A Framework for an Economic Strategy

This entry was posted in Business & Finance, Distributional Economics, Globalisation & Trade, Growth & Innovation, Macroeconomics & Money on by .

<>A note prepared for discussion in September 2012.

 

Keywords: Business & Finance;  Distributional Economics; Globalisation & Trade; Growth & Innovation; Macroeconomics & Money;

 

What is the Purpose of the Economy?

* The purpose of the New Zealand economy is to maintain and increase the wellbeing of all  New Zealanders. It is neither the maximising of material output (GDP) nor the maximisation of profit, although under some circumstances these can contribute to the purpose.

 

How Do We Seek to Improve the Wellbeing of New Zealanders?

* By the social control of the means of production, distribution and exchange. That control may be exercised by the government and other collective institutions, or it may be left to a properly regulated market.

 

What Is The Role of the Market?

* A fundamental principle of democracy is of ‘subsidiarity’, that decisions should be taken at the lowest effective level, as close to those who are affected as possible. The market is a means to do this. However  markets do not always do this effectively.

 

How Do We Make the Market Work Effectively?

* Markets typically need a framework of laws and enforcement to work effectively. This includes

– laws which affect consumer information, safety, protection and transactions;

– where competition does not work well ,workable competition (which can include public ownership);

– in employment relations;

– health and safety (including worker health and safety);

– where transactions are complex and take time for the full outcome to become evident as for financial transactions and construction;

– where the actions produce economic ‘bads’ such as in the environment or from misuse of drugs (including legal drugs such as alcohol and tobacco).

– for goods and services which have a collective or a merit element.

 

What Is the Economic Role of Government?

* To regulate markets.

* To provide the goods and services in alternative ways where markets work particularly ineffectively. Examples include

– educational services;

– health care;

– public interest broadcasting;

– the underpinning of cultural and recreational activities;

– environmental services.

* To maintain full employment by providing an adequate level of effective aggregate demand through fiscal, monetary and exchange rate policies – without stimulating inflation.

* To offset market failure in the mechanisms which promote economic growth. (Especially important is the stimulation of technology and innovation).

* To provide protection and support for the weakest in society.

 

Who Are the Weakest in Society?

* The first priority of the government is to protect the young, the sick and disabled, and the elderly.

* Particular needs at the moment arise from

– the widespread poverty among children;

– those caring for the sick and disabled with inadequate public support;

– beneficiaries who have not had an increase in the level of their benefit above inflation since 1991.

* While education and health are always priorities of a caring government, New Zealand also faces a particular crisis in its housing stock from inadequate maintenance, poor supervision of building quality, the need to rebuild from the Canterbury earthquakes and the need to strengthen to meet future earthquakes. (The latter applies to many public buildings.)

 

How Should the Government Fund its Activities?

* The main source of revenue for government is taxation. Compared to the current taxation regime  the government will need to raise taxation to meet its wider social objectives. Among the options that need to be explored are

– a higher top tax rate, so the rich make a fairer contribution to the nation’s overall welfare;

– a real capital gains tax;

– extending GST to cover offshore electronic transactions and personal imports;

– a financial transactions tax to be imposed with like-minded jurisdictions.

* Use of public resource (such as carbon credits) should be charged for instead of given away.

* Borrowing should generally be limited as the government should be contributing to the nation’s savings.

 

Why Are Savings Important?

* Without adequate savings the economy is unable to fund its physical investment, public investment (including infrastructure) and the necessary refurbishment and extension of the housing stock.

* Depending on foreign borrowing raises the exchange rate undermining the ability of the export sector to thrive.

* The inevitable consequence of foreign borrowing is that an increasing proportion of New Zealand land, resources and businesses will be owned offshore.

* To increase the nation’s saving the government should

– as far as practicable run a surplus on the current government account;

– make Kiwi saver compulsory and raise the contribution rates;

– discourage wasteful investment as occurred recently under the light-handed regulation of the finance company sector.

 

How Should New Zealand Connect with the Rest of the World

* New Zealand is a trading nation, specializing in some exports where it has a high productivity comparative and competitive advantage and importing goods and services which it has not.

* It should pursue free trade opportunities, but never where the concessions would compromise the long run wellbeing of New Zealanders (especially PHARMAC and intellectual property rights).

* It should be reasonably open to direct foreign investment, where the investors are bringing expertise not readily available in New Zealand, but foreign investment should not be an alternative to the failure of the New Zealand economy to save sufficiently.

* It should not get significantly involved in the high turnover finance markets which are destabilising, but seek like-minded international partners to insulate their economies from them; a multi-nation Financial Transactions Tax may be a means of doing this.

Economic Uncertainty

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St Andrew’s Study Trust lecture series: Living with Uncertainty; 4 September 2012

The notion of uncertainty – and risk, which as we shall see, is something else – is central to economics and the economies it describes. Of course there are external events which generate shocks like the Lisbon or Canterbury earthquakes. But today I am going to talk about the financial shocks which the economic system generates. It’s a complex story, so I am going to have to leave some important bits out to keep within the time.

Financial shocks occur almost exclusively in modern market economies: bubbles, panics, depressions and recessions and global financial crises are rare in traditional societies. One of the central characteristics of a market modern economy is that money is pervasive. Economists have long been aware that money, and some different but related phenomena which I shall call “financial paper”, are central to these shocks. Today’s presentation is about how they are.

While some talk of the “mystery of money”, the only mystery to an economist is why people get confused about it. Perhaps they do not think rigorously. For an economist “money” is the “medium of exchange”, what people are willing to accept in exchange when the sell something or settle a debt. There are other functions of money – a standard of value and a means of deferred payment – but these are convenient consequences of money being a medium of exchange.

I have not time to go into why some things are money and others are not. Perhaps in a modern economy the test is that if you can pay your taxes with something it is money. That includes coins, notes and cheques.

There are also things which are “near money” – that is they may be easily converted to money. If you have a bill – or taxes – to pay you can usually go into your bank and transfer from your savings account to your current account and write the cheque on that. A savings account is near money; a cheque account is money, you can pay bills directly with it.

That something as a dollar value attached to it does not mean it is money or near money. You can also sell your house to obtain the money you need to pay a bill. That is far more complicated, so it is hardly sensible to call your house “near money”. It is an “asset”. It is important for the story I am about to tell, that you are uncertain as to how much cash you will get when you sell your house. That is different from your bank deposit; you know exactly how much it is worth.

A particular group of assets are “financial paper”. They are contracts to pay a certain amount of money at some time in the future. They are neither money nor near money,

Perhaps the simplest example is an IOU, which is a contract – a promise to pay a certain amount in the future. If the IOU is from your much trusted brother-in-law who is a billionaire you are pretty certain it will be repaid. If it is in your balance sheet as an asset it is in the promisor’s balance sheet as a liability.

You may even sell it to someone – although its value might be discounted a little because the purchaser is not as trusting of your brother-in-law as you are. Much financial paper is not nearly so secure. For instance some New Zealanders have deposits in finance companies which have gone bankrupt. Whatever the face value of the deposit, the actual return will be zilch if the finance company is unable to pay it back. Sure, there is a contract that says the company will pay – give you money – in exchange for that deposit with them. But if they cant; the contract is worthless.

The value of an IOU is the money you can convert it into. That is different from an asset like a house. A house is a house is a house; it is something tangible with an intrinsic value. Certainly houses also have a monetary value, but an IOU, like all financial paper, has only monetary value.

IOUs and deposits in finance companies are simple forms of financial paper. There are many more complicated ones. In a modern financial system some of the most important financial paper are contracts where the pay-outs are dependent on contingent events.

An early form of contingent contracts was life insurance, which involve one party (say a person) paying another (a life insurance company) a certain amount, with the second party agreeing to pay a somewhat larger amount if a particular person died before a particular date. The reason they could offer such a deal is while we cannot be sure when a particular person will die, based on past experience the life companies have a good idea about how many in a pool of people will. So the risk of an individual dying can be calculated and the event insured against.

Is there a fundamental difference between investing in a contingent contract and gambling – between a contract insuring a life and a contract that if a thrown dice comes up even you get paid and if it comes up odd you pay? There is not a lot – the mathematics are much the same. The distinction is often made according to the usefulness of the insuring transaction. It would seems prudent for a firm to insure the life of its chief executive, since there would be great difficulties if he dies suddenly. But what about someone else betting on the chief executive dying? Maybe they are a shareholder in the firm, maybe they just want to gamble.

This becomes very pertinent when you can insure against a firm or a country going bust. There have been recent examples where the amounts insured far exceed what might be lost if the event occurs. Some must be gambling.

Insurance may be the simplest form of financial paper, that is a contract whose payment depends on a contingent event, but a whole raft of increasingly complex ones have developed; among them are “shares”, “futures”, “options”, “swaps”, “hedges” and “derivatives”. In each case some parties make a contract whose payout depends upon whether a particular event occurs.

We get mesmerised by the mind-boggling sums attached to the value of a particular piece of financial paper. However, behind the row of zeros is the simple idea that there is a contract in which one party has agreed to pay the other an amount if certain circumstances occur, and that one of the parties thinks that the value of that contract is this huge number.

It may not be, of course, since the contingent outcome may be different from what the valuing party assumes. But if enough of this financial paper is held in the investor’s portfolio, the wins and losses average to the average value of the portfolio.

Clearly it is critical how the financial paper – the contingent contracts – is valued. If this can be done in an objective way, so that we can all agree on its value, then the financial paper can be bought and sold. This liquidity makes the financial paper more attractive to investors, who may need the cash before the events in the contract have played out.

Over the years economists and others have developed very sophisticated techniques for valuing the contingent contracts – the financial paper – developing an analysis called “portfolio theory”. The valuation requires an assessment of the probability distribution which underpins the contingent events. I would lose many of the audience if I went through the mathematics. So let me just say it depends upon knowledge of a couple of parameters which underpin the probability of the various outcomes of the contingent events. (I’ll just squeeze in that they are the mean (or average) and the standard deviation.) Once given them, you can value a particular piece of financial paper and make an assessment of whether it should be in your portfolio.

But suppose you don’t know those parameters. John Maynard Keynes pointed out you then suffered uninsurable “uncertainty” rather than insurable risk. Risk is about known unknowns; uncertainty is about unknown unknowns

If there is uncertainty you cannot know those key parameters. Portfolio theory does not work. However some Bayesian statisticians said you could use your best guesses. The dispute is a bit complicated – you can read about it in Skildelsky’s Return of the Master.

But there are two key points. First, suppose everyone is wrong about the parameters they guess for the distribution. Then there may be major distress when the contingent event becomes a reality.

Second, and more subtly, the relevant parameters may be literally unknowable. I wont go through the details but the mathematician Benoit Mandelbrot observed ‘10 sigma’ storms in financial markets pointing out that “[a]ccording to portfolio theory, the probability of these large fluctuations would be a few millionths of a millionth of a millionth of a millionth….But in fact, one observes spikes on a regular basis – as often as every month – and their probability amounts to a few hundredths.” He warned of ten sigma storms a decade before the Global Financial Crisis, but no one listened. Why?

One kind of answer is that portfolio theory may have been imperfect but neither Keynes nor Mandlebrot offered an alternative so portfolio theory continued to be used. This is a nice illustration of the scientific truth that theories get replaced not because they are known to be wrong, but because some one finds a better theory.

Additionally some people became very rich from portfolio theory. They have a vested interest in defending the theory, and since we give great weight to the judgements of the rich on a whole range of issues outside any competence they have, everyone assumed that the portfolio theory that made them rich must be right.

Another kind of answer as to why we ignored the warnings was that portfolio theory seemed to work reasonably well up till then. Of course there had been the odd crisis; the dotcom bust, the Enron debacle, the failure of Long Term Capital Management, a firm whose board of directors includes a couple of economists who were Nobel laureates for their contributions to portfolio theory. Most of the time, the financial system manages to get through these crises. Firms are always falling over, contracts are always going wrong, most businesses have a list of bad debts. But the system had muddled through, and it was assumed that it would continue to do so.

Yet as Mandlebrot predicted, there would be occasions when there was perfect storm in which the financial system breaks down into a systemic crisis. The 2008 Global Financial Crisis was one. It was not the first systemic financial crisis – that is usually said to be the Dutch Tulip Bubble in the seventeenth century; there have been many more since. I doubt that the GFC will be the last. It is only unusual because of its size, reflecting the increasing global inter-dependence of the financial system. When the tulip market crashed in Amsterdam there was barely any impact on London just over the way.

There is perhaps an even more fundamental reason why financial paper has become so important. Karl Marx shrewdly summarised the changes in the evolving capitalist economy in the nineteenth century by a change in the role of money. Once. he said, the economy could be represented by

C –> M –> C’.

That is you started of with a commodity C (perhaps you made it yourself) which you converted it into money (M) in order to convert into another commodity C’(which you would rather have). Money in this circuit was a means to an end, not the end itself.

However Marx observed that as the economy evolved, a new circuit developed:

M–> C –> M+,

Here one starts with money, converts it into a commodity which in turn is used to convert into more money. That reverses the roles. Money becomes the end and commodities are a means to that end. Monetary values begin to supplant intrinsic values in the way we think about the economy.

More recently the commodity in the circuit has been replaced with financial paper.

M–> FP –> M+.

You no longer have to produce commodities to make money, you can do it by producing financial paper – contracts about contingent events.

How can that happen? The conventional wisdom said it arose because the financial system was organised around allocating risk between investors – there is no Keynes or Mandelbrot critique of the existence of uncertainty in the conventional wisdom. It said that some low-risk investors were willing to pay others – high-risk investors – to take over their more risky contracts, just as you will pay a life insurance office to reduce the risk of your partner living in penury if you die early.

I have not heard that explanation used since the 2008 Global Financial Crisis for it seems a bit naive when a lot of low-risk investors were hammered while some high-risk investors were barely touched. But even before then, high-risk investors and those transacting on their behalf seemed to be making a lot more income than could be justified by the marginal differences in risk they seemed to be trading.

So let me offer an alternative explanation as to why financial paper in the money to money circuit seem to generate profits in the good times? Financial paper are contracts about events in the future. We may attach probabilities to the outcomes of those events but until they actually happen we dont know the true value of the financial paper. In principle the combined positive and negative values of the financial paper ought to be zero in the world’s balance sheet. When someone has an investment portfolio with a billions dollars of financial paper as assets, somewhere else there are other balance sheets with the same financial paper as liabilities. In your household balance sheet there may be a deposit in a bank of $10,000. In the bank’s balance sheet there is an offsetting liability of that $10,000. When we add the two together they exactly cancel each other out.

But because financial paper involves guesses about the future they may be valued in different ways (with different parametres) the net position in the world’s balance sheet may be increased by financial paper. We have to guess at the underlying probabilities; different people make different guesses and the combination of their guesses may not obey the rules of probabilities. The mismatch can add to the sum of the world’s wealth in the short run.

This is such a startling phenomenon that I need to explain it step by step. I use an example of a housing bubble. Suppose one day someone authoritative announces that the value of all houses in New Zealand had doubled. All house owners dutifully enter the new value in their balance sheet – if they were meticulous enough to keep one – and feel they were much richer. Are they? This is only a change in the monetary value of your house; what it is worth if you sell it. The doubling of the market value of your house has little effect on its intrinsic value. You may say “I am twice as rich”; but you are unlikely to say “I am enjoying living in the house twice as much”.

A complication is mortgage debt, which acts as a brake on rising house prices. If the brake is weak, as is it was in much of the last decade when banks were flush with overseas funds, house prices rise as home owners try to show off their wealth with more grandiose homes, and as they try to increase their wealth from the capital gains which come from leveraged purchases in rising market.

One of the fundamental rules of economics is Stein’s law, which says “If it cant last, it wont.” House prices cannot rise forever, relative to ordinary prices, so at some time after a boom they will stagnate or even fall. You’d have thought investors could figure that out, but research increasingly shows that their behaviour is not entirely rational. Again this is a huge topic in its own right, so I shall have to skip it. If you are interested, read psychologist Daniel Kahneman’s Thinking Fast; Thinking Slow, and economist Robert Shiller’s Irrational Exuberance.

It is extraordinary just how irrational investment decisions can be. It probably arises because if one make an unwise investment decision one rarely get an immediate signal that it is stupid. Without early feedback, learning is dampened and, in any case, just about everyone else is doing it, so how can it be foolish? Or so it seems until the day of the crash.

The same applies to financial paper generally. Now you might think that while ordinary humans are unsound investors, surely those in the investment industry are not. It turns out they are just as unsound us – but richer.

Should not their judgements be disciplined by these powerful mathematical models they use? That only applies if the models are correct – recall that Keynes said they are fundamentally flawed because they pretend uncertainty can be converted into risk – and if they models have the right assumptions – Mandelbrot says they dont.

But surely the financial paper cannot add to net wealth since the contract values should net out? Only in the long run; in the interim the two sides of the contract may value them differently. A simple example may be that the NINJA – no income, no job, no assets – who borrows to purchase a house with no intention of paying the debt back and values his side of the mortgage in the balance sheet as zero. But the lender is likely to put the mortgage into her or his book at full – or perhaps partial – value. So the values do not net out when the two balance sheets are combined.

Unlike a house, there is no intrinsic value in the financial paper. Yoga Berra might have said the intrinsic values of financial paper is not worth the paper they are written on. Their value is the money you can turn it into by selling it to someone else. So nobody finds out the real value of the contract until it is settled. The US housing finance market started looking soggy in 2006 when the NINJAs began failing to pay.

Because there is no way to resolve the actual value of the financial paper – the contingent contract – until the settlement happens in the future, it is possible for the net value of the financial paper in the balance book of the world to be positive rather than zero. Investors act on the apparent, but deceptive, increase in wealth, which leads to bullish market activity we call a “bubble”. At some point reality undermines their speculations based on false assumptions, and the bubble pops, the financial system collapses and the economy goes into a downswing. During the reversal the false profits have to unwind, which is why we expect a long recession after a major crash. (We are already in the fifth year of the recession associated with the Global Financial Crisis, much longer than the shallow speculators thought in 2008; some informed commentators think it may last another five or more years.)

I could extend this story through to the details of how the Global Financial Crisis occurred, but instead I want to make four analytic points.

The first is that people become exposed to the financial paper without understanding how sound – or unsound – the underlying contracts are. It happens all the time. You dont know much about the bad debts that the bank you deposit with. You believe they are under control and that the equity of the shareholders provides a cushion to protect you. That may be broadly true for New Zealand’s conservative banks, but that was not always true for overseas instances.

The second point is that dealers profit as the financial paper was bought and sold. In the main their profits are offset by the losses of those on the wrong side of the contract. However the latter happens some time later so the dealers seem to be making a profit out of thin air; what they are really doing is taking over some investors’ savings.

Third, the system would work a lot better during the downturn if people had not borrowed to fund their investments. The problem in a housing boom is not the values of the houses no matter how ludicrous they are, but that people have mortgages which they used to pay the fictitious values.

The final point is that some of that debt was taken on in actions which were more like gambling than investment. As I said the distinction is not clear. Indeed the vernacular describes betting on the TAB as an “investment”. Now I have no problems with someone who punts on horses for recreational purposes, provided they do not bet more than they can afford. They may pretend they will win, but generally they don’t – the punting is for the fun, giving you an incentive to follow the horses more closely. The problem arises when you bet your house on a horse, or take out a mortgage to bet on some piece of dark horse of financial paper.

I am not the first to draw attention to the gambling in the financial system. When it was a lot less complex than it is today, Keynes waspishly described the share market as a casino, remarking “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” However the problem is not the gambling per se, but the gambling with other people’s assets, because that is what debt is – other people’s assets.

Should the gambling occur? Let me begin with an analogy from the Canterbury earthquake. It was a consequence of the Indo-Australian and Pacific tectonic plates ramming into one another; earthquakes largely occur near plate boundaries from releasing some of the titanic forces as they clash. If those two plates were not crashing into one another, the Zealandia continent would be almost entirely under the sea. It was heading that way 22 odd million years ago, until the Pacific tectonic plate began expanding. The smash into the Indo-Australian plate drove up part of the sunken Zealandia into the land mass we call New Zealand. If that had not happened we would not be here; all there would be is sea and there would be no earthquakes. They are the collateral damage of living in a New Zealand.

Financial crises are kinds of earthquakes. They too are a consequence of an upheaval – the market-money economy. No markets, no money, no financial crises. But we would be much poorer for it.

We may think that Africans are poor, and of course they are. But even their material standard of living is today about three times higher than it was two hundred years ago.(Ours is about twenty times.) That was the consequence of the market economy which enabled specialisation and encouraged innovation. But its downside is the occasional financial crisis.

Such crises are an inherent feature of our economic system, even if we restrict people from gambling with other people’s savings. The failure may well be compounded by stupidity of investors, by what economists tactfully describe as “misalignment of incentives” which sometimes amount to fraud and corruption, and by poor economic management. But the crises will happen even if these failures are addressed – perhaps less often, perhaps less violently, but they will occur.

Certainly we should address them as far as we are able with the humble recognition that human ingenuity tends to outwit the most careful institutional designer (and our designs are not always careful).

Perhaps we should think about to whom we should give the most protection. I am old-fashioned enough to think we should give first priority to children, the sick and the old – as Michael Joseph Savage once articulated. He would not be satisfied that we achieve his ambition today.

Where I might differ from Savage, is the realisation that the government has not an unlimited ability to protect everybody, to insulate the entire economy from uncertainty, except at a horrendous cost to our material standard of living. For as long as there is economic uncertainty there will be financial crises. That may be a cruel reality, but what a boring world it would be if everything was certain.

New Zealand Aid Programmes – Helping the Pacific Prosper

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

Listener: 1 September 1, 2012

New Zealand ran out of farmland in the mid-1950s. Of course, it has always been limited, but the opportunities to create new farms ran out and the existing ones were getting bigger, so the job opportunities on them did not increase. Countries short of farmland used to acquire more by conquest (or settlement; 19th-century Britain colonised lands like New Zealand to defeat – perhaps only temporarily – Malthus’s dire predictions of population overwhelming food resources). Seventy years ago, the war aims of Germany and Japan included conquering others’ lands to feed their populations. They learnt – as we all have – that it is cheaper and fairer to do this by international trade. Despite knowing the limitations of free trade, economists can be passionate about it because it is an alternative to war. New Zealand is no exception.

