Are We Saving the Right Way for Retirement?

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Should  membership of Kiwisaver be compulsory? Research, some of it thirty years old, points in that direction.

The current debate over the future of Kiwisaver is largely bereft of developments in economics over the last thirty or so years. Rather the frame has been an approach to human behaviour which we know does not reflect reality.

For reasons which can best be explained in terms of the history of the development of economics as a science it was assumed that individuals exhibit optimal behaviour subject to the constraints they face and the knowledge they have, carefully making rational choices which give the best possible outcomes. At the core of the model is a Rational Economic Man (the choice of gender is apposite), also known as Homo Economicus or, more briefly, ‘Econ’.

In a science such an assumption is subject to investigation. When they did, behavioural economists began to accumulate evidence that the hypothesis was not a very good description of how people actually behave. To cut to the core, many of us have poor self-control.

You are probably aware of the ‘marshmallow experiment’, in which a child is offered a choice between one small reward provided immediately or two if they waited a little. Many children are unable to restrain themselves for even 15 minutes, despite the very high return from waiting. (In follow-up studies, the researchers found that children who were able to wait longer tended to have better life outcomes.)

This is but one of a range of experiments which suggest that individuals – children and adults – hardly make optimal decisions. In the jargon, when thinking about economic decisions you have to replace Econ behaviour with human behaviour; in truth ‘Humans’ are rather like you and me. (If you want to chase up this research read the books by psychologist Daniel Kanneman, Thinking Fast and Slow and economist Richard Thaler, Misbehaving: The Making of Behavioural Economics. By ‘misbehaviour’ Thaler means that individuals do not conform to the standard model of Rational Economic Man.)

Building up savings for retirement, in particular, requires self-control over a long period. The research suggests people save less than they subsequently judge optimal, just as fifteen minutes later the child may have wished they had not gobbled the first marshmallow when they could now have had two.

The government has been anxious about Kiwisaver because it is fiscally expensive and because no one seems sure why it is necessary. I accept that the government may not want to use its revenue for the scheme, although it is well to remember that Michael Cullen was ingeniously hiding some of his budget surplus by giving it to individuals as Kiwisaver deposits. However they could not spend the pseudo-tax cut immediately but were forced to save it for retirement.

Official concerns centred on whether the scheme increased savings or whether people simply readjusted their savings patterns to take advantage of the incentives and did not save any more. If you believed that people were Rational Economic Men (or women), you expected mainly the latter. It was even claimed there was evidence to this effect but it is not very convincing, especially if you rely on the scientific standards of behavioural economics which require detailed records of household wealth which do not exist here (or in America).

The Danes keep meticulous records. Using them, a study found that the bulk of the savings generated by an automatic savings regime (such as the regular deposits made by an employer and worker into a Kiwisaver account) was ‘new’. Notice the research findings were only about most savings, for there was some displacement. The humans of behavioural economics are not extremist (unlike Rational Economic Men).

What does this mean for Kiwisaver? Ananish Chaudhuri, a behavioural economist at the University of Auckland, favours compulsory membership of Kiwisaver, arguing that it can have a significant effect on people’s saving behaviour in the long run.

At issue is the ‘opt out’ provision, for while the scheme has automatic enrolment new employees can choose to opt out from day 14 to day 56 of their employment. (Members can also go on a contributions holiday after one year.) The notion here is ‘libertarian paternalism’ proposed by Thaler and Cass Sunstein. You paternalistically frame the decision process in the way that the research evidence suggests is in their long term wellbeing but you allow people to over-ride the imposed decision. (See their book, Nudge.)

I guess I am not so much that way inclined, given that Kiwisaver is intended to be part of a coherent retirement system which includes New Zealand Superannuation. Should we require those who opt out of Kiwisaver to also opt out of NZS which is also part of the scheme?

You can already withdraw your Kiwisaver contributions for particular purposes: to buy a first home, serious illness or death, significant financial hardship, permanent emigration from New Zealand (other than to Australia), but unfortunately not for your tertiary education or training which might encourage grandparents to deposit for their mokopuna.

Kiwisaver has included an initial $1000 which was an incentive not to opt out but the recent budget abolished the grant. Presumably many of those who are newly autoenrolled have less incentive to stay in. (Don’t be surprised if there is no systematic post-policy review; that is not the way we generally run policy in New Zealand.)

What arguments will the government offer when it passes the required legislation and what will the critics argue? How much will the parliamentary debate rely on the idealised logic of Rational Economic Man and how much it will be about the messy reality of Humans? You can be sure that whatever the MPs argue, they will behave more like humans.

What Sort Of TPP Deal?

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

The US senate has given trade promotion authority to the President. What next? Will the TPP agreement be acceptable, and to whom? 

Unfortunately trade negotiations are riddled with acronyms. I have listed the ones used here at the end of the article.

The US Senate has finally passed the Trade Promotion Authority (TPA). This is necessary because the US constitution places responsibility for trade matters (such as Free Trade Agreements; FTAs) with the legislative branch of its government. However it does not have the capacity to negotiate international deals. Instead the deals are made by the executive branch (headed by the President) and approved by Congress. The danger is that Congress could amend the deal after it was settled. No sane trade partner would agree to a ‘final’ deal in which they had made concessions, only to have it changed by the US Congress. The effect of the TPA is that the US Congress binds itself not amend the trade deal when it is presented to it. It either accepts it or rejects it as a whole.

That the Senate has agreed to give the President this authority is not the end of the matter. The House (the lower parliamentary chamber of Congress) has to give it too. It is generally thought that a TPA from the House will be even more difficult to obtain.

But even if they both give the TPA there can be no certainty that Congress will accept the final deal. Practically that means that while the US executive is negotiating with its trading partners it is also negotiating with members of Congress and the pressure groups that influence them in an attempt to ensure that the final deal will be acceptable to the legislative branch of government. Thus far no FTA has been rejected. (A similar domestic process goes on in all democracies.)

The TPA applies to both the Trans Pacific Partnership (TPP) of 12 countries (including New Zealand) as well as the US and the Transatlantic Trade and Investment Partnership (TTIP) between the US and the European Union which is also currently under negotiation. (Note that the EU has  also to get a strong consensus from its 28 member states.) Here I focus on the TPP.

There are three groups of reasons for the US interest in the TPP. One, is it is seen as an integral part of the US Pacific strategy which aims to contain the Chinese economy. This cannot be said too aggressively, so exactly what it means is unclear. My view is that although Japan joined the other 11 members in the TPP late, the US cannot resist a deal with Japan. That does not mean it will be a bad deal for New Zealand because any access the US gets into the Japanese market should apply to the other 10 members too, and while rice liberalisation is not high among our priorities, there should be some (limited?) gains for dairy and meat. What it does mean, though, is the deal is going to be biased towards US and Japanese preoccupations, and that things important to us (and to the other 9) are likely to be downgraded.

The second group of reasons for the TPP is to remove the artificial barriers to trade in goods and services. A common US economist comment is that tariffs are now so low that these hardly matter. Generally true, but not quite. The restrictions on agricultural goods remain high. It would be of immense benefit to New Zealand to have them substantially lowered, although I am not too optimistic.

Even if the low tariffs come down there will be some jobs lost. Pressure from groups who will suffer as a result seems to have been a major factor in the reluctance of some US Senators to agree to a TPA. No doubt the US Government will be doing its best to minimise that impact but it can’t avoid it altogether. (For instance, the Japanese are keen to get better access for their cars to the US market – presumably at the cost of US car worker jobs. In return they will give better food access – at the cost of Japanese farm jobs.)

The third group of reasons might be classified as the needs of the globalised economy. As the world economy becomes more integrated there is a need for supra-national arrangements. Greens want better international coordination of environmental policies, affluent workers want common international standards for working conditions. But the big ones in these negotiations are Investor State Dispute Settlement (ISDS) procedures and Intellectual Property (IP) standards.

I have no difficulty with the need for such supra-national arrangements, although space precludes my detailing the arguments. However it is not at all obvious that the best way to obtain them is via free trade agreements among groups of countries. The US became frustrated with multilateral attempts to address the issues and turned to FTAs to progress them. But imagine a world in which there are different ISDS and IP regimes in the TPP and TTIP agreements, not to mention a multitude of others. It would hardly be a global arrangement.

There is considerable unease in the US about including ISDS and IP provisions in the FTAs, although I did not get the impression they were prominent when the TPA bill was passed. They may become more important when Congress has to agree to the final deal. The concern about the possible deal results in some strange bedfellows. Both the US right and left are uneasy about the sovereignty implications of the ISDS; one cry is that it will give foreign (i.e. non-US) corporations rights which domestic (i.e US) corporations will not have. An IP regime which might be good for the pharmaceutical industry (if not for patients) may be detrimental to innovation in the IT industry.

It is all a bit messy especially if you are New Zealand. Sure, we punch above our weight (every country says that) but it is a small punch compared to those in the Japanese-US negotiations. Fonterra and our meat companies, among other exporters, will be very keen for any improvement in access that can be obtained, but New Zealand as a whole may have to trade improvements in access for less than perfect ISDS and IP regimes.

Not far from the TPP are the TTIP negotiations which may turn up different outcomes. My expectation is that the EU with its members sensitive to sovereignty issues will probably end up with a saner ISDS regime than the TPPA will by itself. I am less sure about their IP deal – there are some big European pharmaceutical companies.

Perhaps the best New Zealand can hope for is that there will be sufficient unease in the US Congress for the ISDS and IP chapters to be parked until the TTIP settles its regimes. Perhaps this is a thin hope; perhaps the best thing you can do is make sure your friends and relatives in the US approach their Congress representatives with your concerns and theirs.

ACRONYMS

EU: European Union

FTA: Free Trade Agreement

ISDS: Investor State Dispute (Resolution) Systems

IP: Intellectual Property (includes copyright and patents)

TPA: Trade Promotion Authority

TPP: Trans Pacific Partnership of 12 members including NZ.

TPPA: TPP Agreement (used by some to distinguish the final agreement from the negotiation)

TTIP: Transatlantic Trade and Investment Partnership (between EU and US)

US: United States of America

A Short Term Budget?

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


AUT Briefing Papers May 30, 2015

Third term governments always look tired. Policies developed in opposition have been implemented (usually with more difficulty and less effect than expected), ambitions – such as exporting 40 percent of GDP – are nowhere near deliverable (and in truth, never were), unexpected issues prove tiresome and intractable and whenever you try to do something the majority grumbles (of too much or not enough, usually both) and too often there is a minority with a veto. Perhaps worst of all, there is never enough cash to do what you’d really like to do. While every third term government looks to its ‘legacy’, this Key-English budget looks flat.

It has never been obvious that the Key-English administration has had a vision other than being ‘good government’. That has been its political strength for vision involves looking to the challenges ahead. It is easier to deal with the immediate issues and, broadly, that is what the public wants as long as things are going well. Admittedly, the current administration took over as the global economy plunged into its worst postwar crisis and its longest postwar stagnation, which is still not over for many economies. Initially the New Zealand economy stagnated too, but it did not collapse and the economic stagnation from 2007 to 2013 was just tolerable. Since then the economy has been growing along at about 3 percent per annum– back on its long term growth track.

There were two main reasons why New Zealand survived the global downturn. The first was the Cullen Cushion, for the previous Minister of Finance had been squirrelling away surpluses which were raided in 2009 to ease the economy through the downturn. So far English has not been able to reflate the cushion. The government budget is still running a (small) deficit and the level of public debt is considerably higher today than it was in 2008. English implicitly acknowledges Cullen’s achievement by saying that he would like to do the same, but the projections suggest not in the current term.

