China Jitters

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World Sharemarkets Are Sneezing. What Does That Tell Us About the World Economy?

Before discussing the state of the world economy – especially what is going on in China – it is useful to say something about the importance of the sharemarket (Americans call it ‘stock market’). It is far more important in pop-economics than serious economics.

This is because there is a new share price almost every second of a working day, easily reported especially if journalists have nothing else to do. There was almost a news blackout on it following David Bowie’s death because the media thought they had something of greater public interest. But on a dull news day, journalists report minuscule changes in the sharemarket with panting breaths. As I write it is in the headlines again.

Additionally, those who make their money from share deals have an interest in presenting the sharemarket as more important than it is. (Everyone does that; I once met a designer who thought the cover was the most important aspect of a book.) So those whose incomes depend upon share transactions are happy to feed the breathless media with material to eke out the story. A similar situation applied to the Auckland housing market with the media uncritically reporting real-estate hype contributing to the speculative boom.

This is not to say the sharemarket has no economic significance. Every market has some. The sharemarket can be a means for raising capital for firms, so it is a means of saving. However, especially for the greedy and uninformed, it can be a means of losing savings – as investors in Dick Smith are ruefully realising.

(One could argue that one of the market’s functions is to transfer savings from the poor to the rich – as Keynes said it is a kind of casino. I’ll mention this gambling again, but it is not a reason against investing in shares. Rather that the investor should be aware they are taking on higher risk and may get a higher return – or they may not.)

Perceptions in sharemarkets also affect business and consumer confidence. High share prices may give the impression that shareholders have more wealth leading to greater spending. When the prices collapse they think they are poorer and cut back.

So when you are told that the share-price index has risen or fallen by, say, three percent, it means just that. The economy – and certainly not wellbeing – is not three percent better or worse that day, it has hardly changed.

So the announcement that the prices in the Shanghai sharemarket are falling – as they have been recently – does not tell us much about what is going on in the Chinese economy (more’s the pity, as I shall explain). Moreover, since the Chinese sharemarket is smaller relative to the economy than rich country ones, changes in it do not have as much direct impact as a similar percentage fall in, say, the US.

A further complication is that it would seem that the Chinese government is involved in its sharemarket far more than is normal. It is said that it has instructed state-owned firms to purchase shares; even Muldoon did not intervene to this extent.

The Chinese economy is an even greater mystery than most economies. Its data is unreliable, some institutional arrangements are unclear and the policy framework is less transparent than usual (probably because there are heated internal debates). The economy is thought to be slowing down from a secular growth rate of, say, 15 p.a. to 5 p.a. I cant think of any economy which has experienced this sort of deceleration, so we cant be sure what will happen except that the ride will be bumpy.

Because we know so little about what is going on, it is difficult to make prognostications. A worry must be that some of the investors (or should we say gamblers?) in the Shanghai market have borrowed to fund their sprees. That works well when the market booms, but when it crashes some of those who borrowed may not be able to cover their debts.* That can generate a severe disruption because an economic actor cannot function with negative equity in their balance sheet – as Dick Smith demonstrates – and the unwindings to cover the negativities can be very messy – as Dick Smith will show.

Even though there is little in the Chinese economy which is transparent we can take the Shanghai sharemarket as another indicator, among many, that the economy is weakening.

Of course, that one of the world’s biggest economies is faltering – we think – has implications for the rest of the world economy. The uncertainty there is being transmitted to the major sharemarkets of the world, impacting on business (and consumer) confidence.

So we cannot rule out that a general weakening of the world economy which will, of course, impact on the New Zealand economy. We do not know by how much. Our economy is also weakening from lower export prices, the winding back of the Christchurch rebuild and the faltering of the Auckland housing bubble.

My guess is the current forecasts are on the optimistic side of what will be the actual outcome. By the middle of the year the economy may not look as robust as it been. It is too soon to tell whether it will be recovering by the end, as we go into election year.

* The recently released film The Big Short makes a heroic attempt to describe what happened in the gambling boom and bust of the American housing market which precipitated the Global Financial Crisis.

Making Quality Judgements

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

A book on the history of the Literary Fund raises broad questions of how our bureaucracy works.

I was too closely involved with Elizabeth Caffin’s The Deepening Stream: A History of the New Zealand Literary Fund to review it. But it contributed to my understanding of some general issues; I think I am allowed to use the book to share them with you.

For the record, the LF was started as a stand-alone entity established in the later 1940s. It lasted until 1988 when it was absorbed into the Queen Elizabeth II Arts Council (later Creative New Zealand) where its ghost struggled on for a few years before it was exorcised. The book argues it had an enormous effect on the development of New Zealand literature, although its funding was small. (About 6 percent of CNZ’s funding today goes on literature.)

While focussing on the literary issues the book also gives an account of the development of public-sector decision-making – albeit in one tiny part of the system. One of my grumbles about our teaching of public policy is that insufficient attention is given to how it actually happens. There are few careful studies; the book adds to them.

Because it is over a five-decade period, the story shows an evolving public policy process. In the beginning one politician, Peter Fraser, then prime minister, drove the introduction of the LF operating through the Under-Secretary for Internal Affairs, Joe Heenan. Of course the times were ripe for the institution – ‘over ripe’ one might say, since the war had delayed the establishment of it (and other cultural institutions such the NZSO).

However, his National successor, Sid Holland, had little interest in literature. Had the LF’s establishment been raised on his watch, it would not have happened. This is not to make a political point. It is true that Labour Prime Ministers Fraser, Norman Kirk and Helen Clark contributed greatly to the development of the arts. But so did National ministers Alan Highet, Doug Graham and Chris Finlayson.

As the LF evolved the ministers stepped back and the bureaucrats took over. It was bureaucracy which drove the absorption of the LF into the Arts Council in the late 1980s. They saw it as an anomaly in their ordered system of things; how often have other apparently good arrangements been upset because they did not fit the bureaucrats’ Procrustean bed? However, the cost of administering the small fund may have been a factor; sometimes it may have cost more to run than the amount it gave away.

Did the system lead to political interference? The allegation has been made for other more generously funded state cultural agencies such as the French one. There are number of examples in the book; the most effective way was to appoint the ‘minister’s man’ (or woman) to the committee, although there were also some more direct interventions. It was not always the politicians. Because of his religious views, an early LF secretary, Pat Lawlor, did his best to scupper a grant to a novel by David Ballantyne. The media did its bit too, with a tizzie fit in 1959 over three short stories about ‘seductions’ (by Marilyn Duckworth, Richard Parker and Jacqueline Sturm). Caffin dryly comments, ‘none would cause anyone from a later age the slightest concern.’

The main funder of literary activity in New Zealand is, of course, the private market – the royalties paid to authors. But because New Zealand is small and publishing involves strong economies of scale, subsidies are an important facilitator. There has always been some private patronage – the LF fostered some initiatives – but in recent years a number of foundations and the like have added to the funding of our arts system, much to its benefit. As much as the resulting diversity is to be welcomed, it is the rich who can afford to be patrons. They too may have political agendas and as reluctant to rock the boat. Arguably the state funding agency is more democratic.

Yet it is odd how little engagement New Zealand literature has had with politics/the political economy in the last 30 years. Some years ago I wrote about how often images of Muldoon appeared in our literature, arguing that he represented the nation’s Jungian shadow of authoritarian power. Today neither Clark’s nor Key’s nanny state are dominant themes – perhaps everyone has aspirations for the Prime Minister’s literary prizes. 

I am not saying there has been no political works among our recent literature, just that proportionally there are less than in comparable regimes overseas. Nor is this is simply the result of state funding, although the priority on quality writing over content may be a factor.

This problem of making good judgements by state agencies is not confined to literature or the arts. It occurs in natural science, social science, history, and many other facets of New Zealand life. As M. K. Joseph wrote sixty years, ago we have a national tendency to ‘worship the mean, cultivate the mediocre’. Frankly, if we chose the All Black selectors the way we chose some of our assessment panels, the All Blacks would have trouble beating the Te Awamutu second fifteen.

The LF was an exception. There may have been some dullards on its committees, but the chairmen were outstanding and usually there was at least one other committee member of considerable literary acumen. Because it is a ‘venture capital fund’, some of its bets were failures but the returns on other ‘investments’ more than compensated. Sometimes the judgements were inspired. Keri Hume got her first grant having only ever won the Te Awamutu Short Story Competition.

Yet, yet; Ronald Hugh Morrieson, one of our most interesting novelists – all four gothic novels he wrote in his short life have been made into usually successful films – does not appear in the book. I suppose he never applied, but surely he deserved some public or private support.

Ultimately then, for me the book illustrates the development of the government policy system and the challenge of designing one which makes quality judgments. But, to finish on an almost reviewer note, many will read the book for its story about the development of New Zealand literature and some marvellous anecdotes about some of our most beloved and eccentric writers.

A Return To ‘Think Big’?

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The strange economic assessment of the proposed extension to Wellington Airport’s runway reduces to a plea for subsidies from tax and ratepayers.

I am sometimes asked to assist voluntary groups with a critique of a commissioned economic assessment of a development project. I decline because of the high standard required from me – one which would stand up as evidence to a tribunal. That means a huge effort and a lot of resources – especially my time – requiring a fee with a good number of zeros between the dollar sign and the decimal point.

What I am about to write then, is not a critique of a report on the proposed extension to Wellington Airports runway but a look at a strange aspect of it. It involves a fallacy which was common in the evaluation of the Major Projects in the late 1970s and early 1980s. It would be dreadful to go there again.

Briefly the proposal is to spend about $300m to extend the runway at Rongotai by a further 354 metres, which would enable larger planes with longer ranges to land there. There are environmental issues which I shall not comment on. Nor am I here evaluating the claim of the consultants (Sapere) that the nation’s coffers will be $2b to the good, 60 years after the longer runway is up and running.

The problem is illustrated by the report’s discussion on the funding of the extension. The report hesitates to recommend that the investment should be funded by the users of the extension. Obviously they should be paying something for the advantages of the longer runway. Why not the whole lot? Instead, the report points to ratepayers and taxpayers making a substantial contribution.

The report’s argument is a bit tortuous even to an economist, but essentially it seems to be that if the required ‘increase in fees were paid by existing users of Wellington Airport, it would necessarily mean a charge which exceeds the economic cost of supplying those services …’

I think the report means ‘existing and new users’ for it would be astonishing if the new users who are central to the benefits from the extension made no contribution. What it seems to be saying is that were the users to have to pay for the improved service, they would not use it. In which case the extension would be not be commercially viable. Therefore, the report says, it should be largely funded by ratepayers and taxpayers.

That argument applies in lots of other cases implying, for instance, that food should be subsidised by the taxpayers too. Economic policy is increasingly chary of subsidising anything, for the good reason that such arguments used could be applied to subsidising everything. That does not mean there should never be public subsidies but that their justification requires a far greater degree of rigour than that provided in this report.

