The Future of Trade Agreements

This entry was posted in Globalisation & Trade, Pundit on 17th November 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The TPP, Sovereignty and Copyright

This entry was posted in Business & Finance, Globalisation & Trade, Pundit on 9th November 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This entry was posted in Health, Pundit on 2nd November 2015 by Brian Easton.

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

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

Its message is simple.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lessons From Greece

This entry was posted in Political Economy & History, Pundit on 27th October 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Where Is The World Economy Going?

This entry was posted in Globalisation & Trade, Growth & Innovation, Macroeconomics & Money, Pundit on 20th October 2015 by Brian Easton.

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

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

* The Australian economy is in the doldrums.

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

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

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

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

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

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

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

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

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

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

To add to the uncertainties a recent issue of the London-based Economist argued that the US economy may no longer be strong enough to be the banker of the world. It fears that come the next financial crisis (I don’t think it expects one soon), the US, the IMF Old Uncle Tom Cobley and All will not be able to bail the system out, even if the US policy response is more coherent than Congress would currently allow.

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

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

Owning New Zealand

This entry was posted in Growth & Innovation, Pundit, Retirement & Savings on 12th October 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

An Egalitarian Society?

This entry was posted in Distributional Economics, History of Ideas, Methodology, Philosophy, Political Economy & History, Social Policy on 6th October 2015 by Brian Easton.

AUT Briefing Papers October 6, 2015

Once upon a time New Zealand identified itself as egalitarian. Phrases like ‘a classless society’, ‘jack’s as good as his master; ‘a working man’s democracy’ were bandied around, often without much critical thought.

A distinction was made between ‘egalitarian’ and ‘equalitarian’. Certainly the aim was that New Zealanders were equal before the law, in access to health care and in educational opportunity (in each case it was necessary to overlook the way wealth could improve chances). Even so, using the words of the 1972 Royal Commission on Social Security, in an egalitarian society everyone is able to participate in and belong to the wider society. Sometimes willingly, sometimes reluctantly, measures were taken to reduce the importance of some differences – such as for those with disabilities.

There were oversights but, pressed, there were confident, complacent responses. Jack may be as good as his master, but what about Jill? (Women are different of course, and we were the first country in the world to give them the vote.) What about Haki? (They are happy in the pa and, anyway, we have the best race relations in the world.) It was a bit of a shock when Jill and Haki joined urban working life.

Under pressure, the final defence was that this was a country of equal opportunity. There are plenty of anecdotes intending to prove it, for – as in other countries – boys from low status families were sometimes successful (and the girls married well too). But there was little attention to those who did not succeed, some of whom may have been equally talented.

Perhaps the most charitable interpretation was that New Zealand as an egalitarian society was an aspiration, how New Zealanders wanted their society to be.

The last sentence is in the past tense. Is it still true? If asked, most New Zealanders would still commend ‘equality of opportunity’ and take it for granted that New Zealand is reasonably successful in attaining this goal.

What about the Royal Commission’s objective? Today the public rhetoric quickly lapses into the notion of the deserving and undeserving (ignoring that the children of undeserving parents may be deserving). However, the rhetoric still sees New Zealand as a land of opportunity where, as Peter Fraser and Clarence Beeby might have said, every person has the opportunity to pursue a life of the kind for which he or she is best fitted and to the fullest extent of her or his powers.

Is this true in recent decades? An answer necessarily looks at inequality on many dimensions. As Tony Atkinson has written, it is not possible to address (dynamic) inequality of opportunity without addressing (static) economic inequality. One dimension is not contested: women today have a lot more opportunity than their mothers who had, in turn, a lot more than their mothers.

Do Poverty and Inequality Matter?

Suppose the rise in poverty was all due to a fall in (perhaps relative) the living standards of the elderly. There might well be some unease about their state, some moral outrage. Would such indignation be ameliorated by assurances that they (or the vast majority) had an adequate income to sustain life and health, but had insufficient income to participate in and belong to the wider community? Fortunately the evidence is that the vast majority of the elderly – entitled to New Zealand Superannuation and other support – are generally not in such poverty (after allowing for the frailties of age).

