What Are You Thinking, Stupid?

This entry was posted in History of Ideas, Methodology, Philosophy, Pundit on 19th December 2016 by Brian Easton.

A book about two psychologists who have altered the way we think about the way we think.

For many people, Michael Lewis is best known for his 2010 book The Big Short and the follow-up film, which describes the carryings-on of the financial sector in the American housing market which underlay the Global Financial Crisis. In fact he has written over a dozen books beginning with Liar’s Poker in 1989 which, by describing the culture in the New York finance industry, presaged the crash a decade later.

Many Americans know him best for Moneyball (2003), in which he describes how one of the poorest professional baseball teams was able to achieve high performance compared to richer teams. Oakland Athletics, which spent $US40m on salaries in 2002, outplayed the New York Yankees with their $US120m spend. Essentially Oakland selected their team by systematically purchasing undervalued players rather than by relying on the judgements of its talent scouts and managers.

There is an economic story here. It is normal to assume that businesses – like the All Blacks, big league baseball is a business – operate (near) efficiently, getting the maximum return on outlays. But Moneyball showed that the baseball industry did not. Perhaps this is a widespread problem throughout business; in which case quelle horreur! A fundamental assumption of how the capitalist economy is ruptured.

But Lewis did not appreciate then that lurking behind this failure was an even more fundamental question: why people were making poor quality decisions. Traditionally economics assumes that people act rationally. Do they?

In his latest book The Undoing Project Lewis explores this by tracing the lives of a couple of Israeli psychologists, Amos Tversky and Daniel Kahneman (who wrote Thinking, Fast and Slow), Kahneman was awarded a 2002 Nobel Memorial Prize in Economic Sciences. Tversky had died from cancer six years before and was not eligible – like Rosalind Franklin of the double helix. Had he survived he would certainly have joined his co-worker – as she would have.

In fact there are similarities between the Watson and Crick team and Kahneman and Tversky. Two very different personalities with differing backgrounds worked together brilliantly. I am not sure which team made the more profound discoveries.

(Lewis portrays the psychologists’ relationship as if it was a marriage – with no sexual overtones. It went through difficulties as marriages do, ending in a ‘divorce’. Three days later, Tversky rang Kahneman to say he had been told he had terminal cancer. Kahneman gave the eulogy at the funeral six months later – all very romantic.)

The book describes the research which led them to the conclusion that people do not always choose optimally and that the heuristics they instead use are not always near-optimal. They can even give contradictory answers. For instance, told that a particular surgical operation has a 90 percent of success one is likely to take it up; told that it has a 10 percent rate of failure the same person is likely to turn the opportunity down. The two statements are logically equivalent but the way the logic is presented affects the decision.

Because it is scientific research the experiments may seem artificial, but that is because they are designed to avoid ambiguity. Astonishingly, even experts can give poor answers. In an early study some surveyed statisticians gave wrong answers to elementary probability problems; how you, dear reader, can expect to get them right is uncertain. But by the end of the book you should be convinced that any rationality assumption for homo sapiens has to be used with the greatest caution.

This does not mean that it can never be used. For simple choices – such as oranges or apples – the assumption may be useful. For complex ones which involve future uncertainty – such as consuming and saving over time – the assumption of pure rationality is almost certainly misleading.

Lewis claims that the findings of Kahneman and Tversky and the other developers of behavioural economics are now well incorporated into economics. I am not sure this is true – at least not in New Zealand. For instance, there is no ‘nudge’ unit here which tries to apply the lessons to the practical interactions between government and the public. There are New Zealand university economists working in the area, but I do not get the impression that the majority of economics graduates are well trained in behavioural economics.

Some economists reject the approach. The older ones may not be up to speed. Keynes wrote that ‘in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.’

Other economists have too much of their research invested in the rationality assumption to change their mind when the evidence says they should.

Some are ideologically fearful that abandoning the assumption of rationality justifies paternalistic interventions by the state. It need not, since those operating on behalf of the state are as prone to irrationality as those they are operating on.

We all suffer from the irrationality. Both Kahneman and Tversky admit that they make errors like everyone else. Tversky remarked that ‘[m]y colleagues study artificial intelligence; me, I study natural stupidity.’

Nor should we confine the impact of the findings only to economics. Kahneman has said that ‘[n]o one ever made a decision because of a number. They need a story.’ He is reporting on tightly designed experiments, but I think we are allowed to adapt his maxim to ‘no one ever made a decision because of a fact. They need a story.’

As the research shows the story need not be particularly attached to the fact(s) nor need it be coherent or consistent. Sounds like a lot of the support for Trump does it not?(To be balanced, those in other parts of the political spectrum can be equally irrational – the way some once supported the Soviet Union for example.)

If you read Thinking, Fast and Slow you would want to read The Undoing Project to enrich your understanding of the themes of the first book (plus there are some jolly good biographical stories – including their involvement in the Israeli military). And if you have yet to read Kahneman’s book you should, if you want to understand one of the major sources of unrest in public policy thinking – and why you and others (and I) sometimes make very stupid mistakes. Then on to Michael Lewis’s book.

Letter to Bill

This entry was posted in Political Economy & History, Pundit on 12th December 2016 by Brian Easton.

Your In-tray is piled high.

Dear Bill,

I recall when you first entered Parliament 26 years ago, it was widely thought you were prime-ministerial material. You’ve made it. Congratulations.

National was going through the extremist phase of Ruthanasia and Jennicide at the time. You were marked as someone who came from the great National progressive center-right tradition of Harry Atkinson, Bill Massey, Gordon Coates, Keith Holyoake and Jim Bolger.

Now that you have made it, you are going to be sitting at the premier’s desk with a stacked in-tray. Your predecessor had a lot of merits but dealing with looming problems was not one of them.

Take the issue of an inquiry into historical abuse of children in state care. The current government position is that an inquiry is not going to resolve anything. (I think; things do slip and slide around.) It is, of course absurd. We’d never have murder trials if we believed that.

It has been true for bigger things too. Your predecessor said in 2007 there was a housing crisis, failed to do anything for seven years, announced there was no crisis, and then instituted a series of panic measures.