Isn’t the logic that if it is not commercially viable the investment should not go ahead? The report seems to argue that the main benefits from the extension would be elsewhere – say, those who sell services to the extra tourists. That was a well-known racket when evaluating the Think Big (and other) projects which did not cut the mustard in their own right. Typically any added benefits were frequently over-optimistically estimated. At this point sloppy thinking starts demanding subsidies from taxpayers. Given the experience of the Major Projects/Think Big that is an instant flag that the project does not stack up.

Another trick in the Major Projects evaluation was to ignore the distributional impact. Very often the locality and the company were better off but the rest of the country was worse. This resulted in an interesting political conflict with the putative beneficiaries of a subsidy shouting loudly ‘GIVE ME’ and the rest of the country asking ‘Who us?’

My superficial reading suggests there are all sorts of technical problems with the report as well as the analysis being opaque. The report does not even say who commissioned it, a standard part of the discipline of a proper evaluation. This is not to say that such reports are inevitably in the interests of the paying client. But a reader is entitled to have any potential conflicts of interest identified.

Dont ask me to sort the muddle out for nothing. Instead, demand the agencies being asked to provide the subsidies (the local authorities and the Treasury) commission another group of consultants to go through the report in rigorous detail. That will take resources – a good number of zeros between the dollar sign and the decimal point. But. as like as not, it will save economic waste far in excess of the cost of a good critique.

The Treasury has tried to set out standards for such evaluations (called cost-benefit analyses). I am struck by the ingenuity of consultants getting around them. The only defence against poor work is a detailed critique done by top rate economists and contested in a tribunal. Wellington region rate payers and New Zealand taxpayers deserve no less.

Whadarya?

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The Ethnic Future for New Zealand Is Unknown. But It Will Be Diverse and Different 

The promise of increased future ethnic diversity is undoubtedly true, but often the statistical projections are both misleading and obscure the real issues.

Each Population Census asks the respondents’ ethnicity. That is not their race, which is a genetic notion. Ethnicity is a social construction, self-assigned and subjective. One politician promised to call himself a Pacific Islander on the basis he was born in the Pacific island of New Zealand. Not all of part-Maori descent describe themselves as of Maori ethnicity. Not all of Maori ethnicity are of part-Maori descent.

Moreover, about half of those that say they are of Maori ethnicity say they are also of another ethnicity – most often European. It is common to ignore this and prioritise. Those who say they are Maori and something else are called ‘Maori’ in the prioritised statistics which is insulting to them because it ignores their specific desire. Of the remainder, those who say they are Pasifika are so classified (unless they also say they are Maori in which case they are classified as Maori) even if they give another ethnicity. Among the remainder, Asian is prioritised over European (or Pakeha).

The last Census was further complicated by those who said they were ‘New Zealanders’, which is not strictly an ethnicity, although exactly what we mean by the term is unclear.

Maori is probably a comprehensive category (although many are keen to mention their iwi too). Neither Pasifika nor Asia is a single ethnicity but groupings of them. Admittedly there may be historic ties between, say, Samoans and Tongans, but Chinese and Indians are very different peoples and the various South-East Asian communities would want to distinguish themselves from the two biggies.

It is foolish to try to predict the evolution of these communities with any precision, especially as individuals may reassign their ethnicities between censuses, while who can tell how the children of inter-ethnic marriages will describe themselves?

I should not be surprised if asked in today’s way, many nineteenth century ‘Europeans’ would have classified themselves as ‘English’, ‘Irish’ or ‘Scots’, a distinction which has largely died.

We cannot rule out new ethnic categories. Those who say they are both Maori and Pakeha may be an evolving one, except they have no ethnic community. Some ethnicities may die out. I shan’t be surprised if in a couple of generations some of the Pacific Islanders from smaller islands are unable to maintain their identity by endogenous marriage and become clans in a wider Pasifika ethnicity.

So our ethnic future is very uncertain. The current projections are misleading, except for saying that things will be very different. While you, like me, may be almost entirely of British descent the likelihood is that among your great-grandchildren and great-great-grand ones there will be those with ancestors from other parts of the world.

Ethnicity is not the only dimension of diversity. The trend has been towards a more secular society, with an increasing proportion of New Zealanders not registering any religion (although that may be no less spiritual). Non-Christian religions are small but increasingly common. In the last census 89,000 described themselves as Hindu, 58,000 as Buddhist and 46,000 as Muslim. They are all up a shade on the previous census, while the numbers who describe themselves as Christian (1.9 million) or Maori Christian (53,000) are down. (There are about 7,000 Jews.)

Because there is a bit of anxiety about terrorism, I add that the vast majority of New Zealand Muslims are as peaceable and socially constructive as the vast majority of Christians. The best defence we have against terrorism is ensuring they are an integral part of New Zealand society, while accepting they are different and not imposing any narrow values on them. (David Farrar provides a thoughtful review of kinds of Muslims.) But it is not solely for Muslims we need to do this. The same challenge applies to every ethnicity, every religion and to other dimensions of diversity too. 

There is another way of looking at our future rather than through mechanical projections. We can, if we wish, make our own ethnic future. To do so we need to be tolerant and responsive to diversity, to celebrate with others’ communities. We are already on the way. The Chinese celebrate their New Year, the Indians Diwali. Those from other ethnic communities who go to these celebrations outnumber the Chinese or Indians. That sort of engagement, together with a comfortable acceptance of intermarriage and the diverse blends it creates, offers a promisingly diverse and uniquely New Zealand ethnic future.

Is Our Economics Good Enough?

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A report on social services by the Productivity Commission raises serious problems about the quality of analysis in New Zealand.

There is a widely held perception that the Productivity Commission, which makes recommendations to the government on how to increase productivity, is neoliberal. Partly that is because the commission was set up at the instigation of ACT but that does not mean that its analysis is necessarily neoliberal. However, many of its recommendations seem neoliberal to some people. Explaining why illustrates some limitations of; economics, especially as it is taught and practised in New Zealand.

There is a basic economic model which says that competition in a market is a good thing – keeping down costs, encouraging innovation and responding effectively to consumer demand. Let me add a caveat, for what economics actually concludes is that ‘under certain circumstances competition is a good thing’.

I am not sure that the  ‘certain circumstances’ caveat is dealt with very thoroughly when economics is taught, while too  frequently it is overlooked in application. Even when they do not exist an analyst might conclude that competition is the best possible option of a not too attractive bunch. But for a good analyst it will be a carefully weighed judgement; others – frequently neoliberals – will ideologically leap to the conclusion that competition is always best or perhaps they don’t bother with or don’t know the caveats.

The Productivity Commission’s 412 page report More Effective Social Services is a part of the government’s push to introduce a ‘social investment’ perspective in social services, that is we should take into account that government spending can have long term consequences. Given that this perspective has long informed education and health policy, an extension to social services is not too radical. (It has not had much traction in the biggest social investment – our children.)

When the word ‘investment’ is used, many economists immediately equate it to private market investment. Despite the various caveats, they automatically assume that market solutions are often (usually) the best way of managing it (although they may require a number of government interventions, such as the RMA). Such economists conclude that the logic of social investment is to design the system to conform as closely to the market as possible. That seems to be the approach in the Productivity Commission’s report.

But the caveats are important. Before listing a few, I confess that I have not done a lot of work in the social services sector. Once upon a time an economist was expected to ‘crawl over ‘a sector before analysing it. I’ve probably done more crawling than the economists of the Commission. They cite a set of desultory case studies including that of Whanau Ora which, earlier this year, received an excoriating report by the Auditor-General for being over-expensive and not yet having demonstrated its effectiveness. (I have done a lot of work in the health sector, which I hope gives me some insights.)

Social services are an example of an economic activity which does not conform to the traditional market assumptions. In a conventional market transaction, the consumer of the commodity knows what they want and pays for it. That is a powerful incentive to align the economic decisions to give a socially satisfactory outcome. But that is not so common in the social services.

When a social worker knocks on your door you have only the vaguest idea what you want, if any, and the government is probably paying for the worker. It is not difficult to show, at least in the health system, that the alignments of responses are all wrong for a socially satisfactory outcome. The more you ignore them, the more expensive and less efficient your health system is; witness the American health system. The report does not even discuss this problem.

It gets even more bizarre when it discusses ‘equity’, that is, whether the outcome is fair. Much of economics deals with equity issues in one of two ways. It may assume that the income distribution is fair and so any market transactions are fair (a host of caveats to be added).

Or it ignores equity issues altogether arguing that economists do not have the skills to make equity judgments. That may be true but in principle we ought to assist people to make their own quality judgements. In fact there is a huge literature in economics on equity, but it does not appear to be conveyed in the New Zealand classroom. Certainly most economists duck when faced with an equity issue, but you wont be surprised that there is often an implicit one in their pronouncements – that the policy is in the advocate’s interest (or whomever is paying them). You will recall that neoliberal Rogernomics almost entirely ignored equity, switching the income and wealth distributions in favour of the Rogernomes.

Because the social service decision is not made by the recipient, the fairness of the income distribution is not particularly relevant (there are some other reasons). So the first draft of the report simply ignored equity even though it remains relevant. Three groups complained. (Good on them.)

The final draft has a bizarre two pages on ‘equity and an investment approach’ which said that ‘[s]ocial services are a form of merit good – something that people should be able to receive aside from their ability or willingness to pay’. Excuse me, but for an economist – a properly trained economist – a ‘merit good’ has a technical meaning and that ain’t it in this context. Even if it were, there needs to be an elaborate discussion to explain what is meant. If it had been explained, much of the underlying conceptual framework of the report’s investment approach would have begun to unravel.

Not surprisingly the rest of the section fails to explain how equity should (or could) be integrated into the social investment approach. The Commission was assuming that the income distribution was fair, the existence of social services says it is not; bit of a contradiction here?

My third example of the report’s weakness can be illustrated by Whanau Ora. I do not know enough about it to comment on it in detail but were I studying it I would be looking at the existence of transaction costs and transition costs. The report makes some desultory remarks about transaction costs – that is the cost of regulating each transaction. If you ignore these you can end up with solutions which favour contracting out. Had the Commission been crawling over the social services sector it would have been struck by what often seem high transaction costs in the contractual arrangements between governments and NGOs – they are always grumbling about them – and they would have tried to measure them. The Commission did not. Nor is there much on the transition costs of getting from delivery system one to delivery system two.

It seems possible that part of the failure of Rogernomics was because transaction and transition costs were so high. (In addition it is not evident that there was any improvement in outcome; sometimes there was a reduction.) In summary, like the Bourbons the report’s writers ‘have learned nothing and forgotten nothing’ from the shambles we call Rogernomics.

If you start off with a weak economic analysis you can easily end up with neoliberal policy conclusions. What I have set out here is quite orthodox and won’t surprised any properly trained economist. So this is not a rejection of economics; it is a rejection of economics as it is often taught and practised in New Zealand. One is reminded of the nineteenth century philosopher Hegel who said that to critique a theory you had first to get inside it, to know it better than its practitioners. Another way he put this was thesis, antithesis, synthesis.

