DOES PIKETTY MATTER?

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

Thomas Piketty says economic inequality has been getting greater in the world, and will get greater. What about New Zealand?

 

Pundit: 28 October, 2014

 

Keywords: Distributional Economics; History of Ideas, Methodology & Philosophy;

 

Paul Krugman has said “Thomas Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to”. Many other eminent economists have said much the same thing. If they are right economics is going through a paradigm shift – a change in the way the discipline (and the public at large) thinks and the issues which it addresses.

 

It is hard in the middle of a paradigm shift to know what exactly is  happening. The stories we tell about previous shifts is that a great man or women had an idea, they published it, and it was immediately adopted by the entire profession. Histories show that in fact each transition was much more muddled, and those in the middle of the longish period over which it took place were often puzzled about what was new, what was important, and how the new paradigm reconciled with the known facts or suggested the pursuit of new ones.

 

The challenge arises because Piketty asks questions about issues which have been almost entirely forgotten by most economists, even if they were once important. Piketty’s book’s title,  Capital in the Twenty-First Century, alludes to Karl Marx but before him David Ricardo was intensely interested in how, in modern parlance, GDP was distributed between the social classes.

 

With a few honourable exceptions, modern economics has largely ignored questions of how income and wealth is distributed. I doubt there are many New Zealand economists who are properly trained in distributional economics. That means New Zealand economics is unlikely to be at the frontier of any paradigm shift. We are excellent at taking up anything fashionable providing it is not too analytically difficult; recall the speed with which we seized on neoliberalism. But when it comes to real revolution we lag decades behind.

 

All professions find sharp paradigm changes difficult. Some of the critics of Piketty are not just elderly gentlemen (and indeed not so elderly ones) fearful of something they dont understand and concerned their status will be downgraded. There are also those who are acolytes of the rich. While they may not understand the intellectual implications of the Piketty revolution. they certainly understand the way it focuses on their rich clients. Commonly their approach is to misrepresent Piketty’s analysis  – it has already happened in New Zealand.

 

A complication is that Piketty has a theory about the income distribution of the whole world. I have carefully replicated his empirical work in New Zealand and found that, over the last three decades, our Inland Revenue statistics do not show any increase in the share of market incomes of those at the top.

 

You may at first be surprised. Just about everyone knows that there has been a sharp shift in the after-tax household income distribution. In the early 1980s, the top decile in households, had a 20 percent share; now it is about a 25 percent share. (That is a huge shift.)  But that is households not the individuals with which Piketty is concerned. Moreover households may have multiple income recipients and they may have children.

 

But we are also comparing before-tax with after-tax distributions. We can show the big shift over the thirty years was due to the reductions in income taxes on those at the top, and the slashing of the real level of social security benefits in the late 1980s and early 1990s.

 

Piketty is not concerned with after-tax incomes but before-tax ones. His thesis is that the income share of the rich is growing because of changes in market and ownership circumstances, not because the tax system is being twisted in their favour (as it has).

 

Why is there no perceptible change in the income shares of the top of New Zealand’s population – event the top 0.1 percent? My paper suggests two main reasons.

 

First, there seems to be a growth in trusts following a change in the law in the early 1990s. As far as I know, nobody has systematically studied this. But trusts need not markedly increase inequality.

 

Second, New Zealanders who live here for less than six months have only their New Zealand income taxed here. Their offshore income is taxed offshore – possibly at a much lower rate. Of course a prudent rich New Zealander will invest a lot of their capital offshore for good financial reasons of portfolio diversification but that is no reason for living somewhere else.

 

The three ‘New Zealand’ billionaires who appear on the Forbes Rich list – Graham Hart; $5.3b at 229th; Richard Chandler; $2.85b at 502th; Christopher Chandler; $1b at 1342th – are tiddlers compared to those at the top; in any case, they dont live in New Zealand and probably hold only a small share of their wealth here.

 

I have mixed feelings about whether we should give such a generous exemption. Such people will be treated as New Zealand citizens for many purposes; they may vote, lobby and fund lobby groups, be awarded royal honours and so on. Yet they don’t pay income tax on all their income. As the famous American jurist, Oliver Wendell Holmes, Jr said: ‘Taxes are the price we pay for civilization.’ The unkindly may say that too many of our New Zealand rich are less than half civilised.

 

The US has begun to chase up the offshore income of its citizens;. Should we? That is the conclusion that Piketty came to.

 

 

This note was prepared for the launch The Pikety Phenomenon published by BWB books, a series of essays by New Zealanders (mainly economists) responding to Piketty’s thesis.

ECONOMIC EVALUATION OF FASD: AN EXAMPLE

This entry was posted in Health on by .

Health Promotion Hui: Cancer Society of New Zealand, 23 October, 2014

 

Keywords: Health;

 

I have been asked to talk about how economic evaluation is used to determine the social costs of diseases and other health conditions. I could give a learned and technical lecture on the topic, but it strikes me that even were it a brilliant presentation most of you would lose the plot – it is not easy; even economists get confused. Instead I am going to give an example of economic evaluation to illustrate some of the issues, how it might be applied and how it can be helpful to other health professionals.

 

The example is the social costs of Fetal Alcohol Spectrum Disorders (FASD). I am aware that while FASD conditions appear to be associated with some cancers, the main damage occurs elsewhere. Even so, I hope you will value both its clarity and its conclusions.

 

I was the economist on a Canadian team, led by Lana Popova, concerned with FASD. I have no expertise on the medical condition. The rest of the team gave me key parameters which I used to do the evaluation. However, despite my lack of expertise, I have to say something about the nature of FASD. Here is my understanding of the disorder; remember I am not a clinician – although I have checked with clinicians about what I have to say.

 

Fetal alcohol spectrum disorders are a continuum of various permanent birth defects caused by the mother’s consumption of alcohol during pregnancy. (It includes its severest form, fetal alcohol syndrome (FAS) which has physical birth defects as well as neurological deficits.)

 

Diagnosing FASD involves medical and psychological evaluation so its clinical incidence is unknown – there is no other way to test for FASD so its prevalence in the general population is uncertain. We used the US estimate of 1 percent of children in the US having FASD, although I have seen much higher estimates. About one in ten of those with FASD are FAS. The uncertainty may not much affect the figures I am about to present; if it does, these estimates are on the conservative side.

 

As I have said, FASD is the consequence of alcohol in the mother’s bloodstream impacting on the development of the fetus. Even moderate amounts are able to cause significant alteration. There appears to be no safe amount of alcohol or safe time to drink alcohol during pregnancy.

 

To jump ahead to the policy conclusion, expert clinicians recommend a woman drink no alcohol at all if she is pregnant or could become pregnant. The corollary is that if she is drinking while pregnant, she should stop.

 

The symptoms are varied and the overt ones need not all be present. Underlying them is damage to the central nervous system. Prenatal alcohol exposure can damage the brain across a continuum of gross to subtle impairments, depending on the amount, timing, and frequency of the exposure as well as genetic predispositions of the fetus and mother. It can lead to neurological impairment and sometimes to growth retardation. The best known physical symptom is particular facial features associated with those with FAS. Many children with FASD don’t have the facial features but are nevertheless damaged.

 

All an economist need know is that an individual with FASD is likely to require greater health care while alive and that they may die earlier, perform more badly at school, have lower productivity at work and place greater demands on the justice, education, health and social services systems – not to forget the additional pressures on their families, their friends and their acquaintances. It is a very sorry condition, yet one which the affected individual had no control over; it is due to her or his mother drinking before they were even born. A mother drinking alcohol may not know the harm she is doing to her unborn baby; the damage can be much worse than that from tobacco, as pernicious as that is.

 

Each item on the list of effects which I have just gone through has economic consequences, such as higher costs to society in terms of less production or of resources which could be usefully deployed elsewhere. There are also non-market personal costs to those associated with FASD. Additionally a person with FASD can lead a less satisfactory life. We are not very good at quantifying these non-market costs but they are always in the back of our minds when we are doing an economic evaluation.

 

The Canadian team asked me to help them identify the costs of FASD from lost production because of lower productivity and earlier mortality. They gave me their estimates of how an individual with FASD might be affected, and wanted to know what was the total cost to society. There is not much point here going through the exact calculations – the methods are in the learned papers. But I need to set out the methodology.

 

A cost for an economist is almost always an opportunity cost – that is, if something was not occurring in the present situation what would be happening in an alternative one? This alternative is called the ‘counterfactual scenario’ in contrast with the actual fact. Choosing a counterfactual requires some skill; usually it depends upon what data is available but also one tends to choose the simplest from the complexity of realistic possibilities.

 

For this study we chose as our counterfactual scenario the assumption that there had never been any fetuses exposed to alcohol in the past, so that there was nobody with FASD today. We asked how much greater additional production would be if those with FASD did not suffer a productivity loss – either at work or being unemployed or because they died early.

 

The summary conclusion is that under the counter factual GDP – the measure of aggregate output by the market economy – would be higher by 0.2 to 0.5 percent if those with FASD had average productivity and employment for their circumstances. (I’ll skip the smaller mortality estimates because there is a complication when interpreting them because the population is larger.)

 

Your reaction may at first be that a loss of 0.2 to 0.5 percent of GDP is not much. But it is a loss from a mere one percent of the population. In New Zealand terms that represents a reduction of output of between $400m and $1b a year. The government often takes a lot of trouble to introduce policies which will generate far less than that.

 

The estimate does not include losses as a consequence of higher health costs, less effective educational services, higher judicial – police, court and corrections – costs, nor the emotional cost to families supporting their loved ones. The team looked at them; we should love to have been able to include them but we did not have statistics we could rely upon.

 

The sort of data we need are called ‘attributable fractions’. For example, we need to know what proportion of prisoners are in gaol because they have FASD, what proportion of any medical treatment occurs because of FASD. We have such figures for smokers and ex-smokers and for drinkers generally. But we don’t have them for those with FASD,

 

This means the figure of $400m as the social costs of FASD in New Zealand is very conservative, not only because it could be as high as $1b just for production losses. These other costs to the market economy are omitted and they are likely to be even larger. Nor does it cover the non-market costs.

 

Even so the $400m seems to be a large number. This year there will be born just under 600 New Zealand children with FASD and this year the economy is going to lose at least $400m, and probably much more, from the productivity losses of those with FASD.

 

What the figure is saying is that if in the past we had spent up to 0.2 percent of the GDP (perhaps even more) effectively preventing all FASD, the economy would have been ahead in output available for consumption, even after deducting the cost of the prevention program.

 

That does not mean that if we spend $400m this year on effective prevention programs the economy would benefit directly by that much this year. The $400m comes from all the earlier births – this year’s births will not impact on the labour force for two and more decades. (In the interim they will pressure health, educational, criminal justice and social services and their families and communities.) But if we carry out an effective prevention program long enough, there will be that sort of annual gain.

 

Of course a prevention program worth $400m plus targeted on preventing FASD is beyond the health promotion sector’s wildest dreams. Probably though, spending quite small sums would give great economic returns providing it was effective. Would you settle for $1m for a prevention program? If effective, the returns on the investment would be enormous.

 

I doubt any program would be 100 percent effective – alcohol is almost universally available, binge drinking is common and New Zealand has a relatively high rate of unplanned pregnancies. But suppose it prevented the most severe cases of FAS, reduced the number born with FASD and that those that remained had milder symptoms. Sound a good idea?

 

Now I have no expertise in health promotion either, but I am aware that on the whole we don’t do a very good job on FASD. Surveys suggest that many potentially or actually pregnant women are not aware of the damage that their drinking at any level can do to their baby’s health. The wider community is even less aware. There appears to be no systematic and coordinated program to inform us, which is surely the first step to prevention.

 

Among the resources available there is a non-government agency Alcohol Healthwatch. There is a FASD Project emerging at the Centre for Addiction Research in Auckland committed to advancing FASD research. As part of the Government’s response to the Health Select Committee Inquiry on Child Health, the Government is committed to an action plan to reduce harm from FASD which expects to be published by mid-2015. It is likely to involve boots-on-the-ground, as they say – people like you.

 

There is a problem which we might call ‘silos’. Does the Cancer Society have an interest in FASD? It does appears that individuals with FASD have an higher incidence of some cancers, but that is marginal, so let us leave this effect aside. It is also true that the Cancer Society has protocols about alcohol consumption because alcohol is associated with some kinds of cancer. Fair enough. But for the reasons I mentioned a few sentences ago they do not specifically mention FASD. And that is fair enough too.

 

However an approach in which each condition focuses only on its immediate concerns leads to a very fragmented approach to health promotion. What interested me, when I first came to FASD many years ago, was that the damage occurs at a time when the target audience is very vulnerable to common sense. Few pregnant women want anything other than the best for the babies they are carrying. I’m guessing that in such circumstances targeting may be very cost effective, especially as the pregnant women are already seeing medical professionals. But to be cost effective the targeting has to be holistic – not one agency concerned with alcohol, another with tobacco, a third with diet and so on.

 

It is not just a matter of targeting pregnant women. There is a period between conception and identification of pregnancy in which the consumption of alcohol is damaging even though the woman does not know she is pregnant. That means reaching out to women who can potentially get pregnant. (Allow me a side remark that if such a program was successful perhaps there would be fewer pregnancies conceived while the woman was drunk.)

 

By now I am well out of my depth, and I am relying on my mentor in this area, colleague Sally Casswell who directs SHORE, the Centre for Social and Health Outcomes Research and Evaluation, one of the research units with which I am associated. She says it is also a matter of the wider social culture and its attitudes to drinking, that we need to enhance our public policies: prices, purchase hours, marketing.

 

But we also need to target particularly damaging drinking, as we do with drink-driving. FASD is surely such a target. But what to do? (My small contribution is I wont drink alcohol in the presence of a pregnant women. I’m not a wowser; I enjoy a pinot with a meal. My attitude is one of solidarity.)

 

These are areas where you are much more proficient than I am. My economist contribution is that if you lot can set up a proposal for reasonably effective promotion program, I reckon an economist can almost certainly show that it will be cost effective, given the terrible damage that FASD does. We should even be able to get it past the Treasury, the keepers of the public purse, which is the gold standard.

 

To conclude more generally, I hope to have shown you that an economic evaluation – the estimation of the social costs of a disease or condition – is not just to generate Gee Whiz to impress everyone the disease is important. Done properly – sadly not all are – the estimate can be used to make better decisions about the deployment of health care services. In a resource-constrained world that is a very honourable objective, especially when it could lead to as beneficial an outcome as reducing FASD.

 

DEALING WITH FOREIGN INVESTORS

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

 

The EU approach in trade deals is likely to protect the right of states to make public policy

 

Pundit: 19 October, 2014.

 

Keywords: Business & Finance; Globalisation & Trade;

 

How can foreign investors in New Zealand be sure that we will treat them fairly? If they are not sure perhaps they will not invest here, even though their investment may be valuable to us. (I do not believe all foreign investment is worthwhile, but much is.)

 

Hence the need for investor-state dispute resolution procedures, whereby an investor (say a firm) with a grievance can get a fair hearing. Why not in the state’s court? In many countries the government can manipulate its courts and the law to give itself a favourable outcome. That may not be true in New Zealand, but how is an investor to know? Additionally, there need to be rules about what are legitimate grievances.