Instead, the rise in inequality at the bottom of the household disposable income in the early 1990s fell mainly upon children and their carers. Poverty measurement is a complex exercise, but according to relative poverty line, poverty among children doubled between the pre-1990 years and the post-1990 years, following the cuts imposed by the 1990 Economic and Social Initiative. Add their carers, and most of the increases of those in poverty involved households with children.

The public outcry against child poverty two decades after the rise of the early 1990s tends to overlook this. New Zealand had been facing high child poverty for a quarter of a century – by 2010 children dumped into poverty in 1990 had become adults, many with their own children in poverty.

Why did it not show? The short answer is that no one looked or, rather, those who looked were ignored. When such issues that were identified they were addressed with income supplements they were targeted on the deserving poor – broadly, those that were employed. The first was the National (Bolger-Birch) Government’s Independent Family Tax Credit in 1996. At the time the Labour Opposition were extremely critical: ‘a simplistic tangle of bigotry and ignorance … barely disguised attack on beneficiaries … mean spirited, ill thought through and punitive … unholy product of National’s deeply held view that everyone on a benefit is a bludger and Treasury’s new right agenda … based on highly questionable incentives arguments’.¹ When in government a decade later Labour chose a similar approach with their Working for Families tax credit.

Another defence was that the poor were Maori and Pasifika. In fact, while the proportions of Maori and Pasifika in poverty are higher, there are more Pakeha who are poor because they are a larger share of the population.

The (sadly limited) social science research effort reported that those on low incomes had poor health as a result of a lack of access to good nutrition and medical care and poor housing. There is plenty of evidence, throughout the world, that health status – usually measured by mortality – is related to class.

There is less evidence on the impact of inequality on opportunity, but it matters. Hugh Lauder and David Hughes showed that a child from a working class background had to, on average, have a significantly higher IQ than in order to get to university. But this was based on 1980s data and we do not know whether things got harder or easier after 1990; the increased access to tertiary education may have ghettoised the poorest.

Perhaps the most persuasive conclusion is from the OECD, based on many studies from many countries (none specifically New Zealand). It concludes that inequality inhibits long run economic growth. The causal mechanism is largely that poor children do not acquire the skills required for a modern economy which drags down subsequent economic performance. (The OECD does cite one econometric study suggesting that the effect of the rise in New Zealand income inequality reduced its economic growth rate.)

Why might a young person in poverty not acquire skills? (There may also be underachievement on other dimensions of the Fraser-Beeby objective to enable people to pursue a life of the kind for which they are is best fitted and to the fullest extent of their power).

It may be that these who are poor have parents (or a parent) less able to bring up children, although the source of the deficiency may be contested; it may not be due to poverty or it may be that they too were brought up in deprived circumstances which leads to poor health, poor formal education and poor informal education (such as books and computer power, additional lessons to cover some deficiency or even adequate space to study). Lack of funding may also prevent the student from participating in out-of-school activities enjoyed by classmates from more affluent backgrounds. Students learn informally from their peers enhancing – or not — their formal education, and adopt the peer group’s ambitions.

Many of the processes just listed, especially the last, require the family to have an adequate income for the student to be able to participate and belong to their community. Providing only sufficient to maintain life and health will mean the young person will end up (increasingly) behind their successful peers.

Thomas Gray reflected on the ‘rude forefathers’ in a country churchyard who suffered ‘chill Penury’ and wondered whether ‘some mute inglorious Milton here may rest’. A quarter of a millennium later we may wonder the same.

¹ Cullen, M. (1996) Hansard.

Underlying Trade Deals

This entry was posted in Globalisation & Trade, Pundit on 4th September 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

Flagging Design

This entry was posted in Business & Finance, Literature and Culture, Pundit on 28th August 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

The State of The Economy: August 2015

This entry was posted in Macroeconomics & Money, Pundit on 13th August 2015 by Brian Easton.

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

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

The main reasons for the slowdown are:

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

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

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

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

The dairy price downturn.

