Now Let Me Give You the Results Of an Equally Valid Survey ….

This entry was posted in Governance on by .

Letter to The Dominion-Post, 10 June, 2011.

Keywords: Governance;

Lacking the impetus to chase hard stories, the ‘Dominion-Post’ ran a survey of government departments last Tuesday based on the rankings of an arbitrary panel. At the bottom was the Ministry of Culture and Heritage scoring 3.18/7. This reflected that the panel did not contain the many who visit our museums, galleries and historic places; watch public broadcasting and films; read literature; appreciate art; attend ballet, theatrical or musical performances; follow our history; depend upon Te Ara the online encyclopaedia (including tens of thousands who visited it after the Christchurch earthquake as the source of reliable information), all funded and/or supported by the Ministry.

An equally arbitrary  survey of this group of ordinary New Zealanders scored the panel at 1.097/7. They were not asked to score your paper, but it would have been much higher given your coverage of arts, culture and heritage. Thankyou.

Brian Easton (Kelburn)

Our Big Lean Greek Wedding

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

What was available could have been shared out more fairly, but the Budget’s  courageous realism kept the shotguns unloaded

Listener: 4 June, 2011.

Keywords: Macroeconomics & Money;

Mentioning credit ratings at the 2011 budget was like mentioning sex at a wedding. Everyone knows, but you dont say it. Instead they focus on the feast and festivities. Not that there were a lot.

Outside were the credit rating agencies, with their shotguns unloaded as long as the expenses were kept down. The bride and groom have been doing a lot of borrowing (she is near 34 percent pregnant, he is 45 percent high) so there was not much left for the festivities, despite shuffling the fare on the tables to obscure the shortage.

Certainly the parents of the couple are not going to admit they are a bit skint. Instead they talk about the desserts and champagne they have saved for the top table arriving in  BMWs. Down at the trudging bottom the sausage rolls were in short supply and cold.

Ask them about what happens the night after, they mutter about Greece. But it is no honeymoon there. Greece has reached the stage where despite severe cuts to its living standards, its rising debt is out of control.

It’s hard to be always sympathetic to the Greeks who are facing much harsher fiscal restraint than we art. The Germans havn’t been. When asked to bail the Greeks out, they learnt that they received a state pension not later than age 60, whereas Germans have to wit until they’re 67. And there is the strange story of the Greek unemployed going on strike over their holiday pay; how does an unemployed person go on holiday? Work?

But squeeze th Greeks too far or too fast, and there could be a civil uprising. It was not so long ago that the colonels were running the country (badly – they even threatened to execute an economist). Straight after the Second World War there was a civil war between communists and royalists. Who knows what will happen if the turmoil on the Greek streets and the industrial unrest gets really nasty?

As I write, the European Central Bank, the International Monetary Fund and various countries (especially the Germans whose banks were major lenders) are trying to sort the Greek debt problem out. Oh sure, the Greek government is involved but the tensions between the bankers are also great. Some of the lenders are going to have to write off some of their debt; each wants others to take the hit.

That is the almost unspoken background to the 2011 budget. Our economy is not as badly indebted as the Greek one, but our national and public debt could get out of control unless we take firm action.

Increasingly nervous lenders burnt in Greece face similar threats in Ireland, Portugal, Spain, Italy, Belgium, some US states and elsewhere. They are toughening up their lending requirements. While loaded shotguns are not trained on us, they went off against the ‘big four’ Australian banks on our budget day, as all experienced a credit downgrade just a week after the Australian Federal budget.

A credit downgrade threatens to raise the cost of offshore borrowing. It would feed into the economy as higher interest rates. Home buyers and credit-card users pay more. Businesses pay more and might put off investing. The government pays more on its borrowing, and has to cut spending or raise other taxes. The main beneficiaries of the interest rate hike are the offshore funders – of almost $160 billion – who get higher returns we’d pay. Warding off a credit downgrade is a kind of tax cut, the ‘tax’ being what we would pay in higher interest rates.

Not that the guests acknowledged that. The festivities were subdued and they grumbled about the food and liquor. Certainly what was available could have been shared out a bit more fairly, but the shotguns remain unloaded. The courageous realism of this election budget deserves to be acknowledged; sadly it wont be during the election campaign.

We are promised more meat and drink next year. That assumes a recovery of the economy which many think unlikely. Next year’s budget is likely to be even leaner.

Poor India

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

Listener: 28 May, 2011.

Keywords: Political Economy & History;

India told those negotiating the Doha Round – the multilateral attempt to liberalise world trade – it had over 700 million people dependent on subsistence farming, more than the entire populations of the European Union and the United States combined. It was not willing to sacrifice them, India said, in the interests of a handful of American and European farmers. And so the Doha negotiations ground to a halt.

This was much to the disappointment of New Zealand farmers, because although Indian farmers do not compete with them – they mainly grow grain – the intricacies of the negotiation mean everything depends on everything else.

Two out of three Indians live in rural areas, often with a standard of living below the World Bank poverty line (less than NZ$2-3 a day). Although the proportion who are poor is falling – the poverty rate has halved in the past 20-odd years – a third of the world’s poor live in India.

When I was there, I saw beggars, amputees and the homeless, but I was struck that most rural dwellers seemed happy enough, although I was not in the most impoverished states. Even so, their young miss out on a childhood, their adolescents on opportunity, their adults on security; most miss a long healthy life. Their predicament is not just a lack of material resources. Perhaps they can cope if things are going well; otherwise the poor are in deep trouble.

So their material needs should not be ignored. The Indian Government proposes to provide virtually every citizen with a minimum income in the form of a daily rice allowance. It is a scheme better in aspiration than execution. Given the endemic corruption, delivery is not assured even if the Government can fund the scheme. (There is already a programme to provide free education to all India’s children, but not every child gets it. The adult literacy rate is 68%, up from 12% at the end of British rule in 1947.)

Ideally, farm productivity should be increased. The green revolution using higher-yielding seeds and fertiliser substantially increased production of food grains in some areas; some wistfully hope for a second revolution. A better prospect is that known technologies could double output. Unfortunately, land tenure and social institutions retard their introduction.

As milk production goes up, market supply goes down, because the farmers retain more for their own use. This is good news for our dairy farmers, as we are negotiating a free-trade agreement with India; other food products will target the thriving affluent. And high-quality hotels serve “mutton” – which can mean goat meat. All good for New Zealand, but sad that we benefit from the poverty, even if we alleviate it to some extent. We need to buy more from India.

The ability of the modern sector to absorb villagers is limited, and the poverty-ridden urban service sector is hardly a happy option. The alternative may be political revolution.