 

So Free Trade Agreements (FTAs) between countries are increasingly containing provisions which set out how disputes between states and foreign investors can be dealt with (usually using independent international tribunals) and what may be disputed.

 

It can be tricky to get the investor provisions right. At the moment about 60 such dispute procedures are initiated each year. Some will be legitimate to a fair minded person; suppose a state expropriated a company without any compensation. However, what about  requiring compensation for the loss of tobacco sales from a public policy designed to improve the nation’s health? International tobacco companies are litigating over an Australian law which imposes plain packs for cigarettes.

 

Many people are nervous about some approaches to an Investor State Dispute Settlement (ISDS) regime especially the version put forward by the US which seem to be very favourable to business. The nervous, including some Americans, fear this would require any policy changes which were against business interests to be compensated, preventing a country from taking action in the interests of the public at large. (It will be recalled that the ACT party proposed legislation which would have had a similar effect; even its National partner in government blanched.)

 

The Commission of the European Union, which negotiates trade deals on behalf of its 28 member states, has consulted them as to what should be the EU policy. It proposes that measures ‘to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations’. It also requires any proceedings and findings to be made public. (Most of today’s are secret.) The approach is likely to be incorporated into the FTA the EU is currently negotiating with Canada.

 

The EU has released its negotiating mandate for the proposed FTA with the US (TTIP – the Transatlantic Trade and Investment Partnership). However the Commission is still reviewing its ISDS-related proposals following public consultation. Presumably the approach in the Canadian negotiations will be there but already the mandate makes clear that the TTIP Agreement should ‘respect the policies of the EU and its member states for the promotion and protection of cultural diversity’. (Audiovisual services are already off the negotiating table.) Our FTA with China has such an exclusion, as well as for policy changes for health promotion purposes and for protection of the environment.

 

The US, if it is driven by its companies rather than by its people, may be determined to pursue a much harsher deal. Probably that would be enough to sink the TTIP.

 

The EU approach is likely to set a standard for SIDS provisions in FTAs among rich and middling rich countries, even when the EU is not involved. Some countries (including New Zealand?) may insist that the EU provisions are the benchmark in the TPP (Trans Pacific Partnership) FTA.

 

Do I hear you snort that any investor state resolution provisions are unnecessary and that they only compromise the sovereignty of New Zealand and other nations? Something like them is inescapable where there is foreign direct investment. It is international trade and investment which compromises sovereignty. Well-designed dispute resolution reduces the compromise especially if it protects a state’s legitimate right to make public policy.

 

This article was made possible by support from the EU Delegation in Wellington and the Goethe Institute on behalf of the Embassy of Germany in Wellington. An earlier version was published in the Dominion Post on Thursday 9 October. It has been revised in the light of recent EU announcements.

A DIVIDED COUNTRY?

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

The election demonstrated deep divisions. Will the next three years make them worse or help heal the rift? And where will the pressure points be?

Pundit: 13 October, 2014.

Keywords: Political Economy & History;

Will we see New Zealanders marching in the streets during the next three years? I don’t mean protests in which the police, while behaving perfectly professionally, are smiling benignly in a sort of agreement. I’m wondering whether we’ll see civil disturbances. And I’m not the only person pondering such things – probably even John Key is. He has had a good parliamentary win, but the country seems intensely divided.

Civil disturbances were relatively rare in twentieth-century New Zealand. (We had wars in the nineteenth.) We had strikes from 1907 (and the famous Blackball strike in 1908) but the first significant disturbances were in 1912 when Fred Evans was shot in an industrial fracas at Waihi and in 1913 when Massey’s Cossacks were turned on wharfies. Probably prime minister Farmer Bill Massey is best remembered for this incident – few associate him with the university which bears his name. Unfortunately we lack a good Massey biography but he evolved beyond the rabble-rouser of his early years.

In 1923 Massey’s cabinet decided to prosecute (Catholic) Bishop James Liston for ‘sedition’ – he had supported Irish independence. Rory Sweetman in Bishop in the Dock reports that Massey was in the cabinet minority who did not want the prosecution. Yes, Massey was a Protestant Ulsterman, but he knew the trial could be socially divisive. (Fortunately Liston was acquitted by an all-Protestant jury.) Massey had become a statesman keen to avoid having to get the Cossacks out again. (I allow that Marxists may argue that the real social divisions are capital vs labour and religious ones are ‘false’.)

Many readers will recall that Rob Muldoon presided over the divisions of the Springbok Tour in 1981. It was not by choice; he could find no alternative. In his biography of the man, Barry Gustafson records that Muldoon had hoped that the New Zealand Rugby Union would voluntarily cancel it. When told that ‘the tour was going ahead, Muldoon sat for a long time with his head in hands …. [and] said through his hands without lifting his head “I can see nothing but trouble coming from this”.’

Key is probably not as steeped in our history as you are, dear reader, but his immediate post-election speeches indicated he intuited the problem. He has said that he would ram through a couple of election promises on the RMA and industrial relations before Christmas which are unpalatable to many. But the plan is to be more consensus-driven afterwards.

Yet, just as in Massey’s cabinet, there are those in this government caucus who would use their slim parliamentary majority to settle old scores, even though only about a third of adults voted for them, a third against them, and a third did not vote at all. What the latter thought, what they want, we can only conjecture – but almost certainly they will not welcome a deeply divided society. (Children make up about the same numbers.)

Despite having a record of short-termism, Key says he won’t join the dividers. But never forget the political temptation to score divisive points. Consensus government is not easy. It involves confining the government to policies which are broadly acceptable (or not unacceptable) to 80 to 90 percent of the population.

Key may calculate he can be dismissive of unionists and beneficiaries. The latter don’t generally organise, the former do but often seem too self-centred. The PSA press releases bewail the fate of the public servants, but rarely mention that the public will suffer a loss of service; teachers can march all they like, but they have yet to recruit parents.

What will be the crunch points? Iraq could blow up in the government’s face. An unfortunate Free Trade Agreement could be divisive. Tony Ryall got healthcare off the front page; I am sure Jonathon Coleman wants to keep it off. I thought giving the intelligence portfolio to Chris Finlayson was shrewd; he is likely to make sufficient changes to dampen down most legitimate concerns. We may have some local flare-ups because the central government often appears to be insensitive of local government concerns, but I doubt they will spread nationally.

The environment? Environmental concerns are right throughout the community as the National Party branches would soon remind the government. (As this was going to press Key was hinting he may back down on the more extreme proposed changes to the RMA.) And what if the economy stagnates?

My trifecta for barricades is unnecessary involvement in Iraq, high-risk anti-environmental developments and a poor quality FTA.

I hope not. Over to you John Key.

PARTY RENEWAL: NATIONAL’S SUCCESS, LABOUR’S FAILING

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

If National can adapt to change, why can’t Labour?

 

Pundit: 7 October, 2014

 

Keywords: Political Economy & History;

 

Once upon a time National was a party dominated by farmers and their rural base. Its first townie leader, Sid Holland, had to have a farm bought for him in the 1940s, to maintain his status in the party. It was such a country party that there was a view in the 1960s that as New Zealand urbanised National would lose voter share because Labour was so much stronger in the cities. National continued with its rural roots – about half of the Bolger cabinet were farmers and others had been in rural servicing. Yet National slowly inched its way into the cities – especially Auckland, where it won more seats in this election than Labour and more list votes than Labour and the Greens together. The next Key cabinet, like his earlier ones, will have far fewer of those who have a rural background.

 

This successful renewal of the National Party forms a background to the self-examination that the Labour Party is undergoing. Why has Labour not been able to hang onto its urban advantage and renew itself too?

 

Its parallel with farmers is trade unionists. In 1951, 17.4 percent of the labour force were in farm occupations, and 36.8 percent of it in unions. Today farmers are down to 4.7 percent and trade unionists are 16.6 percent. These declines are international trends reflecting different forces.

 

Interestingly, the Labour Party abandoned its unionists earlier than National its farmers. There was but one in the 1984 Lange cabinet, ranked 15th, and Stan Rodger came from the white collar PSA. There remain unionists in its caucus today – the most senior is Andrew Little, previously secretary of the largest private sector union, the EPMU (Engineers, Printers, Manufacturers).

 

The question of the role of the union movement in the Labour Party is a contentious one, but I don’t want to review that directly here. What I want to ask is why has Labour not been able to renew itself in the way that National has, whose success may reflect its organisational structure? Its local branches responding to their changing social circumstances and, as the country urbanised, they rebalanced becoming urban too.

 

There was a push to extend Labour’s coverage to a ‘rainbow’ coalition. It had recruited Maori in 1938 and its recent success in south Auckland suggests it has been successful with Pasifika, although Asians are more pro-National. Women were markedly involved in the Labour Party earlier than in National (tea and scone making aside), but while there remains an imbalance, National is steadily making up its women’s deficit. Similarly gays joined Labour earlier (open gays of course, National has long had closet ones) but they are beginning to appear in other parties. So while Labour may be proud of its rainbow leadership, it no longer has an exclusive franchise.

 

Another dimension of the rainbow is the young. Labour seems to think it can reach out to them with young politicians (who sometimes have spent all their adult lives in politics) but often they seem as disconnected from younger generations as their elders.

 

In the late 1980s Labour tried to connect with the equivalent of the Kim Dotcoms. Rich businessmen were an important source of funding the 1987, they fled in 1990.

 

Admittedly, following the political debacle of Rogernomics, Labour has made a lot of effort to re-incorporate the dissatisfied who fled to New Labour, the Alliance and political withdrawal. Has the energy required there prevented Labour from reaching out elsewhere?

 

However I was struck just how feeble was the previous Labour government’s thinking about social welfare. The world moved on but it seemed stuck in a pre-1972 nostalgia. (Don’t tell me that Working-for -Families represented progress, but that is for another time.)

 

Then there is the curious story of the Greens, who first appeared as the Values Party in 1972. Labour has had some successful environmental policies but it never really tried to reach out to environmentalists even though they include people with the energy and commitment which in different times would have contributed to the renewal of the party. It is too late now; under MMP the Green Party is likely to be around for some time.

 

Perhaps the last two paragraphs are a part of the explanation of the difficulty Labour has had with its renewal. It has been too often backward looking. Perhaps understandably, given that Rogernomics forced it to defend the values on which the party was historically based, but so much so that they did not think about how to apply them to the evolving world, and certainly not to thinking about the new challenges that, say, the environment poses. (There are caucus members who do, notably David Parker.)

 

These are but preliminary observations, but it is important that the analysis does not get so obsessed with the particularities of Labour that is cannot learn from the success of National.

 

A final thought. National’s shift to becoming an urban party has led to a lot of discomfort in the countryside. I regularly see articles in farmer newspapers advocating the establishment of a Country Party. It is not impossible given MMP. I almost wish it would, so I could watch how National would deal with the challenge. Smoothly is my guess.

HOW SUSTAINABLE IS NEW ZEALAND?

This entry was posted in Environment & Resources, Macroeconomics & Money, Political Economy & History, Social Policy on by .

One of the biggest issues missed during the election campaign was the sustainability of National’s economic, environmental and even social policies. So what do you do if the government’s not thinking long-term?

 

Pundit: 29 September, 2014.

 

Keywords: Environment & Resources;  Macroeconomics & Money; Political Economy & History; Social Policy;

 

Behavioural economics is not a complete theory but it demonstrates that we are not the economic rational beings usually assumed in economics theory. One of the most troubling divergences is that we make time-inconsistent decisions so our short run choices do not cohere over the longer term. Often this doesn’t matter much in practice – we buy something we realise we don’t really want shortly afterwards. Yet sometimes it matters a lot.

 

Why don’t we have more great disasters when it does matter? What often seems to happen is that we look after our short term interests but expect the state to look after our long term ones. I am not saying the state always does this well, but it has far more resources than we have and – given that the long-term issues are complex – often does it better.

 

The danger is when we believe that the state is looking after us when it is not. One had always assumed that our buildings were robust. The Canterbury earthquakes and the leaky home disasters showed the state failing us by not regulating the building industry properly. A decade ago New Zealanders invested in finance companies in the mistaken belief they were protected from fraud and incompetence. You expect your workplace to be safe (it usually is).

 

We dont expect state intervention to be perfect – even if we grumble when things go wrong. Probably our not unreasonable expectation is that when things go really wrong there will be some kind of social insurance kicking in; when it does not the grumbling turns into public indignation.

 

Of course the government likes to assure us that they are looking after our long term interests. One of my objections to the Muldoon government of the 1970s was that it was almost as short-term as we were. Problems accumulated because they were not properly dealt with. Eventually many of them came to a head and were addressed by the Lange-Douglas Labour government – not well, but often courageously.

 

I have a similar worry about the current government. As with Muldoon’s, we assume that it is looking after our long-term interests. But some issues do not seem high in its thinking. Aside from the not insignificant environmental ones, there are those about our economic and social sustainability. Here are some of the most salient.

 

Our current fiscal policies are not viable in the long run. The big problems are population aging, rising demand for government spending in health (and culture and the environment although on a much smaller scale) and strong demands for lower taxes. The rule should be to respond early and respond incrementally. Otherwise you respond late, rapidly and at greater cost. (The smart politician, naturally, says ‘I wont be around when that happens’.)

 

Our overseas borrowing is also unsustainable, and it also generates unsustainability problems of excessive housing prices and an overvalued exchange rate which damages our export sector. We keep having to sell assets to overseas interests because we have not the savings to keep them.

 

We are also too dependent upon the Chinese market and dairy exports.

 

I am uncertain to what extent New Zealand’s inequality is sustainable. But there are unsustainable consequences of high poverty among children. It raises the current costs (or ineffectiveness) of our educational, health and judicial systems, but even more so in the long term with a loss of workforce productivity which makes it harder to pay for the higher costs.

 

The implications of the digital disruption appear huge but our law is trapped in the middle ages. I’d go far as royal commission on it.

 

I worry that the financial squeeze on the public sector is reducing its ability to help us think through such issues. Nor do we have a robust public debate necessary to think through the issues.

 

This is written in the week after the latest election.

 

What struck me during the campaign was how little these sustainability issues were addressed – by just about any party (your one excepted, of course). So where do we discuss them? How can you be sure that your government is taking a longer term view when it acts than you do?

LABOUR AND GREENS VOTERS ARE MORE ALIKE THAN DIFFERENT

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

 

If voters can see the commonality between Labour and the Greens, why can’t political analysts?

 

Pundit: 22 September, 2014

 

Keywords: Political Economy & History;

 

Most political analysis in New Zealand seems trapped in the two-party winner-takes-all world, or perhaps they are numerically challenged by the number which comes after two. Whichever, to discuss the National-Labour divide without mentioning the Greens is almost pointless. (I’ll come to NZ First shortly.)

 

Sure, Labour with 24.7 percent has had its lowest share of the vote since 1922 (a three-way WTA election, by the way). But the Labour-Green vote in 2014 was 34.7 percent. In contrast National got only 20.9 percent in 2002 – 28.1 percent with its wing party ACT (and it almost won the following election). Whatever, this was the worst voter share for the Left since MMP began in 1996.

