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.

Another Ministry Of Silly Walks?

This entry was posted in Pundit, Social Policy on 26th August 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What Are Universities Really For?

This entry was posted in Education, Pundit on 21st August 2016 by Brian Easton.

A Professor of Education challenges universities about their purpose.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Productivity losses associated with Fetal Alcohol Spectrum Disorder in New Zealand

This entry was posted in Health on 19th August 2016 by Brian Easton.

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

A detailed version of paper.

With, Larry Burd, Jürgen Rehm, Svetlana Popova

Abstract

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

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

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

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

Similar articles

The cost of lost productivity due to fetal alcohol spectrum disorder-related premature mortality.

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

Productivity losses because of morbidity attributable to fetal alcohol spectrum disorder in Canada: a demographic approach.

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

Over-investing in housing

This entry was posted in Macroeconomics & Money on 18th August 2016 by Brian Easton.

AUT Briefing Papers August 18, 2016

While housing obviously fills a need – people need somewhere to live – it also has an investment aspect. How this investment is treated by the tax system influences the housing market, and the investment available for other purposes, such as business ventures.

There is an implicit tax-subsidy to housing investment and it is necessary to understand this in order to understand how the housing market works. Consider two people living in identical houses. Suppose they sell their $1m house to each other, but continue living in their old homes, now as tenants. The people are both home owners and renters: they receive rent for the house they own but do not occupy and they pay rent for the house they occupy but do not own. Assume each landlord clears $20,000 a year after housing costs such as rates, insurance and maintenance. Each person’s position seems neutral from the change – paying rent and receiving rent – until they report their net rental income to the Inland Revenue Department which assesses them as liable for tax. With a marginal tax rate of 33 percent, that’s $6,600.

Of course they do not sell to each other – better to live in the house one owns and avoid paying tax on rental income. In effect, owner-occupiers receive a subsidy by not having to pay tax on the rent which owners implicitly pay to themselves for living in their own homes.

It is not the intention of this analysis to challenge the principle of this tax-break for home-owners although it will argue that it is applied over-generously. That conclusion comes from observing that the consequence of current arrangements is that we over-invest in housing, distorting the pattern of savings and investment in the economy.

Consider, as an illustrative exercise, owner-occupiers being taxed as if they were landlords – an imputed rent – with a corresponding reduction in tax rates on all income. Faced with a tax bill of, say, $6,600 for living in their own home, the household might make different decisions about housing. Older adults whose children have left home may well decide to downsize in order to reduce their tax liability. The savings from the cheaper house could be used to pay off debt or invested.

After full adjustment, across the whole economy, possible outcomes include:

– a better match between family and household size: small families would be in smaller houses and larger families would be less squeezed by having moved into the larger houses they left;

– the same number of houses (or possibly more) but eventually the average size of houses would be smaller;

– a reduction in household debt and hence offshore debt (which funds household debt on the margin);

– more wealth available for investment in other – more productive – activities;

– lower house prices;

– more young families would be able to purchase their own homes;

– a lesser need for accommodation supplements and the like.

To complete this analysis, attention needs to be given to capital gains. In fact, an owner-occupier does not make capital gains (on average) when they move from one house to another, for any capital gains they make on the sale of their old house are offset by the capital losses they make on the purchase of their new one.

What about investors who do not live in houses which they own? At present they get exactly the same tax subsidies as the owner-occupier. The current arrangements enable the investor to rort the tax system. For instant, an owner of the million-dollar house could borrow $500,000 at 4% p.a. which would be covered by the tenant’s rental payments of $20,000 p.a. The return the investor would get would be from the capital gain. Allow a 10 percent annual gain, and the investor is $100,000 up at the end of the year, which is a 20 percent return on $500,000 of equity, on which they pay no tax. For housing investors make capital gains in a way that owner-occupiers do not; they do not have to invest in another house.

There is an even more ingenious way to make a profit on investment housing in times of rising values. Why take a tenant in at all? Admittedly the landlord has to pay for the rates, insurance and maintenance but there is no hassle of a tenant. The result is houses which are untenanted but generating a return via capital gains. That certainly does not help the homeless.