Naxalites do not loom large on our news screens, but these Maoists are endemic in the “red corridor” down the east coast from Bengal through Bihar, the poorest state by far, to Andhra Pradesh. (Kerala is not among them – their Marxists are democratic; nor is the Punjab, where the green revolution has been most effective.) The guerrillas are said to control an area a third of the size of New Zealand. Up to a thousand people die each year as a result of the fighting.

I did not see any Naxilites, but a number of Indians talked to me about their concerns. The failure to eliminate poverty fast enough provides a source of disaffection, which is exacerbated by the growing inequality. From the armchair it is easy to predict that one day rural living standards will rise, and the growth in inequality will reverse, as has happened elsewhere. But that day may be a long way off, and the rural insurgents are impatient. A lot could go wrong in the interim.

This is the fourth of a series of columns on India made possible by a travel grant from the Asia New Zealand Foundation.

The Coming World Economic Order

This entry was posted in Globalisation & Trade on by .

Wairarapa Institute of International Affairs: 25 May, 2011.

Keywords: Globalisation & Trade;

It is easy thinking about the future by projecting recent trends. But if the past is a foreign country, so is the future . Tonight I am going to paint a scenario of a world economy which will be very different from anything we have experienced in the past.

It is a globalised world economy, something which has existed for only a couple of centuries, but it differs dramatically from the past because there will be no single economy which will dominate the globalised world, as Britain did in the nineteenth century and America did in the twentieth. Rather it will be a multi-polar world with a number of large economies contesting with one another, but none will be able to dominate the world economy. That poses an enormous challenge for small and relatively isolated economies such as New Zealand; the purpose of this presentation is to get you to think about that future world.

I am going to be talking about the world economy, and will have little to say about the military scene and about the environment. Economists are not military experts – I am certainly not. We tend to assume that military power is related to economic power, although with a lag. In particular a nation can get over-committed militarily, as Britain was for decades after the Second World War – some would say America is today. That will drain the economy. The evidence is that military adventures do not contribute in total to economic performance. While some sectors benefit, most suffer. So military activities may speed up or slow down the new balance of powers rather than fundamentally change the long run. However if there is a nuclear war, say, all bets are off.

There are complex interactions between the environment and the economy. I have not time to deal with them all tonight, but they are there, implicitly or explicitly, in the analysis.

To understand where the world economy is going, it is useful to start 250 years ago. Then there was not really any world economy as we know it. There was a little international trade but that was mainly of extremely valuable goods which could not be locally produced: ‘quinquereme of Nineveh … with a cargo of ivory, and apes and peacocks, sandalwood, cedarwood, and sweet white wine’ or the ‘stately Spanish galleon … with a cargo of diamonds, emeralds, amethysts, topazes, and cinnamon, and gold moidores’. In contrast the work horse of the globalised world was a ‘dirty British coaster … with a cargo of Tyne coal, road-rails, pig-lead, firewood, iron-ware, and cheap tin trays.’ Today’s container ships may be more stately but they carry pedestrian mass products – perhaps for The Warehouse.

We usually attribute this transformation to industrialisation with its factories exploiting new technologies and economies of scale. But there was another crucial factor. The costs of distance – of communicating, transporting, connecting – began falling strongly about two hundred years ago, with better navigation, steamships, railways, containers, cars, telecommunications and so on. That enabled factories to reap the economies of scale, using the lower costs to undercut local production elsewhere.

The economies of scale do not apply just to a single factory, they can apply to an entire conurbation; the larger its manufacturing sector, the lower its unit costs. Economists call that effect  ‘economies of agglomeration’. It is thought these economies of industry scale are more important than those of scale in a single factory. They explain why manufacturing clusters in urban centres, rather than spreads evenly throughout a land.

The first manufacturing agglomerations were in Britain. As congestion costs rose and the labour supply ran out, the clustering extended to the European Triangle of Britain, Berlin and Paris, and then south to the Mediterranean states and east as far as Finland. It is still extending east to the ex-satellites of the Soviet Union.

The European cluster also extended west across the Atlantic, for while North America is geographically a long way from Europe, shipping costs were low and falling. What began in the US north-east extended into the mid-west and later to the south and Pacific west.

The American clustering even extended across the Pacific, as Japan industrialised. The forty-year Japanese boom is often seen to be a miracle, but when the economy reached the North Atlantic standard of living in about 1990, it switched to slower growth, as it began outsourcing to lower wage regions, just as the European triangle and the US North-east had outsourced before it; this time it was to South Korea, Taiwan and parts of South East Asia.

This explanation says that the post-war attempts by ex-colonies – here I include New Zealand – to artificially stimulate their manufacturing industries by protecting their domestic markets from imports were going to fail, because they did not have the economies of agglomeration. Instead they – this time I exclude New Zealand – were trapped into low-income agriculture.

Where the economies of agglomeration were strong, manufacturing had high productivity and paid high wages. The rural areas surrounding the cities had high wages in the agricultural and service sectors too. Since the rest of the world could not generate this high productivity, their wage levels were low. Thus the ‘great divergence’ between rich and poor countries

There were some exceptions. Economies with a valuable natural resource – like oil – can have high incomes. And so would agricultural economies that were underpopulated, like New Zealand. However, the vast majority of the world was trapped in low incomes and stagnation; although a handful located close to the industrial centres had the prospect of eventually escaping into medium or high wage economies.

In summary, a quarter of a millennium ago manufacturing was scattered around the globe in proportion to the local population. The falling costs of distance enabled manufacturing to concentrate in a few cities, thereby reaping the economies of agglomeration. Congestion costs prevent all the industries of the world centring in a single city, and so economic activity extends to nearby locations, while the rest of the world – with a few exceptions – is confined to low wage agriculture.

However, the model I have been using goes on to predict that as the costs of distance fall even further, manufacturing ceases to be concentrated in particular locations and instead reverts to where the population is. If distance costs are low enough, poor countries can get back into manufacturing by their low wages undercutting the superior productivity of the industrial centres.

That is what has been happening, as manufacturing has shifting from the great industrial centres to China; so once again China is one of the largest manufacturers in world – as it was 250 years ago. Today it is the third largest economy in the world in terms of material output (or GDP), although its per capita income is still low by the standards of the rich economies.

Industry has not shifted as rapidly to India as it has to China, although its population is almost as large as China’s, and growing faster. This is partly because it is not as well located as China – its supply links to Japan and America are not as direct across the Pacific.

It also has yet to get its act together. The chief executive of a big Indian industrial export companies told me that the consolidating ports they use – where they send their product to be shipped to end destinations – are Singapore to the east and Dubai to the west. Years of inward-looking import-substituting industrialisation means there is not one in India. When there is, you will find a dynamic manufacturing sector close by.

