WHERE IS ADULT EDUCATION GOING?

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

WEA Conference, 14 May, 2016, Wellington.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How Should We Run a Budget Deficit?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Value And Price

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

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

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

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

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

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

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

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

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

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

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

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

mpledger 

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

Brian Easton

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

mpledger 

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

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

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

Brian Easton 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            – accepting or holding New Zealand royal titles and honours.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brian Easton

Grumbling

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Lack of Interest

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

God Save the Flag vs God Defend the Flag?

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

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

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

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

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

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

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

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

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

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

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

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

Bubble and Pop.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Do inequality and poverty matter?

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

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

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

Spies (especially the review and resulting legislation)

Iraq (will the two year mission be extended?)

Ship Visits (from the US?)

Polls (how they will develop)

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

Surplus (are we going to get another soon?)

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

TPPA (the debate)

Housing affordability (the implications of the Auckland market cooling)

Social services (the government’s promised shakeup)

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

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

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

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

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

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

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

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

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

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

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

Are we spending enough on healthcare?

This entry was posted in Health, Pundit on by .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Outputs Or Outcomes; The Difference Matters

This entry was posted in Education, Governance, Health on by .

AUT Briefing Papers February 22, 2016

The 1989 Public Finance Act distinguished ‘outputs’ from ‘outcomes’. Outputs are what a department (or, more generally, an agent) can deliver while outcomes are what the minister (or, more generally, the principal) actually wants. Thus a minister may want, on behalf of the country, a high level of education in the population, but a school can only promise to meet certain educational standards in its students, say in literacy, which – ideally – are related to the desired outcome but are not the same thing.

Critically, the output is the measure for which the agent is held to account. Thus Gilling’s Law, formulated by Don Gilling when he was professor of accounting and finance at the University of Waikato, states that the way you score the game shapes the way the game is played. An obvious instance is that in rugby giving tries higher points changed incentives so more of them were scored. Fortunately this output was well-aligned with the desired outcome – winning or, better still, winning an attractive game. But that is not always true; it can be very difficult to align outputs with outcomes.

The easy solution is to redefine the output as the outcome. A recent paper by Des Gorman and Murray Horn, both prominent in the management of the healthcare system, does exactly that. (‘Purchasing Better, Innovative and Integrated Services’, Internal Medicine Journal 45, 2015) It calls the outputs of the health system ‘outcomes’. But the outcome we want from the health system is not so many surgical operations – what it can deliver – but better health. The operations or whatever may contribute to better health, but they are not the same thing. One could imagine a less responsible hospital doing the easy operations to attain its targets, leaving the challenging ones aside even if their health outcomes were higher.

The same problems bedevil the education sector. For example, the stated objective of the Performance Based Research Fund at the tertiary level is ‘to ensure that excellent research in the tertiary education sector is encouraged and rewarded’. But the research it rewards may have little connection with the education with which an institution is concerned. It weights full-time researchers exactly the same as full-time teachers. Ironically so, as universities trumpet their PBRF scores to attract students. They do not mention that their students may rarely meet the high achievement researchers and that many of their teachers may not have been included in the PBRF exercise.

That reminds us that not only has PBRF distorted the purpose of university education – to provide an education by teachers who were on the cutting edge of research (see below for the statutory outcomes[i]) – but that the measurement system itself has been distorted. Some of the practices that have been cynically pursued by university administrators in the calculation of PBRF scores would result in student being sent down if they had used them when being assessed. Some examples of the problems are here, here and here.

The misalignment of or confusion with outputs and outcomes is not peculiar to tertiary education. Although not generally the way it was presented, the row over the NCEA standards was about the degree to which the outputs were aligned with the real educational outcomes with which the sector is concerned. The fear has been that the objectives of the system would distorted towards what was being scored.