Incidentally, Bill, I have no idea why you are keen to offload state houses onto the community sector. Not that it has been successful, although you have spent an awful lot of money pursuing the failure. I’d have thought that if you wanted the central government to get out of housing supply the obvious alternative was local government. Many local authorities would do a far better job at managing the housing stock for, in truth, central government has been a bit of a failure. Locally each would be under pressure to perform, there would be competition between local authorities, while central government would act as a regulator.

The current policy seems to have come from David Cameron’s English initiatives. (Who he? A failed British prime minister.) But circumstances are different here (as you have found).

We have this bad habit of copying overseas fashions, providing the countries they come from speak a form of English, without allowing for fundamental local differences.

True in the education sector where we try to imitate the Americans, oblivious to the fact that theirs is a failing system while ours is not. Even if their initiatives work, they would only get their students up to the standard we think of as normal.

There is considerable doubt that they do work; the evidence is all over the place but it is not, in sum, compelling. Come to think of it, Bill, if you really wanted to transform New Zealand public policy, insist on evidence-based policy. That would eliminate a lot of nutty fashionable policies that do not work. Save a lot of money too.

Pursuing fashionable policies developed in different circumstances also applies to our penal policies – taking them from America. (Did you know the inmates of New York prisons are black but the warders are white?) Again the evidence points to private supply not working, other than by lowering standards. You’ve said our approach is a ‘fiscal and moral failure’. True, but imitating even greater failures is not going to solve it.

Your baptism of parliamentary fire was the Americanised health redisorganisation. When you became Minister of Health in 1997 you said that many of the changes had been reversed so that the health system was developing the way it would have before the crazies took over. (Well, not entirely.)

The country is facing difficulties in the public health system because the National Government has been restraining spending in order to pay for tax cuts. Some estimates suggest you may be under-funding by $1.7 billion a year. Some people are being forced to go into the private sector, some are living in pain and distress while critical services are being inadequately supplied. You will remember from your time as minister in the late 1990s the accumulating backlog of health problems caused by the under-funding of the early 1990s.

The aging sector seems to be under particular health pressures with lengthening waiting lists and inadequate residential care. How about incrementally raising the age of eligibility for New Zealand Superannuation (say by three months every year, as we did in the 1990s) and using the savings for better healthcare for the elderly in need? Do you realise that life expectation has increased by about five years, since the age of eligibility was established by the Accord in 1993? (Your predecessor was an ostrich with his head in the sand.)

I would not worry too much about the income inequality problem as it is usually portrayed, although certainly you do not want to exacerbate it with further tax cuts. The priority has to be increasing the incomes of families with children (which will reduce the inequality rather effectively).

I have been a bit puzzled by the ‘investment approach’ to social policy that you endorse. The current approach is about improving the ambulance services at the bottom of the cliff. Why not invest in families, which your political tradition puts great emphasis on? Far too many families need is a decent fence at the top; that is a good financial foundation which discourages household cost cutting with its consequences of poor health, poor educational attainment and, in many cases, subsequent interfacing with the criminal justice system.

Actually, Bill, you hiked family finances after you first became Minister of Finance in 1998 (I recall getting a rocket from your office for underestimating the impact). You gave them another boost this year. Not enough, but your heart was in the right place. Centre-right, I think; hope it still is.

This list is getting long. There is much more to be listed, like climate change policies. I agree that there is little New Zealand can do to reduce global warming – although many would argue that we have a moral duty to take effective measures. But we also need to think about policies to mitigate the effect of the inevitably rising sea levels.

Nor should we forget that the economic boom of recent years is the result of heavy overseas borrowing, much of which has been for consumption via housing speculation rather than for investment. When it all turns to custard, Macavity wont be there. New Zealand is really going to have to save more.

I had better stop. I’ve made the point that the prime minister’s in-tray is piled high – so high you will not be able to see everyone in a delegation which comes into your room. It has become a ‘too-hard’ basket; your predecessor must be please to be escaping it.

There is a curious feature of many of the papers in the in-tray/too-hard basket. They are signed ‘Bill English; Minister of Finance’. Now it is up to ‘Bill English; Prime Minster’ to address them.

Best wishes, the country needs a bit of policy development rather than stasis,

Brian.

Angries and Mangries

This entry was posted in Political Economy & History, Pundit on 5th December 2016 by Brian Easton.

Could the alienated grumpies have a greater effect on New Zealand political life?

This was written before John Key announced his resignation. Other than perhaps the tense I think there is no need for revision.

Unfortunately most analysis on the American elections focuses on who voted but, as Bob Chapman pointed out, the Non-Vote Party plays an important role. This is yet another example of Gilling’s law of how you score shaping the game; in this case pollsters tend to score voters and pay little attention to those who do not vote.

In fact the American NVP gets more support than either the Democrat or Republican parties. It just does not elect presidents or Congress representatives.

The New Zealand NVP is (proportionally) smaller than the American one, gaining far fewer ‘votes’ in the 2014 election than National, but slightly more than Labour, although less than Labour and the Greens together.

Why is the voter turnout rate higher here than the US? It has been falling. It was over 90 percent immediately after the war and is now below 70 percent. Clearly the NVP is a growing force in the political landscape.

What I am curious about is the extent to which it covers what I called in an earlier column the ‘angries’, people who are alienated from the political system and angry about what it is doing for them, feeling politically impotent. Overseas they typically seem to be older, lower-income, poorer-educated and less well-informed workers. Usually they tend to support authoritarian solutions to social problems, dislike markets and prefer central decision-making which overrides them (and yet they are angry when the decision-making overrides their interests).

Another group of angry New Zealanders is those involved in the political process but angry about Key’s style and his government’s failure to address issues they think important: climate change, healthcare, inequality and poverty … it is a long list. The ones I meet are well-educated middle class who vote and participate in other political ways. Let’s differentiate them by calling them ‘mangries’.

There are angries in New Zealand. I first became aware of them in public life from talkback radio. (Paul Henry is a current public voice for them.) My impression is that many vote, often for minor parties. Those who are successors of Rob’s Mob in the 1970s are likely to support Winston Peters today. But many, I guess, belong to the NVP, although it has other large blocks of supporters such as beneficiaries, Maori and the young.

I do not want to make a comparison between John Key and Donald Trump. You don’t have to be very clever to find plausible similarities between any two politicians. However I want to consider how Key deals with the angries and their political kin, which explains, I think, some of his widespread popularity and why the mangries particularly do not like his style.