Despite being a service, information technology is like manufacturing in that cheap cabling means low costs of distance, enabling it to agglomerate into clusters anywhere in the world. India is well hooked into the international cable system, and its IT sector – ranging from call centres to software – is vibrant and growing. China does not have India’s advantage of a people fluent in English and is not doing as well in IT.

As a result of this relocation of economic activity, India and China are each already among the five largest economies in the world. The other three are the United States, Japan and the European Union.

We often overlook Europe because we are so backward looking and see it as a set of independent nations. Politically it may be, but economically it is the world’s largest economy, albeit only fractionally larger than America. Europe is having its troubles; any area trying integrate its economy as fast as its ambition is bound to have difficulties.

There is a severe one at the moment, highlighted by the financial difficulties Greece faces. Because it is locked into the European Monetary Union, Greece does not have enough policy freedom to deal with its fiscal difficulties in a politically sensitive way. Meanwhile the rest of the EU states are too cantankerous to find a solution. But whatever happens to Europe’s financial arrangements, we can expect a Europe integrated in its product and capital markets, increasingly integrated in its regulatory framework, and clumsily integrated in its labour markets.

New Zealand has long neglected the European market. Fifty years ago the current members of the EU took four-fifths of our exports, today they take one-fifth. Yet the dramatic loss of market share has been barely a public concern. It has not as if we have done well generally – our share of world trade has fallen.

The second largest economy in the world is that of the United States. For over 70 years the US has been the hegemonic leader of the world economy; it has its largest military force – the only global one. The relative rise of Japan, China and India and the increasing economic integration of Europe means that the US is gradually losing that hegemony. This is inevitable, given a relocation of industrial activity.

The US will continue to remain a large economy in the world, and will have a weight and power reflecting that size. But its leadership role will be blunted. It is not even obvious that the US dollar will remain as central to the world financial system as it is today. There are respected American economists who say this change hardly matters to the US; it may matter to the world.

The loss of American hegemony poses various problems, not least that the US may not recognise it, and overreach itself, just as when Britain lost its global hegemony 70 odd years ago, it maintained a military presence far in excess of what its economy could bear. Some argue that the US involvement in Iraq has been similarly ruinous. Yet, what happens when the US scales down its military aspirations to be more in line with its economic size? Who will fill the vacuum; how will it be filled?

Perhaps global hegemony is so central to the Americans’ national psyche that some overreaching is inevitable. Certainly there are American intellectuals who are aware of the changing role of the US, but they are not listened to. I thought Obama touched on this reality in his presidential campaign, but the politics of the presidency has given him little room to move. There is the gloomy possibility that America is becoming ungovernable; the congressional deadlock over the budget may be just the beginning. Perhaps it and the rise of the Tea Party reflect an unthinking, barely understood response to declining US hegemonic power, even though the response may accelerate the decline. What prospects are there for the world economy in which one of its largest economies and the issuer of the international currency cannot run a disciplined fiscal stance?

We see only dimly what this multipolar world will be like. One thing is certain; while the US may no longer be the hegemonic player in the world economy, it will not be replaced by another dominant power. Much of the popular literature is about a contest between America and some other country vying for hegemonic dominance – the Soviet Union, Europe, Japan China or whomever. It is a thinking fixated on the past, of a globalised world with a dominant economic power.

No country is big enough in a multipolar world to lead unilaterally; the others can gang up on it. That can mean deadlock, as has happened over the Doha Trade negotiations, or is likely to happen over a world regime on carbon emissions; and it may happen as they try to sort out the world financial regime. While we know a lot about how to think systematically about a world in which there is one dominant player, and a bit about a world in which there are two major contestants. once there are a number of large players the analysis has no simple insight. That is the world regime we are entering.

In expecting there to be four or five large economic players in the future world economy, I am not including such countries as Brazil, Russia and South Africa. Each is less than half the size of the smallest of the big five, and is unlikely to catch up. The new world regime will have a second tier of countries: those three, one or two from the Middle East, possibly Australia may have a significant role. But the list is limited and it certainly does not include New Zealand.

Three of the big five – those not in the North Atlantic – are Asian. It is the largest continent and it has some of the largest populations. I shant say much about Japan. It is the smallest of the five as measured by GDP – India seems to have just passed it – but it is rich like the North Atlantic economies. It also has very large foreign reserves, although they can be easily squandered, as Britain did during the Great War. The international future of Japan may be as the centre of group of East Asian economies who do not want to get too close to China.

China is currently the growing economic power. It is easy to project the recent past way into the future and conclude that one day the Chinese economy will be huge – larger than any other. I am cautious, for at least five reasons.

First, unique in the developing world, China has an aging population, with population dynamics even more problematic than most rich countries’; theirs can be moderated by immigration in a way that China’s cannot. How quickly will China’s aging population become an uncomfortable burden? There is some evidence that there are already labour shortages which are leading to higher wages which may make some exporting unprofitable.

China’s second problem is that it has serious environmental challenges (as has India) including water shortages, water pollution and dirty air, which may retard or divert its development path.

Its third problem is governance. China is not what we would call a democracy, but its development is creating a middle class who are likely to be increasingly uncomfortable with current political arrangements. Their demands may not be exactly the same as those of Western middle classes, but they will be more like them than they are currently experiencing. The Chinese leadership has been struggling with these tensions since Tiananmen Square – with some success. But incumbents regimes tend to be conservative, and may not respond sufficiently to the growing aspirations of the population without upheaval. One of the geniuses of the West is that it institutionalised the turmoil into regular elections which allows it to throw out backward incumbents, incentivising those in power to be responsive. Even more important is freedom of expression and the elimination of corruption – governments are falling in India, where it is also endemic, because voters are fed up.

The fourth problem China faces is really the world’s. It is such a big economy that its growth will create feedbacks which stifle it and disrupt the world’s economic arrangements. The enormous Chinese foreign savings which fuelled the US financial boom and the resulting Global Financial Crisis is an example. Importing countries cannot absorb China’s exports if they continue to grow at their current rate; China has the possibility of switching to greater domestic consumption – which would also assuage some of the demand of the middle class. That wont avoid, though, China’s competitiveness being undermined by its inefficient gargantuan appetite for oil and raw materials driving up their prices. And what happens internally when China gets to the point that Japan did in about 1990, and the growth rate slows down to the world average?

The fifth danger is the Chinese banking system. We dont know enough about it to be able to assess how just robust it is, but the sniff test suggests that many of its banks have unsatisfactory balance sheets, that the system is fragile and with the wrong shock it could crash. That may be why the Chinese government has been unwilling to float the renminbi because reducing capital controls could expose the vulnerability of their banks’ balance sheets. Some time in the not too distant future the Chinese banking system may get into serious difficulties, perhaps like the South Korean banking system which collapsed in 1998; although given its vast foreign exchange reserves a Chinese banking crisis would be probably be resolved differently.