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

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

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

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

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

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

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

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

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

Confusion about TPP

This entry was posted in Globalisation & Trade, Pundit on 9th August 2015 by Brian Easton.

Trust Us?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Outsourcing

This entry was posted in Governance, Pundit on 3rd August 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

What Happened to Peak Oil?

This entry was posted in Environment & Resources, Pundit on 25th July 2015 by Brian Easton.

Fracking has changed the energy outlook, with major geopolitical implications

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

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

Are We Heading Into a Recession?

This entry was posted in Macroeconomics & Money, Pundit on 18th July 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Are We Heading Into a Recession?

This entry was posted in Macroeconomics & Money, Pundit on 11th July 2015 by Brian Easton.

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

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

This entry was posted in Macroeconomics & Money, Political Economy & History, Pundit on 6th July 2015 by Brian Easton.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Does Income Inequality Reduce Equality Of Opportunity?

This entry was posted in Distributional Economics, Pundit, Social Policy on 29th June 2015 by Brian Easton.

Recent publications suggest that the children who live at the bottom in economies with high inequality have reduced life chances.

The grandfather of modern distributional research is Tony Atkinson, a British economist who began in the 1960s a lifetime career studying the British and world income distributions and other related ones. He has been described as virtually single-handedly establishing the modern British field of inequality and poverty studies – it would not be a great exaggeration to say the ‘international’ field.

In truth much of his research – a combination of economic analysis, history, politics and statistics – has been tediously mapping out what has happened, none the less valuable for that, especially as the work has been in the scientific tradition of combining a passion for his subject with a ruthless search for what happened in a scientific sense (rather than what ought to happen).

Now in his seventieth year, he has broken out in an almost new direction in his book, Inequality; What Can Be Done? It still depends upon the scalpels of analysis, history and statistics of his earlier work, but its central focus is what the policy responses to inequality should be. He has fifteen specific proposals to which, with his usual scholarly caution, he adds a further five ‘possibilities’ which deserve further study.

His package is much more revolutionary (and comprehensive) than that in Thomas Piketty’s Capital in the Twenty-first Century, although it is focused more on Britain than the world as a whole.* It would be foolish to advocate all twenty for New Zealand without careful adaptation for our different circumstances and, in my judgement, he does not pay sufficient attention to the global problem, although perhaps Britain is large enough to get away with some things that little old New Zealand could not.

Yet distributional economics is an evolving field, partly as new data bases evolve, past analytic problems are resolved and the world develops. Hence the concern, captured in Piketty’s book, about the global challenges. It is not just that better data bases enable the better understanding of the income distributions among and within countries, but that the rich have gone global too. (My guess is that ‘non-doms’, those who are not ‘residents’ in order to reduce the tax they pay, will become an increasing issue in public debate.)

Atkinson addresses another emerging issue. A common public stance, especially from the right, is that equality of income and wealth is not nearly so important (or is even unimportant); what matters to them is ‘equality of opportunity’. Usually the rhetoric goes on to imply that such equality is unusually high in New Zealand, or that we need to pursue policies such as better education.

It is hard to gather empirical evidence for how much inequality of opportunity there is, or where New Zealand ranks internationally. (If anyone can think of a cheap scientific way to do this they deserve a Nobel Prize – for peace.) An IMF Staff Discussion Note, which compared the income of one generation with the next, found us plumb in the middle of 13 countries. Those which did much better (that is, appeared to have greater income mobility between generations) were Scandinavian but Australia and Canada did slightly better than us too.

Moreover, there appears to be a negative correlation between income inequality and equality of opportunity on this measure. The IMF report goes on to argue, ‘higher inequality lowers growth by depriving the ability of lower-income households to stay healthy and accumulate physical and human capital.’

Time out for a moment. First, and inevitably, these studies are necessarily retrospective since they involve assessing what has happened to children who grew up in different circumstances in the past and are now adults. That means that they do not cover those who have suffered from the rise in child poverty as a result of the Rogernomics and Ruthanasia measures which markedly increased poverty among children. If the IMF paper is correct, there will be even greater inequality of opportunity for the post-1990 generations than for the earlier ones.