 

But am I justified in adding together the Labour and Greens votes? Danyl McLaughlan, one of our shrewdest political observers, said the two parties hate one another. Maybe, but that is about the party organisations. My experience was that many voters dithered to the last moment over to which to give their list vote; there were even couples who amiably decided that they would split their vote to resolve the problem.

 

There is some empirical evidence that Labour and Green voters are not that different. Not – yet – for this election, but from the New Zealand Election Study for the 2011 one. Its results are reported in the book The New Electoral Politics in New Zealand published earlier in the year.

 

So what difference does it find between Labour and Green voters? Very little. The book’s editor Jack Vowles used some serious statistical procedures on the post-election survey of voters. On eight attitudinal dimensions there was very little difference between Greens voters and Labour voters if you contrasted them with National voters. The biggest was Labour was more pro-welfare and equality but the Green’s difference from National was far bigger, as it was on every other dimension. (Alas, there was no environmental sustainability dimension in the survey.)

 

On the left-right spectrum they looked much the same. There were other smaller differences, smaller than the margin of statistical error. Generally they were in the direction one might expect – so Labour’s voters looked a little poorer (Green voters’ partners had less difficulty finding a job than Labour’s; they looked more like National’s here). But the big difference is between National voters and Labour-Green voters, and not between the latter two.

 

(I also looked at where New Zealand First voters fitted in. To simplify, they sit between National and Labour-Green.)

 

There was one difference worth pondering. On the liberal-authoritarian spectrum, Labour voters were more likely to be authoritarian, Greens liberal. Interestingly, National voters look more like Green voters when it comes to this. The NZ First voter patterns were more like Labour’s with a preponderance of them at the authoritarian end of the scale. Unfortunately, the questions were not detailed enough to explore this difference in detail.

 

What does this mean? I don’t want to deny that Labour voters are different from Green voters – but they are not that different. And apparently they are not as different as the party leaderships think they are.

 

The New Zealand Election Study results have two major implications. The first is that if they want to discuss the future of the Labour Party, political analysts are going to have to learn to count to at least three. The second is that the leadership of both parties are going to have to find some sort of accommodation – the sort that many of their voters have already found.

THE TRUTH ABOUT OUR ‘ROCKSTAR ECONOMY’

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

A softening of the housing market, falling dairy prices and potential weakening of the Chinese economy do not bode well for New Zealand

 

Pundit: 22 September, 2014

 

Keywords: Macroeconomics & Money;

 

There were knowing smiles among economists when earlier this year John Key set the election date a couple of months early. He told us it was because there were various international gatherings that the prime minister had to attend. But it also seemed possible that economy growth would be weakening at the end of 2014. The main forecasts – the ones reported – did not show it, but the downside of a weaker economy was more likely than the expansionary upside. Better, a political strategist would advise, to go early.

 

And, yes, economic growth is slowing down. Whether that will be evident in the statistics by the end of the year is not certain, although some people are already feeling it. One spluttering driver is that of the softening housing market; a reminder of just how dependent we have been on it for domestic economic stimulation.

 

Perhaps even more depressing is the falling dairy prices. Accountant Pita Alexander has published estimates of the resulting change in dairy farmer incomes. If they cannot increase production he suggests that farmers would have to cut their consumption by a quarter together with reducing working expenses and investment, and yet they would still be borrowing. Their reductions flow into the whole economy.

 

The downsides which economists had been thinking about earlier in the year included a weaker Chinese economy. There is no sign of a financial crash there but lower dairy and timber prices and less speculative house purchases may well arise from an economic weakening there. We can overlook how dependent New Zealand has become on the Chinese economy and the surrounding Asian economies. That Chinese economy remained strong during the world recession that followed the Global Financial Crisis protected us from the recession’s worst effects.

 

But there was a second reason for our relative success – Michael Cullen’s earlier stewardship as Minister of Finance, especially his paying off government debt. That gave the Key-English government the room to cut income taxes, thereby sustaining economic demand and employment through the world downturn. Unfortunately there was only so much in the kitty, and it has all gone. During the election campaign, Key was desperate to promise further income tax cuts, but Bill English must have told him they were not affordable; Key ended up with a mealy-mouthed conditional promise.

 

English must have been very aware that while the government’s accounts are near the point where there will be no net new borrowing, the current statement of financial position (what we used to call ‘the balance sheet’) of the government is not as strong as it was when he took over. A comprehensive comparison is a report in itself but a simple one is that Net Core Government Debt was near $13.7b in September 2008 and is expected to be about $62.1b now (only some of which is due to the Canterbury Earthquakes). There is no expectation of significant improvement as far out as the Treasury can see.

It matters for two reasons. First, even when government debt is not increasing, each year a chunk has to be rolled-over (i.e. re-paid and re-borrowed). While our debt ratios are not high compared to those of some economies, overseas lenders are likely to look askance and raise our interest rates (including on private borrowings) if there is not some expectation of long-term improvement. Second, if the world economy staggers again – or ours does – we will have less room to borrow after six years of the Key-English government – in contrast with nine years of the Clark-Cullen one. As the latter demonstrated, prudence has its merits. True, its political enemies were the beneficiaries but so were the people of New Zealand.

 

One cannot be sure how great the growth slowdown will be. I know of no economist expecting stagnation – not in their main forecasts anyway. But they must still think the downside risks are greater than the upside ones. Despite an election campaign predicated – by all parties – on the economy doing well, economic management is not going to get any easier.

PERSON VOTES VS DOLLAR NOTES

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

On the eve of the election, let’s not forget the influence of ‘dollar-voters’ on the outcome

Pundit: 10 September, 2014

Keywords: Political Economy & History;

A modern society uses two main ways for regulating its public life; politics and the market. In principle the political ideal is ‘one person, one vote’, whereas markets are driven by ‘one dollar, one vote’.

In practice the two domains cannot be easily separated, and one can infringe excessively upon the other. Thus before the mid-1980s, politics was too involved in market decisions. But what about the opposite? Rather than person-voters interfering too much in the market system can dollar-voters interfere too much in the political one?

There is certainly an incentive for them to do so. Half the person-votes are held by half of the adult population, but half of the dollar-votes are held by less than a fifth of the population (with annual taxable incomes in excess of about $60,000).

We make an effort to insulate the political system from dollars, prohibiting bribery and treating, trying to control political donations. (My view is the opposite of the British law before 1872 when voters declared in public and funding was secret; I support transparency for all significant donations.)

Part of the public story is the superiority of the market system compared to the political system. The narrative has a vision of business and the market as progressive forces, held back by unnecessary interventions from politicians and governments. Of course the market is a very old social institution; so the narrative is talking about ‘modern’ markets. But the same is true for the government, for modern government evolved to restrain the excesses of modern markets.

Obviously there are both upsides and downsides from interventions in markets. Governments try to maximise the former and minimise the latter. But that is not a part of the public narrative. Neo-liberalism treats governments as a bloody nuisance, politicians as interfering old noun-deleteds. Business should rule, OK. They think dollar-voters are entitled use their extra weight to overwhelm person-voters.

In his Myth, Politicians and Markets: the Truth Behind the Free Market, author Bryan Gould rejects this narrative, objecting to the way that neoliberalism undermines the democratic process. Instead he argues that government is to offset what an uncontrolled market can do. That is not the message the casual reader gets from the media and the ideologues (and ideologies) it promotes.

Gould’s book about the neoliberal myths focuses on the macroeconomic and financial failures of the unrestrained market while giving much less attention to the failures at the microeconomic level such as environmental depletion, waste and the impoverishing the quality of life. No matter, he faced resource limitations and made choices, but it is well to observe that Gould’s is only half the critique.

It is a vigorous one although it will not convince everyone; neoliberal ideologists are impervious to reason. But open-minded readers will find a compelling story. There are limitations. I often wanted to engage with or elaborate his argument page by page. Perhaps the book should not be read alone, but with a vigorous book-group, a chapter a week.

The group will travel over many topics – financial failure, exchange rate policy, monetarism inequality… and many examples including detailed instances from various countries –  Australia, Britain, China, the EU, New Zealand the US.

Gould’s cri-de-coeur is that ‘very few progressive politicians have analysed their situation preferring to tell themselves that they are merely acknowledging what they have persuaded themselves is inevitable and pretending that this central concession leaves intact their political positions on other issues.’ Despite being a (retired) politician Gould has made no such concessions. He can maintain his political position honestly.

Yet we are still left with a dilemma of where to draw the line between political decision making and market decision making. Lower income inequality – so that there is not as great a discrepancy between person-votes and dollar-votes – would help. Even so, people – even the wealthy – quickly appeal to the government when their interests are infringed by market arrangements. To protect democracy properly we need to be restrained in such incursions. But we need to be equally restraining of the way that dollars influence our politics.

For the story behind the column, see here.

Our Children, Our Choice: Priorities for Policy: A CPAG publication

This entry was posted in Social Policy on by .

Contribution to Wellington launch, 9 September, 2014.

 

 

Keywords: Social Policy;

 

This year is the fortieth anniversary of the recognition that by far the largest group of the poor in New Zealand are children and their parents (and guardians). Previously the conventional wisdom had thought it was beneficiaries who were the poor but we know now that families on earnings can be below the poverty line too. Some think the poor are in solo parent households, but there are more in poverty in two parent households. The ethnicity of the poor will surprise others; there are more Pakeha households than Maori and Pasifika ones,. Even numbers of poor in rental housing are lower than those who own their own homes with a mortgage.

 

The confusion arises because of the failure to distinguish between incidence and prevalence – between the proportion in poverty and the numbers in poverty. Thus Maori are more likely to be poor – they have a higher incidence of poverty – but because there are fewer of them there are more Pakeha who are poor.

 

Not understanding this can lead to poor policy, targeting the wrong group. As the Child Poverty Action Group has insisted, the target for eliminating poverty is children, be they brown, white or yellow; be they in one or two parent households; be they dependent on benefits or on wages; be they in rental accommodation or in mortgaged homes.

 

In some ways just measuring poverty, however it is done, misses the point. As the CPAG has repeatedly insisted, poverty has consequences – impacting on a child’s health, educational achievement, wellbeing and prospects.

 

For a moment, suppose we were as financially miserable towards our elderly as we are to our children. Many of the elderly would live in as squalid circumstances, they would have poorer health and they would die earlier. Such a situation would be a terrible moral indictment on our society and we would be the worse for it. But it would not compromise our future in the way that under-investing in children does. Indeed our elderly are worse off today because we have not invested more in our children in the past; they have grown up less able to contribute to a prosperous and decent society and have been a bigger burden on the publicly supplied social services, so there is less available to support others in need, including the elderly.

 

This point is not to advocate cutting back on public spending on the elderly but to ask why we dont give our children as much social support as we give our oldest? The short answer is that children dont have the vote. Just think about how the forthcoming election would change if children were on the electoral roll and they – or perhaps their guardians on their behalf – were to cast a vote. You can be sure that the political parties would stop tiptoeing around family policy and start really addressing child poverty in a coherent and supportive manner. There are more children under 18 than there are adults over 65.

 

It would also reduce the silly nostrums proposed for solving child poverty. Sure, some parents are not too good at managing their money or using health services, but that is also true for the elderly; we dont cut New Zealand Superannuation because they dont get good health care or argue for wider use of budget advisory services as an alternative to a decent New Zealand Superannuation. We dont say it’s the fault of the elderly getting old; children do not choose to be born.

We dont tell the elderly to go out to work and yet there are those who say the problem of child poverty is that mothers dont work. Some cant; some have a handful looking after their kids – I’ve noticed that the loudest advocates of the work solution are men who have never looked after children full-time and professional women who are well remunerated and can afford child care. Our poverty estimates do not adjust for child care costs to working parents. That means we underestimate the level of child poverty, especially among those depending on earnings.

 

It is this sort of casual thinking that led to the misbegotten Working For Families package. One greatly admires the tenacity with which the CPAG criticised it, even if one was pessimistic about the ability of the courts to correct a policy stupidity. Ultimately the remedy is political; what as a nation we decide to do and what we insist of our politicians. That is what this CPAG report is about, the basis for a public campaign. A critical moment is taking place as we vote over the next two weeks especially as the people most affected by poverty – children – wont be voting. When adults vote will they have children uppermost in their thoughts?

 

So why has it taken forty years to get as far as we have – or rather have not? Why are we so complacent? Children dont vote and they dont riot either. Does that mean we should ignore them? That is to ignore the social consequences.

 

The complacent do not see any social consequences. What the report reminds us is that children’s poverty levels rose sharply between 1986 and 1992, more than doubling. The increase among adults not caring for children was much less and from a smaller base.

 

The complacent say that many families are in poverty for only a part of their life cycle. That depends on how you measure poverty – an issue which I am not going into tonight – although the higher the threshold the more families are below the poverty line for longer. What is important is that many children suffer extended periods of deprivation and their number more than doubled twenty years ago.

 

But, say the complacent, society has not fallen apart in the two decades. Leaving aside the moral indignation that we have left New Zealanders in this parlous state for all that time, the reality has been poor health, poor educational attainment and poor prospects as well as poor current wellbeing. Those children are now entering adulthood less ready to take on its responsibilities, less able to make a net contribution to the society which failed them when they were young. Our children are our future. We are good at investing in physical infrastructure, but we not been investing sufficiently in children. The failure is economically unwise as well as a social disgrace.

 

Once more we can applaud the Child Poverty Action Group confronting us with our social failure. Whether we address it – or whether we compromise our future – is up to us.

Ethnicity, Gender, Socioeconomic Status and Educational Achievement: An Exploration

This entry was posted in Education, Maori, Pundit on by .

<>Research Report Funded by PPTA. Completed in April 2103 and Launched 9 July, 2013. A short summary is at

http://www.eastonbh.ac.nz/2013/07/how-good-is-our-schooling/

 

This column was rejected by The Listener. It was published in Pundit on 8 September, 2014.

 

Keywords: Education; Maori

 

 

Executive Summary (Conclusion)

 

The average PISA scores on the three dimensions of reading, mathematics and science literacy of New Zealand fifteen year-olds are high among the OECD countries. There are differences by ethnicity and class (and to a lesser extent gender), which are explored in this report.

 

Ethnicity

 

Students were asked their ethnicity. It is a self-categorisation and is not an objective measure. It may even have a different meaning for boys and girls; it is possible that an individual’s ethnic choice is influenced by educational achievement. Even so the following conclusions may be reached – with caution.

 

The mean achievement scores for those who classify themselves as sole Pakeha are well above the OECD average, a situation which is often described as a ‘world class education’.

 

The same is true for those who classify themselves as sole Asian, although their scores are a little lower than the Pakeha ones. They too are in receipt of a ‘world class education’.

 

The heterogeneous Other group of those who classify themselves as sole ‘Other’ or of multiple ethnicities (other than Maori and Pakeha) score about the same as the OECD average.

 

The group of those who describe themselves as either sole Maori or Maori and Pakeha score lower than the OECD average. When their scores are adjusted for socioeconomic status they are very near the OECD average. They may be said to be in receipt of an ‘OECD average education’.

 

(Those who describe themselves as sole Maori are somewhat below the OECD, even after adjustment for SES, but they are offset by those who describe themselves as Maori and Pakeha who achieve more than the OECD average. It is possible that individual students may choose their ethnic classification in part – directly or indirectly – on the basis of their educational achievement. This is why the two groups have been combined.)