So we cannot assume that the Chinese economy will continue to expand as rapidly as it has. It may even experience a period of financial or social turmoil, or both. The Chinese motor may not drag the world out of the Great Recession.

There is a sort of racist view that the Chinese leadership comes from a very old civilisation and is going to wait the West out and ultimately dominate it. Sure, their leadership may be inscrutable but that is because it is a collective which deliberates in secret and does not have to account to its public. The evidence is that the leadership is well aware of the complexity of the tasks it faces, knows that it is inexperienced, and responds cautiously.

India is just as old a civilisation, but its geography has been much less conducive to a centralising power. Other than cricket, New Zealanders dont have a lot to do with India. It is just out of flying range – but will be inside within a few years – and we export seven times as much to China, although the gap will diminish after we sign a free trade agreement with India at the end of the year. Yet India is the fourth largest economy in the world, and it is growing rapidly. It hasnt an aging population; its population will overtake China’s in about 2030.

There are many ways India differs from China. It is poorer – a third of the world’s poor live in India – less literate, more ethnically and religiously diverse, more politically decentralised and less politically repressive; it has even more problems with its neighbours and it is 70 percent rural, whereas China is only 50 percent. In my recent visit sponsored by the Asia New Zealand Foundation I left both excited by its diversity and promise and frustrated by its paradoxes and failures.

Again dont expect a smooth growth path. Capitalist economic development is like a wobbly bike; it needs to go forward to stay upright, sometimes it falls over, but eventually it gets there. The Chinese will learn that lesson too, although its bike may not be wobbly enough. It is good at replicating simple production processes developed offshore, but it may not be able to develop the cluster of advanced technology firms which lifts the economy into the top bracket of high incomes. Because it is more decentralised – more chaotic – India may; one might cite Infosys, one of the largest IT firms in the world based in Bangalore, as an example of an Indian success which the Chinese may not be able to replicate. (The caveat is that cycles need roads; the Indian infrastructure is far inferior to that I found in China.)

How should New Zealand engage with this evolving world? First, we need to be realistic about our role. It is very marginal. We may have particular responsibilities in Polynesia and Antarctica but they are hardly world priorities. Were New Zealand to sink beneath the sea the United States would send an aircraft carrier to the location; it would drop a wreath and – sail home.

Our economic role has been an extension of the North Atlantic economy, providing it with the food and other raw materials which enabled it to release its farm labour into high productivity manufacturing. We have been able to do this and generate high incomes because there has not been a lot of us. New Zealand is about the same area as Britain, but has one twentieth of the population.

New Zealand is likely to remain a food and fibre exporter supplemented by tourism and a few other things. I doubt we shall become a major world class exporter of manufactures. Certainly we should put effort into making Auckland and Christchurch global cities, exploiting economies of agglomeration, but our ambitions should not overreach.

Prices for food and fibre (and energy) are probably going to rise faster than those for manufacturing. During the industrial concentration phase of globalisation, the surplus labour in poor countries depressed their wages and the price of food and raw materials. As distance costs fall further, and the globalising world moves into the second phase where industry moves back to the centres of population, the poor workers flow out of low productivity agriculture, while increasing their demand for food. Food prices rise, as has been happening in recent years as a result of Asian industrialisation. Of course there will be hiccoughs.

We need to avoid becoming as over-specialised as we were up to 1966, when nine-tenths of our exports were processed grass and two-thirds went to Britain. We should not just be a commodity exporter, but seek to process the food and fibre in sophisticated ways. We should not place too great a reliance on China but have a variety of export destinations. That is why we need free trade deals with India and Europe.

The need for free trade agreements reminds us that trading is not simply about private initiatives; it takes place in a public context. One of our competitive worries about the Australian-US FTA was that if some hitch occurred – perhaps a foul-up at a port – the Australians would get preferential treatment because that is in the agreement.

The issue becomes even more intense during multilateral trade negotiations. We felt our interests were being ignored during the Uruguay Round. We pointed out to the US State Department that the ANZUS Treaty – which was in force then – required mutual support over all security matters including economic threats. The US then helped us to get the negotiations to take greater attention to our trade concerns.

So even if you take the extreme position that our international stance should be confined only to trade and economic matters – ignoring security, human rights, foreign aid and everything else – New Zealand would still have to have political relations with other countries. How to do this in the multipolar world?

When there was a hegemon we treated it as a patron; that was not hard because so many of us came from Britain and spoke a language distantly related to American English. Do we continue to tuck in behind America as our patron even as its power diminishes? Or perhaps go back to Europe? Do we switch over to China, which is likely to become our biggest export market? Perhaps Japan, which may offer a more diversified Asian connection? Can we ignore India given its size and our cricket ties? Where does Australia fit in?

We need to connect with all of them. That is easier to say than to implement, but you will see an ongoing but subtle transformation of New Zealand foreign policy from depending on a single patron to a more sophisticated relationship with each of the big five and Australia.

That means more trade agreements. Multilateralism like the Doha Round has ground to a halt – in part because America is no longer dominant enough to guide the world to a conclusion. We will make bilateral deals like the FTA with India; we should seek one with the European Union. Plurilateral deals, involving a number of countries – the TPP is an example – are attractive. Although all deals will make some of us worse off, hopefully more will be better off. Of course we should never do a deal where there is no net gain to New Zealand.

Had I the time I could explore future economic relations in greater detail. But it would not be a complete vision, for our trade policy has to articulate with the rest of our foreign policy, where I have little expertise. However tonight has been sufficient to have set out an analytic framework to understand the future evolution of the global economy, to convince you that the multipolar world will be very different from anything that has preceded it, and to suggest it presents an enormous challenge to tiny New Zealand. To meet the challenge we must first think about it.

Not in Denial

This entry was posted in Macroeconomics & Money on by .

This was a note I wrote – ‘Listener’ style – in response to the critics of the 2011 budget.

Keywords: Macroeconomics & Money;

Dealing with addiction is confounded by denial: ‘I’m not a drunk’; ‘One more wont hurt’; ‘I need it to get through the day’; ‘He drinks more than me’. ‘I’ve cut back my drinking (so I can afford the occasional binge)’ ….

Borrowing can be an addiction too: ‘I am not too heavily in debt’; ‘A little more wont hurt’; ‘We need it to keep our life going’; ‘Others are deeper in debt than me’; ‘I am reducing my borrowing (so I can buy that luxury on credit)’ …

A private borrowing addiction is compounded by government borrowing. Perhaps public debt levels would be tolerable if there was not so much private debt. So the addict concludes that the government should borrow more.