Second, measures of income inequality are crude insofar as they lump a lot of people together. By international standards New Zealand Superannuation is good at keeping the elderly out of poverty (because it is indexed to average wages not just to consumer prices).** That means we have a relatively higher proportion of children (and their parents) at the bottom of the income distribution. So the causal processes the IMF identifies must be even stronger for New Zealand than in countries which are less caring about their elderly.

The IMF report focuses on the impact on growth and concludes that there is ‘an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth.’ If the IMF estimates are correct, the effect of the distributional policies of Rogernomics and Ruthanasia was to reduce the GDP growth rate by about 0.8 percent p.a or GDP over five years. If the pattern continued through to today – the IMF research could not assess that – New Zealand’s GDP would be over 20 percent lower as a result of the neoliberal policies.

I am not sure we should jump to such a conclusion (and policies to turn the ship around will take a long time to have an effect). But in any case I would want to focus on the impact of New Zealand’s high inequality has on people’s life chances – especially through health and education – rather than the impact on GDP. The slowly accumulating evidence suggests that for those at the bottom of the New Zealand heap it ain’t good. As Atkinson says, you cannot reduce inequality of opportunity without reducing inequality of income.

* Piketty has a generous review of Atkinson’s book in the June 25 issue of the New York Review of Books.

** The 1972 Royal Commission on Social Security recommended a minimum income level for a single parent with one child of about $440 a week in today’s prices. In 1991 it was cut to $301 a week (net), again in today’s prices. It is currently $301 a week with $25 a week boost next April. (A beneficiary may be eligible for other supplements.) The Royal Commission recommended a minimum income level for a retired married couple in 1972 also of about $440 a week in today’s terms. It is currently $539 a week (net).

PARENTS WHO LOOK AFTER ADULTS

This entry was posted in Social Policy on 27th June 2015 by Brian Easton.

I am not sure when I wrote this; perhaps 2015.

My main income over the years was as a consultant. Often I did very interesting – and for me enlightening – pieces of work, which are normally somewhere in the public domain (such as on my archive-blog) although they often lack the background of a memoir or even a column. Yet, usually I felt I could not use them as the basis of a Listener column because there might be a conflict of interest – especially that I would be advocating for one side in a dispute in which I was paid to be involved.

Such it was with a strange dispute between the Ministry of Health and a group of parents represented by the Human Rights Commission. The parents cared for disabled adults. If the Ministry provided caring support – a non-relative – to come into the home and shower them and such like, the support person would be paid. If, however, exactly the same service was supplied by the parent, the Ministry would not pay them. (If the paid carer were to marry the parent, they would cease to be paid.) The parents argued this was discriminatory and the Human Rights Commission judged their case strong enough to take it to the Human Rights Tribunal.

My involvement was because the Ministry of Health had hired an economist to estimate the cost to them if they had to treat parents fairly . In my view the up-to-$243m a year he estimated was outrageously high, predicated on totally implausible assumptions. I was employed to provide a realistic estimate based on what the parents were actually demanding. It proved to be much lower. The $40m odd would have added to a budget of over $1 billion. The Tribunal found in favour of the parents, as did higher tribunals and courts up to the Court of Appeal; each found my estimate more plausible.

Essentially my estimate concludes that the Ministry was cost-shifting from the government coffers onto the parents. That often happens in New Zealand usually without any awareness by the government that it is doing so; current budgeting arrangements mean such cost-shifting can be a useful way for an agency to reduce its outlays. An insight to the unsatisfactory system is that if the outside carer did not turn up and the parent did the showering (or whatever) themselves the Ministry did not pay them, thereby saving funds. The financial incentive was to run as ineffective a service as possible.

You may wonder whether a human right – in this case that parents should not be discriminated against by the state – should depend upon the costs of implementation to a taxpayer. An economist dithers, but the person in me says ‘nonsense’ – especially if the cost is small.