While Key has usually got good political instincts – in the short term anyway – he seems to depend greatly on opinion polls and focus groups. (Have you noticed how he will dramatically change a policy stance over a weekend, presumably when he has had a chance to consult the surveys?) They keep him in contact with middle New Zealand and the angries.T hat he has to form coalitions on policies – with Act, the Māori Party and United First — also keeps him in touch with particular groups in society.

This explains his incremental policies towards their demands, which makes him appear to be a centrist politician. Of course you can’t do that for everyone. Hence the way many mangries feel excluded and the grumbling coming from the business sector.

Two other factors support Key in keeping the angries less prominent. First, New Zealand is smaller with a better electoral system so one can feel there is more opportunity to influence outcomes.

Second, while the income of angries – and most New Zealanders – stagnated for over a decade following Rogernomics and Ruthanasia, they have been experiencing mild increases in material affluence in recent years. Some of the overseas angries appear to be especially grumpy after a long period of income stagnation while the one percent in their countries has done very well.

Could the angries become a greater political force? The overseas experience suggests that it requires special circumstances combined with demagoguery for that to happen. Even so, the rising strength of the NVP is a worry.

If I had to make a bet the most likely immediate source of their irritation would be the failure to adequately fund the public health system. We could see a strange coalition of angries and mangries expressing that concern. But the opinion polls and focus groups would soon alert Key to finding some cash for health, perhaps even before the opposition parties have tried to lead a charge.

However, the angries and mangries do not have a lot in common. Angries dislike diversity, mangries tend to celebrate it; angries are social conservatives, mangries are more liberal.

For the economy it would appear that angries have a relatively short-term outlook, mangries a longer-term one – arguably they can afford to. As Key finds – and no doubt Trump will too – it is easier to govern in the short term, disregarding a multitude of long-term issues like an effective climate change policy, healthcare, housing, inequality and poverty, the water resource, the age of eligibility for New Zealand Superannuation and …. well that is just the beginning of the list.

Key’s government may be less admired by the voters in the long run than it is today. But as the Trumpites say – ‘we won’.

Footnote: In the earlier column on the angries I said the 2016 turnout in the US presidential was higher than in 2012. It appears to have been only marginally higher. However it is said to be significantly higher in states where Trump won and lower in Clinton states. I await a full analysis and will report if there is anything to learn from this.

What Is Technology?

This entry was posted in Growth & Innovation, Pundit on 28th November 2016 by Brian Easton.

A new book leads to ponderings on our technology strategy.

Technology is an ambiguous notion. Its most common use in economics arises in the following way.

The laws of thermodynamics mean that there exist production functions which relate inputs to outputs. The most familiar ones have a single output generated by inputs of labour and capital, although there can be other inputs such as land, energy, intermediate goods and imports.

When economists measured production functions they found that they shifted so that, over time, more output was produced by the same inputs. This shift was attributed to ‘technology’ but here it is but a term with no independent existence to explain the phenomenon – there are many similar instances in physics. When economists and others use ‘technology’ in an economic context they are usually referring to this vague notion; so vague that a couple of economists described the measure of technological progress as the ‘coefficient of ignorance’. (That leads to the thought that those who want to increase its rate are trying to increase the coefficient of ignorance; many of the advocates are well qualified to do so.)

I like to think of technology as plans of how to produce things. The plans are stored in a huge warehouse, only parts of which are accessible. Over time, and often using resources, we can hunt around and find new plans, some of which tell us how to produce more for the given inputs. We can implement the plans; economists call more output for the same inputs an increase in ‘productivity’.

(If I had room I would say more about the outputs, observing that there may seem to be new ones, although they are simply better ways of doing past things; when cars replaced horses; the fundamental outputs would be travel times, distances, comfort and convenience. Another output issue is changing consumer preferences.)

Some flesh to the bones of this story will be found in Alan Wylde’s Technological Innovation and Economic Growth in New Zealand: 1918 to ‘Think Big’. The warehouse of plans is so enormous that no book could cover the entire the topic. This book gives concise summaries of technical change in railways, the meat industry, grasslands, aerial fertiliser, dairying, wool, flaxmilling, hydroelectricity, geothermal power, the Cook Strait cable, the steel industry, and the hydrocarbon-based major products.

I shall not review the book but instead share the ponderings which it precipitated.

Most importantly, the vast majority of the technologies we use are generated overseas – 100 percent to the nearest percentage point. Sometimes we import the plans, or experts knowledgeable about them, but often they come embodied in a product – like the computer this is being written on.

However, there is very often a challenge to adapt the foreign technologies to local conditions. The first example in Wylde’s book is that because our terrain is very different from England’s, we had to adapt their railway technology to local conditions. Tasman found the Scandinavian pulp and paper plant they installed was not designed for radiata pine and spent a lot of time fine tuning it.

The list could go on, each item illustrating that while we often get the technologies from overseas we had to rummage around in the plans warehouse to tweak them.

The rummaging may be done by our engineers and scientists, but sometimes the key adapters are others. For instance, monolithic cladding can be a very effective means of shielding a house. Applied badly it can result in a leaky building. I would never trust the cladding unless the building workers were trained in its application.

We can be very sloppy, more like the Brits than the Germans, whose secondary schooling and technical training makes more effort to ensure their workers are properly skilled.

The sloppiness happens at all levels. A union organiser told me of management calling in their process workers and demanding to know why the downtime of a new expensive machine was far higher than the German manufacturer’s specification. The answer was that the workers had never been trained to use the machine.

The perspective I am offering is pretty obvious – Wylde’s book is rich with examples illustrating it. But it is not the way that public policy thinks. In particular we are pouring resources into an ‘innovation strategy’ which aims to generate technological plans which can earn royalties by being sold overseas. Undoubtedly this will sometimes happen, but Wylde’s book has very few such examples; when it happens the earnings are often the consulting fees our technologists earn.

I doubt total external sales will earn an acceptable return on the public outlays. Does the balance in our innovation strategy make sense? To what extent should we placing more effort on improving the importing, adaptation and implementation of world technologies?

This does not mean spending any less. Our chance of making a major breakthrough in cancer treatment, say, is very small. The effort, surely, should be to ensure that what is available internationally is applied quickly and effectively to those who suffer cancer. Probably a key element in this transfer process is high quality scientific teams who are involved in research near the world frontier so they understand what is going on and can pass it on. But let us not pretend their purpose is to make the country a fortune by an international breakthrough (we could be lucky).