Removing tax breaks for investors would have a similar impact to taxing the imputed rent of owner-occupiers, although the magnitude would be smaller. Whatever one thinks of the tax-subsidy to home-owners, the case for a similar subsidy to house investors is thin, especially as it screws up the housing market for those without their own homes, diverts resources from productive activities and increases offshore debt when investors borrow to leverage their return.

What is to be done if we want to avoid these ills?

First, the logic argues for a comprehensive capital gains tax on housing which is not owner-occupied. It need only be calculated on capital gains after the date of introduction. Taxing past gains will not get the behaviour the policy is about. An interesting possibility is that some jurisdictions only have a capital gains tax exemption on owner-occupier houses up to a limit – say double the median house price – and tax any capital gains above that. Tricky to apply, but it makes the point that the tax exemption on owner-occupied homes is for comfortable living, not for extravagance.

Is there a case for some penalty on houses which are owned but not occupied? Because it is administratively complicated one needs to know something about the size of the problem – and in any case a capital gains tax would discourage such vacancies. But in principle, if the tax treatment on owner-occupiers is to enable occupation, it is not obvious why it should be given when the houses are not occupied.

As much as they will help, changes in taxation on housing will not solve all the problems in the housing market. A building programme will still be necessary. Because it will be building fewer large houses, the available resources will be able to build more houses. We probably need to reform the accommodation supplements.

Instead this analysis finishes with attention to savings and investment. Recall that which drives these proposed changes is the distortionary effects on overall investment of the tax exemptions on housing. The intention of the package is to cut back wasteful investment in housing and channel the savings into more productive activities. New Zealanders invest in housing and property because that is the only investment they understand. They will pay off any debts as they unwind out of their investment, thereby reducing the amount of offshore borrowing, making New Zealand financially more secure. But what will they do with surplus funds?

Many will deposit them in banks or finance companies which may, or may not, route the proceeds into business investment (as well as paying off international debt). However, there is also a need for a more direct channel from households to business. Kiwisaver is an example. New Zealanders need greater confidence in investing outside property or financial institutions.

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

This entry was posted in Health on 18th August 2016 by Brian Easton.