As I told the Tribunal, I had a personal interest in the decision. Dad spent the second half of his working life as a psychopediatric nurse at Templeton Hospital and Training School ,which catered (mainly) for intellectually limited people. He loved the job. It gave him the opportunity to work in a medical area; if he had had my life opportunities he would have been a doctor. Shortly after he retired, Templeton was closed down, pushing the caring role onto the community including parents – which eventually led to this case. Dad sat on my shoulder while I was presenting my evidence (and before – I always try to go beforehand to get a feel of proceedings).

The Tribunal was very proper, but the room in which the hearing was held was cheerfully shambolic. Not only were some of the plaintiffs there, but because they had no alternative, they had brought their adult children with them. Some of the disabled were bright but with greatly limited physical skills. Others were more like those that Dad cared for and whom I remembered from my visits to Templeton in my youth. Inevitably they were not well disciplined in the court room; it takes a real effort to sit through the tedium of a case, even if you understand what is going on.

When I work on such cases I try to understand the other side’s point of view. Indeed I have greatly frustrated clients by presenting it in the discussions preparing for the hearings. (This can be later offset when counsel says, ‘we were well prepared for that argument’.) To be honest, I am still unclear what the Ministry really thought. It seemed to be something like, ‘we bureaucrats have made an arbitrary decision and we are sticking to it. Anyway it costs us money.’

Curiously for the effort (and no doubt expense to the taxpayer) they seemed to be putting into it, their counsels seemed to be very young and inexperienced. I wondered if the seniors at the Crown Law Office thought something like ‘don’t be stupid’ and passed the job down. A more senior counsel would probably have presented the Ministry’s case more effectively, although the last line would surely have been ‘we surrender’.

The Ministry arguments usually bordered on the pathetic. One implied they could not think how to monitor the quality of care by parents. (Not that they monitored the quality of care of non-relatives; the monitoring which did occur – by a private agency – could have been adapted for the new situation.) I remember thinking when while the senior Ministry official pleaded such helplessness, ‘we are paying you six figures (probably three times that) and you can’t solve this problem. You deserved to be sacked’. Had I been the politician in charge I would have transferred the service to the Ministry of Social Development since the Ministry of Health was clearly not coping.

An expert witness is not involved in later stages of a case – to my regret I lost contact with the parents, sterling people whom I liked. But I did watch the case move through the system, the Ministry losing each time. After they lost at the Court of the Appeal the Minister of Health announced that they would not go to the Supreme Court but would introduce a scheme.

Which they did grudgingly. When the 2013 bill for Funded Family Care was being rammed through parliament the Minister said that it would cost only $23m a year (dunno what happened to the $243m) and cover about 1600 disabled people with high or very high needs. Two years later only 121 people qualified for the scheme. I have not seen a cost but on a pro rata basis that might amount to less than $2m a year.

That might make even my estimate seem excessive, but the new scheme seems to me to be ungenerous and excessively clumsy – even bizarre, for it was based on even seriously intellectually disabled people ‘employing’ their parent (I kid you not). I was arguing on the basis that the independent agencies which provide the non-relative carers would be able to employ a parent instead.

It is difficult to believe that the politicians – minister or parliament – were adequately supervising the Ministry. It might be they do not really care about the disabled. But in recent years one has come across other instances where deep in the bowels of a government department things are going on about which the politicians would be appalled if only they knew.

This is but one of a series of cases in which I was involved which would have made good columns but I felt unable to write. Glad to get it off my chest in a memoir (with column content) if only to salute the committed Human Rights Commission team, a wise tribunal, the wonderful parents and, of course, Dad.

Explaining the New Zealand Economy to a Latin American

This entry was posted in Political Economy & History, Pundit on 22nd June 2015 by Brian Easton.

The following response to three questions (in italics) was published in a prestigious Uruguayan weekly newspaper “Brecha“. It may be of interest because I am responding to the Latin American economic debate which is slightly different from the New Zealand one (but only slightly). Sorry for the included material necessary for an audience outside New Zealand. Thankyou. Nicola, for checking the translation from Spanish.