We are lucky to have a government which is not in denial. That is how to read the 2011 budget. Sure, it could have used all those justifications to increase borrowing this year: ‘We are not too heavily in debt’; ‘Just a little more’; ‘We need it to stimulate the economy’; ‘Others are deeper in debt’; ‘Its coming down so we can afford another binge’.

Many urged the government to spend-up or tax-down. The temptation in an election year must have been strong – like a recovering alcoholic in a bar. The prudent turn away, because they know the alternative is short term pleasure and long term pain.

The long term pain of borrowing is you have to pay it back, or the country does. One day. Of course the drunk promises to give up drinking, and we can promise to stop borrowing some day in the future. But the crisis usually hits well before we get around to it.

A borrowing crisis? Its when the lenders to whom we have become addicted become nervous. Perhaps we wont pay it back; perhaps we wont be able to pay it back. Shouldn’t they get out now before they lose their investments? Yes, lose their investments: as I write lenders to Greece face that possibility. Its called a ‘haircut’, but it means that you get back less than you put in. One can lose a lot of hair. (Investors in some finance companies went bald.)

That they are talking about haircuts in one country, makes lenders nervous about others. New Zealand is not as badly placed as Greece, but there are enough similarities to make investors nervous. That’s what a credit downgrade means. Its not the ratings agents being mean. Their job is to provide guidance about what lenders think.

Two out of the three major agencies have put us on credit watch. Lenders may soon get nervous. As they do they will want higher interest rates. That will be painful for the borrowing addict. That’s you if you have a mortgage or consumer debt; that may be the business you work for since it certainly owes money and may want to borrow more for expansion; that’s you because you pay taxes, and some of those taxes cover debt servicing. (Can’t we borrow more to cover the extra debt costs? You really are in denial arnt you?)

Couldn’t the government have been a little more expansive borrowing more this year, but restraining itself next? Just like the drunk who is giving up tomorrow. The credit ratings wouldnt have changed this week. (They were too busy downgrading the Australian banks;. Australians are debt addicts? You must be joking.) But they might have later in the year. Just before the election – winning the World Cup wont make the lenders any less nervous.

Choosing restraint was a tough political decision. Full marks for the 2011 budget. I’d have restrained differently, but that reflects different analytic and political judgements.

The weakness of the budget? Of course the year to June 2012 could go wrong. (Who was predicting the Christchurch earthquakes?) But the predictable problem is that there may be less lift in the economy after 2012 than the budget predicts. In which case the ending our over-borrowing will be more difficult. I am betting on a tougher budget in 2012. After the election.

Christchurch Earthquake Tax

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

Listener: 9 May, 2011

Keywords: Macroeconomics & Money; Regulation & Taxation;

John Key has shown considerable ability responding to the moods of the New Zealand public. That’s why I’m astonished by his rejection of an earthquake levy, involving a relatively small tax on income over 10 or more years to pay off the costs incurred by the Christchurch earthquakes. Instead, it seems we’re going to pay for them by squeezing Government expenditure.

There is a case for doing this, but it is about our uncomfortable fiscal situation, the mounting external debt this is causing and the fear that at some stage the international lenders will treat us as they have treated Greece, Ireland and now Portugal.

Earthquake costs are on top of that. That means the Government is going to either fail to address the dire debt situation or have to cut spending even more.

Claims of easy “productivity gains” in the public sector are nonsensical. They take time and are incremental. A lot of this Government’s success is a result of the capability the previous administration developed among our bureaucrats. Ironic that: rather than celebrate its good luck, this Government proposes to destroy one of its strengths.

Of course, some cuts will be on whole programmes the Government does not think the electorate generally values (such as TVNZ 7). You may regret losing them, but presumably the Government thinks in each case the regretters are in a voting minority.

Some cuts won’t affect Government expenditure at all. Reductions in Working for Families, benefit entitlements, support for students and the KiwiSaver subsidy reduce the incomes of families, beneficiaries, students and savers. I leave you to decide whether each is a good thing. But reducing their income is a kind of additional tax, not a cut in the amount of resources the Government is using.

That makes the Government’s argument against an earthquake levy so strange. Certainly it is a tax and it would dampen the economy. So will cutting people’s incomes. But an earthquake levy on incomes falls on those with the ability to pay. Instead the Government is taxing the poor, weak and vulnerable. Is that fair? We are not arguing about what we should do about the quakes, but who should pay for their consequences.

Perhaps there is a political calculation – the Greens thought of the levy first – but why should the devil be left with the best tunes? The public feels deeply about the consequences of the earthquakes. The concern is broader than just those who are there, including those with family and friends in the city, or who have lived there, or who empathise with New Zealanders who have been hit hard. They would pay the levy – grudgingly, naturally, but holding a grudge against the devastation wrought – with a shrug that says, “There but for the grace of God go I.”

The Prime Minister has failed to articulate that response into national solidarity. Where are you, David Lange, when we need you? Key is trying to create national unity with the Rugby World Cup, even though about a million New Zealanders will be grumpy about the disruption it causes and the money the Government has lavished in a time of fiscal frugality. (It won’t contribute to an economic recovery; remember the America’s Cup?)

Key is an optimist. So are New Zealanders; we ought to be, given many of our ancestors sailed across thousands of miles of ocean from Hawaiki or Europe to a barely known destination.

But the optimism has to be grounded in reality. We are already in the fourth year of what is internationally known as the Great Recession. It has some years to go. Optimism is not enough; we need leadership that brings us together, not the sort that divides us by attacking the defenceless.

It is said that an earthquake levy would be unfair. Excuse me! Since when has charging for public collective goods by ability to pay been unfair; since when has charging the weak, poor and vulnerable been fair?

Will the Budget Be Fair?

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

Listener: April 26, 2011

Keywords: Macroeconomics & Money;

‘We object so strongly to having our own incomes further reduced by taxation that we think the incomes of pensioners should be reduced instead … In times of depression it is necessary to curtail the community’s consumption of many goods and services. Already people with large or moderate incomes have diminished their expenditure on many of the pleasant but unnecessary things which formerly they enjoyed. Most of them are, however, still tolerably comfortable. A great deal of money is spent on motor cars and holidays, on racing and other amusements. But rather than curtail further expenditure of this kind, we think it will become necessary to reduce expenditure … [that] would be most advantageous to the whole community.”

So wrote University of Otago professor Alan Fisher in 1932, satirising the attitudes of many of the elite as New Zealand struggled with the impact of the Great Depression. Are those attitudes still widespread? Are there people who are saying today that despite being well-off they should not contribute to the sacrifices made necessary by the Christchurch earthquakes and the global financial crisis?