A hundred years ago we had imperial ambitions in the Pacific. Today we trade instead, including in products we can produce ourselves. Tonga, 2000 km to our northeast, is not so tropical it cannot produce a variety of temperate vegetables that look healthy and attractive in the Talamahu market in its capital, Nuku‘alofa. Some are exported to countries such as Japan and New Zealand. The catch is phytosanitary controls. If that word seems too complicated, how about “fruit flies” (although there are other pests)? Such controls need not only occur for international trade. If foot-and-mouth disease ever breaks out in one of our islands, restrictions across Cook Strait will be slapped down faster than a government backdown on increasing class sizes.

We saw the effort earlier this year when one tiny fruit fly in Auckland caused millions of dollars of effort to eliminate it and any of its mates. Less prominently, we had to give assurances to some of our export markets that our products were unaffected. And don’t forget the decades-long negotiations with the Australians to get them to abandon their embargo on our apples because we had a bacterial disease, fireblight, that they didn’t have. What they were really doing was protecting their apple producers from foreign competition. The Pacific has between 22 and 50 fruit fly species; three to five are in Tonga. Shouldn’t we follow the Australian example and exclude all Tongan imports to look after our own producers? Our approach has been exactly the opposite.

Our Pacific aid programmes help Pacific nations to manage the phytosanitary risks, including providing facilities to sterilise their exports from the threatened bugs. If we can’t find a solution, the fruit and veges can’t come. And if a product does slip through and arrives with an infection – watermelon with a fungal disease was a recent example – our border controls come into full force. But why undermine our producers (although, of course, among the 39 horticultural products Tonga could send us are tropicals we can’t easily grow)? The international trade answer is that we can use our horticultural land for other purposes that, ultimately, give a higher return – perhaps dairy farms or export flowers. We also have development commitments to Pacific nations. We want them to prosper. Those living there may be welcome to come to New Zealand, but we don’t want them pushed out by grotty living circumstances.

Sadly, some – especially among the young – are unemployed. I was reminded of the consequences in Nuku‘alofa, which had riots in 2006. Some larrikins joined a serious political protest about the degree of democracy in Tonga. Somehow fires were started and buildings burnt down. There was looting, including by families who should have known better; if they were identified they were prosecuted – neighbours were often keen to help the police. There were also tales of community solidarity and bravery; Chinese traders were targeted – neighbours stood between them and the hooligans. Six years later, there are vacant lots in Nuku‘alofa’s central business district, yet to be rebuilt on. It was not war, but the empty sections are a grim reminder of how unemployed youth with little investment in an economy can wreck it. Hopefully, our importing from the Pacific (and spending as tourists there) more creates more jobs for the young, thereby promoting peace.

How Much Does This Family Need?

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

<>In the course of an appeal to the <>Social Security Appeal Authority I was asked to prepare an estimate of the income that the appealing family would require. Here follows my affidavit. The aim has been to keep the text in full, including those necessary for a court document. However there are a few changes made for simplification. In addition the authority directed that the family appealing should be anonymous. I am very comfortable with that direction (in any case would have disguised the family details). Their names reflect common ones of the period. Ms ‘Smith’ is an<> invalid’s beneficiary; her daughter ‘Emma’ in in her early teens.

 

Keywords: Distributional Economics; Social Policy; Statistics;

Introduction

 

I, Brian Henry Easton swear:

 

1          I am an independent scholar based in Wellington, working in the areas of economics, statistics, public policy and history. A summary of my qualifications and experience is set out in paragraphs 9 to 11 of this affidavit.

2          I have been asked to assist the Social Security Appeal Authority by providing expert evidence on a matter affecting the exercise of a discretion by the Chief Executive and Authority. The discretion is in deciding whether steps should be taken to recover a debt owing to the Ministry of Social Development by Ms Smith. Both the Chief Executive and the Authority have held that the debt should be recovered.

3          On appeal the High Court has remitted the matter back to the Authority for a reconsideration of that decision. This is because the Authority made its decision without regard to New Zealand’s international human rights commitments to ensure an adequate standard of living.

4          I am instructed the commitments are in relation to both ICESCR (International Covenant on Economic, Social and Cultural Rights and UNCROC (United Nations Convention on the Rights of the Child). Under ICESCR the government has committed to provide its citizens with an adequate standard of living, including adequate food, clothing and housing and the continuous improvement of living conditions.  As part of its commitment the government is also obligated not to take retrogressive measures unless they are in pursuit of a pressing goal, they are strictly necessary, and there are no alternate or less restrictive measures available.

5          The government has also specifically committed under UNCROC to take measures to provide an adequate standard of living for its children to the maximum extent of its available resources:

Every child has a right to a standard of living adequate for the child’s physical, mental, spiritual, moral and social development. (art 27.1). The parents have the primary responsibility to secure the conditions necessary for the child’s development but state parties are obligated to take appropriate measures to assist parents, in accordance with national conditions, and to provide material assistance and support particularly in regard to nutrition, clothing and housing.

 

6          My evidence concerns the minimum weekly income needed by Ms Smith to provide an adequate standard of living for her and her dependent daughter, Emma, who is now 15.

7          This is an affidavit to a tribunal. I am Fellow of the Royal Statistical Society and a member of the Royal Society of New Zealand, both of which have codes of professional ethics to which I adhere. These codes complement the Code of Conduct for expert witnesses of the High Court, which I also follow.

 

My conclusion

8.         My conclusion is summarised at the end. It recommends ‘a rate near $540 per week be the benchmark income when judging whether Ms Smith and her daughter have an adequate standard of living. In addition exceptional expenses of $108 per week may have to be added.  However, the state of her consumer durables should not be overlooked.’ (para 144).

 

My background relevant to the evidence I am giving

9          Over the years I have worked in many of the areas which are relevant to this evidence, as will become evident as I report New Zealand social research relevant to this affidavit. Indeed I was one of the New Zealand pioneers of these matters some forty years ago. I shall build on this research to assist the Authority.

10        I have degrees in mathematics and economics from the University of Canterbury and in economics from Victoria University of Wellington. My senior degree is a D.Sc. in economics from the University of Canterbury. I am a Fellow of the Royal Statistical Society, a Charted Statistician and a Distinguished Fellow of the New Zealand Association of Economists. My CV elaborates these and other formal qualifications and relevant experiences.

11        Before I was an independent scholar, I was Director of the N. Z. Institute of Economic Research when it was the premier centre of applied economics in New Zealand. I have also held teaching or research positions at the Auckland University of Technology, the Central Institute of Technology, Georgetown University, Harvard University, the Institute of Development Studies at Brighton, Massey University, the National Institute of Economic and Social Research, the University of Auckland, the University of Canterbury, the University of Melbourne, the University of Sussex, the University of Waikato and Victoria University of Wellington.

12        I am currently an adjunct professor of the Centre for Public Policy at the Auckland University of Technology, an associate of the Stout Research Centre at Victoria University of Wellington, an honorary fellow of Social and Health Outcomes, Research and Evaluation (SHORE) at Massey University, an honorary research fellow of the National Institute for Demographic and Economic Analysis (NIDEA) at the University of Waikato and an honorary research fellow of the Wellington School of Medicine of the University of Otago. Not all of these are directly relevant to this affidavit but they are indicative of my standing in the social science research community and of my experience.

Ms Smith

13        I have read the affidavit of Smith dated 24 August 2012.  I have also met with her and her daughter in her home and discussed her evidence in detail with them. This was to ensure that I did not overlook any relevant aspect of her current living circumstances.

14        The focus of this affidavit is to provide guidance about what is a minimum income to provide an adequate standard of living for her and her daughter today. Ms Smith’s history does not directly affect my task, other than that prolonged income deprivation  will mean she and her daughter have inadequate household durables, stock, clothing and other assets together with – sometimes – debts. Ms Smith has been continuously on a benefit for about the past 8 years.

15        Ms Smith’s circumstances include difficult health problems. …

16        Exhibit D of Ms Smith’s affidavit reports that in August 2012 her weekly rate of Income Support was $469.78. (She received $350.78 in the hand after deductions for her house rent and to repay a WINZ loan for her washing machine.) To repeat the conclusion of my evidence: this amount is substantially below that which seems necessary to maintain her and her daughter at an adequate standard of living.

Some Methodological Preliminaries

17        The calculations refer to weekly rates in mid-2012. Unless otherwise stated I have used the Consumer Price Index to convert older dollar amounts into mid-2012 levels. Unless otherwise stated, all incomes are reported net of tax.

18        Many of the comparisons made in this report involve very long periods, over which the statistical series used are rarely comparable. Therefore the estimates are unlikely to be precise, but they are likely to be in the right order of magnitude.

19        I shall initially make two assumptions. The first is that Ms Smith does not have unusual health problems; the second is that if she has not suffered a long period of income deprivation her and her daughter’s stocks of household durables, stocks and clothing are likely to be adequate. I will later explain the adjustments needed to take these into account.

Assessing an Adequate Standard of Living

20        In order to assist the Authority I set out a number of different ways to estimate an adequate standard of living for the family based on the New Zealand research program over the last four decades.

21        One thing which will soon be evident is that there is a considerable amount of judgement in determining an adequate standard of living, especially if one wants a precise number. That is because fundamentally it is a community judgement. There is no scientific estimate of an adequate standard of living.

22        However, what will be clear from the research is that Ms Smith and her daughter are substantially below any level which the New Zealand community would judge as reasonable.

The 1972 Royal Commission on Social Security

23        The 1972 Royal Commission on Social Security stated:

(e)          The aims of the [social security] system [and income-maintenance policy] should be

(i)         First, to enable everyone to sustain life and health;

(ii)        Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community;

(iii)       Third, where income maintenance alone is insufficient (for example, for a physically disabled person), to improve by other means, and as far as possible, the quality of life available. (Para 3/42 – original’s italics)

 

24        What is crucial in the Royal Commission’s statements of aims is that while sub-paragraph (e.i) says that the system should maintain life and health, sub-paragraph (e.ii) says that is not by itself enough. The social security system in a civilised society such as New Zealand aims to ‘ensure … that everyone is able to enjoy a standard of living much like that of the rest of the community’ and the test for that is they are ‘able to feel a sense of participation in and belonging to the community’.

25        The Royal Commission defined belonging and participation as:

no-one is … so poor that they cannot eat the sort of food that New Zealanders usually eat, wear the same sort of clothes, [and] take a moderate part in those activities which the ordinary New Zealander takes part in as a matter of course. The goal is to enable any citizen to meet and mix with other New Zealanders as one of them, as a full member of society – in brief, to belong. (Para 3/32 – original’s italics)

 

26        In the poverty literature this is frequently interpreted as meaning that a society is not concerned merely with an absolute level of income (i.e. enough to ‘maintain life and health’) but a relative level enabling one to exist in a community whose average standard of living is somewhat above this absolute minimum (although of course there are societies whose average is close to the minimum). The UN conventions imply this relative notion when they state that appropriate measures are ‘in accordance with national conditions’.

27        The Royal Commission said that a policy objective based on a relative standard of living does not require everyone ‘to have substantially the same standard of living as everyone else’. (Para 3/32) According to it there was little public demand for such an ‘equality’ goal. (Para 3/34) Aside from that being impossible to assess (since everybody is different), an economist would add such an equalitarian society would not be a high income one since differences in income levels provide incentives for effort and innovation. The aim of an egalitarian society is to produce high standards of wellbeing for everyone, while celebrating diversity and difference and enabling all to participate and belong. This is consistent with the widely held approach to social justice set down in Theory of Justice, written by the outstanding twentieth century philosopher, John Rawls. (The book was published in 1971, and so was not submitted in evidence to the Royal Commission. Had that been possible, the Commission would certainly have been comfortable with Rawls’ approach and smoothly incorporated it into its own thinking.)

 

The 1988 Royal Commission on Social Policy

28        In much the same spirit, the 1988 Royal Commission on Social Policy reported that people required ‘access to a sufficient share of income and other resources to allow them to participate in society with genuine opportunity to achieve their potential and to live lives they find fulfilling.’ (The April Report – Report of the Royal Commission on Social Policy, Volume 1, p 731)

The Participation Aim in Public Policy

29        Forty years after the Royal Commission on Social Security’s deliberations the ‘participate and belong’ phrase is still used in social policy discussions although it tends to get contracted to being able to ‘participate in the community’. A phrase like it is, for instance, widely used in discussions on setting a poverty line.

30        It also appears in various Ministry of Social Development documents reporting on the framework for government policy. Examples are

(i)         Older People in the Tairawhiti District are able to participate as full and equal members of society and enjoy a sustainable quality of life.” (Tairawhiti Positive Ageing Strategy: 2009 to 2014, p.6 – original is in italics)

(ii)        Compared with many countries, New Zealand has done a lot to ensure that disabled people are able to fully participate in and contribute to society.” (Achieving an independence for disabled New Zealanders: Briefing to the Minister, 2012, opening sentence of the Executive Summary, p3.) Later the phrase ‘greater participation and inclusion’ is used.

(iii)       … ensuring that families and whanau can participate fully in society today, including in the modern economy, are critical features of planning for the future in New Zealand.” (Every Child Thrives, Belongs Achieves – the Green Paper for Vulnerable Children. p.3) The same paragraph interprets the third article of the Treaty of Waitangi as ‘participation’. The exact English text of article the third of the Treaty is “In consideration thereof Her Majesty the Queen of England extends to the Natives of New Zealand Her royal protection and imparts to them all the Rights and Privileges of British Subjects.”

(iv)       In this report poverty is understood as exclusion from the minimum acceptable way of life in one’s own society because of inadequate resources.  The definition is explicitly relative, and includes both resources and outcome elements. (Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 to 2011, p.111.)

 

31        It is evident that the notion of ‘participation’ is an integral part of public policy in New Zealand. The most appropriate way of assessing Ms Smith and her daughter’s adequate standard of living is to ask whether they are able to adequately participate.

The Economic Circumstances of the Smith Family

32        A useful way of examining the Smith family economic circumstances is to begin with the Budget Worksheet prepared in July 2012 for the Smith household by an advisor in the Central Districts Budgeting Services.

33        It begins with the $350 p.w. cash in hand following the deduction of household rent ($104) and the loan repayment ($10).  I have added them back to make comparisons easier. The following tabulation summarises their worksheet.

34        The third column is based on comparable outgoings of the average household in the 2010 Household Survey which are scaled so that there are the same outlays on food, and other outlays are in the same proportion. This gives some notion of the relative magnitude of the Smith outlays.

WEEKLY OUTLAYS:

Expense Item Smith Budget Worksheet Household Survey Comparison Notes
Food

$130.00

$130.00

 Set at the same level
Housing

$104.00

$153.48

 Rent vs Total Outlays
Lawn

$15.00

 Household Survey figure NA.
Household energy

$40.38

$31.60
Clothing &  footwear

$10.00

$22.31
Transport

$97.12

$95.91
Medical

$40.00

$17.78
Education

$12.50

$12.29

 Only 27.3% of households outlay on education.
Bank fees

$5.00

$3.80

 May not be comparable
Communications

$26.04

 Smith household is funded separately
Other

$10.00

$254.67

 Excludes savings.
TOTAL

$464.00

$747.88

 

35        We now compare item by item. (Note there may be fixed costs and economies of scale for the survey household which  would make the comparison the Smith household spending effectiveness is greater than it actually is.)

Food:

36        The Budget and Survey expenditures are set at a level approximately corresponding to that recommended by the University of Otago’s Department of Human Nutrition which is discussed below.

37        We mention here that, not untypically, food for the Smith family is a residual expenditure, that if there is an income shortage, they spend less on food. For instance, it would appear that when last year counselling sessions were required for Ms Smith at a cost of $60 a week, the family cut back its food outlays to pay for them.

38        In the past the family has had, on occasions, supplements to its food budgets from other sources, including food banks …

Housing (and lawn care and Power)

39        The Smith family pays $104 p.w. for its housing. The equivalent in the Household Survey would be $153.48. Not reported in the latter is the ‘imputed rent’, that is, many households benefit from living in a mortgage free house.

40        The Smiths are fortunate to be living in relatively cheap housing provided by the Housing Corporation of New Zealand; it may well be subsidised. However the accommodation is not of high quality; I would venture it is below average.

41        Additionally it has two large grass lawns which have to be maintained. The Smith budget sets aside $15.00 a week for this purpose. I think this is not unreasonable. As an adolescent I (hand) mowed the family lawns which were probably a third in size of those of the Smith section. I am sure I would have objected to having mow such a large area as this one. In effect then, the lawn charge is an offset to the low rental, and will be treated as such in the subsequent discussion so that the effective rent is $119.

42        A similar phenomenon may apply to household energy. Ms Smith does not seem to be extravagant, and yet she spends more than the comparable figure in the household survey. ($40.38 p.w. to $31.60). This may partly reflect that she does not have an efficient energy delivery system, but it probably also reflects that the difficulty of heating the house. Again one can argue that the additional expenditure is, in effect, offset by the low rental.

43        There is no provision in the Smith budget for house or contents insurance.

Clothing and Footwear

44        The Smith budget provides for clothing and footwear outlays slightly less than half the Survey comparable budget. ($10.00 p.w. to $22.31 p.w.) Cutting back on this item is a typical measure the poor use to eke out funds, making do, and, as Ms Smith mentions, obtaining second-hand and gifted clothing.

Transport

45        The provision for transport outlays is much the same. ($97.12 p.w. for the Smith budget compared to $95.91 p.w. for the Survey comparable budget.) I was struck however, when discussing her spending that Ms Smith is very concerned with petrol costs and I wonder if she actually spends $80 p.w. on petrol as budgeted. (I observe she has no vehicle insurance, again a typical saving by those facing financial stress.)

46        Relatively high transport costs may reflect a poor location of the dwelling, which offers a low rent. I make no judgement on this in the case of the Smith household as I do not know the area well enough.

Medical

47        Given the particular medical challenges that the Smith household faces compared to the typical one, the comparison of medical expenses is hardly useful. ($6.00 p.w. against $17.78 p.w., which will include dental care). From the evidence in Ms Smith’s affidavit the $6.00 pw is almost certainly an underestimate.

Education

48        A comparison of the two educational outlays is misleading.($12.50 p.w. to $12.29 p.w.) Only 27.3% of households outlay on education (most do not have children). The comparable figure for households with children would be $65.13 p.w. That includes outlays on early childcare, tertiary and private school fees and private after school activities (such as ballet lessons).

Bank Fees

49        These are small and may not be comparable.

Communications

50        There was no provision in the Smith household budget for communications such as house phone, mobile phones and internet. This is because an adult child pays for them on behalf of his mother. The comparable budget figure is $26.04 a week. This may be misleading because of fixed costs and economies of scale.

Other

51        The only provision for other expenditures in the Smith budget is $10, the amount she pays WINZ for the loan on her washing machine. In the Survey comparable budget there is $254.67 of other expenditure (excluding savings).

52        There are two indications of what those other spendings cover. First, the Smith budget has zero provision for the following items:

Life assurance

Dental care

Stationery/uniform

Pet expenses

Recreation

Presents

Haircuts/personal products

Personal cash

Children’s pocket money

Children’s education (trips)

Donations (church/charity/koha)

Outlays on consumer durables.

53        Second, the Household Survey mentions the following items in the ‘other outlays’ category:

Household contents and services

Furniture, furnishings and floor coverings

Household textiles

Household appliances

Glassware, tableware and household utensils

Tools and equipment for house and garden

Other household supplies and services

Recreation and culture

Audio-visual and computing equipment

Major recreational and cultural equipment

Other recreational equipment and supplies

Recreational and cultural services

Newspapers, books and stationery

Package holidays

Miscellaneous domestic holiday costs

Miscellaneous goods and service

Personal care

Personal effects nec

Insurance

Credit services

Other miscellaneous services

Alcoholic beverages, tobacco

 

54        One might conclude that the Smith budget, prepared by a reputable budget advisory service, meets (or almost meets[1]) Royal Commission’s first aim of sufficient to sustain life and health. It certainly does not attain the Royal Commission’s second aim of being able to enjoy a standard of living much like that of the rest of the community, and thus able to feel a sense of participation in and belonging to the community.

Ms Smith’s Ability to Participate

55        Ms Smith’s affidavit throws considerable light on her limitations. In a paragraph which was written before I drew her attention to this aspect of public policy she wrote

The debt is a millstone for me and my family. It casts its long shadow over our household and very much affects Emma, whose whole life now is about living without. There are so many things that would go to help her to be healthier and develop her potential and be able to participate in society when she is an adult … (Para 10)

 

56        The extract illustrates a phenomenon which is common in my experience. Mothers define the inadequate standard of living in terms of the impact on their children, often disregarding its impact on themselves (even when that will indirectly compromise the quality of life of the child). That mothers make such sacrifices for their children may be noble, but it is not always wise if the long term effect is to undermine their ability to function as a parent.

57        In Ms Smith’s case any such impact is worsened by her health. The Royal Commission included the caveat that it may not be possible for someone to fully participate and belong because of ‘limitations which may be imposed by physical or other disabilities’. It added ‘where income maintenance alone is insufficient (for example, for a physically disabled person), to improve by other means, and as far as possible, the quality of life available’.

58        What the previous section has demonstrated, and which is confirmed by illustrations in the affidavit, is that given the current income available to the Smith family, in all sorts of way neither Ms Smith nor her daughter are able to participate in the communities to which they belong as intended by the 1972 Royal Commission on Social Security when it described the aims of the New Zealand social security system and of income-maintenance policy generally.

59        While my purpose of visiting the Smith household was to ensure that the factual basis of this affidavit was as accurate and comprehensive as I could make it, I came away with the observation that whatever Ms Smith’s past misdemeanors have been – I am in no position to assess them – I am certain that the family’s current economic situation is severely compromising her daughter’s future.

Assessing an Adequate Standard of Living

60        The gold standard for assessing an adequate standard of living would be a close inspection of the person’s ability to participate in society (an inspection which might however be judged overly intrusive) compared to the typical person’s ability to do so (which would require a huge and complicated survey of the population as a whole and would probably also be considered overly intrusive).

61        Lacking this data base, the New Zealand research community has tended to focus on estimating an income which appears to provide an adequate standard of income. The next part of the paper explores some of the efforts to do this. In particular the following approaches are considered:

(1)        Comprehensive Budget Standard;

(2)        Food Budget Standard (Only);

(3)        Multiplying up a Food Budget Standard;

(4)        Expert Panel Assessment;

(5)        Lay Panel Assessment;

(6)        Poverty Lines;

(7)        A Composite Approach.

 

Estimating Income Necessary for an Adequate Standard of Living

 (1)       Comprehensive Budget Standard

Concept

62        The basic idea of a budget list is that there is a list of commodities deemed to be necessary for an adequate standard of living, which are priced to give the income necessary to purchase those commodities.