1. New Zealand had a downward trend in terms of GDP per capita and fell behind several OECD countries in the last quarter of the 20th century. What are the main factors that explain New Zealand’s relative lagging after the 1970s?

The New Zealand economy tends to grow at the same rate as other rich economies. But in 1966 it experienced a dramatic fall in the long-term price for wool, then its main export, amounting to a 16 percent reduction of total export revenue. This meant that resources had to be redeployed out of the highly productive – but now less profitable – sheep industry. That adjustment slowed down economic growth so that New Zealand grew more slowly than the rest of the rich economies for over a decade. The resulting structural adjustment has involved substantial diversification of New Zealand’s export products and destinations. The value of wool exports is now exceeded by dairy products, tourism, meat, horticulture, viticulture, fish, forestry and some services. (Forty years ago two-thirds of exports went to Britain; today the Chinese, Australian, US, Japanese, and Korean markets all exceed the British one.)

The New Zealand economy is now again growing at about the same rate as other rich economies, but on a lower track because of the loss of productive capacity from the fall in the terms of trade and the consequential restructuring. Indeed it has grown faster than many rich countries since the Global Financial Crisis of 2008, in part because half of its exports go to Asia which was not as hard hit and also because of a strong demand for dairy products – especially infant foods to China. The level of public debt was low, making credible tax cuts possible. It has since increased, but New Zealand’s level is still low by international standards.

2. It has been said that the liberal reforms introduced by the Labour Party government in 1984 were a radical response to New Zealand’s economic crisis and the subsequent economic stagnation. In the light of New Zealand’s economic performances in the last three decades, how do you assess the results of liberal reforms regarding relevant economic variables such as economic growth, employment and income distribution?

Compared to other rich countries New Zealand was a laggard in the market liberalisation which followed the unwinding of controls imposed during the Second World War. The Third Labour government addressed the controls and other interventions but in the simplistic and extremist way of neoliberalism. The economy stagnated for seven years – also contributing to the loss of its international per capita GDP ranking. There is not total agreement why this stagnation happened. Some argue it was the incompetence of economic management, some that it was the inevitable consequence of the disinflation and liberalisation, some that it was the tail-end of the restructuring following the wool price crash.

Instructively, many of the more extreme market liberalisations have been reversed (despite having entrenched strong self-interests for their preservation). Today’s New Zealand government would not be described as neo-liberal (except by anti-market extremists) but operates in the traditional New Zealand way of a close interaction between government and business. Some would call it corporatism, but the most common term is ‘NZ (Inc.)’.

Once the neoliberal economic management ended, the New Zealand economy returned to a low-inflation growth rate similar to that of other rich economies, with an unemployment level a little lower than the OECD average. However the income distribution remains much more unequal than it was before the market liberalisation, because the tax and social security cuts benefited those on the highest incomes. In international terms New Zealand is not exceptionally unequal because there is no hyper-finance sector, while the investment market is too small and the richest have moved (and invested) offshore.

3. Several analysts suggest that the future of New Zealand’s economy and its integration into the global economy depends on a debate between intensifying the exploitation of its natural resources (agriculture and tourism) and diversifying its exports of goods and services with more products intensive in knowledge and technology. What would be the best way for New Zealand to find a development path that puts it again among the leading OECD countries?

As has happened in other rich economies, New Zealand has had a major fall in the share of manufacturing in the last quarter of a century, in part because of a major reduction in the external protection regime in the 1980s, but also because its main source of manufactures is now East Asia. Aside from its primary-product processing the economy has never had very advanced manufacturing – typically it has had the sort of activities which low-wage East Asia has now taken over. A major factor has been that its industrial centres have been too small to generate the strong economies of agglomeration which are necessary for sophisticated manufacturing. (The largest city, Auckland, has just over a million population.) Given New Zealand’s location far from other industrial centres, it is not practical to be in the middle of supply chains. An additional issue is that the training of the labour force has been poorer than world-class manufacturing requires.

Internally, the service sector has grown to fill the production and employment gap – in much the same way as happened elsewhere.