Of course there are – there always are. Fisher’s point was that they were persuasive during the Great Depression, and that instead of the burden being shared across the community according to ability to pay, it was the weak and vulnerable who carried the greatest load in unemployment, loss of income and deprivation.

Is it happening again this year? I cannot tell yet. We should be able to make a judgment when the Government announces its tax and spending plans (the Budget) on May 19.

You won’t be able to tell from the public comment. Nowadays economic commentators (and professors of economics) rarely speak out for the weak and vulnerable. Those who do comment are rarely as transparent as Fisher was. Many will dress up their self-interest by pretending they are speaking on behalf of others. That’s the nature of the rhetoric of today’s politics.

Part of the problem is that today’s economists are not trained to think about fairness and equity. The discipline, rightly, says that economists have no special expertise for making such ethical judgments.

But the danger is that, instead, individual economists implicitly make them. Because they are not thinking about fairness, their judgments may reflect their own politics, which, more often than not, gives a low weighting to equity.

It is easy to say that the Budget will be “fair”, providing you are not challenged over what you mean (remember it is rare for an economist – or a journalist – to be well enough trained to make the judgment). Politicians will say their policies are fair when manifestly they are not. From 1985 to 1995 they said they were creating a fairer society, but as a result of their policies, inequality was objectively growing faster in New Zealand than anywhere else in the rich world.

Of course, an honest politician could say, “Yes, I am increasing inequality”, or “My policies place the burden of adjustment on the weak and vulnerable”, accompanied by an explanation of why they are doing this. (Hopefully, the reason would not be that the MP is politically dependent on the well-off who are as unwilling to make sacrifices today as Fisher says they were 80 years ago.)

Unfortunately, we don’t have good measures of inequality and fairness. (Why? Perhaps because the people who choose the measures we have don’t think these are important issues.)

But there is a simple way to evaluate a package. Ask whether the reductions in the Government’s deficit are funded mainly by additional taxation or by lower spending. If the former, it affects the well-to-do; if the latter, the weak and vulnerable.

And what if we don’t carry out the deficit reduction? Then the burden falls on future generations; you can’t be more vulnerable than they are. The future impact may be soon – perhaps as early as next year, if the international lenders become increasingly reluctant to lend to us. Then the adjustment will be harsher. Who will bear that burden? Go to the start of this column for an answer.

India’s Unmet Domestic Development Needs

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

Listener: April 16, 2011

Keywords: Political Economy & History;

In 1947, newly independent India embarked on a strategy of economic self-sufficiency in which domestic industry was protected from external competition behind high barriers. That reflected the fashion of the times, but also that Indian industry had had a pretty rough deal under colonial rule.

It was a similar desire for independence and self-sufficiency that led to the proposal to make Hindi the sole official language. Nonetheless many regions of India are not Hindi-speaking. Tamil-speaking Tamil Nadu (formerly Madras state), where more speak English than Hindi, even threatened to leave the union. Common sense prevailed; as well as Hindi the constitution mentions 21 regional languages, plus English as a second official language, with the expectation that students will learn at least three. (Accuracy requires mentioning that many Indians’ “Hinglish” is incomprehensible to the English-speaking visitor, and vice versa.)

What the founders of independent India did not predict was that one day the Indian economy would open up to the world, and the English they almost rejected would be integral to that engagement. The Indian dominance of international call centres could not operate without it.

Indian liberalisation has been slower than China’s. The key player has been the Prime Minister, Manmohan Singh, who was minister of finance in the early 1990s. The result has been some impressive internationally oriented businesses.

For instance, Rane Group, based in Chennai (Madras city), makes automotive components – including the precision forging of engine valves and tappets. It started a century ago as an importer, and evolved into manufacturing in the 1950s behind protective barriers. But it has now become more outward-directed, and exports to 25 countries, including supplying Volkswagen in Germany. That requires high-quality manufacturing and effective delivery, something the Indian service industry does not always attain. (Virtually every Indian hotel bath-room I have used showed poor workmanship.) As international competition pressured it, the firm switched from “inspect and reject” to total quality management, which requires a higher involvement by its workers in the production process. Today it wins Deeming awards, which celebrate the founder of modern production management.

Or take the giant software company Infosys, founded in 1981 by seven Indian engineers with about $300 between them. Initially they made little progress because Indian banks were not interested in switching from their traditional labour-intensive manual systems. Liberalisation allowed a few specialist foreign banks into India; they hungrily bought the company’s services, forcing the slumbering domestics to follow. Today Infosys is among the world’s top 10 software companies, with 60% of its revenues earned offshore. Its main campus, in Electronic City, Bangalore, employs 25,000 mostly engineering graduates drawn from all over India, a third of whom are women.

As much as they are shining lights in the economy, companies like Infosys do not have strong links to the traditional economy. The campus has only about 5000 non-graduate employees – cooks and cleaners – although its staff also hire service workers for their personal domestic needs.

Rane Group, which recruits its workers from more modest social groups – including the children of farmers – requires successful high school education and good character. It trains them in local technical institutes, offering the young people a life opportunity different from the traditional ones of their parents.

Given the size of the traditional sector, such career paths are welcome, but they are small compared with the need. Analysts talk of a “two-speed” India, with growing inequality. In the 2004 election the Government campaigned on “India Shining”, and lost office. Democratic India’s politics are so confusing it is hard to interpret the result, but undoubtedly a large proportion of the population did not buy into the shining that had passed them by.

Manmohan Singh is right. India needs to engage with the world, promoting firms and industries like Rane Group and Infosys. But that will not be enough. The urban service sector has to modernise, too, and, most of all, the rural economy has to lift its performance.

This is the third of a series on India, made possible by a travel grant from the Asia New Zealand Foundation.

Jolt Cost Must Be Shared

This entry was posted in Macroeconomics & Money on by .

Sunday Star Times: 3 April, 2011.

Keywords: Macroeconomics & Money;

The government may come to regret its decision not to impose an earthquake levy on taxable income. It says the public is not interested. That is not the sense I have.

New Zealanders are dismayed by the devastation in Christchurch. There is a widespread desire that its costs should be shared. If the total costs are around $5 billion, and we spread those across 10 years, that represents an annual levy of $500 million or less than $5 per taxpayer a week, even if we allow for the inevitable overruns and the costs of servicing the debt. That would be about half a percent on the existing tax rates, not a huge level because the burden is spread across a decade, and across all of us.

We cannot avoid the burden. The issue is how it will be funded – who will bear its cost? Fiscal policy is rarely transparent, but the effect of the levy would be to shift the burden from selected groups to the community.