The other key positive factor in the New Zealand economic performance has been the consequence of the China-NZ Free trade agreement which has opened up opportunities in the growing Chinese market especially for dairy products. Again it was the Clark-Cullen government which did the deal but it was the Key-English government that benefited from it.

This is not to make a political point. The reality is that each government inherits from its predecessor newish policies which it continues. For instance, the Minister for Economic Development was able to get some large infrastructural projects quickly underway because some five years earlier the previous government had seen the need and prepared the groundwork. Similarly the restructuring of Auckland’s governance was underway under Labour (although the first thinkings occurred in the time of the Bolger-Birch National government).

A third reason for the government’s short term success, a negative one which also began evolving under the predecessor government, concerns the heavy offshore borrowing by the private sector. Little of this has gone into increasing the capacity to produce (or export to pay for it) but has been for consumption purposes – either directly or via housing construction.

It is hard to disentangle the Canterbury earthquakes rebuild so let us just focus on the Auckland housing market with its speculative boom. It is only the short-sighted or those who profit from the boom who cannot see the obvious. The Reserve Bank thinks that increasingly rents do not cover landlords’ outlays. The logic is that either the landlords are subsidising their tenants or that they are in it for the capital gains.

Admittedly there is a problem of a housing shortage in Auckland to which the difficult geography and lack of a commuting infrastructure complicate the migration pressures. The speculative boom has added to the shortages because its new housing is at the large end of the market. People don’t really need huge houses to live in but the reality is that there are more capital gains to be made from an over-leveraged large house. Building one large house means there is not the capacity to build two or three smaller houses, thereby contributing to the shortage of affordable houses for ordinary New Zealanders.

However, speculation requires a regular turnover of housing which generates fees to transaction specialists – real estate agents, valuers, conveyers, lawyers, financiers and the like – who largely consume their income rather than save it. Thus a speculative boom financed by offshore borrowing flows through to consumption and everyone feels prosperous as long as the capital inflows and the boom continues.

The issue has been, among the rational anyway, not whether there is a speculative property boom but how to restrain it. Supply-side policies of increasing the stock of housing are too slow, and in any case won’t work during a bubble. The Reserve Bank has found exhortation ineffective and is constrained by its legislation as to what else it can do. At face value, using prudential finance policy instruments such as loan-to-value ratios for macroeconomic purposes is odd but the RBNZ is trying to avoid ramping up interest rates to moderate the Auckland boom. That would kill housing in the rest of the country and productive investment everywhere.

Belatedly therefore the budget announced a capital gains tax to discourage short-term property speculation. (There appeared to be an element of panic; earlier in the year the prime minister had announced there would be no new taxes in the budget.) Will this be enough to quiet the boom? While policy managers dream of a slow deflation, speculative bubbles usually pop spectacularly, erratically and messily.

Thus the three main forces sustaining the economy are all under threat. There is no Cullen Cushion for a buffer, the initial penetration into the Chinese market is now on its saturation path (and there is sufficient turmoil in the world dairy market to threaten prices even if the Chinese economy does not slow down) and the housing bubble may implode. (The fourth, the Christchurch, rebuild will eventually come to an end.)

One does not get a sense that the budget speech is aware of this although no doubt the Minister of Finance has been briefed along similar lines to the contents of this article. There is a hint where the Treasury forecasts say the Chinese and commodity risks are ‘skewed to the downside’. Because the penalties are even higher on the downside than the gains are on the upside, the prudent would think more about the downside; the budget does not.

Any thoughtful review of the economy’s prospects would conclude that the country needs a higher savings rate. More savings would enable a sustainable exchange rate. It would give people greater security in retirement, increase domestic ownership and maintain national integrity. That is one of the reasons for the government running a budget surplus.

Consider the ending of the Kiwi-saver incentive. Cullen ingeniously hid some of his budget surplus by giving it to individuals as a Kiwi-saver deposit. However they could not spend the pseudo-tax cut but were forced to save it for retirement. Whether it additionally increased the private savings rate may be debated, but the effect of abandoning the incentive for opening the account as in this year’s budget and using it to fund the benefit increases to poor families will be to stimulate consumption.

The net effect of the budget is pro-consumption when increasing domestic savings ought to have been a medium term goal. Having said that, the benefit increases are a long-term investment in the economy insofar as they reduce the poor health of children, improve their education and access to training and help reduce social inequality which should also reduce crime and delinquency.

Few of these medium and long-term considerations were prominent in the budget speech. They may be overwhelmed when the downside occurs. That will surely happen one day – but hopefully not too soon!

UNDER CONSTRUCTION

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New Zealand International Review, May/June 2015, Vol 40, No 3.

 

There is a bit of a construction shambles around the buildings that house the European Union in Brussels with new buildings, buildings retrofitted for energy efficiency and improvements to the subway and public surrounds. It is not that the activities of the EU are necessarily compromised, but it symbolises that the ‘more perfect union’ it seeks is far from complete.

 

That is well illustrated in its energy union. The EU energy system is not unified; integrating it is one of the priorities of the recently appointed new president, Jean-Claude Juncker. The problem became more acute last year when it was realised how dependent some of the 28 member states were on imported Russian gas. A third of the EU gas comes from Russia, and half of that through Ukraine.

 

Given a hard winter and a bullying Putin, a cut in the supplies could have left some very cold and vexed EU citizens, especially in the east. Mercifully, the winter was mild and Russia needed to sell gas for foreign exchange. (Its cut-back of supplies to Ukraine could be justified in commercial terms because they get behind in their payments; yeah right.)

 

There are other sources of gas from overseas, including Australia, but the shipping terminals are limited and it it is not currently possible to send the gas from west to all of the east because some of the pumps are not reversible. Terminals are being extended and built and the pumps are being given a reverse capability. The risks will not be as high next winter even if it is more severe and Russia is more belligerent, but the situation is a stark reminder that the EU energy system is not integrated, not even physically, let alone commercially; EU energy policy is under construction.

 

The EU’s problem arises because most of its member states have a national monopolist in charge of gas supply, each jealous of its position and unwilling to coordinate with the one next door. It is not easy to develop a more perfect union because pipes are infrastructural monopolies (common carriers) so the usual solution of increased competition does not work.

 

The Poles, for instance, are putting in a gas terminal at Swinoujscie which will reduce their dependence upon Russian gas. Swinoujscie is on their Baltic coast about as west as you can get in Poland, butt against the German seaside resort of Ahlbeck. Why not bring the gas in from a North Sea terminal piping it across Germany? Cough! Presumably that would compromise Poland’s national independence or, at least, it would provide challenges to the Polish national gas distributor.

 

A similar problem of national independence bedevils the European Monetary Union. Before explaining it, a word of caution. Most of us read only English texts written by Americans and Brits who have a political agenda – the euro is a threat to the supremacy of the US dollar and the position of London as a financial centre – and whose monetary history has not been nearly so chaotic as the continent’s.

 

For the individual or business, not having to keep changing currency whenever one crosses a border is a boon. Interest rates do not need a premium to cover exchange rate volatility between the member states’ currencies and have come down. Having the currency regulated by an independent and prudent European Central Bank (based in Frankfurt) is another benefit

 

So far, so good. But some issues had not been thought through. Rather than go through the entire list, we focus here on the problem which has led to recent difficulties.

 

The theory of monetary unions assumes that the significant borrowers are businesses (and individuals) who can go bankrupt, in which case they close down and the shareholders lose all their equity. But sovereign states cannot go out of business and their ‘shareholders’ have quite a different investment in them.

 

The European Monetary Union established rules which tried to avoid levels of sovereign indebtedness which threatened a debtor crisis. But shortly after the Global Financial Crisis it became evident that some countries were in deep financial trouble with debt they could neither repay nor rollover because lenders no longer trusted them.

 

Most of the focus has been on Greece but it was not alone, just the most extreme example, so extreme that the usual procedures for sovereign bailout – typically they are applied two or three times a year in the world as a whole – would not work.

 

Greece got into its difficulties because of generous government spending and a weak tax base (including tax evasion and corruption). Its public accounts were misleading. As a result it borrowed vast sums to cover the fiscal gap but this did not become apparent until 2010 when the statistical base of the government accounts were straightened out.

 

It is well to remember that European banks chose to lend the sums; voluntarily, many would say ‘recklessly’. As a result, and given the poor performance of the Greek economy (as a consequence of the long recession following the Global Financial Crisis as well as the adjusting to a more sustainable fiscal path), its public debt to annual GDP ratio rose from about 100 percent (which is usually thought to be well above a prudent level) to near 180 percent, a level which involves such high interest outgoings that it will continue to rise even if the Greek government runs a fiscal surplus and the economic performance improves. In the jargon the debt is ‘out of control’. Resolving it is all very complicated.

 

One complication is the role of Germany. As the largest economy in the EMU it has considerable sway in its decisions, but its role is limited by the German populace being impatient with the spending generosity of the Greek government in contrast to the austerity of (the somewhat richer) German government. A further complication is that there is still deep resentment among the Greeks at the German invasion of Greece during the Second World War.

 

Greece has improved its fiscal management substantially and now runs a ‘primary surplus’, that is before interest payments. The full deficit, including interest payments, is still large and debt levels will continue to rise unless there is some sort of bailout.

 

The analysis thus far has been largely in terms of the governments as business entities. But in a democracy, their shareholders have quite a different relationship. While they are happy to benefit personally from government spending, they do not really think of any consequential debt incurred as theirs personally.

 

Greece has had troubling changes of governments. The latest is that the leftist party of Syriza (an acronym for the Coalition of the Radical Left in Greek) became government after the 25 January 2015 election on the promise of easing back the fiscal austerity. Those who hold Greek bonds were not consulted, nor did they vote. As the subsequent negotiations between them and the Syriza Minister of Finance, Yanis Varoufakis, bear witness there has been little room for manoeuvre other than delaying decisions..

 

The public lenders are haunted by the fear that to give concessions to Greece may set precedents for other troubled nations. (Spain is mentioned as next in the queue.) But they must also be haunted by the fear of giving neo-fascists throughout Europe a popular cause. (Greece had a military junta from 1967 to 1974.) And they are also haunted by the fear that a Grexit may lead to a collapse of the European Monetary Union, or at least a severe diminution of its size and influence in the long-term.

 

Perhaps this is too much detail, but it highlights the theme of this article: the EMU is still under construction. Some will argue that its whole conception is impossibly flawed; others that it was being built but was in its incomplete state unprepared for the GFC and its aftershocks.

 

Avoiding a long economic thesis about how monetary unions work, for these purposes note that a monetary union involves giving up a sovereign exchange rate and thereby abandoning one of the tools of economic management. Grexit can be thought of as the Greeks demanding that tool back unless there is some compensating assistance for its loss. (Having an additional tool in the kit will not simply resolve their problems.) It is instructive that Polish economists have shifted from an enthusiasm for Poland joining the EMU to much greater caution.

 

This reflects a fundamental challenge faced by the EU which we saw also in its energy system. Many economists would only recommend a monetary union if there was also fiscal (and there fore political) union. Once more the ever more perfect union involves member states giving up chunks of sovereignty.

 

The Greek debt crisis suggests that fiscal sovereignty is under threat as the EU forces Greece to address its economic policies. This is no different from what usually happens when the IMF leads a consortium to sort out a debt crisis anywhere in the world or, indeed, when a bank has to deal with a private borrower that cannot service its debts.

