The Price of Labour and the Value of Work

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bolger and Neoliberalism

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Redesigning the Reserve Bank?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have We the Right Approach for Regional Wellbeing?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Changing World Economy; Four Themes.

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

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

1. The US is No Longer The International Hegemon

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

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

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

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

 2. The Nature of Economic Globalisation Seems to Be Changing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How Much Should the Government Be Spending?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

International Rankings of New Zealand University Subjects (2017)

This entry was posted in Education, Pundit on by .

How do New Zealand’s university departments rank internationally?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I Rankings by Individual Subjects

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

17/45 are 51-100

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

5/45 are 101-150

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

1/45 151-200

  • Materials Science

Not taught in New Zealand

Engineering – Mineral & Mining

 II Overall QS Rankings of Universities

(Bracket shows PBRF ranking in NZ)

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

The Changing World Economy; Four Themes.

This entry was posted in Globalisation & Trade on by .

Paper to Wellington South Rotary; 22 March, 2017

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

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

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

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

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

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

 

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

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

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

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

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

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

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

 

  1. The Nature of Economic Globalisation Seems to Be Changing

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

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

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

 

To Conclude

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

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

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

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

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

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

Is the Government Expecting a Migration Boom?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Destabilising New Zealand Superannuation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brexit: How New Zealand Might Cope

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brentry: How New Zealand Coped

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Social Democrat Assesses How is the Land Faring?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

From Whence Europe? Whither Europe?

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

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

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

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

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

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

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

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

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

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

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

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

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

Big Data – Good?

This entry was posted in Pundit, Statistics on by .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The No Man’s Land of Studying Distributional Economics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will Many Americans be Healthcareless without Obamacare?

This entry was posted in Health, Pundit on by .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our Education System Seems to Be Struggling

This entry was posted in Education, Pundit on by .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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