At the aggregate level of the production function, technology may be mysterious. At the micro-level of the descriptions in Wylde’s book, it is far less so. Whether New Zealand can accelerate the world’s rate of technological change is doubtful. But thinking practically at the micro-level could lead to better economic performance and, I would hope, to our environmental and social performance too.

The Future Of International Trading.

This entry was posted in Globalisation & Trade, Pundit on 23rd November 2016 by Brian Easton.

Can Trump wreck the world trading system?

New Zealand is such a small country that it is very easy to be internationally bullied. Much of our diplomatic effort aims to minimise such bullying, but fear of it lurks behind concerns about what a Trump administration might do, not only to us but the rest of the world. Could the US, big enough to be hard to bully, disrupt the world trading system? The answer is, ‘of course’, but it is unlikely.

At the heart of the international trading order is a rules-based system embedded in the World Trade Organisation. Membership of the WTO requires conforming to a set of rules and agreements that regulate international trade.

For example, in 1999 the US slapped a tariff of at least 9 percent and up to 40 percent on our (and Australian) lamb exports despite an agreement that it was bound to (could not be higher than) only a few cents per kilo. The surcharge was entirely for domestic political purposes, and it may have cost New Zealand farmers up to $45m over three years. Our redress against the bullying was to follow WTO procedures, which eventually found that the agreed bindings had not been kept. The US, accepting it was bound by international trading rules, reduced the tariffs to the bound levels.

These sorts of disputes happen all the time; on occasions the US has been the plaintiff. (Another example was when we took Australia to task over excluding our apple exports; again we won.) It seems likely that there would have been many more disputes which have been avoided because the offending country expected to lose.

So could a Trump administration refuse to observe the various bindings previous administrations have committed the US to? The short answer is ‘yes’, but it would then face the dispute resolution procedures of the WTO. Not just from New Zealand, for a host of other countries would also be litigating.

Could a Trump administration withdraw from the WTO? To do so would mean US exporters losing their preferential access to others’ markets. They would be very angry and the Trump administration would come under severe political pressures from business. Knowing this, it is unlikely to withdraw from the WTO.

I am less sure about individual trade agreements. Some the US has negotiated are for political purposes as well (as with Israel and some Latin American states) but Trump has threatened to abrogate the North American Free Trade Agreement with Canada and Mexico. It has been there for a while and many American businesses, representing powerful lobbies, would be deeply damaged. I suppose he could demand a renegotiation, but the Canadians and Mexicans are likely to want concessions in return.

Trump is not expected to go ahead with the Trans Pacific Partnership (TPP); he probably could not get it through Congress if he was keen – he is not. The TTP may proceed among the other 11 participants following renegotiation. But TPP11 would be less ‘ambitious’ and we would not get the improved access to the US market we had hoped for.

In a wider context, we seem to have reached a new phase in globalisation for exports are no longer growing faster than domestic production. This probably arises because the falling costs of distance which drove that growth seem to be exhausted (services aside).

In any case, most of the traditional opportunities in international trade deals have largely been implemented. The TPP was intended to be ‘ambitious’, a term intended to indicate a new stage of coverage. Without ambitions, all that is left is tidying up.

New Zealand is currently negotiating traditional deals with 14 Asian nations plus Australia (RCEP), the EU (probably delayed because of Brexit), the Gulf States, India (probably done as a part of RCEP) and Russia (strictly the Eurasian Economic Community), Each could be a tidy little earner, but none is ‘ambitious’.

Actually, New Zealand has a secret ambition. Tariffs on manufactures under the WTO are near zero. (Work still needs to be done on trade facilitation, eliminating administrative barriers, and on services.) But there remains severe restrictions on access for many agricultural goods, especially meat and dairy.

There is a conflict in WTO principles between free trade on industrial goods and services and protection of domestic agricultural sectors which many countries practise. Others demand freedom of access for their exports, just as for manufactures; among them New Zealand is a leader. Our strategy has been to use international forums to make explicit demands for comprehensive free trade in agricultural products while using particular trade deals, including the TPP, to nibble away at the restrictions as much as we can.

The US has been ambivalent, wanting international market access for its farm exporters but also wanting to protect its domestic-oriented farmers. Sometimes it has been helpful to New Zealand’s general case but only grudging about American market access. It may well be more battened down under a Trump administration.

We cannot expect US leadership for more ambitious deals under Trump, nor as much attention as we would like to the fight against agricultural protectionism. Meanwhile New Zealand will have to continue to put considerable efforts into maintaining a rules-based WTO. But we need not expect a disaster. I’m afraid I cannot say the same on other dimensions of international affairs.

Restoring Fiscal Responsibility

This entry was posted in Macroeconomics & Money, Pundit on 16th November 2016 by Brian Easton.

The times are a’changing, as recent macroeconomic fashions are being abandoned and old verities are being restated.

Alan Blinder, an American economist, described as ‘one of the great economic minds of his generation,’ was an economic adviser to President Clinton and was a Vice Chair of the American Federal Reserve (central bank). He is known to many as the co-author of an extremely successful textbook.

He recent monograph Fiscal Policy Reconsidered is an important statement by a saltwater economist contrasting with the failure of the freshwater Austerians (those who advocate fiscal austerity). It argues that it is possible to have an effective fiscal policy (that varying government taxation spending and borrowing can be beneficial for the economy) and that monetary policy (what central banks do) may not be effective.

His position is summarised in a rejection of two standard neoliberal propositions.

– that sensible fiscal policy is impossible because Congress is too slow and too political;

– that fiscal policy is superfluous because monetary policy can always do the job.

I explain what this means by the New Zealand experience. Even so, some readers may find the column all a bit technical. Sorry. If anyone can simplify without losing the rational economics, please have a go.

Once Were Macroeconomics

In the 1960s and 1970s both propositions that Blinder rejects would have been thought odd. It was quite usual to change fiscal settings in order to change the direction of the economy – to protect the balance of payments, to change employment levels and to restrain inflation.

The prime minister commanded parliament so he did not have the difficulties that the US president has, but there were implementation lags; it took about six months to set up a change in income tax. Formulating the right policy response is not easy either.