 

The EU is likely to be under construction for some time. Could it fall to bits before it is completed, perhaps as the result of it member countries refusing to give up enough sovereignty? Politics is so dependent on the contingent who can tell? Yet I left the study tour optimistic.

 

My July stay in Brussels coincided with a meeting of the heads of the member states the purpose of which was, among other things, to elect the new EU President. Before doing so they made a pilgrimage to Ypres where the first major battle of the Great War had occurred one hundred years earlier. (Later it would host the Battle of Passchendaele.) They meet solemnly at its Menin Gate, the memorial to the British Commonwealth soldiers who fell there; together and as friends, despite their predecessors being deeply divided a century ago, symbolising their commitment of ‘never again’. It was a war between sovereign states.

 

This article was made possible by a trip to Europe supported by the European Delegation in Wellington and the German and Polish governments, with travel support by Air New Zealand. As grateful as I am for their assistance, none are responsible for any of the views expressed here.

Two Dollars A Day, Is All They Pay, For Helping With Povertay

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The 2015 Budget did not deal with children’s poverty  but it did put a down payment. 

(This is based on a presentation to a Child Poverty Action Group Post-budget Breakfast.)

The budget begins by identifying five ‘fiscal priorities’. Three are about the fiscal deficit and the track of the fiscal debt, one is about ACC levies – which strictly are not a fiscal issue – and the fifth is the government’s intention to reduce income taxes from 2017 (which just happens to be an election year). Apparently the government does not have a long run priority of reducing child poverty.

Undoubtedly the 2015 budget gives some attention to child poverty. On its own estimate, it provides a $790m package over four years. It is a gross measure; the amount is not offset by reductions in the real values of other spending on children.

It is not much. A total of $790m over four years is equivalent to a spend of just over $2 a day for each of the quarter of a million children who are usually thought to be in poverty. That is an average. Some will get more, some will get less or nothing and there will be some unavoidable leakage to children who are not in poverty. Whatever, it is not a large amount. You can hear the government flipping a two dollar coin to a kid and telling them not to spend it all in one shop.

The small amount reflects two things. First, this is a very tight budget with little additional spending. I am not uncomfortable with the overall fiscal stance. It reminds that the claim that New Zealand is a rock-star economy is not very convincing; nobody has said that this government is a rock-star and its budget position certainly is not.

The second reason for the small amount is that the rise in child poverty was a consequence of substantial tax cuts favouring the rich which were paid for by cutting the incomes of poor households especially those with children. We cannot significantly address child poverty without rebalancing the tax and income support system towards them. Certainly one can find $2 a day by fidgeting around the edges of revenue and spending, but that is nowhere near sufficient. When I did a detailed analysis of a beneficiary and her child I concluded that they needed an extra $140 a week or so – about ten times as much as the $2 a day.

The government thinks it has found a way to square the circle. The budget speech says that ‘[t]he best thing we can do for these children [in material hardship] is to get their parents into sustainable, full-time work, where that is possible.’ There are two problems here. The first is that it may not be possible. The health problems faced by the particular family I was looking at – the one which needed an additional $140 a week – precluded her working very long hours. Admittedly, more income would have led to better nutrition and healthcare which may have made it easier for her to work – in which case the government’s approach puts the cart before the horse. The family needs more money in order to be able to go out to work. The government’s approach leaves her family rotting on a low material standard of living.

But there is a second issue only marginally understood by the government and those who advocate work as a solution to child poverty. Very often a working parent requires childcare; that can be costly. Their net income is actually their after-tax income less the cost of childcare. However the standard measures of poverty ignore this and treat childcare as a luxury spend. .

 Over the years there have been various childcare subsidies; they seem to be a bit of a shambles and are not flexible enough to meet many working parents’ needs, so the families end up poorer than the income statistics show, because of the costs of unsubsidised childcare. That means we underestimate poverty in working families and overestimate work as a solution to the child poverty problem. The government strategy won’t eliminate child poverty; it seems designed to allow the government off the hook of addressing the problem properly.

Yet one must acknowledge that within the tight fiscal constraints imposed by the state of the economy and the unwillingness to raise additional revenue, the government has tried to ameliorate child poverty in New Zealand.

There will be a lot of grumbling about aspects of the package as is the nature of budget commentary. Given that it is based on ad hoc incrementalism – of tinkering about with an inadequate structure – much of that grumbling is justified.

I would go the other way. Within the limitations and subject to the foolishness of their long run strategy of trying to solve the poverty problem by getting all parents out to work – the government has made some progress. The government acknowledges there is a serious problem and it is doing something about it.

But what it has done – at $2 a poor child a day – it is not enough. Or to put it more constructively, it is only a down payment. It would be totally wrong for the government to say complacently ‘we have addressed the child poverty problem, now onto the next issue’. What the children’s lobby must do is continue its pressure for further measures. It should demand another $2 a day, or more, in the 2016 budget and another $2 a day in the 2017 budget and probably for a few more budgets after that.

In the interim, I hope that the government will start doing some hard thinking and, instead of incremental additions to an existing and not very effective system of fmaily assistance, develop a comprehensive approach which – as an aside – would demonstrate that getting parents into paid work is not going to be the ultimate solution.

The lobby can take heart. It appears that it was only during last year’s election – six months ago – that the government came to the conclusion that child poverty is an issue to which it should give priority. It was not the research evidence, accumulating for forty odd years, which persuaded it; it did so because the public showed it cared about the state of our children. That is what led to the prioritisation – pressure from people like you. Congratulations. Good on you. Keep it up, you should be able – eventually – to get much more than $2 a day for our kids.

Should There Be A Budget Deficit?

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There is a lot of chatter about the government’s budget deficit but, politics aside, why does it matter?

Rob Muldoon famously remarked that the typical New Zealander would not know a budget deficit if he or she tripped over it in the street. Knowing a little bit about it I have puzzled as to how one would come across the deficit in the street – perhaps I lack imagination.

Even so, over the next week the deficit will be one of the centres of attention. In part it is because in last year’s election campaign the National Party promised to have the government budget in surplus this year. If it is the only promise that gets broken over the next three years, Key’s government will have performed a miracle.

In fact the deficit or surplus is the difference between two very large numbers, each subject to fluctuations and margins of error. Does the magnitude matter greatly when the difference between them is small? In some ways ‘no’, but if the deficit persists we need more caution. This is the seventh deficit in a row; cynics will not be surprised that – whatever is promised in Thursday’s budget – the eighth year will also bring a deficit.

Formally, a budget deficit requires additional borrowing (or privatising assets, but let’s not go down that path for the present). In any year the government does an enormous amount of borrowing, most of which is rolling over existing debt, preferably at low interest rates. At some time those relending the debt may get impatient with a country’s debt levels and refuse to continue lending or raise the interest rate they charge. We dont have to go through here what happens after that, because on the whole New Zealand’s public debt levels are low by international standards.

Our private international debt levels are not. There is an argument that when the private sector fails, the public sector will have to bail them out. (Sigh.) International lenders take that into consideration when they are assessing the New Zealand government’s debt position. They might well think that the government’s debt levels are currently too high from this perspective, although I do not have the impression that it is a major concern yet. But those who know what the deficit is, are aware of this danger.

Even if there is not a borrowing problem we should never forget that government debt – which is increased each year by the budget deficit – is a burden on future generations; one day they may have to pay it off. Morally I am uneasy at resolving today’s economic problems by simply passing them on to others, especially those who are yet unborn or who had no vote in the last election. Just as I worry about whether we are treating the physical environment sustainably, I am concerned whether our economic, social and financial policies are sustainable too.

That does not mean there should never be a budget deficit. Sometimes you have to ease back on the gas to drive a car around a corner, sometimes an economy taking a hard knock has to run a public deficit to ease the harshness of adjustment. But that hardly justifies seven successive years of deficit. (Those of you with a biblical turn of mind, will recall that Joseph stored grain during seven years of plenty and ran the stores down during seven of famine. We are told that these are years of abundance; yet we still seem to be running down the grain stores.)

Of course, if the deficit had the effect of reducing the burden on later generations we might be more relaxed about it. There is an argument that much of government spending – say on education and healthcare – is an investment for the future.

It is more complicated than that. Our investment in education is partly to offset the depreciation of its value in the adult population (every time someone dies the investment in their education is lost). Much of our healthcare is for improving the quality of life. I do not object to such expenditure, but it is largely for consumption purposes; children aside any investment dimension is small.

A second issue is that the investment in an individual may give zero return to the state when they migrate and take the investment with them. On the whole I am cautious about the social investment arguments.

In any case the deficit has arisen from giving ourselves income tax cuts so we could consume more – presumably at the expense of future generations’ consumption. In effect we have been stealing from our grandchildren. I would have a different view, I suppose, if the deficit had arisen from a major program to ‘invest’ in poor children rather than tax cuts.

All this suggests that analysing the budget deficit is difficult. Perhaps it is a good thing you dont trip over it in the street. But the issue is not usually the deficit per se, but what its causes are, whatever the uninformed commentators will tell you over the next week. Rather, we need to ask about the purpose, quality and extent of public spending and whether we are paying enough taxation for it. Ultimately, does it represent a sustainable strategy?

Footnote: Older readers will recall that before the Muldoon era the government regularly ran a budget deficit. While economists talked about it, they were not too concerned. In those days the deficit was measured differently. The government ran a surplus on its current account which was used to invest in public assets (such as State Owned Enterprises). The ‘deficit’ was the borrowing for the remaining investment. We can’t do that to the same extent today because most of the SOEs have been sold off.

Peculiar Outcomes Of FPP Elections.

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

You may have been surprised at the outcome of the recent British elections, but New Zealand’s experience shows you should not have been surprised that you were surprised

While writing my history of New Zealand, I wondered about whether it would be possible to assess people’s attitudes before there were surveys. Writers often impose their prejudices, without realising they are doing so. That applies to contemporary writing of the times, while private writings – say, correspondence and diaries – reflect the musings of a particular (the most literate) part of the population (and often have little to say about the political questions my history is interested in).

I don’t trust newspapers; I have worked with too many journalists who are cynical about their readership and impose their prejudices on public opinion.

It occurred to me that every three years or so the government surveys the adult population with one question which should throw some light on the issues troubling me. I thought election voting might shed some light on the public’s attitudes about the political economy.

There were problems of interpretation. One is tactical voting, in which you might prefer Party C but voted for Party A because you wanted to keep out Party B. Then what to do about miscellaneous parties especially the ‘Non-vote’ Party which Bob Chapman pointed out often has an enormous impact on the elections outcomes (the less imaginative refer to it as ‘voter turnout’)? Additionally there was no proper conservative party until 1908 when Reform was created by Bill Massey so I could not really go back before then.

The elections, which occurred before there were useful surveys, were run under what is conventionally, but inaptly, called First Past the Post (FPP) regimes. There is no ‘post’, so the book refers to them as ‘Front Runner’ (FR); when the music stops, it is the candidate in front who is elected, even though he or she may have made little progress in the race.

What I found was that frequently the elected government of New Zealand did not reflect the wishes of the electorate. Historians tend to report about seats won, not about votes won. Sometimes there were significant divergences. Here are some examples.

1911 Election: The incumbent Liberals won 194,059 votes and Reform won 165,127. Yet Reform won 37 seats against the Liberals’ 33, becoming government after various deals and floor crossings. (Reform votes exceeded the Liberal vote in the next, 1914, election.)

1928 Election: This time the incumbent Reform Party won 263,382 votes but it was the ‘United/Liberals’) winning only 225,042 votes which became the government. Each won the same number of seats (27) but Ward acquired a few independents while Labour with 19 seats sat out the dance. Incidentally, between 1925 and 1928 Labour increased its voter support by 10,714 votes and won another 7 seats. In the previous triennium between 1922 and 1925 it had won 36,930 extra votes but lost 5 seats.