Foreign borrowing has added to the available foreign exchange, although it is argued that it – and private foreign debt – is too high, both increasing the vulnerability of the New Zealand economy to world volatility but also pushing up the exchange rate, choking off some export activities.

New Zealand’s foreign exchange earnings come primarily from resource-based exports (including tourism) with value added by the manufacturing sector. Primary exports can be very sophisticated. For instance, components of milk are stripped out and used to make pharmaceuticals. Its production often requires high standards of quality control. There have been a handful of incidents of contamination of processed milk – although surprisingly few, given the huge through-put.

Moreover there is an optimism that primary export prices in the twenty-first century are on a long-term rise, with an expectation of the reverse of the slide in New Zealand’s terms of trade which occurred during the twentieth century. The case for the change rests on the movement of manufacturing to low-wage East Asia resulting in relatively falling prices for manufactures, while generating a rising demand for food which supply cannot keep up with.

The problem with many of the primary-product exports is that their prices fluctuate much more than those of manufacturing (in essence because it is not possible to control supply for primary products in the way that is possible for manufacturing). That means New Zealand faces a higher degree of volatility of supply of foreign exchange than many other rich countries. This was a major issue in the twentieth century but, for various reasons, it has not been so significant recently until the last year or so when key dairy prices plummeted.

Another worry is that there may be an over-dependence on the Chinese market – its recent slowdown has contributed to the slide in dairy prices. Its resolution is further export market diversification; New Zealand has maintained an aggressive program of negotiating free trade deals – the most recent was with South Korea.

This has led to a contrary view that New Zealand should expand exports of products which are not from the primary sector. Much of the argument harks back to the twentieth century, ignoring the changing world economy – and ignoring the sophistication of the primary sector. Thus far it has not produced much of an export boom.

Perhaps the most surprising ‘new’ export has been feature films of which Peter Jackson’s Lord of the Rings trilogy is best known. ‘Wellywood’ (Jackson lives in Wellington) seems to have been serendipitous (it is where he grew up), although there has been some government money (including tax exemptions without which the industry would have moved offshore to more favourable tax locations, so New Zealand would not have got the tax revenue anyway).

Making a film is not only a sophisticated knowledge-based activity but it requires international cooperation; for instance, the day’s filming may be sent by cable overnight to the US to be processed. This suggests that probably any ‘new export’ sector will be in sophisticated knowledge-based services, dependent on international IT connections – sometimes called ‘weightless exports’. There may be no ‘block-buster’ foreign-exchange-earning industry but lots of middle-sized businesses with their development, design and control based in New Zealand and any manufacturing offshore.

Even so, it seems likely that the primary sector will remain the chief earner of New Zealand’s foreign exchange, although it will be a very different sector from that of one hundred years ago in terms of what, how and for whom it produces and its vital dependence on a knowledge base.

What Is Left For the Left?

This entry was posted in Political Economy & History, Pundit on 15th June 2015 by Brian Easton.

Those on the left of politics have a choice between defending their past achievements or taking up the challenges which face us.

The Democratic Left is in disarray throughout the world. It is mainly out of power (but that has been true for most of its history); when it is in power it looks awfully like the other side (which has not always been true in the past). Its problem is much more than inadequate organisation or inferior leadership; the issue is too endemic. There appears to be something deeply wrong.

The origins of the Left are mainly in the nineteenth century during the economic and social changes which Karl Polayni called ‘The Great Transformation’. Industrialisation and the rise of the market were creating turmoil, and it was not evident that things were actually improving. Economic historians still debate whether there was a rising in living standards for ordinary people, but whatever their answer, the change in living circumstances was disruptive.

There was a diversity of responses including going back to the past, religious reform and a pretence that nothing was happening. With hindsight, the most interesting were those that grew out of the Enlightenment, that attempt to apply rationality rather than accept traditional authority (although the Left has always had a romantic wing too) and its social science children.