 

Those who describe themselves as Pasifika score markedly lower than the OECD average, even after adjustment for socioeconomic status.

 

Gender

 

There are large differences in scores in reading achievement by gender, with girls having a markedly higher achievement than boys. This is not peculiar to New Zealand but reflects OECD outcomes generally. As in the rest of the OECD, boys score a little higher in mathematics while the science literacy scores are about the same. (On the whole, the scores by the individual ethnic groups reflect these generalisations.)

 

Socioeconomic Status

 

Socioeconomic status seems to affect educational achievement, even after controlling for ethnicity and gender – students with higher SES tend to achieve better than those with low SES. Those in the top SES decile typically average over two years more in attainment than those in the bottom SES decile.

 

Conversely some of the difference among ethnic performance can be explained by the OECD SES variable. There are good reasons to believe that an SES variable (or variables) designed specifically for New Zealand would explain an even greater proportion.

 

Effectiveness of the New Zealand Education System

 

The OECD also finds not only that the New Zealand students perform well on average, but that their annual gain is higher than the OECD, suggesting that for those in the mid-teens the New Zealand (formal and informal) educational system is more successful on these achievement measures than that of the typical OECD country.

 

The superior effect of the New Zealand (formal and informal) education system is that New Zealanders are about a year ahead on the achievement measures compared to the OECD average.

 

Summary

 

New Zealand students up to the age of 15 experience a world class education system on these achievement measures. This applies especially to Pakeha and Asian students (on average).

 

Some minority ethnicities – including Maori and Maori-Pakeha and the heterogeneous Other groups – do not achieve as well; their level is comparable to the OECD average, including Britain and the United States, when socioeconomic differences are allowed for.

 

Only the Pasifika ethnic group scores markedly worse than the OECD average.

 

 

Introduction

 

Every three years the OECD Program for International Student Assessment, or PISA, assesses the educational achievement of 15 year old students, in a number of nations (including the entire OECD). The data base includes measures of student achievement in education, mathematics and science literacy, together with numerous measures of the student’s home and their parental social characteristics.

 

While the OECD does not collect ethnicity data, the New Zealand survey does. This report is a preliminary exploration of the relationship between ethnicity and educational attainment together with the interactions with gender and socioeconomic status.[1]

 

Defining Ethnicity

 

The students were asked to identify their ethnicity/ethnicities. The precise question is recorded in the appendix. Their responses are consolidated into Pakeha, Maori, Pasifika, Asian and Other.

 

A student could choose more than one category. This presents a problem of analysis. Rather than go through the complexity of arguments and approaches, this study simply reports that it uses the following categories:

– Pakeha (sole);

– Maori (sole);

– Maori and Pakeha;

– Pasifika (all);

– Asian (sole);

– Other (including multiple ethnicities but excluding Maori-Pakeha and all Pasifika).

 

This approach avoids double counting, while maintaining an adequate size of each grouping to give some statistical confidence in its use. (The ‘Other’ is a small heterogeneous category, included for completeness.)

 

(For reasons explained below, the report sometimes combines sole Maori and Maori-Pakeha into a ‘Both’ group. A similar approach, for similar reasons, could have been done for Pasifika, but because the numbers were smaller, a single all Pasifika category was used.)

 

Table 1 summarises the ethnicities of the students.

 

Table 1. Reported Ethnicities

 

Categories Used in Analysis All Responses
Number Share of Total Number Share of Category in All
Pakeha

2725*

58.7%

3283

83%
Maori

369*

7.9%

833

44%
Maori-Pakeha

334**

7.2%

**
Pasifika

465***

10.0%

465

56%
Asian

528*

11.3%

647

82%
Other

222****

4.8%

107
TOTAL

4643

100.0%

5334

* Only one ethnicity chosen.

** Chose Maori and Pakeha only (40% who chose  Maori said they were also Pakeha but no other ethnicity)

*** All who chose Pasifika including where there was other choices

**** Residual (includes Maori and Pakeha with Asian or Other).

Source: Ministry of Education PISA data base.

 

Ethnicity is not an objective categorisation like descent. Not only may an individual choose their ethnicity based on their social context, but they may vary their choice for different circumstances. An even greater complexity arises for the purposes of this study if one of the social variables which influence the student’s ethnic choice is educational achievement. It seems possible that a student is more likely to choose one ethnic classification if they are of high educational achievement, another if theirs is low. (Data presented below may be interpreted this way.) Where this occurs one has to be cautious about making inferences about ethnicity and educational achievement because a reverse or two-way causality may be occurring.

 

An insight into the complexity is evident in Table 2 which shows the gender breakdown.

Table 2: Gender by Ethnicity

Boys as % of ethnic group
Pakeha

50.8
Maori

57.2
Maori-Pakeha

48.8
Pasifika

52.7
Asian

53.4
Other

49.5
TOTAL

51.6

Source: Ministry of Education PISA data base.

 

There is no reason to believe that the proportions should be markedly (and statistically) different for Pakeha, Maori and Maori-Pakeha if they were objective.[2] Yet boys are more likely to describe themselves as Maori than girls. This suggests that there is a social element in the choice of ethnicity. If it can be observed for gender it is likely to apply for other social characteristics.

 

Suppose educational status affects ethnicity choice; for instance those from Maori backgrounds with poor educational achievement might tend to choose sole Maori ethnicity, those with higher achievement might add another ethnicity. In order to dampen – but regrettably not to eliminate – the possibility that ethnic choice is influenced by educational achievement, much of the analysis uses a category which pools both Maori and Maori-Pakeha. The name of the category is abbreviated to ‘Both’.[3]

 

As much as possible, the studies treat the ethnicity-gender categories as different, avoiding automatically assuming that a boy and a girl who state they are Maori are meaning the same thing. We cannot treat ethnicity as an objective fact independent of social circumstances.

 

Measuring Socioeconomic Status

PISA assesses socioeconomic background with an index of social, cultural and economic status (SES), which is based on information provided by students about their parents’ education and occupations and their home possessions, such as a desk to use for studying and the number of books in the home.

 

On this index, one ‘unit’ is equivalent to one standard deviation across all OECD students. So across all OECD countries, about two-thirds of students are from a socioeconomic background that is between one unit above and one unit below the average.

 

(It seems likely that, were there the resources available, a better New Zealand index of socioeconomic status could be constructed. It might well sharpen up the SES impact on educational achievement.)

 

Gender

 

Despite also being a self-categorisation, the gender variable does not present the difficulties that ethnicity of socioeconomic status does.

 

Ethnicity and Educational Achievement

 

PISA assesses its fifteen year old students on three main dimensions, reading, mathematics and science literacy. Although there are various subcategories the focus here is on a single measure for each dimension which summarises the assessment.

 

The scale is open ended but the following may be a useful way of interpreting it. PISA 2009 says that ‘[f]or the 32 OECD countries in which a sizeable number of 15-year-olds in the PISA samples were enrolled in at least two different grade levels, the difference between students in two grades implies that one school year corresponds to an average of 39 score points on the PISA reading scale.’ The figure from reading is 44 score points for New Zealand.[4]

 

Unfortunately no equivalent figure was published for maths and science literacy in PISA 2009. But the 2003 international report gives the equivalent for mathematics of 41 score points as the OECD average and 50 score points for New Zealand.[5] The 2006 international report gives an average of 28 score points for OECD countries in science literacy and 43 score points for New Zealand.[6]

 

In each case the New Zealand annual increment exceeds the OECD average. This is consistent with the data about to be reported which shows New Zealand achievement scores are above the OECD average (as one might expect from accumulating annual increments).

 

It also might suggest that the New Zealand educational system is better at increasing achievement on the given measures since an extra year adds more. (So it is not a matter of New Zealand students starting a lot higher when they are younger and the relativity being maintained. It is being increased.) However any success is from the entire system including the informal sector of parents, the media and out-of-school activities, as well as the formal sector of schooling.

 

The averages for the ethnic groups are summarised in Tables 3R (for reading), 3M (for mathematics) and 3S (for science literacy). To assist interpretation, the score is bolded where it exceeds the OECD average.[7]

 

Table 3R: Mean Reading Scores by Ethnicity

Boys Girls Total*
Pakeha

528

566

547
Maori

440

474

457
Maori-Pakeha

488

538

513
Both

461

507

484
Pasifika

426

482

454
Asian

507

540

524
Other

480

537

508
TOTAL NZ

503

543

524
OECD

474

513

493

* The total assumes equal numbers of boys and girls

Source: Ministry of Education PISA data base.

 

Table 3M: Mean Mathematics Scores by Ethnicity

Boys Girls Total*
Pakeha

550

537

544
Maori

462

450

455
Maori-Pakeha

511

505

508
Both

483

478

481
Pasifika

450

451

451
Asian

547

520

533
Other

501

505

503
TOTAL NZ

528

516

521
OECD

501

490

496

* The total assumes equal numbers of boys and girls

Source: Ministry of Education PISA data base.

 

Table 3S: Mean Science Literacy Scores by Ethnicity

Boys Girls Total*
Pakeha

563

560

562
Maori

466

465

466
Maori-Pakeha

514

529

522
Both

487

498

493
Pasifika

443

464

452
Asian

538

527

532
Other

503

523

513
TOTAL NZ

534

535

535
OECD

501

499

501

Source: Ministry of Education PISA data base.

* The total assumes equal numbers of boys and girls

 

On all dimensions Pakeha and Asians are well above the OECD averages. So are the national averages, by the equivalent of at least a year of schooling. It is these scores which are sometimes used to say that the New Zealand educational system is ‘world class’ (for those up to 15 years of age – there are not comparable measures for older students).

 

On the other hand the scores for sole Maori and Pasifika are somewhat below the OECD average. However the group which describes itself as both Maori and Pakeha are comfortably above the OECD average, although not as spectacularly as for sole Pakeha or sole Asian. When the sole Maori with the Maori-Pakeha groups are pooled, their averages are below the OECD averages, although much closer than in the case for sole Maori.

 

(The Other group has scores about or just below the OECD average. Because it is such a heterogeneous group there seems little point in discussing this result, especially as the sample size is small.)

 

The Socioeconomic Gradient: Educational Achievement and Socioeconomic Status

 

It is well established that educational achievement is related to socioeconomic status (SES). Moreover there is a correlation between SES and ethnicity. This section investigates the SES effect on the educational achievement scores.

 

The measure of SES used here is the standard one provided by the OECD in the international data base. It is probably not the best measure for New Zealand, but it has the merit that the results are comparable with the OECD’s international research. A New Zealand constructed index might well show a greater effect on educational achievement.

The analysis is based on ranking the students by SES dividing the surveyed population into ten categories (deciles). The deciles are numbered from 1 which has the lowest SES scores to 10, which has the highest. (Theses SES deciles are not the same as the deciles which are used to rank schools.)

 

Table 4 illustrates the general method showing the reading achievement scores of sole Pakeha boys and Maori and Maori-Pakeha boys by decile.[8]

 

Table 4: Reading Achievement by SES Deciles

Boys 1 2 3 4 5 6 7 8 9 10
Pakeha 458 486 505 512 519 524 524 548 564 583
Both 412 456 465 456 459 471 482 498 512 517

Source: Ministry of Education PISA data base; some calculations.

 

To simplify the interpretation of the table the results are shown visually in Figure 1.

 

Figure 1: Reading Achievement by SES Deciles

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Table 4.

 

Both show a distinct rising – and, as it happens, statistically significant – trend with higher SES. However the Maori and Maori-Pakeha scores are below the Pakeha ones in each decile. (Even so, those of the combined Maori groups in the top third of the socioeconomic ranking are higher than Pakeha at the bottom third of the ranking.)

 

This trend or gradient can be estimated econometrically. The gradients are summarised in Table 5. The measure shown is the estimate of the difference between the average score at the bottom decile and the top gradient.

 

Tables 5: Difference in Educational Achievement between Top and Bottom SES Decile.

Average Score

Reading

Mathematics

Science Literacy

Boys

Girls

Boys

Girls

Boys

Girls
Pakeha

105

102

92

112

100

97
Maori

45

92

46

78

53

109
Maori-Pakeha

117

106

109

143

124

123
Both

87

112

84

132

95

128
Pasifika

143

99

141

129

158

110
Asian

110

96

112

135

113

103
Other

139

126

134

132

140

151
1 Year*

44

50

43

* OECD estimate of the effect of one school year.

Source: Ministry of Education PISA data base; some calculations.

 

With the exception of sole Maori (especially boys) the gradient magnitudes are much the same. So will be the score difference between the top and bottom SES decile. The implications of the low sole Maori gradients are discussed in the next section.

 

The gradients are large. Typically students from the highest SES families average more than two years in their achievement relative to those in the bottom SES families. It would appear that given a choice between being in a top SES family or being in a bottom SES family and having two extra years of schooling, the first option would give a higher educational achievement on average. (In practice the student in the low SES family is likely to get fewer rather than more years of schooling.)

 

Of course the outcome may not be only the pure effect of the socioeconomic status of the student’s family, since other effects may be subsumed in it. For instance, those from high SES families may go to better-resourced schools.

 

Where gradients exceed the Pakeha ones – which is generally true – there is a convergence with rising socioeconomic status. That means that the gap between these ethnicity achievement scores is proportionally greater at the low SES level than at the high level.

 

Maori and Maori-Pakeha

 

In many circumstances it does not matter for purposes such as this study that the ethnicity is not an objective characteristic but reflects social circumstances (including the context when the self-report is made). However here it would matter if one of the determinants of an individual’s choice of ethnicity was their educational achievement.

 

For instance suppose there was a tendency by students of Maori descent with low educational achievement to categorise themselves as ‘sole Maori’ but those with higher achievement to categorise themselves as both Maori and Pakeha. Given that educational achievement is positively correlated with socioeconomic status, we would expect to see a higher proportion of Maori-Pakeha in upper SES deciles than in lower ones, and a stronger gradient for Maori-Pakeha, than sole Maori. This is exactly what happens.

 

This fact does not prove the conjecture that the choice of ethnicity is affected by educational achievement, but in case further investigation found some greater credibility for the conjecture, the analysis has combined Maori and Maori-Pakeha into a single ‘Both’ category which is reported in the tabulations.[9]

 

The result from combining the two ethnicities is a gradient for each achievement dimension more like those for the other ethnic categories. Even the slightly lower gradients could be explained if some higher achievers of Maori descent chose only a ‘Pakeha’ categorisation.

 

If the conjecture were to apply for Maori, it might also apply for Pasifika (only 56% of all Pasifika describe themselves as sole Pasifika, as distinct for an equivalent statistic of 44 % of those who describe themselves as Maori). The gradients (not reported here) of the sole Pasifika were low like the sole Maori. (Numbers were small; hence the use of an ‘all Pasifika’ category.)

 

The purpose of this section is not to argue the conjecture is correct, but to point out the complications if a factor in the choice of ethnicity is educational achievement. Using the Both (sole Maori and Maori-Pakeha) and the (all) Pasifika categories reduces any such effect.