1935 Election: Seen as a great victory and a turning point in New Zealand politics, Labour won 46.1 percent of the vote and 53 seats, while the National Coalition won only 32.8 percent and only 19 seats. This was partly because two other parties (Country and Democrats) split from National, winning 10.3 percent of the vote, and fragmenting support. If you go through electorate by electorate adding the fragmented right-wing votes to National, the right would have won more seats than Labour. Once it was factionalism on the right which kept them out of power.

1946 Election: This was the last time a party won more than half the votes. Previous occasions were 1938 and the Liberals in 1890 to 1908 (excluding 1896), but then there was not really an organised alternative party and often elections ran under a system different from FR/FPP.

1951 Election: Here is what the draft book says:

            ‘[Following the ending of the Waterfront Dispute] the Labour Opposition had called for an election. Not a good move because it gave National the excuse to call a snap election, in which they gained another four seats. However their share of enrolled voters fell by 0.5 percentage points while Labour’s share fell 3.3 percentage points. The big ‘gain’ was those who did not vote, rising 3.4 percentage points. The outcome of the snap election is often portrayed as a ringing endorsement of National’s handling of the dispute; it is really an indication that the Labour movement handled matters worse.’

1978 and 1981 Elections: Both elections are noteworthy for Labour winning more votes but fewer seats than National.

1993 Election: Here is what the draft book says:

            ‘It was a very grumpy population that voted in 1993. National lost almost 200,000 votes compared to 1990, with its share of registered voters falling from 39.6 percent to 29.0 percent, lower than its support in the 1984 election after nine years of Muldoon. Yet Labour’s share fell from 29.1 percent to 28.7 percent. The alternative left vote had consolidated into the Alliance whose main components were New Labour and the Greens; they won 15.1 percent of the vote, over a third of the left vote. Meanwhile New Zealand First, a breakaway centre-right party arising from Winston Peters leaving National, won 7.0 percent of the vote. …‘It was the last FR/FPP general election; once more the allocation of parliamentary seats was eccentric. National won 50 seats, Labour 45, the Alliance 2 and New Zealand First 2.’

In about one in three elections under FR/FPP outcomes were markedly eccentric (space has meant leaving out some of the nuances) where parliamentary outcomes did not reflect voters’ wishes (even ignoring the Non-Vote Party). The effect was especially strong when there was a significant third party support reflecting that the populace’s opinions could no longer be treated as simply being on a left-right spectrum.

The surprise then is not that New Zealand switched to an alternative voting system but that it took so long to do so.

The May 2015 British election underscores the same lesson. Labour’s share of votes rose 1.5 percentage points, more than the Conservative’s 0.8 percent;, but it lost 26 seats while the Conservatives gained 24. At the specific level one can explain this by the complexity of the other third of voters switching between a multitude of minor parties. Conservatives got 36.9 percent of the vote, Labour 30.4 percent.*

As I watched the run-up to the election I wondered how anyone could predict the election outcome with confidence. I was not surprised the outcome was surprising.

Will Britain switch to a more representative voting system? It has a record of getting to the right solution only after it has tried everything else – often decades (or centuries) too late. The last opportunity for change was fumbled when the Liberal-Democrats got no movement on electoral reform despite being in coalition with the Conservatives as part of the previous government.

The problem arises because the FR/FPP electoral system evolved before there were parties as we understand them today. Electorates elected their members to represent them, not as representatives of some party. The result – as the New Zealand parliament before 1891 well illustrates – was that governments were rarely stable.

The creation of parties gave a stability – even an elected dictatorship. While there have been occasional bouts of turbulence, no New Zealand government has fallen because of instability since 1911. The price has been that MPs are usually loyal to their party rather than to their electorate.

Throughout the world the vast majority of today’s MPs give greater priority to their party. But our thinking and institutions have yet to adapt, particularly as our societies become increasingly heterogeneous. It took years after the establishment of the first party (the Liberals in 1891) for parliament to formally recognise the existence of parties. The first step I know of was legislation in the early 1970s when party allegiance was put on the ballot paper; the biggest changes occurred AFTER the referendum which adopted MMP. 

As for my general history? I think I was able to make some long run inferences from the electoral record – but weak ones. You’ll have to await its publication to find out.

* The Greens won one seat with 3.8 percent of the votes; SNP won 56 with 4.7 percent of the vote; UKIP with 12.6 percent got one seat, the same as the Greens; the Lib-Dems won 7.9 percent and got 8 seats. Each with 0.6 percent of the vote, the Democrat Unionists won 8 seats but Sinn Fein only 4. (The voter shares come from a BBC website. I have seen slightly different shares quoted elsewhere.)

Barbarians At The Gates

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

Arts and cultural policy seems to be going backward at the moment. Why? Does it matter? 

In his 1852 inaugural speech as Canterbury’s first superintendent, James Fitzgerald – later to be New Zealand’s first premier – said, ‘There is something to my mind awful in the prospect of the great mass of the community rapidly increasing in wealth and power without that moral refinement which fits them to enjoy the one or that intellectual cultivation which enables them to use the other.’

One hundred and fifty six years later I recalled to the new Minister for the Arts, Chris Finlayson, that he had two great predecessors in Alan Highet and Doug Graham. Teasingly, I mentioned that a previous National Government’s prime minister, Jim Bolger, said that he wished he had spent more on the arts during his prime-ministership. The ex-premier standing next to us said, ‘I did say that, and I still believe it.’

I am not sure what the current prime minister believes. Possibly does not care; the consequence is that the arts, culture and heritage are being undermined by neglect and bureaucratic  insensitivity.

Here’s a question. Where in Wellington is the National Library Building? No, it is not on Molesworth Street. What you had in mind is now referred to by senior officials as ‘Department of Internal Affairs (Molesworth Street)’. Just along from it is ‘Department of Internal Affairs (Mulgrave Street)’. One has the National Library in it, the other Archives New Zealand (so half marks).

Apparently this will enable the DIA to spend a fortune shifting the various treaty documents from the security room of Mulgrave St to the Molesworth St site without legal challenge, since they are not leaving the Archives New Zealand building – there isn’t one. (A couple of asides. The lecture theatre in the past National Library has yet to be renovated for a far smaller cost, but they can’t find the cash to do the job. Of course it is not ridiculous that the National Library has no decent lecture theatre – it hasn’t even got its own building. Meanwhile the past Archives New Zealand building is being invaded by other divisions of the Department of Internal Affairs.)

This sad state of affairs has arisen because the bureaucrats decided to merge the Library and Archives into the DIA. (You will recall the Clark-Cullen Government, which showed leadership in the arts and culture, had established them as separate entities.) An uninterested minister – he once told us the only New Zealand poet he knew of was Sam Hunt – agreed. The minister has since moved on to primary industries (he is more knowledgeable about cows and sheep) but the resulting administrative structure put the National Librarian and Chief Archivist – formerly departmental heads – at the third level below numerous bureaucrats who, apparently, seem out of sympathy with archives and libraries and may not have even heard of Sam Hunt.

Don’t you feel good about their eliminating the national brands of Archives New Zealand and the National Library and replacing them with the Department of Internal Affairs brand? Does your heart not swell with pride at the symbol of a barbarian-led DIA at the heart of the nation’s self-image?

The DIA attack on branding is not alone. Te Papa is proposing to eliminate Te Papa Press. In contrast, Massey University is establishing its own press as a part of promoting its brand. The next thing is that its graduates will be even more proud, students even more attracted. (Perhaps the university should be merged into the Department of Internal Affairs with the VC at level three; those above would be sure they knew better how to run a university.)

Then there is Te Ara, the world’s first electronic public encyclopedia. Apparently the proposal is to double your pride in the achievement, by ensuring it is the first world’s first electronic public encyclopedia not to have an ongoing program of updating. However, becoming a fossil will not double its usefulness. (Serve the politicians right. Being without bones their fossils won’t appear in the stagnating Dictionary of New Zealand Biography.)

The annual Book Awards are also in turmoil. The withdrawal of the major sponsor (the previous one was a state owned enterprise) has meant the postponement of this year’s awards. Meanwhile the BNZ says it is withdrawing from its literary awards, notably, the Katherine Mansfield short-story award. (Her father was chairman of the BNZ for seventeen years.) Its sponsorship focus is on Plunket, Super Rugby, Cure Kids and Kiwis for Kiwis. All very worthy, of course.

The lack of sponsors has also meant that Book Month has been postponed, possibly indefinitely. (I am never quite sure of its purpose since I buy and read New Zealand books every month.)  So business is contracting its role in supporting the arts too.

It is especially disturbing is that while many of our key cultural agencies should be dealing with the challenges of the electronic revolution, they are instead fighting barbarian bureaucrats and depending on commerce much of which has little interest in arts, culture or heritage. With a lack of leadership at the top, they are not winning.

A healthy arts environment helps us face the challenges of the future. Time and again I am struck by how our leadership is stuck with a world view that is not looking anywhere. Its priorities seems to be casinos, rugby and war – certainly not moral refinement and intellectual cultivation.

Has New Zealand A Rock-Star Economy?

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

Why does the Minister of Finance say this is is hardest budget ever? The economy may be doing moderately well, but it is by no means performing outstandingly.

In 1993 the New Zealand economy began to show signs of an upswing after the seven years of Rogernomics Stagnation. In a public comment I remarked that it seemed to be in the ‘recovery’ phase, which is the economist’s technical term for the stage in the business cycle when the economy leaves the bottom of the business cycle and goes into upswing.

The term was taken up by politicians including the prime minister. They thought, I think for their thinking was fuzzy, that it meant the economy was on a long-term upswing, at a higher secular growth rate than it had experienced in the past.

In fact the economy returned to growing at much the same as its past rate with a standard business cycle superimposed. It peaked in about 1997; its downswing with the Asian crisis was followed by widespread outrage that Rogernomics had not worked.

So sometimes an economist’s comment is seized on by the public and given a different meaning from what was intended. I’d like to think that was true about the claim that New Zealand was a ‘rock-star economy’. At the time New Zealand was doing a little better than some of the rich Western economies – we still are – but, on the whole, we are not performing at the giddy heights associated with a rock star.

New Zealand got through the Global Financial Crisis and (thus far) the Long Global Recession better than most for a couple of reasons. One was the strength of the Chinese economy. It was not just that it has been growing faster than other big economies, but that our Free Trade Agreement with it enabled New Zealand dairy and meat producers to open up new markets.

The other was the Cullen cushion effect. I use the name of the previous Minister of Finance, although there were others who contributed to an economic management regime which squirreled reserves away for a rainy day. When that day came in the form of the Global Financial Crisis and its aftermath, New Zealand was better placed than most to work its way through the difficulties. (The Canterbury earthquakes have also lifted economic activity. But, to make an obvious but often overlooked point, they have done more destruction and so the economy is actually worse off.)

This is not to say that Bill English has done badly but to remind us that compared to the fiscal messes many countries found themselves in, New Zealand was well managed. So many economies have stagnated, or worse, while New Zealand has gently powered on (but remember that we did not recover, in the non-technical sense, to the late 2007 level of output a head until late 2013).

Why then is English saying this is the hardest budget he has ever had to bring together? The cynics will say that the Finance Minister always says that; those with a more kindly nature might suspect he is getting bored – it is his eighth. In any case he is in a cabinet in which every other minister is baying for more government spending.