It is instructive of how poorly these output measures can be thought through. A high average NCEA score is not even the output we want. Economists distinguish between ‘net output’ and ‘gross output’. There have been economic regimes whose incentives are to maximise gross output; they are often called ‘Stalinist’ after the approach of his times. It is an inefficient system in the sense that it in encourages wasteful production as the record of the Soviet economy well illustrates. Modern economies seek to maximise net output, or value added, that is the difference between output and inputs; they have a much better performance record compared to the Soviet-type ones.

In the case of schools the aim ought to be to improve the student’s attainment, so that it is a greater achievement to start off with a student from an educationally underprivileged background and give her or him a high score than it is to take a student from a privileged background and put in a little effort to result in the highest score.

Instead Stalinism reigns and, just as for the PBRF, the educational system is being distorted by the NCEA. Some schools have concluded that they can up their average score by excluding students who are from underprivileged backgrounds or are otherwise hard to teach. Their challenge is how to do this without it being too obvious. Apparently a few have been caught.

Thinking rigorously about the output-outcome distinction is likely to prove a challenge to the Productivity Commission which is charged with reviewing the tertiary sector. Productivity is measured by the ratio of outputs to inputs. In a conventional market the output of a business aligns with the required outcome, but it does not where the ‘market’ works differently, as occurs in education, health and social services.

The danger is that the Commission will lapse into traditional thinking and add to the distortions from which tertiary education and training already suffers from the misalignment of outputs and outcomes.

It is vital that those sectors which are not driven by the market in the conventional way challenge the established wisdom with its confusion between outputs and outcomes and its dominance by generic managers who are good at pursuing outputs but who have no sympathy for the sector outcomes.

Ideally the challenge to the conventional wisdom needs to be from an alliance of sectors which are suffering from the confusions of the current regime. However the immediate point of contestation is the Productivity Commission review. It would be heartening if the university sector was to rise to the challenge; it would involve diverting some of their very best thinkers to do so – with, no doubt, a reduction in their PBRF scores.

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[i] There is a tendency to set outputs without even addressing the outcomes set out in statute. Here they are for universities. Observe especially the ‘primarily’ and ‘principal’ in the first subsection and ponder the extent to which the PBRF took them into consideration.

Under Section 162 of the Education Act (1989) a university is defined as having the following characteristics:

(i) They are primarily concerned with more advanced learning, the principal aim being to develop intellectual independence:

(ii) Their research and teaching are closely interdependent and most of their teaching is done by people who are active in advancing knowledge:

(iii) They meet international standards of research and teaching:

(iv) They are a repository of knowledge and expertise: and

(v) They accept a role as critic and conscience of society.

Do The ISDS Provisions In The TPPA Reduce Our Sovereignty?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Open Economy And Free Trade Deals

This entry was posted in Globalisation & Trade on by .

AUT Briefing Paper February 3, 2016

It is difficult to see any option other than an open economy for New Zealand. But there are many possible open economies although we may not be able to choose some of them.

The open economy is an extension of Adam Smith’s principle that specialisation generates higher productivity. That is true for us as individuals, it is also true for nations. A small nation, such as New Zealand, cannot produce everything; neither can the largest nations in the world. Better to specialise in what it can do best and trade that output for what it cannot do nearly as well.

However the consequence of trade is a reduction in sovereignty. Specialisation means that one gives up some power over one’s life in exchange for something else – ideally a better standard of wellbeing. There is a parallel in marriage which involves a loss of personal sovereignty. When they marry, a couple judges that the advantages of the union exceed this loss (that is, if they are rational – the romantic are not always so). How important is this reduction in sovereignty is a proper matter for assessment of the balance between the gains and losses.

Marriages are governed by laws as well as by informal arrangements. Once upon a time trade did not require formal laws; perhaps it was more like one-night stands – what you see is what you get. But it soon became apparent that some regulation would reduce the transaction costs. Instead of arguing over the quantities involved, international standards for weight and measures and the like evolved in the late nineteenth century. New Zealand did not have to adopt them – the US has not done so to the same degree as the rest of the world – but it would be troublesome for our exporters and importers if they had to keep converting the local measures into international ones.