 

Educational Achievement adjusted for Socioeconomic Status

 

The various ethnic groups are not spread evenly through the SES ranking so that proportionally more Pakeha are clustered in the top of the ranking and proportionally more sole Maori are in the bottom (Maori-Pakeha more middling). Given the SES gradient the average scores are affected by the distribution of socioeconomic characteristics.

 

This effect can be eliminated by deriving an average as if the two groups had exactly the same socioeconomic structure. The outcome for groups shown in table 4 (the reading scores of boys from two ethnic groups) is shown in Table 6 where it is assumed that each has 10 percent of the population in each decile, but the achievement score in each decile is exactly the same as in the original survey. (The adjusted scores are thus the averages of the deciles shown in Table 4.)

 

Table 6: Unadjusted and Adjusted Reading Scores (Boys)

Boys

Unadjusted

Adjusted

Difference
Pakeha

528

524

-4
Maori & Maori-Pakeha

461

470

 9

Source: Ministry of Education PISA data base; some calculations.

 

Pakeha tend to be slightly more preponderant in the higher SES groups. If they were spread evenly though the deciles (with the same average score in each decile) their reading score would average 4 points lower at 524 rather than 528. Conversely the Maori & Maori-Pakeha are more likely to be in the lower SES deciles. If they were spread evenly their reading score would be 470 instead of 461, some 9 points higher. Thus the difference between the two ethnicities of 67 points is reduced to 54 points when the results are controlled for SES. There is a sense in which some of the difference between the two groups’ score can be explained by differences in SES.

 

Since there is almost certainly a better measure of SES for New Zealand than the OECD one, the estimate that class explains only a quarter of differences is probably too low. Calculating the actual figure would involve more resources than are available for this project. What this report demonstrates is that ethnicity cannot be the sole explanation for differences in achievement scores between the two groups.

 

The adjusted and unadjusted scores for all the ethnic groups used in this report are shown in Tables 7R, 7M and 7S. Again bolding indicates that the score is above the OECD average.

 

Table 7R: Mean Reading Scores by Ethnicity

Boys

Girls

Unadjusted

Adjusted

Unadjusted

Adjusted
Pakeha

528

524

566

557
Maori

440

450

474

493
Maori-Pakeha

488

500

538

546
Both

461

470

507

523
Pasifika

427

453

483

502
Asian

507

503

540

539
Other

480

494

537

533
TOTAL NZ

503

503

543

543
OECD

474

513

Source: Ministry of Education PISA data base; some calculations.

 

 

Table 7M: Mean Mathematics Scores by Ethnicity

Boys

Girls

Unadjusted

Adjusted

Unadjusted

Adjusted
Pakeha

550

540

537

523
Maori

462

473

449

466
Maori-Pakeha

511

523

505

518
Both

483

492

478

497
Pasifika

450

476

450

474
Asian

547

543

520

519
Other

501

494

505

501
TOTAL NZ

528

528

516

516
OECD

501

490

Source: Ministry of Education PISA data base; some calculations.

 

Table 7S: Mean Science Literacy Scores by Ethnicity

Boys

Girls

Unadjusted

Adjusted

Unadjusted

Adjusted
Pakeha

563

559

560

555
Maori

466

478

465

480
Maori-Pakeha

514

528

528

539
Both

487

497

498

518
Pasifika

443

471

464

485
Asian

538

534

527

526
Other

503

537

523

518
TOTAL NZ

534

534

535

535
OECD

501

499

Source: Ministry of Education PISA data base; some calculations.

 

While the scores do not move much they result in one major change to the earlier conclusions. While the educational achievement scores for sole Pakeha and sole Asians were among the best in the world, it now appears that the scores for the Both group (i.e. combined sole Maori and Maori-Pakeha group) are close to the OECD average when there is an adjustment made for their tendency to have lower socioeconomic status.

 

The implication is that Maori may not be getting a ‘world class education’, but what they do get is typical of the OECD. Probably they are getting an education – on these measures – similar to that they would get in Britain or the United States if they were in a similar socioeconomic situation.

 

Table 8: Some International Comparisons

Boys & Girls

Reading

Mathematics

Science Literacy
Both (adjusted)

497

495

507
Pasifika (adjusted)

478

475

478
OECD Average

493

496

501
Britain

494

492

514
United States

500

487

502

Source: Ministry of Education PISA data base; some calculations.

 

However the all Pasifika group remains below – but closer – to the OECD average.

 

Conclusion: Ethnicity and Educational Achievement

 

The conclusions are set out in the Executive Summary. It should be emphasised that this is a preliminary exploration, and the data base is such that a more refined statistical analysis is possible and would almost certainly be worthwhile.

 

APPENDIX: THE ETHNICITY QUESTION IN THE PISA SURVEY

 

Q4: Which ethnic group(s) do you belong?

You may tick more than one box

New Zealand Māori

New Zealand Pākehā/European

Other European

(Please say which)

Samoan

Cook Island Māori

Tongan

Other Pacific Island

(Please say which)

Chinese

Indian

Other Asian

(Please say which)

Other Group

(Please say which)

 

Note that in the 2006 New Zealand census of those aged 10 to 14 (the midpoint of the group would have been 15 at the time of the 2009 PISA survey), 55% were reported as New Zealand European, 19% as Maori, 9%, as Pacific Islander, 8% as ‘other’ and 8% were reported as ‘New Zealanders’ (an option not offered in the PISA survey). These figures include multiple choices. They do not match well with the PISA responses. Differences may reflect the options given for answering the question, that many of the fifteen year olds may have had their census ethnicity chosen for them by their parents when they were twelve, and that individuals change their ethnicity over time or for particular circumstances.

 

Acknowledgements

I am grateful to Judie Alison, Warwick Elly, Liz Gordon, John Hattie and Geraldine McDonald for comments on early drafts and for assistance from Jit Cheung and Steve May from the Ministry of Education. All the remaining errors are mine, as are any interpretations of the findings.

 

The research is funded by a grant from the Post Primary Teachers Association.

 

Endnotes

1.         The ethnicity data of the students was kindly supplied by the Ministry of Education, providing that the individual responses of the students were not disclosed. The rest of the PISA data is in the international domain. The report uses the term gender rather than sex because, like ethnicity, it is a self-categorisation.

2.         There may be differential gender migration for the other categories.

3.         Note that in their PISA studies the Ministry of Education estimates of Maori includes all those who describe themselves as Maori, including those with multiple ethnicities.

4.         Volume II (2009), p.27 and Table A1.2.

5.         Volume II (2003), p.60 and Table A1.2.

6.         Volume II (2006), p.55 and Table A1.2.

7.         The results weight each student equally. There are sampling weightings, but they have not been used.

8.         That the Maori and Maori-Pakeha data is less regular than the Pakeha data probably reflects the smaller sample.

9.         The Both group is similar to the prioritisation method, in which those who categorise themselves as Maori are allocated to that group and no other, and the double-count method in which a person with multiple ethnicities is allocated to all categories. However the Both group excludes the sixth who chose at least one of their ethnicities as Maori but also mentioned another other than Pakeha – such as Pasifika or Asian.

 

 

A NEW HOME FOR BRIAN EASTON

This entry was posted in Miscellaneous, Pundit on by .

Notice in the Gilling New Service: 9 September, 2014

 

Keywords: Miscellaneous;

 

Brian Easton will be doing a weekly column on the website Pundit:

http://pundit.co.nz/.

 

Usually it will be put up Monday; sometimes Tuesday. His first was this week at http://pundit.co.nz/content/how-good-is-our-schooling-really-0.

 

Brian says, ³the initial reaction when the Listener column was ended was to say that after I have done enough and retire. However I was greatly moved by the large number of people who contacted me and regretted the termination; warmingly that included professional colleagues as well as general readers. So I must have been getting something right. Moreover, I think I still have things to say – indeed while writing the column I had a work list for about three months out and it has got longer while I have been Œoff the air¹. .

 

³I¹ve got such a backlog that I am initially going to do the columns weekly.

We¹ll see if we can keep it up. The first columns will be from the backlog (including columns that were rejected by the Listener editor), although they will be interspersed with contemporary columns. It¹s a new media format for me so I am betting things will change; let me know how I am doing.

 

Just by way of background, Pundit is a broad ranging serious blog. One of the things which attracted me to it was it has some exceptional contributors but also that it is not confined to a single political view point with its panel ranging from retired Green politicians  to retired National ones and many others beside. (The editor is Tim Watkins, a professional journalist whose current job is executive editor for TV3¹s The Nation.) So I hope that, if you don¹t go to it already, my joining them will encourage you to be a regular reader. (I am acutely aware that the digital disruption – now there is a column in my to-do list – means that the funding of the blog is precarious; by being a regular visitor to it, you strengthen its base.)

 

WHY DID ROGERNOMICS WORK IN POLAND?

This entry was posted in Growth & Innovation on by .

Published in Stuff, 2 September, 2014.

 

Keywords: Growth & Innovation;

 

In the two years after the Berlin Wall fell in 1989 and Poland (among others) detached itself from the Russian Empire, the Polish economy contracted by about a sixth. They call it ‘shock therapy’ but the policies which were pursued – privatisation, market liberalisation, the withdrawal of subsidies – were much like what we call ‘Rogernomics’. However, unlike the New Zealand experience the policies seemed to have succeeded; since 1992 their GDP per capita has grown 4.4% annually; in contrast to New Zealand’s 1.9%.

 

I was given many explanations for the Polish economic miracle while in Poland as a guest of the Polish embassy in Wellington. I focus on three of particular relevance to New Zealand.

 

The first is they did not ignore the export sector. Right next to its giant German motor economy Poland was better placed than we are. Their poorly managed government-owned manufacturing was privatised, replacing clapped-out party hacks with more competent managers or the business went to the wall. The Swedish furniture giant, IKEA, bought some of the factories which had been supplying it and overhauled them. Today furniture is one of Poland’s biggest exports (not only from IKEA).

 

Our Rogernomes did not pay much attention to the export sector, treating it on a par with the domestic one. A small economy like New Zealand (or even Poland with about eight times our population) can latch on to growth markets elsewhere – a small supplier can even increase its share in a slow-growing market. A flourishing export sector drags along the rest of the economy. A quarter of a century after the Rogernomics failure we still have not learned this lesson.

 

Second, Polish industrial performance is underpinned by the quality of their industrial workers, attributed to the quality of their secondary and tertiary education and training, a Central European phenomenon famously illustrated by the quality of the German workforce, Polish wages are relatively lower, so German business relocates production to Poland. One is not surprised that Poland’s biggest export to New Zealand is agricultural machinery, often based on German design and German-owned factories using Polish workers.

 

New Zealand pays little attention to the training of middle-level workers, putting its effort into the top level (degrees).We even abolished apprenticeship training in the early 1990s. Our approach partly arises from our British heritage – British workers are no match for German ones – plus our casual can-do/number-eight-fencing-wire attitude. We forget that poor workmanship has been a major factor in the leaky homes debacle. It is sobering is that the more focused German training approach began over 150 years ago. (I was impressed by the high quality of Polish design. It may come out of their middle level training, rather than a focus on the elite.)

 

A third message is that the Poles were willing to make sacrifices in the short run for long run gains. It was explained to me that their stoicism came from that East-Central Europeans having gone through hardships in the past – the Great Depression, the Second World War, the sufferings under the Russian Empire.

 

New Zealand politicians of all shades operate on the basis that we are unwilling to make the sacrifices, deferring difficult decisions in the hope that something will turn up. (It does not help when politicians ask for sacrifices but exclude their friends from them.)

 

I dont want to suggest that the Polish economy is perfect. Its standard of living is still low by Western European standards, it has more regional inequality than would be acceptable here and its unemployment rate of 13 percent is high (although given how entrepreneurial Poles are, many of the ‘unemployed’ are probably active in the unrecorded economy).

 

One day the Polish economic miracle will come to an end when its economic growth slows down to a rate similar to that of its Western neighbours. But Poles will remember their shock therapy with an affection we do not give Rogernomics, Hopefully they will not forget its lessons. Nor should we.

AN EU FINANCIAL TRANSACTIONS TAX AND NEW ZEALAND

This entry was posted in Regulation & Taxation on by .

 

Keywords: Regulation & Taxation;

Support from the EU delegation and the German and Polish embassies in New Zealand plus a travel grant from Air New Zealand enabled me to visit Europe on a study tour in June and July 2014.

 

Much of what I learned will appear (first) as columns, the material I gathered on the Financial Transactions Tax (FTT) in the EU is not quite column material. (But see http://www.eastonbh.ac.nz/2012/03/new-zealand-should-tax-financial-transactions/) This note lists my main learnings.

 

The Case for and against FTT

 

The case for an FTT rests on two major pillars. Financial transactions are usually not otherwise taxed and therefore do not make a contribution to the public purse while, second, the tax avoidance itself amounts to a subsidy to the sector in a comprehensive tax system and is likely to generate inefficiencies. (In New Zealand most financial activities are not covered by GST.)

 

The case against an FTT usually amounts to a case against all taxation or a special pleading for a particular sector (in this case the financial sector). Even so, a badly designed FTT (or any other tax for that matter) could result in major inefficiencies; for instance, an orderly monetary system requires a ‘repro’ market which an FTT might discourage.

 

There are also the usual bureaucratic grumbles that the administration of the system will be too complicated. That is true for every tax, especially at the time of introduction. (It may take some time to adapt IT systems for a new tax.)

 

FTT in the EU

 

A number of EU countries, including Britain, have what amounts to an FTT on some of their financial transactions – but not all transactions and not all countries. The original EU proposal was to have a comprehensive FTT across all member states with the revenue going to the EU (rather than individual countries). However politics has stalled this option. Instead a group of 11 members (but others may join) are proposing to have one under the ‘enhanced cooperation’ provisions in the EU treaties (more below). They represent about 65 percent of EU GDP and 60 percent of the population.[1]

 

The biggest exception is the United Kingdom. Because London is a major financial centre its views carry more weight than Britain’s economic size would normally justify.

 

The Form of the EU FTT

 

It seems generally agreed that any FTT will be administered via a ‘stamp duty’ system, that is, a tax levied on the documents involved in the financial transaction.

 

Initially discussions (for a comprehensive EU FTT) were based on a tax levied on financial transactions between financial institutions at a rate of 0.1% for the exchange of shares and bonds and 0.01% for derivative contracts if just one of the financial institutions resided in a member state of the EU.[2] Proposed exemptions included:

Day-to-day financial activities of citizens and businesses (e.g. loans, payments, insurance, deposits etc.).

 

Investment banking activities in the context of raising capital.

Transactions carried out as part of restructuring operations.

Refinancing transactions with central banks and related institutions.

 

(In my discussions there was no specific mention of an FTT on foreign exchange transactions, except where they involve derivatives.)

 

However, given that the FTT is unlikely to be EU wide, there may be different coverage.

 

There appears to be some disagreement over whether the levy should be on a residence status (where the transaction occurs) or an issuance status (where the document is issued). A German expert told me that the issuance principle could well be ruled out by the German constitution. Clearly it is important there is as much alignment as possible between jurisdictions.

 

I had a sense there was a conflict between the French approach and the British one. Britain is not a member of the EU11 group (France is) but some see a strong case for as much alignment as possible between Britain (with its London capital market) and the EU11 group approach.