But there may be three other reasons. China is slowing down and the Cullen cushion has lost its padding. Besides the China issue, the world dairy market was in turmoil even before the EU ended its quotas on dairy production, which is expected to lead to a major increase in their dairy supply. (The minister may possibly also have some big expenditure blowout we don’t yet know about.)

Moreover, while the economy may have been doing well in aggregate, different regions are growing at different rates (or not growing at all). Regions which have benefited from the dairy boom are expected to be much less buoyant and in any case regions that have not been doing that well in the past have little prospect of doing better in the immediate future.

You may be puzzled about the six year stagnation. Don’t recall it? Possibly you were in a privileged part of the economy, but the government’s success in the 2011 election suggests that there was a general feeling of prosperity. (During the 2014 election the economy was expanding.)

What has been going on is that offshore borrowing – mainly for housing rather than increasing productive capacity – has given a false sense of prosperity. The catch is that some time the borrowing has to be paid for. You may think you can pay off your debts by selling your houses, but everybody cannot at the same time. Meanwhile the government is continuing to be a net borrower – that is what the government deficit means – and its debt is rising too.

So the economy has muddled through the past seven years; perhaps that is all we can expect from ourselves. But we are not as well placed as we were a few years ago to cope with a major external shock. The possibilities include another collapse of the international financial system and a physical catastrophe like an earthquake. (Will there be another global financial crisis? That is another column, but we should not rule one out.)

Key seems to be alienating the Auckland business community, probably because they don’t think his government is addressing such things (albeit with a business twist to their concerns). Perhaps others should be just as concerned (albeit without a business twist).

If we think we are a rock-star economy it may be because we are on hallucinogens. Withdrawal when reality comes to account can be painful.

Should Environmentalists Care About Poverty?

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

Can an environmentalist focus solely on sustainability or are they drawn into wider issues such has how fairly the material product of the economy is distributed?

Perhaps heightened by the leadership contest in the Green Party, there appears to be a debate going on about where environmentalism fits into the political spectrum. I am not a member of the Green Party (nor any other, for that matter) but I have been struggling with how the environment fits into the general history of New Zealand which I am writing. Along with resources, the environment is integral, of course, especially if you are coming from an economics perspective, but they are frequently overlooked.

There are a number of problems associated with the interaction between the environment and the market economy. Let’s look at only one, sustainability. A market works on the basis of dollar votes, that is, the number of dollars an individual spends influences the market outcomes. Those who have no dollars have no votes. That includes those who are yet to be born. Frequently, but not always, we use our dollar votes in a way that ignores their interests. The outcomes include environmental destruction and resource depletion which ,later generations will regret.

The solution is not automatically a non-market one. Children and the yet-to-be born dont have much political clout either. Those countries which were part of the Soviet Empire with economies which largely over-ruled the market had deplorable environmental records. In comparison it makes one proud to be a New Zealander, but only in comparison; our historical record ain’t too good either.

What we have tried to do as we became increasingly aware of the environmental damage we were causing, is to restrain the private market by government actions. There are many examples, but a good illustration is the Resource Management Act with its provisions for sustainability. What exactly that means is a matter of fraught debate, but one way of thinking about it is that it gives the interests of the yet-to-be born some weight. Whether it gives them too little or too much is contested. The constant pressures to undermine the sustainability provision of the RMA come from those who seek dollar votes. They are offset, in part, by the green lobby who give greater weight to outcomes which do not reflect the market, giving more weight to the interests of the young and yet to be born.

The implication is that one dimension – not the only one, I add – of the environmentalist concern is a distributional one. It is an intergenerational conflict which economists find difficult to analyse except at a simple level.

But they can be provocative. Famously Larry Summers, the most qualified economist to have ever headed the US Treasury, signed a World Bank memorandum which remarked that ‘the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable’. The person who wrote it for him, Lant Pritchett, insists that it was intended to be ‘sarcastic’. (Summers has a reputation for making provocative statements intended to open up debate.)

Read the memo in full and you will have no doubt it was ironic. The very last paragraph indicated its real intention. It was to remind the Summers team that the arguments listed in the parenthesis all deserve weight in their decisions:

‘The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.’ 

Let me write a parallel statement (please dear reader, it is ironic to get a point across): ‘the economic logic behind dumping a load of toxic waste for future generations to deal with is impeccable’. Change the term ‘toxic waste’ to some other environmental degradation and we have the case for castrating the RMA; the last paragraph of the Summers memorandum says ‘dont be silly’.

Is the issue solely an intergenerational distribution one? The memo is about rich and poor countries but equally it could be about rich and poor regions or rich and poor people.

To put it more elaborately, should we protect the interests of future generation at the expense of the poor of this generation? After all, the average level of material consumption of those yet-to-be-born is likely to be higher than that of today’s poor?

That does not mean that we should sacrifice the environment today in order to give the poor a better deal. (That is an implicit argument used for some environmentally degrading projects, but careful analysis shows they are typically of much greater value to the rich.) Rather, it says that the moral logic of promoting the interest of the yet-to-be-born leads one also to be concerned about the poor.

This is just one example of a general issue of green politics. Unless it is extremist extremist, it cannot ignore the rest of the political issues which confront us. I’ve done this only on the distributional policy dimension. There are other issues such as the nature and outcome of the growth process, the valuation of intangibles not valued in the market, imperfect information and the quality of life, where the same conclusion broadly applies.

What this means for the Green Party is for them to decide, Even if you do not belong to the party  you also have to cope with the challenges.

Gambling On The Dollar

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

Sharp movements in exchange rates often reflect sophisticated speculation. Is there much we can do about it?

While the near parity of the Australian and New Zealand dollars got a lot of breathless attention recently,  there was little analysis of why it was happening. Explaining the exchange rate depends upon the time horizon. In the long run, exchange rates reflect relative prices between economies; in the medium run the price effects are influenced by their investment-saving balances; in the short run there are cyclical effects influenced by interest rates and capital movements. All these are important in the exchange rate between the Australian and New Zealand dollars, with the additional complication that other countries’ economies and exchange rates are impacting as well,  while the dynamics – the transitions through time – can be horrendously complicated.

As likely as not, when there are sharp movements in the very short term, there is financial speculation. So, probably, the recent movements are result of betting on the New Zealand dollar rising to parity or higher. Speculators who bought a $NZ100 at $A98 and sold it at $A102 would make a tidy return over a short period. Except they were betting millions of dollars not a hundred.

Who was betting? We cannot be sure but practically banks, importers and exporters do not usually go in for these short-term squeeze plays. Typically those betting involve managed investment funds – often called ‘hedge funds’ – with billions of dollars of financial resources pursuing high-risk high-return investments. For our purposes we do not need to go into the intricacies of how they operate; relevant, though, is that they are generally based offshore and not in Australasia.

And yes, the funds are gambling. There use to be much mention in the financial media of how they contributed to the management of risk, but that theme has been, unsurprisingly, silent since the Global Financial Crisis of 2008 where it became apparent the funds were contributing to the financial instability instead. Moreover a lot of the gambling in 2008 proved to be with other people’s money. Some people, not those making the financial decisions, lost a lot and states found themselves reluctantly bailing out failed financial firms at the taxpayers’ cost. Not to have done so would have collapsed the whole payments system with substantial collateral damage to production, employment and consumption.

If it is gambling, then it is a zero sum game (or slightly negative since resources are required to play; foreign exchange dealers take their clip from each transaction). If some hedge funds are winners then there must be others who are losers. Presumably some hedge funds screw up on occasions, but for the industry to stay ahead it needs suckers from outside. Australians who had to buy New Zealand dollars (say for travel) probably don’t pay the industry’s coffee expenses. There may be some small investors who speculate and lose their shirts. Some businesses (and banks) may have the misfortune to need to roll-over the foreign exchange at the wrong moment (and sometimes a junior staffer of the firm loses their head – remember Nick Leeson of Barings?). Very rarely today, central banks intervene – taking them to the cleaners is one of the joys of the hedge fund industry.

But does not a rise in the New Zealand dollar show how healthy the economy is? Not if it is the result of a speculative attack against the Australian one. It is a bit like a bookie scam in which the odds in favour of a crippled horse improve.

Events are not helped by naive journalists asking those in the finance industry with fancy titles what is happening. What we hear and read must surely be clips from longer interviews. It almost invariably ends with a prediction which proves to be wrong. Journalists really should ask their ‘experts’ whether they, or their firm, are getting involved in the speculation. The honest answer is ‘of course not; I’m here to give my business some free publicity’. (If they say ‘yes’ get your funds out of the business, pronto.)

Should we do anything about these sorts of goings on? A high value of the New Zealand dollar damages our export firms and the jobs in them. So ‘yes’, we should do something (but it is complicated because there are numerous exchange rates). But that is a longer horizon issue – which belongs to another column – it’s not about dealing with speculative attacks.

The options to deal with the attacks are limited. Most central banks are small compared with hedge funds. (Our Reserve Bank has lots of New Zealand dollars, but its foreign exchange holding are small and they are what matter.) Obviously the more informed people who are involved in foreign exchange markets the better. Journalists for a start.

There are attempts to regulate hedge funds but that is proving difficult. There is not much New Zealand can do, other than support the bigger regulators. It is noticeable that the industry has not been that profitable since the Global Financial Crisis; some funds have closed down. While we may be broker as a result of the GFC, we are probably wiser. (Don’t worry, the wisdom will wear off as those in today’s short pants join the dealing rooms so the global gambling will return.)

I support the adoption of a Financial Transactions Tax, but New Zealand should impose one only if some bigger players do. Going it alone would be like our Reserve Bank taking on the world’s hedge funds. However, while an FTT would reduce the level of speculative financial activity it would probably do little to deal with currency attacks. They happen offshore even if they use New Zealand dollars. Our crippled horse gallops on.

Slavery In New Zealand

This entry was posted in Labour Studies, Pundit on by .

How come we tolerated such appalling working conditions for so long? (And a tick for crusading journalism.) 

Charles Dickens would be appalled. So would Fredrick Engels who wrote The Condition of the Working Class in England, as would New Zealand’s Sweating Commission of 1890. Even Simon Legree, the slave owner in Harriet Beecher’s Stowe’s Uncle Tom’s Cabin, would be astonished at the working conditions and wages (or lack of) that employers were getting away with. But this is not in the nineteenth century nor even the twentieth. It is in this one, and even more extraordinarily it was neither in industrialising Britain nor slave-owning America. The slavery is in New Zealand.

The working conditions? Up to 18 hours a day with food, water and sleeping accommodation of the lowest quality. The pay rates? Often cents per hour, if paid at all.

Ah, you say, the slave labour is not actually in New Zealand, it is Asians on ships in our Exclusive Economic Zone (when they are not in port). But we claim the EEZ and they are fishing with our permission, using Individual Transferable Quota (ITQ) issued by the New Zealand government. It really has something to do with us.

First, some background. The average person on the planet eats about 17 kilograms of fish a year. You wont be far off that yourself if you eat fish on Fridays. The rising demand has generated two forms of exploitation.

First, the world has been fishing species to extinction. When one disappears, fishers seek out others. It is true that an increasing proportion of the fish come from ‘sustainable’ aquaculture, but farmed fish are usually fed fish from the sea.