The Future of Trade Agreements

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Given a long history of numerous trade agreements, why has the public become especially concerned about the TPP?

At a recent public meeting, a retired Secretary of Foreign Affairs pointed out that although he had been involved in negotiating many free trade agreements, the TPP was the first one about which the public had showed any significant interest.

The official MFAT website records New Zealand has nine FTAs (with 15 countries) in force and we have recently settled one with Korea. Collectively they cover 27 percent of the world economy.* Additionally we have SPARTECA with South Pacific island nations, and have signed up to multilateral deals under the GATT and WTO known as the Kennedy, Tokyo and Uruguay rounds (but the Doha round is still to be settled).

Adding the new economies in the TPP would increase coverage to 51 percent of the world economy. We are also negotiating other FTAs which would take the total to 82 percent. (The big ones involve bilateral deals with EU – the first or second biggest economy in the world – and India – the fourth biggest.) Additionally we are also in negotiation over RCEP (Regional Comprehensive Economic Partnership) which is largely with existing free trade partners in Asia (but also Japan, which is in the TPP, and India); it would further reduce barriers with them. Given all this past activity why, ruminated the ex-Secretary, has there been this reaction to TPP?

An initial problem was that the National Government did not involve the various interest groups (in the way the Labour Government did in the China deal). This has since been corrected so it does not explain the subsequent public disquiet.

Undoubtedly there is some resistance to any deal which includes the US. Perhaps New Zealanders dislike the American government or hegemonic economic power (whichever country has it). Not far from this is antagonism to the giant corporations which have driven some of the provisions. America is seen as the representatives of their bullying, although on some matters Japanese corporations have made similar demands.

Concerns have arisen because the TPP was to be more ambitious than the earlier deals, pushing into new areas. The totality of the ambitions were not reached, but American economist, Jeffrey Sachs, nicely illustrates the complexity by dividing the proposed agreement into four separate deals.

‘The first is a free-trade deal among the signatories. That part could be signed today. …

‘The second is a set of regulatory standards for trade. Most of these are useful. …

‘The third is a set of regulations governing investor rights, intellectual property, and regulations in key service sectors, including financial services, telecommunications, e-commerce, and pharmaceuticals. These chapters are a mix of the good, the bad, and the ugly. Their common denominator is that they enshrine the power of corporate capital above all other parts of society, including labor and even governments.

‘The fourth is a set of standards on labor and environment that purport to advance the cause of social fairness and environmental sustainability. But the agreements are thin, unenforceable, and generally unimaginative.’ [Some observers are more optimistic about some aspects but would acknowledge they are not especially comprehensive.]

So the public has some proper concerns about the TPP deal. It always had them, even with the simplest free trade deal. The political rhetoric has been that each was good for the country, but the reality is that some benefited, some lost out and that usually, under certain political assumptions, there was a net benefit to the country as a whole. So when we abolished car tariffs, car workers lost out but I don’t recall car owners, car dealers or even car manufacturers (who switched to importing) on the barricades.

The final critical feature of the New Zealand unrest has been Jane Kelsey, personably and publicly articulating concerns about the TPP deal. I do not always agree with her analysis, but even some trade negotiators have admired her energy and grasp of the issues (although on occasions she has depended upon leaked old documents when things had moved on). It is instructive that the media automatically go to her for comment, ignoring most of the other private sector experts (many of whom represent particular interests and hardly speak for the ‘public’).

Given this background of public resistance, the government faces the challenge of implementing the provisions of the deal including passing bills through parliament. It cannot back down. It is not just its political credibility in New Zealand that is on the line, but to walk away now from the TPP while certain sector groups would lose real benefits (to them). More fundamentally, all our partners in the free trade deals we are negotiating would pull back because they could not trust the New Zealand government to deliver. (We are never high among their priorities anyway.)

Undoubtedly the government’s strategy will be to use its thin majority to ram the required legislation through parliament. (I don’t think there is any Mike Minogue or Marilyn Waring to derail it.) It may do so slowly because it looks as though the US Congress will take its time. I shant be surprised if the deal is ultimately signed by President Clinton. I shant be surprised if it is never implemented in the current form – the critiques from Sachs and other American heavies are quite compelling, although ideas can get overwhelmed by corporate interests in the medium run.

My advice to the government would be to look for internal policies which would moderate the harsher TPP provisions. (I tried to indicate how one might do that with the pernicious copyright provisions,here.)

An even more important step is to try to win the public over to an open economy strategy. We have had one for three decades, but the commitment has been very much from the national elite, who have little connection with the wider community and have hardly tried to convince them – except arrogantly – or deal with their concerns. It was this challenge that the ex-Secretary was mulling over.

Recently Kelsey received a $600,000 Marsden Fund grant ‘to refine options and strategies for transcending embedded neoliberalism in international economic regulation’. (It is not as much money as you might think after the university has top and bottom sliced its share, and probably done a bit of surgery in the middle too.)

All power to her, but supporting the open economy does not make one a neoliberal. There needs to be an intellectual centre – perhaps a research centre for globalisation studies – that analyses the open economy. It should not be dominated by the elite or interest groups but reach out to all New Zealanders – just as Kelsey has.

 * I have measured the contribution to the world economy by GDP measured in common prices (PPP). Other measures might give different proportions but they would not take away the main message. We already have FTAs with big chunk of the world economy; the TPP would substantially increase that chunk; but we are also after FTAs with a big chunk of the remainder.

The TPP, Sovereignty and Copyright

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While TPP – any trade deal – compromises sovereignty it does not mean we cannot respond constructively to unsatisfactory aspects such as those involving intellectual property. 

The stupidest thing said about the TPP deal – thus far – is the claim that it does not reduce New Zealand’s sovereignty. Of course it does. Agreeing to it will mean New Zealand will not be able to do things it currently can do. How important this reduction in sovereignty is is a proper matter for assessment for there are gains as well as losses.

There is a parallel in a marriage. Spin doctors may say that there is no loss of personal sovereignty when a couple  marry. Of course there is, but the couple judge that the advantages of the union exceed this loss (that is, if they are rational – the romantic are not always so). Similarly we need to look at the entire TPP deal and ask, whether its downsides are more than outweighed by its upsides.

There is a difference. A nation has many individuals and interests. It may be that some are better off while some are worse off. Thus beef farmers are going to be enthusiastic about the very favourable gains in beef access while others may see nothing for their interests or even a reduction. The government has to make – presumably has made – a judgement about the overall value of the deal to the nation. It can also take measures to moderate the downsides.

For instance Pharmac is going to have to pay more for some of its drugs. The government has said it will compensate Pharmac for these extra costs. It hasn’t said yet how it will do that. What would be unacceptable is if its healthcare budget was held constant and the Pharmac funding reduced some other part of the public healthcare system – say residential care for the elderly. The additional costs for Pharmac need to come from general taxation.

Can we afford it? The government claims that the deal is worth (eventually) $2.5b or so a year. If so, around about $1b a year will end up as additional tax revenue. The government should put its money where its mouth is and use some of that revenue to fund the additional costs to Pharmac and to offset other downsides.

Sometimes it will have to be imaginative to moderate the disadvantages. I am particularly cross over the extension of copyright from 50 to 70 years after death. Copyright is an interesting area because initially it was hard for an economist to justify it. The argument goes like this.

Information is a pure ‘public good’ in the technical sense that it is both ‘non-excludable’ and ‘non-rivalrous’; individuals cannot be effectively excluded from its use while use by one individual does not reduce availability to others. That you read a novel does not prevent anyone else reading it (although a book – the platform for the expression of the information – is not a public good). Note that the economist’s term ‘public good’ is quite different from the casual public use which uses it to mean a benefit to the public.

It is easy to show that in the ideal economy a pure public good should have a zero price. One should pay for the artefact of the book but not for the information it contains. That would mean no royalties for authors who provide the information. But, the argument goes on, information can be costly to produce so there needs to be a market incentive to produce it. (Some of our great writers have been driven by the commercial desire to earn an income; notably Dickens when copyright laws were much weaker.) So economists see the purpose of copyright as an incentive to produce new information.

Does extending copyright to 70 years after death make sense? How many authors are mindful that their works of genius will be of benefit to their great-great-grandchildren whom they will never meet? Did the announcement of the twenty-year extension result in any writers getting onto writing that novel which previously they had not bothered with? (I don’t even agree with 50 years. There is a view, including among some prominent American economists, that the period should be no greater than 20 years after death; I think that is to deal with publisher stocks at the time of the demise.)

Apparently New Zealand was opposed to the extension to 70 years, but Japan and the US already have domestically legislated it as a result of corporate pressures and they insisted. Our negotiators had to give in, in exchange for other benefits (that beef access is really valuable), although we got some phasing in of the extension.

So if we think the TPP deal is to our advantage we are going to have to adopt the 70 years. But we can adapt policies to improve access to free information. Here is the beginnings of a list:

* the government should stop privatising the information it holds; yes it has sold-off some valuable data bases and their owners are charging like wounded bulls for their use;

* the government should direct the agencies which manage its (publicly owned) data bases to stop profiting from them. They may charge for the costs of releasing the information, but only those costs. This would require some financial compensation to the agencies who may well be reluctantly charging but need the cash because of government meanness;

* the government should set up a fund to purchase private data bases putting them in the free public domain;

* the digitisation project – placing public records in the digital domain – needs more funding.

These do not directly address the extension of the copyright period. What I should like to see are legislated provisions which enable holders of a copyright to transfer their rights to a ‘creative commons’. (They might do so on death or at some other time of their choice.) It is already possible for an individual to do this by an individual contract. What is needed is a simple and standard way to do this.

There is a private ‘copyleft’ movement. An important advocate organisation is the Creative Commons ‘which seeks to support the building of a richer public domain by providing an alternative to the automatic “all rights reserved” copyright,’ As far as I know, no country has taken up their challenge. Perhaps New Zealand could be the first. 

That I’m afraid, will not undermine the greed of the corporations but it would offset a bit of it. It would demonstrate that while New Zealand may lose some sovereignty from the TPP deal, it can still use what is left (and the financial benefits from it) to enhance the human condition.

Thrive: The Power of Psychological Therapy: Richard Layard & David M Clark

This entry was posted in Health, Pundit on by .

The book’s ‘message is as compelling as it is important: the social costs of mental illness are terribly high and the costs of effective treatments are surprisingly low’.  Daniel Kahneman (psychologist and Nobel economics laureate).

In due course this Penguin is likely to become fashionable – like The Sprit Level and Capital in the Twenty First Century – because it touches issues which many people care deeply about while offering some solutions.

Its message is simple.

* Mental illness is widespread; on some measures it is the largest single source of illness.

* Despite its extent, the public health system pays insufficient attention to mental illness.