 

Until we have a clearer idea about what is being proposed, it is difficult to discuss avoidance. It is a major issue with the danger that a badly designed tax could shift activity to where there is no FTT at a cost of local jobs with no significant revenue gains nor any efficiency ones either.

 

Note that some options would generate little gain for those members of the EU11 group with simple financial sectors and that is likely to affect the final choice of the scheme.

 

Where is the EU11 Group at?

 

In discussion. They hope to have a position paper by the end of this year (2014) and to implement the tax in January 2016. The introduction date has already been delayed.

 

A complication is that Britain has said it would veto the EU11 proposal. The tax would operate under the ‘enhanced cooperation’ provisions of an EU treaty and Britain has a strict policy that there should be no increases in EU taxes.[3] It would not, however, object to an individual country implementing an FTT. (I am guessing Britain would hardly object to a group of countries simultaneously implementing similar regimes.)

 

Polls suggest that over 60 percent (perhaps 80 percent) of the population supports a FTT (although they may have only a general notion of what it entails). There is less political support. For instance, Germany supports it because the SPD made the investigation of a FTT a part of the coalition agreement; Its coalition partners, the CPU/CSU, are less enthusiastic.

 

What should New Zealand do?

There are two main reasons why in the right circumstances New Zealand might support a FTT.

 

First, it would eliminate the implicit subsidy to the financial sector which does not pay GST on its net outputs.[4]

 

Second, it would increase government revenue in an environment where there are strong pressures for further income tax cuts and increases in government spending. The EU wide proposal was projected to generate tax revenue of about 0.4 percent of GDP. The equivalent amount in New Zealand would be about $1 billion p.a., although the New Zealand revenue is likely to be less given its less sophisticated financial sector. Any realistic FTT will be unable to generate enough revenue to replace GST, as some have hoped, but it would be a useful addition to the fiscal revenue. .

 

The downside might be the effect of even a well-designed FTT driving too much financial activity offshore.

 

I see no merit in New Zealand introducing an FTT unilaterally. Not only would it be easily avoided by moving transactions off shore, but New Zealand has hardly the policy capacity to develop the details on its own.

 

This suggests the following strategy for New Zealand.

 

1. It should closely monitor the EU11 group discussion and proposals.

 

2. It should seek out other like-minded countries outside the EU who would be interested in simultaneously implementing an FTT parallel to any EU one.

 

3. As soon as the EU11 group has a reasonably detailed proposal New Zealand should establish an expert group to consider its implication here. Membership should include experts who are mildly sympathetic to an FTT.

 

4. The NZ expert group may have to pay particular attention to foreign exchange transactions.

 

4. If an NZFTT goes ahead (a key condition should be the EU11 group or some other largish block introducing one) I would not expect it to be introduced before, say, March 2018.

 

Brian Easton (August 2014)

 

Endnotes

[1] Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, Spain.

[2] This is markedly lower rate than the Swedish FTT in operation between 1984 and 1991.

[3] Existing ‘enhanced cooperation’ cover patents and divorce; very few member states are not included.

[4] There is a more sophisticated argument, proposed by James Tobin, that the real economy would benefit by the slowing down of high turnover financial activity which induces volatility. I have some sympathy with his analysis, but it is not a necessary reason for introducing the FTT.

THE RIGHT TO DISSENT by Jack Shallcrass

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

Jack Shallcrass died on the 13 August, 2014 at the age of 91. Many years earlier in 1965 – he was 42 and I 21 – he spoke at the University of Curious Cove.  His lecture, ‘The Right to Dissent’ greatly influenced my thinking. Its themes of the central role of dissent in a civilised society remain as significant four decades on – even though the context may have changed. As a tribute to Jack I reproduce the lecture as published in the proceedings of that Congress.

 

Keywords: Education; History of Ideas, Methodology & Philosophy;

 

When I agreed to speak on this subject, I had in mind a more or less impassioned attack on those pressures which inhibit dissent in our society – such things as the increasing demands for conformity, not only within societies but between them; the ever present and often deadening mass media; the widespread fear of being, or appearing to be, different; the need of the young, and the not so young, to retreat into socially pointless rebellion; the relentless growth of one-party government throughout the world, and the depressing sameness of the parties in two-party states; the politicians who ask us to defend and admire democracy and all its values, but deny certain political parties, in particular the Communist Party, access to radio and television during the elections. We should also note the increasing tendency for Cabinet rather than Parliament to make decisions and the incidence of rule by decree.

 

Free speech used to be advocated on the ground that free discussion would lead to the victory of the most worthy opinion. This belief appears to be losing ground, because of the effect of the many fears which beset us. The result is that truth is one thing, and official truth another. This is a first and most important step on the road to Orwell’s ‘double talk’ and ‘double think’. The forms of free speech and dissent are preserved, but the organs of publicity are open only to the orthodox.

 

We seem to accept as necessary the security police in our midst. These people, in default of any ready-made spies, spend their time in seeking out and providing information on those whose opinions vary markedly from the accepted. Worse, they do this in secret, so that the person being investigated is seldom, if ever, in a position to answer any charges or allegations made against him. It would be interesting to know how many secret files there are on citizens of this country – files which are used to determine whether or not they may travel, to where they may travel, and whether or not they are considered fit to hold certain positions in the community. The men who gather the information for these files are in the enviable legal position of being judge, jury, prosecutor and, executioner.

 

We must also note the power of the police, and their increasing efficiency in the daily defence of the establishment. This is to be applauded, except where the power appears to be misused. Even a cursory reading of the Ward case in Britain would indicate. how seriously such power and efficiency may sometimes be prostituted. Someone had to pay for the Profumo affair and Ward was the fall guy.

 

Think also of the tyranny of the organisations to which. we belong, which increasingly control and determine our actions; the growing number who have professional behaviour clauses; ‘the good union man’ who is in much the same position as the person forced to be ‘the good organisation man’. Whyte’s book, The Organisation Man, is vividly illuminating reading in this area. Along with the power of the organisation grows the power of the official – an official not always trained in or aware of, the obligations of this position. ‘Perhaps the motto of the organisations and of the organisational society should be ‘Don’t Rock the Boat’ – for this is the recurrent demand placed upon those who sail in it.

I had thought to base my talk on some of these factors, and on John Stuart Mill’s rinsing assertion that ‘if all mankind minus one were of one opinion, and only one person sera of the contrary opinion, mankind would be no more justified in silencing that one person, than if he had the power would be justified in silencing mankind … we can never be sure that the opinion we are endeavouring to stifle is a false opinion: and even if we were sure, stifling it would be an evil still’.

 

Clearly we offend against this in many respects, and if we treasure our right to be heard then we must accord that right to ,every other person. If it is correct for us to deny any person or section of the community any right, then by change of circumstance it would be correct in denying them to us. But all these things are only the symptoms of our ills and I am more concerned with the causes.

 

Despite our shortcomings, however, it is, I believe, true that liberty of opinion, the right of dissent, is the basic principle of political and legal institutions in the West. We may not always observe this principle, but it is clearly built into our institutions, but it will remain only so long as we insist that it shall by practising it.

 

But unfortunately there now seems to be a marked lack of passion or conviction about this basic assumption. It appears to havebecome a habit rather than a conviction, a fossil rather than a living organism. When one talks of freedom of opinion, liberty, the right of dissent, the most common response is a slight embarrassment. One’s friends talk soothingly, as though to a demented child, or, worse, say, ‘Oh yes – but of course we must be realistic.’ God preserve me from the realists, for they always do the greatest harm to their fellows, and eventually to themselves. It’s almost as though we have begun to doubt the validity of many of our renaissance and post-renaissance beliefs – as though we are beginning to doubt ourselves as individuals, and to edge back towards or rush frantically from the sheltering womb of the tribe.

 

This is in direct contrast to the optimism and confidence of the 19th century, which was very sure of itself and its values. It not only had a long line of brilliant scientific discovery which culminated in the reassuring pledge of perpetuity given by Darwin and Spencer, but even God seemed clearly on the side of liberalism and progress. Though the 20th century does have an afterglow of this confidence in socialism and communism, even they appear to have doubts as this century ages – we seem to be waiting for new thought, for new ways ahead – unsure of where we stand, or where to go. Our world, in many respects, is one of doubt.

 

Jung said, ‘Along the great highroads of the world everything seems desolate and worn’. Kehler: ‘Everything is in flux, everything open to question. Everything is involved in perpetual change and dissolution.’ Tillich: ‘The anxiety in present western civilisation is similar to the mental climate of Europe during the decline and fall of Rome and the waning of the Middle Ages.’ ‘We feel as though history has slipped from our hands and that the world is being borne on by a great wave.’

 

We think of Eliot’s Hollow Men, of Grosz’s Stick Men, and Capek’s Engineer Prokop, of Ionesco’s Individual seeking to preserve the dignity of self in a world of stampeding rhinoceroses; of Camus, who sees man’s future like that of Sisyphus, who was condemned to roll a huge stone up a hill only to have it roll back again, in a journey without arrival; and of Sartre, Pinter, and Eliot, who see us trapped in our individualism, unable to communicate with our fellows, or to think beyond our on immediate needs; and finally Erich Fromm, who sees us as having escaped the most obvious restraints of the mediaeval world, but also as having lost its beliefs without adequate replacement. This has given us a great deal of personal freedom, but we have been unable to develop the social, political and economic institutions necessary to growing ‘individuation’, or the recognition of the responsibility which grows in direct proportion to individual freedom. He sees us as being individuals and societies without a cause or sense of purpose. This was ‘one of the cries of the angry young men of postwar Britain – ‘there are no more causes’. This is the society which John Betjeman described as a cotton wool society – no bones, no skeleton, no point.

 

In spite of these opinions it was fashionable in some quarters during the middle 1900s to talk about the Second Elizabethan Age, as though the name itself would bring back the glory. Such talk was a wistful echo of the greatness of our imperial and artistic past, but in a different and more important sense there is a great deal of truth in the parallel. The Elizabethans were poised between a mediaeval corporate experience, and modern individualism, while we appear to be reversing the pattern because of an electronic technology which would seem to render individualism obsolete and to make some sort of corporate interdependence mandatory. The printed word which arrived as part of the renaissance was one of the prime factors in the growth of our attitudes to the individual – a person and a book meant a complete break with the past, where a book had been read aloud by the teacher to his scholars. Printing gave all individuals access to books, as individuals. But the electronic age and the mass media is taking us away from the printed traditions back to an oral tradition. It is possible now for the bulk of the human race to share the same experience at the same time, through television – and literacy is insignificant in this sharing. All extensions of our senses – the alphabet, the radio, television etc. – are closed systems. They cannot translate from one to the other. Only our consciousness can do this. But in the electric age the instantaneous nature of communication is a critical factor, because it has brought us to a world-wide sharing of experience similar to tribal communication.

 

The consequences of this are not easy to see, except that there seems little doubt that there will be inevitable development towards corporate societies, that we will have to develop many new institutions as a result and that there will be even greater pressures on us to conformity.

 

This is why I think we pay only lip service to the right of dissent, and why we lack passion and conviction about it. We are in a twilight period when the past is becoming blurred and the future as yet has no clearly defined outline. We therefore doubt the old truths, but, having none to replace them, we hold to them from force of habit. This is why freedom of opinion and general political liberty may be the late flowering of a declining capitalist society. Our democratic freedoms have grown out of the fight for economic freedom in a growing laissez-faire capitalism just as most principles have grown out of expedience. There is a real danger that the freedoms will disappear as the faces which produced them decay. This is why we may already be an interesting museum piece.

 

But principles are no less sacred because they may be near the end of their universal acceptance. ‘To realise the relative validity of one’s convictions, and yet stand for them unflinchingly, is what distinguishes the civilised man from the barbarian.’ The principle of dissent is well founded in tradition, but there are even more pressing reasons for it in the contemporary world, despite the possible changes already referred to.

 

The first of these concerns you, now, and will concern you more as you grow older. This is the principle of academic freedom, which is no more than the duty to protect the right of heresy. Freedom for the expression of someone’s wrong idea secures freedom for the expression of my right idea. Error is essential to the finding of truth. What we know depends equally on knowing what is and what is not the case. Hence, the futility of enforced orthodoxy – for we can only know if its view is right if we also know other views. Thus civil liberties exist only insofar as they are lived, and academic freedom is the frontier of civil and all other liberties.

 

It was Nietzsche who said that intellectual courage is shown not by forming certain convictions, but by being prepared to test them – truth is an endless process. This is doubly true in a world committed to science, because science is more than anything else an attitude of mind which doubts everything until it is proven, and is always willing to change in the face of new evidence. It recognises and works from the principle of uncertainty and believes, therefore, that all facts, all opinion, and all evidence, must be heard.

 

Freedom of opinion in politics is analogous to this scepticism in science, and acts in the same way, fermenting change. It is for this reason that the established tend to fear and choke freedom of opinion and dissent, because change may well mean the end of their brief moment of truth and power, and here we are back to our problem of avenues of dissent.

 

Throughout much of the liberal era, or perhaps one could even say the renaissance era, we have thought of the individual as being the basic unit of society, and have tried to define his rights. Thus, in the more blatantly individualistic societies, there has been much reverence for. the sort of rugged individualism which happily, now appears to be going out of political and social fashion. But people still think of, and talk about. the individual and his rights – and seldom about his obligations. One of the great strengths.in capitalist development was clearly the sort of rugged individualism typified by the Carnegies and Billy the Kid – the only obligations they had were to themselves. But it seems very clear. to me that rights must always carry, at least an equal proportion of obligations.

 

We in the West are prone to think that individuals can have no rights or no freedom, in a corporate society, whereas it is clear that there are many societies which demand much from their members but give a great deal in return. Further, we too often confuse the form for the substance. Thus, there are many who vote once every three or four years and think they have rights and freedom – but the vote without the accompanying acceptance of social and political obligations is an empty gift. We are chasing a shadow so long as we pursue rights for purely selfish ends.

 

Perhaps the gravest political and social irresponsibility is the expression of one’s own will and the pursuit of one’s own ends without reference to the problem facing the sovereign community. I also believe that international responsibility may be measured between communities in the same way.

 

We are to a degree political romantics in that we seek ready-made formulae and the easy answer. As always, we run the risk of measuring by the obvious – by such things as the vote, the number of political parties, what the laws may say – and while these are of vital importance the strength of a community can eventually be measured only by the commitment of the people in it to the things in which they believe.

 

Man only seems able to escape this sort of selfishness, however, if he can see a greater purpose. In the past this has ranged from divine to imperial purposes. Perhaps our biggest single problem is our lack of purpose. We are against many things but what are we for? Our ‘anti’ foreign policy leads us into odd situations and gives us some strange allies.

 

The theory of democracy has always carried the clear implication of what political scientists call ‘the natural light’. This I take to be a guiding sense of good, which may be absolute. Where this has been present the forms of the society have been guided to a central point, causing the various forces of the community to converge and to produce a pattern within which the members found security. But if the natural light disappears or weakens, there is in theory a very real danger that the forces of the community will pursue their independent paths and diverge, producing dissociation and eventual chaos.

 

There are people who doubt the ability of the liberal democracies to maintain themselves, because their natural light is a waning force. Perhaps the dominant factor in modern Western history is the decline of religious faith in the West, for with this decline goes the loss of form and pattern and the increasing possibility of dissociation and divergence. This is what Sartre has called ‘the modern tragedy’, and why he says that what is wanted is a new fight.