Example

63        The only detailed New Zealand example I know of came from a family budget standard provided by the Community Council of Greater New York whose purpose was to provide ‘representative lists of annual purchases need to maintain current standards of adequate consumption at moderate cost.’[2] I converted each item from its New York price to a 1973 New Zealand price and tallied them up. [3]

Advantages and Disadvantages

64        The advantage of this approach is that it is simple to understand and very transparent. (For instance, it is precise about alcohol and tobacco consumption.) It can also be adapted to different circumstances. For instance, it discriminates between the needs of children by age, and recognises that those working outside the home may have additional costs.

65        A major disadvantage is that it requires judgements which may be contentious. For instance, it provides for two nighties a year for an income-earning woman but only one if she is not earning.

66        A particular disadvantage is that this figure is based on 1970 consumption standards – and an American one at that. It is not only a matter that numerous items of expenditure have entered the market. (For instance, today’s adolescent student has to have access to a computer terminal and the internet.) Since the standard was set in 1970, the average per capita consumption has risen about 57 percent in real terms.

Application

67        Assuming a family in standard – and not exceptional – circumstances, the approach suggested  would require an income of $460 a week (in 2012 prices) to obtain the 1970 New York family budget standard for a woman not employed in the market work-force, with a teenage daughter and a car.

68        If the relativity with average consumption were to be maintained, the adequate income would be about $723 a week. However the New York standard seems to be a modest rather than minimum income for an adequate standard of living of those times (and, in any case, New York standards might be relatively higher than New Zealand ones).

Conclusion

69        The figure calculated here is indicative of a method, rather than definitive, especially as it is based on consumption patterns which are 40 years out of date.

(2)        Food Budget Standard

Concept

70        This approach is intermediate between the comprehensive budget standard (approach 1) and the multiple of the food budget standard (approach 3). It is treated separately here because it leads to a useful conclusion. The idea is similar to that of the comprehensive budget standard but the list of items applies only to food items, typically selected by an expert team of nutritionists.

Example

71        For over 40 years the Department of Human Nutrition and its predecessors at the University of Otago has been compiling a measure of food costs. They advise that:

most healthy families or individuals will meet their nutritional requirements needs when spending the amount of money specified as the basic costs. .. However, spending less than this amount increases the risk of not getting all the necessary nutrients. Many people will not lack energy or nutrients when spending less than this amount on food if they make careful management choices. However, the chances of consuming an inadequate diet increase as the amount spent to purchase food falls below the basic costs. [4]

72        The estimates are based on detailed calculation of quantities and prices. Weekly meat and poultry requirements are set at 900gms a day for a woman and adolescent girl (men and adolescent boys are 1150gms), and there is additional protein provision from fish, eggs, cheese and legumes. There is also an indication of the sorts of meats which can be purchased (such as mince, corned silverside, hogget leg, mutton and pork chops sausages, saveloys, various categories of chicken and luncheon meat for a basic diet). As indicated quantities are set for men and women, adolescent boys and girls, and also for younger children of four age groups. Prices are obtained from four supermarkets in each of the five main centres.

Advantages and Disadvantages

73        Those who chose the quantities are skilled nutritionists; the normal household purchaser may not make such good choices. [5] On the other hand the household may be able to supply some of their fruit and vegetables (3.5 kgs a week for an adult, 4kg for an adolescent girl) from a home or neighbour’s garden. There may be some economies of scale for larger families.

74        The Department of Human Nutrition estimates the basic food costs in Auckland for a woman is $63 per week and $70 per week for an adolescent girl. That is, a total food budget for the Smith household of $133 per week. In her affidavit Ms Smith says ‘[l]ast year I would have spent been spending only $40 – $80 a week’. (Para 18). The estimated basic food costs for 2011 for a woman and adolescent girl were $129 – between one-and-a-half and three times what Ms Smith was spending.

75        While she describes ways in which she adds to their diets one is left with the impression that her health and that of her (growing) daughter was compromised by an inadequate diet, and that they probably lacked normal energy. It would appear that when she gave up counseling, she used the $60 p.w. on additional food (indicative of how food is a residual expenditure item).

Conclusion

76        Within its limitations the food budget approach is one of the most satisfactory approaches available. However it is not comprehensive. The main limitation of the food budget approach is that it covers only about a fifth of household outlays. (But see the next approach – multiple of food budgets.)

77        In regard to Ms Smith’s circumstance we might conclude that she is struggling to spend an adequate amount on food. Under current circumstances (based on her 2011 experience) when she goes back to counseling or  has to outlay of a similar magnitude  the household needs at least another $70 a week, assuming that she can afford an average of $60 a week for food and that the food budget recommends $133 a week for the two. If she can afford only $80 a week (the maximum payment she recalls) then the extra is $50 per week. The reason this is a minimum is that she may also be skimping on other items (say clothing or heating). Were she given only $50 a week she might – quite prudently – divert some of the additional money to these more urgent items, so the household may remain underfed.

(3)        Multiplying up a Food Budget Standard

Concept

78        Molly Orshansky, an American economist and statistician, applied a multiplier to the cost of a nutritionally adequate diet to derive a set of poverty thresholds, which are in effect minimum adequate income levels. Very occasionally the method has been used, or discussed in New Zealand.

Example

79        In the early 1990s Edith Brashares, an American economist temporarily working in the New Zealand Treasury, applied the Orshansky method to New Zealand. She multiplied a nutritionally adequate diet (set out by a predecessor of the Department of Human Nutrition) by three, four and five to obtain estimates of minimum adequate incomes. [6] (She also looked at some other measures implicit in those used below).

Advantages and Disadvantages

80        The method is simple. However it depends on the choice of the multiplier. A change of 10 percentage points (say to 4.0 to 4.1) changes the level by $13 a week in the case of the Smith household. Yet there is considerable uncertainty as to its level, indicated by the Brashares analysis using a variety of multipliers.

81        The method also leads to paradoxes. If the multiplier is fixed there will be an automatic change over time in line with changes in food prices. However these may not generally track the prices of non-food items. Another paradox is that budget standard food costs are higher for a man than a woman, reflecting his higher nutritional demand on average. (They are also higher for an adolescent boy or girl than for a man.) The application of an inflexible multiplier suggests that a man needs a higher income to attain the same adequate standard of living as a woman. This seems unlikely.

82        Brashares avoids the paradox by using the multiplier on a family of four only. She then calculates the relative income for other household compositions by using a Household Equivalence Scale.

83        Brathshares seems to be unaware that twenty years earlier the 1972 Royal Commission on Social Security considered the Orshansky method and rejected it. [7]

Household Equivalence Scales

84        Since households differ in composition some means are necessary to convert their income to the same standard. This is commonly done by a household equivalence scale. The simplest method would be to convert them onto a per capita basis. However it is generally assumed that children cost less than adults to reach a given living standard (and there may be differences by age, including among adults [8]) and that for some items there are strong economies of scale (especially for housing and other durables; a house does not need a toilet for each inhabitant).

85        While these are well-researched measures they, like the food budget multipliers, are subject to considerable uncertainty. [9]It is sometimes claimed that the scales are all much the same. However the different scales give quite different compositions of those in poverty. The most commonly used scale, the Jensen Scale, is particularly problematic because it is biased against children relative to the other scales. In a review of those which were available in New Zealand, I recommended that they should be avoided if a better statistical method could be found. [10])

Applications

86        Brathshares estimated minimum adequate incomes levels for a one adult, one (average age) child family at $195, $260 and $326 per week in 2012 prices, according to the 3, 4 or 5 multiplier. The level would be higher for a household with a child in her early adolescence. It makes no allowance for any general increase in prosperity since 1988/9.

87        If we apply the multipliers to the current Department of Human Nutrition we derive estimates of the income required for a minimum standard of living of $399, $532 and $665 a week. (The reason why the two sets of numbers are badly out of line is that Brathshares used the Jensen Household Equivalence Scale and because the Smith family has an older child.)

Conclusion

88        The food budget multiplier method as applied here is too mechanical and too reliant on arbitrary assumptions to be of any practical use. The standard based on a multiplier of 3 is almost certainly too low and I have not further used it. (A multiplier of three would seem to be too low in New Zealand where, compared to America, food prices are relatively lower.)  I have also not used the standard based on a multiplier of 5 to avoid the possibility that the earlier deletion creates a bias in the conclusions.

(4)        Expert Panel

Concept

89        An expert panel looks at typical expenditures and incomes in the community and uses that evidence to assess what would be the minimum required to enable a particular household to participate and belong in the community.

Example

90        The 1972 Royal Commission on Social Security considered a wide range of evidence submitted to it together with the available economic statistics, including many of the approaches discussed here, and recommended a social security rate for a couple, and a single beneficiary without children.

91        In particular it recommended that:

(4)        For the purposes of establishing the level of adequacy of benefits at this time the ruling rate of wages paid to building and engineering labourers and the lower quartile level of adult male earnings be regarded as the major reference points.

(5)          (a) The married benefit rate be set close to 60 percent of the designated earnings levels after payment of income tax (set at $33 per week at September 1971);

(b)          The unmarried benefit rate be set at 60 percent of the married rate (say at $20 a week at September 1971). (Recommendations, Chapter 19)

 

92        It then considered how to set rates for families with children. To simplify another complicated discussion it set the benefit level (including the family benefit) for a solo parent with one dependent child (age unspecified) as equal to that for the married couple. (Recommendations, Chapter 21).  It also stated:

We again wish to make it clear that we are not suggesting that benefit levels should be irrevocably tied to the formulae alone. What we are suggesting for the future is that if (after considering all the information which is or may later become available about consumption patterns, living costs and prices, wages productivity, and taxation) the benefit levels decided upon approximated those above the method of analysis, the test of adequacy according to the ‘belonging’ aim is likely to have been met reasonably well. (Para 19.23)

Advantages and Disadvantages

93        Clearly there is much merit in a weighed judgment by experts although it is costly to produce and requires an updating mechanism. Over times circumstances change. For instance the discussion of the Royal Commission is dominated by the notion of the single income family. Relating the benefit level to male wages only would mean a growing gap between beneficiary standards of living and two-income families.

94        Some would object that the expert panel is likely to have little real experience of the living circumstances of those whose income they are recommending. There is a sense that the Royal Commission demonstrated this need not be a decisive criticism by the soundness and compassion of its recommendations, following careful consideration of the evidence submitted to it.[11]

95        However, as mentioned in the opening remarks of this affidavit, the judgements are social and not scientific, and others might come to different – perhaps only slightly different – recommendations. As the Royal Commission said of itself:

we readily concede that this is only a rule of thumb formula, but from the information we have, we believe that it is an adequate and reasonable arrangement (para 21.54)

 

96        A difficulty in interpreting the Royal Commission’s recommendations is that in fact it is recommending a number of different ways of setting the appropriate adequate standard of living and in other circumstances they might diverge. This is evident from the next subsection when they are applied today.

Applications

97        The recommended rate for a solo parent with one dependent child (age unspecified) is $428.99 in 2012 prices. However the average level of consumption has risen about 50 percent. If the Royal Commission’s recommendation were to be scaled by this amount to maintain a parity, the rate for a solo parent with one dependent child would be about $630 in today’s prices.

98        The designated wage measures no longer exist in the exact form used by the Royal Commission. The average weekly wage in the middle of 1971 was $46.81 net on average (at 1971 prices)[12]; so that the recommended rate for a married couple (and hence the solo parent with one child) was 70 percent of the after-tax average wage. A similar wage rate in early 2102 was $817.38. [13] Applying the 70 percent of 1971 might suggest that the Royal Commission today might have recommended around $572.22 per week (net) as the rate for the minimum adequate income for a solo parent and child.

99        Another comparison the Royal Commission proposed was that the solo parent and child got the same income as a couple on New Zealand Superannuation. The net rate in mid 2012 was $536.80 per week (net).

Conclusion

100      Were the Royal Commission to be reconvened it might well recommend a level of around $530-580 per week (net), or $100 a week or so more than Ms Smith is currently getting, even if we ignore her exceptional needs.

(5)        Lay Panel

Concept

101      Just as an expert panel may deliberate and recommend a minimum adequate income, a panel of lay people with no particular expertise other than their living experiences may also propose an income sufficient to meet a minimum adequate living standard.

Example

102      The New Zealand Poverty Measurement Project (NZPMP) asked focus groups made up of people on low incomes to assess minimum adequate household expenditures for two household types. [14]

Advantages and Disadvantages

103      In contrast to an expert panel, a panel of low income people has personal experiences of the situation they are assessing. However the assessment requires some care, which is not evident in the work of the New Zealand Poverty Measurement Project. Do the focus groups have a realistic assessment of the typical household expenditure patterns? They were not asked. Are the focus group’s assessments consistent?

104      We can test the second question by considering one example of focus group deliberations that the NZPMP published. It thought a minimum adequate income for two adults and three children was $475 per week (in 2012 prices) and $374 per week for one adult and two children. [15] Even to the inexpert, the relativity seems wrong. The Jensen equivalence scale, which the NZPMP used, suggests it should be $475 to $274.

105      So compared to the two adult, three child household the one adult, two child household had a standard of living somewhat higher. It is similar to what the group assesses as ‘fair with adequate participation’; the focus group was more generous to solo parents than to couples with children. [16]

Application

106      The NZPMP chose the focus group’s assessment for two adults and three children as the minimum adequate income (which they set as a poverty line – approach 6). Had it chosen their assessment for one adult and two children the poverty line would have been 36 percent higher. The former rate is equal to about 60 percent of the median equivalent household disposable income (approach 6).

107      The minimum adequate income rate for a solo parent and one child based on the NZPMP choice of a level for two adults and three children was $423.35 per week in 2012 prices. If this is increased in line with the rise in per capita consumption it would be $616.40 per week.

Conclusion

108      Consulting lay groups seems promising. However, given the huge divergence between the recommended standards of living of the two household types, these estimates should be used with caution. (In any case the NZPMP moved onto the next approach of 60 percent of the median equivalent household disposable income measure.)

109      I note that the New Zealand cabinet revised social security benefit levels for April 1991 down sharply below the levels proposed by the 1972 Royal Commission on Social Security. Subsequent practice is to increase them in line with inflation only. Whether the cabinet is an expert or lay panel may be a matter of definition. Since there is no documentary evidence why the particular levels were chosen – although they look a bit like a food budget standard with a multiplier of four – they cannot be evaluated in this affidavit.

(6)        Poverty Lines Based on Income Distribution

Concept

110      Given the central notion of the poverty line (or the minimum adequate income) being a relative notion, one approach has been to set the line relative to the overall (household) income distribution.

Example

111      Although there is no official poverty line for New Zealand the rates of 50 percent and 60 percent of median household income are used so widely – including within government – that they might be said to have a semi-official status. For instance, the Ministry of Social Development social monitoring program regularly produces estimates of trends in indicators of inequality and hardship which use these measures. [17]

112      I note that the Human Rights Commission uses 60 percent median income after housing costs as a measure of the extent of child poverty. [18]

Advantages and Disadvantages

113      Directly connecting the income for the minimum adequate of standard of living to the actual income distribution is obviously in the spirit of the notion. Moreover as incomes change the measure will change over time too. However, it is still necessary to make a judgment as to what is the appropriate relativity. Is it 50 percent or 60 percent or some other proportion?

114      There is also an issue of proportion of what reference point? The New Zealand poverty lines use the median (or middle) household income (after it has been equivalised by, say, the Jensen scale). While a measure of the middle of the income distribution is an obvious reference point, the median can result in paradoxes. For instance, if income is shifted from middle income households to high income ones (e.g by raising taxes on those in the middle and lowering them on the rich), the median will fall, and so will the poverty line even though the poor have had no change in their income. This actually happened in the late 1980s and early 1990s when hardship was manifestly rising but poverty (on this measure) was falling. [19]

115      A further complication which has been hardly addressed is the choice of equivalence scale. There has been a tendency to use the Jensen Scale without any sensitivity that it is not empirically founded but based on assumptions which may – but probably do not – reflect actual household experience. [20]

116      An illustration of just how mechanical the adoption of the scale has been is that there is a discussion about whether income should be measured before or after housing costs are deducted. [21] Following the decision, the same equivalence scale is used irrespective of whether housing expenditure is deducted. But housing expenditure is a major component of any economies of scale, so if the scale was right before housing costs are deducted it was wrong after, and vice versa.

117      Expenditure on housing is given this exceptional treatment because spending on it is erratic, depending on whether the house is rented or owned and, if it owned, the terms of the mortgage if any. Nor do housing rent prices quickly equilibrate to a market average so individual rents may be far from the market equilibrium rate, while publicly provided housing may be subsidised relative to rental housing. Housing is also the expenditure item where there are likely to be large regional differences.[22])

Application

118      The latest estimates for the 50 percent and 60 percent of median income are based on the 2009/10 Household Expenditure Survey. The median equivalised (disposable) income was $890 per week in 2012 prices. At 60 percent of the median income the recommended adequate income would be $534 per week; at 50 percent it would be $445 per week.

Conclusion

 

119      While the use of the household income distribution necessarily links the set income standard to those of the community as a whole (and allows for developments such as multiple income households), it still requires an element of judgement. The current dependence on household equivalence scales adds another dimension to the caution at the approach’s use.

120      A recent development, although the initial work goes back to the mid-1970s, has been to assess the actual indicators of material wellbeing of households. [23] The use of material wellbeing measures which are linked to incomes has the prospect of reducing the degree of judgment although not abandoning it. This is work-in-progress and the indicators are yet to be linked to actual incomes.

(7)        A Composite Approach

Concept

121      The approach is to use some of the previous approaches sensitive to their limitations. One might think of it as a family budget standard which uses a multiplier method to fill in for those items which detailed spending is not assessed.

Example


122      An example is attached as an appendix to this affidavit. It is based on a budget standard approach but rather than evaluating all items, it assesses only food, housing (and household energy) and medical and education outlays directly and uses a multiplier to assess the rest. The multiplier is derived from actual household expenditures and is applied only to the food standard.

Advantages and Disadvantages

123      While the approach avoids some of the weaknesses of the individual approaches it uses, there remains a judgmental element. It can be adapted to the particularities of personal and housing circumstances. It has not been possible to carry the approach out fully, as the data to enable a full expenditure estimate was not available.

Application

124      The appendix derives an estimate of the minimum adequate standard of living for Ms Smith and her daughter of just over $544 per week excluding medical, education and other exceptional expenses, made up of food $133, housing and energy $143, and other expenses $268.

125      The appendix sets out various caveats which apply to the estimate. Whatever their margin of error it is clear that the current Income of Ms Smith is markedly below that which the method judges to be an adequate standard of living.

Conclusion

126      This approach provides a more realistic account of individual household expenditure. It could be further refined.

Exceptional Circumstances

127      The above estimates are based on a person with no exceptional expenditures. They need to be added into the above estimates in the case of Ms Smith.

Medical Expenses

128      Ms Smith mentions about $6 a week for her exceptional medical expenses. Additionally there is a need for … This suggests that the Smith family has exceptional medical costs of around $75 a week (although she may make a greater utilization of medical services – including dental care — if her income were higher).

129      While Ms Smith places some emphasis on the costs of travel for medical care, I have assumed they are covered in the general costs of transport. I respect that she is anxious about these costs, but they really reflect that she is so under-funded that every small cost counts. Were she properly funded the anxiety would not be as great.

Educational Expenses

130      According to Exhibit L the Smith household has been invoiced $695 for Emma’s college school fees and other expenses. This amounts to weekly educational expenses of $13.40.  This does not include some other items which the family thinks are necessary for Emma’s schooling, as set out in the affidavit. It is therefore a minimum.

Repayment

131      Ms Smith has been required to pay the Ministry of Social Development up to $20 per week in order to pay off a benefit overpayment … (Para 6) (It is not currently being levied.)

132      Suppose it is deemed that a minimum adequate standard of living for Ms Smith is some amount per week. The $20 would then reduce her standard of living below the minimum standard. As I interpret the UN conventions cited earlier – especially the obligation not to take retrogressive measures unless they are in pursuit of a pressing goal – I have to assume that the income level provided to people such as Ms Smith has to be $20 per week above the earlier defined minimum adequate standard of living.

Household Durables and Debt

133      If, as is the general thrust of this affidavit, Ms Smith has been receiving substantially below an adequate standard of living, this will not only be compromising her and her daughter’s health but it will also mean that she has run down various consumer durables such as household utilities (electrical, electronic and possibly gas), kitchenware, furnishings, clothing and footwear to below – substantially below – the level assumed in an adequate standard of living. In her affidavit Ms Smith refers to various examples of this, but I have not done an inventory to assess the degree of the run down.

134      She may also carry inappropriate debt. The optimum strategy would be a lump sum payment to upgrade the various durables and write-down the debt. Once upgraded the adequate income standard includes an amount to offset the ongoing depreciation and need for renewal of the durables. Other than this, there is no allowance for the existing run down of assets in the following calculations.

Savings

135      There is no allowance in these estimates for significant savings or for insurance..

Summary of Exceptional Expenses

136      The weekly exceptional expenses particular to the Smith household are as follows:

Medical                                   $  75.00 p.w.

Educational                             $  13.40 p.w.

Repayment                              $  20.00 p.w.

TOTAL (say)                          $108.00 p.w.

 

This does not include any provision for run down assets or debt as the result of past funding inadequacies, nor for savings.


Summary of Estimates

137      The table below summarizes the various estimates of an adequate standard of living for Ms Smith. These figures do not include exceptional expenses of $108 p.w.

Approach Adequate Standard of Living Notes
$465 p.w. Rate currently paid to Ms Smith.
Budget Standard $723 p.w. Based on New York Budget Standard for 1970; increased by change in real per capita consumption
Food Budget Standard >$525 p.w. Amount necessary to enable her to purchase the University of Otago Basic Food Budget Standard
Food Multiplier $532 p.w. 4 x University of Otago Basic Food Budget Standard
Expert Panel $630 p.w. 1973 RCSS recommendation relative to prices; increased by change in real per capita consumption
$573 p.w. 1973 RCSS recommendation relative to wages
$536 p.w. 1973 RCSS recommendation relative to New Zealand Superannuation
Lay Panel $616 p.w. NZPMP figure for 1993; increased by change in real per capita consumption.
Poverty Line $455 p.w. 50% of median equivalised household income
$534 p.w. 60% of median equivalised household income
Composite $537 p.w. As explained in appendix

 

Conclusion

138      The table estimates ten levels of the income for a minimum adequate standard of living excluding the exceptional expenditures required by the circumstances of the Harlan family. The lowest is the poverty line 50% of median equivalised household income ($454 p.w.) which means the Smith household would still have insufficient income to afford an adequate basic diet.