We do not know exactly who the government intends to carry the cost of the earthquake – that will be detailed in its annual budget on May 19. But there are clues. Does it really make sense to expect the burden to be heavier for university students paying more for their education, for families who will lose their working-for-families entitlements, for social security beneficiaries, for KiwiSavers, and for those who value government services such as culture and heritage, law and order, the environment, infrastructure, and recreation?

Last week the minister of health announced that all our hospitals will have their resources cut to make up for Christchurch Hospital’s losses; no doubt the same is happening in education.

Let me make it clear that I still support fiscal consolidation to get the government and country living within their means.

There is also some spending which needs to be improved, although genuine gains will come from the steady application of efficiency principles rather than hasty slash and burn. Sure, there are spending programmes this government does not think are important and will abandon. That is what we voted for in 2008. But these moves will not find all the $600-$800m they are proposing to cut.

Am I not suggesting further government borrowing? No more than the government seems to be planning. The difference is that an earthquake levy goes into a fund, perhaps managed by independent commissioners, which disburses costs as they occur and borrows to even out the spending surges.

That says very clearly to our overseas creditors: “We have had a once-in-80-years disaster, which we are addressing in a prudent and practical way. Look through the earthquake reconstruction costs and see the government deficit coming down, and soon. You know it is crazy to cut expenditures in the short term to cope with such occasional crises. Fiscal consolidation goes on.”

More important, an earthquake levy means the community is supporting the reconstruction on the basis of ability to pay, instead of at the expense of those vulnerable to the government’s spending knife. Without one, we are sacrificing national unity based on compassion and concern, and replacing it with divisiveness. The cost to the nation will outweigh any politically expedient gains.

Consensus Rebuilding

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

Listener: April 2, 2011

Keywords: Macroeconomics & Money;

As the nation comes together in its response to the Christ church earthquake, the activities of opportunists are particularly detestable. Most obvious were the few looters taking advantage of people’s unprotected homes. But the worst case of opportunism may be in economic policy, when it is claimed that certain programmes would have to be reduced because of the devastation.

It was known before the earthquake that features of Working for Families and the zero interest on student loans packages were problematic. (For example, Inland Revenue has declared one woman “not-married” so she does not have a Working for Families entitlement, although Work and Income has said the same woman is “married” and ineligible for the benefit.)

It was also being argued, well before the earthquake, that remedying these defects presented an opportunity to cut back on public spending, but that is not necessary. For instance, I would reintroduce market interest rates on student loans, but use the fiscal savings to increase student grants.

This opportunism arises because there is a desperate need to reduce Government spending, given the size of the internal deficit and the concerns that overseas lenders think we are too heavily in debt and borrowing too much. What the cut- backs are about is how we share out the burden of adjustment. It is not obvious that families and students should bear more than most.

It is further opportunism to say that the cut-backs are needed because of the Christchurch earthquake. They aren’t. They were necessary before February 22 and they were necessary before last September. To pretend the economy was in a good state before the earthquakes is just dishonest. I doubt it helps to mislead the public, except in the short term, for it makes medium-term economic management much more difficult.

It is true the earthquakes have compounded the difficulties of fiscal management. The Government has, rightly, responded generously to the financial and resources needs of the public in their immediate distress.

Such emergencies are one of the reasons the Government needs reserves (and why the recent increasing of public debt has been a bit of a worry). These demands won’t go away quickly. There is an awful lot of public infrastructure to be replaced, and the private sector will need support, too.

A further complication is that some of the resources for reconstruction for both sectors will have to come from other parts of New Zealand. Len Brown, the mayor of Auckland, was right to acknowledge there will be less for extending Auckland’s infrastructure and so there is a need to look for alternative sources of funding.

This year’s Budget is going to be as fiscally difficult as it gets. It’s election year, so the Government would prefer to sit on its hands (or indulge in handouts). But as Finance Minister Bill English has insisted, fiscal consolidation – reducing the medium-term deficit – is urgent. Dealing with the earthquake adds to public expenditure. My impression, though, is that despite their reputation, foreign lenders are not unmindful of the devastation from the earthquake. If they are convinced we have a programme of sound fiscal consolidation, they may well lend more for earthquake reconstruction purposes.

What is needed, then, is a 2011 Budget that determinedly returns the Government finances to surplus in the near-to-medium-term. But the rebuilding of Christchurch cannot be left solely to the market. Its “me first” is not going to work in this case, and neither will it efficiently co-ordinate the resources required, let alone prioritise the reconstruction and share the burden in the way we want.

What we need is a Government White Paper about earthquake reconstruction. Did I write “Government”? Would it not be just wonderful if the national consensus – looters aside – that has arisen from the pain of the devastation from the earthquakes was continued in Parliament by a multi-party approach to the reconstruction? It will probably take at least a decade, so it requires a nationwide commonality of vision. That would not be opportunism but New Zealand collectively seizing an opportunity.

The Canterbury Public Library and Me

This entry was posted in Literature and Culture on by .

In March 2011 we were invited by the Editor of the Christchurch City Libraries’ Digital Library Web Team, Richard Liddicoat, to write something for the Canterbury Earthquake for the Christchurch Public Library.

Keywords: Literature and Culture;

Dear Richard,

I could not write to anyone in the Christchurch Public Library about what is happening after the Christchurch earthquake. The Library is too integral a part of me.

Not the new one on Oxford Terrace but the old one – on the site since 1863 – on the corner of Hereford St and Cambridge Terrace, opposite the police station (it is still the site of the old YMCA for me) and with the Canterbury Club on its north (never been in it).

It is so central to my Canterbury and to my growing up there. Both the university and the Royal Society had their first meetings there. My grandfather would cycle all the way from St Albans with my mother on the bar to collect books. I biked there by myself the five kilometres from South Christchurch – those were days when it was safe for a kid, and pleasant enough too; I can still describe the precise route (including the variations, some designed to moderate a head wind).

I am not sure when I started. I must have been very young, for I recall taking Enid Blytons and Biggles from the spacious children’s library on the left of the entrance. I was dismayed when they disappeared from the shelves. My mother, who became a librarian – Hilmorton High School has named its library the Thelma Easton Library for her years of service, in which she paid particular attention to encouraging children to read  – told me they were removed because children kept rereading them and didnt move on. (Years later I found a copy of Up the Faraway Tree, but the magic I remembered had drained away.) I moved on. Some librarian kindly gave me permission to go to the young adult section in the main library room near the stairs.

It was without permission I climbed those stairs and found the huge non-fiction room, with its millions of magical books. I read so many of them, although not all were authoritative: Velikosky’s Worlds in Collision, a book that argued Shakespeare was really Marlowe (of course Shakespeare was Shakespeare but at least my preferred alterative had talent). It was fortunate that such works were not censored, so I learned how to evaluate them myself. I was captured by a few books on codes; some librarian must have directed me to the Country Library Service (was it in the Press Building?) to extend the selection. (Again the CLS librarian treated me as a little odd, but humoured me; another huge range of non-fiction books became available.)

