In The Best Interests Of Her Children?

This entry was posted in Distributional Economics, Social Policy on by .

Punitive public policy too often ignores its impact on the children involved.

My last column described how the punitive measures we had for dealing with debtors were only abolished in 1989. Yet others continue to suffer from oppressive legislation – if they are low enough in social ranking.

I was reminded of this by a report that the Child Poverty Action Group published recently. Kathryn’s Story, by lawyer and journalist Catriona MacLennan, describes the life of someone near the bottom. (I was marginally involved with the case, although my economic analysis did not need to know all of Kathryn’s life circumstances which the report reveals.)

The report uses the term ‘Dickensian’, but Kathryn’s life has been far worse than that of any Dickensian character. You will have to read the report yourself but it describes sexual abuse and family violence including homicide. (As far as I can recall, Dickens does not mention the former and only alludes to the latter on rare occasions.)

The Dickensian parallels are with the way the social institutions treated Kathryn. A court decided she had committed fraud by obtaining a benefit while she was in what it judged a marriage-type relationship. She denies that she was. Whether she was or not, you’ll have to make up your own mind after reading the report. Perhaps there is a fundamental clash between the rigours of the law and the complexities of the human condition.

It was the rigours of the law which sentenced Kathryn without warning and promptly jailed her. Not for her the court offering a businessman a respite before incarceration to put his affairs in order. Her affairs were her children; she had no chance to say goodbye to them. or to make arrangements for them while she was in prison.

I leave you to decide whether, had she committed fraud, imprisonment was a just punishment given her circumstances. Research by academic accountant Lisa Marriott compared sentences for benefit fraud with those for tax offences. She found tax frauds, involving an average of $287,000, carried a 22 per cent chance of jail for the fraudster. In contrast, beneficiary fraud averaged amounts of $67,000 but carried a 60 per cent chance of imprisonment. So a beneficiary fraudster was almost three times more likely to be imprisoned than a tax fraudster, even though the amount involved was only a quarter. (Incidentally, there was no penalty on the man involved in the alleged relationship, despite his knowingly benefiting from what the court found was ‘immoral earnings’.)

When Kathryn returned to civvy street she was still required to repay her debt. Not having any resources, her benefit has been deducted by a weekly amount. Benefits are well below a decent standard of living and Kathryn has even less. Can you imagine a businessman required to repay debt having his standard of living cut to below the poverty line?

So Kathryn leads a crippled life, and while the report says little about her children in order to protect their dignity, they too must be scarred for life. Yet she has been brave enough to challenge the deduction from her benefit, with a consequent and still ongoing 15-year legal fight.

Is this the best we can do? Are we too busy punishing those we do not approve of to ignore the consequences to human dignity and to the children who suffer collateral damage?

I have a soft spot for Hillary Rodham (Clinton); many decades ago I learned the phrase ‘in the best interest of the children’ from a book to which she contributed. (She is sometimes credited with ‘the whole village brings up a child’. The phrase is probably based on African proverbs; good on her for promulgating the sentiment.)

I am struck how often social policy at both the lower level (say of the courts) and at the upper policy level ignores the best interests of any children involved. I cannot believe that the jailing of Kathryn was proportionate if the impact on her children had been taken into account. They were taken into state care while she was imprisoned; sad to say the care was not always satisfactory – in effect they were jailed too.

I am an advocate for the Commissioner for Children – what an excellent job the outgoing one, Russell Wills, has done – becoming a parliamentary commissioner reporting to parliament whether legislation, policy and public practice is in the best interests of children. The role would be paired with the Parliamentary Commissioner for the Environment whose remit is to be concerned with another dimension of the wholeness of life – in this case the environment – which also does not elect MPs.

Micawber’s children and Amy Dorrit – Charles Dickens himself – all ultimately have benign life stories despite their fathers being incarcerated. One has no such confidence of a similar an outcome for the children of beneficiaries like Kathryn. The former lived in the harshness of nineteenth-century England from which many of our ancestors escaped to lead a better life here.

The Economics Of Information And The Newspaper Merger

This entry was posted in Business & Finance, Pundit on by .

The economics of information shows that whatever happens, the solution our ailing newspapers to the digital revolution will not be a perfect one. 

An important notion in economic analysis is of a ‘public good’ (which may be a service). Not THE public good (a.k.a. the ‘common good’), which is shared and beneficial for all or most members of a given community. A public good in this narrow sense has two key features: it is ‘non-excludable’ and it is ‘non-rivalrous’. Non-excludable means that non-paying consumers cannot be prevented from accessing it. Non-rivalrous means that it may be consumed by one consumer without preventing simultaneous consumption by others.

Sorry about these tricky definitions, but they are really important for some purposes – such as understanding the proposed merger of the two newspaper chains. So on with the exposition.

The standard economic example of a public good is a lighthouse. You cannot exclude non-payers from using it; one using it does not prevent others from using it too. It is difficult for a commercial market to supply a public good in adequate quantities. As a result, lighthouses are usually paid for by a public agency. Neoliberals tend to get tetchy because public goods are a justification for government – bother!

Perhaps the most important public good is information. In principle you cannot exclude people from using it; my using the information does not prevent anyone else from using too.

Even so, information is likely to require a resource cost for its production and delivery. At which point there does not seem to be any simple solution to organising information for the public benefit.

To give a couple of practical examples. It was a long struggle by writers to get secure payments for their efforts. Essentially copyright allows the author (the producer of the information) to charge for its use. The right to charge is limited (usually to 50 or 70 years after death – don’t ask me why such a long term).

Without a copyright, it is argued, authors would have no incentive to write. (I am not sure that is true, but certainly there would be less incentive.) So the purchase of a book by a recent writer includes a royalty to reimburse her or him for the cost of writing, even though welfare economics says that is sub-optimal because the higher price discourages the purchase of the book and the access to the  public good of the information. (It does say, however, that the purchaser should pay for the resource cost of the artefact/book which delivers the information.)

A second example is a pharmaceutical which is a molecular encapsulation of a piece of information. The cost of producing that information is horrendous, particularly because there is a testing process to ensure that the drug is safe. The cost of the molecule itself – the drug – is negligible in comparison. Yet typically pharmaceuticals whose patents have not expired are very expensive because the drug company is trying to recover the cost of developing the medication.

The complexity of the issue was well illustrated by HIV-Aids drugs whose prices were out of reach of the poor nations where the disease was rampant. The compromise was to charge poor and rich countries differently (and hope there was no too much smuggling from one to the other).

The commercial market provides many goods and services with a reasonable degree of efficiency and equity (providing certain conditions are met). But there is no such easy solution where information is involved. The ideal is that it should be provided free with only the delivery system being charged for. But what about the costs of creating the information?

Newspapers devised an ingenious solution to pay the costs of their producing information (news). Generally media subscriptions (we meet them again as pay-walls) prove to be insufficient to produce the required information. So the surplus from advertising revenue funded the production; while advertisers got the audiences they sought, attracted by the news.

Regrettably the solution has broken down under the digital revolution. One fundamental change has been that the costs of delivery have reduced, because of news websites and because the costs from copy to print have gone down as ‘middlemen’ have been eliminated.

But the bigger change is that advertising has been decoupled from news, partly following the shift of small classifieds to the web, to sites like eBay and Trademe. Commercial advertising remains but that too is down as advertisers shift to web-based sites.

The industry says that only half of their advertising is effective but they do not know which half. The success proportion is probably really much smaller, but the web offers opportunities to better target relevant audiences at lower cost. The opportunities include non-traditional ones such as search engines and the social media.

The collapse of newspaper advertising revenue is not being covered by subscription revenue. Even the website of the Financial Times with 550,000 plus subscribers is struggling to generate enough revenue to fund its news-teams. Moreover the walls leak – the FT has one of the ‘hardest’ pay-walls (i.e. difficult to get around without payment). Economic analysis should welcome the leaks – information should be free – were there not a cost of producing it.

Had advertising revenue held up, newspapers could probably have coped with the digital revolution with much the same difficulty as many other industries, switching over to websites as alternative news delivery, perhaps slowly losing audiences as the young turned to other sources.

With the fall in advertising revenue, the challenge became much greater, if near impossible to overcome. Among the alternate producers of news is commercial broadcasting where the advertising fall-off does not seem to have been as great. There may be state funded providers such as the BBC and RNZ. Another possibility is trust funds – London’s Guardian is a notable example ,although it reserves are not unlimited and falling. Donations contribute but only to a small extent.

A New Zealand response is for the two main paper chains to merge. Does this reduce competition? A silly argument – which has not prevented it being put forward – is that individual newspapers are already monopolies in individual regional markets. But their news websites are national and competing.

Presumably a merger means the Stuff and New Zealand Herald websites will be merged with some cost savings. Perhaps a paywall will be introduced although the charge will have to be low given there are alternatives such as those provided by RNZ, TVNZ and TV3. (Blogs which focus on opinion provide low quality news. The legendry editor of The Guardian, C. P. Scott, wrote ‘comment is free, but facts are sacred’. His almost as eminent successor, Alan Rushbridger, editing in a more commercial age might have said ‘comment is cheap, facts are expensive.’.)

Presumably the merger of the two chains will result in a merger of newsrooms. Fairfax may not deliver much in Auckland but it currently has a newsroom there; APN maintains a presence in Wellington, home of parliament; both could be consolidated into one. Less news will be produced and there wont be the competition that occurs between existing newsrooms. Arguably though, without some rationalisation there could be even less news produced.

The merger has to go before the Commerce Commission. Approval will depend upon interpretation of the law, but underpinning it will be issues of analysis and fact. A key fact in all mergers is the definition of the market. The above analysis suggests there are at least three distinct markets. One is characterised by the public demand for information/news. A second is the market for advertising – although not all advertising is relevant to the news market. A third is the production of news. A nice issue might be whether it would be better to have less news from competing producers rather than more by a monopoly.

The Commerce Commission will be greatly challenged by the ending of the symbiotic relationship that has traditionally existed between advertising, delivery systems and the production of news. Whatever its decision it will be an imperfect one; the peculiarities of information as a public good ensure that.

Lee Churchman 

 It’s not written in stone that we must have a private media. There are all sorts of cases where the state had to establish an institution (e.g. Electricity grids; telecoms) and they were eventually privatised. The reverse is also necessary on occasion. 

TBH New Zealand’s papers are awful. I wouldn’t pay for them, but I happily subscribe to the New York Times. 

Brian Easton 

The problem with your proposal, Lee, is that state sponsored journalism has been used by authoritarian regimes to pursue their aims. We are very lucky that Radio New Zealand has not suffered this fate but I fear that without an independent balance the danger would be increased.

This is not paranoia. It is said that Peter Fraser insisted that the government agency which provided news to the NZBS (radio) should first show it to him as he was the representative of the people. More recently, it is said that the government’s unwillingness to increase Radio New Zealand is a reminder to it not to get too far out of line. 

There are private alternative suppliers of journalism and I support an increase of funding of Radio New Zealand.

Micawber Down Under

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

Nineteenth-century migrants may have come here to escape oppressive laws, but the laws migrated too. It was late in the twentieth century that we abolished one of the most oppressive ones. Our origins are less humane than we like to pretend.

Wilkens Micawber was incarcerated in a debtors’ prison. It is said that he is modelled on Charles Dickens’ father, who suffered a similar fate. Meanwhile, his twelve-year-old son had to work in a factory. He hated the experience. A debtors’ prison appears in The Pickwick Papers, as well as David Copperfield, and most extensively in Little Dorrit. whose heroine, Amy, is born in one.

Micawber eventually migrated to Australia where he became a successful government magistrate. Which meant, I suppose, that he committed debtors to a local prison. For not only did people migrate to Australasia, so did may of the oppressive laws they were trying to escape.

The New Zealand experience is told in A Blot on the Statute Book: Imprisonment for Debt in New Zealand 1840-1990. It was initially written by Peter Coleman, a New Zealander who also researched the topic in the US. After his death, Ken Scadden finished the now published monograph.