 

The same tendency to divergence and chaos is of course present in the physical world. The second law of thermodynamics is concerned with the natural tendency of systems to move from states of order to states of disorder. This is known as entropy. Man, however, has succeeded in bringing large areas of local order out of this chaos. Perhaps this is what prompted Teilihard de Chardin to declare that evolution had now produced in man an intelligence which is great enough to give future evolution a conscious guiding hand, that man is now capable of taking command of the torrent of biological evolution which has produced him, and of directing the flow where he will. This could perhaps be summed up in what has been called the thermodynamic imperative, which is that man should always fight to increase order.

 

The Hedonist, who seeks only pleasure, says ‘jump on the entropy wagon and enjoy the ride’. But the man conscious of the responsibilities of his intelligence says, ‘I must work to create order and pattern’. Civilisations have grown in proportion to their success in challenging their environments and creating order. Just as the artist brings order and pattern to emotional experience, political man must bring it to his social and political life.

 

I find it difficult to understand how the Hedonist and the rugged individualist can live only for themselves and their moment of time, and not be moved and excited by man’s present position on the crest of the evolutionary wave, with the intelligence to see from whence he came and the ability to determine where he may go.

 

This is possible only if human intelligence and the tools it has created are fully used, and, most important, it can only be done by open minded men prepared to try and test all possibilities. This requires the, freest exchange of ideas and opinions and we have few discernible institutions to ensure this.

 

There are many questions which remain. Just how far can a community tolerate differing shades of opinion and belief? Is there a limit? Can’ we live without the natural light, and still retain some of the democratic virtues? Can we, as a race, live in a pointless and purposeless universe and still find something in which we can believe? Are our minds sufficiently flexible, or can they be made so, to be able to live in a world where nothing is sure, except that nothing is sure? Can we accept the responsibilities of our intelligence and create order, or must we continue jumping on the entropy bandwagon and rushing madly on like latter day Garderene swine? Can we bring ourselves to accept the scientific attitude in daily life, or are we still socially and personally so immature that our lives must continue to be largely consumed by hate, prejudice, and fear?

 

I think that we have almost reached the stage, and in certain communities we have already reached it, where it is possible for man to free himself from the productive machine and to begin developing himself as a person and not as a were producer and consumer. This being so, we must drastically revise the content and aims of our education systems which are still to some extent based on the thinking of a static world, and to a considerable extent on the needs and thinking of a commercial world. We may need to think much more of what happens to the human mind, and much less about the volume of facts we can cram into it.

 

Whether one’s answers to my questions are pessimistic or optimistic, it seems clear to me that very great changes are taking place at such a rate that we can only sense them, and one of the few things that I am sure about is that we must develop institutions and attitudes which will utilise the resources of the human mind to keep pace with them, and this means all human minds. I am equally certain that one of the few ways in which our minds keep alert is by having constantly to sharpen themselves on other and different minds. For this reason alone, the right to dissent is one ofour most precious gifts.

 

Bertrand Russell said that when he was at University there were men more intelligent than he, but where they gave up when they left university he thrived on contention and his mind has continued to grow. This is the most important single duty of education and of all those who would be educated – to keep growing.

 

It was Oliver Wendell Holmes who said, ‘I think it is required of a man that he should share the action and passion of his time, at peril of being judged not to have lived’. The action and passion of our times is clear – keep on speaking out not just for sake of speaking but because you have something to say and you may then be judged to have lived.

 

But on balance I am rather pessimistic about it all. Though I think that in theory enlightened, independent and responsible citizenry has great influence; and while I have much faith in the possibilities of education, I am deeply impressed by the power of the ‘establishment’ to sustain itself through its immense and growing authority and its control of the mass media which enables us to isolate or eliminate contrary views. How to control this, how to see that the scientific attitude is. observed at all levels, how to see that the right to dissent is preserved is perhaps our insoluble problem.

AND THE WINNER IS …

This entry was posted in Growth & Innovation, Listener, Political Economy & History on by .

In the economic contest between communist China. and democratic India what matters is people.

 

Listener: 9 August, 2014

 

Keywords: Growth & Innovation; Political Economy & History;

 

The debate in the 1950s was whether the Chinese economy would do better than the Indian one. Both countries had become independent in the late 1940s, China after a vicious civil war, India after having shed the shackles of British imperialism. The issue was whether communist-dominated China would – or would not – outperform democratic India.

 

Sixty years later it is no contest. China has grown faster than India in per capita terms by about 2% a year. India’s material standard of living was about a third higher than China’s in 1950; now it’s only two-fifths of it

 

This does not prove that communism is better at economic growth than capitalism. It was in the 1950s that Nikita Khrushchev, leader of the Soviet Union, told the West that “we will bury you” economically. They haven’t – the Russian economy remains a basket case supported only by its mineral wealth.

 

The Indian economy hasn’t done too badly, for that matter. Its per capita growth rate has been about double New Zealand’s, which is not that dissimilar to the rest of the rich world’s, apart from blips from external events such as the 1966 wool price collapse and the Rogernomics era.

 

We should not be too surprised: economists rec­ognise this as the catch-up effect. As the rich struggle to develop new technologies, poor economies can grow from adopting the old ones. A poor, well-run economy should in principle grow faster than the richest.

 

Curiously, too, there is little evidence in the data that the Chinese economy grew especially faster than the Indian one in any particular period, not even following Deng Xiaoping’s market liberalisation from 1979. India’s growth has lagged over the entire six decades.

There is no simple explanation for the difference in economic performance. Possibly there is a problem with Chinese statistics, but few would dispute that its mate­rial conditions were substantially worse than India’s in the 1950s and are substantially better today.

Although Indian economists Amartya Sen, a Nobel laureate, and Jean Drèze are extremely committed to their country, the title of their book, An Uncertain Glory: India and its Contradictions, captures their gloom. They draw attention to failures, such as the fact that twice as many Indian children as African ones go hungry and that many adults, espe­cially women, are undernourished. Obesity and diabetes, meanwhile, spread among wealthier Indians.

Despite gains, extreme poverty is rife and death in childbirth is not uncommon. Immunisation rates for most diseases are lower than in sub­Saharan Africa. Prejudice kills on an immense scale: as many as 600,000 fetuses are aborted each year because they are female. The adult literacy rate is 63%, well below the 90%-plus of East Asia, including China, one of the explanations of that country’s better economic performance.

Indian infrastructure is often inadequate, especially in the north. Half the population still defecate in the open, resulting in many deaths from diarrhoea and encephalitis and leaving women especially vulner­able. In contrast 90% of Bangladeshis have toilets despite living in a poorer country; so do 99% of Chinese.

The focus on such indicators rather than GDP leads the authors to the conclusion that Indian rulers have never been properly accountable to the needy majority. India is only a democracy of sorts. May’s general election under first past the post rules gave 52% of parliamentary seats to the BJP party, under Prime Minister Narendra Modi, but it won only 31% of the vote. Given a voter turnout of 67%, the BJP’s parliamentary majority represents only 21% of eligible voters.

Regardless, China and India will remain two of the largest five econo­mies in the world. Given its younger population, India’s economic growth will perhaps begin to grow faster China’s.

But Sen and Drèze argue that success is better meas­ured in terms of health, hygiene, literacy and security among the poor. It seems likely, too, that paying more attention to the condi­tions of its people will accelerate the economic growth rate.

The New Zealand CPI at 100: History and Interpretation.

This entry was posted in Statistics on by .

Speech at the launch of the VUP Book, 29 July, 2014.

Keywords: Statistics;

I want to begin by paying a tribute to Jack Baker who was Government Statistician between 1958 and 1969. I first met him as a lecturer in economics statistics as a part of my second year economics course – yes the Government Statistician gave the lectures in those days. That is where I first met the Consumer Price Index. In those days a trainee economist was expected to know the details of the CPI – its conceptual underpinnings, how it was constructed, how it was used.

 

Today that it is not seen to be so necessary. One goes to the Statistics New Zealand website, then into ‘Infoshare’, ‘Economic Indicators’ and thence to ‘Consumer Price Index’. All very easy – especially if you can use a spreadsheet – so easy that even a journalist can do it. Indeed from some of its misuses as a general deflator, many economists have has much grasp of the index as the journalists who use it.

 

What they are all relying on is the integrity of Statistics New Zealand to produce high quality statistics, something which Jack emphasised, as have all of his successors. In my judgement the Department has maintained the high standards we expect of it; where I grumble is that there has been a lack of funding which has held up development of key statistics.

 

This led to a disjunction between the Department professionals and a handful the knowledgeable outsiders and the vast numbers who use or rely on the CPI. This book, The New Zealand CPI at100: History and Interpretation, helps fill in some of the gaps, indicating to lay economists, journalists and the general public just how complicated some aspects of the Index are.

 

It does not cover them all. You will have to hunt around for the relevant papers on the Statistics New Zealand website for that; deeper below that you may have to approach an expert.

 

One limitation of the website – but not of the book – is that material before the website was introduced is largely omitted. Understandably, because there are no electronic versions of the hard copy. But as the book shows, the CPI and its uses has a history which shapes today’s CPI. As in so many other areas, we forget economic history at our peril.

 

I acknowledge that Statistics New Zealand is slowly putting long term series on its website. That it is not a funding priority of the government is indicative of the short-termism which dominates so much of New Zealand’s economic thinking. The CPI is there, on Infoshare back to 1914; and predecessor series before 1914 are in the obscure part of the SNZ website too. (You can also use the Reserve Bank’s ‘Inflation Calculator’.)

 

 

It is a nice judgement whether the CPI is the most important official statistic. It has been with us longer that the National Accounts; volume GDP would be a challenger today. But, then again, censuses started in 1851.

 

Whatever, we need more published work of this technical and historical nature. I hope this study is a precursor, but that we don’t have to wait until 2039 for an authoritative review of the National Accounts, nor until 2051 for the bicentenary publication on the Population Census.

 

Goethe said that `it has been said that figures rule the world. Maybe. I am quite sure that it is figures which show us whether it is being ruled well or badly.’ A democracy requires, and a good government deserves, high quality statistics including adequate documentation and good histories. Jack would agree.

BATTLEFIELDS OF TRADE

This entry was posted in Globalisation & Trade, Listener, Political Economy & History on by .

Conquest was the old way for countries to acquire resources, but trading is much cheaper.

 

Listener: 12 July, 2014.

 

Keywords: Globalisation & Trade; Political Economy & History;

 

Over the next few years, as we think back to the Great War a century ago, we will be reminded of politics and bungling, heroism and tragedy, deadlock broken by technol­ogy. But there is also an economic lesson we can learn.

 

In the run-up to 1914, the German economy had been growing rapidly. When the nation was formed in 1871, Germany’s GDP was about the same size as France’s and 30% smaller than the UK’s. By 1914 it was 50% bigger than France’s and only 10% smaller than the UK’s.

 

This is no excuse for going to war, but Germany felt economically hemmed in within Europe; precipitating the Great War could be seen as a way to resolve the claustrophobia.

 

But at what cost. Germany’s defeat meant there was no resolution. In 1919, the French exacted revenge for losing the 1870-71 Franco-Prussian war. Indeed, the reparations imposed by the Allies on Germany led to World War II.

 

Although the British and US economies were of a similar size in 1871, by 1914 the US economy was about double the size of the UK’s. A war for dominance in Europe became a world war; its outcome was American hegemony. The post-World War II economic success of losers such as Germany and Japan simply reflected what was going to happen anyway.

 

Of course, the economic story is more complicated than a column can encapsulate, but what is instructive is that the great Western powers responded differently after World War II. The all-powerful US instituted the Marshall Plan aid initiative to lessen the privations of Europe’s postwar reconstruction. Two French politicians, Jean Monnet and Robert Schuman, were even more prescient: they proposed the European Coal and Steel Community (ECSC), established in 1951.

 

They reasoned that if the steel and coal industries of France and Germany (and four other European countries), which provided “the sinews of war”, could be sufficiently integrated, the countries could never again fight each other. They have not.

 

But this was still driven by the last war, about the need to curtail military might. It did not address the economic jostling within Europe. The establishment of the European Economic Community in 1957 – with which the ECSC was to merge – began that process. It is now the European Union of 28 sovereign states, none of which has fought (militarily) another since joining. If this seems trite, it is almost 70 years since the end of World War II – the longest period of peace for that part of Europe (although outside its bor­ders there has been war).

 

In part this peace is because they have found a different way of resolving economic tensions. Once, a country acquired the resources it needed by conquest. Today, the resources can be acquired by trade. That is cheaper than conquest, and the costs of not succeeding are far less damaging.

 

Thus the world trading and investment regime has become an alternative to warfare, especially in Europe. But the regime still com­promises the sovereignty of those involved in the economic transactions, just as conquest does, although not as extensively.

 

This tension exists as long as we retain some notion of a national community. It also occurs within countries. A New Zealand region may resent a business transferring jobs to another part of the country – but probably not as much when they move offshore.

 

So should we abandon the nation state and just get on with economic intercourse with whoever is willing? Markets still need a legal and policy framework. More fundamentally, as long as we have a sense of belonging to a community, abandonment seems unlikely.

 

Three generations after the end of World War II, it doesn’t appear that individual Europeans are markedly less nationalistic than their fore­fathers. Fortunately, they are happier to express their feelings by contesting the European Cup or the Eurovision Song Contest. Less damaging, less tragic and more fun than repeating the Great War we are remembering.

BLOWING BUBBLES

This entry was posted in Business & Finance, Listener, Macroeconomics & Money, Regulation & Taxation on by .

If New Zealand is heading for a housing market implosion, watch what you borrow.

 

Listener: 24 June, 2014.

 

Keywords: Business & Finance; Macroeconomics & Money; Regulation & Taxation;

 

When commentator Jesse Colombo in business journal Forbes said New Zealand had a housing and credit bubble, Economic Development Minister Steven Joyce shot the messenger, saying, “His view on life is that the whole world is pretty much in a bubble.” That does not mean Colombo was wrong.

 

Shortly after, the OECD pointed out that our house prices were exceptionally high relative to rental prices. It seemed to be suggesting that whereas investors could get an annual return of, say, 6% from company bonds, they would make only 3.6% as landlords.

 

However, the OECD reported house prices rose 8.2% in the year. Added to rental returns, that was a whacking 11.8% compared with bonds’ 6%. The after-tax housing return is higher still since capital gains from house price increases are not taxed. If the landlord had a mortgage, the return would be even better.

 

That was for last year, of course; strictly, the calculation is only really meaningful if the landlord sold the house, although the transaction costs of selling can be quite hefty. If the capital gain is not realised, there is only the promise it may be one day.

 

Including capital gains, property investors seem to have made a good return on their outlay. But will house-price inflation continue? The short answer can be found in Stein’s Law: if something can’t go on forever, it will stop. Indeed, when the housing bubble pops, house prices may even fall, although probably not by as much as the 40% implied by the OECD.

 

More likely they will fall a little, then stagnate. That is already true in some regions. The biggest housing bubble is in Auckland; Christchurch house prices are rising because of the earthquake, but so are its rents.