One of the tricks in the fiscal system was that the tax system was progressive so that a rise in incomes from economic growth or inflation meant that tax revenues rose proportionally faster than the economy – a phenomenon called ‘fiscal drag’. That meant the main tax changes usually involved cutting rates, which are easier to get through parliament. The flattening of our income tax scale has reduced this progression with the consequence of less fiscal drag and a loss of the ‘automatic stabilisers’ which we thought important at the time, as does Blinder does today.

Spending changes were harder. I recall once in the late 1970s when Treasury officials had been instructed to increase infrastructural spending and were scrambling around to find projects which could be implemented immediately. Was that the time when the government gave a one-off increase in the family benefit because it could be done very quickly? An additional worry is how to wind spending down when there was too much expenditure pressure.

The difference between spending and current revenue has to be borrowed. Looking back all those years, I think we were a bit sloppy in our thinking. Debt is a burden on future generations. Today we might say that current spending and revenue should be equal over the business cycle but that the government may borrow for long term for investment. Nowadays, infrastructural investment is the big thing, but once a lot of government borrowing was for investment by state owned enterprises. In either case, assuming the investment is effective – it was not always – future generations had its benefit to offset the burden of debt.

The role of monetary policy in this macroeconomic framework was to support fiscal policy, not an alternative to it. Generally monetary policy was thought to take a long time to be effective; I recall about ten years. Moreover it worked through interest rates impacting on investment and consumer borrowing, not through the quantity of money, which Monetarists like Friedman thought. (One trouble was there were so many definitions of money and if you targeted one all the others moved differently.)

I’ve set down as briefly, and as non-technically, as I dare the standard macroeconomic framework of the times. There is no question that Muldoon misused it. The conventional macroeconomists of the day criticised him; so did the Monetarists.

Then Came Monetarism

In the mid-1980s, the Rogernomes abandoned the standard macroeconomics framework and imposed a monetarist one based on principles not unlike the two which Blinder criticised. It substantially reduced the significance of fiscal policy and put the weight of macroeconomic control onto monetary policy.

I recall that at the time it was suddenly assumed that monetary policy worked quickly – in months rather than years. I do not recall any empirical evidence to support that conclusion. We seem to have simply adopted the American monetarist framework including the idea that parliament could not manage fiscal policy. It was colonial cringe, taking over the imperial ideology with little thought of its local relevance.

One of the strange results was that the Treasury in charge of fiscal policy and the Reserve Bank in charge of monetary policy did not talk to one another, a matter not addressed until the late 1990s.

That said, a close reading of RBNZ statements indicates that their economists thought fiscal policy important – certainly more important than the public rhetoric. I think what was happening was that there were still conventional macroeconomists in the institutions who, while not dominant, continued to use the standard framework.

The Monetarists claim the great success of their framework was the squeezing out of inflation from double digits (above 10 percent a year) to very low levels. But the story is more complicated.

First, much of the inflation of the mid-1980s was from government policies (such as introducing GST, raising State Owned Enterprise prices and hiking the exchange rate). Once the new initiatives stopped you would expect inflation to fall.

Second, world inflation was falling so there were not the same external pressures on domestic inflation.

Third, Rogernomics and (later) Ruthanasia (deliberately) broke the linkages and protective mechanisms which enabled a price rise in one part of the economy was transmitted through the rest.

Fourth, inflationary expectations were reduced. This reduction could be attributed to the new monetary policy but equally Muldoon could say that his price freeze reduced expectations too. It was not so much the policy itself but that the public believed the policy.

Thence was the GFC

If you look at the economists who predicted something like the GFC would happen – they got neither the exact timing nor the magnitude correct, of course – they were using the conventional rather than the monetarist framework. The conventional framework has proved more helpful since the GFC. Indeed Monetarists have repeatedly said policies which involve enormous increases in the stock of money will generate inflation. They have not in the short run (although they may in the long run, as the conventional framework allows).

However, stimulation from monetary policy by itself has not led to a strong economic recovery. Again holders of the conventional framework are not surprised and there have been increasing calls for a fiscal stimulus, typically by government borrowing to spend on (infrastructural) investment.

This is the context of Blinder’s paper. Let me finish by saying that there is nothing in the conventional framework which says that fiscal and monetary initiatives should be ill-disciplined. They have to be applied with care and thoughtfulness and with a pragmatism rather than ideological fervour.

Angry People

This entry was posted in Growth & Innovation, Political Economy & History, Pundit on 11th November 2016 by Brian Easton.

The alienated Angries who supported Brexit and Trump are not going to go away.

If any question why we died,

Tell them, because our fathers lied.

Arch-imperialist Rudyard Kipling’s bitter couplet, written shortly after the death of his son at Loos in September 1915, is an alternative view to the current commemoration – even celebration – of the events surrounding the First World War. It has a kind of eternal verity, does it not: Johnson in Vietnam, Bush and Blair in Iraq, Putin in the Ukraine?

But as angry as the couplet is in a military context, it is also about today’s upheavals in domestic politics and its interaction with the international economy. For the basic message of the Angries, supporting Trump, Brexit and a host of similar movements in other countries, is that the elites are lying to them.

It is not quite as simple as this, but I was struck by a recent lead editorial in the London Economist of October 1. As you would expect, the publication was staunchly supportive of the open economy and opposed to the ‘anti-globalists’, as it describes them. However the editorial was so busy talking to the elite who read the magazine that it was not listening to the grievances of the dissenters who don’t.

It is all very well listing the Angries’ demographic characteristics but, unfortunately, most of the surveys do not ask about what they actually think. One report said that a widespread view among Brexit voters was they did not trust experts; there must be a similar attitude among Trump supporters.

It is all very well the elite saying ‘you are not listening’. The Angries’ response is ‘you lied to us’ or more temperately, ‘you are not listening either.’ A Brazilian colonel captured it, after having taken the expert advice of neoliberal economists: ‘how come the economy is doing well but the people are not?’

Of course the elite may be doing well. Recall that the top 10 percent recovered their previous disposable income levels after a couple of years of Rogernomics; it took the bottom 30 percent two decades to get back to their pre-Rogernomics levels, by which time, the elite had experienced considerable income growth. (Even the second-to-top decile took over a decade.) How can the majority support Rogernomics and its successors given that its promises to the majority were not met?