139      I shall also delete the highest estimate. The budget standard is based on New York consumption standards which may well be higher than New Zealand ones

140      Eight remain although one, the budget food standard (>$515 p.w.), is only a minimum. The six break up into two groups. The expert panel adjusted for prices ($630 p.w.) and a lay panel ($616 p.w.) are reasonably close, averaging $623 p.w. They sit somewhat higher than the remaining four (combining the two Royal Commission on Social Security estimates).

141.     Focusing on the remaining four: All are above the minimum suggested by the amount needed to deal with Ms Smith’s household shortage of food.

  • Food multiplier (times four)                                                                      $532 p.w.
  • RCSS recommendation

relative to New Zealand Superannuation and wages                               $555 p.w.

  • 60% of median equivalised household income                                         $534 p.w.
  • Composite measure                                                                                   $537 p.w.
  • AVERAGE                                                                                              $540 p.w.

 

142      It is surprising, given the variety of methods used to estimate the level of income necessary for an adequate standard of living, that they are so close. This was neither my intention nor expectation when I began to prepare this affidavit. Partly the closeness arises from deleting the extreme estimates.

143      Given that the UN conventions acknowledge that a factor in the setting of the standard should be national conditions, I am inclined to recommend that serious consideration be given to the four (or five) rather than the higher ones although a reasonable case could be made for those two.

144      In conclusion I recommend a rate near $540 per week be the benchmark income when judging whether Ms Smith and her daughter have an adequate standard of living. In addition exceptional expenses of $108 per week may have to be added for the particularities of the household circumstances. Moreover, the state of its consumer durables should not be overlooked.

APPENDIX 1: THE COMPOSITE APPROACH

145      The composite approach is designed to simulate, as far as possible, the Budget Standard, which sets down each item a particular household needs. In this approach the outlays are directly estimated in the case of

  • food;
  • housing and household utilities;
  • education spending;
  • medical service expense.

 

146      The remaining expenditures are estimated indirectly from the Household Economic Survey. (Note that the latest HES is for the 2009/10 period; there is no allowance for changes in consumption patterns to 2012 except for changes in prices.)

Food Outlays

147      The food budget is taken directly from University of Otago August Department of Human Nutrition estimates for a basic food costs. It was $133 p.w. for a woman and adolescent girl in Auckland.

Housing and Housing Utilities (energy) Outlays

148      Because housing costs vary greatly for a host of reasons we do not estimate a representative figure but have simply taken Ms Smith’s current rent on a state house. It is $104 p.w.  plus an allowance for lawn mowing of $15.00 per week. Variations in the quality of housing affect the energy used in the house to keep it suitably warm. Ms Smith reports a monthly bill of $174, which amounts to $40.15 p.w.

Educational and Medical Outlays

149      Educational and Medical outlays are treated as exceptional expenditures.

Other Outlays

150      Other outlays cover clothing and footwear, household contents and services, medical products, transport, communications, recreation, alcohol and tobacco, and miscellaneous. I note that two items in the Household Economic Survey are omitted: other expenses (savings-related ones) and Sales, trade-ins and refunds.[24]

151      Rather than itemise each of these, the composite approach uses the food budget to predict what the remaining expenditures would be. Items which are complicated for various reasons and can be directly estimated – housing and household utilities and educational and medical services – are treated separately as already explained. Essentially it is a variation on the multiplier approach but the multiplier is based on actually patterns of household expenditure rather than on arbitrary choices.

152      Ideally, the ‘multiplier’ would be estimated from a set of econometric expenditure functions, but the necessary data (unit records) are not available. Instead an ad hoc method is used as follows. The average ratio of food spending to the above group of outlays for all households in 2009/10 was 3.35. [25] For a household of a solo parent plus children the ratio is 2.67, which means that they spend a higher proportion of their total outlays on food than the average household.[26] This is in part because the households are poorer.

153      It is possible to calculate the ratio for all households if they had the same income distribution as solo parent households. It is 2.96. That suggests that the ratio for solo parent households should be 90 percent (2.67/2.96) of that for all households whatever their composition. [27]

154      Not surprisingly, the ratio rises as the income of the household rises, reflecting that the share of food in total spending falls with rising expenditure. It is possible to estimate an equation for the effect of income (Y in $10,000 p.a.) on the ratio. It is

R = .090Y + 2.486

155      The square of the correlation coefficient is 0.925 on ten observations suggesting the statistical fit is a good one. (It says that the income explains 92.5% of the variation in the ratio across the ten observations.)

156      The equation says for a household of average composition with no income the ratio of other purchases to food is 2.49. For every extra $10,000 the ration rises by 0.09. Suppose the household income is $26,650 per annum (which is the lower quartile household income). Then the ratio is 2.51 – not very different from the zero income ratio. [28] It is proposed to use this ratio.

157      The estimate is for an average household composition. It is scaled down by 10 percent for a sole parent and children household to 2.26 and it is applied to a household with an average-age child (i.e not an adolescent girl [29]).

158      There is one further adjustment, necessary because the Household Economic Survey is for the 2009/10 year, but the affidavit requires an estimate for mid-2012. So the 2009/10 estimate of other outlays is scaled up for inflation between the two periods (but there is no allowance for change in composition and real levels of spending). That added a further $10.79 p.w.

Total Required Spending

Food                                        $133.00

Housing                                   $119.00

Household Utilities                 $  40.16

Other Outlays                         $245.23

TOTAL                                  $537.39

 

159      In addition there is an extra $108 p.w. of exceptional expenditures related to the particular circumstances of the Smith family. [30]

That gives the composite estimate of the necessary income as a total of $536 p.w.

Caveats

160      The method is necessarily limited because the econometrics cannot been done. This is  a consequence of the unit data records not being available and the lack of time and resources to obtain and process them. However it is believed that the more econometric approach is likely to give an estimate of the other outlays very close to this one.

161      I note that where an assumption has been made it has tended to be on the conservative side as some of the footnotes point out.

Endnotes

1. Including the assumption that no catastrophic event occurs to the household.

2. Community Council of Greater New York (1970) Family Budget Standard.

3. B. H. Easton (1973) The Needs Index (unpublished report, University of Canterbury – available from the author)

4. Department of Human Nutrition, University of Otago (2012) Information Package for Users of the Estimated Food Costs 2012.

5. Associate Professor Winsome Parnell of the Department of Human Nutrition looked at an earlier version of this section and pointed out that ‘although nutritionists have put it together we have not chosen all “optimal” foods. We have averaged a variety of foods that people actually choose. For instance we would not recommend sausages, but they are eaten, so in they go to contribute to the “meat average”.’

6. E. Brashares (1993) Assessing Income Adequacy in New Zealand, New Zealand Economic Papers 27(2), p.185-207. For a critique see B. H. Easton (1995) ‘Properly Assessing Income Adequacy in New Zealand’, New Zealand Economic Papers 29(2), p. 89-101.

7. Easton (1993) Op. Cit. p. 112

8. In principle men could be given a different weight to women, but in practice they are treated the same. Another distinction, rarely made, is between those which work outside the home and those that dont since the former have additional expenses such as for commuting.

9. B. H. Easton (2004) The Econometrics of Household Equivalence Scales, Paper to the Wellington Statistics Group 11 February, 2004. http://www.eastonbh.ac.nz/?p

10. Easton (2004) Op. Cit.

11. On a personal note, I have the utmost regard for the two Commission members I knew: Thaddeus McCarthy (the chairman) and Alan Danks. I did not know the other three members.

12. $55.33 per week less income tax of $8.52

13. $1006.32 less income tax of $188.94.

14. R. Stephens, C. Waldegrave & P. Frater (1995) ‘Measuring Poverty in New Zealand’, Social Policy Journal of New Zealand: Issue 05, December 1995.

15. Op. Cit. Table 3.

16. If it were argued that the focus group was right and the Jensen scale wrong, then the rest of the NZPMP analysis which is based on the Jensen scale would be invalid.

17. E.g. B. Perry (2010) Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 to 2011, http://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/household-incomes/index.html

18. E.g. 2011-2014 Statement of Intent and Service Performance, Human Rights Commission, 2011, p.31.

19. B. Easton (2002) ‘Beware the Median’, SPRC Newsletter No 82, November 2002, p

20. B. H. Easton (2004) The Econometrics of Household Equivalence Scales, Paper to the Wellington Statistics Group 11 February, 2004. http://www.eastonbh.ac.nz/?p=516. The revised Jensen scale has very strong economies of scale, which are likely to be wrong. There is no allowance for the age of the children.

21. Observe that three ‘housing adjusted’ measure deducts an expenditure from an income, so it must be conceptually muddled.http://www.eastonbh.ac.nz/?p=207. There is a case for deducting housing expenditure from total expenditure, but while the resulting measure may be used to measure of numbers below the poverty line (if done properly) it does not give an income standard.

22. B. Easton & S. Ballantyne (2002) The Economic and Health Status of Households, Chapter 8 for an rigorous way of adjusting for housing. The executive summary is at http://www.eastonbh.ac.nz/?p

23. B. Perry (2011) The Material Wellbeing of Low-income Households? paper to the Wellbeing and Public Policy Conference, 17 June 2012

24. No specific judgements are made as to the appropriateness of these expenditures. For instance if a person chooses not to purchase tobacco they have more to spend on other leisure activities.

25. Two thirds of the cost of food and takeaways is deducted from the food budget and added to the other outlays, on the basis that only about a third of the outlay is actually on food.

26.   Ideally the household type should be a solo woman plus a single child. However data for that household type is not available. The method is such type used here probably does not much affect the outcome.

27. This is not unlike making an adjustment via a household equivalence scale, except that it is derived from the data rather than an assumption imposed outside.

28. It affects the final estimate by less than $3 p.w.

29. This assumes that the needs of an adolescent girl are the same as for an average child, except for food. Probably a conservative assumption.

30. It is interesting, but coincidental, that the food multiplier is, in effect, near 4, excluding exceptional circumstances. It would be higher if the family was renting privately.

The Maori Urban Migration

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

National Institute of Demographic and Economic Analysis, University of Waikato Seminar: 23 August, 2012 ( am grateful to Joan Metge and Ian Pool for assistance with various aspects of this paper; the errors remain mine.)

This paper is based on Chapter 34 the book I am writing: <>Not in Narrow Seas, which is a history of New Zealand from an economic perspective. Thus far I have written over 250,000 words up to the 1970s. It will take me about a further two years to get up to the present. The purpose of Chapter 34 is to get Maori into the modern economy; it describes the second great Maori migration which occurred in the last 60 years. There will be one after, describing them there.

There are eight chapters about the Maori economy – probably 40,000 and more words – and Maori appear in many other chapters. This will be, I think, the largest work on the Maori economy since The Economics of the Maori by Raymond Firth but it only looked at the pre-market economy. This account will be more comprehensive and uses a range of reports and scholarship to which Firth did not have access.

There are many earlier chapters on the Maori and their ancestors, beginning with their roots in Central Polynesia, following with their arrival here 700 years ago. An economist observes that for most of this time since then the Maori economy has been a subsistence one.

The term “subsistence” is not, for an economist, a value laden one. It is used to describe a community which is largely economically self-sufficient. There may be some trade, but it is typically a small proportion of total consumption. With the arrival of the market, there may be some commercial work – perhaps wages, perhaps the selling of the farm surplus.

A theme of the book is modernisation, one aspect of which is the increasing role of the market. Those of European descent would do well to remember that most of their ancestors lived in a largely subsistence economy. Indeed it seems likely that many small settler farms were largely subsistence until the 1880s.

A consequence of self-sufficiency is a lack of specialisation. Today, we take for granted Adam Smith’s insight that the market enables specialisation which gives a higher average material standard of living. Those who are more self-sufficient cannot reap economies of scale and learning so that a subsistence economy tends to have a lower material standard of living than a market driven one. But that does not mean that it is necessarily lower or inferior on other human dimensions.

The Maori economy was dominated by subsistence activities, even in the first part of the twentieth century. We know this, despite the lack of data, not only from anecdote but because Ngata’s economic policies were to shift Maori from subsistence to commercial economic activities. As the great man said:

“There are Maori communities which are satisfied to live on minimal reserves, where they grow the vegetables they require, from which they make seasonal excursions into the labour field to obtain the minimum resource for the purchase of clothes and food, and where they [live a country life] between periods of employment.”

For over a century after the European arrival Maori remained a rural people. Some lived in towns or small urban areas, but typically they were a part of their iwi’s region and their marae – with its central role in communal life – and the whanau was not far away. Numbers in these urban areas – with the exception of Auckland – were up to the size of a large hapu – 434 in total in Wellington on the 1926 Census night.

There were 1162 Maori in the Auckland urban area. While over 70 percent of Maori were located in the Auckland region – north of Taupo – only 1.8 percent of all Maori lived in Auckland in 1926.

Note that the Statistics New Zealand definition of urban is a town of 5000 people or more. (A Maori who shifted from Kaitai in the 1950s to Auckland – the sort of migration Joan Metge tracked – would not have changed their urban status for statisitical purposes.) In 1926 some 15 percent of Maori met this definition of urban living; today it is 84 percent. Even more revealing is that aside from Auckland and Wellington, the largest urban centres of Maori in 1926 were Gisborne, Napier, Wanganui – which like Auckland and Wellington – had substantial Maori settlements around which the European towns were built.

There had been a slow migration to the cities in the interwar period. It is sometimes argued it accelerated during the Second World War; perhaps one can see this in the data, perhaps not. Perhaps the Great Depression delayed the drift in the 1930s. However it was a trickle compared to the urbanisation flood after the war.

The urban growth was primarily in the four main centres (initially, and mainly, Auckland). They housed only one in ten of the Maori population in 1926. By 1971 four out of ten lived there while more than two out of ten lived in the other urban centres with populations over 25,000. Currently the urban proportion in the big cities is not overly different from the non-Maori proportion. (It crossed the 50 percent threshold before 1926.)

Population Growth

The proportions obscure the massive population growth that was occurring. The definitions may not be comparable but the 1926 census records 70,000 or so of Maori descent; the 2006 Census says there were 640,000 but there were over 130,000 Maori living permanently overseas (and those temporarily there on Census night). Given there would have been few overseas in 1926, the Maori population in the world probably increased by a factor of eleven in eighty years – a population growth rate in excess of 3 percent p.a.

This is a rate somewhat higher than the maximum that demographers would normally of think as sustainable for a population, but Maori were breaking no biological rule. Instead many children had one parent of Maori descent and the other non-Maori.

For much of the interwar period Maori had a high rate of fertility in the range of 6 to 7 births per woman. Non-Maori had been at that level in the 1880s but over the following century they had gone through a slow fertility transition down to close to 2 births per woman by around the 1980s. The Maori fertility rate remained high until the early 1960s and then collapsed over the following two decades to close to the non-Maori rate. The reasons for this exceptionally fast transition are complex, but urbanisation was most certainly one, evident in the differential fertility rates by location.

The Drivers of Maori Urbanisation

What caused the urbanisation? Undoubtedly there were Maori who went to the cities because there were prospects of lifestyles, incomes and careers which a rural society was unable to provide. But many more were driven into the urban areas because there were insufficient prospects in the countryside. One study found migration from a region in the early 1960s was associated with poor-quality housing and low incomes.

In 1926 almost half of the Maori labour force said their main occupations were fishing, farming, forestry or mining, about 21,000 in total. By the 2006 Census there were 16,000 employed in these industries, only 7.8 percent of the Maori labour force. The story becomes a familiar one for the entire labour force. Because there were limits on the land available and because higher production was associated with less labour per unit of land, the primary sector was unable to generate sufficient employment for the burgeoning population.

The urbanisation was hardly expected. With the exception of the chapter on economic circumstances by Horace Belshaw, professor of economics at Auckland University College, elaborated below, there are no references to it in The Maori People Today, published in 1940. The contributors were thinking about the future of the Maori. How could they get it so wrong?

Consider Apirana Ngata, at the centre of the Maori revival in the first half of the twentieth century. Born in 1874 when the Maori population was still declining, he reached adulthood about the time it reached its nadir and when the turnaround was still not obvious. He grew up in a rural community, and turned down the prospect of a successful career as an Auckland lawyer to go back to ancestral lands on the East Cape.

The reality he faced was that the vast majority of Maori were rurally based and most were hardly prospering. The immediate economic issue was the ‘cultivation of the land’. While there was considerable progress, it seems unlikely that the living standard of the typical commercial Maori farmer was comparable with that of the Pakeha farmer, while many remained subsistence farmers and others were landless. However Ngata’s strategy had assumptions which proved wrong after his death.

Belshaw set out the problem as follows.

Estimates based on observations, on discussions with Maori leaders, and on information from Departmental sources, would suggest that when existing freehold land is fully developed about 5000 farms will be established, supporting say 20,000 people or one-quarter of the present population. This will leave 60,000 not provided for by farming on native lands even if the population does not increase.

Belshaw concluded “[e]ven though the above estimates may be subject to a wide margin of error, there is an unambiguous picture of a people whose land resources are inadequate, so that a great and increasing majority must find other means of livelihood.” While there was considerable variation by region,”[n]o tribe has sufficient land to support all its people.”

He thought Maori had to find employment in other rural activities. His doubts about the difficulties of urban migration prove, in retrospect, excessively pessimistic. One reason may have been that bumped around on half-formed roads in his tour of Maori farming, he under-estimated the coming communications and transport revolutions. As they transformed in the post-war era, urban Maori found it increasingly easy to keep in touch with the folks back home.

Attitudes to the New Arrivals

It would be foolish to argue that there was no racism towards Maori in New Zealand in the middle of the twentieth century although it was moderate compared to the approach to minorities in – say – other English speaking settler colonies. One factor was marriage between the indigenous and settler peoples. Another was that, with most Maori in the countryside and most Pakeha living in towns, the two peoples rarely interacted. Urbanisation increased the interaction, and the possibility of racism became sharper.

On the other hand the low unemployment in the early post-war era moderated the worst outbreaks. Many Maori were pulled into the cities by job opportunities, as much as pushed by the job shortages in the places they grew up. Because demand in the labour market was strong they were not really competing with anybody much, and so a standard source of racial tension in other cultures was not as present.

There was a common view among non-Maori that Maori should “assimilate” – they should become brown Pakeha (although the advocates would not use that term; more likely they would say “become like us”). However majoritarianism was more a matter of political rhetoric than social reality, a reality which enabled Maori to maintain and adapt their culture for the new conditions, rather than abandon it.

Pakeha majoritarianism tends to treat all Maori as the same – as a unity. There was no unity before the arrival of the European; even the name “Maori” was adopted after – it means “ordinary”. Maori society remains largely organised on an iwi basis. While relations between iwi can be generous and cooperative when the need arises – hospitality is central to Maori relations – the distinctions between iwi are jealously guarded. Perhaps the only occasion one sees unity among the Maori is when they are dealing with the government – and not always then.

Urbanisation

The flows were not even across the map. Initially there was movement to local towns and then on to Auckland. This urbanisation involved much longer migration and different iwi, well illustrated in Joan Metge’s study of the connections between the Far North (Muriwhenua) and Auckland. Still a six hour drive between them, the physical connection was a far greater challenge in the early 1950s. Yet the rural and urban communities managed to stay in touch far more intimately than those involved in the thirteenth-century Polynesian migration or the nineteenth century British one could. Even so there were significant differences and tensions which continue to this day.

The ongoing connections were a major reason why the assimilationist strategy could never work. As long as the urban dwellers were robustly attached to a rural community deeply immersed in and fiercely committed to its own culture, the migrants could not easily abandon it either.

Yet they had to have their own institutions in their urban environment. In the cities the rural migrants were often manuhiri (visitors) with restricted rights compared to the tangata whenua (people of the land) – rights which were integral to Maori cultural practices. If the marae was the centre of social life back home, how were the manuhiri to have a comparable centre in the territory of another iwi? Solutions were slowly found; nowadays non-local marae of various status are common (the mihi which begin meetings acknowledge the position of the tangata whenua).

The notion of a chain of migrants is well understood; a few intrepid souls settle successfully in the new land, and others follow, relying on the pioneers’ guidance and hospitality to settle in. The success of one new settlement encourages others to move onto the next city. Thus it was with Auckland. The success there was followed by migration to other urban centres. The movement was dominated by teenagers and early twenties , with the women younger. Later they invited their elders. The great drive which generated the inflow into Auckland ended in the 1970s after which population growth was dominated by births. Other centres began absorbing the dispersing Maori.

The outcome is nicely illustrated by Christchurch whose region’s tangata whenua – always small – had been decimated by Ngati Toa raids in 1831. Despite being New Zealand’s third largest urban area, it had the seventh to largest Maori population in 1926; eighth in 1951. By 2006 it was third.

Maori are about as urban today as Pakeha, although many practise a different sort of urbanisation both in terms of the lives they lead in the cities and their connections with the countryside;  they continue to visit regularly their whanau marae, for extended family occasions as well for holidays. (They visit more often than Metge records in the 1950s, given the greater ease of travel and ownership of cars.) Of course some Pakeha have holiday homes (or perhaps rural family bases where the children stay regularly), while perhaps a fifth with Maori descent have little connection to their whanau roots.

Adapting to Cities

There is a sense in which many Maori were not well adapted to urban life, what Belshaw called the “imperatives of changing capitalism”. To give but one illustration, consider educational and training attainment. Despite the emphasis placed on it by Ngata, Belshaw and others, Maori markedly lagged behind non-Maori in educational achievement.

The 2006 Census reports that in aggregate Maori averaged 2.1 years of attainment of qualifications (where zero is no qualifications – say, leaving school at 15), whereas the non-Maori average was 3.5 years. Now 1.4 years of extra qualifications may not seem much but a Maori born in 1974 had about as much training as a non-Maori born in 1944; in simple terms they are 30 years – more than a generation – behind.

Perhaps the education deficit did not matter for rural living, but it mattered in the cities. Occupationally over half (52.6%) of non-Maori are managers, professionals, technicians or trade workers; but under two-fifths (38.0%) Maori. The difference is larger as the occupational categories become more highly paid.

The consequences of the deficit also appear in the statistics of social failure. Unemployment rates in each age group are higher for Maori than non-Maori. Similarly, even age adjusted, Maori are proportionally more numerous in prison than in the whole population. What we do not know is if we control for socioeconomic background (such as education and training) as well as age, whether the Maori rates of social failure are still higher.