Of course the world economy keeps evolving. The falling costs of distance have made it easier to trade goods; the telecommunications revolution has meant services can be internationally traded too. Who, would have thought a couple of decades ago that you needn’t go to a bookshop on High Street to buy a book? (Answer: Jeff Bezos, the founder of Amazon.)

A cheap way to set up a contextual framework, such as international standards, is through the nation state. Corporations could do it, one supposes, but they would have to be monopolies to be effective. Oops – better to have the state monopoly. And in principle no state can enforce its monopoly outside its borders. Hence the international negotiations of which free trade agreements (FTAs) are the most prominent outcomes, although there are numerous other conventions.

Their name suggests that they are primarily about ‘freeing’ up trade (the ‘f’ could stand for facilitating since the agreement may also cover management at the point of entry). But as they are dismantled artificial barriers to trade at the border are becoming less important, with the exception of some very high ones against certain farm products. Because agricultural exporting is important to New Zealand, we tend to pay a lot less attention to everything else.

In any case trade is no longer just goods, some services can be traded and intellectual property is internationally mobile. For many purposes foreign investment is just trade over time so rules for that become as necessary – or more necessary – as for instant trading. The negotiating agenda has moved on.

Not everyone wants to be a part of it. Some countries choose to opt out. New Zealand has chosen to opt in, always in the hope that we shall make some progress on the removal of agricultural restrictions, (and we do, we do, but oh so incrementally).

The catch is that an FTA involves agreements between nations. In order to get a deal it is necessary to make concessions. Because the deals are no longer only about barriers at the border the concessions can be behind the borders. Nor are they simply ‘I’ll reduce this tariff if you reduce that one’. The trade-off may involve ‘I’ll give you better agricultural access if you adopt these parts of my intellectual property law’. (And it is so much harder if the deal involves a behemoth and a midget.)

As has been widely noted, the agreement from the Trans Pacific Partnership (TPP) is not a simple free trade deal if that is defined as being about artificial barriers at borders. Its 6000 pages make it extremely difficult to evaluate. It is easy to identify provisions which are detrimental to New Zealand and ignore some extremely advantageous ones, or vice versa. The New Zealand government has to look at the whole deal. Because there are downsides some people will be worse off. To what extent do their interests need to be taken into consideration? Can we do anything to ameliorate the downside? Should we? (In principle the benefit from the gains from the deal should make such compensation possible, but those who benefit from the deal are unlikely to want to share their benefit or even recognise there are losers.)

Winners and losers aside, there is perhaps an even greater challenge in the changing power balance. Summarising the impact of the TPP, American economist Jeffrey Sachs argued that the deal can be split into four components one of which is

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

These corporations are operating through the (mainly) American and Japanese governments but there is an interesting extension to the sovereignty argument here. One of the effects of the increasing use of the market to regulate the economy in particular and thereby society generally is to move power from the nation state, or at least the democratic nation state, to the corporations. This is a loss of democratic sovereignty which is not strictly about FTAs but a more fundamental feature of the shift to market regulation domestically as well as internationally. However, that loss is intensified and internationalised by the extensive form of FTAs.

In the short run the government probably has to implement the provisions of the TPP. It cannot back down. It is not just its domestic political credibility in New Zealand that is on the line were it to walk away from the TPP, while certain sector groups would lose real benefits (to them). More fundamentally, all our partners in the other free trade deals we are negotiating would pull back because they could not trust the New Zealand government to deliver. (We are never high among their priorities anyway.)

International trading deals are not going to go away. And we are left contemplating just how much sovereignty and what sort of sovereignty we are willing to sacrifice to get the benefits of economic specialisation. What sort of open economy, of those available to us, are we going to choose?

Can We Afford Not To Adopt The TPPA?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

China Jitters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Making Quality Judgements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Return To ‘Think Big’?

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

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

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

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

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

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

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

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

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

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

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

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

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

Whadarya?

This entry was posted in Literature and Culture, Maori, Political Economy & History, Pundit on by .

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Our Economics Good Enough?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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