Over the years, almost 20,000 debtors were incarcerated in NZ prisons – an average of nearly three committals a week. The vast majority were men but there were some women. (That could be especially tough because the nearest women’s prison could be distant. One wretched Invercargill woman imprisoned at Addington had added to her debt the cost of flying her there and back.) There is no comprehensive count of the number of Māori but where data is available (1945-1960) they amounted to almost half of the total. All of the debtors seem to have been from the poorest classes of the country; you did not see many businessmen incarcerated for their debts.

A charitable interpretation – which Coleman sets out – is that the state did not know what to do about civil debts. The practice of imprisoning failed debtors had arisen in medieval times and there was much subsequent development of debt law (such as provisions for bankruptcy). I suppose it was less inhumane than Shylock’s solution to the Merchant of Venice not paying his debt.

The book describes some of the writhings of the New Zealand courts to implement the law in a humane way, although it also instances cases of mean-spirited decisions. There is no hint that the courts took into consideration that the lender bringing the action could have behaved irresponsibly by making an advance to someone unlikely to repay.

It strikes me as a curious practice that failure to implement a civil contract between two ordinary persons could result in one being detained at the pleasure of Her (or His) Majesty. Indeed at one stage the New Zealand government became concerned that a civil action could result in a public cost from the incarceration. (Presumably that was why the airfares were added to the prisoner’s debt rather than the state’s.)

Perhaps the most extraordinary part of the story is that the laws on which the imprisonment were based were not really abolished until 1989; apparently tardily – after all, these debtors were not in the forefront of the government’s concerns at the time – following some remarkably effective agitation led by the Reverend Jim Consedine and his Lyttelton parish together with the prison chaplains. It was not that the practice was dying; in 1988 114 men and 23 women were binned for debts – still one every three days.

Even today you can end up in periodic detention if a court judges you have the means to pay off a debt and refuse to do so. And of course contempt of court over a debt may be rewarded by imprisonment.

(Additionally as a result of 2014 legislation, those with unpaid student debts may be arrested when they got through border control. A few have; none, as far as I know any have been jailed as a result although it is a criminal offence. Apparently there is a similar provision for those who have not met their child support obligations.)

Coleman’s book is a reminder that despite the national myth of New Zealand being founded as a progressive democracy with egalitarian and humanitarian ideals, it sometimes could be punitive and oppressive, especially to those at the bottom of the social ranking.

Brexit And Nostalgia

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

It is unclear why anyone is voting for Britain leaving the EU nor, in many cases, why they are voting for remain. What are the possible alternatives? How is Britain or New Zealand to function in an increasingly globalised world.

As I put up this column, the Brits are about to vote on Brexit – whether Britain should withdraw from the European Union. We do not know what the outcome will be, for the opinion surveys are all over the place; in any case turnout may be crucial. In 1975 a similar referendum taken a couple of years after Britain joined went two to one for ‘stay’. No one expects that margin this time.

It is not even clear what happens if the voters choose the ‘leave’ option. The legislation for the 2011 British electoral reform poll said that a ‘yes’ for change required that legislation had to be put before parliament. This time there is no such provision. A vote to leave will presumably initiate a negotiation process without immediate withdrawal. In the interim there would be political turmoil with the conservative Prime Minister David Cameron challenged. I expect there will also be economic and financial market turmoil; their effect is even more unpredictable.

I imagine too, there will be a hiatus in international trade negotiations – and that we will be further relegated to bottom of the EU list as it struggles with what to do with Britain.

To be frank, I have not been able to take the Brexit campaign intellectually seriously. No doubt there is an alternative to Britain being inside the European Union but the ‘leave’ campaign has been very woolly about what it might be. Curiously one of the most comprehensive, but far from convincing, proposals came in a speech by Winston Peters to the British House of Lords.

He argued that there was an alterative in a trading group of the Commonwealth, describing it as ‘a dynamic powerhouse, crossing every time zone and trading session in the world. It covers nearly 30 million square kilometres, almost a quarter of the world’s land area. Its members can be found in every single inhabited continent. Together, we have a population of over 2.3 billion, nearly a third of the world’s population. In 2014 the Commonwealth produced GDP of $10.45 trillion, a massive 17% of gross world product.’

But would the Commonwealth be willing to contemplate such a trading group? I am very sceptical and I expect most trade negotiators are too. A major problem could well be India, the fifth largest economy in the world– currently behind China, the EU, Japan and the US – and a major component of the weight in the Commonwealth. It was very reluctant to open up its economy to international trade in the Doha round and its negotiations of bilateral FTAs (including one with New Zealand) are bogged down. It also seems to be the least enthusiastic member of RCEP, the Regional Comprehensive Economic Partnership (of 16 countries: Australia, 10 members of Asean, China, India, Japan and Korea – and us) despite India being far more concerned with Asia than little red blobs on the world map.

Incidentally the RCEP economies, the EU (even without Britian), as well as those involved with the TPPA are each a bigger proportion of the world economy than the Commonwealth. As is the US by itself. (The US and the EU are currently negotiating a TTIP (Transatlantic Trade and Investment Partnership) deal. That is a really big chunk of the world economy.)

Be that as it may, what interests me about the Brexit campaign – well-illustrated by the Peters’ proposal – is its nostalgia for a world which has passed. Perhaps unsurprisingly, most nostalgia harks back to the time of the speaker’s adolescence; so different generations have different ambitions. It is the younger Brits who tend to support ‘remain’; they have been in the EU all their remembered life for Britain joined over 40 years ago.

Perhaps it is inappropriate to assume most Brexiters are rational. Many are lashing out over grievances which have only a marginal relevance to membership of the EU. (Many voters will be tempted to vote for Brexit because they cannot abide David Cameron.)

Behind all this is what is the alternative to living in a globalised world, be you uneasy about the EU or a Trumpite, or dislike the TPPA and RCEP. I am sure the answer is not nostalgia – changing technology and geopolitics rules that out.

I do not expect to write much about the Brexit referendum again whatever the outcome. There will be lots of opinions; I shall probably agree with all of them – in part.

But do expect me to continue to gnaw away at the question of how New Zealand is to function in an increasingly globalised world. I do not know the ultimate answer but I think we can progress it, providing we are forward-looking rather than nostalgic, analytic rather than emotional.

Comment by Brian Easton

I understand your concerns, Stewart, but you miss my point. What is the alternative? The usually mentioned one is association like Norway and some other European nations not in the EU. Norwegians grumble that they have to adopt Brussels law although they have no influence over them. Moreover, they make monetary transfers to EU (which are used for supporting its poorer members). Over half of Norwegian exports go to the EU but that includes hydrocarbons which are an international commodity.

Around half of British exports go to the EU so Britain is very like Norway but not as well placed in hydrocarbon terms. (Additionally many companies have their European head offices in Britain or supply Europe from plant in Britain. London is the financial centre of Europe. All these may move offshore.) Hence the necessity of finding some EU associate role as Norway and others have done.

The other model might be Russia which is not an associate of the EU. It’s strength is, again, hydrocarbons. I have not seen a discussion on Britain following the Russian model.

 So what is the alternative if Brexit has to be executed? The EU may be awful but are the alternatives any better?

PS. I should have added that Switzerland has a slightly different arrangement from Norway with the EU.

The Budget: A Longer Term Prognosis.

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

A major preoccupation of the budget was preparing for the next major financial crisis. To do so it is reducing government spending relative to GDP. Where do tax cuts fit in? 

Our politics reminds me those weekly serial movies where each week the heroine ends in an impossible situation but next week she miraculously escapes and the action moves on to the next impossible situation.

True for a budget too, as far as the populace is concerned – they will soon move on. Yet for serious analysts there is a lot in one but it takes time to draw it all out. (Written grumpily – I spent two hours on Friday chasing an oversight I had made in a spreadsheet.) When you have finally got your head around it, political life has moved on, and there is not much interest in any deep thinking.

The government encourages this by handouts which capture the attention of the superficial who faithfully reproduce them as news. Have you noticed how often the government mentions new policy (announced as a four year outlay to bulk the number) but fails to draw attention to closures and downward pressures in their spending programs? If they do not have any new policies the minister announces the department’s budget as if it is fresh, rather than a rollover from the previous year.

Thus far I have worked on two budget issues. The first is the Treasury forecast of the economy. They are expecting stronger growth in the economy than I expect (although their forecast will not be very different from that of the majority of economists who, in my experience, tend to be a bit optimistic).

In any case the big problem remains. Despite forebodings, the Chinese economy is still growing. I am reminded of a decade ago when serious economists were worried about the US economy, although no one exactly predicted the trigger for the Global Financial Crisis.. It is instructive that the Minister of Finance – but not the Prime Minister– has said he wants to get our public debt down to give the government more room to move.

I shant go through some other wrinkles but the main driver of the economy appears to be overseas borrowing. The Treasury does not give its estimate of the level of overseas debt but it appears to be rising faster than GDP or exports. This is private debt, which a neoliberal says is of no concern to the government. If you are a central banker you say ‘nonsense’, especially as most is coming through the banking system and the Reserve Bank may have to bail it out (as it did after the GFC); that usually requires some assistance from the Treasury.

I am sure that is what Bill English means when he talks about getting public debt down; it gives him room to manouevre when we hit a private debt wall. It is good to see there is some anticipation, although it is hardly a comprehensive strategy which would also address the private overseas borrowing more directly, especially as it is distorting the housing market.

The other issue I have looked at is the pattern of government spending. Sure, ministers have gone out of their way to baffle you with numbers, but actually …

One of the major purposes of the government budget is to set the balance between private and public spending. This is largely a political judgement but the curious fact it that historically New Zealand’s right-wing and left-wing governments have both been committed to increasing public spending and, perforce, reducing private spending; the exception has been social security where National has been less enthusiastic than Labour.

That no longer appears to be the pattern. Quite out of character with its historic record (neo-liberal Ruthanasia in the early 1990s aside), this National government is committed to reducing public spending. It depends on how you measure it but, for a number of technical reasons, I use the Core Government Spending to GDP ratio In simple terms, the ratio has fallen, whereas traditionally National is associated with a rising proportion (excluding social security).

Under the previous Labour-led Government, Core Government Spending rose to a trend level of 31.8 percent of GDP at the end of its term; this (fiscal) year – under National – it is expected to be 29.9 percent (and is projected to fall further to 28.5 percent in 2020). The 1.9 percentage point fall represents a reduction of about $4.7b in public spending this year.

Every major spending area is experiencing reductions, with the exception of New Zealand Superannuation whose share relative to GDP is continuing to grow because of the aging population and because, unlike social security benefits, the rate is indexed to after-tax wages rather than just to prices. (Even so, many superannuitants are suffering from discomfort while on a public healthcare waiting list or from financial stress if they skip the wait by being treated privately; many face inadequate home and residential care if they become frail.)

So, for instance, public spending on healthcare is lower today relative to GDP than it was in the past (let alone allowing an increment for rising relative prices, population aging and our affluence). The reductions not only impact on the high-user elderly and their families. Recently the Minister of Justice (Amy Adams) complained about inadequate mental health care impacting on the justice and corrections systems; Law and Order spending is being relatively cut too.

Indicative of the short-termism of the government is how they dealt with a series of housing difficulties which came to a head just before the budget. There seems to have been no anticipation (despite the claim they knew there were problems) nor solid policy development about a housing strategy. Instead the government rushed around with its bandaids none of which will be particularly effective. (Blaming the Auckland Council will be of great comfort to someone living in a car in Invercargill.) Meanwhile government spending on housing is expected to fall slightly relative to GDP over the next few years.

The spending cuts are being used to fund past income tax cuts. The Prime Minister says he wants more tax cuts next year. (He has mentioned $3b, which amounts to about 1.2 percentage points of GDP.) The Minister of Finance has differed. His priority is reducing debt to be ready for the next global financial crisis. But he has also indicated that he is worried about further cutting of government spending. Perhaps through his portfolio, the Minister of Finance is more in touch with the difficulties the cuts are causing. But it also may be that English belongs to the traditional National Party with its preference for cautious incremental increases in public spending, whereas John Key is to his right with a preference for tax cuts and damn the public sector.