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

Abstract

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

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

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

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

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

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

Text

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

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

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

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

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

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

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

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

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

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

Method

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Results

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

– Please insert Table 1 about here –

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

– Please insert Table 2 about here –

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

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

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

– Please insert Table 3 about here –

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

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

Discussion

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

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

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

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

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

References

Lim SS, Vos T, Flaxman AD, et al. A comparative risk assessment of burden of disease and injury attributable to 67 risk factors and risk factor clusters in 21 regions, 1990-2010: A systematic analysis for the Global Burden of Disease Study 2010. Lancet. 2012;380:2224-2260. (Errata published 2013, in Lancet 381(9874), 1276; Lancet 381(9867), 628).
Abel EL. Fetal alcohol abuse syndrome. New York: Plenum Press; 1998.
Stratton K, Howe C, Battaglia F. Fetal Alcohol Syndrome: diagnosis, epidemiology, prevention, and treatment. Washington DC: National Academy Press; 1996.
Chudley AE, Conry J, Cook JL, et al. Fetal alcohol spectrum disorder: Canadian guidelines for diagnosis. Can Med Assoc J.2005;172:S1-S21.
Astley SJ, Clarren SK. Diagnostic guide for fetal alcohol syndrome and related conditions: the 4-Digit Diagnostic Code.2nd ed. Seattle: University of Washington Publication Services; 1999.
Burd L, Klug MG, Martsolf J. Increased sibling mortality in children with fetal alcohol syndrome. Addict Biol.2004;9:179-186.
Burd L, Klug MG, Bueling R, et al. Mortality rates in subjects with fetal alcohol spectrum disorders and their siblings. Birth Defects Res A Clin Mol Teratol. 2008;82:217–223.
Habbick BF, Nanson JL, Snyder RE, Casey RE. Mortality in fetal alcohol syndrome. Can J Public Health. 1997;88:181–83.
Iyasu S, Randall LL, Welty TK, et al. Risk factors for sudden infant death syndrome among northern plains Indians. The JAMA. 2002;288:2717-2723.
Popova S, Lange S, Shield K, et al. Comorbidity of Fetal Alcohol Spectrum Disorders: A systematic literature review and meta-analysis. Lancet. (under review).
Burd L, Cotsonas-Hassler TM, Martsolf JT, Kerbesian J. Recognition and management of fetal alcohol syndrome. Neurotoxicol Teratol. 2003a;25:681-688.
Paintner A, Williams AD., Burd L. Fetal alcohol spectrum disorders —Implications for child neurology, Part 2: Diagnosis and management. J Child Neurol. 2012;27:355-362.
Chasnoff IJ, Wells AM, King L. Misdiagnosis and missed diagnoses in foster and adopted children with prenatal alcohol exposure. Pediatrics. 2015;135:264-270.
Burd L, Carlson C, Kerbeshian J. Mental health disorders comorbid with fetal alcohol spectrum disorders. In Sher L, Kandel I, Merrick J, editors. Alcohol-related cognitive disorders: research and clinical perspectives. New York: Nova Science Publishers; 2009. p. 111-123.
Burd L, Fast DK, Conry, J, Williams A. Fetal alcohol spectrum disorders as a marker for increased risk of involvement with correction systems. J Psychiatry Law.2010;38:559-583.
May PA, Gossage JP, Kalberg WO, et al. Prevalence and epidemiologic characteristics of FASD from various research methods with an emphasis on recent in-school studies. Dev Disabil Res Rev. 2009;15:176-192.
Public Health Agency of Canada (PHAC). Fetal alcohol spectrum disorder (FASD): A framework for action.2003.
Roberts G, Nanson, J. Best practices. Fetal alcohol syndrome/fetal alcohol effects and the effects of other substance use during pregnancy. Ottawa Canada: Canada’s Drug Strategy Division, Health Canada; 2000.
May PA, Baete, A, Russo J, et al. Prevalence and characteristics of fetal alcohol spectrum disorders. Pediatrics. 2014;134:855-866.
Barry KL, Caetano R, Chang G, et al. Reducing Alcohol-Exposed Pregnancies: A Report of the National Task Force on Fetal Alcohol Syndrome and Fetal Alcohol Effect. U. S. Department of Health and Human Services. 2009. Available from http://www.cdc.gov/ncbddd/fasd/documents/redalcohpreg.pdf
Nelson DE, Naimi TS, Brewer RD, et al. Metropolitan-area estimates of binge drinking in the United States. Am J Public Health. 2004;94:663-671.
Substance Abuse and Mental Health Services Administration (SAMHSA), Fetal Alcohol Spectrum Disorders Center for Excellence. Fact Sheet: The Language of Fetal Alcohol Spectrum Disorders, 2004. Available from: http://www.fasdcenter.samhsa.gov/documents/WYNKLanguageFASD2.pdf
Thompson A, Hackman D, Burd L. Mortality in Fetal Alcohol Spectrum Disorders. J Pediatr. 2014;4:21-33.
Lemoine P, Harousseau H, Borteryu JP, Menuet JC. Les enfants de parents alcooliques: Anomalies observee a propos de 127 cas [The children of alcoholic parents: Anomalies observed in 127 cases]. Quest Med. 1968;21:476-82.
Dubovsky D, Whitney N. Modifying approaches to improve outcomes for women in treatment who have fetal alcohol spectrum disorder. Paper presented at the 4th National Conference on Women, Addiction and Recovery, Chicago, I. 2010.
Conry J, Fast D K. Fetal alcohol syndrome and the criminal justice system. Vancouver: British Columbia Fetal Alcohol Syndrome Resource Society and the Law Foundation of British Columbia. 2000.
Credé S, Sinanovic E, Adnams C, London L. The utilization of health care services by children with Foetal Alcohol Syndrome in the Western Cape, South Africa. Drug Alcohol Depend.2011;115:175-182.
Harwood H. Updating estimates of the economic costs of alcohol abuse in the United States: Estimates, update methods, and data. Report prepared by the Lewin Group for the National Institute on Alcohol Abuse and Alcoholism. Based on estimated, analyses, and data reported in H. Harwood, D. Fountain and G. Livermore, the Economic costs of alcohol and drug abuse in the United States, 1992. Report prepared for the National Institute on Drug Abuse and the National Institute on Alcohol Abuse and Alcoholism, National Institutes of Health, Department of Health and Human Services. (NIH Publication No. 98-4327). Rockville MD: National Institutes of Health. 2000