New Zealand has a good record on this environmental exploitation because the ITQs are designed to allow fishing only at sustainable levels. I was marginally involved in their introduction thirty years ago and I do not recall anybody saying then that while the ITQ was brilliant in principle, the application of the principle is very complicated and clumsy. Even so, we are but one of a handful of countries that try to maintain a sustainable fish stock in this way and, in any case, vast areas of sea are outside countries’ EEZs while ITQs do not work for migrating fish – notably tuna. (New Zealand, by the way, has been active in international trading negotiations demanding that the subsidies for fishing be wound back. Alas we have been about as successful in this as in arguing for the elimination of subsidies on agriculture.)

Second, many crew on fishing vessels are exploited. Typically they are Asians – say, in our case, Indonesians – with officers from another country – say, Korea. The ships usually fly flags of convenience – including those from countries which have no sea borders – and regularly change them and their ship’s names to obscure the true ownership, especially when the rustbuckets are caught out.

How come they are fishing here? While the rules of ITQs say that they must be owned by New Zealand entities, the quota may be leased to foreign fishing companies. Asian-owned ones have been willing to offer better returns to the quota owners. That is not true for all the fishing in our waters. Some is under New Zealand flags and employ crew (including New Zealanders) with New Zealand pay rates and working conditions.

You can read more about the appalling practices in Michael Field’s The Catch: How Fishing Companies Reinvented Slavery and Plundered the Oceans. (And while commending the book, I also commend publisher Mary Varnham of Awa Press who, reading of Michael’s work in newspapers, asked him to write the book.)

Before you get too indignant – and give up eating fish – the New Zealand parliament eventually got around to addressing the disgrace. The last statute the previous parliament passed was the Fisheries (Foreign Charter Vessels and Other Matters) Amendment Act 2014, which requires that, from May 2016, all foreign-owned fishing vessels are to fly under a New Zealand flag and obey all New Zealand laws including labour ones.

So don’t be surprised if fish prices rise a little thereafter. It will still be healthy food with the advantage that it has been caught decently as well as sustainably. Since the regime does not apply elsewhere fish eaten overseas may not be as clean.

The time between Michael’s first articles in 2011 and the enactment was three years – five before implementation. (There was a review committee in between.) That is not too bad for us. However, foreign fishing began in the 1980s so who knows how much exploitation has occurred. Why did it take so long?

One factor is that new situations often generates abuses faster than we can respond to them. But thirty years? Perhaps because it was outside our purview but ,come on, we are proud of our huge EEZ. Then again, it did not involve New Zealanders but guest workers. Aside from the implicit racism, are we really willing to tolerate their getting a bum deal – do they on land?

I am left with the uneasy feeling that this is yet another instance of our penchant for light-handed regulation, of ignoring the uncomfortable, of leaving the unregulated market to deliver high-quality, ethical, sustainable products and services. It does not always work, does it?

Will there be an apology from the lackadaisical government? At the very least it could offer crusading journalist Michael Field a knighthood, perhaps in tandem with Nicky Hager.

Bloody Bureaucrats

This entry was posted in Governance, Pundit on by .

Are we paying enough attention to bureaucracy? Are the current bureaucratic pressures changing the nature of society — and are they doing so for the public good?

David Graeber may be best remembered for coining Occupy Wall Street’s ‘We are the 99 percent’. In the literary world the LSE-based anthropologist is well known for his Debt, the First 5000 Years, but his just-published The Utopia of Rules; On Technology, Stupidity and the Secret Joys of Bureaucracy may be more important when it argues that we underestimate the importance of bureaucracy in our lives.

While bureaucracies have been around for five thousand years, Graeber’s argument is that they have become increasingly pervasive in our lives, citing the rising demands to fill in forms – both paper and electronic. He provides no data, but that is my impression too, although he has much better anecdotes.

An important aspect of Graeber’s thesis is that bureaucracies exist in the private sector as well as the public sector (and various agencies between them such as hospitals and universities). I probably fill in more forms for private bureaucracies than for public ones.

Many will connect the rise with phenomena like the GCSB, but my interest is their impact on the economy and our lives more directly. I became aware of their increasing importance following the changes made to the public sector in the late 1980s.

They increased the phenomenon of the generic manager, someone who knew little about the activity they were managing but knew lots about management – or it least knew lots about the current fashion in management jargon, for many of them seem to manage very badly. A repeated feature has been that once appointed they restructure the agency, in effect saying their predecessor was such a dodo they could not establish a decent organisational structure. When they move on, their successor relegates them to dodo status too.

It was not just the waste of resources and the human pain that each redisorganisation generated. Generic managers can be positively dangerous in their ignorance. A very senior one in the health redisorganisation of the early 1990s announced that a city as large Wellington could afford competing Intensive Care Units. He had confused the highly specialised service with the more routine Post-Operative Recovery Unit. One was so glad he never had a heart attack.

Ignorance and waste was not confined to the top. The doctors at one hospital discovered a unit deep in its bureaucracy which promulgated medical ethics. Had it consulted them – bureaucrats rarely do, if at all, until after they have made the main decisions – they would have discovered that the medical professions had a long history of ethics going back to Hippocrates which made the bureaucrats look like first-year students. Insulted, the medics dismissed the set of proposed rules as platitudinous and irrelevant.

It was a visiting American professor of public administration, Alan Schick, who pointed to the tension between professionals with an ethic of responsibility and managers who demanded accountability. He ‘suspected’ – his is a very discreet report – that the managerialism squeezed out professionalism.

The consequence has been the development of complicated systems of accountability with a bureaucracy to manage it. Any university academic will tell you stories of how their professionalism has been limited by rules, and rules, and rules. The most bizarre case they tell me of is that they have to spend days of research time filling in forms setting out their research achievements. The universities even provide bureaucrats to assist them, although uniformly, I am told, they know nothing about research – but they do ensure the forms are filled in. Some of the university bureaucracies have got so enthusiastic about the idea that they require the forms to be filled in even in years when the Performance Based Research Fund is not being assessed. What would the bureaucrats do in an off-year?

Graeber’s laconic summary is 

“A timid bureaucratic spirit has come to suffuse every aspect of intellectual life. More often than not, it comes cloaked in the language of creativity, initiative and entrepreneurialism. But the language is meaningless. The sort of thinkers most likely to come up with new conceptual breakthroughs are least likely to receive funding, and if, somehow, breakthroughs nonetheless occur, they will almost certainly never find anyone willing to follow up on the most daring implications.”

There was a strange seminar in the early 1990s in which a senior public servant propounded the importance of ‘trust’. It did not occur to him that both the Lange-Douglas and Bolger-Richardson administrations had destroyed public trust by reversing major election promises in office. No doubt he went back to his office and continued imposing controls. If you don’t trust professionals you need accountability mechanisms; if you don’t trust people you need more and more rules to regulate their behaviour – rules which need to be checked by forms issued by bureaucracies.

And so the bureaucracy grows, using more resources for inputs without generating additional outputs. I bet that failed venture into medical ethics cost, say, a dozen hip replacements. The funding for one Vice Chancellor’s office exceeded that for the university library. We have come a long way from Erasmus’s ‘when I get a little money I buy books: and if anything is left I buy food and clothing.’ (The VC’s successor reduced his office – by setting up other administrative units; no reduction in staffing.)

The implication is that the growth in bureaucracy absorbs resources but doesn’t actually do anything for economic welfare – other than employ numerous people with a clerical bent. One would like to think they could be deployed for more useful purposes but that would require a system with a great reliance on trust and responsibility. Perhaps we cannot go back.

Graeber’s concern is that public and private bureaucracies have a life of their own, accumulating power and resources for their own purposes rather than for any public good. They have to increasingly destroy trust and responsibility to increase their power.

He cites academics who over coffee discuss neither teaching nor research (and certainly not contributing to the public good). Instead they moan about the university bureaucracy. One is reminded of the bon mot that once the function of a university registry was to raise funds to enable academics to teach and to do research. Today the roles are reversed. The academics’ purpose is to raise the funds to employ those in the university administration, a far more elaborate organisation than the old-fashioned registry.

THE END OF MY ‘LISTENER’ COLUMNS

This entry was posted in Listener on by .

The story of reviewing ‘Myth, Politicians and Markets: the Truth Behind the Free Market’, author Bryan Gould
This column was never published in The Listener. It is a curious story which begins in October 2013 when I was asked to review the book for the magazine – urgently of course, reviews are always required urgently. I submitted it in November. There was no sign of it. When I asked about it in April 2014, I was told ‘soon’, and then came an apology that the editor thought it was out of date. (A book out of date in a year?) However if I wished, I was ‘welcome to adapt the review for a column’. I did, not only adding words (columns are longer than reviews) but extending the content and adapting it to a column format. I submitted it and was told that it would not be published.
Shortly after I was told my column would end. No adequate reason has been given; I acknowledge that a columnist is subject to the behest of the editor who does not have to give a reason. There were mutterings that being lost down the back of the magazine the column was not being reading, although no evidence was given for the claim (or whether that applied to all columns). I am not sure that the Listener even had the data to make an assessment.
There were mumblings that I could do features up front, although there had long been a pattern of asking unqualified and uninformed journalists to write on economics. (I have lost count of the numbers of times I have had to say, following criticism of upfront articles and editorials being ill-informed or with errors, that I was not consulted nor involved.) Since the termination I have not been asked to contribute a feature or do a review.
Among my close, collegial and casual acquaintances there was considerable concern. Some approached the editor directly or through letters, none of which were published. Some said they would not renew their subscription, although I insisted they took that action only if the whole magazine was failing to meet their needs. Some said that my column was the only thing that did – which was flattering; some switched to the TV Guide.
I have no idea how big was the upwelling. The Listener circulation and readership continues to fall, but it has been doing so for some time.
I almost gave up columns altogether, but surprised at the support I got from economists – including some very senior ones – who said they valued its role in the profession, I switched to writing for the Pundit blog. It is probably too soon to say how it has affected the column’s content and approach, but I work to shorter deadlines and am not so constrained by word length. (Over the years my Listener column length was cut by about 25 percent; I notice that I am returning to nearer the older length.)
Intriguingly I am getting more feedback and invitations to contribute on other parts of the media. Perhaps the Listener editor was right; perhaps the back of the magazine was a bit of a ghetto for the informed current affairs contributor although it does not follow that the only solution was termination.
I’m also writing weekly. I was always worried I would not have enough material to write a Listener column weekly (I was never asked to); the worry has proved needless.
If I am asked I explain that, like other media outlets including newspapers and broadcasting, The Listener is struggling. Apparently informed current affairs does not attract advertising. Have a look at the advertisements in whatever you are reading or watching and try to assess who the advertisers are trying to connect with.
It is an international phenomenon. My guess is that the future for those concerned with current affairs analysis will be electronic (although, for some time, there may be some international platforms which will be based on hardcopy publications, such as The Guardian and New York Review of Books). The challenge New Zealand faces is there are so many blogs it is hard to keep up with them all, that entry is free so that quality is variable and – most of all – there is no ‘business case’ (or, jargon free, means of fully financing them, for the platforms have a cost and few bloggers get paid, which does not encourage quality or depth).
Like other media forms – as I write, TV3’s Campbell Alive is under pressure – The Listener has responded by shifting its focus away from serious analysis towards lifestyle issues (think of the attraction to advertisers). It does not even have a Wellington journalist (a parliamentary reporter is not the same thing). The Listener is not the magazine I so happily began contributing to all those years ago.
It was great while it lasted. Let me conclude with some thankyous. I’ll not detail how much I valued the readers or those who have helped with columns. I must mention the subeditors, who I think have a dreadful job, but for four decades they have professionally, with good humour, turned my submitted texts into something for others to enjoy reading. And then there are all the editors who have supported me over the years. Thankyou every one.

The Trans Pacific Partnership Agreement.