 * While the neglect might have been justified in the past by there being only limited effective treatments, today there are Cognitive Behavioural Therapies (CBT) with proven efficacy.

* Not only do CBT often work but they are cost-effective so that the benefits they generate exceed the costs of applying them; often cost savings to the government alone exceed the costs.

* The policy conclusion is that the public health system should make CBT available to all of those for whom they may work (once there are sufficient qualified therapists).

* The book also argues, less rigorously, for preventative measures.

The eminent authors (Layard is a leading labour economist, Cameron a professor of psychology) are also very supportive of the British IAPT (Improving Access to Psychological Therapies) initiative. Between its initiation in 2008/9 and 2012/3 it increased annual numbers seen by a factor of 15, the numbers treated by 38.

Not being a psychologist, I am cautious about commenting on CBT. As best as I can judge, its theory argues that some mental distress generates negative feedback loops which intensify the distress, and that ‘talk therapies’ can often replace these negative loops with positive ones, thereby reducing the degree of distress. (The authors observe that sometimes the medication and CBT applied together is even more effective.)

As well as reduced distress there would be reduced spending on other health care, increased work productivity, and reduced public spending on social services and justice. So the widespread application could be (largely) self-funding in public sector terms. Their cost-effective partly arises because the time required for therapy is limited – an average of ten hours of one-on-one sessions. (The authors emphasise that the therapists have to be properly trained. They mention a British need for about 8000 therapists – which translates to about 400 for New Zealand.)

 I valued the book for its dummies’ guide to mental illness (necessary because it is written for the general public) and for its passionate demand for better treatment for the mentally ill,

It turned out that full economic evaluations were unnecessary because the treatments were so cost-effective that many of the benefits associated with successful treatment could be ignored and yet the treatments were still viable. The thesis is evident in the two most economic chapters.

 Chapter 6 – essentially amounts to a cost-of-illness study – reviews the economic costs of mental illness:

 – unemployment, absenteeism and presenteeism (‘less effective work when a person’s mind is a mess’).The majority of the mentally ill are of working age, so these effects are more important than for some other health issues.)

 – much of the crime in advanced countries is committed by people with a prior-diagnosis of conduct disorder.

 – mental health problems often make physical health worse, typically increasing mortality by 50% for people with the same initial health conditions.

It estimated that the three components cost the British economy 7 percent of GDP (of which 4 percent of the GDP is borne by the Treasury – i.e. taxpayer). In contrast, spending on mental health care amounts to 1 percent of GDP (most of which is borne by the Treasury/taxpayer). The difference between the 7 (or 4) percent and the 1 percent does not, in itself, prove a case for more spending on mental health treatment, That depends on each treatment’s effectiveness and the economic impact of the treatment,

Chapter 11 gathers together a number of studies which measure the gains from reducing mental illness .

The most comprehensive study evaluates the cost of treatment in comparison with QALYs (Quality Adjusted Life Years) a measure of patient wellbeing. The book cites four examples:

 – Depression: CBT compared with a placebo costs £6,700 to give one QALY;

 – Social anxiety disorder: CBT compared to Treatment As Usual (TaU) costs £9,600 to give one QALY;

  – Post-natal depression: Interpersonal therapy compared with TaU costs £4,500 to give one QALY;

  – Obsessive-Compulsive Disorder: CBT compared with TaU costs £21,000 to give one QALY.

The authoritative British National Institute for Health and Care Excellence (NICE) considers that interventions costing the NHS less than £20,000 per QALY gained are cost-effective. (Those costing between £20,000 and £30,000 per QALY gained may also be deemed cost-effective, if certain conditions are satisfied; covered in next paragraph). That means that three of these particular cases are very cost-effective compared with many treatments of physical conditions in the British health system considered worthwhile doing. (The fourth is probably cost-effective.)

The NICE approach focuses only upon the cost to the health system. The cost-effectiveness from a social perspective is generally lower. There may be substantial gains to the public sector in terms of lower social welfare costs and higher tax returns from more of the treated returning to the workforce and from higher productivity at work. (Additionally there may be gains from reduced crime, but thus far they have not been evaluated.) From the even wider perspective of the economy as a whole there will be greater gains from additional production.

Moreover, the measured QALY/wellbeing gains are only those to the individual. Mental illness can also generate considerable distress to the family and associates of the ill. Neither are taken into account.

Such caveats suggest the denominator (QALYs) of the cost-effective ratio are higher than reported above, and the numerator (costs) are lower, so the ratio from the social perspective is even more favourable than that reported for the health perspective of the NICE guidelines.

In summary the use of CBT is being judged as cost-effective on narrow measures, and is almost certainly even more cost effective if a wider perceptive is taken into account.

The book makes a compelling case for taking mental illness more seriously than, apparently, the British health system does; the New Zealand health system is even further behind. This is not only because mental illness is widespread, affecting much of the population directly, or through association, but because there appear to be effective (and cost-effective) treatments which are not being widely applied.

So a very readable book which is likely to have a considerable impact on public perceptions when it becomes more widely known. However, professionals will need to be more cautious than the general public. CBT is not always successful (even when professionally exercised) and the evaluation of their cost-effectiveness is complex.

Lessons From Greece

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

Travel extends the mind. Here are some of the things I learned from a recent trip to Greece: about the age of the human condition, about how civilisations end with environmental depletion, about the stresses to the current Greek economy and about how trivial are New Zealand news websites.

There are remnants of wall frescos from the 3500-plus year old Minoan palace of Knossos in Crete – home of the legendary Labyrinth and Minotaur. (The building is rambling enough to be a maze and some of the frescos show boys leaping over bulls.) I was struck by their love for the environment (Beethoven would have been moved) while some had personalities with which a modern mind could empathise.

I first became aware of how old was this empathy from reading Homer. The humans in his great poems are just like us, without as much scientific knowledge of the world. So they attribute what they cannot explain to the gods (we might explain by a heart attack when someone gets struck down by a thunderbolt from Zeus ). The frescos are 800 years earlier than Homer – longer than humans have been in New Zealand. One is left pondering just how far the essence of our humanity goes back – before the beginnings of literature; before the beginnings of art.

I also visited the acropolis of Mycenae with its great stone palace and its lion gate. Mycenaean civilisation is a little later than the Minoan one and probably conquered it. The stone buildings of the palace/citadel are impressive. Its blocks weighed an average of 10 tonnes and it is thought it would have taken 100 man-years, to put them in place. It too came to an end, about 3100 years ago; there is some dispute as to why.

There is a problem with archaeology in that, inevitably, it collects what has survived: stones, pottery, other mineral-based artefacts. Perishables are not there. Women’s Work: The First 20,000 Years in which Elizabeth Warren Barber brought together evidence of weaving in early times – loom weights, a few bits of fabrics from bogs, mentions in literature (like Odysseus’s Penelope weaving), frescoes and pottery which show us the clothes they wore – to make a compelling case of the importance of activity largely forgotten because the evidence is so sparse. (What you observe — or measure — frames your understanding.) 

Museums pay little attention to weaving (loom weights aside) and I did not see the remains of a single boat in one, despite the Greeks being fundamentally a seafaring people . (Compared to the more recent Maori middens – which are very revealing – there is not much on their food either.)

So what is left is a very selective picture of what actually happened. I got thinking about wood – another perishable. It was probably the material first used for the citadels. Later it was used in constructions (such as roofs on houses), and probably also for scaffolding. It was used for furniture, looms, tools, and as a source of energy.

The hills surrounding Mycenae are denuded of forests; the valley below a flood plain planted with olive trees. (Any river is a long way from the acropolis; in Mycenaean times it must have been closer.) Presumably once the hills were covered with trees,. As they were felled, the hillsides eroded and their good soil swept into the valley below. It would not have happened overnight. Each year – over centuries – some trees were taken, some slips resulted until eventually the valued resource was exhausted – unrenewable given the environmental destruction. Nobody would have particularly noticed the erosion each year but cumulatively a key resource was exhausted and the civilisation which depended on it died too.

Jared Diamond has written Collapse: How Societies Choose to Fail or Succeed in which he describes communities ended by environmental depletion. He did not mention ancient Greece but despite other (relevant) explanations – external invasions, technological change, earthquakes – deforestation is surely part of the story. (Incidentally the ‘golden age’ of Athens was based on silver mines they owned; when the silver ran out so did Athenian power.)

Not far from Mycenae is the 3250 year old ‘Treasury of Atreus’, an impressive tholos (tomb) – its lintel stone weighs 120 tonnes. Like the other Greek treasuries we saw it was empty, looted and full of tourists.

On the whole, Greece looks a modern economy. If you are in the tourist sector it is hard to see signs of fiscal and economic austerity. (I did not get any sense of personal danger from the political turbulence which is said to have discouraged some tourists.) I did see half-finished blocks of town houses – perhaps speculative ventures which had run out of cash. There were no ongoing roadworks – in one place there was an almost complete expressway with no finishing being done – presumably a consequence of fiscal decisions. To my inexpert eye agriculture also looked prosperous. I take it that austerity’s big impact is outside the export-oriented tourist and agricultural sectors.

Did I say ‘looked a modern economy’? The one exception was outside a number of tourist sites there were people standing around selling postcards and such trivia – one was selling ‘genuine imitation watches’ – something characteristic of much less developed economies. They were probably the unemployed eking out their minimal unemployment benefits, if any.

Apparently the Greek economy is further contracting this year and is expected to contract next. So much for the neoliberal mantra that austerity would mean a return to economic growth. (You may remember the Rogernomes promised this too, while the New Zealand economy remained in one of its longer postwar stagnations.) There is far too much international complacency about the prospects of the Greek economy. There is a further round of financing to be discussed later this month; perhaps this time those outside the country will face up to the reality.

(The Greeks and Turks were also greatly troubled by the refugees flowing through their country from Syria.)

I travel in part to get an outside perceptive of New Zealand. I was struck by the trivia on the New Zealand news websites I consulted while away. They were dominated by anecdote and opinion, reminiscent of your suburban giveaway rather than a proper newspaper. They were particularly thin on serious international news – in hard copy they do better. Travel may extend the mind; I am not sure that our news sources do.

Where Is The World Economy Going?

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The more one is certain about the state of an economy, the more one is likely to be wrong; the more one is certain about the state of an economy, the greater the media coverage. No wonder the public is confused.

I shan’t add to the confusion. In quick summary, the New Zealand’s economic growth seems to be slowing down but we don’t know whether it will go negative and economic activity contract.

* The Australian economy  is in the doldrums.

*Chinese economic growth seems to slowing down from an underlying 15 percent a year to 5 percent. That is not as bad as slowing down from 5 percent p.a. to minus 5 percent p.a., but many firms could still get caught out.

* The European economy remains sluggish; I am guessing it will remain so until it resolves the problems of Greece and some other Mediterranean economies.

* The US economy is a bit of a mixed bag; it has some of the characteristics of the 2007 economy just before the Global Financial Crisis when we knew something was wrong, although the current indications are that 2015 is not as problematic as 2007 was. The only certainty is uncertainty.