Part of this confusion arises because of the reluctance of New Zealanders to contemplate the existence of socioeconomic class. Certainly many of their ancestors came here to escape the deferential class system of Britain and, equally certainly, foreign models of class do not work well in New Zealand with its large group of self-employed and affluent family farms. But the analysis of class of orthodox social science, based on social gradations which affect life style and choices, applies in New Zealand as much as in any affluent and industrialised society.

The consequence of the neglect is that the existence of a Maori ethclass – despite its considerable internal social gradations – is used as a proxy for class analysis in New Zealand .The unfortunate consequence is policy mistakes, for policies which target only Maori fail to address the majority of the poor. The white poor can object to such targeting, leading to the possibility that middle class good intentions result in working class racialism.

Economic Inequality

The stereotype of Maori as failures applies to poverty too. Certainly the rate of poverty is higher among Maori than non-Maori. However, there are more poor Pakeha than Maori. The totals require the rate to be multiplied by the population numbers; the Pakeha population is so much larger than the Maori one that it swamps the rate difference. This confusion has led to an unfortunate public misunderstanding which equates poverty with Maoriness.

According to the 2006 Census adult Maori gross incomes averaged just over fifth lower than Non-Maori ones. Their market incomes would have been even relatively lower, after deducting social security transfers. (Including children would further depress both relativities.)

There are well-off Maori, but they are proportionally fewer. Taking $100,000 p.a. (about three times the national average) as a cut-off for being well-off, there were 1.3% of Maori reporting exceeding it and 4.0% Non-Maori.

Conversely Maori are over-represented in New Zealand’s lower income distribution. But while relatively more Maori are there in the lower tail of the distribution, their numbers are dwarfed by non-Maori. Almost two out of five adult Maori were below $15,000 p.a. in 2006. But so were a third of Non-Maori; some (33.4%) of them – seven times as many. Low incomes are not a peculiarly Maori phenomenon.

Inequality exists within the Maori population as well as between Maori and Pakeha. Gross income inequality within Maori is slightly less than within non-Maori, probably because the levels of individual social security benefits are the same, and hence higher for Maori relative to their market incomes. It seems likely that the market income distribution may be more unequal for Maori than non-Maori.

The History of Maori Inequality

The historical narrative contributes to an explanation of the origins of these differences. There was little material inequality in pre-market Maori society, because there were not the technologies to enable it. Europeans brought with them processes which when applied to Maori society developed divergences, both between iwi – because some of which were better located or had more marketable resources – and within iwi – because the rangatira, in particular, were often able to convert their mana into material wealth.

At the point of early contact the well-being of Maori was similar to that of the typical European arrivals (although it is a difficult comparison to make). However Maori did not prosper to the same degree, in part because of the alienation of much of their asset base of land and resources, in part because their traditional practices – collective community effort and horticultural-based farming – did not translate well into the new farming styles, in part because most lived far from where sheep (the basis of the first great staple) thrived. As a rural people they had not the same urban opportunities either.

Rural Maori inequality was compounded by the differences between commercial farming and other enterprises and non-commercial or wage based life with the rangatira more in the first group of farmers and Nga Morehu – the landless – in the second.

The two drivers of urbanisation may have intensified the rural Maori inequalities. Probably rangatira went to the cities for opportunities that the countryside did not offer; some would have left because there was no work on the family farm. The movement of Nga Morehu was more a matter of leaving subsistence lives for the low-paid – but still better – employment opportunities that the cities offered.

There is not much evidence of a subsequent convergence which often follows such transitions. Possibly structural factors impede it; perhaps of the inter-generational cumulative causation kind. The children of poorly educated parents may find it difficult to do better; the children of unemployed parents find it difficult to get a job. (Drug and criminal subcultures reinforce the vicious circle.)

Alternately the convergence is happening, but it is incremental and overlaid with numerous other complications which hide or slow it down. It is only a slight exaggeration to say that just after the rural Maori settled into the cities in the 1970s, attracted by job opportunities, the labour market weakened and unemployment rose. Later the Rogernomics restructuring seems to have hurt Maori more than non-Maori

Various government measures – especially in education and population-based health – are intended to contribute to the convergence but their impact is incremental. It takes over two decades for a successful school program to impact on half the labour force; the effectiveness of public health measures has similarly long lead times.

Conclusion

Belshaw had been gloomy about the prospects of Maori in cities. Getting there had been haphazard. There was no grand plan, no leader – an urban Ngata – to guide them. Nor was there a Wakefield planning settlements or a Vogel assisting immigrants. It was more like the first great Polynesian migration – an unorganised movement of people across a great divide.

We may ponder whether the second great migration was easier than the migration 650 years earlier. To do such an exercise in detail would be futile. The key difference may be that the proto-Maori experienced a hazardous voyage but they brought their culture into a different but hardly hostile environment. Their descendants’ trip, while physically safer, involved a greater cultural challenge; the difference was the new destination was already peopled, and the arrivals had to adapt a lot faster.

The Soe Bonus Scheme

This entry was posted in Business & Finance, Governance, Listener, Political Economy & History on by .

Listener: 18 August, 2012.

One of the reasons King Charles I was beheaded in 1649 was that, without Parliament’s approval, he raised taxes and spent the proceeds. Forty years later, after the Glorious Revolution, the English Parliament passed the Bill of Rights, requiring that the Crown tax or spend only with Parliament’s approval.

That act remains an explicit part of our law and underpins the authority of the New Zealand Government. In 1976, a public servant, a Mr Fitzgerald, challenged the order of incoming Prime Minister Robert Muldoon suspending the 1974 New Zealand Superannuation scheme – Labour’s scheme, not unlike a compulsory KiwiSaver. The Chief Justice, citing the first clause of the 1689 Bill of Rights, declared Muldoon’s instruction unlawful, even though the new government had a clear majority and would soon repeal the law.

Not that Parliament is always in charge. Told on another occasion that an action he was contemplating was illegal, Muldoon looked out of his Beehive window to Parliament below and cackled, “We have a little room down there to change the law.”

He sometimes found a way around the limits of Parliament’s power, as when he gave Think Big schemes secret guarantees. Parliament found itself with huge financial commitments to honour when some of the projects went belly-up, even though it had no foreknowledge of them.

The subsequent Public Finance Act requires that Parliament be advised about such guarantees; otherwise they are not enforceable. The result of that law is the Government has to push even its most unpopular legislation through Parliament, enabling the public to assess it and identify any mistakes.

So it was with the proposal to partially privatise some state-owned enterprises. You may not like the proposal – polls suggest more than 80% of the population do not – but it is the law and the Government can now sell a chunk of them. Our redress is how we vote at the next election, if we think it important enough.

To make privatisation more palatable, the Government has said it will sell shares to small investors. To avoid them “stagging” the sales – that is, bidding for shares and flicking them on at a profit – it has said it will give bonus shares to those who hang onto them for three or so years.

As I write, the details are not available, but it has been suggested the cost of the bonuses may be between $60 million and $500 million. You may think there are a lot of other things the money could be better spent on (reducing taxes, say), but apparently the Government considers that is its best use. That’s politics.

Prime Minister John Key has said the bonus scheme will contribute to a shareholding public. However, when former British Prime Minister Margaret Thatcher tried the same strategy during her privatisation binge, the public bought the shares, but a few years later had sold most to financial institutions, leaving the public largely shareless again (except for those held indirectly via KiwiSaver-type investments).

In effect, the Government is offering a group in the community the $60-500 million for free. It is a wealth transfer from the taxpayer to the well off, turning an honourable policy of deepening capital markets into a tawdry bribe. Meanwhile, Government policies cut back the incomes of those really in need. That is an expression of its priorities.

How is this giving away of taxpayers’ money to be reconciled with the Bill of Rights? The Treasury is recommending that the subsidy be treated as a parliamentary appropriation. That means Parliament will approve the grant to those wealthy enough to afford to buy shares when it passes the Budget in its annual appropriation of expenditure, which gives the Government the power to spend taxpayers’ money.

The bonus proposal involves the constitutional basis of New Zealand Government – it’s a matter that should be treated with the utmost seriousness, whatever one’s position on the privatisation. It looks as though we shall not have to behead the Queen – or the Governor General who represents her – after all.

A Background to Our Understanding of Child Poverty in New Zealand

This entry was posted in Social Policy on by .

Anglican Chaplaincy Seminar, VUW, 8 August, 2012

I have been asked to talk about the history of child poverty. Social scientist don’t have much of a systematic account before the 1970s, although there is plenty of anecdote. It was the 1972 Royal Commission on Social Security which precipitated the upwelling in research and thinking about children, together with the first useful household income surveys. What the statistics suggested was that around one in four children were below the poverty line, a proportion not very different from today’s, which means we have not made much progress in forty odd years. That makes you think.

Of course the proportion is sensitive to the exact poverty line. There appears to be a general agreement that in an affluent country like New Zealand that we use a measure relative to the nation’s living standard as a whole, not an absolute standard. It is not a matter of being just able to sustain life – no matter how miserable that life is. There is a general acceptance of the principle, if not the practice, that the standard of living has to be sufficient – in the words of the 1972 Royal Commission on Social Security – to enable the individual to participate in and belong to their society.

The early 1970s research was not only important in quantifying the level of poverty in New Zealand – much of the subsequent research has been refining the central idea, although there is another strand, which also began  then, which uses measures of material wellbeing, but which still does not connect to an income measure – the main policy instrument that we have for relieving poverty.

Perhaps more important than the numbers, was the realisation that poverty was not only about beneficiaries – a wildly held anecdotal belief at the time. What the research showed was  that poverty was mainly to do with children. The last time anyone calculated it – admittedly before the working for families package had cut in – the research found that over 80 percent of New Zealand’s poor were children, their parents and others living in their households.

Moreover it found that child poverty was much more widespread than today’s conventional image that the typical poor household is a brown, a solo-parent beneficiary, in rental accommodation. In fact:

  • there are more pakeha than Maori and Pasifika who are poor;
  • there are more in two-adult families than solo-parent families who are poor;
  • there are more dependent on wages than benefits who are poor;
  • there are more in their own homes (typically with a mortgage) than in rental accommodation who are poor.

What has confused people is that while there are a higher proportion who are poor in the minority categories, there are so many more people in the majority categories their numbers swamp the lower proportions.

It is children who generate the majority of poverty – not being brown, or solo, or on the benefit, or a tenant (although there are some people in these circumstances who are in pretty cruddy situations).

Very typically for New Zealand social rhetoric we have been happier to list the number of poor – perhaps adding anecdotes – than to analyse what is going on. As a result we often end up with inefficient policies.

It would be easy, for instance, to jump to the conclusion that what we need is higher wages. That has been a long held belief, first codified in 1907 with the “Harvester” decision of the Australian Arbitration Court, which said that the wage level had to be set to provide an adequate standard of living for a worker, his wife and two children. But if it was adequate for that family it would be generous for a single man and inadequate for a family of four and more children. It is not possible to eliminate child poverty by simply relying on wages.

So there is market failure. I suppose it is obvious but let us go through the economic analysis. Essentially children are an investment in the future. But it is not an investment that you can borrow against – student loans aside – so the family has to fund the investment from its own resources. Typically the parents do not even get a financial return in the future. The beneficiaries are directly their children, and indirectly older generations as a whole because when they are adult the children pay the taxes which sustain the New Zealand Superannuation and the health care of the elderly.

If families under-invest in their children – and when they are seriously income constrained that is inevitable – the children will suffer. But so will society as a whole. Not only will the retired suffer when it becomes the younger generation’s turn to fund them, but the under-invested children will cause more government spending – such as on law and order and health care – and other government spending – on education – will be inefficient.

The logic to a civilised nation is that the government should contribute to the investment in its children to compensate for the under-investment caused by relying solely on wages (market incomes). We do this when we provide free education and health care – although each may be insufficient in quantity while user-pays has been steadily creeping in. However, often the performance on these and similar public sectors are deeply dependent on adequate investment by the family and that means some top up of income by the state.

We already do this via social security benefits such as the domestic purposes benefit, family support and working for families. There are two issues: is the available funding properly allocated, and is it enough?

I focus on the second question. The poverty research suggests that family incomes are too low, limiting the ability of many children to be able to grow up as a part of society as a whole. Additionally there is fragmentary social and medical research which suggests this leads to problems among the children, although in some cases this can be best remedied by more spending on health and education, say.

What I have just described is the analytic framework which was developed in the 1970s and which underpins my of the critique of the government’s approach to children’s income maintenance. It did not particularly influence the Rebstock committee because it had another agenda.

But it is a very old framework. Forty years after the Royal Commission on Social Security there has been social change, and some elements of that change have yet to be incorporated into the framework. Rather it pretends as if nothing has happened. Practical New Zealanders are notoriously slaves of defunct economists.

Among the major relevant social changes are (in alphabetical order):

  • an increasing proportion of children are in solo or blended families;
  • changes in the housing market;
  • more migration so not all the benefits from children accrue to where they grew up in;
  • increasing affluence, diversity and income inequality;
  • rising charges for schooling;
  • the rise of two income households;
  • unemployment is higher.

Each of these poses a challenge to the analytic framework I have just described. As one of the people who consolidated it all those years ago – although I readily acknowledge it reflects a much older social philosophy in New Zealand and elsewhere – I am proud that the framework has stood the test of all this time, eager to get onto developing it for the changes since then, impatient with those who are stuck on an outdated one, but – most of all – greatly puzzled why it had so little impact on public policy.

Water Rights and Ownership

This entry was posted in Governance, Listener, Maori, Political Economy & History on by .

Listener: 4 August, 2012.

This column has previously advocated making greater use of market mechanisms to allocate the use of water. New Zealand has a comparative abundance of water, but we benefit if it is allotted as efficiently as possible.

Those familiar with the issue acknowledge the argument, but many point out that the “P” and “M” words have made it politically infeasible. People object to privatisation, and there are complex issues of property rights involving Maori. This Government therefore showed considerable chutzpah by tackling both P and M head-on in proposing to partially privatise state-owned enterprises (SOEs) that use water for hydro, thermal cooling and geothermal generation.

At least I think it was political audacity. It would be the most incompetent Government in my lifetime if it had not realised privatisation of SOEs reliant on water would end up at the Waitangi Tribunal, and probably in the courts, in order to sort out Maori property rights.

Economists can’t tell you what entitlements Maori own. That is a matter for the courts and legislation – perhaps following negotiations between the Treaty partners, assisted by the Waitangi Tribunal. In the case of the foreshore and seabed legislation, which involved issues not unlike water rights, such negotiations (as took place) were done badly. What economists can contribute is an understanding of the property rights.

You might think that since water comes mainly from the sky, nobody can own it. Certainly it makes no sense to spend time discussing who owns the rain that has been drenching us recently. But some rain ends up in the lettuces we eat. By then the water is privately owned; it was privatised somewhere along the way. If we can clarify where that happens, we might expect the water could then be used more efficiently.

Ownership rights are very complicated. Suppose you have a picture. You can sell it, you can rent it out, you can lend it without charge, you can charge for its image and so on. There are also many possible rights to water. Even if it ultimately runs to the sea, there are opportunities to use it, many of which may be charged for.

Very often water’s use is regulated by resource consents. Although there is no charge for them, they are valuable (so users spend money to acquire the ones they need). For instance, Mighty River Power – the first state-owned company the Government wants to partially privatise – has consents to generate power using Waikato River water.

Consider what would happen if the consents were revoked. In that unlikely event, Mighty River would have to stop producing hydropower, and its sharemarket value would collapse. So the consents have a value. It follows that a partial privatisation involves selling 49% of those valuable consents to private shareholders.

The Maori position – or at least one Maori position – seems to be that as long as the property rights are held by the community, Maori are happy to leave them there. But as soon as they are privatised they demand their Treaty rights be recognised and they get a share of the proceeds.

This approach is independent of what those (yet to be decided) rights are. Intentionally or otherwise, the Government has opened a Pandora’s box of water rights, which should keep the lawyers busy for a long time.

Following the release of all the troubles, Pandora found Hope at the bottom of the box. An economist might expect to find efficiency gains there, but they are small beside the political and legal issues, if the travails of the foreshore and seabed are any indication. Let us hope that the freshwater dispute will be settled with less misunderstanding, acrimony and political fallout than riddled the last comparable one. Any resolution will involve more than chutzpah.

The Role of the Environment in History

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

Science Express: 2 August, 2012; Te Papa Tongarewa.

I am writing a history of New Zealand from an economic perspective. It’s about two thirds complete – up to the 1970s, with 250,000 words of text – that is already about three conventionally sized books. Tonight I am going to talk about one aspect of the book – the way that the environment is an integral part of New Zealand’s history.

This is not the same thing as a history of the environment. What I am arguing this evening is that a conventional history which neglects the impact of the environment omits a critical dimension of the story of New Zealand, just as – and this is the main theme of the book – a neglect of the economy gives a limited and distorted account of our development.

You may ask why an economist should be paying attention to the environment. Economics, if you understand it in any depth, is founded on the laws of thermodynamics; there is a sense in which economic history is equally dependent on the environment. Tonight I am going to illustrate the dependency with – mainly – nineteenth century examples. So I am not particularly focused  in the book or tonight, on the future. We have numerous expert and confident futurologists, for it is easier to make predictions than it is to understand the past. (Although making correct predictions may be harder – few futurologists get it right in retrospect, as history shows.)

The book starts off 600 million years ago, before New Zealand existed in any form. (Our oldest rocks are 510 million years old.) New Zealand – or more precisely the continent Zealandia, most of which is under the sea – is the erosion from the Gondwanaland craton which sedimented off the east coast of Australia. About 85 million years ago it unzipped and began drifting east, opening up the Tasman. Because the crust was being stretched, the continent began spreading out and sinking. It could have ended up under the sea for ever, but about 23 million years ago the Pacific tectonic plate began expanding, smashed into the Austro-Indian plate, driving up the land we know as New Zealand. Being on the plate boundary explains why the country is a long straggly one, why we have rough mountain chains and why we have earthquakes. Big shocks can be a bloody nuisance, but it well to remember that were there not the forces that create them, there would be no New Zealand at all.

A consequence of our geology is that, aside from coal and hydrocarbons, New Zealand has few commercially interesting minerals. Generally its soils are also poor quality and thin (thanks to the ravages of the ice ages and volcanic eruptions), lacking the nutritive minerals and the physical properties which make them good for farming. When our European forefathers first arrived, they saw lush bush and assumed that meant fertile soils, not realising that over the millennia the vegetation had evolved to cope with the soil deficiencies.

It often took many times the cost of the land purchase to make it suitable for farming. This is nicely illustrated in the early part of the twentieth century when there was no growth in farm productivity. A farmer opening up new land would get a reasonable crop for up to four years, exhaust the soils and then struggle on, although he might not notice because those first years involved the hard grind of establishing the farm. It is not until the mid-1920s when farmers began spreading phosphates, that farm productivity took off. When they stopped using fertilizer – in the 1930s because they were broke, in the war years when the phosphates were diverted to explosives – productivity fell.

Exhausting the soils and mining phosphates – even overseas – are  ultimately unsustainable activities. Political economists call it “the quarry”. New Zealand histories tend to play down the significance of quarrying activity which dominated the  economic activity of the first Europeans; instead they give the impression that the European settlement was sustained by farming from the beginning.

However the first Europeans quarried seals, whales, fish, timber, kauri gum and gold. The initial prosperity of Wellington depended upon the whales that came through the Strait; within a decade of settlement they became almost extinct. Fortunately the whaling sustained the settlement until the wool cheques came in from the Wairarapa.

Other towns were sustained by gold, – Dunedin, Auckland, even Christchurch which prospered from supplying the Victorian gold fields (as did Wellington). Another unsustainable activity was warfare. There is much about the battles and the politics in our conventional histories, but few observe that Wellington in the 1840s and Auckland in the 1860s were military camps. Local farmers supplied the quartermasters as they had the goldfields.

After the quarrying phase the economies of the southern towns became based on wool. Auckland’s was not. In the nineteenth century, the top half of the North Island suffered the consequences of events 1650 years earlier in 233CE or so, when the Taupo volcano had its last major super volcanic eruption. The ash which spread to the north and west was deficient in trace minerals, especially cobalt and selenium. Stock which grazed on it wasted from bush sickness. Eventually scientists identified the soil deficiencies and today the missing minerals are added to livestock’s diets.

After the volcanic explosion there was a great lake in the Waikato river basin where the water broke out of the caldera – Lake Taupo – and found its way to the sea. The swamp meant footrot for sheep. It was not until the Waikato railways were established in the early twentieth century that dairying could take off. Cows are not prone to footrot but their produce – butter and cheese – needs heavy transport.

The consequence for the city of Auckland was it remained a port servicing quarrying activities – gold, timber, kauri gum – until a generation after the southern towns. Moreover Coromandel gold was in hard rock, not alluvial which can be panned by individual miners. Hardrock gold requires substantial investment in underground mines and rock-crushing batteries. The risky capital to fund the enterprises led to the development of an Auckland business community built round a share market. Other centre had smaller ones,  but without the same need to raise capital they were neither as vigorous nor as vulgar as Auckland’s. Thus was laid the foundations of today’s Auckland’s business predominance.

Not only did the Taupo volcano cleave the settler economy in two – south and north of the lake – but it also had a major impact on Maori economic development. In a period when the nation’s economic thrust was growing wool, the majority of Maori lived in the sheepless areas. North of Taupo there were 7 percent of the sheep and 60 percent of the Maori (compared to 20 percent of the settlers). It is true Maori had lost a lot of land, but they retained much – on some measures more per capita than the settlers – enough to develop a viable sheep industry. We know this because Maori sheep flocks south of Taupo were comparable – relative to their population – with settler flocks.

So Maori economic development was located in the wrong places. By the time economic activity moved north to dairying early in the twentieth century Maori were too impoverished to go into dairy farming which required greater investment than sheep farming.

The book gives considerable attention to the Maori economy. It argues that when the proto-Maori first arrived they quarried the environment just like the Europeans did. We cannot be sure what led to the extinction of the moa, but I would hazard Maori hunting was important. Archaeologists know from the middens that early Maori fished out some species, and we know the seal line – where the seals were – steadily retreated south during their first  five centuries.