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

Perhaps New Zealand’s acceptance of the TPPA will depend upon the outcome of the Northland by-election

Prime Minister John Key shortened his trip to Japan and Korea in order to spend more time campaigning in the Northland by-election. Domestic affairs trumped international ones – for a short time anyway.

He said he was going north to progress the TPP – the Trans Pacific Partnership, which is meant to lead to a free trade agreement between 12 economies including the US. Negotiations have been wandering on for years, with the ongoing promise of a conclusion ‘soon’.

I support the strategy of New Zealand’s involvement in such deals. In order to prosper, the economy needs to be an open one, engaging with the world. It will be a specialist producer – exporting some things, importing others – and that involves working with our trading partners. A consequence is that we (and they) have to give up some economic sovereignty, making concessions in order to obtain gains.

Free trade agreements are not just about eliminating tariffs and other border barriers. It is also necessary to change policies deep inside the borders which are, in effect, also forms of protection. However I do not think that all national policies should be compromised for trade purposes – any more than I think that GDP (material market output) is the ultimate indicator of progress and prosperity.

Economic theory says not every free trade agreement is necessarily beneficial. I am not alone in being haunted by AUSFTA – the Australian-US FTA. At the time it was signed in 2005 there was a widespread view that John Howard’s Australian government was so politically over-committed to the agreement that it settled on a poor quality one, with small benefits offset by large downsides (instead of the other way around). A decade later the research suggests such fears were well founded.

There are fears that this will happen with the TPP Agreement (TPPA). The negotiations have been too secret for us to know what is in it; the consequence is that there are exaggerated claims as to what will be agreed. But even so, if what is settled is moderate, it remains possible – some would say ‘likely’ – that its benefits to New Zealand will not offset the downside compromises.

The concern is that, like the Howard government, Key’s may be so over-committed to the TPPA deal that it will sign up to a poor quality one. What the domestic response will be I cannot tell. Unfortunately the internal debate has largely been between uncritical pro-free traders (and the handful of businesses which may benefit) versus the anti-TTPA lobby. There is very little public articulation of the view expressed here that whether we should sign up depends on what is in it (and what is left out).

Can the Key government sign up to a deal without public consultation? Usually – probably in the case of the FTTA – there will be a need for some legislation approved by parliament. Often this legislation is not very contentious in itself, but parliament could refuse to agree to it, thereby scuppering the whole deal including the more unacceptable bits which may not require legislation. Will parliament? I don’t know. Even if we knew what will be in the TPPA the politics is complicated.

It may be even more complicated if the Northland by-election rejects the National candidate in favour of Winston Peters because the government will then have to convince more parties of the wisdom of the TPPA in order to get any legislation through parliament.

To be frank, New Zealand is such a small player that I doubt that Key will have had much influence on Japan’s and Korea’s thinking. Rushing back to Northland may be doing far more for his hopes of pushing New Zealand’s accession to the TPPA through.

And so to a coda. The anti-TPPA movement recently expressed their opposition in city-wide demonstrations. I could not help wondering if it would have been more effective campaigning for Winston Peters in Northland.

Regional Development Policy?

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

The Northland by-election demonstrates we do not have a regional development policy. Should we? What might it look like?

The government’s announcement that it would be upgrading ten one-way bridges in Northland was a response inspired by the forthcoming by-election. Whatever the politics, it well illustrated the feeble state of regional development policy in New Zealand. Once upon a time it was a prominent part of economic policy – there was even a minister of regional development – but about thirty years ago it began winding back.

The reasons were manifold. One was that the policy change we associated with Rogernomics has markedly reduced the number of policy instruments available to central government (there was also a vigorous debate within the economics profession as to whether they were effective). Second, the political process meant that if a concession was offered to one region, it would soon be offered to others so that eventually every region other than the three main cities was being treated as in need of special assistance. Famously, a minister of regional development said his policy was that all our regions should grow at above the average rate.

Third, the shift to MMP has downgraded the importance of winning particular electorates. It is no accident that regional policy raised its feeble head during a by-election in a (potentially marginal) regional seat. It is accidental that Northland is the poorest of all general electorate seats; the pathetic government response to its needs highlights the absence of a coherent regional development policy.

A caveat though. There is a sort of anti-regional development policy. About 15 years ago some economists – led by Treasury, as I recall – saw the need to strengthen Auckland in order that some industries had a chance to survive in New Zealand rather than move offshore to Sydney: head offices, finance, biotech … More recently, following the earthquake, the government has had to deal with the Christchurch region.

A recent book, Growing Apart: Regional Prosperity in New Zealand, by NZIER chief economist, Shamubeel Eaqub, has drawn attention to the regional problem. It is not merely that some regions are poorer than others, nor that the regional mix is changing. Slow-growing regions (generally those that do not have a main city) suffer because out-migration is differential – the young adults leave and the region ages faster than the nation. Additionally a lack of scale means that key services are more expensive, of more limited range and often of poorer quality.

Forty years ago the solution was to establish a new business in the region – famously a plastics factory on the West Coast. Aside from that such a policy requiring government subsidies rather than import licences, manufacturing is not the central activity it was once. Today the New Zealand industrial structure basically consists of export-oriented industries (including factories which process local resources) and service industries which depend on the population – which, in the case of many regions, is getting older and declining.

We seem to have lost interest in developing new resource-based products which can be grown for import – I recall proposals to grow tea. There are resources to be mined; the government has been enthusiastic but unfortunately there are no oil wells near Northland. Tourism is always near the top of the list – on the top of every region’s list. (I don’t get the sense the Minister of Tourism is that interested in his portfolio – casinos and convention centres aside.) Another policy was to locate government agencies outside the main cities but this seems to have ruled out by the pressures on government agencies to save on costs irrespective of the service they are giving New Zealanders together with the ICT revolution.

Eaqub offers no ready solutions, arguing that we need research. Presumably he wants to avoid the usual cheap and ineffective policies based on instant, uninformed reaction. Let me cautiously suggest two economic issues which a research program should consider (there are also social and public service ones).

First, there is a need to look at the resources in the region and ask whether they are being properly utilised. Be careful. One of the reasons some regions’ populations are stagnating is that improving farm productivity is reducing the number of workers on the land.

Second, we need to look at the logic of the Auckland strategy. I am not against it but there is a second phase. Auckland’s growth will lead to congestion so some economic activity will want to move out of the centre. Its ability to do so will depend upon the quality of the transport and communication networks which link Auckland with its hinterland.

I don’t have a strong view on, say, the exact linkages between Auckland and its north (although I do think it unhelpful to focus on recreational and commuter traffic on roads and not recognise they – and railways – are also conduits which truck goods). Probably Northland’s best chance – at least in the south of the region – is to offer opportunities to Auckland businesses to supply from there. Upgrading ten backblock bridges is not a regional development strategy.

One other suggestion for investigation. I am far from persuaded that the port of Auckland can, and should, continue to be as important as it currently is. It causes excessive congestion in the centre of the city against the interests of those key industries which only Auckland can provide. With the right transport links, Whangarei and Tauranga can provide better port services to the isthmus while strengthening the localities and reducing Auckland congestion. Implementing such a strategy is much harder than thirty years ago, before the ports were – in effect – privatised into different forms of ownership. The Rogernomes did not understand the monopolistic nature of infrastructure just as they had a distaste for regional policy.

Why Children are in Poverty

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

The Elimination of Child Poverty Requires a Universal Child Benefit. 

The Growing Up in New Zealand Study at the University of Auckland found that half of the 7000 families in their sample suffered measurable material hardship in their babies‘ first years of life. That so many of New Zealand’s children are in poverty eating poorer quality food or feeling cold and suffering other deprivations is no surprise, given that the study is yet another in the forty years of research on poverty. The real surprise is how unwilling we are to address the issue.

Rather than trying to understand why there is so much poverty, we rush into solutions which are hardly relevant. Usually we do not distinguish between causes and consequences. Some 13 percent of the sample had gone without fresh fruit and vegetables so they could pay other expenses. Therefore let us take GST off fruit and vegetables. Observe that it neither addresses the reasons nor is it well targeted on the poor.

So what are the causes? The unsurprising evidence is that poor families do not have enough income. Rather obvious, you might think, so why don’t we give them more? After all, the Working For Families In Work Tax Credit (and its 1996 Independent Family Tax Credit predecessor) deliberately avoids giving income to some of the poorest. Overall, Working for Families lifted some families out of poverty and left some families in a slough of deprivation.

Moreover ,the evidence is that child poverty rose when government income support to them was cut in 1991. Exactly how much depends on the choice of the poverty line, but the short answer is ‘a lot’.

According to the July 2014 MSD report, Household Incomes in New Zealand, child poverty today is about double what it was in the early 1980s. There is no separate analysis of parents but the likelihood is that their poverty level doubled too and that almost all the increase in those fateful years involved children and their caregivers. We do know that over 80 percent of the poor belong to that group.

What is frequently overlooked is that all the significant increase occurred between 1990 and 1992. The poverty level was much the same before 1990 (and low) and much the same after 1992 (and high), with a big jump in the period when the National Government – Ruth Richardson, Minister of Finance and Jenny Shipley Minister of Social Welfare – cut back state support to families.

If we ignore this – and it is surprising how many commentators do – we come up with solutions which wont solve child poverty. One is to send all the mothers out to work; that increases their income, doesn’t it? And besides. households with both working parents are measured to be less likely poor. Unfortunately there is a major glitch in the way we measure poverty. (Actually there are more but let’s focus on this one.)

Currently the poverty estimates (and the tax system) treat the cost of childcare while a parent is working as consumption not as a cost of production. So suppose a mother goes out to work and earns $100 (after tax) but her childcare while she is working costs $50. We record her discretionary income as increasing by $100 implying that she could have gone out to work leaving the child at home, and the childcare is a consumption indulgence. Yeah, right. Were we able to adjust for the costs of childcare we would find that poverty is much higher among both-working families. We are underestimating the level of poverty by ignoring that many women need childcare to go out to work. .

So getting mothers out to work is not a solution even if we ignore that many are unable to work for very good reasons such as their or their children’s health.

So let us go back to the lesson from 1991. If we cut public support to families, poverty goes up – indeed it doubled. Does it not follow that if we increased public support it would decrease? Why don’t we? “It would be too expensive’, say those keen to keep the taxes down on themselves irrespective of the social damage that causes.

More public support may be expensive but it is probably the cheapest effective way to reduce poverty. The badly targeted alternatives are really expensive, so much so that the likelihood is that the effort will be below what is required to reduce poverty substantially. Thus the test of whether the next round of measures address child poverty is whether they give additional support to the poorest, perhaps in the form of a universal family benefit (which might be income taxed so it is of greater value to the poorest).

That is not all that has to be done. We need to address the shambolic treatment of childcare for employed parents too. It is a cost of production and should either be treated that way for tax purposes or fully subsidised up to a reasonable level.

Having addressed the causes we also need to address the consequences. We have a backlog of twenty and more years of failure to tackle poverty. The consequence is generations of deprived children with poor health, poor educational performances and reduced opportunity. For society as a whole it is lower productivity, higher unemployment and more social ills including greater expenditure in the justice area and waste in the health and educational areas as medics and teachers struggle with the consequences of deprivation.

What Is Happening At The Top Of The Income Distribution?

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

The increase of the share of those on top incomes has not been caused by market forces but is the result of their more favourable taxation regimes they have experienced since the early 1990s. 