These summaries describe the state of the various business cycles, but each fluctuates about a long-term trend. The problem may be that it is changing, not only in China but in the world generally. There are some economists – including the eminent Larry Summers – who think that the world economy may be in secular stagnation and that GDP per capita will not grow much in the long term.(Secular stagnation has been a long term concern of the profession; among those who have pondered on it are David Ricardo, Karl Marx, John Maynard Keynes and Joseph Schumpeter.)

Discussion at the moment seems more around the consequences of secular stagnation, rather than why. I’ll hazard a couple of suggestions (without going into the subtleties which underpin them).*

The first is that there is not really world-wide economic stagnation. It is confined to rich countries as they offshore production to poorer economies. I wrote about this in my Globalisation and the Wealth of Nations. It involves a complicated underlying economic model, but it has the interesting prediction (for us in New Zealand) that the price of foodstuffs relative to the price of manufactures (the terms of trade) will rise. I think I would want to add to my 2006 book that most of the countries to which the business is being relocated do not have high-quality rule-of-law regimes and that will slow down the world economy as a whole.

The second explanation relies on economic growth arising from technological innovation. The American economist who has best studied this in the long run is Robert Gordon. He does not think that current innovations are nearly as significant as those which happened a century ago, (Surely the impact of electricity has been greater than the computer; it is far easier to conceive a modern economy without the latter than one without the former.)

There may be a slightly different explanation to why Gordon cannot find the productivity gains in recent years that he found earlier. Recall the number of ICT applications for which there is no business case (i.e. their owners cannot figure out how to make a profit) but which are valued by the user. In this case their value may not appear in the productivity statistics.

It is this profitability issue which worries Summers et al. Low productivity growth means there have been fewer opportunities to invest, with the consequences that interest rates (and hence profits) are driven down. Perhaps today’s low international interest rates are not just a part of the cyclical adjustment to the Global Financial Crisis but are because of the secular stagnation; in which case they may be with us for a while. That would mean a dramatic change to the nature of the world economy – to capitalism.

For instance, it would invalidate Thomas Picketty’s predictions of increasing inequality (but not the analytic model he developed). Hedge funds would find it more difficult to make profits. (Perhaps that is why they are turning to funding such government-funded projects as improving mental health based on social bonds; it is a basic principle of capitalism that when private projects are not available investors turn to plundering the taxpayer.) Another significant consequence – many would say, already evident – is that macroeconomic policy could not rely upon monetary policy in the way it has in recent years, because interest rates would be very low.

To add to the uncertainties a recent issue of 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 it 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.

OUTC&A includes China. Its renminbi is subject to too many restrictions to act as a reserve currency (say in tandem with the US dollar). The Chinese have a saying ‘may you live in interesting times’. Uncertain ones certainly are.

* Footnote. A decade ago I would have worried about higher energy prices as a consequence of the rising cost of oil choking productivity growth. As I have argued earlier, fracking has delayed that

Owning New Zealand

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

How Much of New Zealand Has to Be Owned and Controlled by Foreigners?

This year is the fortieth anniversary of the founding of CAFCA – the Campaign Against Foreign Control of Aotearoa – a Christchurch-based, but national, activist organisation. It ‘promotes the concept of an independent Aotearoa based on policies of economic, military and political self-reliance’ including cultural and social issues (such as news media ownership) and it sees itself as a part of the peace movement. It is prominent in resisting foreign ownership of New Zealand assets (especially business and land).

 CFCA has celebrated its years in their latest biannual publication, Foreign Control Watchdog, but it is worthwhile asking how successful they have been. Certainly they have kept their concerns in the public headlines and sometimes there have been wins; the government’s recent rejection of a Chinese company’s plan to purchase more New Zealand farms was no doubt a response to their focus-group polls, but their members were implicitly or explicitly influenced by the widespread public concern which CAFCA has encouraged.

Yet the record is that foreign ownership of New Zealand assets continues to grow (as a recent CTU bulletin reports). Some of that growth is inevitable. Once a country is exporting, the purchasers of the export products will want to secure their supplies by ‘vertical integration’ which involves their owning stages of production and processing before the actual crossing of the wharf. Fonterra and other New Zealand companies do that too.

There are also the needs of portfolio investors to diversify outside the local boundaries. The NZ Superannuation (Cullen) Fund holds a considerable part of its investments overseas, while some iwi invest outside their rohe. Similarly international investors may find it prudent to include some New Zealand investments in their portfolio, although it is rarely a controlling interest.

Many economists have sympathy with new ‘foreign direct investment’ which involves a business setting up in New Zealand. I am probably a little more cautious than the middle of the profession, seeing the merits of the argument applying most strongly to businesses which are in the tradeable sector – exporting or import substitution. The arguments are considerably weaker when it comes to domestic supply or purchasing of existing businesses.

These are international phenomenon, reflecting the capitalist world in which we live (like it or not). In principle the foreign ownership in New Zealand should net out against the foreign ownership of New Zealanders offshore.

However, a major reason why New Zealand foreign ownership rises is because we do not save enough. (Many households do not save at all.) Our total investments exceed the savings we have available to finance them. So we borrow offshore. Once upon a time that borrowing was done by the New Zealand government which then invested in some of New Zealand’s businesses. So such businesses were largely locally owned but there was an offset of heavy offshore debts of the New Zealand government. The international rules have changed and that strategy no longer works. Which means that as long as we want to invest more than we have saved, we have to borrow offshore.

There are many channels by which that borrowing flows in. A common one is a local business being sold to an offshore investor, with some of the proceeds being consumed or used to reduce foreign debt (which, in effect, was used to fund past consumption)..

In some respects, then, the Overseas Investment Commission simply prevents some assets going into foreign ownership but somewhere else in the economy other assets have to be sold off instead. As a result foreign investment in New Zealand will rise as long as we do not save enough ourselves.

How to increase domestic savings? The government running a budget surplus is one way. Under the Cullen regime some of the surplus was used for the public purchase of overseas-owned companies (such as Air New Zealand and Kiwirail); it was also used to fund the NZ Superannuation scheme which has invested in local businesses (including the petrol chain Zed). His successors have not been running a surplus.

The Cullen regime also introduced Kiwsaver which involves individuals – the private sector – contributing to a savings fund for their retirement. Some economists claim this has not increased private savings but diverted it from other sources. This may happen at first, to some degree, but the research shows that in the long run such schemes result in individuals increasing savings (and reducing consumption). Again this government has been less enthusiastic than its predecessor about the approach.

Kiwisaver funds, just like NZ Superannuation, will invest offshore as a part of their diversification strategy but they will also invest in New Zealand reducing the need to sell assets to foreigners.

However whatever we do, there will be some overseas ownership of New Zealand – although it could be less than today’s proportions. But ownership need not be the same thing as ‘control’. Your local corner store may be owned by its operator but her or his political influence is restricted.

Just how much political involvement should larger businesses have? That is a question we have been reluctant to pursue nationally, not least, I think, because our two major parties depend upon donations from businesses – both locally and foreign owned. Perhaps organisations like CAFCA – whose funding come from individual donations – should put more effort into getting more transparency into the ability of private money to influence our public life.

Underlying Trade Deals

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

This was an introduction to a presentation by Stephen Jacobi: “TPP – Where to from Here (And How Did We Get Here Anyway)?” To a NZIIA lecture, 2 September 2015. (Some editing)

It was suggested I first say a few words about the context in which the TPP and other trade negotiations are occurring. At the heart of economic progress is specialisation. That Economics Stage I comparative advantage model that you were taught said that by specialising and trading its surplus a country could be better off.

That the model had a number of assumptions which are no longer true – especially as the costs of distance have fallen. It is not just that more products – notably services – have become tradeable. The model did not have foreign direct investment – capital flows – nor did it have labour mobility – people flows. It did not touch upon the flow of ideas – of intellectual property – not all of which can be commercialised. Ownership of the factors of production and business has changed dramatically as has the organisation of production illustrated by the rise of supply chains. International markets are becoming increasingly integrated.

None of these ruin the conclusions of the comparative advantage model but they make international trade deals more difficult to negotiate – much more difficult than, say, NAFTA, the New Zealand Australian Free Trade Agreement of 50 years ago.

he model has another implicit assumption which is proving even more difficult to deal with. It assumes nation states exist. Yet international trade in goods, services, investment, people, ideas –market integration – undermines the nation state, fudging its boundaries, its coverage, its powers its sovereignty.

This is the background to Stephen’s presentation on the TPP which, with its ambitions of a 21st century deal, is attempting to cope with some of the issues I have just raised.

A consequence has been a considerable backlash. I recognise three key features in the public concern.

One is a lack of appreciation that international commerce has moved on and the old limited deals are no longer as relevant as it integrates.

The second is there remains a loyalty to the nation state as we once understood it and a fear that the deals will undermine it without an appreciation that it is actually being undermined by the market integration. Perhaps there is the hope that resistance to the TPP will halt or delay the inevitable.

Third, compounding this nostalgia, is a lack of understanding of what is being negotiated. The blogosphere and public comment is thick with claims, many of which cant possibly be true while others remain unsettled. There is a notable tendency to assume the worst possible outcome.

Until those involved in the negotiations speak publicly – they may not yet be able to – this turmoil of public misunderstanding will continue. Tonight we have, what an economist would call, a second best solution to the actual negotiators. Our speaker, Stephen Jacobi, is an excellent substitute both by experience – he is a former diplomat and industry organisation CEO – while his current position – Executive Director of the NZ International Business Forum and alternate member of the APEC Business Advisory Council – requires him to follow trade negotiations very closely and in an informed way on behalf of the business sector.

Flagging Design

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The flag debate tells us something about the quality of design in New Zealand

I am not going to tell you about the right choice for New Zealand’s flag. That would invalidate the point of the column. Certainly I shall vote for one; much of my response will be an instinctive opinion. What I shall probably miss – what we are currently missing – is expert guidance on the characteristics of a good flag.

It is so typical of us to tackle the issue this way. A panel of celebrities, each successful in a narrow part of the world, are endowed by government fiat with the task of making decisions outside their limited expertise. I am not objecting to public opinion making the final decision – I shall be voting – but it is so typical that we do not begin with expert advice, instead jumping directly to uninformed opinion.

It reeks of the story that some firms approach a professional designer for preliminary guidance and then announce they will do the job themselves – it will be cheaper and be just as good. The do-it-yourself result frequently looks a botch job.

I am continually faced with poor quality design, notably in packaging and websites; so many are unfriendly and aesthetically horrible. The botchers (you can hardly call them ‘designers’) seem to have little idea of who their users are and appear to design for themselves – geeks who don’t actually use what they are designing and with the taste of louts on a high.

 My grumbles are numerous but, to take an obvious one, the font size is frequently unreadable to an older person. Those who engaged the botchers would be unnerved as to how often I turn away from their product because its website, say, is busy, incomprehensible, unreadable – screaming that it is not interested in me. I do not know how common is my response, but if there are enough others like me, money is being spent to turn off customers.