Available from: http://pubs.niaaa.nih.gov/publications/economic-2000/alcoholcost.PDF

Interagency Coordinating Committee on Fetal Alcohol Spectrum Disorders [ICCFASD]. Consensus statement on recognizing Alcohol-Related Neurodevelopmental Disorder (ARND) in primary health care of children. Rockville (MD): ICCFASD; 2011.
Lupton C, Burd L, & Harwood R. Cost of fetal alcohol spectrum disorders. Am J Med Genet C Semin Med Genet. 2004;127C(1): 42-50.
Popova S, Lange S, Mihic A, et al. Prevalence of Fetal Alcohol Spectrum Disorder in correctional systems: A systematic literature review. Can J Public Health.2011a;102:336-340.
Popova S, Lange S, Burd L, Rehm, J. Health care burden and cost associated with Fetal Alcohol Syndrome: Based on official Canadian data. PloS ONE, 2012a;7: e43024. doi:10.1371/journal.pone.0043024
Popova S, Lange S, Burd L, et al. Cost of Fetal Alcohol Spectrum Disorder diagnosis in Canada. PLoS ONE.2013a;8:e60434. doi: 10.1371/journal.pone.0060434
Popova S., Lange S., Burd L., et al. . Cost of specialized addiction treatment of clients with Fetal Alcohol Spectrum Disorder in Canada. BMC Public Health. 2013b;13:570. DOI: 10.1186/1471-2458-13-570
Popova S, Lange S, Burd L, Rehm J. Canadian children and youth in care: The cost of Fetal Alcohol Spectrum Disorder. Child Youth Care Forum. 2014a;43:83-96. doi: 10.1007/s10566-013-9226-x
Popova S, Lange S, Burd L, et al. Cost of speech-language interventions for children and youth with Fetal Alcohol Spectrum Disorder in Canada. International Journal of Speech-Language Pathology. 2014b [Epub ahead of print] doi: 10.3109/17549507.2013.862858

Popova S, Lange S, Burd L, Rehm, J. Cost attributable to FASD in the Canadian correctional system. Int J Law Psychiatry. 2015. doi:10.1016/j.ijlp.2015.03.010. Available from: http://www.sciencedirect.com/science/article/pii/S0160252715000497
Public Health Agency of Canada (PHAC). Assessment and diagnosis of FASD among adults: A national and international systematic review 2011.
Abel EL, Sokol RJ. A revised conservative estimate of the incidence of FAS and its economic impact. Alcohol Clin Exp Res. 1991;15(3) :514-524.
Klug MG, Burd L. Fetal alcohol syndrome prevention: Annual and cumulative cost savings. Neurotoxicol Teratol.2003;25763-765.
Rice D, Kelman S, Miller L. The Economic costs of alcohol and drug abuse and mental illness: 1985 Rockville MD: U.S. Department of Health and Human Services; 1990.
Chudley AE, Kilgour AR, Cranston M, Edwards M. Challenges of diagnosis in fetal alcohol syndrome and fetal alcohol spectrum disorder in the adult. Am J Med Genet C Semin Med Genet. 2007;145C:261-272.
Thanh N, Jonsson E. Costs of fetal alcohol spectrum disorder in Alberta, Canada. Can J Clin Pharmacol. 2009;16:e80-e90.
Single E, Collins D, Easton B, et al. International guidelines for estimating the costs of substance abuse. 2nd ed. Geneva, Switzerland: World Health Organization; 2003.
Statistics New Zealand. Infoshare. Available from http://www.stats.govt.nz/infoshare
Easton B, Burd L, Sarnocinska-Hart A, et al. Productivity losses because of morbidity attributable to Fetal Alcohol Spectrum Disorder in Canada: A demographic approach. J Stud Alcohol Drugs. 2014;75:1011-7.
Harwood HJ, Napolitano DM, Kristiansen P L. Economic costs to Society of Alcohol and Drug Abuse and Mental Illness: 1980. Rockville (MD): Alcohol Drug Abuse and Mental Health Administration; 1984.
Easton B, Burd L, Sarnocinska-Hart A, et al. The cost of lost productivity due to fetal alcohol spectrum disorder-related premature mortality. J Popul Ther Clin Pharmacol. 2015;22:e3-8.
Popova S, Stade B, Lange S, et al. Economic impact of fetal alcohol syndrome and fetal alcohol spectrum disorders: A systematic literature review. Alcohol Alcohol. 2011b;46:490-497.
Popova S, Stade B, Lange S, Rehm J. A model for estimating the economic impact of fetal alcohol spectrum disorder. J Popul Ther Clin Pharmacol, 2012b;19:e51-e65.
Stade B, Ungar W, Stevens B, et al. The burden of prenatal exposure to alcohol: Measurement of cost. Journal of Fetal Alcohol Syndrome International. 2006;4:1-14.
Stade B, Ali A, Bennett D,et al. The burden of prenatal exposure to alcohol: Revised measurement of cost, 2007. Can J Clin Pharmacol. 2009;16:e90-e102.