I am not sure one should get politically excited about their disagreement. It is normal in politics. But in New Zealand it usually occurs behind closed doors, not in the public arena. Will the public be aware of it in a week’s time?

Have We a Housing Policy?

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

The government has let the housing market deteriorate with measures which are insufficient, late and ineffective. As a first step we need to identify the underlying problems. 

The Prime Minister’s announcement that there is nothing new about homelessness is both an example of his strengths in reassuring the public that there is never really a problem and the weaknesses of the government’s policy approach.

The fact is the government has no ‘housing policy’, that is a comprehensive approach to the sector. It has fragments of initiatives which do not always makes sense, but it has had little anticipation of the accumulating problem nor analysis of the sector’s development. Most fundamentally, its responses are largely reactive.

Most activities and sectors of the economy do not have specific ministers and policies. If there was a shortage of, say, onions, the prime ministerial assurances that ships were on the way and there are alternatives would largely satisfy the public who would not expect another outbreak a few weeks later. But the government does not know its onions from its housing.

There are two key reasons for housing being different. First, the stock of housing does not change much. You cannot ship in a couple of containers of houses when there is a shortage – although there have been suggestions that the homeless could be dumped in containers.

But second, and more subtly, housing is not just about income – like having enough to be able to purchase your onions. It is also about wealth – having enough to be able to put down a deposit. True, less income inequality would make it easier for those at the lower end of middle incomes to purchase a house (if one was available) but there would still be a wealth barrier for many. The usual assumption in market economics is that income and wealth are fungible – that you can get from one to the other easily – but that is not true. Even had we had a less unequal income distribution the inequality in the wealth distribution would still create difficulties in the housing market (but not in the onion market to emphasise the point).

The wealth problem has been complicated by what seems to be an increasing globalisation of housing markets. The pressures in the Auckland housing market appear also elsewhere in the Pacific Rim in Vancouver, Sydney and Melbourne – and London and New York among other places. (Observe, as we would expect, that the prices are rippling to areas outside the primary urban centres, such as Hamilton and Tauranga.) This may partly be because the rich can have residences in more than one place, given their relative ease of travel and from high migration.

But the pressures are also caused by capital flight from jurisdictions where crony capitalism is rife and where governance is arbitrary – China, the Middle East and Russia, are frequently mentioned but there are many others. So they keep their wealth in safer jurisdictions. (Incidentally, while most of the discussion on the Panama Papers is about tax avoidance, their disguising capital flight is also important.) At least some of this ‘grey’ money goes into the top end of the housing market, because it is harder for a foreign power to seize it than a bank deposit.

The globalisation seems to be pushing housing prices up. Existing home owners may feel richer. They are not really (unless they downsize) because the cost of the replacement house is higher too. Those to whom they leave their wealth may eventually be, but in the interim they may find home ownership unaffordable.

I have not yet mentioned housing as a fundamental economic right. That is true but not all house purchases are for this purpose. Obviously someone living in a car or container needs a house of, say, 80 square metres, but it is less obvious a similar need is being met by a house which is two and three times this size. Instead, the owner is purchasing status and a capital investment (the profits from which are not taxed). An economist may be relaxed about conspicuous consumption although wary of a borrowing splurge to increase capital gains leverage, but my point here is that if we are building bigger houses than we need or more houses than we need, there are less building resources for smaller occupied houses. (Such a building program probably requires government funding.).

The building program for new houses has also suffered from diversion of capacity for the Canterbury earthquakes rebuild and the need to remedy leaky homes. (This arose partly from the introduction of new technologies without the skills to implement them, but also because of a fetish for light-handed regulation which we have not entirely discarded.) Additionally, a lot of buildings have had to be rebuilt or modified because they did not meet earthquake standards. (Again one may ask, how did some buildings put up in the last three decades not meet reasonable earthquake standards? The fetish again?) That has meant that the supply of housing has not kept up with population growth, especially in centres whet there has been a heavy inflow of migrants from offshore and elsewhere in New Zealand. Probably supply cannot keep up unless the government takes the sort of building as it has done in the past. It hasn’t.

Additionally, Housing New Zealand appears to have had an inadequate maintenance program many of its houses are coming to the end of their life or need a major refit, while there is private housing which needs insulation.

Then there is the adequate land problem. It differs by location. Christchurch can build to the Alps if it has too. Auckland is trapped on a narrow isthmus; extensions north and south add to an overburdened motorway system. It has to infill and go up (even if apartments are not a traditional way of New Zealand life); my guess that building a decent public transport network for Auckland is critical and should be ahead of housing development – not, as it is today, behind.

Such an exhausting list illustrates the lack of serious attention the government have given to housing even though it is high among the public’s priorities. Yet, so he says, the Prime Minister has been aware of the difficulties. The record is, as in so many other areas, it may have been aware of the problem but the government has done hardly anything about them.

Now the public alarm has become overwhelming. As the shoe pinches, yet again we may soon see a half-baked response to try to deal with problems which have been accumulating for some time. That’s an idea! What about housing the homeless in a shoe?

Where Is Adult Education Going?

This entry was posted in Education, Pundit on by .

This is a condensed version of a paper given to a WEA Conference on 14 May, 2016,

The initial invitation suggested I talk about the future economy and its relevance to adult education. I explained that the best advice I ever came across is ‘don’t make predictions, especially about the future’. You get a sense of the difficulties if you go back thirty years ago, say, and realise any forecasts of today would have been way off track. I’ve chosen thirty years back, to reflect a time when today’s average adult was entering adulthood.

Think about the economy thirty years ago. It is easy to say that Rogernomics, which blew up shortly after, was a deviation, but I am sure more-market and its companion economic liberalisation were (almost) inevitable. Rogernomics (or neoliberalism) was an unfortunate and extreme version which did unnecessary damage and has still left elements to be reversed. For instance the neoliberal 1988 report on Post-compulsory Education and Training (the Hawke report) said that we should not distinguish between education and training which meant that the tertiary institutions focused only on training. To this day we have lost the distinction except in rare places.

We should not assign all the changes which have happened since to that liberalisation. For instance, the number working in the manufacturing industry in New Zealand has halved. The reasons are complex: one is that productivity rises in manufacturing faster than in the service sector so its employment rises relatively more slowly; another is that individuals are increasingly consuming services; yet another is that manufacturing is increasingly offshoring, where it can, to cheaper locations.

Thirty years ago we would not have thought much about globalisation, although it has been happening as long as we have historical records, albeit faster in the last two hundred years. I am not sure if we are entering a new phase – as an historian said, two centuries after the French revolution, ‘it is too soon to tell’.

One consequence of globalisation is the increasing ambiguity of cultural identity. Another has been the rise of globalised finance. In my view, we economists dont have a good handle on how the financial sector works – and neither has anyone else. My guess is that much is about transferring income entitlements through time so that individuals are taking the future profits, if any, as income today. (I say ‘if any’ because there is an argument that most finance is primarily a Ponzi scheme, shuffling IOUs, and that one day the system may implode, even more dramatically than it did in 2008, when many of the IOUs prove worthless until they were bought by the taxpayer.) It is this boom in finance which has generated the rising income and wealth inequality. You would not have predicted that 30 years ago. Inequality had been falling slowly in the postwar era. Another transformative recent change is digitisation – the rise of the computer and the increasing access to information that comes with it.

There is the possibility that rich economies are entering a stage of what is called ‘secular stagnation’, that is, a period of in which productivity growth (as it is usually measured) is zero (or very low) in the long term and in which traditional economic policies do not work.

Stagnant material standards of living in affluent economies need not mean there will be no progress. Wellbeing may improve, with greater longevity and better health while we are alive. We may be better informed, although past experience suggests we will be no wiser. Perhaps there will be more leisure, although we may have a problem in sharing it out, with the unskilled experiencing high unemployment and the very skilled experiencing long, stressful hours. I am guessing that the average working week may shorten and there will be more holidays – New Zealand is not an international leader in decreasing hours worked. I shant be surprised if in the future greater weight is given to environmental sustainability.

I have identified a few recent trends. How well did the formal education system of 30 years ago prepare today’s adults? How well is it today preparing young people for the unpredictable future?

Adult education provides only a part of the rich range of the experiences from which we learn and enable us to adapt to these changes. Probably the most important is the conventional media, but commerce, the social media, blogs and self-education and many informal organisations play a part.

What strikes me is how poor the quality of much of this adult education is because it is a by-product of some other purpose. As H. L Mencken said ‘No one in this world … has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.’ Dumbing down is the natural approach of commerce.

We have not yet adapted to the information revolution. It is no longer what you know, when finding it with the hand-held computer in the handbag has become so much simpler. The challenge now is to evaluate the quality of the information which pops up on the screen. We assume that the reader has some training in critical awareness.

Isn’t there an issue of the extent to which the public can address and improve their understanding of non-trivial issues? Organisations like the WEA once filled gaps which mass tertiary education and the media have since taken over. But much of what is provided is essentially anti-education, with the aim of training the student to be a pliable employee without any civic interest other than their pay packet. That leaves a huge gap for informal adult education institutions.

I would be disappointed if there was no demand for programs to meet this need, for it would reflect a narrowing of intellectual life in New Zealand and a consequent reduction of our ability to accept the challenge of change as we face an unknowable future.

Perhaps that is what we want. We want to be entertained rather than enlightened. We want to be comforted by a nostalgia for the past, even if that means we have little idea about what is actually going on in the present and are unprepared for the future. But that is not what education should be about – for children or adults.

There are two lessons I want to draw. First, our thinking, and the institutions that underpin it, are dominated by where we have come from, not by where we are going; very often our expectations of the future are founded on unquestioned assumptions which are questionable. Second, where we are going is very uncertain and unpredictable. Perhaps the one secure prediction is that the future wont be like we expect it to be. These need not be pessimistic conclusions. The best way to approach the future is to recognise that it is largely unknowable, but that we can develop skills which enable us to cope with that.

WHERE IS ADULT EDUCATION GOING?

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WEA Conference, 14 May, 2016, Wellington.

The initial invitation suggested I talk about the future economy and its relevance to adult education. I explained that the best advice I ever came across is ‘don’t make predictions, especially about the future’. You get a sense of the difficulties if you go back thirty years ago, say, and realise any forecasts of today would have been way off track. I’ve chosen thirty years back, to reflect a time when today’s average adult was entering adulthood.

Thirty odd years ago my daughter’s high school was drumming up donations to purchase more musical instruments for the pupils. Now I happen to be an active member of the local concert audience, but I wrote to the school suggesting they should give priority to acquiring computers, because in the future, that is, today, those girls would be very dependent on them; at that time, the school had but two clapped-out personal computers.

Please don’t suppose mine was an outstanding prediction. I had in mind that computers were replacing typewriters. In the time of mainframes I had no idea of just how pervasive personal computers would become. If you had told me then every modern miss would carry one in her handbag, I should have been astonished. Yet the mobile phone is, in fact, a hand-held computer.

There is another lesson I learned from the school at the time. For certain purposes – say, going to a play when there were limited seats – the school gave preference to those students who took Latin. Obviously some selection criterion was necessary, but Latin? My daughter happened to choose biology. You might say that the study of Latin is rigorous, but that is increasingly true for biology. Isn’t Latin the foundation of our language and civilisation? That is contestable, but perhaps biology is an even greater foundation for the way we live.

The reason Latin students were preferred was that Latin teachers were senior staff and they made the decisions. The reason they were senior staff? Good teachers of biology, or whatever, had other career opportunities so they more rarely rose to the top ranks of schools.

(Just to round off these school illustrations, I am not against Latin; indeed I am envious of those who have mastered it, for it was not a path I had the skills to travel. Second, for the record, my daughter did not go down a biology path occupationally but a mastery of biological principles has been invaluable in her life; she and my son are both employed in activities which are heavy users of computers.)