It is broadly true that Maori were living in a sustainable balance with the environment just before the Europeans arrived. For the politically correct it is inconceivable that their actions could have led to the extinction of species. What they forgot is that the proto-Maori, who arrived 700 hundred plus years ago came from a tropical environment and would have made environmental blunders because of their ignorance too. But there were fewer of them; their environmental destruction was not as great.

But in their first five hundred years they developed a sustainable lifestyle. We shall have to learn from that example although it is much harder in a globalised economy – and we have less time to do it.

Fairness and Community

This entry was posted in Distributional Economics, Political Economy & History, Regulation & Taxation, Social Policy on by .

Presentation to ‘Spirited Conversations’, Nelson, July 25, 2012.

At a public meeting of the Tax Working Group, whose recommendations were the basis of the 2010 tax changes when GST was raised to the benefit of those on higher incomes, a member of the public raised the question of the role of fairness in their thinking. Perhaps he was wondering about a capital gains tax or about the high marginal tax rates faced by the poor – far higher than those on the rich which were worrying the TWG. Perhaps he was wondering about the increased inequality that the TWG members, so concerned with taxes on their own class, were ignoring. Whatever, a member of the group replied that it was most unfair that some similar investments were taxed at different rates.

Hardly what the questioner meant, but nicely illustrating the importance of ‘fairness’ in New Zealand’s public rhetoric. Yet for all the references, does the notion loom large in public policy? Every day someone sensitive to the issues of equity and inequality meets examples where their concerns are breached by those who, at best, pay lip service to the notions or, more frequently, ignore them altogether.

The notion of fairness is not easy, and we tend to use it casually. We have an inherent notion of justice, but its application evolves through time. A couple of generations ago we treated women more differently from men than we do today. We probably think today that the older treatment was unfair to women (and to some men too). But in both eras we were trying to be fair.

One could provide a long – and perhaps boring – account of what we might mean by fairness and justice. But instead, let me give the approach that I use. It is due to the twentieth century philosopher John Rawls who proposed a criterion based on decisions being taken behind a veil of ignorance.

A simple example – and one I have applied a lot – is that suppose we are thinking about a gender issue. Behind a veil of ignorance I would not know whether I was a man or a women and I try to choose a resolution which seems acceptable to me not knowing which I am.

As an egalitarian I do not demand exact equality and am willing to tolerate a lot of income differences in society, because I know they are but one dimension of the totality of social and economic diversity. If I have to choose between an income of $500 a week and $550 a week, I would choose the larger amount. But if I was on the lower amount I would not get particulalry indignant. There will be other differences which mean the comparison is not exact; the higher income may be associated with longer hours or additional stress. However when it comes to a big difference, say between $500 to $500,000 a week, I get uneasy.

Rawls argued that any differences – of income, say – are acceptable if they make those at the bottom judge themselves better off as a consequence. That would mean that an informed person at the bottom would agree to the high incomes at the top, so that capitalism – say – may generate acceptable income inequalities because the initiatives of those who are well remunerated lift the standard of wellbeing of those at the bottom. So they may not begrudge the wealth of Peter Jackson, say, for it reflects the pleasure his films have given to so many others; more subtly the wealth of Stephen Tindal is a consequence of his Warehouse chain providing many products to New Zealanders at lower prices and in greater variety than before.

But the acceptable difference principle is not used extensively in our public policy deliberations. I am not aware of the Tax Working Group consulting those at the bottom as to whether we should give those at the top a reduction in the taxes they pay.

The Rawlsian notion of fairness requires empathy, that, is the capacity to recognize and, to some extent, share another’s situation, feelings, and motives. It is of course, to be done with humility – this man is never going to fully understand what it is to be a woman – but without it we cannot effectively operate from behind the veil of ignorance. The consequence of empathy is that a person is a member of a community. This membership is not instrumental whereby we favour a community because it enables us attain our individualistic goals, and would dump it if a better option came along. Rather community membership reflects belonging and having a commitment to the community.

Rawls’s approach to justice is not as revolutionary as it might seem. It developed from Immanuel Kant, whose ‘categorical imperative’ was to act as if what you do was a universal rule. That itself comes from the biblical injunction – the golden rule – to do unto others what you would have them do unto you. Closer to home – in time and place – the First Labour government established the welfare state with the principle that the first call on the resources of the economy was for the young, the sick and the elderly. They called it “Applied Christianity”.

Clearly there are a number of ways to define fairness and it is not obvious which notion we should use. Or which we actually use. But we need to avoid ‘fairness’ as a fossilised term whose meaning is long forgotten – as when we say ‘goodbye’ which once meant ‘god be with you’.

Eminent American historian David Hackett Fischer was so struck by the importance of fairness in our public rhetoric when he visited in 1994 that he wrote a book, Fairness and Freedom: A History of Two Open Societies, contrasting New Zealand with the United States, where the stress is on “freedom”. Here are two open settler societies which ought to have much in common but which seem to diverge on a crucial matter of public priorities.

His answer is provided in the introduction. Fischer uses the word-count facility in Google’s million book corpus to show that “liberty” was frequently used in the period up to about 1825, while “fairness” only becomes important after then. It would appear that America, founded in the earlier period, latched onto freedom, while New Zealand, founded later, was more influenced by fairness. Apparently each notion has persisted in the political culture for generations.

Liberty (or freedom) is much less about community than justice (or fairness) is. It is a notion based on the individual. Since the obligations of a community may well limit the individual the tension between freedom and fairness is central to living in a modern society. To what extent am I an individual; to what extent do I belong to a community?

It is well to remember that in the medieval and early modern societies community obligations could be oppressive. One could be fined for not going to church the state said you must. More serious breaches could lead to being burnt at the stake.

Given the central role of religion, the liberty of the early modern era centred on the freedom to follow one’s own religious conscience. Over the centuries the notion has widened to include human rights and the freedom to contract. Even so, the notion of religious liberty is still there, popping up in surprising ways; almost half the citizens of the US categorise themselves as “Christians” rather than Americans.

Of course not all liberty issues were resolved by the nineteenth century when its importance in the corpus diminishes and the significance of fairness rose. But there had been good progress in liberty and rights in Britain, whence much New Zealand thinking came. Te Tiriti o Waitangi guaranteed to Maori the rights of British subjects. Although they were not as extensive as they are today, they were thought sufficiently important to be incorporated in the treaty.

A number of reviewers, misunderstanding Fischer, have suggested his book indicated that New Zealand was an exception. While it apparently gives a balanced account of the two countries’ histories, it is actually a plea to Americans from a Boston liberal to give greater weight to fairness in public life. It is the US which is the exception. A recent Pew Research Centre survey of five countries found Britain, France, Germany and Spain all gave it greater weight than the Americans – just like us.

This might be interpreted to suggest that America’s public values are a fossil from the eighteenth century, whereas Western Europe continued to evolve past liberty to incorporate fairness in the public’s thinking. If so, the American right’s insistence on liberty as the direction of the future is rather a redirection to the past. Of course, liberties are important – authoritarian regimes need to be replaced by systems which respect individuals, giving them the human rights we take for granted. But if they are necessary they are not sufficient. We live in communities which we want to regulate by fairness.

Market mechanisms operate on the basis of individuality and in doing so they can undermine the community, as the development of New Zealand since the 1980s well illustrates. Much of Fischer’s account of New Zealand reflects the country before the Rogernomics Revolution rather than the country as it is today. He seems to have been misled by the nostalgia of New Zealanders and the public rhetoric which is still couched in the language of fairness even if equity is no longer as central to public practice. Today those involved in public policy do not have the once normal distaste for severe inequality.

Why did this happen? The American right points to the inevitability of liberty as the destination of humanity. Certainly there is a strong element of this in today’s New Zealand right which was not there in the 1970s. The Burkean tradition in the New Zealand political right represented – although not first expressed – by Harry Atkinson continues through to at least Jim Bolger. But there has never been anyone who has articulated a distinctive New Zealand version.

The case for market freedom, aside from historical determinism, is that increasing complexity has meant that the paternalistic state could no longer directly regulate as much of life as it had. That meant social change, much of which was destructive of traditional communities. In any case communities evolve more slowly than the external shocks which disturb them. It seems likely that any policy responding to the challenges posed in the 1980s would have had to break some of the tight linkages (say in remuneration rates), thereby disrupting traditional notions of fairness. However that does not explain why public policy concerns about equity were increasingly abandoned even though initially the rhetoric was retained.

There are at least two reasons for this failure. The first is that there were few experts on the impact of tax and scoial security on inequality although everyone has ill-informed opinions. Since 1984 those experts have been excluded from the policy process, which has meant the most anti-egalitarian policies could be introduced without anyone seriously challenging them. Some Labour politicians genuinely thought they were being fair while they steadily retreated from their egalitarian traditions. Sometimes the most ludicrous arguments were advanced to justify patently unfair policies, perhaps no more so than during National’s attempt to privatise the public health system in the early 1990s. For instance, some Maori were convinced that the privatisation of the health system would improve Maori health; yeah right.

The second reason was that the insiders – those who had not been excluded – were increasingly influenced by American thinking, even when it was not particularly relevant to New Zealand. The thinking is, of course, an idealised account of America but then it is hard for a New Zealand historian not to idealise our history without going to the other extreme.

There are areas of human life where we remain committed to ‘fairness’ – more or less – such as in gender and race relations. But notions of economic fairness are drifting off the practical public agenda while, perhaps, remaining there only in the rhetoric. When was fairness last a driver of change in distributional policy (except in the grumble that it was not fair the rich paid so much tax)? Hardly anyone mentions that we have not raised the real level of social security benefits since they were cut in 1991, over twenty years ago. Is it fair that beneficiaries dont share in the nation’s prosperity?

A nice illustration of the transition is the eagerness with which many have seized on the research of the ‘Spirit Level’, which argues that increased economic inequality may reduce the level of health in the community and increase the level of crime. That may well be true but suppose it did not. Would we not still advocate reducing income inequality because we were concerned with the unfairness which currently exists? While there may be an instrumental case for reducing inequality as a means of seeking higher goals, surely fairness in its own right is one of those higher goals .

There is a real sense that much of our public policy is becoming more like that of the US where, for instance, the dispute over Obamacare is in part that individuals with quality health care do not see that their good fortune should be extended to others – although behind the veil of ignorance we should surely conclude that it should be

Soon the generations who remember a New Zealand when there was a strong commitment to egalitarianism will have passed on. Will all that is left be the echoes of fairness in the rhetoric as we become overwhelmed by notions of liberty without community?

How to evolve an alternative? It cannot be a matter of just going back to the past. If we want to reestablish equity as a worthwhile social goal, we will have to do so in a fresh way, for today’s New Zealand society is more market-driven than it was once.

The first thing is we need to affirm – in public and loudly and frequently – is that fairness is a crucial element of New Zealand’s social goals. The notion of fairness being promoted should be a community one, not the individualistic one of the five-year old who throws a tantrum with “it’s not fair” when the child means “I don’t like it”.

Nor should fairness be about the politics of envy, which says people should not be better off than average. My reading of the New Zealand tradition is that we were much more concerned about providing a decent minimum for those at the bottom than decrying those at the top. Certainly everybody, including the rich, should do their share in supporting those at the bottom. But we need to avoid the divisive politics of envy in which parts of the community are pitched against one another.

The rich could help by being a little more humble, rather than pretending that their wealth made then more worthy than the rest of the community. There is a considerable element of luck in any of our personal achievements. It would be helpful if this humility meant less dependence upon conspicuous consumption – including vanity publications praising the rich. That sort of thing goes on even down into the middle incomes with their SUVs and bigger houses. You can help by ignoring the flaunting of wealth, while respecting those who make large contributions to society relative to their means. Perhaps TV should read the parable of the widow’s mite once a week or illustrate it much more often. Many of the rich are generous in supporting public activities; while I am grateful for that I cant help observing that the rich were just as generous before 1984 but less public with their private charity.

When you advocate fairness do not make it one dimensional say, by paying attention only to gender or ethnicity or whatever. Fairness has many dimensions. Do not unintelligently recruit another dimension – say income inequality – to justify your chosen concern. It is true that an individual Maori is more likely to be in poverty than a non-Maori, but it is also true that there are more non-Maori in poverty – simply because there are more of them. The ignored Pakeha poor – who outnumber the Maori by more than two to one – have showed remarkable restraint; I would greatly regret that the exclusive focussing on the Maori poor turns the Pakeha poor against their brown neighbours, which the politics of envy encourages.

Sure, you may put your effort into a single tile of the mosaic of unfair treatment – all of us have only so much energy – but acknowledge the entire lattice. Best wishes with your effort, and on behalf of men and women of goodwill, I say thankyou for doing it.

So the first thing to get back on the public policy agenda is a fairness which celebrates and is committed to community. But it has to be an empathetic one, not some narrow self-interested claim that fairness is what makes you better off. (And of course to succeed you must live fairness in your private life too.)

Before finishing defining fairness, we need to think about what is the relevant community. We typically belong to a set of communities. One will be our family and close friends. A wider one may be the neighbourhood or colleagues. Some will belong to an electronic community – like Facebook, heaven help you. And there is also your national community (and you may also feel a community with the whole of humankind). While they go from small to big they may not quite nest inside one another. Some of your family will live offshore, few will live in your neighbourhood. That is a big change from two hundred years ago.

I am going to focus my remaining remarks on the nationwide community, although there is much you can do in your smaller ones. I have only time to cover the welfare state and taxation. There are of course other institutions – such as symbols and the environment – which bring us together as a nation and contribute to the community that we are.

Let’s begin with our public health system which is universal and free. Of course it is constrained by limited resources and there has to be prioritisation. But the primary principle for eligibility of treatment is medical need; neither ability-to-pay nor privileged status are relevant factors. Certainly we have a private system alongside where those with the ability-to-pay can obtain treatment. We worry it could undermine the universality and priorities of the public health system – we should worry. But as long as we can keep it progressing and staff it with people who are committed to its principles the public health system should survive as a key community institution.

The biggest attempt to destroy it was the proposed privatisation of health in the early 1990s. That failed for three reasons. First, those pursuing the destruction were incompetent, hardly knowing anything about how a health system works. Second, they chose a variation on the American health system, which is almost universally acknowledged as the most inefficient and unfair system in the rich world. But third, the community rose up, defended its public health system and rejected a privatised system and the unfairness it would have created.

You would have thought the government would have learned, but twenty years later, the Accident Compensation system was put under a similar attack. Perhaps a new minister wanted to redisorganise it, as it is common for a new minister. That was not the whole story for the health system redisorganisation in the early 1990s. We know some of the key advocates of change were neo-liberals who wanted to reduce, or eliminate, the significance of government; that an effective public health system was an anathema to them. So privatisation was a part of their agenda. Possibly what has been happening to ACC is another ill-thought out preparation for privatisation.

Another area critical to our sense of community and fairness is the provision for the aged. Again the privatisation forces were beaten back, this time in 1998. New Zealand First had proposed a second tier community superannuation scheme not unlike that enacted by the Labour government in 1974 or the current Kiwisaver Scheme. However, by the time it went to a referendum it had been transformed into the scheme proposed by Roger Douglas in his neo-liberal tract Unfinished Business, the foundation policy document of ACT. The public rose up in wrath and soundly rejected the ACT scheme by a huge majority.

New Zealand Super is undoubtedly an integral part of the New Zealand community institutions. But we should not allow it to fossilise and fail to adapt to changing circumstances. I am an advocate for raising in small steps the age of eligibility. There is nothing sacred about the current age of 65. Forty years ago Bill Sutch wondered whether the eligibility should soon be raised to 67. Since then the life expectation at 65 has risen by almost another five years; how do we respond to that?

There is an important issue here that I need to touch on and to which I shall return. Modernisation and responding to change is always difficult, but today we have an additional problem that we do not trust those proposing change. Too often they have a hidden agenda of privatisation and the abandonment of fairness. Our distrust is perfectly understandable given their record over the last quarter of a century. So how are we to adapt? It depends upon having people in charge who are committed to fairness.

The third area which the first Labour government prioritised in its welfare state was children. We continue to pay lip service to that objective, but as a myriad of reports – usually including international comparisons – tell us, we are not treating our children well, despite it being a whole community who brings up a child.

I have been observing child policy for five decades and we persist in giving a low priority to children’s needs. Why we continue to fail is another presentation but briefly it is the same story of paying lip service to fairness and community, but ignoring it in practice. That applies to education too (that’s also another presentation).

To repeat my earlier caution; times change and so do the needs a social security system meets. Again we need to avoid fossilising it to something which may have worked reasonably well long ago, but no longer does. To be fair, to Welfare Working Group chaired by Paula Rebstock recognised that change was necessary. But no one trusted its deliberations because it seemed to give a greater weight to neo-liberal analysis; they see a repeat of 1991 when benefits rates and entitlements were savagely cut. Of course there is a need to adapt and progress the system of income maintenance but if the government keeps putting neo-liberals on its advice committees it has to accept that the advice will be resisted by the public, even when it makes sense, especially if success is couched in terms of cost savings and advantaging the well-off relative to the rest of the community.

The real level of basic welfare benefit has not been raised since 1991. In that time New Zealand superannuation has gone up a third more than the rate for a single unemployed 25-year old. If it had kept up with the elderly, the level would be around an extra $70 a week for the young adult. Is that fair? Some of the gap may be covered in various supplements but even they are indicative of failure compared to the simple and fair system we once had, much commended by the 1972 Royal Commission on Social Security.

There are numerous reasons why we are so mean towards those at the bottom of society. Certainly there are malingerers who need to be pushed. Certainly the system traps some people into dependency on benefits – which is a way of thinking about the conclusions of the Rebstock committee, if not its solutions to resolve the failure. But underpinning these is the simple matter that the priority of distributional policy in recent decades has been keeping taxation down on the rich; that means strangling the state of the funds it needs for contributing to a fair society. As long as we drive our tax system with the objective of what Fischer calls “freedom” – and I would call prioritising individuality over community – we ignore issues of fairness and justice. Those at the bottom will suffer, while as the Spirit Level warns us, the overall effect may be poorer health and greater criminality as well as a loss of life opportunity for those who are in the margins of society.

These issues are not easy. How does one combine individual freedom with community concern and a commitment to some sort of nationhood, especially in an increasingly globalised world? Are we up to the challenge or, as the last quarter of a century suggests, will we fail to engage and slowly succumb to a neoliberal vision of a world of individuals without communities, a world which Thomas Hobbes described as “solitary, poor, nasty, brutish, and short”?

Blast from the Future

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

Listener: 21 July, 2012.

Fortunately, the recently instituted deep-earth monitoring observed the magma slowly working its way to the surface. Breaking out, it pushed up a cone not unlike its twin, Rangitoto (some 600 years older), erupting to fill the skies with ash, bombs, rocks and poisonous gases. Given the warning, few lives were lost. The primary eruption happened in the school holidays; children not already out of town were evacuated to school-based centres by teachers giving up their time off. But the physical destruction was great, not just from the cone and lava runs, but from the ash and debris so thickly layered on roofs that houses and buildings collapsed under its weight. Few had realised just how vital the transport links through the Auckland isthmus were to the country as a whole. External supplies were maintained by diverting ships to Tauranga and planes to Christchurch.

Unprepared Auckland-based firms disrupted their branches when their centralised computing systems failed. Other than producing stunning pictures of the volcano and the destruction it wrought, the media (which had been largely based in Auckland) could barely cope with the chaos. Businesses and people moved to Hamilton and Tauranga and elsewhere in New Zealand, but the long-term shift was to Sydney and Melbourne. Although the rest of New Zealand welcomed the extra jobs, it found itself struggling because a smaller, less-productive Auckland, less able to reap economies of agglomeration, meant there were fewer businesses there to supply and service. Farmers in the north welcomed the mineral-rich ash that boosted their pasture’s productivity. House prices rose as people who lost Auckland homes scrambled for shelter. Real estate agents said the rise showed the housing market was in recovery.

The building industry promised economic growth and jobs from their extra work. (A greenie grumbled that he’d rather have had no volcano and gone surfing.) But because of the destruction of Auckland capital, any growth – for the rebuild was repeatedly delayed – was from a lower base and no one really felt better off except those who profited from others’ misfortunes. A Treasury wag suggested that if such popular miscalculations were correct, New Zealand could get itself to the top of the OECD by nuking Wellington; she promptly left for a job in Japan. The triennial redisorganisation of government departments meant there was no recollection of any lessons from the Canterbury earthquakes. The increasingly casual treatment of Archives New Zealand found the documents in a mess. The report in which officials, fearful of another great Wellington earthquake (the last was in 1855), had tried to bring together the Canterbury lessons had been scrapped when it was realised that it would be very critical of politicians.

The dominant individualistic ideology, without any notion of community, could not work out how to harness the collective concerns of the nation. People were willing to make common sacrifices for the public good. But the leadership, which had been more concerned with dollars and cents than nation-building and public well-being, failed to meet their aspirations, destroying community and commitment with mediocrity rather than inspiration. Instead of harnessing local enthusiasm, initiatives and knowledge, central government imposed top-down controls over the rebuilding, repealing just about every democratic right – except the ancient constitutional one to grumble, of which New Zealanders readily availed themselves. The parliamentary opposition, with largely the same concerns and competencies as the Government, supported it; the Auckland Council was too divided to have any effect.  Aucklanders demanded that the rest of the country pay for the rebuild by cutting Government spending, rather than by a levy on income tax to which they would also contribute. The Cabinet minute was signed off as a true and accurate record of the discussion, but nobody could make sense of it. As a hard-hatted Auckland engineer who had moved north to escape the Canterbury earthquake said through his breathing mask, “just like the last time”.

Lifting the Age Of Retirement

This entry was posted in Listener, Retirement & Savings, Social Policy on by .

Listener: 7 July 7, 2012.

I am appalled by the Prime Minister’s deferral of consideration of the age of entitlement for New Zealand Superannuation. Many think it should be raised from 65 years. Key said he was more focused on immediate issues than on longer-term ones. That is an appropriate attitude for a money-market dealer, who locks up each night to start afresh in the morning. It is not appropriate for a prime minister. One of the functions of government is to provide a long-term context for its people. They don’t want to wake up one morning to learn that the age of retirement has suddenly become a matter of focus, and will be ratcheted up the day after tomorrow. (Which is sort of happening in Europe.)

Many want to plan for retirement. (We owe something to the younger generations, whose taxes currently pay the state retirement pension, who recognise the current scheme is unsustainable and do not expect to get a state pension when they retire.) The private sector needs greater certainty so it can offer good retirement plans and annuities. Key was responding to a report by the Financial Services Council, the lobby group for the sector. Given the policy confusion, should we establish a royal commission on retirement? If we give it some urgency – yes, Prime Minister, it is a matter of immediate significance – the commission could be functioning by September and report back within a year. Its recommendations would form the basis for public discussion in 2014, and be part of the party election manifestos at the end of the year.