Generally New Zealanders have a poor sense of aesthetics or do not value it. Bill Sutch said it was because many of our ancestors came from nineteenth-century Britain where design was not valued. That is not true elsewhere in Europe. I was struck on a recent trip to Warsaw of the Polish aesthetic sense in industrial design; this was rural Hicksville 150 years ago when Britain was leading the industrial world.

There are some areas where, as best I can judge, New Zealanders have good sense of design – or half of us in the case of women’s clothing. How do I know? The country has fashion designers who export throughout the world. They could not, if their domestic market was not always challenging them to do better. (Interestingly almost every example of good New Zealand design cited to me involved an export industry.)

So it is not simply a matter of design schools; some of ours are world class. But their graduates exist in a world which is not particularly sympathetic to their achievements. As the businessman said ‘I don’t need a graduate experienced designer; my son got NZCEA’ – he could have added ‘and my customers couldn’t care less’.

How to raise the design standards of the population? No, it is not to introduce design courses in schools, isolating design from everyday life. Teachers need to be drawing attention to good and bad design as it occurs in the course of the day; it is an integral part of life. So do commentators if they have the judgement. And we as customers need to as well. But that requires those providing the service to listen; yeah right.

What worries me is that we are not choosing a flag for ourselves but for future generations. Celebrity panels and the general population tend to be backward looking. Will it be a flag for the future? Is it just a logo, to be abandoned as business so often does, after a few years? One cannot tell, but one hopes that a less aesthetically challenged future generation will not look at our choice and say ‘Yuk’ – as too often one does to the designs around us.

The State of The Economy: August 2015

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

Also notes for Radio NZ Nights with Brian Crump: 11 August, 2014

The indications are that economic growth is slowing down from the boom rates of the last few years. The slowdown may turn into a contraction – that is, output may fall. There is a view that the contraction began in the middle of 2015. (It is not possible to be sure. All the data is not in and is subject to measurement error. Last week’s labour force statistics gave mixed results with unemployment up, employment up and labour force participation down.)

The main reasons for the slowdown are:

            The private sector Christchurch rebuild has peaked; the public sector is still muddling along.

            Chinese economic growth is slowing down. This is probably structural. The productivity gains which enabled the 10-plus percent annual growth have been exhausted. The expectation is a future growth rate of around 5 percent. Still pretty good. However the worry about the Chinese financial situation continues.

            Added to China’s slowdown is that other economies important to us in South-east Asia and Australia have benefited from the Chinese growth and our export markets there may not expand as fast..

            There are mixed views about the Auckland housing market. It may have peaked, it may be about to peak. (The imponderables include any impact from the Chinese financial troubles; investors from there may have a marginal involvement but probably add to a speculative boom. The direct impact of the loan-to-value restrictions may be small but may take the top off the market.) Any reduction in the housing boom will impact on employment in a host of industries – real estate, surveyors, valuers, movers, builders, refurbishers, solicitors – as well as on house prices.

            The dairy price downturn.

Why have dairy prices slumped? Actually they are back to where they were about ten years ago. Perhaps a better question is why were they so high in between. It would seem that the opening up of the Chinese market following the FTA led to a surge in dairy prices because the world dairy industry could not keep up with demand increase in the short run. As time went on, though, the industry geared up for increased supply and is now in oversupply, depressing the international price. The oversupply arises because farmers invested on the assumption that the high prices would continue indefinitely. Perhaps the long-run price for dairy products is $4 to $5 a kilogram; it seems that much of the investment has been on the basis of a long-run price of $5 to $6 a kilogram. Critically that investment was debt financed.

So many farmers are carrying too much debt. The consequence is that they are struggling with negative cash flows after debt servicing. They will have to cut back spending, which will impact on their suppliers, on rural communities and ultimately the whole of New Zealand. Especially heavily indebted farmers will go under – I’m told that particularly includes share-milkers. We don’t know how long it will take before milk prices return to ‘normal’.

What to do? In some respects we’ve blown it. Market economies swing up and down as a matter of course. We’ve had a number of years in which conditions have been very favourable. We’ve treated them as ‘normal’ and while there have been some positive developments – say the broadband rollout – we’ve been borrowing for consumption rather than preparing for a more moderate future.

The Reserve Bank will probably continue to ease up, with an even lower floor interest rate (OCR). It will not be enough to offset the forces driving the downturn, nor the bad decisions of the past. The international evidence is that monetary policy by itself hardly lifts a contracting economy or if it does so it does so slowly. There is a need for fiscal policy.

There will be calls for austerity, cutting back government spending, say on the poor. Overseas experience shows austerity does not work.

Tax cuts which stimulate consumption are not easily reversible. Arguably the 2009 tax cuts should have been temporary, eased back as the economy expanded. But they were not.

I’ve argued for increased public spending on infrastructure although I don’t know whether there are projects ready to go ahead quickly. The mucking around in Christchurch shows how slow it can be to get things underway. Amongst the infrastructural spending worth bringing forward might be upgrading of poor quality housing, better connecting struggling regions to growth hubs, making more effort to meet realistic greenhouse emission targets, perhaps a bit more on conservation and heritage, more spending on health prevention and early detection and taking leaky school buildings seriously.

When asked what should be done I am reminded of the person told that he has lung cancer who demands his doctor do something about it. The doctor patiently explains she did. Whenever he came for a checkup she told him to give up smoking. He ignored her. His doctor may be able to help him through the next stage if he listens, but she cant reverse his past decisions.

Ultimately, we have to accept we have been making bad decisions – spending when we should have been saving; speculating rather than investing on realistic assessments of future outcomes; accumulating debt when we should be have been paying it down. We cannot easily reverse those mistakes. Anyone who says we can, hasnt understood the problem. In the past they were probably advocating the sort of advice that got us into the current uncomfortable situation.S

Confusion about TPP

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

Trust Us?

If you think you know what has been going on with the TPP, you have not been following closely enough. However, here are a few matters for clarification.

Trade negotiations used to be like the following. Japan wants better access to the US market for the cars it produces, while the US wants better access to the Japanese markets for its agricultural products. If they agree, car workers in the US will be worse off, as will Japanese farmers. Conversely, US farmers and Japanese car workers will be better off. In each case the government will have to trade the interests of its farmers against the interests of its car industry.

The introduction of a third party complicates the deal. Mexico will also lose out because it currently supplies cars to the US. There is the additional demand that it open its markets up to dairy imports so it loses on that dimension too. (Presumably it has hopes for other wins.)

There you are; three paragraphs before I mention New Zealand. We are a bit player in the game. Our hope is to benefit from the overall deal, but it wont matter if we withdraw – it would matter if Japan did.

New Zealand’s difficulty is that two decades ago we gave away barriers to imports so we have little to offer. Yet our agricultural exports are often (brutally) restricted. We’ve been hunting around for decades trying to reduce foreign barriers to agricultural product. While we have had some successes, the fact is that while there is, virtually, total free trade in manufactures, severe restrictions on international trade in foodstuffs remain. It would be a big gain for New Zealand if access was easier in the TPP twelve. I doubt there will be unlimited access any more than we have unlimited access to the Chinese market. But a TPP agreement offers the opportunity of substantial improvements. (As an aside, whatever the TPP outcome, it will do little for the current state of dairy prices. The impact will be slow.)

The danger is that, say, Japan will give access to US products but not to ours. That might not be a total disaster because US dairy exports would be diverted from some of our current markets. It would also be better for an orderly liberalisation of world agricultural trade if a number of markets opened up together. (Hence the importance of the WTO and the Doha round.)  Opening up one could have a lot of farmers charging into it. Better to have improved access to the Canadian, Japanese and Mexican markets together (and the American one, for despite its dairy export ambitions it is still very restrictive to dairy imports).

Instead of offering a concession to US and Japanese imports in exchange for our market access we could offer to pay their governments if they let our products in. That is not the way gentlemen do trade deals. Instead their pharmaceutical industries have said pay it to them by extending the period of their patents.

It works roughly like this. Each year some of the pharmaceuticals come out of patent and Pharmac gets cheaper generic drugs instead. It uses the savings to purchase new drugs. This will not happen to the same extent if the patent period is extended.

The government has said it will increase the Pharmac budget for the additional costs it faces so that it can continue to provide the new drugs. Where the funds would come from is not stated. I would be very opposed to the funding coming at the expense of other components of the public healthcare budget, which would mean the sick suffering in order to give a better deal to our farmers. The government should promise to lift its healthcare budget above current plans to pay for any increase in the drug costs as a result of the TPP.

A couple of asides. First, this arrangement does not compromise Pharmac; it would just be more expensive to run. Second, there is not much agreement, even among American economists, that long patents are a good idea. Allow me to duck the argument, by saying that if the US government has decided they are, we might go along with it if we get enough gains for market access for our foodstuffs. (While the talk is all about dairy, I assume that there could be some loosening of restrictions for meat too.)

The Prime Minister, John Key, has said for some time that Pharmac will not be compromised (all he has said is that it will be more expensive to run). I am intrigued how many have ignored his assurance. The indications are that people are not listening to him and we are not weighing his words carefully. Key trades on a ‘trust me’ brand. Some sections of the public say they do not trust him. It is not just the TPP deal; the Saudi farm deal is yet another example of his undermining Brand Key (so was the convention centre). Perhaps it is only among those who value proper procedure. Unsurprisingly, doubts are common in inner Wellington but I have no idea how widespread they are in the country.

Why should he be ‘lying’ – a sentiment often mentioned to me– when he says that the TPP is very close to a deal on dairy access? He could soon be found out; there are Fonterra officials who are just as informed but could leak the opposite if it was true. (Mind you I have not much idea how close is ‘close’.)

The government is handling its relations with the public appallingly. My guess that when any deal is announced there will be a sizeable minority who will reject whatever is proposed, no matter how favourable it is, because they simply dont trust the government.

But neither does the government trust the public. In answer to a question in parliament the acting Minister of Trade, Todd McClay, stated ‘What I would say to that member [Russel Norman] is that people who want us to make public these documents actually do not want to see the text; they just want to derail the agreement.’

I accept that much of the negotiation material between diverse parties has to be held back – a point McClay made earlier in his answer. But I was insulted by the above response. I’d like to see more but, as this column shows, I dont want to derail the deal. I would like to know what is going on so we can have a better informed discussion to judge the deal on its merits.

Outsourcing

This entry was posted in Governance, Pundit on by .

Allow me to share a puzzle. Public sector outsourcing (a.k.a. ‘contracting out’) has been increasing in recent decades. It is not the same as ‘privatisation’ because the government retains the role as a funder but it outsources the task to a private provider – which may be a corporation or non-government organisation.

 A recent prominent example has been the outsourcing of Mt Eden prison to SERCO. But it is happening elsewhere including charter schools and NGOs operating in the health and social services sector.