There are two lessons I want to draw. First, our thinking, and the institutions that underpin it, are dominated by where we have come from, not by where we are going; very often our expectations of the future are founded on unquestioned assumptions which are questionable. Second, where we are going is very uncertain and unpredictable. Perhaps the one secure prediction is that the future wont be like we expect it to be.

These need not be pessimistic conclusions. The best way to approach the future is to recognise that it is largely unknowable, but that we can develop skills which enable us to cope with that.

Think about the economy thirty years ago. It is easy to say that Rogernomics, which blew up shortly after, was a deviation, but I am sure more-market and its companion economic liberalisation were (almost) inevitable. Rogernomics (or neoliberalism) was an unfortunate and extreme version which did unnecessary damage and has still left elements to be reversed. For instance the neoliberal 1988 report on Post-compulsory Education and Training (the Hawke report) said that we should not distinguish between education and training which meant, of course, that the tertiary institutions should focus only on training. To this day we have lost the distinction except in rare places.

We should not assign all the changes which have happened since to that liberalisation. For instance, the number working in the manufacturing industry in New Zealand has halved. The reasons are complex: one is that productivity rises in manufacturing faster than in the service sector so employment rises relatively more slowly; another is that individuals are increasingly consuming services; yet another is that manufacturing is increasingly offshoring, where it can, to cheaper locations. We could have stopped the latter by continuing to protect high cost producers, but instead we source offshore and redeploy the labour to produce more valued services.

Thirty years ago we would not have thought much about globalisation, although it has been happening as long as we have historical records, although faster in the last two hundred years. I am not sure if we are entering a new phase – as an historian said, two centuries after the French revolution, ‘it is too soon to tell’.

One consequence of globalisation is the increasing ambiguity of cultural identity. Once you knew you were a New Zealander, or whatever. Today you probably also categorise yourself in some minority grouping – by ethnicity, gender, location, religion and so on and, as likely as not, you have either had overseas experiences or a loved one has. Thus there is a degree of uncertainty as what your cultural nationality exactly is.

Another consequence of globalisation has been the rise of globalised finance. In my view, we economists dont have a good handle on how the financial sector works – and neither has anyone else. My guess is that much is about transferring income entitlements through time so that individuals are taking the future profits, if any, as income today. (I say ‘if any’ because there is an argument that most finance is primarily a Ponzi scheme, shuffling IOUs, and that one day the system may implode, even more dramatically than it did in 2008, when many of the IOUs prove worthless until they were bought by the taxpayer.) It is this boom in finance which has generated the rising income and wealth inequality. Again you would not have predicted it 30 years ago. Inequality had been falling slowly in the postwar era.

One of the transformative recent changes is digitisation – the rise of the computer and the increasing access to information that comes with it. Again it is too soon to tell; who would have predicted after Johannes Gutenburg introduced moveable type that it would precipitate, among other things, the Reformation?

I dont have the space to do the linkage in full, but the information revolution may be part of the explanation of something that is puzzling leading economists – it may be that the great surge in economic growth of the last two centuries is coming to an end.

I have not the time to explore the whole of this argument, but it may be that the big technological innovation is digital information but that, unlike past revolutionary technologies, it is difficult to make a commercial profit from them. If that is correct it could mean a major shift in the way we organise society – market capitalism. We just do not know.

Whatever, there is the possibility that rich economies are entering a stage of what is called ‘secular stagnation’, that is, a period of in which productivity growth (as it is usually measured) is zero in the long term and in which traditional economic policies do not work. What this would mean, if the trend of the last decade or so continues, is that in a couple of decades GDP per capita in rich economies will be much the same as it is today, although middle-level economies will have higher material standards of living as they increasingly adopt existing top level technologies (which, not incidentally, will mean they will need better skilled labour forces). I am not sure what the prediction says about the poorest economies.

Stagnant material standards of living in affluent economies need not mean there will be no progress. Wellbeing may improve, with greater longevity and with better health while we are alive. With luck, the world will be more peaceful, although I can see reasons why one could easily be more pessimistic. We may be better informed, although past experience suggests we will be no wiser. Perhaps there will be more leisure, although we may have a problem in sharing it out, with the unskilled experiencing high unemployment and the very skilled experiencing long, stressful hours. I am guessing that the average working week may shorten  and there will be more holidays – New Zealand is not an international  leader in decreasing hours worked. Consumption and leisure activities are more likely to involve services – such as tourism – than things such as cars.

I have identified a few recent trends: structural change, liberalisation, globalisation, cultural ambiguity, global finance, the information revolution, secular stagnation and improving welfare and leisure without rising material standards of living. How well did the formal education system of 30 years ago prepare today’s adults? How well is it today preparing young people for the unpredictable future?

Adult education provides only a part of the rich range of the experiences from which we learn. Probably the most important is the conventional media, but commerce, the social media, blogs and self-education and many informal organisations such as churches play a part.

What strikes me is how poor the quality of much of this adult education is because it is a by-product of some other purpose. Commercial media is to make a buck either by charging or from advertising; they have a commitment to their educational activities only insofar as they contribute to the buck. As H. L Mencken said ‘No one in this world … has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.’ Dumbing down is the natural approach of a commercial educator.

We have not yet adapted to the information revolution. It is no longer what you know, when finding it has become so much simpler with the hand-held computer in the handbag. The challenge now is to evaluate the quality of the information which pops up on the screen.

One of the most common questions I ask myself on being told something is so, is ‘how does one know that it is true?’ Too often the answer is that the alleged fact was on the media or a web-based database, with the believer giving no critical evaluation of the truth. Very often the factoid is no more that an opinion reported without judgement by journalists, often advanced by someone in the pursuit of an agenda who has an interest in the reader being gullible. I understand why journalists take the naive approach – they do not feel competent to judge factual truth – but it assumes that the reader has some training in critical awareness. Yeah, right. How many would even know the expression ‘evidence based’, that is not jumping to a fashionable opinion but thinking through the issues carefully using evidence to support and contradict the theories we hold?

Isn’t there an issue of the extent to which the public can address and improve their understanding of non-trivial issues? Recall those I could only touch on earlier: structural change, liberalisation, globalisation, cultural ambiguity, global finance, the information revolution, secular stagnation and improving welfare and leisure without rising material standards of living. When did you last see a serious discussion on any of these, especially from a New Zealand perspective, because every country has its own distinct challenge?

Curiously, with some honourable exceptions, the universities do not contribute much either in their adult outreach or, as far as I can discern, in their teaching and research. In contrast, John Condliffe, who was professor of economics at Canterbury University College in the 1920s, once told me he had three future prime-ministers in his WEA classes.

Organisations like the WEA once filled gaps which mass tertiary education and the media have taken over. As their competitors are much better funded there may be little point in competing with them directly. Rather adult education needs to identify gaps.

That means that the informal institutions should not try to provide training for employment. Not only do they not have the funding, but much of what is provided is essentially anti-education, with the aim of preparing the student to be a pliable employee without any civic interest other than their pay packet.

That still leaves a huge gap. Here are some examples where the powerful institutions are failing to respond to.

At the moment there is a vigorous, but not very informed, public debate on the TPPA – the Trans Pacific Partnership Agreement. Leaving aside the factual and opinion issues, the TPPA is a consequence of the latest phase of globalisation. Little of the public discussion reflects this. Much of the anti-TPPA position reflects a world economy which is passing; much of the pro-TPPA position is naive about the world economy which is looming. Where would the ordinary thoughtful adult get an assessment of these underlying issues – the nature of contemporary globalisation, especially about New Zealand in a global context? Certainly not the media; and I know of no formal tertiary institution which is meeting the challenge either.

Or consider how often do you gather something from the media and wonder whether it is true? Isolated at home, you have no means of testing for truth. Is there a place for a group to come regularly together and evaluate rigorously some examples. Take the Trump-Clinton presidential contest which seems to be being framed by the media for their own ends. Would it not be interesting to have a discussion on how our views of these questions are being shaped by the media and not just who will make the better president or who will win? A better understanding of the media shaping may well change our assessments of these latter questions.

And while these a macro-issues, there are also local ones, like – say here in Wellington – the Basin Reserve flyover and the Airport runway extension. Are any of us we satisfied by how well we are informed? I know that there are advocates who have strong opinions – and some even have some facts and analysis – but how often does the general public have opportunities to do an independent evaluation of the situation?

I would be disappointed if there was no demand for such programsfor it would reflect a narrowing of intellectual life in New Zealand and a consequent reduction of our ability to accept the challenge of change as we face an unknowable future.

Perhaps that is what we want. We want to be entertained rather than enlightened. We want to be comforted by a nostalgia for the past, even if that means we have little idea about what is actually going on in the present and are unprepared for the future. But that is not what education should be about – for children or adults.

Organisations like the WEA are still needed, providing they face the challenges. What must distinguish the WEA is its commitment to education – not to the TPPA or Trump or town politics but to enabling its members to understand the issues around them better.

How Should We Run a Budget Deficit?

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If it necessary to run a budget deficit then it should be spent in the interests of future generations, rather than on increased consumption to be paid for in the future.

It is very easy to demand the government should run, or increase, its budget deficit, that is, it should spend more than its revenue and (one way or another) borrow the difference. Many think that is what Keynes said, but the Keynesian analysis is more subtle than the crudities that the deficit advocates seem to rely upon.

This column looks at only one aspect of the rigorous analysis but it comes, I think, to a useful conclusion which does not compromise the issues which have been omitted.

Basically, borrowing has to be paid back. When you borrow for your own ends you either have to reduce your consumption in the future or your bequests will be smaller. When the government borrows to add to your consumption, you may not have to pay it back. Probably some future generation will, and they usually have little say in today’s decision; some are not even born.

Let me introduce a moral dimension – economic policy rarely ignores it – of whether it is right to consume at the expense of future generations. My inclination is no; I am consistent enough to insist this is not only true for financial borrowing but we should be trying to run an environmentally sustainable strategy as well. (I am acutely aware that the argument that future generations have moral entitlements is philosophically contentious. Allow me to skirt it; I guess I am grateful to past generations who took me into consideration when they made their decisions.)

From which one might conclude that the government should never borrow or borrow only temporarily and pay it back across the business cycle. There was a bit of this in the original Keynesianism but there was another case for borrowing.

Suppose that as well as stimulating the economy in the short term, the spending from the borrowing enhanced the wellbeing of future generations – that it was an investment which benefited the future. You might ask whether unborn generations will be better off as a consequence of the spending which induced the deficit.

That was the New Zealand practice, probably long before it pursued Keynesian policies. (The public accounts are difficult enough to interpret today; in the past they were much worse.) Indeed the practice was to run a surplus on the current account (current public revenue and consumption) and use the savings to invest for the future, so that total government investment exceed the borrowing (as it should for most of an individual’s life).

The investment was not always commercially wise although it may have contributed to economic growth. For instance, railways rarely ran at a profit, just as they do not today, but they played a crucial role in opening up farming districts. (This was before trucks and quality roads.) On the other hand, the government ran a number of big enterprises which would have run at a profit – or would have if they had been allowed to operate commercially. Most of these have been privatised, so the government cannot save or borrow to invest in them.

Today, non-economists use the term ‘investment’ rather loosely. You hear people saying they are ‘investing’ in the horses. If you enjoy following them and a flutter on the TAB enhances that, so be it. But it aint an investment. (There is a growing literature which suggests much of the so-called ‘investment’ by the financial sector which led to the Global Financial Crisis is little better than such flutters – or worse.)

So before you line up with your pet spending plans to be funded from the budget deficit, it is well to evaluate carefully the extent to which they are justified for future generations. For instance, I am passionately committed to giving more support to our children, knowing that spent wisely it will enhance their opportunities in the future. That should be treated as a consumption and funded out of current revenue not borrowing. (Incidentally, recent American research suggests the best bang for the buck is enhancing family income, although we still need to work on education and healthcare.)

Crippled for opportunities by the privatisation of state owned enterprises what should the government invest in from its borrowings? One sort of reply is to answer the question from the point of the view of the unborn. Here is my guess.