There are similar stories elsewhere – the majority are not going to listen to those who talk about how well the economy is doing. How are they going to believe that globalisation is beneficial? (To make my position clear, I do not think trade deals need be neoliberal, but it hard to get this across.) It is easier to think, and say, the elite are lying.

The same applies to many Brexiters and Trump supporters. For them the elite – ensconced in London and Washington – have not been acting in their interests.

Practically, democracy is not a rule of the people. Rather, it tries to put constraints on the ruling elite so that they act in the interests of the people. The practice does not always work well, especially when the elite does not listen and when institutional arrangements blunt the ability of the wider population to express themselves and influence the rulers. Those who are angry become alienated. But institutional oddities have enabled the Angries to finally articulate their anger in public. Unlike on early occasions they turned-out to vent their alienation.*

How often have you heard the view that Cameron should not have allowed the Brexit referendum? (Though it could have been better organised.) The way American parties choose their presidential candidates plus the US electoral system itself let Trump bolt through.

The Angries are not going to go away as long as the elite ignore them rather than listen to them. Sure, much of what they say suffers from truthiness – that truth is determined by belief rather than by facts. But is that not also true for the ‘truths’ of the elite?

I do not know where this goes. One possibility is a retreat into the sort of neo-feudalism – as it is sometimes called – of Putin in Russia and Xi in China. To avoid it, or some equally unpleasant fate, the elites are going to have to surrender some of their privileges, to listen to those whose interests they profess to rule, to describe the world in terms which are not biased towards themselves, to stop ‘lying’. Or rather, to understand their truthiness is seen by others as lying. A big ask.

In the interim the Angries in charge may cause havoc. The best will in the world is finding Brexit hard to unscramble. Trump may find himself much more limited than he expects (even though he has a Republican Congress).

Shakespeare – as so often – got it right. In his Cymbeline, Princess Imogen (Innogen) is lost in a wood. She says:

Two beggars told me

I could not miss my way: will poor folks lie,

That have afflictions on them, knowing ’tis

A punishment or trial? Yes; no wonder,

When rich ones scarce tell true. To lapse in fulness

Is sorer than to lie for need, and falsehood

Is worse in kings than beggars.

Absolutely; kings need to set a standard. If they and their courtiers do not, given the chance the underlings will rebel.

* Among the things that Bob Chapman taught us was the importance of the Non-vote Party. Not only in New Zealand but elsewhere. The outcomes in both in the Brexit referendum and the American presidential election depended on the Non-vote Party losing a lot of support.

JAFA Inequality

This entry was posted in Distributional Economics, Pundit on 7th November 2016 by Brian Easton.

While overall income inequality may have been relatively stable over the last two decades, it appears to be increasing in Auckland (and perhaps in our other big urban centres).

This column honours Bob Chapman (1922-2004), professor of Political Studies at the University of Auckland, remembered for his mentoring of many students including Helen Clark. He was an early New Zealand social scientist who did not just study elections but used the results to explore the social development of New Zealand

In particular, in a 1962 Landfall article* he argued that New Zealand’s egalitarian society would be stressed by urbanisation. Over 50 years later I am going to report some evidence for his prediction; not just anecdotes – we all have those – but statistics. As you might expect, Bob was not quite right, but he was prescient.

This column is conversational, not clouded by the impenetrable rigours of academia. My conversation is based on a chapter by Omonlyi Alimi, David Mare and Jacques Poot, ‘Income Inequality in New Zealand Regions’, in a recent book.**

The only available data to assess regional income inequality is gross income (market income plus benefits before-tax) reported in the New Zealand Population Census since 1981. It is not an ideal measure because it leaves out housing. Moreover, the researchers report only the figures for adult males. Excluding females means the measure is not comprehensive, but it avoids the complications of women’s unpaid work. It will serve for our purposes.

It has long been known that average incomes differ by region – I reported on this in 1983*** – so I shall largely skip over this. For the record, in 2013 Wellington has the highest average incomes – about 15 percent above the national average, while Northland is 20 percent below it. Auckland was 9 percent above. A major factor examining the difference is different regional industrial structures; Te Awamutu does not have the large financial sector that Auckland has.

The new insights from the research is the income distribution within regions; The researchers find a familiar story for the whole of the economy. Gross-income inequality – measured in a number of different ways – was roughly constant from (census years) 1981 to 1991 and from 1996 to 2013. There is a marked jump in inequality between 1991 and 1996. This is the result of the benefit cuts and (probably) the liberalisation of the labour market (the Employments Contracts Act) which took place shortly after the 1991 Census. (The familiar indicators which also show a big increase before 1991 are after-tax with the big inequality-driving tax-change in the late 1980s. This study uses a before-tax measure.)

To avoid the impact of the benefit cuts, which do not seem to have had a differential regional impact, I focus on the 1996 to 2013 period. The basic conclusion is that, with one or (possibly) two exceptions, there is not a lot of differences in the internal income inequality among the different region. In general, too, the degree of inequality within each region is similar to the overall inequality in New Zealand.

(I have suppressed a long discussion on the minor variations, the problems of measurement error and the statistical tests I have done to give me some confidence in this assessment.)

The exception is Auckland. On the whole, in 1996 its income inequality looks much like other regions. But by 2013 it is evidently an outlier. That means that income inequality has risen in Auckland even if it has not risen elsewhere and it is now out of line with (just about) everywhere else. (Again I’ve suppressed the details.) Our largest urban centre has become more unequal in recent years even if the nation is not.

The sharpest rise in Auckland (income) inequality appears to be a growing gap between the middle and bottom incomes although top incomes are growing faster than middle incomes but not quite as rapidly. This has not been characteristic of elsewhere in New Zealand. Note this is not directly the effect of the Auckland housing boom; were we able to incorporate the implicit incomes from owning your own homes the inequality would probably be rising even more.

What about the other large urban centres? The definitions of regions do not quite correspond to cities. Wellington’s region contains a bit of rural Wairarapa. Even so, if you squint you can see a similar pattern to Auckland – rising internal inequality to above the typical regional level but not as much. Were there no Auckland, Wellington would be the outlier region.

We might expect a similar story for Christchurch. However, its region includes rural Canterbury and Timaru. Moreover, the urban boundaries have changed because of the Canterbury earthquakes. I can but report that income inequality in the Canterbury region looks much like the rest of New Zealand excluding Auckland (and possibly Wellington). It is both near the average and hasn’t changed much.

