pacific Partnership Agreement).

We are bombarded with the standard trope that a free trade agreement (FTA) raises economic output. However, sitting behind the claim is an economic analysis which relies on a host of assumptions. One is that following the removal of tariffs and other border restrictions the economy adjusts quickly, with the resources in the low-productivity businesses which the trade deal closes moving to high-productivity ones.

But suppose they don’t? A recent modelling exercise by a team at Tufts University assumed the adjustment did not happen and found there were losses from trade liberalisation. I think their assumptions were also unrealistic, but the exercise reminds us that ‘it ain’t necessarily so’. (FTAs such as the TPPA are often phased in, in order to facilitate the adjustment.)

But even if full adjustment takes place it does not follow everyone is better off. Following a trade deal some workers might be laid off from high-skilled, well-paid jobs, ending up in low-paid ones. What the theory says is that the gains from trade more than cover the cost of compensating those made worse off. Everyone is better off only if the compensation happens. Instead, the direct beneficiaries from an FTA deal trumpet their benefit, but ignore the worse off.

There is a tendency for the advocates to oversell the return from a deal. That was true for the TPPA, with much astonishment at how small the measured gains are actually thought to be, now it is concluded. The gains to New Zealand – mainly from lower tariffs and better access for our primary exports – are real enough and will boost farmers’ incomes. They are well worth having; but they are not HUGE. It is claimed that the RCEP (Regional Comprehensive Economic Partnership between Asian economies) FTA will give bigger gains. Don’t be surprised if we get solid gains but not huge ones. (Because the concessions are phased in, any gains will take some time to fully appear.)

FTA deals involve making concessions in return for the ones we get. Because we gave up most of our protection barriers under Rogernomics, we have had to make other concessions, such as aligning intellectual property rights.

That involves another bit of economic theory. As I have explained, the US successfully demanded extensions favourable to them but not to us and which, in my judgement, are inefficient. But the cost to us is not great and the gains from the concessions for our farm products more than offset them.

So there are two sorts of grumbles about the TPPA. One is that some of our concessions are not optimal (even so, the gains from better access for farm products more than offsets them). The other is that there is nothing in it for ‘me’. I get the downsides but others get the upsides; I shall pay for Netflix but won’t get a cent from the primary-product concessions because I am not a farmer.

This is nicely illustrated by those who voted for Brexit in England. As a rough rule the votes depended on whether the EU has benefited the individuals concerned. A lot of voters do not care whether the London financial system will suffer when Britain leaves the EU (many may delight at it suffering). The one exception to this generalisation is the age divide. As a rule, the young favoured ‘remain’, and the old favoured ‘leave’,  suggesting they have different visions for Britain’s place in the world.

This suggests that the Minister for Trade (Todd McLay) telling elite audiences that trade deals are good for them misses the point. Those he is not talking to are concerned that there is hardly anything in it – or less – for them.

The one politician who has attempted to put trade deals in a wider context is the Prime Minister. In a speech in June, John Key said he favoured New Zealand’s future as being that of ‘an open, outward-facing country, welcoming of people and ideas from other countries, and part of wide-reaching global supply chains. … we should be a good global citizen and promote ourselves on the world stage’.

This is a framework. It does not say New Zealand should adopt the TPPA or go into negotiations over the RCEP. It says that we should think about such choices in this context.

Unfortunately Key’s speech was to the NZIIA, an elite audience. He did not present the approach at the National Party conference; I take it National supporters are not into the vision thing. We’ll see if he says the same to ordinary people elsewhere. Would it connect with them?

It is forgotten that our electoral referendum in 1993 was a kind of ‘Brexit’ referendum. The public voted for constitutional change – something which voters rarely favour. Actually they did not. The elite told them to vote for the existing electoral regime. They voted the opposite.

You won’t be so surprised if you recall that the elite had told them that Rogernomics was good for them. As it happened, 80 percent of households suffered a reduction in their income (many would not recover to the pre-Rogernomics level for over a decade). Over half the labour force was forced into unemployment. Rogernomics was not good for them.

Now you may say – especially if you are a member of the elite – that this was all necessary. But the elite never acknowledged the hurt of the policies. (Was it necessary to cut the incomes of the bottom 80 percent in order to increase the incomes of the top 10 percent?) As far as the majority of the population was concerned, they were lying. The electoral referendum let the public tell the liars what they thought of them; the palpable hurt that the elite expressed on losing the referendum was very satisfying to many.

The elite has hardly learned from the lesson, continuing to misuse economics to mislead the public. Most probably believe the claims they make; serious intellectual analysis is not New Zealand’s forte, and in any case it is comfortable to believe if you are doing well then everybody else is too. The vacuum was compounded by a very conscious policy of the Rogernomes to undermine the status of those economists who criticised their shallow analysis, thereby dumbing down the level of public economic discourse; it has not recovered.

Here, and elsewhere, chunks of the populace are rejecting the neoliberal paradigm as being out of touch with their reality. They express their doubts in different ways – via Trump, Sanders, Brexit, Corbyn, and a host of dissatisfaction movements on the European continent. Those who articulate the superficial popular economics do not know they are relying on underlying assumptions which do not apply. Many of the public feel their rhetoric is wrong, even if they do not know the reasons.