First, they want a sustainable environment. They would want us to address global warming and to take measures to protect our natural environment. Second, they would want improved infrastructure. I’m guessing they would welcome the broadband roll-out, but for them the development of a good public transport infrastructure is also critical. It takes ages for these networks to become viable; think of how long it will take to build high density housing close to a high density link. I guess too, they would like to address the shambles which is the government’s housing policy. Ideally that should give a commercial return in the long run.

As already mentioned, there may be a case for counter-cyclical investment. As the economy goes into a slowdown it makes sense to bring forward investment projects using the temporary slack in the economy to get them under way early. (The difficulty is that it is usually hard to slow down the construction activity as the economy recovers.)

Thus there may be a case for certain sorts of infrastructural investment funded from borrowing. The Reserve Bank has said it thinks so and because good economists tend to have similar analyses, I should not be surprised if some in the pubic bureaucracy are like-minded. But their approach would be the disciplined one of a fiscal conservative, not favouring a wild spending spree.

What abut the spending on children, on healthcare and on education which I think is so badly needed? The fiscal conservative says that it is basically consumption spending which should be funded out of current revenue and that if there is insufficient revenue taxes should be raised. A budget deficit should not be a means of avoiding raising taxation for public consumption.

Value And Price

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

The social worth of a person in no way reflects their income or wealth. To confuse the two notions is to play into the values of the rich. 

My brother, Keith, died in the hospital wing of a Christchurch retirement home recently. He had been diagnosed with metastatic bowel cancer two years before, and had 22 months of a reasonable quality life, thanks to the efforts of doctors, nurses and his partner-in-life, Rose and those who supported her, and to his own fortitude.

Inevitably the last two months were a bit rugged and I found myself, yet again, visiting a retirement home which was the last living stop for a friend. What struck me, yet again, was that except registered nurses, those who tended Keith were immigrants. They were willing and caring, responding cheerfully to the challenges of those they were looking after. There is no way a robot could replace these valued attributes even though good equipment enables them to focus on the caring.

This economist could not help thinking that they were exhibiting valuable traits that were not mentioned in their employment contract. Nor would it say that they should attend the funeral service of their now deceased client – but they do. Yes, I have deliberately used the business term of ‘client’, to remind you that they were in a business relationship; yet it is not the way they, or you, think of it – rightly.

I am not going to argue they should be paid more because of the value of the services (again the business term) the carers provide. I am going to be much more radical. I want to argue that how much they get paid tells us absolutely nothing about their value to society.

We confuse social value and commercial value. You know the joke about economists knowing the price of everything and the value of nothing. But we do know the difference, as my first-year economics course taught when it asked why the price of diamonds is higher than the price of water when it is so obvious that water is much more valuable to society. The standard answer is that price equals marginal value; because water is plentiful we use it for a lot of things of low marginal value which reflects the price; but there are other uses which are extremely valuable – fundamental to life.

Nowadays I am not even sure that the term ‘value’ being used here is meaningful except in economists’ technical sense of reflecting market demand. Social value – what the carers were adding outside their employment contracts – may not be reflected in market demand but it is terribly important to all of us. (If you are unsure of this, think of what we pay for parental childcare.)

Our public rhetoric confuses the distinction. We treat Sir Walter Elliot as a much valued member of society because of his status and the income that goes with it. But is he contributing any more to society than the nurses who were contributing to Keith’s welfare? (For that matter, are his claims to wisdom and insight any more significant than those of people on lower pay and status even though our preference for pompous platitudes says they are?)

I am not saying we should not pay these nurse-carers more. I believe everyone has the right to a decent standard of living, albeit together with obligations to society that go with it. I am saying that the argument that ‘nurses are worth more’ does not lead to the conclusion that they should be paid more. Nor should we conclude that the income of one-percenters reflects their worth – it does not. To use the worth-argument for carers is to implicitly confirm it is also true for the rich. It is buying into their account of society – of commerce – and their importance in it.

That social value is not the same as market income is true for others including Keith. I have no idea what he was paid, but he was part of the salt of the earth, without which the world would have no flavour. His value to society far exceeded whatever his income was.

Ultimately society is far larger than commerce; social worth is far larger than economic worth. We should not equate them. To do so lessens the significance of society; it diminishes us all. 

mpledger 

I see “Sir Walter Elliot” and think Jane Austen … but then I am not an economist.  

Brian Easton

Jane Austen’s Persuasion is the most interesting of her novels to an economist.

mpledger 

I thought he must have been an economist.  :->

In Persuasion, one of the characters talks about sailors being the most worthy set of men in England so I had thought you were alluding to how sailors were poorly paid in wages (and had terrible conditions) compared to the value they gave to England – ruling the seas and all that.   (Even if some did make their fortunes by privateering.) 

Anne chose not to marry Wentworth because she thought she would hinder his rise in his profession although others tried to talk her out of it because he was poor and she was young.   

Brian Easton 

If you look at the novel’s last sentence, Megan, you will see the theme of support for the navy is Jane’s (although it has an interesting ‘feminist’ twist too).  JA had brothers in the navy.

In some ways the legalised piracy of the British navy in the Napoleonic wars is like London’s financial sector today, dramatically changing the political economy of London (and Britain) by a big injection of funds from offshore. Regents Park, for instance, was built for Navy personnel retiring on their share of the loot from naval engagements.

Reducing External Political Interference In New Zealand: A Modest Proposal.

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

Are we too generous about the civilian rights of non-doms, who do not pay tax on all their incomes? 

Bryan Gould has drawn attention to the dangers we face in New Zealand of foreign political interference by funding contributions to political activity. His apposite example is Chinese money being channeled into the change-the-flag campaign. Would it not have been humiliating if the change had squeaked through and then we found that we had swapped one colonially imposed flag for another? (As an aside, noting that the Prime Minister was involved with the proposal, it is ironic that a few decades ago the Communist Party was heavily criticised for taking Chinese gold.)

We probably cannot stop all attempts by such outsiders to spend money in order to influence political outcomes, or even to make such funding transparent. But we can do some things. Here is a modest proposal.

Some years ago, working on the top of the income distribution which is heavily influenced by tax avoidance, I had to investigate those personal taxpayers who are treated as non-resident. Let’s call them ‘non-doms’ (the term used for those who are not domiciled in Britain for tax purposes). Here, non-doms pay taxes only on their New Zealand income, so any offshore income is not taxed by New Zealand while the offshore income of resident New Zealanders is. (I have put at the end of this column the section from the original paper.)

There are perfectly good reasons to have non-doms when assessing income tax and I have no quarrel with the principle of such a status nor of how they are treated for tax purposes. But how we define non-dom status is important for it includes rights to participate in New Zealand political life – to be citizens.

The primary definition of a non-dom is those who spend less than half the year in New Zealand. However there is a second test: ‘having an “enduring relationship” with New Zealand.’ As I understand it, there is no statutory definition of this relationship; it depends on the judgement of the IRD. I do not know how often it is applied.

Let us guess at some of the criteria which might indicate an enduring relationship:

            – a NZ passport. (But there are some non-doms who have good reasons to have one; for instance young people on OE);

            – being registered on the electoral roll. (I would have thought this a certain indication of an enduring relationship.)

            – claiming a first home in NZ for tax purposes. (If you are not a resident here, you cannot have a first home here.)

            – accepting or holding New Zealand royal titles and honours.

Here is another one, which I doubt currently gets much consideration.

            – contributing financially to political parties and to other political activities. (Note that contributions to charities are not covered by this criterion. One has no objection to Chinese gold, Russian roubles or US dollars contributing to the kakapo recovery program.)

Suppose we were to make such funding decisive evidence of an enduring relationship with New Zealand. That would strongly discourage non-doms interfering financially in our political processes. No doubt ‘Panamanian’ lawyers can think of ways around such a rule. However the ways would be tested by administrative decisions and judicial process. So the costs of getting it wrong would be horrendous because those found channeling donations into political activities would have to pay taxes on all their incomes.

At the heart of this approach is that taxes are the price of citizenship. If someone is not paying full taxes they should not have full citizen rights (although they must retain their full human rights).

A simple patch on the current system; is it worth doing?

From B.H. Easton, Distribution of Pre-Tax Top Personal Incomes

Under New Zealand tax laws, non-residents with high incomes can avoid declaring offshore income for taxable purposes by avoiding being New Zealand tax residents. The criteria for being a New Zealand tax resident are:

            – living in New Zealand for more than 183 days in any 12-month period, or

            – having an ‘enduring relationship’ with New Zealand, or

            – being away from New Zealand in the service of the New Zealand government.

People who are not New Zealand tax residents are liable for New Zealand tax only on their New Zealand-sourced income. Such non-residents report their taxable income in an IR3NR return. They are not included in this data. There is no long-term series for them, but tax payable from this source is currently around $30m-$40m per year, suggesting an annual income of around $100m; this would be only a portion – often a small proportion – of the non-residents’ total income. New Zealand is such a small economy that those with very large fortunes are likely to hold wealth portfolios diversified by jurisdiction. It is not implausible that for many less than a third of their income comes from New Zealand sources; only that part is reported in the tax statistics. Given increasing international mobility, it seems likely that an increasing proportion of those at the very top of the income distribution are not tax residents. If so, any Piketty effect of a growing elite of the rich is likely to be missed in the New Zealand tax data.

PS. This is a different issue from those covered by Panamanian papers, although no doubt some of our non-doms will appear in them.  

(William) KEITH EASTON: 18 August 1944 – 26 April 2016

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(William) KEITH EASTON: 18 August 1944 – 26 April 2016

When I was about 12, the family was hit by a virus which made us lackadaisical and sleepy. I recall that on the afternoon it impacted on me, I struggled to meet my raspberry picking quota. Keith, 17 months younger, went down for a week. He was like that; anything nasty going in the health area and he got it worse. He was, for instance, a talented sportsman, but his wonky knees let him down.

So when two years ago, he told me that he had cancer in the liver, my reaction to myself, was ‘you dont have a chance’. Even so, the doctors, nurses and Rose gave him another 22 months of quality life, something we discussed during those last two months which were so much more difficult. He was grateful to them all.

If he had bad luck with his health, Keith had good luck in other ways. Sitting at the front here are three examples – his children, Andrew and Anna and his life partner, Rose.

I greatly admired Keith. He had the attributes of our much loved father: decency, generosity of spirit, caring, kindness, sociability, loyalty, commitment to his family, support for his community. He got some of these things from Mum too — like her, he was a far better organiser than Dad.

It is difficult, you know, when family things are happening and one lives out of town. I am ever so grateful for the support Keith gave to Mum and Dad, especially as they moved towards their ends, and to Jean in her times of troubles. Keith is modest and he would rightly insist I mention Danni’s contribution. I bet there are others in the audience he has supported in their need, but he would not think of mentioning it.

Keith loved music, a passion he shared with Rose. I greatly admired  his manual skills. You will know of Keith’s contribution to the Menz Shed in New Brighton; you may not know that from an early age he had his own shed down the back of the family section where he honed carpentering and metalwork skills which he used later in life. He helped many of you with jobs around the home; he added to the stock of Canterbury housing but, alas, not enough to offset the earthquakes.

The Shed was only one of a number of community projects and organisations with which he was involved. I remember too, the occasions when we were walking together and we would bump into a gangly adolescent who said so cheerfully ‘Hello Mr Easton!’; it was a student he taught in primary school, remembering him with affection.

Keith was loyal. Around my house are a number of mementos he gave me to remind I am a Canterbury man. (Actually he did not have to.) One of the last things we discussed was his ambitions to write a book about rugby – it would have been a celebration of the amateur form of the game.

Alas we can no longer have the direct benefit of those skills and talents, nor of his cheerful company. John Donne said ‘no man is an island’. Keith was a terrific son, brother, partner, father, uncle, grandfather to Rose’s grandchildren, cousin, friend and colleague – oh and cat lover. As Donne wisely said, we are all diminished by his death. The loss will be particularly painful to his closest: Rose, Andrew and Anna. Our thoughts are with them too, as Keith would wish – would insist.