What do these statistical results mean? Oh, we do need Bob Chapman.

Here is my guess. The rising income inequality in Auckland and in Wellington (probably) and Christchurch (possibly) presages a different New Zealand, a less egalitarian New Zealand much as Bob expected. Perhaps a little later than he predicted, although arguably the processes were going on earlier but could not be statistically detected.

Will the different New Zealand be a better or worse New Zealand, and in what ways? I am sorry we have not Bob to help us think the answer through. We shall have to do it ourselves.

* R. Chapman (1962) ‘New Zealand since the War (8)’ Landfall (63) Vol 16, No 3, September republished in E. McLeay (ed) New Zealand Politics and Social Patterns: Selected Works by Robert Chapman

** P. Spoonley (2016) Rebooting the Regions.

*** B. Easton (1983) Income Distribution in New Zealand.

Who Was Accountable For The Shambles?

This entry was posted in Health, Pundit on 31st October 2016 by Brian Easton.

A novel about an historical event reminds us of the health redisorganisation of the 1990s, raising issues remaining relevant to today.

I puzzle at how politicians and advisers can make giant mistakes but are never held accountable. The notion of accountability became fashionable in the neoliberal changes of the 1980s and many people further down in the system now work under tighter surveillance than they did then. But others, especially those higher up in the hierarchy, completely avoided accountability despite having been deeply engaged in, and supportive of, policies which proved disastrous.

I was once more faced with the puzzle when reading Ian Cowan’s novel, Not Our Problem, based on the health redisorganisation of the early 1990s. Cowan is a consultant radiologist working at the Canterbury District Health Board. However the novel’s hero, Stephen Cassidy, is a talented surgical trainee. He suffers burnout and takes a year off, joining the managers trying to implement the redisorganisation in Paxton hospital, a thinly disguised Christchurch one.

Note I increasingly avoid the word ‘reform’ with its overtones of ‘improvements’. Too often, despite the hype of the advocates, their changes do not improve the situation much – often making things worse. Such it was with the health redisorganisation, a neoliberal attempt to impose commercial practices without any understanding the reasons why the public sector organisations existed; their purpose cannot be summarised in a single output variable such as profit.

By joining those involved in the implementation, with responsibilities for staff liaison, Stephen is nicely – for the novel – placed as the ham in the sandwich between the two sides of the controversy which is at the centre of the novel and which occurred at the time. The confrontation is reported in one form or another in page after page. It is nicely captured in this passage (Claudia represents the funding agency, a Regional Health Authority (RHA), one of the institutions deeply involved in the implementation.)

‘And you think I’ll tell somebody with a new cancer that we can’t treat him because of an externality do you?’ Cassidy laughed. ‘I don’t think so. No Paxton doctor would do that’.

‘Why not.’

‘Because it would be immoral. And unethical. And unfair … don’t you agree?’

She chewed for a moment . ‘I don’t have an opinion on it.’

“What? How can you not have an opinion on something as important as that?’

My job is to make sure the RHA is protected from risk,’ said Claudia, ‘and that’s what I do. If they had employed me to debate ethics I would, but they didn’t so I don’t.’

The clash here is between two different approaches to one’s job. Stephen is a professional steeped in an ethic which places responsibility at the centre of an individual’s performance; Claudia is a manager who is accountable for what she is contracted to do.

Actually Claudia is a ‘generic’ manager. That is, she knows nothing (or very little) about what she is managing and so is unable to take into consideration the particularities involved. She, like most of the other managers in the novel (and, in my experience, in practice), constantly stumbles against the realities of what they are managing. An example, not used in the novel, is that managers insisted that bed usage in wards be increased, without understanding that the more intensively they are used the more likely there will be cross-infection. Doctors tell me that people died as a result. I’ll leave you to read the novel for many other examples.

Yes, people died as a result of redisorganisation, many more experienced greater discomfort, and – as the novel details – resources were wasted. Managers rarely take into consideration the resources they are using in order to save resources. I think Cowan is broadly correct in that the additional resources used by the managers to govern the professionals roughly outweighed the ‘gains’ in efficiency the managers made, while quality deteriorated.

The novel’s portrayal of the medical profession is much as I recall them at the time. Totally committed to their profession and hence to their patients but baffled by what was going on; Stephen, though, is well informed – the book is backed by numerous references. The portrayal of the generic managers is of people who are arrogant and obsessed by a theory which proved wrong while ignoring contradicting evidence; occasionally their humanity breaks though. My memory suggests the picture is a bit harsh, although that is certainly the way that most came across in public.

The novel chronicles the collapse of the redisorganisation (it actually took longer than the story’s span), as time and again reality stopped the plans of the managers. In summary, no gain; plenty of pain. But the reality was supplemented by stout resistance from professions in the health sector – who the managers describe as ‘vested interests’ – and the public.

This happened two decades ago but the novel, as well as being a contribution to the historical record, remains pertinent today. The clash between professionals and managers occurred not only in the health service, but also in the universities, in science and in many other parts of the public sector. The point is that a properly regulated private sector business can contribute to our welfare, but many activities cannot be so regulated and it is better to make use of professional responsibility. As we undermine professionalism, we get an inferior job done.

The central problem is captured in the novel’s title. The managers thought the delivery of health care was not their problem while the health professionals tended to ignore the resource restraints which the managers faced. When, before the redisorganisation, I used to teach health economics sixth-year medical students I would write on the board in large letter ‘either doctors take responsibility for the resources they use or accountants will make medical decisions’. The message glared, making some of the students profoundly uncomfortable, for they saw their job was to save lives – not to worry how much it cost.

Cowan nicely captures the shambles of the redisorganisation. Despite its almost total failure, the novel describes managers totally captured by the neoliberal ideology and totally confident they could deliver although a few are doubters by the novel ends (including Claudia).

It is unlikely one of the committed managers will write a novel defending what they did; I guess they would say in the dock, as they do in the novel, they were only doing what they were contracted to do. (As the trial of Adolf Eichmann, an SS officer and organiser of the Holocaust, reminds us, following orders is not a defence.) I suspect few recall their contribution with pride, if they remember at all. Stephen Cassidy will; thankyou Ian Cowan for reminding us.