Policy Quarterly has just published papers from a symposium on distributional inequality held last June. There are really interesting papers by Geoff Bertram, Phillip Morrison, Bill Rosenberg and Simon Chapple et al which you may want to read for yourself. This summarises my paper on pre-tax top personal incomes, and a follow-up paper on after-tax personal incomes which presents new research.

It is a tricky area because definitions are important and are frequently confused. I looked at the top 10 percent, 1 percent and 0.1 percent of all adults. (Not taxpayers because tax law affects who reports tax. In any case we want to include those who have zero incomes, especially as the proportions changed in the 1970s when more women entered the paid-workforce.) Unfortunately, only the top of the distribution is well recorded by the Department of Inland Revenue whose data I used. I’ve not used the aggregate income the IRD reports because, again, of the poor recording of those at the bottom in the past. Instead I have used the aggregates from the National Accounts. Sorry for this boring paragraph, but you would be surprised how many commentators skip these things and come to conclusions at odds with the evidence. Some don’t even distinguish personal and household incomes or income and wealth.

I can trace the share of before-tax personal income (which almost exactly corresponds to market incomes) of those at the top back to 1937. Before then the IRD data is contaminated by the inclusion of company incomes. The pattern it shows is that the share of those at the top broadly decreased from 1937 to the mid-1980s. That is similar to the conclusion I found in my 1983 book Income Distribution in New Zealand. At the time I was surprised because I began the study with the popular hypothesis that the income distribution in a capitalist economy tends to become more unequal. The evidence from the 1950s to the 1970s was that it did not always.

My response was similar to Keynes’ ‘when my information changes, I alter my conclusions. What do you do, sir?’ So the book discusses how we might explain the falling inequality of before-tax incomes over the period. I suggested the two main drivers were low unemployment and women entering the paid workforce.

From the mid-1980s the shares of before-tax (i.e. market) incomes of those at the top is broadly stable. There are year-to-year variations, and some will see a trend which others will say are not there or are too small to be worth worrying about. Given my 1983 study one might draw attention to higher unemployment and that there were not as many women entering the paid workforce flattening out the previous trend. As a broad generalisation we may collude that the forces driving the post-war reduction in inequality ended so that market shares have been broadly constant in recent years.

The same pattern is not evident in the after-tax data.Unfortunately the data goes back only to 1971. Before then there was a social security tax on incomes which the IRD data does not record.

The story of the disposable income shares is different. There is a slight fall in the share of those on top incomes from the early1970s to the mid-980s followed by a huge jump in their share between 1988 and 1992. (The size depends on which group you are talking about, but the higher the incomes the greater the proportional increase; the share of the top 0.1 percent increased to more than 2.5 times.) After 1992 the distributional shares stabilise again (subject to various caveats including on measurement and tax avoidance; read them in the paper).

Since after-tax (or disposable) incomes are before-tax incomes with income tax deducted and social security transfers added, the change that took place between 1988 and 1992 has to be the result of income tax cuts, because there was no change in before-tax incomes. (Except for New Zealand Superannuation, there are no social security transfers to those at the top.) The key changes were the major reduction in top income tax rates and the change in the way that company incomes were taxed which was very favourable to those who received dividends – mainly those in top income brackets. It follows that the big increases in the gains at the top – a major contributor to the increase in income inequality – was that taxes on them were reduced.

We were promised that reduced taxes on the rich would result in them investing more (from their higher incomes) and innovating more (because lower taxes would be less penalising to risk). The idea was that this would result in faster economic growth, and that while they would benefit most (and therefore their income share would grow faster) there would be a ‘trickle-down’ effect so that (just about) everyone would benefit.

There is no evidence this happened. Once the Rogernomics Recession came to an end, the economy grew at much the same rate as it had in the past. There is no evidence that the Rogernomic measures lifted the long-term growth rate.

What happened? My guess is that the rich did not save much of their extra income but spent it, and that they were not particularly innovative or that, possibly, in total they made a lot of bad investments. The second paper goes on to discuss how the higher income share at the top led to an increase in conspicuous consumption by the wealthy and of the power of those at the top.

You may be surprised that New Zealand’s rich do not appear to follow the international pattern which Thomas Piketty found of their increasing income share in recent decades. I suggested two reasons. First, we do not have the hyper-financial sector which has driven the Piketty identified changes. Second, our rich are hardly so, compared to the rich that Picketty is tracking. Were they so rich, the New Zealand market would be too small for them, and they would diversify offshore, at which point they could live only half a year in New Zealand (at most) and report only their New Zealand income for tax purposes. The three richest ‘New Zealanders’ in the Fortune Rich List all live offshore.

That is where the empirical research ends. Except I also detail the measurement difficulties. As best as I can judge, none of them, if totally resolved, would markedly change the conclusion about trends. Opinion is cheap, but if anyone can do the hard empirical research which would modify my conclusions, I would be delighted to acknowledge it and incorporate into my analysis.

Does Radio New Zealand Need a Television Channel?

This entry was posted in Business & Finance, Pundit on by .

Probably most people who regularly read Pundit are in the cyberspace equivalent of the ‘beltway’ – the term for those who live in or work in inner Wellington and are intensely interested as to what is going on there, not just in parliament but in policy-making. (OK, OK, they are interested in the gossip too.) Much of what goes on there is not transparent. One can spend hours poring over an opaque public government report not quite getting it. Mention it to a mate you bump into on Lambton Quay and a cryptic remark makes it transparent.

If I am right, you are probably disappointed by the quality of the commentary which appears in our public media. It so often seems superficial, not getting to the bottom of things. In part this is because so much of the national media is based in Auckland. True they may have staff in the parliamentary press gallery but that is only part of the beltway. Admittedly there are a handful stationed out of it. One values Brian Fallows, of the New Zealand Herald, often seen walking in a jaunty bow tie along LQ. (Tim Hunter in Auckland provides an equally valuable service to Fairfax readers.) But few of the editorial staff are inside the beltway trotting along LQ, so they are not in touch with it.

Of course, the majority of the media’s audience is not particularly into the beltway – a bit of parliamentary froth is sufficient. However beltway addicts may feel deprived (some will take a little consolation reading the Wellington local Dominion Post); Bryce Edwards’ regular summary of the blogs is great too.

There is, however, one national media institution which is of the beltway: Radio New Zealand, whose new chief executive, Paul Thompson, has certainly sharpened its coverage. You may say that is because it is public service media. That cannot be quite true. There are many overseas private-owned newspapers which provide great coverage of their ‘beltway’. Or consider Maori TV which provides a terrific public service but it is hardly of the beltway (and should not be).

New Zealand democracy would be the better if RNZ also provided a television service. I understand that they are interested but the politicians are not. Of course they are not; what politician wants Radio New Zealand on screen, even if the public does and it would enhance democracy? It is not that RNZ is anti-government, although that is the way the government – any government – may feel about it. Rather, it is a proud example of the fourth estate which, like the other estates, is part of the institutions of democracy.

I am told RNZTV is technically feasible although I do not know the details of how it might be delivered. I worried a bit whether a channel would distort RNZ’s current high quality material. It would change it of course. But the digital and cyberspace convergence means that steam radio’s website already has images including some video (radio with pictures?).

Cost? Maori TV gets about $35m a year from the public purse (as does, currently, RNZ). That suggests an advertising-free RNZTV channel could be provided for about $35m a year too – perhaps a little less given the synergies with radio provision. Could the government find the amount from the public purse? You betcha if it were, say, for the Americas Cup. It is a question of what our national priorities are.

Sadly, the polys would not be enthusiastic. Satisfied with the coverage of the theatre of parliament, why disturb the system with critical information? It will come only if the public insists.

Let me finish with a prediction. If we ever get a public service RNZTV channel you can be sure that the Auckland-based national media would relocate some editorial weight to the beltway; there will be a rise in the quality of their analysis too.

What Is The Problem With A Universal Minimum Income?

This entry was posted in Pundit, Regulation & Taxation, Social Policy on by .

They involve tax rates horrendously high or the minimum incomes so low that the UMI is not a viable means of eliminating poverty.

The notion of a universal minimum income has had a long gestation. Some say it originated with a proposal for a ‘social dividend’ by Lady Rhys Williams as far back as 1942 but you can find precursors even to that. The American origin is Milton Friedman’s ‘negative income tax’. When Minster of Finance, Roger Douglas promised a Guaranteed Minimum Family Income but he never implemented it.

Today the notion is usually described as a Universal Minimum Income (UMI), in which the government provides everyone with a basic income which it funds by taxing market income. It is a popular idea and seems eminently sensible so why has it not been implemented?

Many advocates put the UMI forward without doing the sums. Those who do, find that the required tax rates are horrendous or the minimum income is so low that it is not a viable means of eliminating poverty. Among the latter are New Zealanders Douglas, Gareth Morgan and Keith Rankin.

What the notion falls foul of is a simple mathematical theorem. Like all economic analysis it requires some simplification but once you have got it, then the tradeoff is obvious because the simplifications do not affect the logic of the outcome.

Let me explain how it works. Suppose you set the minimum income that all New Zealanders should get as X% of the average income.

(An important aside, this is not the same as the average wage, because each wage supports, on average, other people such as children and non-earning household members. The last time I did the calculation, the average private disposable income (including investment income) was about 60 percent of the average wage before tax.)

When I have asked people, they usually suggest a minimum income of about 60% of the average income. That is X = 60%. Bingo! You have just set the average income tax rate at 60%. It is as simple as that. The average tax rate is the same ratio of the minimum income as a proportion of average income. Relax the simplifications (like the state providing public services such as education and health care) and you still get the same broad result: a high minimum income requires, on average, a high tax rate.

That explains why those on the benefits face horrendous marginal tax rates, sometimes over 100 percent. By increasing theirs we can lower tax rates on everyone else – including the rich.

I have known this result for a long time (it is obvious once you have done the mathematics) and try as I might, I cannot find a way around the logic. For instance, you could raise the tax rate on the rich to, say, 80 percent and lower the rate on the rest – but not by that much. The poor would still find about half of every dollar they earned would be taken from them.

Now to the crunch. I said there were assumptions in the mathematics. One is that there is no behavioural responses to the change in tax rates, that faced with higher tax rates, people do not work less and do not take other measures to reduce their tax burden (including moving offshore). Yeah right. At this point the modelling gets messy, but the clear result is that if people faced by high tax rates cut back their effort (and their savings), tax rates would have to be even higher for a given UMI. Ooops. (Beneficiaries currently facing ultra-high rates might work more but their additional work would not compensate for everyone else cutting back.)

Others have argued that we simply need to drop the minimum to say 25 percent of average incomes (the rate Friedman mentioned) which would reduce the average tax rate to 25 percent, close to its current one. Most advocates of the UMI would not support that because it would not eliminate poverty.

I have thought of but one way out of the dilemma. Suppose we split the community into two groups based on whether they should work (in the earning workforce) or not. (This is a thought experiment, you understand; it might be an administrative and political nightmare.) Those who should work would get nothing but they get a job and its after-tax income, those that cannot work get a guaranteed minimum income as in the UMI scheme. If the second group was only 40% of the population, then the required average tax rate for a 60 percent minimum income would be only 24 percent (i.e 60 *40%).

There are two conceptual difficulties. The first is that earners and non-earners (including children) live together in the same house so  the non-earners may not have a guaranteed UMI. The second is some of the earners will be on occasions unemployed. Bother, bother, bother.

So I ended up thinking about how to improve the current system, which kind of (clumsily) works a bit like this two group option. To me the priority is giving additional support to children and those that care for them.

The government talks about doing this in its next budget, but it seems to be very muddled. I guess I’ll be coming back to the issue of the child poverty – before and after the budget.