As I told him, as I have told many of my friends, Keith was a beaut bloke. He deserved a longer life than his 71 years. He will sort of get it as we affectionately recall him in future years. I will not be the only one who will deeply miss brudder Keith.

Brian Easton

Grumbling

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

Responses to the flag referendum and the TPPA have parallels overseas such as supporting Trump in the US and Brexit in Britain. A sizeable proportion of the population think that the government is not listening to them and doesn’t care about them.

Kiwiblog presents an impressive scatter-diagram which shows that the more an electorate voted for National, the more it voted for a new flag. It seems unlikely that National voters are republican and radical (especially given the views of the leader they endorse). Rather it suggests that the ’conservative’ vote for the existing flag came from voters who are not very keen on the current government. Apparently for many, the vote was not about republicanism and the future; it was a vote against current developments. The referendum gave them an opportunity to express their grumbles.

Not only the flag referendum. I have been struck by how specious a lot of the grumbling has been against the TPPA. Regular readers will know I recognise real problems with the trade agreement and only reluctantly support it because the advantages from better market access outweigh the disadvantages of the investor state dispute proposals and the more restrictive intellectual property rights.  In doing so, I accept that others may rationally balance the issues differently.

But frankly, some of the earnestly proposed arguments against the TPPA are facile. For example: ‘X is dear to my heart. There is a faint possibility that the TPPA may just compromise X (even if the agreement explicitly excludes the possibility), and therefore my organisation is opposed to the TPPA.’ What is really going on, I think, is that the objector dislikes the TPPA and is trying to generate arguments against it. To an outsider they seem thin.

I am not even sure that the TPPA is the focus of their concerns. It often seems to be that they dislike what is going on more generally – including insufficient government lack of concern with X – so that the TPPA, like the flag referendum, is a lightning rod attracting the grumbling.

This grumbling is not confined to New Zealand. I detail two examples – Britain and the US – but there are many others. (For heaven’s sake, those great internationalists, the Dutch, are voting on whether the EU should be more supportive to Ukraine.)

In Britain the lightening rod is the referendum on whether Britain should leave the EU (Brexit). (Were I a Brit, I’d be on the ‘remain’ side because I have not the foggiest idea what a realistic alternative ‘out’ would be; however this is largely irrelevant for this column’s purposes.) It is undoubtedly true that some ‘outs’ have very clear views about the sovereignty issue (to which I shall return) but many more seem to be grumbling about the state of Britain, especially after six years of austerity and the Conservative government still imposing further austerity measures. Prime Minister, David Cameron, opposes Brexit, so a vote for it is a vote against him and all his policies. (I have wondered what our flag referendum outcome would have been if John Key had favoured the existing flag.)

On the other side of the Atlantic, there is the extraordinary support for Donald Trump. Even if he does not get the Republican presidential nomination, he has demonstrated there is a significant group of grumblers who don’t like the Republican establishment and Washington governance. Those who support Bernie Sanders are the Democrat equivalent, although his campaign is not nearly so bizarre. (I am reminded of Eugene McCarthy’s 1968 campaign for president with its ‘Children’s Crusade’ involving many young people.)

Trump’s supporters centre on white working-class American males who have not fared well economically and socially in recent decades. There is a parallel here with many Brexit supporters, and I should not be at all surprised if a lot of the anti-Key grumblers in the flag referendum have similar economic characteristics. They feel left out by such increases in affluence as there have been – by the growing inequality – and are using lightning rods to express their grievances.

But there is another interpretation, most prominent in Brexit and Trump’s rhetoric and implicit in some of the grumbling about the TPPA. It is about perceptions of national sovereignty. The balance of international relations is changing; America is not the global hegemon it once was (although even if its power is diminishing, it remains the most powerful nation on earth). There is still a residual nostalgia in Britain for when it was the hegemon and a belief it can still ‘punch above its weight’. (Every country believes that.)  Many New Zealanders are nervous about an evolving world in which it seems we are losing our independence (although less a nostalgic account of our history might suggest we have never had much room to manoeuvre, except as given by the grace of our very powerful allies).

The two phenomena are partially linked. In a world of increasing international trade, finance and interdependence it is likely that, unless some active measures are taken, there will be some groups who will not be great beneficiaries, especially measured relative to others, and who may be even worse off over time. I doubt they articulate this notion with any rigor but they intuit a connection between globalisation and their struggling situation. Their response is a desire to wind back the clock to the simpler world they think existed in the past.

Well we can’t (or not by more than the 60 minutes when summertime ends). Yet it would be equally wrong to ignore their cries of anger. Responding may require a vision that Cameron, Trump and Key do not have.

Addendum After the above was drafted, the government announced that the select committee considering consider hundreds of submissions on the TPPA has had the time frame set for deliberation drastically cut from four weeks to just five days. Even if many of the submissions are not significant, the reduction is democratically disgraceful. Additionally it confirms to the grumblers that they are right; that the government is not listening to them and doesn’t care about them.

A Lack of Interest

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

Are we entering a long period of secular stagnation in which interest rates are low? We cannot foresee all the implications. 

This has not been an easy column to write, and it may not be an easy one to read. Part of the problem is that there is no agreement within the economics profession as how to interpret what is going on. I cannot recall any previous occasion in my lifetime when good economists were so puzzled.  Yet, what appears to be occurring is so fundamental, and may have such a huge impact on our lives, that readers deserve some sort of guidance.

The crucial fact we are trying to grapple with is that world interest rates are low. For the last six years base US interest rates have been near zero while key interest rates in Europe have turned negative. (New Zealand ones sit a little higher. That is because those who lend to us want a premium for exchange rate risk; but even ours have been falling to unusually low levels.)

A number of explanations have been put forward by a galaxy of the world’s top economists including, Ben Bernake, Robert Gordon, Paul Krugman, Kenneth Rogoff and Larry Summers. (Yes, they are all Americans and all are broadly Keynesians – serious monetarists hardly appear nowadays, although populist pseudo-economists are inclined to warble on.)

Rather than go through each of their explanations (and tie readers into knots) I am going to offer – ever so tentatively – my synthesis.

The effect of low interest rates should encourage investment in productive activities. (I’ll talk about the impact on finance shortly.) That is not happening. It is possible that there is insufficient demand. But over recent years many measures have been taken to increase investment-inducing demand and they have had little effect. Six years is a long time – longer than from the beginning to the bottom of the Great Depression; you have to go back to the 1880s for a longer period of international stagnation.

The other possibility is that there are insufficient new investment opportunities. Of course, there are some – think of the (art deco) cinemas constructed during the Great Depression. But there are not enough to generate a demand for savings to push up interest rates.

In his recently published The Rise and Fall of American Growth Robert Gordon argues that current technological innovations are not as significant as those of 100 years ago; that, for instance, electricity had a far more pervasive impact than computers.

I am a bit embarrassed to challenge such an eminent authority, and neither of us will be around when a comprehensive evaluation can be made. But the problem may not be so much the significance of the new technologies as that it is often difficult to make a profit from them. Your life is being transformed by the digital revolution, but many of the innovations’ applications are not profitable. The media cannot work out how to make a profit from their news websites – while traditional media, such as newspapers, make losses. Twitter has not made a profit in ten years.

Suppose that Gordon – or my version of him – is right, then there will be much reduced opportunities to invest reasonably safely, and interest rates will fall. The outcome will be the sort of world economy secular stagnation we are seeing. Certainly, there remain some high risk investment opportunities with high putative returns but many will bomb out.

The point about the Gordon – or Gordon-plus – analysis is that we may not be experiencing a short-term stagnation. It may be that the world economy is going to remain in a slow growth stage of development for some time. Sure, there will be change, but returns on investments will be low.

This is a rather tentative projection, but it is worth exploring some of its outcomes. A curious one is that as rates of return fall, world wealth inequality may rise even though world income inequality falls. That is because the price of a financial asset rises when returns generally fall.

That induces more financial speculation, which is not underpinned by real economic activity to finance the speculators’ consumption; ultimately it implodes. Remember 2008; we may repeat something like it in the not too distant future.

A particular example is housing. As interest rates fall, mortgage debt servicing becomes easier. So, you can pay more for your house, the only restraint being the deposit. (That tends to lock out those currently renting – at least until their folks die and they inherit a share of their housing capital gains.) The rising house prices induce speculative investment for capital gains, although that cannot go on forever. I am not sure what happens in the long run.

For if the long-term secular stagnation theory is right, we are in uncertain territory, with outcomes we can only vaguely foresee, if at all.

Let me finish with one further example (thereby ignoring the implications for government spending. Retirees are grumbling that their incomes are being cut by the falling interest rates. So be it. The implication is they are going to have to consume some of their financial savings (so there will be less for their heirs). Systematically running down one’s assets is called ‘decumulation’ (the opposite of accumulation). However exactly how to do it is unclear.

You won’t get much guidance from financial advisers and their journalist counterparts, many of whom are likely to be stuck into a high interest mindset long after it becomes clear to everyone else that the world has changed.

God Save the Flag vs God Defend the Flag?

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

The story of our national anthems might provide guidance for how to proceed with the flag.

A recent Victoria University graduation ceremony invited everyone to sing The National Anthem. As we lustily, but not tunefully, sang God Defend New Zealand, I avoided the thought that while pedants would point out that New Zealand had two national anthems there are few pedants left in our universities. Instead the conservative in me, which like Edmund Burke favours organic change, reflected on how the national anthem, God Save the Queen, has morphed into God Defend New Zealand. I was not able to find an authoritative description of the transition, so I am going to have to fill some of the gaps with my memory – corrections welcome.

By the 1960s, New Zealanders were appalled that when one of them won Olympic gold GSQ was played just as if a Brit had won. The 1977 compromise was that GSQ, which had been the national anthem since 1840, would continue but that GDNZ would also be one too. GSQ was to be played in the presence of monarchs, their representatives and their relatives. On other occasions it would be GDNZ. The change seems to have been by government fiat for I have been unable to find a relevant statute or regulation.

I do not know how many countries have two national anthems, but over time the deuce has been forgotten except by pedants and, no doubt, somebody in the Department of Internal Affairs who deals with things monarchical. For most New Zealanders there is, today, but one national anthem.

Our current version is not that designated in 1977. Hinewehi Mohi sang GDNZ (Aotearoa) only in te reo before the All Blacks versus England match at the 1999 Rugby World Cup . After the usual hubbub we settled down to sing the first verse in Maori, the second in English. All very Burkean; perhaps one day a third verse in a Pasifika language may be sung on appropriate occasions.

The relevance to the flag debate will not have escaped the reader. The anthem change did not come from statute or referenda, nor was it abrupt. Perhaps something like that would be ideal for the flag. We might have a national ensign with the Union Jack on display for things monarchical and a different flag for other occasions.

The difference is that there was a well-agreed alternative to GSQ. It had been around for a hundred years when Thomas Bracken’s poem was put to music. I do not recall any challengers – except wits who wanted Peter Cape’s Down the Hall on Saturday Night. (Subsequent proposals include Pokarekare Ana, surely a song rather than an anthem, and Dave Dobbyn’s Loyal, which is bereft of any New Zealand content.)

This Burkean is uncertain as to what happens next; that is the nature of organic growth. I take it the Lockwood design is out, rejected in a referendum. I did not like it when I saw it flapping in the wind – that black bit next to the flagstaff did not work. I am also told that the fern itself was too complicated – what on earth is the symbolism of its 37 points? But it was internationally distinctive in the way the red peak flag was not; foreigners would see no confusion with any other nation’s flag – a big objection to the current one, which those who should know better have muddled with Australia’s.

My guess is the next stage is for individual New Zealanders to put up a second flag of their choice. Over time – 100 years? – out of that diversity we would converge on one that captures our imagination sufficiently to become the one (or strictly the two). I must say I appreciated the effect of a couple of flags flying together. Unlike some nations; we are not a flag people and rarely fly them.