Can Te Awamutu Have Its Own Independent Central Bank?

This entry was posted in Macroeconomics & Money, Pundit on 24th October 2016 by Brian Easton.

Pretending it can, or that the Reserve Bank of New Zealand can function independently from the rest of the world, could generate a financial crash.

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

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

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

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

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

This column focuses on a single problem which illustrates the interdependence between monetary and fiscal policy. Many people say, why shouldn’t the New Zealand government run a fiscal deficit, spending more than its current revenues and borrowing the difference? After all, the New Zealand government debt is low by international standards – very low actually. What the advocates do not consider is that the offshore debt of our trading banks is high by international standards. All that international banking debt could end up a charge on the New Zealand government.

That is because trading banks can go to their central bank if they get short of cash when access to international funds dries up. That may solve their immediate problem but the effect is that the central bank, and therefore in our case, the New Zealand Government, would in effect become liable for the international debts of the trading banks. Those liabilities are, of course, matched by assets, which are liabilities of the trading banks. The catch is that the Reserve Bank assets are in NZ dollars, but its liabilities are in US ones. Its balance sheet becomes vulnerable to changes in the exchange rate and a substantial depreciation – a likely part of this scenario – would cost the taxpayer hugely – among other things.

That almost happened during the Global Financial Crisis. In the circumstances the Reserve Bank and the Treasury handled the situation brilliantly – much better than the business commentator and other self-appointed monetary experts seem to be able to even understand. At one stage the government ended up owning, in effect, a chunk of the house mortgages of New Zealand.

As sketchy as I have been here, I think we can draw some lessons.

First, the New Zealand government is exposed to substantial foreign-exchange-denominated debt. This fact is quite in contrast to the neoliberal position that private debt has no relevance to government affairs, which is yet another example of neoliberal economics crashing as forcefully as did the world financial system during the Global Financial Crash.

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

Third, New Zealand will not be as well placed if there is another local or global financial crisis as it was in 2008. The Reserve Bank is to be commended for the prudential measures it has taken (which shift some of the risk from the government to the private sector) but there is no longer the fiscal room we had then.

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

This is a serious caution; there will be a future New Zealand government whose time will be dominated by the problems of high overseas debt (not for the first time in our history). Those on the watch whose negligence caused the high debt will be out of power and hardly held to account.

This column is a revised extract from Unfinished Business – What the 5th Labour Government Did Not Do and the 6th Should a paper to the Fabian Society,.

Comment Dear Antoine,Why is the

Dear Antoine,

Why is the Reserve Bank required to lend foreign currency to NZ’s banks? I could see why they would be required to lend NZ$s at a specific rate, but other currencies…?

It is very hard to predict exactly what would happen.

It is true that the RBNZ would lend in NZ currency to the trading banks. The trading banks would then convert the NZ currency into foreign currency to pay off the debts they owed. (Recall we are talking about a situation where there has been a seizure in the foreign exchange markets and they can neither borrow nor roll over debt in foreign currency markets.) That would probably collapse the exchange rate, inducing rapid inflation, unemployment and impoverishment. (This assumes, as is almost certainly true, that the supply-side responses from exports would be slow.) A further complication is that trade credit would probably dry up so that it would be difficult to export or import.

At least that is what we fear but it is difficult to be sure because there would be so much chaos elsewhere in the world economy too.

What the RBNZ did during the GFC was arrange a ‘swap’ with the US central bank (possibly also with the British, European and Japanese central banks). In effect the RBNZ would have been able to borrow US dollars from it. (Remember that borrowing from any central bank is costly.)

And why do NZ banks borrow large amounts from overseas?

Much easier to answer, Antoine. Trading banks make their profits (largely) from charging a margin between what they pay for borrowing and what they charge for lending. The more they borrow/lend the bigger their profits.

The Nobel For Economics?

This entry was posted in History of Ideas, Methodology, Philosophy, Pundit on 18th October 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Footnote Comment New Zealand’s first three-way

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

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

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

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

UNFINISHED BUSINESS

This entry was posted in Distributional Economics, Environment & Resources, Globalisation & Trade, Growth & Innovation, History of Ideas, Methodology, Philosophy, Macroeconomics & Money, Political Economy & History, Regulation & Taxation on 17th October 2016 by Brian Easton.

Paper to the Fabian Society, 12 October, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monetary and Fiscal Policy

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

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

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

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

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

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

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

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

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

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

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

The Environment

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

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

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

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

Globalisation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Income Inequality

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

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

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

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

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

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

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

Regulating the Market

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

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

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

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

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

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

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

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

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

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

What A Social Democratic Government Is About

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

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

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

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

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

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

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

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

Do We Need Poverty Targets?

This entry was posted in Pundit, Social Policy on 10th October 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Over-Representation Of Māori In The Criminal Justice System

This entry was posted in Pundit, Social Policy on 4th October 2016 by Brian Easton.

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

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

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

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

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

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

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

Wow! I knew it but not so quantitatively.

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

– that bias operates within the criminal justice system; and

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

It concludes:

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

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

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

have police contact;

be charged;

lack legal representation;

not be granted bail;

plead guilty;

be convicted;

be sentenced to non-monetary penalties;

be denied release to Home Detention.

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

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

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

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

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

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

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

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

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

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

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

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

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

The saddest paragraph in the report was:

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

So there is racial discrimination in crime.

Rethinking Trade Policy.

This entry was posted in Globalisation & Trade, Pundit on 23rd September 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Developing Our Understanding Of Poverty

This entry was posted in Pundit, Social Policy, Statistics on 12th September 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PROGRESSING THE FASD CHALLENGE

This entry was posted in Health and tagged FASD, productivity loss on 12th September 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Are New Zealanders Anti-Intellectual?

This entry was posted in History of Ideas, Methodology, Philosophy, Literature and Culture, Pundit on 4th September 2016 by Brian Easton.

Is it possible to have sensible discussions in public?

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

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

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

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

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

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

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

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

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

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

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

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

Will Housing Prices Crash?

This entry was posted in Macroeconomics & Money, Pundit, Social Policy on 29th August 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

THE NOTORIOUS CAPTAIN HAYES by Joan Druett

This entry was posted in Literature and Culture and tagged Bully Hayes, Joan Druett on 27th August 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

Oh, and vote for Donald Trump.