 

During the stagnation, landlords will get only 3.6%, instead of the 6% annual return on company bonds. Some will try to sell their rental properties, which will push housing prices down, making the return even more miserable for those who stay in.

 

Does this analysis apply to house owner-occupiers? Not nearly as much. If house prices fall – even dramatically – it would not affect them immediately. House outgoings would remain the same, including mortgage payments. Even if the house was worth less than the mortgage, it would only matter if the owners lost their jobs so they did not have enough income to service their debt. Unemployment usually rises when a bubble pops.

 

Those without a house might find it easier to buy one. But the people who would be most hurt by a bursting bubble – landlords and the jobless aside – would be those who needed to change houses for practical reasons such shifting location, a change in household size or retirement. There would be fewer houses for sale and fewer buyers in the market. The market might seize up, as it tends to in winter, but in a post-bubble world winter could last for years.

Economists dispute whether the Government should do anything about a housing bubble. Certainly it would be better if it went down slowly, but some doubt whether the Government can deflate it with any precision. The Reserve Bank already monitors the trading banks to ensure they are not too exposed, so when the bubble pops the payments system will not be compromised.

 

There would be agreement among economists that Government actions should not contribute to inflating the bubble. The Treasury, the Reserve Bank, the International Monetary Fund and the OECD think good tax policy treats the return on all investment the same. They have not actually advocated a capital gains tax, however.

 

When will the housing bubble pop? Stein’s Law says only that it will – unless it deflates gently – not when. You would be wise to follow the banking system and make sure your downside is prudently protected if house prices stagnate or fall – especially if you are a landlord.

TOP MARKET INCOMES

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

Symposium on Inequality: Causes and Consequences June 19, 2014

Keywords:  Distributional Economics; Statistics;

Introduction

 

The purpose of this paper is to present some data on top market incomes in New Zealand. It updates an earlier paper by one year to 2011/2 and extends the estimates it back to 1936/7 .

 

The background to this paper is the international top incomes data base assembled by Facundo Alvaredo, Tony Atkinson Thomas Piketty and Emmanuel Saez. This paper provides an implicit critique of their New Zealand series without minimising their statistical achievement nor criticising Piketty’s theoretical analysis.

 

Working with data is tedious; definitions require great care. I shant talk in this paper much about methods, but I need to discuss definitions,. I do by differentiating between alternatives.

 

What Economy?

 

New Zealand. Some of the public discussion confuses what is happening in New Zealand with what is happening elsewhere (especially the US). Too often we imitate what is going on overseas instead of applying general principles to the New Zealand specifics. Towards the end of the paper, I place the New Zealand results in an international context as far as possible.

 

Who?

 

Natural persons who are adults (over 15). As far as possible the data to be presented excludes trusts and companies and other such legal artefacts.

 

Covering all adults deals with where the data base does not include all income recipients. While taxpayers were 98.2 percent of the adult population in 2012, in 1936/7 only 12.0 percent of adults where taxpayers.

 

This standardisation also allows us for the impact of women joining the paid labour force – a very important post-war phenomenon. I’ll say something more about adults with odd residential status.

 

What?

 

Wealth or Income?

 

Income. We dont not have very detailed information on top wealth.

 

Disposable or Market Incomes?

 

Ideally we would like to report market incomes. In practice the data being used is income reported for income tax purposes. Basically, it is market income but there is a little contamination from National Superannuation. Some omissions are explained below.

To be Compared With?

 

Not all market income is reported for tax purposes particularly in the past when not all individuals filed tax returns, and Inland Revenue had no other means of identifying their income. Instead we have used private market incomes as measured in the National Accounts. Unfortunately there is only a detailed series back to 1980/1. I have projected back earlier using National Accounting estimates of private income.

 

How Far Back?

 

To 1936/7. Earlier tax data does not separate out those who are not natural persons, such as companies.

 

Consistent Through Time?

 

‘Fraid not. I’ve done my best. What I particularly cant do is allow for changes in tax law.

 

One tax change which complicates the data is the treatment of corporate dividends. Until 1989 they were ‘doubled taxed’. Corporations paid tax on their profits and their dividends paid from the tax-paid profits were treated as taxable income of the shareholder. From 1989 there has been a dividend imputation system in which a shareholder receiving a dividend from a company is entitled to an ‘imputation credit’, which represents tax paid by the company and is offset against the shareholder’s income tax liability. In effect corporation tax becomes a withholding tax for shareholders’ dividends.

 

This altered the way that dividends are recorded by the IRD. For example, $100 of corporate profits which were taxed at, say, 33 percent and fully paid out were recorded as $67 before imputation but as $100 after the new regime was introduced. Thus the taxpayer’s recorded income went up, but so did their after tax income (by the same amount).

 

In order to get consistency over time I have treated the grossing up of these dividends as the substantial tax break that it was, so we are classifying the increase as belonging to an increase in disposable income . (That was in addition to the substantial lowering of the top tax rate from 1988.)

 

What Part of the Income Distribution?

 

Top incomes only. I shall report the income shares of the top 10 percent, 1 percent and 0.1 percent of adults. Also the Pareto coefficient which I explain shortly.

 

Given these Limitations, Why Bother?

 

Because it is there, I suppose. The reason it is prioritised is that Piketty’s book considers what is happening to top market incomes. What has been happening in New Zealand?

 

I am reporting is the best data I have. Robert Solow famously justified some statistical work he was doing by citing the addicted gambler who knew ‘the casino wheel is crooked but it is the only one in town’. At least he knew what he was doing.

 

Benchmarks

 

The following 2012 tax year benchmarks may be useful:

 

There were about 3.5 million adults over the age of 15. So the top 10 percent of income recipients amounted to 350,000, the top 1 percent were 35,000 and the top 0.1 percent were 3,500.

 

10 percent of adults had an income above about $72,500 and a 37.4 percent share of all income.

1 percent of adults had an income above about $165,000 and a 9.7 percent share of all income

0.1 percent of adults had an income above about $500,000 and a 2.7 percent share of all income..

 

The annualised average wage was around $45,000 while the average adult income was $36.000.

 

The Pareto Coefficient

 

Vilfredo Pareto famously proposed that upper incomes followed a power probability law characterised by a single parameter, the ‘Pareto coefficient’. They indicate how compressed the top tail of a distribution is. The lower the coefficient the more unequal is it is – the more stretched out

 

Pareto coefficients are in excess of 1, but typically near 2. If the coefficient is 2 and there are 1000 above income $X, then there will be 250 above $2X. But if the coefficient is 3 there will be only 125 above that income, the smaller number indicating the distribution is more equal.

 

The strength of the Pareto coefficient is that it represents well the top of a distribution, while the rest of the distribution need not be known. Its weakness is the converse.

 

The figure shows the Pareto coefficient for top incomes between 1936/7 and 2011/2. Initially it starts low at around 2.0. The average of 17 OECD countries in 2005 came to 2.1; on this measure New Zealand was about as unequal at the top before the Second World War as is typical for an OECD country today.

 

The coefficient then steadily rises to about 3 by 1960. Over the entire period it averages about 2.9; high compared to many other countries, which implies a lower top inequality. It then runs at this three-ish level from the early 1960s to the end of the 1980s, after which it perhaps begins to rise.

 

I explain the reasons for this pattern after I have looked at income shares.

 

Top Income Shares

 

The pattern for the top 10 percent of adults is the converse of the story of the Pareto distribution. They have a high share of around 35 percent of all market income from just before the War. A 35 percent share means that the decile had an average income 3.5 times the national adult average. A 25 percent share is 2.5 times the national average.

 

The 35 percent level continues to about 1959/60, and then falls to 25 percent in about 1980. The top decile’s share then stagnates through the 1990s since when it has been increasing slightly.

 

The patterns for the top 1 percent and top 0.1 percent are broadly the same as for the top decile, except that there is no evidence of their share increasing in the last two decades.

 

Observe that there is little evidence in the data of a a business cycle – perhaps surprisingly. There is probably not a lot to be gained from a year-to-year analysis because of sampling variability. However some changes need to be dealt with, before we look at the trends.

 

The 2000 Blip

 

There is a definite blip in the income shares in the 1999/2000 year indicating an increase in inequality. The top income tax rate was increased from 33 to 39 percent for the 2000/2001 year. Many taxpayers arranged their income flows to move income from the high tax year back to the lower tax year, temporarily raising income in 1999/2000 and lowering it in the following year.

 

Why Did Inequality Measure at the Top Decline in the First Part of the Post-War Era?

 

There was a secular decline of the share of top Incomes in the first 40 years after the Second World War.

 

Its causes were probably more related to the remaining 90 percent of adults and cannot be tracked from this data basis. However other work I have done suggests that the most important driver was the impact of full employment in the period. It operated through the following four channels.

– Male labour force participation rose, essentially out of unemployment.

– Female (paid) labour force participation rose dramatically as changing household circumstances and domestic technologies made it easier to (also) work outside the home.

– Maori migration from the countryside into the urban centres, which increased their market incomes.

– There seems to have been compression in remuneration margins within the labour force.

 

What Happened After 1990?

 

Since the 1980s the early post-war drivers towards less inequality were no longer there. Full employment, as we understood it in the early post-war era, no longer exists. Probably our ‘normal’ level of unemployment will be now similar to other rich market economies. The post-war migration of woman into the paid labour force and Maori into cities is largely over. The institutional mechanisms which enabled wage compression have been largely abandoned. I shall have more to say about this. So the increasing inequality which characteris4ed the first four decades of the Post-War era came to an end. The market (tax assessed) income inequality largely stabilised.

 

However the share of the top 10 percent seems to have marginally increased (although it is volatile) suggesting some increases in overall inequality. Yet the Pareto coefficient also incrementally increases, which is in the opposite direction suggesting a reduction in inequality among top incomes.

 

The two results can be reconciled if the strong increase in shares is accruing to those in the second to tenth percentiles – the top 10 percent less the top 1 percent (The 2 to 10 top percentiles.) . That would compress the top of the income distribution as indicated by the mildly rising Pareto coefficient.

 

Since the very top is far more influenced by rewards to capital, while below them there is a greater impact from the remuneration to top managers and professionals it would seem that in the last few decades the rewards to ordinary labour. Piketty observes this effect too.

 

One local factor may have been the 1988 State Sector Act which abandoned the rigid relativities that existed in the public service, enabling higher relative remuneration to the top civil servants, while most civil servants were experiencing restricted real increases (or declines). The same thing was happening in the private sector; a consequence of the globalisation of the market for management and higher professionals.

 

Unfortunately we cannot estimate the magnitude of the margin increasing in order to assess to what degree that explains the rest of the upshift.

 

If this hypothesis is correct then the driver of the recent increasing inequality is from widening labour earnings rather than increases in the return and quantity of wealth.

 

What About the Piketty Thesis?

 

First notice is that New Zealand’s high income recipients have low incomes compared to those overseas. Our top 0.1 percent are about 3,500 individuals who report annual taxable incomes of $500,000 or more in 2011/2. Around 700 would report incomes in excess of $1,000,000.

 

New Zealand does not seem to follow the Piketty thesis of rising inequality in top incomes. But this would be to adopt the Piketty thesis crudely.

 

New Zealand has no sophisticated financial sector. That means no mega-remunerations. (There is no general agreement within the economics profession as to why this is happening.)

 

But the Piketty effect is even more explained by patterns of wealth accumulation and returns. We dont have the New Zealand data to explore this directly. Before tackling the issue I need to explore some other possibilities.

 

There are, of course, measurement problems. The data series since 1981/2 are of higher quality. However there are omissions.

 

The data series does not cover trusts. Apparently trusts have become more common since the ending of inheritance tax in 1992.

 

Nor does it cover capital gains. There is often confusion about the effect of omitting capital gains. Unquestionably including them would increase the level of income inequality. On the basis of the handful of countries for which there are estimates, the inclusion of capital gains might add about 1 percentage point to the share of the top 1 percent’s income – say increasing their share from 5 to 6 percent of private income.

 

However, while the omission of capital gains reduces the measured inequality, it does not automatically follow that it disguises increasing inequality. It is not impossible that capital gains were smaller after the Global Financial Crisis than before it. In which case inequality of top incomes may hardly been have changing at all. We just dont know.

 

My suspicion is the big issue which makes the data difficult to interpret though is what may be called ‘partial New Zealand residents’.

 

Partial New Zealand Residents

 

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

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

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

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

 

People who are not New Zealand tax residents are liable for New Zealand tax only on their New Zealand-sourced income. Thus they may appear in the IRD data base but only part of their income is reported.

 

New Zealand is such a small economy that those with very large fortunes are likely to hold wealth portfolios diversified by jurisdiction. It is not implausible that as little as a third of their income comes from New Zealand sources; only that part is reported in the tax statistics.

 

Given increasing international mobility it seems likely that an increasing proportion of those at the very top of the income distribution are not tax residents. If so, any Piketty effect of a growing elite of the rich is likely to be missed in the New Zealand tax data.

 

Earlier I argued for a New Zealand social science, and not an imitative colonial one. But New Zealand analysis needs always to be in the context of a globalised world.

 

Politics and Market Incomes

 

Disraeli summarise privilege as ‘pay, patronage and power’. Recently there have been increasing public concern about the extent that those on top incomes are influencing the political process.

 

Underlying this concern is the ideal of democracy being about ‘one person one vote’, whereas market activity is about ‘one dollar one vote’. In practice the two areas of public life cannot be so easily separated, so one can infringe excessively upon the other. For instance, it it is now generally accepted that before the mid-1980s, politics was too involved in market decisions. But can the opposite happen? This is an evident political concern in the US; does it apply in New Zealand? This is a wider issue than this paper can cover; here are few pointers.

 

It is an interesting feature of New Zealand’s electoral system that we now have three minor parties openly backed by millionaires. Each is dependent upon the threshold effect which our MMP system allows. Many think it is an anomaly; perhaps it becomes even more anomalous if it enables millionaires to buy seats in parliament.

 

Perhaps political donations are more in the spirit of democracy if they are transparent. It is not obvious they are sufficiently transparent in New Zealand.

 

The rich have also the ability to buy acolytes to promote their political views. Again transparency of funding sources may be vital, but as one who is unwilling to curtail open speech it seems to me that it would be better to develop institutions with an alternative view rather than have the lopsided funding of lobbying which currently dominates New Zealand.

 

It also appears that some of those who are not tax residents play a significant role in New Zealand political life as donors, as political advocates and as lobbyists (and as voters). Given that taxation is the price of citizenship is this appropriate? Perhaps such political activities amount to having an enduring relationship with New Zealand.

 

Conclusions

 

The share of those with top incomes fell up to the end of the 1980s, while top incomes became increasingly compressed. Shortly after, there were increases in inequality arising from increases in remuneration margins for management and professionals and the introduction of a dividend imputation system. There have been small or no increases in inequality since.

 

Calibration difficulties make international comparisons difficult, so we must be cautious about ranking New Zealand’s top income inequality with economies elsewhere.

 

However there is no evidence of a major surge in inequality in the New Zealand data in the first decade of the twenty first century, as has occurred in the UK and the US, probably because New Zealand does not have as sophisticated financial sectors as they have and because New Zealand’s wealthy may function – for some purposes – outside the country.