 The proposed disposal of some of the stock of state housing is not outsourcing – it is really old-fashioned privatisation, although there is a funding dimension via housing allowances. Neither, strictly, are public private partnerships which tend to be (not always successful) funding operations, although there may some consequent outsourcing (as in a BOOT – build, own, operate, transfer – operation). I acknowledge that private businesses outsource too but not their core business. Yet the public sector on occasions seems to.

 (Social bonds are a form of outsourcing in which are payments by results. However they are so weird that they require a separate column; an issue is whether the government can specify the ‘results’ sufficiently precisely to get what it wants, and if it does whether anyone would be foolish enough to invest in the scheme. We shall see.)

 Why is outsourcing happening? One answer is that it is all ideology. Certainly, governments of the right are more prone to outsourcing than governments of the left. It is difficult to deal with ideological taste – you like coffee, I like tea. If ideology is all there is,  we are going to get a yo-yoing back and forth as the political pendulum swings.

 Of course each side argues there are gains from their options. Typically there are, but they are offset by downsides which advocates are less likely to mention. The tradeoff is often not carefully evaluated.

 Outsourcing sometimes appears to be used to weaken a public sector union. (Legislation and privatisation have also weakened unions over the last thirty years, so it is a part of a trend.) Probably unions improve the conditions of their members, in the case of public sector adding to the cost to the taxpayer. But usually they add to the professional quality of the service that the taxpayer gets. (Sometimes they forget the latter. I was struck a few years back by press releases put out by the PSA that whined – yes, that is the correct word – about government measures reducing their members’ working conditions; and so they were. But there was nary a word of how the public service was suffering.)

 As a result, there is often a deterioration in the quality of the service provided. Sometimes it may be deliberate, but often it seems unintentional. In principle the contract between the government and the provider will specify the quality of service but, in practice, ways can be found around the contractual specification. (My favourite example – although not involving outsourcing – was the case of the British target for accident and emergency departments to process victims from the time of arrival. When overburdened, some departments left the patients in ambulances outside, thereby delaying the time they ‘arrived’ in order to shorten the time they were processed.)

 The bureaucrats monitoring the contracts keep adding extra rules. For instance some years ago there were small Private Training Establishments in receipt of government funding which paid their principals (who were the owners) salaries in excess of those of the vice-chancellors. So the Tertiary Education Commission limited their top salaries. There appears to be an ongoing cat and mouse game as the public sector sets rules and the private sector finds its way around them.

 The rules and form filling (does anyone look at them?) are not only onerous but presumably generate quite a bureaucratic monitoring cost. An explicit one was when the head of the Department of Corrections had to turn up at the Mt Eden prison himself after allegations of slackness there. One would like to believe he had more valuable things to do than sorting out a failed outsourcing.

 One of the consequences of these rules is to reduce the effect of professionalism, which while not a perfect regulatory system served us well in the past. The replacement system of accountability via contractualism probably reduces professionalism’s effectiveness. Weakened it may be, but very often it generates the whistle blowing identifying poor quality services; even with lay whistle-blowers there is often a professional lurking behind (fearful that if he or she is too prominent they will lose the career to which they are dedicated).

 The notion of outsourcing to charter schools seems to have been imported from America. There is some evidence that the US ones get superior educational outcomes although this is contested. An international survey found that our 15-year-olds are a year ahead of American 15-year-olds on some measurable educational attainments. Suppose that American charter schools added a year to their student attainments. Hooray, but they would only be catching up to the average New Zealand school.

Apologies for this being a list of loose thoughts – more a blog than a column. I have not been able to find much rigorous thinking about outsourcing – is there a government manual which describes when it should be used and when it should not? Contributions welcome but, please, not ideological rants; I have read too many of those already.

What Happened to Peak Oil?

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

Fracking has changed the energy outlook, with major geopolitical implications

About a decade ago, there was much concern about ‘peak oil’ – that the production of oil would peak and then fall off quickly leaving the world’s transport system stranded. The idea is really an extension of the two hundred year old insight of Thomas Malthus that the demand from an increasing population would exhaust food production with resulting starvation because land was limited. America had gone through a peak-oil experience with its production rapidly falling off about this time.
Economists were more cautious. After all, if as revered a member of the profession as Malthus got it wrong, who were we to be sure? In fact Malthus did not allow for the opening up of vast productive farmlands in North America and the Southern Hemisphere, together with the rising productivity of farming. Most economists probably have an assessment similar to mine; the Malthus logic was impeccable but various things have deferred the collapse; we cannot predict when it will happen.
The assumption that since peak oil happened in America it would happen everywhere else combined American isolationist chauvinism with colonial cringe among some non-Americans. The economic model accepted that at some time oil production would peak but there would not be a sudden collapse in production because rising prices would encourage reworking of old wells and drilling in deeper and more expensive ocean sites. Moreover, there were alternative sources of transport energy which, while costly, would be stimulated by higher oil prices; in any case, the costs of these new energy sources were falling.
I remember going through the list of possibilities, trying to assess what was available and their likely cost. I concluded that total energy was not a physical problem although it might be expensive. Transport fuels might be more problematic although there were options such as electric- and gas- propelled vehicles.. One thing I concluded was that infrastructure mattered and that we should be planning our cities to conserve transport energy; I was particularly keen on putting in public transport corridors (especially in Auckland and Wellington) which might run at a loss but would lead to a reconfiguration of housing along them over thirty years or so.
I did not predict the fracking of the shale reserves – I do not recall anyone mentioning it (tar sands were in my calculations). I am going to talk only about its economic and geopolitical implications but mention environmental concerns in a couple of end notes.
Fracking can apparently easily produce oil at $US60-70 a barrel, a higher price than in the past, but not an intolerable one. Moreover, it can produce – for practical purposes in the medium term – unlimited supplies at this price, in effect setting a medium-run ceiling for the oil price. There are various caveats such as that it takes a little time to get a production unit underway, so sometimes the oil price will temporarily go above the $60-70 a barrel.
One effect will be to inhibit alternative energy sources, although they will still steadily phase in as their costs come down to the medium-run cost of fracking. Plans for conventional drilling are being put off too. But yes, there is not an unlimited supply of oil from fracking, so one day it will phase out, although not soon.
The geopolitical implications are intriguing. For a short period while the world was learning to frack, the oil price rose up to around $US110 a barrel. Some countries’ budgets were geared to this price; now they are struggling.
One such country is Russia which is also suffering Western financial sanctions. Apparently hardship is rising there – perhaps more as Russia tries to roll over some large Western loans. There is the worry that Putin will try to divert the populace with military adventures, a long-run strategy which is more difficult if he is broke, but is already causing pain in the Ukraine.
Another country whose budget is badly compromised is Saudi Arabia, where they have used the largesse from oil to buy middle-class acceptance. They have substantial foreign reserves which are being run down, but budget tightening and related measures (some impact on immigrants) is also taking place.
There has also been a shift in OPEC, a cartel which brings together various oil producers. It seems to have accepted that it no longer has the muscle to have a major affect on the oil price and supply.
The geopolitical implications? America is importing less oil because of domestic supply from fracking. It is not so dependent on the Middle East and need not be so threatened by a rational Russia (which may require Putin to move on).
It is a very different energy world from the one that was troubling us a decade ago. No doubt there will be a different one in a decade’s time.

Endnotes on Environmental Implications
I am not convinced that the local environmental implications of fracking are fully worked out. My stance is that we should not frack in New Zealand until they are. But is that not to rule out fracking one day.
Many see fracking adding to climate warming. As I understand it, the biggest source is coal (not in New Zealand)which it is expected to be used less (although the reductions are not fast enough to prevent climate warming). It is not impossible that without fracking there would have been more greenhouse emissions because the world would have turned to coal-fired electricity for cars. Fracking or not, we need to keep up the pressure to reduce the emissions. I would prefer to do this by reining in demand rather than directly restricting some sources.

Are We Heading Into a Recession?

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

Whatever the answer, what are we going to do about it?

Steven Joyce, Minister of Economic Development and most other economic things, was hardly helpful when he dismissed talk of an economic recession on a recent TV3 The Nation on Saturday. Economists outside officialdom can guess what his officials were generally telling him. It probably goes something like this (although I may be presenting it a bit more informally).

Minister, growth rates in an economy fluctuate over a business cycle. We are pretty sure that New Zealand’s are slowing down at the moment. The immediate cause is the fall-off in dairy prices, which is impacting on dairy farmers and some rural parts of New Zealand very hard. There is an offset to these downward pressures from lower oil prices but their impact on the economy is much more diverse.

We are also worried, Minister, about the state of the world financial system. Greece is a bother but unless there is an international meltdown – heaven forbid – it should not upset New Zealand too much.

Harder to fathom is the state of the Chinese financial system. As Churchill might have said, it is a riddle wrapped in a mystery inside an enigma. But the little we do know is that it is under great stress. The Chinese financial authorities are doing their best to relieve the stress, but we cannot recall a similar occasion when actions by the authorities have been totally successful. Aside from the impact of the financial stress on the Chinese economy, which is now our largest market – some of our other large markets such as Australia are exposed to China too – there is a mysterious connection between the Chinese financial system and the Auckland housing market which may result in the latter coming off the boil.

Will the growth slow-down turn into a contraction – a fall in production? We cannot be sure. In any case there is a high degree of noise in the data of a small economy like New Zealand so the statistics can jump around from quarter to quarter for no apparent reason (journalists make up the reasons but we duck). We should also warn you, Minister, that there is almost an iron law of economic forecasting which says that, at this stage in the cycle, forecasters almost invariably underestimate the depth and length of a downswing.

Even so, we are reluctant to say there will be a recession. Part of the problem is the term has two distinct meanings. One is that the late downswing during the standard business cycle is called the ‘recessionary phase’ – the economy may be still expanding, but slower than average and layoffs and unemployment may be rising. The other meaning of recession is a longer period of negligible and even negative growth. Here the term ‘recession’ was adopted to distinguish the economic track from the depths of a depression.

So, Minister, we expect soon to be in the recession phase of the business cycle (if we are not in it already). We don’t yet know if we will be going into a contraction and one of these longer and more uncomfortable recessions.

Our advice, Minister? We think one should acknowledge that there is a growth slowdown. Of course that may mean some businesses will cut back on investment, which will intensify the growth slowdown. But better that than going ahead and finding themselves with excess capacity and additional debt to service. Delaying the slowdown may ultimately make it worse and damages your credibility. Short-term talking up (or down) the economy does not work in the long run. Ask Alan Greenspan.

I thought the Prime Minister handled the issue better a few days later (presumably he was listening to his officials). He acknowledged the slow down, but advised us not to panic, although I imagine a number of businesses and households have adjusted their plans in response. But he showed an awareness of the possibility of some sort of negative growth rate and hinted that if things deteriorate too far, the government would speed up its infrastructure spending. Better that than a short-term (and difficult to reverse) tax cut which temporarily boosts consumption, increasing government debt with no corresponding long run gains.