Most parties would promise something close to the royal commission’s conclusions. They will want to differentiate their offerings, but given the commission’s sensitivity to the national mood, it will not be by much. One party may reject the findings completely, but it would be targeting a niche constituency. What might a royal commission conclude? It would be its own master, so anything I say has to be conjecture. But I wouldn’t be surprised if it recommended raising the age of entitlement by three months in April 2015, say, and by three months in succeeding years. That would mean the age of eligibility would be 67 in 2022. Should we stop there? In an earlier column I argued that we should set the age of eligibility at the point where the expectation of life is a further 15 years (Listener, August 12, 2006). That expectancy is similar to the level for earlier retirement schemes.

Since then the elderly have lived longer. A 70-year-old today can expect to live another 15 years on average. In this approach that age of entitlement would be reached in 2042 (although probably longevity will have risen even further by then). No doubt a royal commission would consider many related matters. We need to review how well the current arrangements are looking after those who have to retire before they reach the entitlement age. (Special provisions were put in place in 1993, when the age was phased up from 60 to 65.) We also need to pay more attention to the health needs of the elderly. A woman over the age of 85 uses about six times as much public health care as average. I favour a lower or later public retirement provision for the younger elderly if it leaves more funding for the real oldies. I grieve for the young elderly (and 50-year-olds) who are lovingly struggling with their failing ninety-plus-year-old parents.

Establishing a royal commission on retirement has to be a cross-party decision, with the opposition parties consulted about its membership and terms of reference. That also puts a constraint on the Opposition. It would be very easy to embarrass the Prime Minister given the unfortunate position he has taken (although he has indicated he could change his mind). They need to be statesman-like as he has to be by setting up a commission. Our future retirement provision is too important to be left to petty politicians.

League Tables Will Create a Stalinist Education System?

This entry was posted in Education on by .

Sunday Star Times: 24 June, 2012

Keywords: Education;

I was shown over a model Berlin dairy farm is 1990 when it was still in a Communist regime. They proudly displayed a cow which produced twice as much milk as the New Zealand average. Our farmers were unimpressed. Shoveling enough grain down the throat could get very high gross output, but the New Zealand dairy farmer aims for the maximum output from the available inputs.

Market economies focus on value added while the communist ones – we called them ‘Stalinist’ – were more concerned with gross output, which is one reason why their economies did not perform as well.

The proposal to publish league tables of school achievement is as Stalinist because it, too, focuses on gross output. Children are not equal in educational attainment when they begin a school. One who is bright with supportive parents may find it easy to get up to a high scholarly achievement level compared to someone who is dyslexic, who missed out some schooling because of poor health, and comes from a home (or homes) with a poor learning environment. Yet the Stalinists treat the two as equal, to be measured by their NCEA attainment. In truth a school may add a lot more value by giving a child from a bookless home a love of reading than by enabling the child of a professor to win a scholarship.

Stalinist production could lead to absurdities. Asked to produce shoes, one factory produced its quota but only for left feet, since it was easier than having to change the lasts over for the right foot. ‘Ah’, said the planners, ‘produce pairs’. The factory did, but all the pairs were of the same size.

Soviet stores were stacked with consumer goods produced to plan, exceeding quota, but which no-one wanted.

The same applies to a Stalinist school system. Set the goals and, as Gilling’s law says, the scoring system determines the way the game is played. Parents will be misled by the Stalinist imprimatur of an otherwise meaningless indicator. They dont really want a school with high gross achievement; they want one that gives the best deal for their child.

External grades do not tell them much, its improvements in net achievement which matter; how the school adds value to their child who may be struggling but has potential.

More of the boys from my intermediate school class made jail than university. Today probably more of the girls would have had teenage pregnancies. I dont want the inmates and teenage mothers to have higher educational qualifications, I want fewer of them. Scoring schools by a gross output target of attainment will not do much for my goal, even though it is critical to the sort of society we shall have. It may not do much for most students either.

A teacher at a private school told me their strategy was to put a lot of effort into their top students to get the scholarships and other marks of public acclaim, and to ignore the needs of the rest of the students. Is that what we want?

We were not allowed to see the milking sheds on the farm, they said, for hygiene reasons (I am told this is nonsensical). But for Barry, who sold milking equipment throughout the world, the suck, suck, suck of the milking machines was as seductive as the Sirens were to Ulysses. He thrust his camera into my hands, leapt over the fence and sprinted towards the objects of his desire. He was escorted back. I asked him about what he saw: ‘Probably donated to the farm by Kaiser Wilhelm’.

The country would greatly suffer if our dairy industry were focused on gross output, and ignored value added. It would suffer even more greatly were our education system also to be organised on Stalinist principles.

Chartering Through the Long Recession

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

Listener: 23 June, 2012

Keywords: Education; Macroeconomics & Money;

Naomi Klein’s The Shock Doctrine opens with a description of the American neo-liberals using Cyclone Katrina’s devastation of New Orleans as a chance to replace the city’s public school system with charter schools. This is but one of the book’s examples of their seizing opportunities following civilian turmoil to pursue their political agenda. Klein would not be surprised that our Act Party, with its tenuous hold on parliamentary representation, has used its leverage in a way that United Future has not. (I have no expertise on charter schools, but I am struck that the notion was developed in the entirely different educational environment of the US. A colonial cringe dominates so much of our policy thinking.)

Seizing the occasion is not peculiar to the right; Lenin arrived at the Finland Station in Petrograd/ St Petersburg just as the tsarist regime in Russia collapsed. Nor does opportunism rule out some very disreputable alliances. Chicago school economists worked for the unsavoury Pinochet regime in Chile; the Soviet Union did a nasty deal with Nazi Germany at the expense of the Polish people. Yet sometimes opportunists are unable to pursue their agenda because it is wrecked by the occasion. We are in the greatest economic crisis since the Great Depression. The global economy is already in its fifth year of stagnation, and there is little sign of its end. But a neo-liberal response to the crisis hardly exists – I don’t think charter schools are going to resolve it.

So, right-wing opportunism is not happening in New Zealand macroeconomic policy. We are not getting a lot of neo-liberal input into the US economic debate, either. If we were, that country’s colonial imitators would be trotting out the same policies here in New Zealand, oblivious that a peripheral economy like ours has a quite different place in the global economic system from a core economy like the US. Of course, every one is different, but it is instructive that Australia, Canada and New Zealand have not had the same monetary and fiscal turmoil as much of the US and Europe. (Even so, we are dependent on their economies; if they fail, we struggle, too.)

We were affected differently because we have a different banking system from the international banks at the centre of the global financial crisis – ours are more like those in Oklahoma than New York. I once discussed this with a retired governor of the Canadian central bank; he agreed, adding that we were also lucky. (Luck is the single most powerful historical explanation.) But we should closely follow international economic debate. It has many fine economists grappling with the issues, although those who developed the neo-liberal analysis have left the defence of their side of the argument to politicians and journalists.

Which is disappointing, because the best way to understand a problem is to engage with good minds challenging your understanding. We are past the point of asking whether a commentator was surprised by the global financial crisis. The economists leading the international debate were not, even if they could not predict exactly when and how it would happen. Neo-liberals were surprised that it happened and still seem in a state of shock,. The questions now to ask are: what have we learnt from the crisis; how have we adapted our analytic framework in the light of events; what remains valid, what has to be discarded, what should be reconstructed? Every economist genuinely in the debate is struggling with these questions. Anyone who is certain of the answers has not understood the problems. That is also true in New Zealand.

The underlying framework will be probably the same but its application here will have to be adapted to our particular circumstances. And here, as elsewhere, there is hardly a squeak from the neo-liberals who were so certain they had it right up to the day of the crash. Like the Bourbons, they have learnt nothing and forgotten nothing. Which suggests they won’t be very good at reforming education, either.

Government Budgets: the Ceremony and the Reality

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

Listener: 9 June, 2012.

Keywords: Macroeconomics & Money;

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity

Despite the media extravaganza that still surrounds them, government Budgets are no longer the major economic statement of the year. The Government now has so many opportunities at other times, and its no-surprises approach means much is dribbled to the media in advance. The Budget has also returned to the old approach of being primarily a fiscal statement about what is happening to government revenue and spending. It contains little economic strategy, reflecting the dearth of debate on the economy. On Budget night I was reading WB Yeats’s poem The Second Coming, whose lines open this column.

Let me try to guess the Government’s economic strategy – or part of it. For about 20 years, ministers of finance – from Ruth Richardson to Michael Cullen – ran a Budget surplus (the Government collected more money than it spent) and used it to pay down net core Crown debt. This was not much above 5% of the annual gross domestic product (GDP) at the time of the 2008 election. But the world was going into a long recession, which the new National Government tried to cushion us from by cutting taxes in 2009. That markedly increased the Budget deficit, and the debt rose quickly; it is expected to peak at over 30% of GDP in 2015.

Public debt is not high by international standards. However, the Government thinks it should go no higher, arguing that past ministers of finance reduced government debt to enable us to withstand major external shocks, especially as there may be another one soon. New Zealand’s private external debt is uncomfortably high, so we may not have the public reserves to bail out the private sector next time. Plus the world economy is growing much more slowly and, therefore, so is New Zealand’s. This means public spending has to slow down, too – no easy matter and complicated by National’s political preference for spending less and reducing income tax rates. (Had Labour stayed in office, it would have had to slow spending, too, but perhaps not as much because it is not so predisposed to cut tax rates.)

And so we had the “zero Budget” in which there was a very strong restraint on government spending (plus some fiddling on the revenue side) aimed at reducing the Budget deficit and getting spending on a lower track. That always means someone is worse off – a boon to media trying to hype a boring Budget. Because the focus is on getting the fiscal position into balance, not much attention was given to the growth of the economy. The Budget statement says the economy has been growing recently but at a slower rate than the population.

As you might expect in a long recession, the economy is bumping along a bottom and is likely to keep doing so until the world economy starts expanding – probably some years away. In these circumstances, it seems to me that more attention should be given to redirecting the economy to better-quality consumption and fairer distribution within the constraint of broadly stagnant production.

The Fiscal Strategy Report says a “steady pace of expansion in activity” is expected. The next sentence lists the underpinnings of growth as:

“the rebuilding of Christchurch” (it has been repeatedly delayed; in any case, since when have earthquakes been good for an economy and should we pray for more of them?);

“historically high terms of trade” (wool, log and milk prices are falling sharply);

“and the strength of our key trading partners, including Australia” (the Prime Minister said the New Zealand economy is better off than Australia’s).

“and China” (whose property bubble appears to have burst, so its economy may be on a downer).

There is no mention of the downside of the debt crisis and stagnation in Europe. It is sobering that what happens in the Greek parliament may have more impact on New Zealand’s economic prospects than what happens in ours.

Convention Centres and Public Subsidy

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

Listener: 26 May, 2010.

Keywords: Business & Finance; Governance; Regulation & Taxation;

The row that has erupted over the proposed SkyCity convention centre in Auckland involves gambling, but there are deeper fiscal issues. But this is not a column about gambling, even though a study I was involved with found that pokies were the most damaging of all forms of gambling.

It is argued that New Zealand needs an international convention centre; Auckland is the only centre with the necessary associated facilities. But convention centres run at a loss. The profits go to other facilities, so – it is said – the economy as a whole benefits. If we are going to have a centre, there will have to be subsidies. The ideal solution would be for those who benefit to contribute to its cost, but it is hard to get them to pay, and so – it is argued – there needs to be some sort of public subsidy. (What’s that thing about privatising profits and nationalising losses?)

With the Government struggling to balance its books and a clamour from others demanding public funds, subsidising an international convention centre was not looking attractive. Then SkyCity proposed to Tourism Minister John Key that it would establish one in exchange for being given more pokie machines. That raises an interesting point: there will be a public subsidy but it won’t appear in the public accounts. That was a central problem with the Muldoon era. All sorts of support were given to businesses, and these did go on the books. Not only were there misgivings about whether this breached government protocols, but there were also deep concerns about the danger of corruption.

Corruption is related to the constitutional issue of how much politicians and public servants are accountable to the people. In many less well-governed countries, a major source of corruption is the issuing of licences. Overseas politicians have transferred millions of dollars to their personal bank accounts in the course of handing out licences.

That rarely, if ever, happens in New Zealand. (An exception may be the worry that those who contribute campaign funds to winning parties may get preferential treatment.) The reason is that we have had a record of public vigilance underpinned by parliamentary accountability and backed by a system of law and institutions that enable the monitoring of potentially corrupting transactions. The latest proposed extension is the lobbying bill put forward by Green MP Holly Walker.

There was sufficient concern about the possibilities of corruption under the Muldoon-era regime for there to be a raft of changes in the 1980s intended to prevent the most egregious possibilities. The Government can no longer give secret guarantees as happened with the Think Big energy projects – which ultimately cost taxpayers hundreds of millions of dollars. To have legal effect they must be reported to Parliament, and if they are significant, they appear in the annual Budget as a contingent liability (in one of the most interesting Budget documents). The granting of pokie licences in exchange for a convention centre will not appear in the Budget, although it manifestly involves a transfer of resources from public to private ownership (a privatisation). In contrast, a direct financial subsidy would appear in the Budget. That seems kind of wrong, doesn’t it – that the way a particular deal is structured depends on a quirk in the way the government accounts work?

A more rational procedure might be to auction off the pokie licences and use the proceeds to subsidise the construction of a convention centre. The Auckland casino may be willing to pay top dollar for the licences, but another consortium with a better proposition might get the go-ahead to build and run the place. But why then use the returns from the pokie tendering for the convention centre? Might there be more worthwhile projects, such as extending paid parental leave or whatever you fancy? Then again, why restrict pokie licences at all? Isn’t it to do with the consequences of problem gambling, not only on the welfare of New Zealanders but also on government spending to address the problems? That appears in the Budget as a cost.

Could Auckland Have a Greek Crisis?

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

Submitted to ‘New Zealand Herald’ but mot published.

Keywords: Governance; Macroeconomics & Money;

Could New Zealand have a financial crisis like the current Greek one? Anything is possible but the central government has a formidable series of institutional arrangements to reduce the probability of it happening together with prudently committed ministers of finance. History reminds us of the dangers. In 1939 we were saved from a Greek-type austerity bailout by the oncoming war. In the 1980s the government spent almost  three months of GDP – say $50b (spread over the decade) – unscrambling the financial mess the Muldoon Government had got us into.

The local government story is patchier. Most famously, in 1870 the bankrupt  Southland Province reunited with the Otago Province.  (It had invested too much on transport – railways in those days.) Could that happen again?

Could it happen to the Auckland Council? I have some faith in the quality of its politicians and institutions, but its draft plan for 2012-2022 gives one pause for thought. It talks about a net borrowing of at least $8.4b over the next ten years, with a quarter of Aucklanders’ rates being used to service the resulting interest at the end of the decade. That is getting to Greek proportions.

The Greek problem is their unwillingness to pay taxes; the Auckland problem is that the borrowing will be mainly invested in infrastructure – like roads – and other facilities which do not pay the investor a return, so the council will be asset rich, revenue poor. (Additionally some of the borrowing is to cover consumption spending, justified by the melding together of the disparate legacy councils.)

As a councillor I would be reluctant to adopt such an ambitious plan that depended so heavily on borrowing (It also requires a more generous central government than I think we have). I would only agree to the investment plan if there was a better funding strategy.

I do not see a lot of merit in raising local body rates faster, although that will happen – dramatically – if Auckland has a Greek-type crisis. Instead I would want the plan to go past a discussion of levies on the transport system, into a commitment to them, with the caveat that if motorists do not pay more for their road use, the Council will not commit itself to all the planned developments. Where I would have a revenue discussion is seeking other sources of funding. The one I like is a low-level retail sales tax across the region,  but a working party would look at other imaginative solutions.

Unless Auckland can break out of the narrow funding constraints imposed on its draft plan it is going to miss out on the infrastructure and facilities it deserves. If it borrows to provide them, the certainty is high debt servicing and the possibility is of a Greek-type crisis for Auckland.

Dr Brian Easton prepared an independent report on the financial implications of the Auckland Council Draft Plan for Land Solutions Ltd. http://www.eastonbh.ac.nz/?p=1664

What Are Our Public Priorities?

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

This is the revised version of a paper given to the a public health group in Lower Hutt, and a Presbyterian Church group in Hamilton. It is a development of an earlier paper “What Are Our Economic Priorities?” (http://www.eastonbh.ac.nz/?p=1549) There is an accompanying PowerPoint presentation.

Keywords: History of Ideas, Methodology & Philosophy;

I want to talk about our public priorities. I’m going to differ from the conventional wisdom by arguing we should pay less attention to the growth of material output or (GDP) and more attention to employment, to social coherence and to the quality of life. While that may leave the conventional wisdom uneasy, I want to insist that my approach is within orthodox economic thinking, albeit a little ahead of much of the profession.

Before doing this I need to say a little about the economic context – about the past, the current, and the possible future state of the economy.

The New Zealand economy is in the fifth year of stagnation. There are always those who promise it will soon be over. I am reminded of the wife of an economist who sued for divorce on the basis of the non-consummation of the marriage. She explained that her economist-husband just stood at the end of the bed, beating his chest, and saying things were going to get better; ‘but they never did’.

In fact since 1862 New Zealand has already experienced five great stagnations, long periods – five and more years – when per capita real income did not rise. In all but the Rogernomics Recession of 1984 to 1993, the stagnation was caused by an unfavourable world economy. This is as true for this one, the sixth. I could go through the analysis of why the world economy is in a long stagnation and why it may take another five years before it returns to growth.

However my purpose in drawing attention to it is to ask what is to be done given the prospect of a long stagnation. I am not foolish enough to argue here for policies which will boost New Zealand’s economy – dragging the rest of the world out of recovery behind it. Rather I want to consider whether we should despair if we are in for a period of stagnation.

Note that the principal indicator which is used to assess economic stagnation is per capita GDP in constant prices over time. I am comfortable with its use for that purpose but there has been a tendency to assume that per capita GDP is some measure of well being. As its name ‘Gross National Product’ indicates, GDP is a measure of material production. It is also such an indicator of market incomes that I can use the terms GDP and income interchangeably.

That was not the purpose for which it was designed. Indeed when Simon Kuznets first conceptualised the measure nearly 80 years ago he wrote ‘[t]he welfare of a nation can scarcely be inferred from a measurement of national income’, and economists have held that position ever since. Kuznets was deriving a measure of total market activity, which was important at the time for tracking the Great Depression and employment and unemployment, and that and related purposes of observing the growth of market production of goods and services remain the main use of GDP by economists to this day.

Since there was no alternative measure GDP became equated with the welfare of the population, despite that not being its purpose and despite Kuznet’s warning that it was not. Economists suspected that there might be some sort of correlation and non-economists grabbed the measure because it was all that was available.

(Some think that broadening the definition of GDP may make a difference. Economists explored this about forty years ago with the notion of a Net Economic Welfare. More popular today is the General Progress Index proposed by some non-economists. Both are minor changes within the original GDP paradigm and dont really address the issues with which I am dealing today.)

Almost as an aside the Governor of the Reserve Bank has recently pointed out that the correlation is not a good one, especially in relationship to New Zealand. He drew attention to an OECD study which pooled together twelve measures of what one might judge as contributing to welfare and compared them with per capita GDP. The scatter diagram of it against their Better Life Index shows the 33 OECD economies cluster around a common line with the higher the per capita GDP the higher the index. There is one economy way out of line – New Zealand. Some have concluded that we may be underestimating our GDP by a third or more, but the modest scientific conclusion is that the relationship is not a very good one The OECD ranks New Zealand as fourth on its Better Life Index while it is below twentieth on GDP per capita.

We can get an understanding of why by looking at the components of the index. Here is New Zealand’s ranking out of 33. (I’ve put in Australia because that is such a natural comparison. It ranks second on the index, and fifth in terms of GDP per capita.)

New Zealand      Australia

Environment                           2                                   9

Housing                                    3                                   2

Community                             3                                   6

Governance                              4                                   1

Health                                     4                                   2

Jobs                                         5                                   6

Safety                                      7                                   4

Education                                12                                16

Life Satisfaction                     12                                  6

OECD MIDPOINT                             17

Income                                    25                                14

Work-life balance                    26                                30

OVERALL                              4                                  2

Before everyone gets chauvinistically excited about these results, I caution that there is a lot of judgement in the figures and that quite small differences – well within measurement error – can change rankings substantially. By adding other measures or changing the weightings one can alter where New Zealand is located.

Despite a host of limitations I have shown them to draw two conclusions.

First, where we do well is in areas which GDP does not measure very well at all, a sobering reminder of its limitations. If we take the measures – they are the best we have – we find that on many of them we are in the top half – or even quarter – of the OECD. Where we do really badly is income (which is a kind of direct measure of per capita GDP) and work-life balance which says that we seem to work longer hours than many other countries. (But that does not include time travelling to work whose inclusion might raise our ranking, a reminder of how sensitive the measures are to definitions.)

Second, one needs to be careful not to damage where we do well in order to pursue the increase of GDP. For instance we might well increase GDP per capita by cutting back on health care, but we would not necessarily be any better off. The obsession of a lot of politicians with the goal of increasing GDP may lead to our reducing national wellbeing.

It is an interesting feature of the table that New Zealand tends to do better where the government has more impact. We seem to have weaknesses in the market sector. That does not exempt the government, but it reminds us of the business sector tendency to divert attention from its failures by blaming the government for everything. The government may not be blameless but it is important we recognise its strengths and do not undermine them.

There is a particular danger that if we think per capita GDP is correlated with wellbeing (even though it is not) and if output remains much the same during a long stagnation, we may think there is no increase in wellbeing, or even that it is declining. Yet much of our political rhetoric is based upon the fallacy.

In particular in recent years economists have been evolving a more sophisticated account of what determines wellbeing. The OECD research I have just reported on is one attempt, but a very limited one.

This broadening of our understanding has been possible because of an increasing range of data bases which introduce various measures of how well off we are. In the past economists did not have them. We knew our understanding of the determinants of wellbeing was limited, but lacking the empirical evidence, we were unsure how to modify our theories. Recently accumulated data has enabled some progress.