The story of the GDNZ teaches us also that the flag needs a Polynesian/Pacific element. (Ferns are not unique to New Zealand.) Some people’s second – or first – flag will the Tino Rangatiratanga one but even though it is striking. given its exclusiveness, it is unlikely ever to be the nation’s choice, It was designed by a a collective of Maori women artists especially Linda Munn, Hiraina Marsden and Jan Dobson Smith – pity that referendum committee did not consult them. (Incidentally this stolid Burkean preferred as the Maori flag the first ever New Zealand flag of the United Tribes of New Zealand – St George’s cross with the Southern Cross in the top left quadrant – a version of which was used by the New Zealand Company. But its historical appeal is outweighed by aesthetics.)

Do I have a preference? I’ve long liked simply replacing the Union Jack in the current one by a koru while retaining the blue sea and red Southern Cross. Perhaps we could have a host of flags, with the same sea and Southern Cross format but different symbols in the upper-left quadrant. The Maoist in me says let many flags bloom.

Bubble and Pop.

This entry was posted in Business & Finance, Macroeconomics & Money, Political Economy & History, Pundit on by .

The history of New Zealand is speculation on farm land which stokes up debt, with disastrous consequences when the bubble bursts. The New Zealand industry is going through another one. 

During the Great War, farm land prices boomed. When farm product prices collapsed in 1920, farmers walked off their land. It was not that the land prices were too high. Farmers had borrowed to purchase their farms and with lower revenue they could no longer service the debt. (Much the same seems to have happened during the Long Depression of the 1880s, but there is not the statistics to trace it with any precision.)

Not all farmers walked off, of course. Those with low or zero debt and a modicum of luck – like reasonable weather – can usually survive such price collapses.

A similar thing happened in the 1930s. Again many farmers were carrying too much debt. I calculate they were not getting a reasonable return on their labour, even under the better prices of the 1920s, When product prices plummeted at the start of the Great Depression many could not now even service their debt let alone make a living, and they walked off their land.

Almost the same thing happened with the removal of land price controls by the first National Government after the war. Fortuitously, wool prices boomed in the early 1950s enabling farmers to ease back their debt burden. The same thing happened to some farmers with the wool price collapse in 1966.

My calculations in the late 1970s suggested that again farmers were carrying too much debt. Muldoon was bailing them out with SMPs and the like. When the Rogernomics government removed these in the 1980s, some farmers found they were unable to service their debt and walked off their land.

It seems to be happening again. When the Chinese markets opened up there was a surge in demand for dairy products which resulted in higher prices. To capitalise on them, dairy farmers increased supply in part by purchasing more land, borrowing to do so. Inevitably international dairy supply caught up (perhaps now the world is in over-supply) and prices collapsed. Some farmers find they have paid too much for their land, gambling on a long run price of $8 a kg of milk solids, while the current price is below $4kgs. They are now struggling to service their debt.

I am sure about what happens next. Some farmers will walk off their land as banks foreclose on them. Some farmer will demand government bailouts. Everyone will blame Fonterra; it may make mistakes but it did not purchase the overpriced land. The banks themselves are not under threat. Perhaps they were imprudent advancing debt on the basis of excess optimism about long run dairy prices but they have diversity in their lending and dairy loans are only a small proportion of the total.

There may well be a drop-off in dairy production. Feeding palm kernels is likely to be cut back, but a bigger worry would be if some farms went to ruin with deterioration in pastures and herds and inadequate maintenance of farm equipment, as occurred in the 1930s. Banks are, probably, not foreclosing on some farmers in order to avoid this.

In national economic terms, any falloff of production is compounded by the falloff in prices so that real incomes (purchasing power) fall more than production (as the National Accounts recently reported). There may be further production falloffs as the lower incomes result in less spending but there is not much evidence of this yet.

The revenue from higher prices for farmlands goes to the sellers – often retiring farmers. Some of them will have lost part of their savings in poor financial decisions (as in various finance company failures, but part of those losses were borne by taxpayers), some will have invested in housing (contributing to the bubble – they may lose part of their savings in a burst) and some will have been spent on consumption.

So the booming farmland prices have generated prosperity throughout the economy. Conversely, the collapse will generate the reverse. But those who benefited on the upswing will not be exactly the same as those who suffer from the downswing.

Why do we keep doing it? Don’t they ever learn? Perhaps they think this time it is different – it always is; it never is – or perhaps they do not know any history. Some may be gambling they will get out with a profit before the crash; some do, but in doing so they leave someone else holding the debt.

Too much of our farming is for capital gains. Too many farmers are willing to take low incomes relative to their assets and their effort, in return for a large capital sum when they sell out. Big capital gains usually require ‘high gearing’ – high debt to income – as high as your lenders will let you get away with.

At which point the debt financing activity becomes speculation and a crash is eventually unavoidable – as happened in 1928 on the American stock market and in 2008 in the American housing market and which may yet be repeated in the Auckland housing market.

What to do? The die is cast for this round of speculation and some are going to have to pay for it – including innocents who were not beneficiaries of the upswing. The precise responses depend on how the economy unfolds after the crash.

Later we might consider measures to dampen the booms. The easy solution would be a comprehensive capital gains tax – I’d go for a real and realised one, but that is a rather technical issue. But capital gains are so built into our farm sector, it is not obvious just how we can introduce one. It ought to be obvious though, that having a leading economic sector integrally dependent on a boom and bust speculative cycle is not in our best interests.

Do inequality and poverty matter?

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

A journalist’s list of the ten most important issues politically facing us did not mention inequality and poverty. Why?

A month ago Fairfax political journalist Tracey Watkins listed the following ten areas to watch out for in the political year:

Spies (especially the review and resulting legislation)

Iraq (will the two year mission be extended?)

Ship Visits (from the US?)

Polls (how they will develop)

Tax Cuts (although I thought they were promised for 2017)

Surplus (are we going to get another soon?)

Water (trying to get a compromise between Maori and general public claims)

TPPA (the debate)

Housing affordability (the implications of the Auckland market cooling)

Social services (the government’s promised shakeup)

There is no mention of inequality or poverty among the ten despite it being a major issue a year or so ago. Has it lost its puff? I am not arguing that the items on the list are unimportant. But the omission surprised me.

Now Watkin’s is just one journalist’s opinion – albeit a senior journalist of one of New Zealand’s main media groups. But the likelihood is that she discussed it with colleagues and even showed the piece around before it was posted. So it probably represents the overall consensus among her colleagues. Did not one of them say ‘How about inequality and poverty?’ (And perhaps a few other things.)

Significantly, such lists affect the way that some of those who form opinion are currently framing the public debate, although you might argue that the compilers are such butterflies that in a few months – or even days – their list will be different..

There is a more insidious possibility. The list may not just reflect the journalists’ views. They are continually interacting (interviewing and gossiping) with the politicians and advisers who inhabit parliament and the Beehive. A reasonable interpretation of the list is that it reflects the obsessions of those politicos about what they have to tackle over the next few months (or days). If so, inequality and poverty are not among their major obsessions.

It would be easy to say that the groups who formed the list are on above-average incomes and hardly in poverty, so that they have little personal interest in such topics. It is more complicated than that. First, in every case on the list there is a concerned government agency. That is not true to the same extent for poverty and inequality. There are some very good experts in some agencies but they are not at the top of the agency thinking. (What about the Ministry of Social Policy, you ask? Yes, they have some experts but as the list shows, their concerns are the (costs of) delivery of social services.)

Second, the journalists and advisers must have decided that those concerned with inequality and poverty have little impact on politics. True, there are some very active groups – especially in Auckland – but they are not getting much traction.

Those committed to the egalitarian society – which was once New Zealanders’ pride – need to ask why their concerns have so little effect. A possible explanation is that, despite the rhetoric, the rise in income inequality occurred over 20 years ago, largely as a result of Rogernomics and Ruthanasia. I know many want to believe economic inequality is still rising in New Zealand, but the careful statistical work I have done shows little change in the distribution of market incomes in the last thirty years, and the big changes in after-tax incomes were about a quarter of a century ago.

This is not to contradict the findings of Piketty and all. The evidence is that the surge in top incomes and wealth has occurred where there has been a sophisticated financial sector such as in Britain and the US. Ours is plain vanilla; the top incomes it pays contribute to overall inequality but they do not seem to have been increasing faster than average – or not enough to show in the data.

Now it is very easy to say something like ‘we have had this inequality for over 25 years and society has not fallen apart, so why worry?’ The implicit message is that the poor are not a large enough part of society or not angry enough to rise up in wrath.. (My view is that if the poor are mainly children and their parents, the former don’t make good crusaders and the latter are too busy trying to cope with family pressures to man and woman the barricades.) In any case the complacent message from the list of ten is why worry about distributional issues (tax cuts for the well-off aside)? Things are going fine, aren’t they?

So should we worry about inequality other than as some sort of moral concern (it is certainly proper to have one) or a nostalgia for a past when things were more egalitarian? But there are also long term consequences of poverty, the companion of inequality which may not be immediately apparent but which is threatening the viability of the nation.

Today’s children of the poor have less opportunity than their fellow children and possibly less than their parents and grandparents had. I could write at length how this undermines the skill acquisition and citizenship which are necessary for a sustainable New Zealand (and how it adds to a health deficit). But instead, let me remind you that New Zealand was once a society of opportunity for just about everyone (women and Maori aside – we are doing better there). That may no longer be true. Is that what we want?

Are we spending enough on healthcare?

This entry was posted in Health, Pundit on by .

The government is restraining its spending on healthcare – perhaps by over $2 billion a year. Is that what we really want?

A common assumption is that public spending on healthcare rises faster than GDP. There are three reasons behind this assumption.

First, an aging population requires more healthcare. The over-65s consume more healthcare resources than the under65s (and the over-85s even more so).

Second, is the ‘Baumol effect’, where the price of services such as healthcare rise faster than that of other sectors so even at constant volumes the value share of services in nominal GDP increases.

Third, as they become more affluent people demand more healthcare. That seems a perfectly reasonable decision; as you get richer do you want more knickknacks or a better quality of life from improved health?

Implicit is the assumption that a high proportion of healthcare would be funded by the taxpayer. Some people assume this as a norm. Some think there should be more private funding of healthcare. My conclusion is that private funding, as a rule, leads to unfair outcomes and high transaction costs. (That is another column, but to summarise, I wish we could make greater use of private funding including insurance without greater inequity and inefficiency. I’ve concluded we cannot.)

So I was greatly surprised to learn that in recent years the public healthcare spending as a share of GDP has been falling. The pattern is difficult to describe but, to simplify, Crown Health spending peaked at 6.75% of GDP in 2010/1 but last year (2014/5) it was only 6.26%. That represents a reduction in spending on about $1200m a year relative to the peak. It is almost double that if you allow for the tendency for public spending of healthcare to rise faster than GDP. That total amounts to the government spending over $400 per person a year less than if past trends had continued.

Forgive me if I don’t go on to list the consequences of this. If you are in discomfort on a long waiting list, or having trouble finding suitable care for an elderly relative, or missing out on a treatment because is not available because of its expense, or you or someone you know has been financially crippled because they had to go private, or you know somebody who died when they should not have or earlier than if they had had good care, you know some of the items on the list. Instead, I want to focus on how it has happened. (I’ll come to the ‘why’ after.)

Each year the government budget sets the amount it will spend in each sector. Much is a carryover from the previous year. In addition there are ‘operating allowances for new spending’ (OANS). That is where the additional spending for public healthcare (and many other programs, such as education, defence, law & order, cultural heritage recreation and the environment) comes from.

Now it happens that since the Global Financial Crisis there has been – in the jargon – a considerable tightening of funding for the OANS. That means there has been less for public healthcare and all the other publicly provided services. There is still some additional funding, but not as much as in past. While nominal spending on Crown Health expenses has risen in those four years by $1.3b, it has not been enough to keep up with the rise in GDP. Health, and to a lesser extent education, got the lion’s share of the extra, while most other areas got next to nothing, but it has still meant less for health than on past trends.

Why has this happened? You really need to ask the government but let me make a few observations.

It cannot be simply attributed to the GFC in 2008. Certainly, economic growth has been slower since then, but I’ve been focussing on public healthcare spending as a proportion of GDP, so the slower growth is already taken into account.