(Yes, the infrastructural spending will increase the fiscal deficit, in my view a perfectly sensible thing to do during a downturn. I just wish the government had been running more of a surplus during the boom. Earlier comments here.)

Spending programs involve implantation lags. Hopefully the instruction has gone out to officials to start looking for suitable investment programs. In the late 1970s, Muldoon wanted to start some infrastructural spending immediately. I recall officials scrambling around to find programs that could be got rapidly underway, knowing in their hearts that much of the spending would be ineffective.

I wonder what the officials are looking at. Hopefully an upgrading of poor quality housing and better connecting struggling regions to growth hubs (certainly not widening narrow road bridges to nowhere – a result, almost certainly – of officials scrambling around). More effort meeting realistic green house emission targets? I would not mind a bit more on conservation and heritage, more spending on health prevention and early detection and isn’t it bloody time we took the leaky school buildings seriously – it is over a decade since we learned about the problem.

No problems then about there being a list. What officials will be looking for is spending that can easily be turned on in a year or so, easily turned off when it is not required for stimulation and which adds to the capacity of the economy and which enhances the welfare of the nation.

Are We Heading Into a Recession?

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

Whatever the answer, what are we going to do about it?

Steven Joyce, Minister of Economic Development and most other economic things, was hardly helpful when he dismissed talk of an economic recession on a recent TV3 The Nation on Saturday. Economists outside officialdom can guess what his officials were generally telling him. It probably goes something like this (although I may be presenting it a bit more informally).

Minister, growth rates in an economy fluctuate over a business cycle. We are pretty sure that New Zealand’s are slowing down at the moment. The immediate cause is the fall-off in dairy prices, which is impacting on dairy farmers and some rural parts of New Zealand very hard. There is an offset to these downward pressures from lower oil prices but their impact on the economy is much more diverse.

We are also worried, Minister, about the state of the world financial system. Greece is a bother but unless there is an international meltdown – heaven forbid – it should not upset New Zealand too much.

Harder to fathom is the state of the Chinese financial system. As Churchill might have said, it is a riddle wrapped in a mystery inside an enigma. But the little we do know is that it is under great stress. The Chinese financial authorities are doing their best to relieve the stress, but we cannot recall a similar occasion when actions by the authorities have been totally successful. Aside from the impact of the financial stress on the Chinese economy, which is now our largest market – some of our other large markets such as Australia are exposed to China too – there is a mysterious connection between the Chinese financial system and the Auckland housing market which may result in the latter coming off the boil.

Will the growth slow-down turn into a contraction – a fall in production? We cannot be sure. In any case there is a high degree of noise in the data of a small economy like New Zealand so the statistics can jump around from quarter to quarter for no apparent reason (journalists make up the reasons but we duck). We should also warn you, Minister, that there is almost an iron law of economic forecasting which says that, at this stage in the cycle, forecasters almost invariably underestimate the depth and length of a downswing.

Even so, we are reluctant to say there will be a recession. Part of the problem is the term has two distinct meanings. One is that the late downswing during the standard business cycle is called the ‘recessionary phase’ – the economy may be still expanding, but slower than average and layoffs and unemployment may be rising. The other meaning of recession is a longer period of negligible and even negative growth. Here the term ‘recession’ was adopted to distinguish the economic track from the depths of a depression.

So, Minister, we expect soon to be in the recession phase of the business cycle (if we are not in it already). We don’t yet know if we will be going into a contraction and one of these longer and more uncomfortable recessions.

Our advice, Minister? We think one should acknowledge that there is a growth slowdown. Of course that may mean some businesses will cut back on investment, which will intensify the growth slowdown. But better that than going ahead and finding themselves with excess capacity and additional debt to service. Delaying the slowdown may ultimately make it worse and damages your credibility. Short-term talking up (or down) the economy does not work in the long run. Ask Alan Greenspan.

I thought the Prime Minister handled the issue better a few days later (presumably he was listening to his officials). He acknowledged the slow down, but advised us not to panic, although I imagine a number of businesses and households have adjusted their plans in response. But he showed an awareness of the possibility of some sort of negative growth rate and hinted that if things deteriorate too far, the government would speed up its infrastructure spending. Better that than a short-term (and difficult to reverse) tax cut which temporarily boosts consumption, increasing government debt with no corresponding long run gains.

(Yes, the infrastructural spending will increase the fiscal deficit, in my view a perfectly sensible thing to do during a downturn. I just wish the government had been running more of a surplus during the boom. Earlier comments here.)

Spending programs involve implantation lags. Hopefully the instruction has gone out to officials to start looking for suitable investment programs. In the late 1970s, Muldoon wanted to start some infrastructural spending immediately. I recall officials scrambling around to find programs that could be got rapidly underway, knowing in their hearts that much of the spending would be ineffective.

I wonder what the officials are looking at. Hopefully an upgrading of poor quality housing and better connecting struggling regions to growth hubs (certainly not widening narrow road bridges to nowhere – a result, almost certainly – of officials scrambling around). More effort meeting realistic green house emission targets? I would not mind a bit more on conservation and heritage, more spending on health prevention and early detection and isn’t it bloody time we took the leaky school buildings seriously – it is over a decade since we learned about the problem.

No problems then about there being a list. What officials will be looking for is spending that can easily be turned on in a year or so, easily turned off when it is not required for stimulation and which adds to the capacity of the economy and which enhances the welfare of the nation.

Let’s Not Turn Greek Debt into a Democratic Deficit.

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

We need to distinguish the sovereign state from the people it governs, and the other political institutions between.

Things are moving so fast in the financial negotiations between Greece and the Troika (European Central Bank, European Union, International Monetary Fund) that there is little point in my trying to comment on them. But there is a structural issue which most commentaries overlook. It applies not only to this negotiation but all international ones including those involving trade and foreign treaties; it certainly applies for New Zealand. Key to understanding is that the term Greece refers to (at least) four distinct groups of players

Right at the top is an institution which we call the sovereign state (New Zealand sometimes calls it ‘The Crown’.) That is an entity which borrows offshore and makes trade agreements. When commentators talk about the Greek debt and negotiations between Greece and the Troika they are talking about the Greek sovereign state. You can think of it as a fiction, but as far as the Troika (and any other counter-party) is concerned, it is the sovereign state with which they have contracts (in this case about servicing and repaying debt).

The sovereign state is advised by the government . In the Greek case the government is currently led by prime minister Alexis Tsipras whose party is Syriza. The reason we make the distinction is that while the sovereign state is in principle eternal (invasions and the like aside), the government which advises it changes. Tsipras became prime minister only six months ago.

What determines the government (at least in democracies) is parliament, which selects the prime minster and the government. Typically he or she leads a party which, with allies, has a majority of MPs. In fact Syriza has only 149 of the 300 in the Greek parliament so it has a coalition agreement with ANEL which has 13 seats. Any coalition agreement is under pressure (ask John Key or any prime minister before him going back to Jim Bolger) but additionally any political party contains factions and dissidents who may leave it (true in New Zealand going back to – at least – Muldoon).

Parliament is elected by the people. As it happens, Syriza got only 36 percent of the vote last January. Even with ANEL’s 5 percent the Greek government did not get the majority of the vote in the election. (It was a snap election because the previous parliament could not agree.)

The Troika-Greek (sovereign state) negotiations will impact on people. If things go badly for them Syriza could lose its parliamentary majority or the country could be precipitated into another snap election. The sovereign state and its contractual obligations would continue but there could yet be another government.

Not long ago the Greek economy was overspending relative to its production, which gave an air of false prosperity. The excess spending was funded by the Greek sovereign state borrowing from (mainly) European banks (whose debt was largely taken over by the IMF and ECB in the 2010 bailout). It had been running a huge government deficit (up to 13.9 percent of GDP) which had been going to the Greek people in high government spending, generous welfare benefits and a lack of assiduity in enforcing the tax regime.

When the additional borrowing was turned off, GDP (i.e production) contracted by about a quaret, spending contracted even more and unemployment rose to a quarter of the labour force. Understandably the Greek people are pretty unsettled. Syriza was elected upon a program of no more austerity.

On this criterion the Greek economy is doing pretty well. The ‘primary government surplus’, which is its revenue less its spending would be around 5 percent of GDP if the economy was not so depressed, higher than any country in the eurozone. Despite the economy being depressed the surplus is still a healthy 3 or so percent of GDP. You could argue the Greek government is paying its way.

Except that the primary deficit does not include debt servicing, which is expensive because Greek debt is high (around 180 percent of GDP) and, because there is a possibility of default, the interest rates the sovereign state is paying are high. Its budget deficit including interest payments is large as a result. It is a terrible situation because the Greeks have taken aboard austerity and yet their debt is rising.

The Troika and the private lenders are saying that, nevertheless the Greek sovereign state entered into contractual commitments which it should meet and the Greek people (or most of them) benefited from these commitments in the past so they should take the downside. But the Greek people can say nobody told them how much was being borrowed (true), many can say they did not benefit from the over-borrowing as much as they are suffering from the austerity (often true).

I could go on in more detail; instead I’ll finish with three simple points.

The underlying purpose of the Greek referendum was to strengthen Syriza’s mandate. With at most 41 percent of the votes (on a 64 percent turnout), it cannot really claim to ‘represent’ the people, even if it is advising the sovereign state. Many commentators, impatient with democracy, have failed to draw attention to the insecurity of the Greek government.

Second, in 1919 following its defeat in the Great War and the November 1918 German Revolution, Germany established the ‘Weimar Republic’ with a social democratic government. The winning Allies (led by bankers who were not notable democrats) imposed onerous reparations on Germany which was oppressive on the German economy and people. The outcome was Hitler. It took another world war before social democracy was restored  – to all our benefit. (In the course of immediate postwar adjustment the Allies wrote off a chunk of German debt.)

In the end I am not nearly as concerned by the damage being done to the European Union or to the eurozone, great as that could be, My priority is for Greek democracy. It is much more fragile than ours; Greece was ruled by a military junta from 1967 to 1974. I am not saying that Greece does not need more fiscal change, but I favour a phasing of it in as the economy grows – not as it contracts. And one way or another, the Troika need to reduce the outstanding debt burden. (A grant by Germany in compensation for its Second World War invasion would help.)

Third, the complex, and in some ways tenuous, connection between the sovereign state and the people applies elsewhere, including New Zealand. The ongoing anxiety of our policy community over the national debt (some of us would also add its exposure to private debt) may seem odd to most New Zealanders, although more than once we have had difficulties. This is not to argue for austerity or even a balancing of the books. But we need to be constantly aware of the dangers of short-term borrowing with its danger to long-run national welfare.

The constitutional arrangements just described apply not only to international borrowing but to trade agreements and a host of other international deals with which the New Zealand sovereign state is involved. Can we practically improve the disconnect? A better understanding of the issues would be a first step.