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

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

FAS: Fetal Alcohol Syndrome

FASD: Fetal AlcoholSpectrum Disorder

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

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

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

FAS: Fetal AlcoholSyndrome

FASD: Fetal AlcoholSpectrum Disorder

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

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

^cBased on Harwood et al. (1984)

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

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

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

FASD: Fetal Alcohol Spectrum Disorder

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

Numbers are rounded

What Are Universities Really For?

This entry was posted in Education on 14th August 2016 by Brian Easton.

A Professor of Education challenges universities about their purpose.

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

How Much Migration?

This entry was posted in Labour Studies, Pundit on 8th August 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Frexit For New Caledonia?

This entry was posted in Globalisation & Trade, Political Economy & History, Pundit on 30th July 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Policy by Panic

This entry was posted in Distributional Economics, Environment & Resources, Health, Political Economy & History, Pundit, Regulation & Taxation, Social Policy on 22nd July 2016 by Brian Easton.

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

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

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

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

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

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

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

Capital gains tax and tax avoidance.

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

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

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

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

Energy sustainability.

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

We are still lagging on investment in public urban transport.

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

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

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

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

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

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

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

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

Housing And Monetarism

This entry was posted in Macroeconomics & Money, Pundit, Social Policy on 17th July 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Misleading Pop-Economics And Populism

This entry was posted in Globalisation & Trade, Political Economy & History, Pundit on 11th July 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Best Interests Of Her Children?

This entry was posted in Distributional Economics, Social Policy on 1st July 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Economics Of Information And The Newspaper Merger

This entry was posted in Business & Finance, Pundit on 28th June 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lee Churchman

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

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

Brian Easton

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

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

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

Micawber Down Under

This entry was posted in Political Economy & History, Pundit on 25th June 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

Brexit And Nostalgia

This entry was posted in Globalisation & Trade, Political Economy & History, Pundit on 19th June 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

Comment by Brian Easton

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

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

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

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

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

Recent Trends in Public Spending

This entry was posted in Governance, Macroeconomics & Money on 30th May 2016 by Brian Easton.

AUT Briefing Papers May 30, 2016

Despite the public’s desire for more government spending there has been little increase in the aggregate level of government spending relative to GDP over the last 20 years. There was a slight rise immediately after the GFC, because GDP stagnated. Government spending as a percent of GDP is now lower that it was at the end of the Bolger and Shipley governments. It is slightly higher in 2014/5 than 10 to 15 years earlier, mainly because of rising spending on New Zealand Superannuation and items such as Kiwisaver and pay-outs under the ETS.

<><>

The decision on how much the government is to spend is one for the political process led by the government of the day. Even so, the current government’s decisions seem to contradict the popular preference: the 2014 Election Survey, for example, showed a desire by the participants for measures to reduce income inequality, and an increase in public spending on health, education, housing, law enforcement, public transport and the environment. How has government spending fared over the last (almost) two decades?

Government Spending 1995/6-2014/5

Note that the existing data base ends in 2014/5 but there is (almost) another full year of spending since. That and spending plans announced in the 2016 budget will alter the conclusions, but probably not by much.

<><>

Healthcare

Healthcare spending increased from 5.0 percent of GDP in 1996/7 to 6.0 percent 2007/8, rose to 6.4 percent by 2010/11 and the share has since been drifting down to 6.2 percent in the last available (2014/15) year.