You could explain it by the government’s target of getting a fiscal surplus. As it happens, I’m inclined to agree with it for various reasons, not least because a deficit represents borrowing from future generations and I don’t see any strong case for our doing that. I add – it is another column which I may have to write later in the year – that there may be technical reasons for easing on the deficit target but at the moment I think it still a wise economic judgement to aim for a fiscal surplus or small deficit.

I don’t think, incidentally, that the claim that the government can get major productivity gains in its spending is particularly valid. There were such gains in the past; there will be some now. But they are small and already built into the projections.

What is really happening is that the government has chosen to target its deficit by holding back on government spending rather than raising the taxes which provide the revenue to fund the spending.

That is a political decision – in effect we voted for it in 2008, 2011, and 2014, although I do not remember what amounts to cuts in health funding being an election issue. Apparently, the government is restraining government spending in order to position itself for a further income tax cut in 2017.

Presumably it thinks that individuals can make up for the restraint in its healthcare spending by private purchase. After all it only amounts to around a weekly $8 a head on average. But that average hides enormous outlays for those in need. Private funding tends to be unfair and inefficient.

I wonder if that is the public’s choice. Of course, it will revel in a 2017 tax cut just before an election. But I wonder is it really keen on individuals experiencing discomfort on a long waiting list, or having trouble finding suitable care for an elderly relative, or missing out on a treatment because is not available because of its expense, or dying when they should not have or earlier than if they had good care? For many voters, they and their family and friends are healthy enough to avoid these fates – tomorrow may be different.

Do The ISDS Provisions In The TPPA Reduce Our Sovereignty?

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

The short answer is all trade reduces sovereignty to some extent. The TPPA is no exception, but its effect is probably small. 

Allow that we had to give away something, such as increased copyright extensions, for better access for our exports; the real issue for us in the TPPA is that it reduces ‘sovereignty’. To report my conclusion at the beginning: all trade and all trade deals reduce sovereignty to some extent. This has been going on in New Zealand since its first European economic engagement. The Investor State Dispute System (ISDS) is another step. As far as I can judge, the ISDS provisions in the TPPA do not represent a great loss of sovereignty – but then the TPPA benefits from increased market access are not huge either.

I use the term ‘sovereignty’ here to mean the ability to act independently of others – ‘the full right and power of a governing body to govern itself without any interference from outside sources or bodies’. The governing body may be the state but it could also be the individual or a host of institutions in between. Once the body comes to an agreement with another party it loses some of its sovereignty. Since trade involves such agreements, every trading action involves some loss of sovereignty – it may be small, it may temporary, but it is a loss.

Modern trade increasingly requires a formal framework between the participants. To take a simple illustration: transaction costs between traders are reduced by common standards for weights and measures and the like. New Zealand is a signatory to various international agreements It did not have to adopt them but it would be troublesome for our exporters and importers if they had to keep converting local measures into international ones.

Because it is a small country New Zealand has been very keen that there be an international framework based on a rule of law so that, typically, there are enforcement provisions in each agreement to make them work. On occasions they have definitely worked in our favour. For instance, we have had favourable WTO rulings in regard to apple access to Australia and lamb access to the US – in each case a larger power was pushing us around but they had to give up some sovereignty and do what the WTO tribunal decided. When we are on the wrong end of a decision, we will also have to agree to something we do not want to do too.

The ISDS extends the framework to foreign direct investment. For economics, investment is a kind of trade characterised by it taking place over a longer period than a conventional export or import. Its effect is to bind the destination of the foreign investment to treat the investor in certain ways. Illustrative is that the first ISDS appears to have been between Germany and Iran in 1979 with the purpose of preventing expropriation of German investments without compensation. Today’s provisions are much more complicated although they exclude some areas which the foreign investors may not take action over – the environment, health care, the Treaty of Waitangi. for instance.

No investor will absolutely trust the state legal processes since the law may be changed, the courts stacked. Thus investors seek a dispute resolution procedure outside the state even though New Zealand probably has a better reputation than most states.

My ideal, would be a world court for investor state dispute resolutions, something like that proposed by the EU. But the US Congress will not countenance such a court system, and its fallback is an arbitration system between the state and investor.

It is not be the first time we have agreed to an ISDS process in a free trade deal; it wont be the last. (Instructively, some who oppose the ISDS provisions in the TPPA are willing to take human rights issues to the international tribunals – even though that represents a potential loss of sovereignty too.)

What I think is going on here, is that economic globalisation is undermining the ability of states to govern themselves exclusively. Economic transactions now cross their borders. We have to create supranational institutions to govern them. Such institutions undermine national sovereignty.

As I have indicated, the US is also nervous about this loss of its sovereignty. It is possible that the ISDS provisions will affect whether the US Congress votes to adopt the TPPA or not. In particular there must be some anxiety that foreign investors in the US have privileges that US domestic investors do not have.

The US as hegemon has an alternatives to the ISDS to solve investment disputes. It imposed sanctions when Cuba privatised some US businesses with offers of negligible compensation. New Zealand would never be able to do that as effectively. As a small economy we need an international rule of law to enable us to pursue our international objectives and to protect us from bullying (although, alas, it still happens to a lesser extent).

Of course we could easily avoid the need for an ISDS by repatriating all foreign investment. Ridiculous? Yes. But it illustrates that ISDS is not an autonomous change but a response to another change, the rise of foreign direct investment. (To be clear, I am not against all FDI, but I have argued that our failure to save adequately means we have too much of it.)

Is an ISDS necessary? In principle we do not need one, but we would face the challenge of being less attractive to foreign investors compared to those that were a part of the ISDS (say Australia); so we would attract less FDI and it would be more expensive.

It is argued by some proponents of the ISDS in the TPP, that they already exist in other FTAs and that New Zealand has never had to a claim under one. I say, ‘thus far’. And it is also a matter of concern that the few cases involving other jurisdictions mean there is not a lot of case law.

So the ISDS in the TPPA reduces our sovereignty, or rather it reinforces the reduced sovereignty that foreign direct investment is already causing. In my judgement the reduction is not great compared to all the many international concessions New Zealand has already made. But the benefits from improved market access (offset by the copyright extension) are not huge either even though they are there.

Can We Afford Not To Adopt The TPPA?

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

A key issue may not be what is in the TPPA, but that by not adopting it we may ruin the other international agreements we are pursuing. 

In the 1960s I was an active member of the Campaign for Nuclear Disarmament. It was a moral crusade with unrealisable objectives such as withdrawal from SEATO (a now defunct treaty), a nuclear-free New Zealand and withdrawal from ANZUS. The dreams of youth can become a reality.

I was there the night CND morphed into the Committee on Vietnam. We didnt win that one; the troops went, although we were broadly right as the resulting debacle and withdrawal demonstrated. Perhaps we did better than we thought at the time. The Ministry of Foreign Affairs was deeply divided on our involvement in Vietnam; perhaps we outsiders contributed to the doves who argued for – and got – the minimalist response that New Zealand could get away with, given the network of international relations in which the decision was imbedded.

Those outside often have little understanding of the complexity of the network. For instance a consequence of the legislation which made New Zealand nuclear-free and led to our ejection from ANZUS changed the balance in our relations with Australia and the US. Our practice had been to play one off against the other. When the US withdrew in a huff, we found ourselves much more dependent upon Australia; in one way our independence was reduced by being nuclear-free.

These complex interdependences also apply to trade negotiations. While there has been much focus on the TPP deal, there has been hardly any mention of the WTO (World Trade Organisation) agreement in Nairobi which prohibits agricultural export subsidies. Some 30 years ago a trade negotiator commented to me that getting rid of this dumping might be the best single thing we could do for our exporters. Not only would it stop the undercutting of their markets but it would force domestic agricultural reform because the dumping nations could no longer export the surpluses arising from their subsidies. There is not a lot of this subsidising going on at the moment but without an agreement export subsidies are likely to come back – to New Zealand’s detriment.

What was not always mentioned was that the chair of the WTO agricultural committee which negotiated the deal was a New Zealand ambassador, who is the fifth New Zealand chair in succession. This not only reflects the excellence of our Geneva ambassadors and the priority we give to agriculture in the WTO, but that the powerful – most notably the US – trust New Zealand to do a good job. That trust arises from the way we behave in other trade negotiations, including the TPP. The implication is that if we defaulted on the TPPA we would damage that trust and our ability to function effectively in a wide range of other international negotiations we care about, including on climate change.

That puts us in an extremely invidious position over the TPPA. Sure, we could turn it down, losing both its benefits and its downsides. Were we to do so, however, we would compromise the trust our international activity depends upon, especially the possibility of other trade deals which would open up markets currently restricting our exports.

Briefly, there are five (or six if you treat ASEAN as a unity) major trading groups in the world, plus Australia, which are particularly important to us. We have deals with ASEAN, Australia and China but we need the whole seven so that we do not become too dependent on any one of them (especially as the three just mentioned are closely interdependent). We have trade negotiations with India and are beginning soon with the EU but we are low on their priority lists. Frankly I am not optimistic about India which is proving especially recalcitrant with everyone, but we might do a bit better there with RCEP, the Regional Comprehensive Economic Partnership, which includes India and also ASEAN, Australia, China and Japan.

Japan and the US (indeed the whole of the North American bloc) are members of the TPP. We have been struggling for ages to get deals with these two but have been too low on their pecking order to be noticed. So you might think of the TPPA as a means of getting the deals.

That is a positive, but of course the deals have to be favourable to us. Many argue they are not although their vehemence is offset by those who argue the opposite. The truth is that there are positives and negatives and different people balance them differently. In my opinion it is not much use focussing on a subset of the outcomes and ignoring everything else. Deals are about giving and taking.

The logic in this column is that we now do not have much choice about the TPPA. The government is trapped into agreeing to it because rejecting it has implications for other trade deals and our wider international relations. That is probably what our MFAT officials are advising, although no doubt there are many diverse views in there, just as there were with Vietnam. Here is my best guess about what is likely to happen.

There is a signing of the agreement in Auckland this Thursday. The exercise is primarily ceremonial – agreeing to a common text and exhibiting solidarity. I suppose the protests outside are ceremonial and for solidarity too.

The twelve partners then go away and prepare for the implementation of the text. Some things can be done by regulation, some require a change in law. The degree to which each partner has to do this differs according to their constitutional arrangements.

New Zealand requires some change in law. The government will drive those through by using its dominance in parliament, despite a large minority of the public having doubts (and much of the rest being thoroughly confused). I am afraid that, just as it did during the negotiations, the government will not seek consensus, but it will aim to disrupt the opposition for short term political gain whatever the long term consequences.

Even so, the government should try to meet specific legitimate concerns. For instance, Maori do not trust the government to reject certain actions if they compromise the Treaty of Waitangi. International treaties, such as the TPPA, are between governments, but they do not prevent a government enacting domestic legislation which would require it to consult and get a mandate from parliament.

Everyone will be watching the US, where the passage of the measures is likely to be most contentious. Many of the predictions of what will happen reflect the soothsayers’ view of the TPPA rather than a solid political assessment. There is considerable division among those who are informed. Some think the US Congress will agree to the deal this year because it is so crucial to US economic hegemony, particularly relations with Japan and the reducing of China’s economic leadership. Others think the Congress will not bear to give Obama a win and will hold it over to next year. Another view is that there are so many fish-hooks in the deal that Congress will not be able to get an agreement.

Until each of the partners has demonstrated they can implement the agreement, its provisions do not come into effect. When they have all done this the partners ratify the treaty. (Most required legislation will not come into effect until ratification.)

By now there are so many imponderables that there is insufficient room in a column to pursue them all in a balanced way. My guess is that, given the way we are trapped by the wider international issues, the cautious advice is to proceed on the path of implementing the legislation for the TPPA, making as much international progress elsewhere. We can then review whether we really want to go ahead with the implementation. Legislation can always be reversed, agreements abrogated, although if the government changes its mind it is better that some other partner pulls the plug. Much of what is due to happen will be less ceremonial than this Thursday.