Essentially the Democratic Left saw the Great Transformation as inevitable and potentially beneficial if society was to reorganise itself in a response. The benefits of economic growth could be shared by all and not just the privileged, while social institutions could be modified in order to moderate the harshness and inadequacies of the market. It was a deeply moral program but it was also founded on the best social scientific (including economic) understandings of the day.

Slowly this thinking, often led by the leading intellectuals of the day, became a political program which was largely implemented during the first and middle part of the twentieth century. It was evolutionary socialism not revolutionary socialism. (When the latter was implemented its ugliness gave socialism a bad name.)

Forgive space for not allowing the account of the ‘other side’ nor the contrast in nineteenth century with the pre-Enlightenment religious response to, say, the seventeenth century turmoil. What is important for this story is that economic and social change did not halt after the democratic socialists implemented their reforms. In some important ways the subsequent change has undermined the assumptions and institutions which had been instituted to deal with the nineteenth century transformation.

The Left had two options. One was to meet the new challenges by progressing its thinking and promoting institutional changes necessary to moderate the undermining. The other was conservative – to defend the institutions that they had put in place.

I am not sure why the dominant strain of the Left chose the latter course. To be frank, I think most of us are naturally nostalgic, preferring to return to the golden weather of our childhood – providing we could keep all the benefits of change we have had since. Second, you could argue the key institutions of the Left have been captured by pressure groups which are now past oriented just as happened with the Right in the nineteenth century, Third, there has been a disconnect between the Left and the progressing social sciences (especially economics) which reflects, I think, an unwillingness to engage with the challenges before us. To sharpen this argument let me identify five main (economic) themes which are troubling.

On environmental sustainability, the green Left particularly has a creditable record. On the other hand, much of nineteenth-century analysis was casual about the damage that was being done to the environment and much of that tradition is pervasive in many parts of the left. Additionally, there are other dimensions of sustainability such as fiscal sustainability – not leaving an impossible debt to service to future generations – Greece is not the way to the future. How we adapt to the changing demographics is third.

In many ways today’s globalisation is the next stage of nineteenth-century industrialisation – a continuation of the Great Transformation, although the shift to a full market economy is almost complete. The Left response was to command the state to moderate the market, but globalisation is undermining the power of the state. Pretending it is not happening or that it can be stopped by fiat – Cnut like – is not helping the adaptation to the new circumstances.

The growth of state power, necessary to moderate the market, has been associated with increased bureaucracy. There is a strong pressure from the right to moderate and dismantle the state bureaucracy. The left response has been largely to defend it without asking how can it be adapted and improved in the light of new circumstances (thus recognising that some of the Right criticisms are valid). A good place to start would be to recognise there are private as well as public bureaucracies which are just as unsatisfactory.

One of the transformational characteristics of today’s politics is affluence. The widespread deprivation of the nineteenth century has been broadly overcome in rich countries. But if the promise is fulfilled there are resulting problems. I am not talking about economic growth (there is not the slightest evidence that one side is better at effecting economic growth than the other; despite each’s rhetoric). The issue is that affluence has not always resolved issues; consider some of our spending – on binge drinking, drugs, gambling and tobacco. The issues of life choices and social stability remain unresolved. More gene rally, when does the market deliver and when does it not?

I am not going to call this last group inequality (and poverty) but inclusiveness, which also covers identity politics and regions (and therefore nationhood). Moaning about economic inequality without understanding its causes and how to respond, saying ‘we are agin it’, aint enough.

(The digital/(ICT revolution overlaps with many of the above topics, but perhaps meeting its challenge amounts to a sixth theme.)

I’ve had to do each of these briefly. Those familiar with recent developments in the social sciences (by ‘recent’ I mean the last fifty odd years) will appreciate that I am touching on some big topics. My point is that the Left, like the Right, has largely disconnected from them.

Over the next few weeks listen to commentators on the Left and ask to what extent they are engaged with these great issues. My bet is they rarely will be. Far more common will be a reaction to some circumstances, often with the message that ‘we’ can do it better (yeah right) without any understanding of the underlying issue, without an indication that the response is in the context of a framework that the responders have already set out. Coming to think of it, that is true for the Right too.