We might discount the rise in the early 2010 as a result of government spending not being as restrained as much as the stagnation of production. If we project the trend from 1996/7 to 2007/8, spending on healthcare would have been slightly over 9 percent higher than it was in 2014/15 – say, an extra $1.4 billion.

We might expect spending on healthcare to rise faster than GDP because:

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

Second is the ‘Baumol effect’, where the price of services such as healthcare rises faster than that of other sectors, so that even at constant volumes the value share of services in nominal GDP increases. (The Baumol effect applies to most services which the government provides as well in the private sector.)

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

However, these effects do not seem to have been strong enough in recent years to overcome the government’s demand for spending restraint.

New Zealand Superannuation

New Zealand’s universal retirement pension was costing about 5 percent of GDP in 1996/7, fell to 4 percent around 2003/04 and has begun rising again to near 5 percent in 2014/15. The pattern partly reflects the raising of the age of eligibility from 60 to 65 years by 2001 which reduced outlays, some changes in rate of payment relative to wages, and population ageing, with the baby boomers increasingly coming on stream after 2010.

As far as demographers can project, the ageing of the population will continue. Even raising the age of eligibility of the pension to 67, say, will only moderate this effect, not eliminate it in the long run.

(This spending category does not include spending on the retired’s healthcare nor some supplementary transfers that are classified as social security.)

Other Social Security & Welfare

Social security transfers were around 7 percent of GDP in the late 1990s but have been falling since and were nearer 5 percent in 2014/15. They show a temporary upturn at the time of the late 1990s Asian crisis and a longer one at the time of the GFC but, these aside, there is an undoubted downward trend.

It is out of historical character that spending on social security fell under the 1999-2008 Labour-led Government. In part this was due to falling unemployment but more importantly it never restored the benefit cuts which the previous National Government made in 1991, only maintained the real value of benefits, indexing them to prices rather than to, say, wages – in which case beneficiaries would have shared in the prosperity of the era.

Social transfers spend as a proportion of GDP stabilises towards the end of Labour’s last term. This is because it introduced the Working for Families transfer for those with children, but beneficiaries were specifically excluded from it. Entitlement required the recipient to be working at least 20 hours a week and not on the benefit.

Educational Services

Educational Services appear to be modestly rising as a proportion of GDP from 4.8 percent of GDP in 19967/7 to 5.4 percent in 2014/5. There are two complicating effects. One is population shifts which, given the ageing population, suggests that the share should fall. However, like other government services, education is subject to the Baumol effect.

Additionally, there has been a big extension of funding of Early Childhood Education as a greater proportion of children have been involved. Indeed, three-quarters of the increase in share of GDP can be attributed to this subcomponent (from 0.22 percent to 0.68 percent of GDP compared to a total increase in spending of 0.60 percent). The other big gainer is departmental expenses which increases .021 percentage points. The data base does not indicate why this happened.

A second big effect is the write-offs of student loans in 2005/6, 2008/9 and 2010/10, which causes blips in the underlying trends. These all appear to be related to election promises although this may be timing effect. Arguably, tertiary education is not simply an investment for students but also includes an element of distributional entitlement and a public good in the improved capacity for citizenship. Even so, the practice of primary and secondary schools having to charge private fees to parents did not get a similar treatment; schoolchildren do not vote.

Debt Servicing

Debt servicing fell from 3 percent of GDP in 1996/7 to just above 1 percent in 2009/10 as a result of falling relative debt levels and lower interest rates. After which, the level rises reflecting the additional borrowing to smooth New Zealand through the GFC, flattening out because borrowing was eased back and interest rates continued to fall. In 2014/5 it was 1.6 percent of GDP.

Conclusion

In recent years spending in many areas fell or stagnated as a proportion of GDP rather than continuing to rise as they have in the past. This almost certainly reflects a reluctance of the government to raise taxes. There is evidence that the public wants more of these services and transfers. To implement their demands, the public must also accept they will have to pay higher taxes. The designing of a tax regime to meet the needs is not easy. However, the first step must be a clear direction that the public’s wishes should be pursued.

The Budget: A Longer Term Prognosis.

This entry was posted in Macroeconomics & Money, Pundit on 30th May 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Have We a Housing Policy?

This entry was posted in Business & Finance, Pundit, Social Policy on 23rd May 2016 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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