One approach has been to ask individuals about their wellbeing, with questions like ‘how happy are you?’, or ‘how satisfied are you with your life?’ Individual responses are subjective, but there is evidence that the responses are consistent with the objective evidence. These surveys usually involve thousands of people and have been carried out in many different countries. The conclusions are pretty consistent across cultures; including New Zealand’s.

We can use the responses to identify regularities. For instance, women tend to say they are happier than men, although the difference has been converging over the years. The young are happier than the middle-aged, but after about the age of forty the decline reverses and the elderly are as happy as the young. Being married is, on average, associated with being happier than not being married.

All the results I reported here assume all other things are equal. If you dont do that, you can end up with weird results. A market research firm claimed that widows were happiest. There are not a lot of 40-year-old widows but a lot of elderly ones and the age effect outweighs the marriage effect; dont bump off your husband to make yourself happier, but you are welcome to outlive him.

Economists and government cannot do much about age, gender or marital status, but we claim to be able to influence incomes (and other economic variables). What is the evidence about the impact of incomes on happiness? There are three salient results which require a little care to reconcile.

The first result comes from looking at the data over time. More than 60 years of survey data from America shows no rise in average happiness, despite real incomes more than doubling. The implication is that raising national income does not increase happiness.

The second result comes from looking at the data between countries. It shows that happiness among rich countries does not seem to be much affected by relative income. For instance, New Zealanders are typically happier than Australians even though our income is lower.

However, those in poor countries are on average less happy than those in rich ones. It is not hard to see that an increase in income improves the lives of the desperately poor. But once the basics of food, clothing and shelter are met, it appears that rises in average income do not directly lift wellbeing. This level is well below New Zealand’s standard of living, so the phenomenon does not generally apply to us.

(I take a little comfort here about the sagacity of the founders of economics. Two hundred years ago almost everyone had a low income by today’s standards, so early economists were right to focus on raising incomes to raise wellbeing. Two hundred years later, the connection between material consumption and wellbeing is no longer true at current levels of affluence.)

The third result comes from looking within a country. It shows that those on higher incomes are happier than those on lower incomes. Above a threshold the effect is small; for instance, the married on about half the equivalent income are happier than those who are  not married,. But the income effect is definitely there; the New Zealand research with which I have been involved with finds it too.

I suggest a way of thinking about these results is by using Maslow’s hierarchy of needs. You will recall it has five levels. Bottom to top they are:

1. Physiological needs: Breathing, Food, Water, Sex, Sleep, Homeostasis, Excretion

2. Safety and Security: Personal security, Financial security, Health and well-being, A safety net against accidents/illness and their adverse impacts

3. Love and belonging: Friendship, Intimacy, Family

4. Esteem: Self esteem, Confidence, Achievement, Respect of others, Respect by others

5. Self-actualization:   Morality, Creativity, Spontaneity, Problem solving, Lack of prejudice, Acceptance of facts

(Some times a sixth level of self-transcendence is added.)

Now the economy really contributes only to the first two at the base of the pyramid, physiological and safety needs, although it can indirectly facilitate some which are a bit higher (as when communications make it easier to connect with the extended family).

That suggests that at a certain point the contribution of the economy to needs becomes less effective. That is perhaps what we see in the cross-sectional evidence of how after a certain point a rise in per capita GDP does not seem to increase wellbeing. That does not mean that everybody in countries above the threshold has all those needs met, but apparently the numbers are small enough not to affect the average. (Even so we should address their needs.)

What seems to be happening is that as average incomes rise the curve which relates people within the income distribution shifts. Why does this happen? Perhaps we should stop thinking of income as enabling you to buy things but think of it as indicating what you can buy relative to others – an indicator of your status in society.

In terms of the Maslow’s hierarchy of needs we can see that there could be a relativity effect at the esteem level. Perhaps one has more self-esteem and respect from others if one can purchase more. Perhaps high incomes treated as an indication of social achievement. That seems to be the way we think about these things.

Economists describe this phenomenon by a theory of positional goods, but it comes from an older tradition developed by an American economist and sociologist, Thorstein Veblen, of ‘conspicuous consumption’, where goods and services are acquired mainly for the purpose of displaying income, wealth and power.

You will be aware this is widespread in a modern affluent society. Particular products – homes, cars, clothes, extravagant parties – are used to display the holders’ wealth, and to upgrade their position in society. Underneath this is the notion that’s one social status is perceived largely – or importantly – by one’s income relative to others. It is not that additional income directly generates happiness, but that it contributes to self esteem and social status. Additional income raises ranking in society. But if everyone can buy more, the average ranking does not change, and people dont get collectively happier.

So what is the point of raising incomes since nobody, on average, is any better off? We have an economic system based on each of us seeking to raise our income. On the whole – periods of economic stagnation aside – it succeeds, and yet it does not make us individually happier. That leads to the deep philosophical question of the purpose of it all – I am not going to answer that tonight.

But to progress it, let’s think about the differences between me and my father, who was born about a quarter of a century before I was. It is a matter of record that, on the whole, my income has been higher than my Dad’s. It is a reasonable conjecture, on the basis of the research I have just reported, that I am no happier than Dad. So am I really better off than he was (except I have the better son)?

What strikes me is that despite all his achievements, Dad did not have the opportunity to go to university – he had the ability – and pursue the career for which he was naturally qualified – he would have been a superb general practitioner (as his final career as a psychopaedic nurse well attested).

That is the difference between Dad and me. I can regret that he missed his natural vocation; I doubt my son will think that I missed mine in the same way. Dad did not have the choices that I did. Economic and social development – and the support from Dad and Mum – meant I had opportunities that they could only dream of.

(Arguably my mother did worse than my father, because she was a woman. Later generations of women will not suffer as much as her generation did. That is true for other minorities. They may not yet have attained the same opportunities but the gap has narrowed. Many of the policies which reduced those gaps have little to do with economics.)

What I have been describing is a simplified account of objectives set out by the great Indian economist and philosopher, Amartya Sen, who emphasises the importance of life opportunities and choice: not the choice we have when we go into a supermarket and select between brands of baked beans, but the real choice of being able to select a life style consistent with one’s potential.

On the whole, the development of the economy improves those opportunities. From this perspective higher incomes are a collateral consequence of rising opportunities but they are not the social purpose of the economy, with the imperfect correlation between rising incomes and increased opportunity; sometimes the relationship may even be negative with higher incomes and lower opportunities. We should not focus on income as the sole policy target; at best it is an intermediate one which enables us to do other things. .

Consider the argument that higher taxation reduces the efficiency of the economy and lowers income. Suppose it were true (it probably isn’t). Having broken away from the fallacy that social purpose is about rising income, we can instead ask whether the additional income advances opportunity and achievement. It might not, if the consequence is a drop in the wrong public spending.

Some public spending – that which cannot be delivered effectively in any other way except through the public purse – contributes to the wellbeing of some individuals. This is a treacherous area because it involves supply-side and distributional issues, which I have not time to reflect upon here. So let me just list some salient examples of public spending which can increase wellbeing in non-economic ways: culture and heritage, the environment, recreation, safety and security. In each of these, the private sector has manifestly failed to supply sufficiently for our needs. If taxes are reduced the resulting cut back in the provision of public services ting them back may reduce wellbeing.

Education which creates fundamental opportunities and enlightenment is another area where it is difficult to envisage adequate private sector provision. That is why so much education is publicly funded. (But we should treat vocational training differently; that is about economic development.)

An even bigger public spending item is healthcare. While income may not really add to one’s happiness, effective healthcare may prolong the period when one is happy. It is not just a matter of living longer, but increasing the quality of life following sickness or disability. (This is a large topic in its own right. Much of the rhetoric on public policy on health remains in terms of extending mortality. However much of health care does not extend life – or only extend life. It increases the quality of life. I am not sure we have fully included this in our policy thinking.)

Now privately driven healthcare is ineffective and expensive – the American failure is a salient example – so it makes sense for the public sector to be involved. How to design that involvement is complicated – let’s leave that for another day too.

Observe then that my support for public spending is pragmatic rather than ideological. Its need arises when the private sector does not supply it well; taxation is a consequence. The economist’s task is primarily about evaluating the tradeoff between more public spending less private spending (although economists get sucked into managing the expenditures, if others do not try to use the resources efficiently).

However there are some aspects of the economy, other than the level of public spending, which directly impact on welfare and where economists have some expertise. One is the degree of inequality in a society.

Recently there has been a lot of excitement about the book The Spirit Level, published a couple of years ago, although there was a precursor The Impact of Inequality published four years earlier by the senior author, Richard Wilkinson. Another key player in this research has been Ichiro Kawachi, who did his doctorate in New Zealand. His and Wilkinson’s work goes back to the 1990s, so what I am to tell you is not as new to the profession as it is to the public.

What they show is that there is a correlation between the degree of inequality and various measures of poor social performance. The strongest and longest established correlation is that a larger gap between the rich and the poor is associated with poorer health status; poorer mental health, greater drug use, more suicide, poorer physical health, lower life expectancy, greater obesity and earlier pregnancy. More recently, violence and criminality have been shown to be associated with greater inequality. Inequality is also associated with unequal life opportunities, but that has been long known.

While there have been challenges to the conclusion that income inequality is associated with poor social performance, the empirical evidence is too strong to dismiss the relationship out of hand. More controversial is what the underlying causal processes are.

Social inequality is a complex phenomenon. Consider a society which pays insufficient attention to its elderly; contrast it with another that does not support its children and with yet another which has high unemployment which severely disadvantages its young adults. Each could generate exactly the same measure of income inequality, yet each is likely to malfunction differently. Ignoring the elderly is unlikely to increase criminality, disadvantaging adolescents may.

Wilkinson and his co-author Kate Pickett argue that neuro-endocrinological stress, provoked by a perception that others enjoy a higher status than oneself, undermines self-esteem and generates these malfunctions. Can a single channel explain so much, even if it seems consistent with my earlier discussion about the importance of social status in the economy? I think it better to treat their explanation as a hypothesis and look for further supporting evidence and alternative explanatory channels.

But whatever a research scientist may think, for practical policy purposes the material the authors bring together counsels that it is sensible to try to reduce income inequality and unwise to increase inequality except for a very good reason.

Increasing income inequality in order to accelerate economic growth is not a good reason. Some vigorously advocate cutting taxes on the rich to do so. The empirical evidence is that lower taxes would not have much effect on the growth rate; some contradict it suggesting lower taxes may even reduce GDP. If there is any effect, it is very, very small; so small that we cannot measure it with any certainty. In any case higher incomes do not in themselves promote greater wellbeing or happiness.

The rich are quite right when they say the tax cuts will benefit them. It increases their self-esteem. But Wilkinson and Pickett warn that not only may this be at the expense of those lower in the income distribution, but also at the expense of the nation in terms of poorer health, more criminality and loss of opportunity.

The second directly economic issue is the level of employment and unemployment. The survey evidence is that the unemployed are not as happy as the employed; that would be true even if they had the same income as they could earn, rather than the much leaner unemployment benefit. That is because work is a socially valuable experience. It does not just pay us, but it has some latent social functions:

– Employment imposes a time structure on the working day:

– It involves regularly shared experiences and contacts with people outside the nuclear family:

– It links an individual to goals and purposes which transcend her or his own:

– It enforces activity.

That is employment does not just contribute to the bottom of the Maslow pyramid by providing income, but makes some important contributions in the middle levels. A quick summary is that we because we are social animals we are happy to work, for it gives us more than just income.

(I am sure that Marie Jahoda who articulated the latent functions did not require the work to be paid, so her list certainly covers voluntary work. You will observe that housework is not quite as successful at covering the latent functions – as well as it is not paid – which may explain why it is unpopular.)

The implication of work having these values to a social being is that we can enhance wellbeing by keeping unemployment to a minimum. Now while it might seem to be easy to guarantee everyone a job, it is actually hard. Work and Income would love to get the unemployed off their books, they put a lot of effort into doing this, but they are not that successful. More subtly, we cannot guarantee everybody a job for life, other than by having a totally stagnant economy without any technological innovation. Such an economy would have reduce the opportunities which enhance wellbeing compared to a dynamic one. (And in truth I am not sure we can stop technological innovation, even it we wanted to.)

If people do not have a job for life, then sometimes they will be in transition between jobs: they will be unemployed. Some unemployment is not avoidable, but we can handle it poorly or badly. We sometimes talk about a pool of unemployment; a little limnology can be helpful. The pool may be stagnant with the water sitting there full of rotting detritus. Or the pool may consist of freshwater flowing in and flowing out quickly the other side. Far too much of our pool of unemployed is of the first sort; we need to extend the second, especially so a person who becomes unemployed has some confidence that the stay in the pool will be short and not too unpleasant. A first step would be to stop pouring the acid of contempt onto the unemployed. Their pool is an integral part of a dynamic economy.

Observe that I am sneaking in a case for economic progress. Its aim is not to lift incomes but to generate jobs and opportunities. Because of technological change, because of physical shocks like earthquakes, because of changing overseas conditions, the economy has to be dynamic and changing, even if aggregate real income is not increasing. We need to direct the dynamism so it contributes to wellbeing and not just higher output.

So I am not arguing we should try to catch up to Australian income levels at all costs. That is what some people want to do, although they are silent on just how the policies they advocate would do this. After all their policies got us well behind Australia when they were implemented a quarter of a century ago.

Moreover the policies will increase income inequality – did you know that we had the largest increase in inequality in the OECD between the mid 1980s and 2010? Didnt help us to catch up with Australia much. Our inequality is about seventh highest in the OECD. Is that really where we want to be? If Wilkinson and Pickett are right, we are heading for poorer health, more crime and less opportunity – and lower on the wellbeing list.

Did you know that our secondary schooling system is doing better than the OECD average and slightly better than Australia on the PISA scores? It is true that we have a brown tail of poor achievers where we need to do better. But will cutting back on educational spending and even privatisation – the inevitable consequence of tax cuts – mean we will do better? What evidence have we that charter schools are not driven merely by ideological hopes and will do something for those in the tail?

Forgive the tone of irritation in the last few paragraphs but it captures the central theme of this presentation. The empirical evidence cautions against the obsession of equating income with wellbeing or of pursuing income growth at all costs. There are other things which contribute as well, and some things – even economic things – may contribute much more: certain sorts of collective spending, better health and education, lower income inequality, less stressful unemployment. The economy can contribute to much of this, but we would be unwise to sacrifice them for the pursuit of income. It should be our servant, not our master; the same applies for economists.

That does not mean we should ignore economic issues. I support the government’s objective of reducing our borrowing by shifting from a budget deficit to a surplus. It is prudent to have reserves for the unexpected, like a need to borrow in the future if the world economy goes badly awry again. There remains a danger that when we need to borrow, lenders may say ‘no’ or charge extortionate terms – as they did just before the Second World War.

But if I support the government’s objective of reducing our dependency on lending, I do not think they are going about it in the right way. It seems to me a nonsense to fund the costs of the terrible Christchurch earthquake by squeezing other government expenditure. Later generations will puzzle over the absurdity of the decision, wondering why the government did not impose an earthquake levy on incomes which shared the costs across the entire community instead of requiring the weak and vulnerable to carry an unfair share, while cutting back on key elements of public spending which underpin the enhancement of wellbeing.

They may well snort at the claim that the government’s strategy of screwing the public sector will enhance economic growth – it hasnt and it wont – but they may also query whether it should have been focussing on material output to the extent that it did.

Instead, as Socrates advised us, we should be promoting the good life well lived. Which is what happened with my Mum and Dad. With Amartya Sen’s addition that we should also be enhancing people’s life opportunities. Beside that goal, income maximisation is trivial; in any case the economy is going to be stagnant for a while.

Problems with Experts

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

PROBLEMS WITH EXPERTS
New Zealand Books, Winter 2012, p.9.
Keywords: Macroeconomics & Money; Regulation & Taxation;
The New Zealand Economy: An Introduction by Ralph Lattimore & Shamubeel Eaqub (AUP) 170pp. $34.99. ISBN: 978-1-869404-89-5
The New Zealand Tax System: New Zealand Taxes in Comparative Perspective by Rob Salmond (Institute of Policy Studies) 129pp. $30.00. ISBN: 978-1-877347-45-0
To begin with the final paragraph of Rob Salmond’s book:
The educational role of experts is important in a democracy because it is the public, via their elected representatives, who are charged with making the final decisions over the experts’ suggestions. The principle of informed consent requires that experts actively inform laypeople before seeking their consent. The tax system ultimately belongs to the citizens, not to the experts. And in order to make that ownership real, experts have a continuing responsibility to make balanced, high quality information about the tax system not just publicly available knowledge; but rather public knowledge. (Original’s italics)
Alas experts play a small role in the New Zealand economic debate. which is dominated by politicians – in and out of parliament – with agendas, and journalists willing to uncritically pass them on. The result is nicely illustrated by a couple of Salmond’s book’s conclusions:
– Some people have argued that New Zealand’s consumption tax is smaller than average … that conclusion is misleading at best …
– Some have suggested that New Zealand’s top income tax was unusually and punishingly high under the previous government. That is incorrect .. In fact, it is the new top tax rate that is unusual for OECD countries. It is unusually low. … the data also reveal the New Zealand is an unusually lighter taxer of both corporate dividends and capital gains …
They are derived from a chapter-by-chapter analysis of various taxes, mainly involving a comparison with the rates of those in other OECD countries. It is a tedious exercise, but the conclusion seems to be robust: our tax system does not redistribute spending power as much as most other OECD countries. That is not a complete story, because there are redistributional effects from social security and other government spending (especially on education and health). Probably we dont redistribute well through them either. The implications are – I am stretching the book’s findings, but consistent with other research – that New Zealand has long abandoned any pretence of using the government to create an egalitarian society.
How did the egalitarian objective slip away? Answering this is more than the scope of the study, but the opening chapters provide some insights by tracing the workings of the 2025 Taskforce (chaired by Don Brash) and the TWG (Tax Working Group chaired by Professor Bob Buckle).
Salmond is dismissive of the Brash Taskforce. Aside from the few who consulted its background papers ‘the 2025 Taskforce process added nothing to [the public’s] understanding of how tax in New Zealand compares to tax elsewhere. Given the Taskforce’s first major recommendation was to reform the tax system in dramatic ways, this absence was unhelpful’.
He is more positive about the TWG which ‘represents a big step in a good direction for policy making in New Zealand’ because, despite being expert, if had a more open consultative approach. Even so he thinks there is room for improvement. ‘The TWG drew its membership from a narrow class of people (mainly academic economists, tax lawyers and accountants all of whom were men).’ Polite company does not mention that all had incomes in excess of $100,000 a year, which may be why they paid so little attention to the impact of their recommendations on those on lower incomes. Let me instead point out that there was an absence of rural specialists too, and blow-me-down, there was not much TWG sympathy for rural New Zealand’s concerns either.
That is the problem with experts. They may be more knowledgeable, but they (especially the ones the government consults) are in privileged positions in society. The growing inequality and social heterogeneity means that they are increasingly disconnected from the general masses; the result is divisive recommendations.
Salmond has an interesting investigation of the reportage of both groups in the New Zealand Herald using the website (he is a New Zealander based at the University of Michigan). He seems to have missed that most of the reportage appears on the business pages, which are not well read by even the majority of Herald readers. What the opening paragraph omits is the need for mediators connecting the experts and the public (although Salmond rightly draws attention to the excellence of Brian Fallows, economics editor of the Herald).
The New Zealand Economy: An Introduction is probably a book more for mediators (columnists and journalists) than the general public even though the authors state it is ‘aimed at those who want a pocket guide to the New Zealand economy’ – at 210 mm by 150 mm one needs a large pocket. (They say it is also ‘designed as an introductory text …for school and university students’.)
I happen to be writing this review on a day in which the economic headline is ‘NZ current account deficit worsens’, so let’s test how the book might be used to understand that story. The index tells me there are three pages starting at p.27 and a further four pages starting at p.79. The initial section opens with
‘The current account balance measures many of the transactions across New Zealand’s borders. It captures the value of imports and exports, and also some money flows. Conceptually, the current account measures the difference between a nation’s savings and its investments. If investment exceeds savings, then we have to borrow as a nation from overseas.’
Totally meaningful to an economist (I promise not to get more complicated), but the majority of the readers of this review (who are only a selection of an educated elite who read New Zealand Books) will struggle with the paragraph, even had they read the book’s previous pages, for not all the concepts used here are well-defined earlier either. This is not a book for general readers.
But suppose you are a journalist who has been asked to write the story up (perhaps just after coming off the front page (horrible) story of a ‘mother jailed 7 years for repeatedly abusing child’). You have done a course in economics some years ago – it’s why the chief reporter gave you the story – but it was probably badly taught. Hopefully the section would prompt some memories from the course, and alert you to some of the snags in the notions the news item is using. A few pages on there is a useful graph of the current account deficit as a proportion of GDP (i.e. aggregate market production) and you might observe that the level (4.3 percent of GDP) is not too different from a typical level for the last third of a century (although it bobbles around from year to year). At this point you will be prepared to go to an expert, although whether you can translate her or him right (or pick their agenda) is another matter.
Fortunately today’s news story is not about the International Investment Position (for you, dear reader, let’s call it how much we owe overseas), which has been preoccupying us in recent years (it influences our international credit rating, the ease with which we can borrow offshore, and interest rates in New Zealand). My hunt through the index proved fruitless. It truns out there is a paragraph and chart (p.79) but too dense for non-specialists to make sense of.
So despite its claim, we have to think of the book as having a different – and less modest – objective. It sets out an account of the course and performance of the New Zealand economy since about 1980 written around the notion of New Zealand as a small, open (i.e. engaged with the international economy) and relatively rich economy.
Now economists scrap like Kilkenny cats over the narrative and analysis of an economy – the profession is built around vigorous robust debate – and it is incumbent upon me to disagree with authors Ralph Lattimore and Shamubeel Eaqub of the NZIER. But let’s leave that to another venue. In truth, the core of the profession agrees on about 90 percent of all things (no one takes the slightest interest when we agree) – my guess is we would mainly disagree about omissions. The account the two authors provide is certainly within that core, so the reader who persists – they probably would have had to have done some preliminary study of economics – will find the book is a useful introduction, as promised.
There are two appendices: on technology by Gary Hawke which will disappoint the general readers and on ‘City and Globalisation is Auckland Special?’ by Philip McCann. The introduction describes this as the ‘new topic of economic geography’. Ooops, it is about 30 years old, so established that Paul Krugman was awarded the 2008 Nobel memorial prize in economics for his work on it. It may be new to New Zealand and it may be new to readers; McCann provides a useful non-technical introduction.