I have no recall of reading economics books at this time. Perhaps the closest was an essay by a John Maynard Keynes on Newton as the last sorcerer – I knew about Newton – in a collection which changed my life. For it was in the Christchurch Public Library I stumbled upon J. R. Newman’s The World of Mathematics, a four-volume collection of essays, articles and extracts – each with an introduction – on matters mathematical. I was proving to be a strong mathematician, but the marvellous selection placed the purity of mathematics in a social and historical context, a path from which I have never strayed.

By then I must have been at Christchurch Boys’ High School. Except for its chemistry section, its library was small, dark and sad. (I applied to be a school librarian – I had been one at South Intermediate – but there was no call to arms.) I recall reading Poe and other detective and macabre writers, and the novels of Thomas Hardy. But my interests were in non-fiction and once or more a week I would divert from the direct southward bike ride home, and go east through Hagley Park to the public library. By then I was also taking out books for my younger sister. I recall Orlando the cat and Babar the elephant. There were also large colourful picture books – usually American and often with a moral; there was one about an immigrant who insisted on painting his house purple to the horror of his neighbours, but they – and I – learned tolerance of foreign diversity.

A big change in my choice of reading occurred after seeing a high-school production of Bernard Shaw’s Arms and the Man when in the Lower Sixth. I was captured; I read all of GBS, any other modern plays I could find, and went on to social philosophy and debate – at first Fabian, then what was near those books on the shelves. All from the public library, of course. (My English teacher must have wondered what hit me. Once I use to sit up front, but in order to read it all, I sat right at the back, the book hidden behind the boy in front. Desert Joe was too tired or too knowing to reprimand me.)

The University had its own library – it had once administered the public library too – so as an undergraduate I no longer visited the Cambridge Terrace one much, although it was just down the road from the campus. Any relationship lapsed when I left Christchurch for my second degree, research training and OE. In any case I was building a personal library.

Returning in the 1970s, I rarely visited the Christchurch Public Library for my own purposes, the occasional visit to the New Zealand room for research aside. But Jenny and I were regular visitors with the children for their books. Honest, I took them when they were still in the pram. The front steps were a bit of a challenge but I discovered the back entrance past the rubbish bins (pram pushing is a good reminder of how badly our public facilities treated the disabled in those days). It’s for the kids to talk about the impact of those books on them, but I was struck how there was an evolving New Zealand children’s literature which we never had. (Once a librarian asked Jenny what we thought of some books she was taking out. The usual platitudes were followed by a little later noticing that the picture of the author on a back cover was that librarian – Margaret Mahy.)

Anita ended up in hospital for a week when she just eight. I read to her every day. First were the books I had loved as a child; some still worked, even for the adult reader, some did not. Then on to new ones. A public librarian must have helped me choose them. Some remain memorable: as The Chronicles of Pyrdain and The Weirdstone of Brisingamen, the thought of which still sends shivers down the spine of this mildly claustrophobic.

I left Christchurch for parts wild again and, not long after, the Christchurch Public Library moved to its new premises in Oxford Terrace. I was appalled when visiting my beloved city, to discover the old buildings were now business offices. I have no objection to commerce, indeed much of my work has been explaining to people its contribution to social wellbeing. But it did not seem right that the intellectual heart of my turangawaewae was taken over by it. Alas it has been a precursor, for many other sites of intellectual activity have been similarly overwhelmed.

Some years later, the Wellington Public Library was deaccessioning stock (what an insulting phrase to a devotee of libraries). In my study is a print I bought from it: ‘Christchurch Public Library. W. B. Armson, architect., 1875′ showing the building at the north end of the complex, although I never used it – offices? Its back says the rental fee was $5.00 (overdue charges 10 cents, crossed out for 20 cents, a day); the rental slip shows it had been taken out twice. (I dont think I paid a penny to the Christchurch Public Library, for I never borrowed the rental books, and I dont recall any fines. But paying local body rates, I always think of its public libraries.)

Stephen J Gould says he was set on his career by the cases of fossilised bones in a natural history museum in New York. I claim no such eminence, but one could say the Christchurch Public Library played a similar role in my life.

So, Richard, I dont want you to tell me that the Oxford Terrace buildings are in ruins or have a demolition order on them (as nasty a form of architectural deaccessioning as there is). But tell the citizens of Christchurch that they must replace what has to be replaced with a building which celebrates the site’s earlier functions, and the contributions it made to the lives of those who used it.

Brian Easton.

Quakenomics

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

Earthquakes are bad for the economy, despite the wool some are trying to pull.

Listener: 19 March, 2011.

Keywords: History of Ideas, Methodology & Philosophy;

Business journalists sometimes seem to compete among themselves for the silliest argument, but the height of fatuity must be the crowing that the Christchurch earthquakes will increase our gross domestic product (GDP). Perhaps they will, but it does not follow that this is a good thing. If it were, we could blow up all the offices of business journalists, thereby increasing GDP. Let’s blow everything up and we shall have the highest GDP in the world – huh?

For although GDP is a useful indicator of market activity, it should only be used with caution as an indicator of economic welfare. Economists have known that since it was first developed in 1934.

Economist Simon Kuznets said in his first report, “The welfare of a nation can scarcely be inferred from a measurement of national income.” Ken Galbraith made the same point in an elegant chapter in his 1958 book The Affluent Society, and so did my first economics teacher, Alan Danks, in the lecture in which he introduced the concept. The rest of the world may think GDP is the best measure of social welfare; economists certainly do not.

Kuznets developed the notion of GDP because he wanted to track market production and employment, an important issue during the Great Depression; economists have used GDP for this and related purposes since then.

The acronym hides some very subtle ideas. The P (product) in GDP refers to the output from market activity, which is only part of total human activity. Lots of other things we do add more to our welfare. Of course, we have to produce things – like food – but we also need to live in communities and interact with people, none of which is counted in GDP. Nor is our health or leisure.

The G (gross) refers to the consumption of capital: buildings, infrastructure and equipment – but not financial assets, which are treated in quite a different way because they are contractual obligations and not materially real. Capital wears out. The measure that takes that depreciation into consideration is called “net domestic product”, which is the amount we have left when we have replaced the worn out capital, and which can be used for new investment and consumption.

A major earthquake destroys an awful lot of capital, so it will be harder to produce things in the future. Canterbury’s (and New Zealand’s) total capital stock has been diminished by the earthquakes. Until the capital is replaced, productivity is reduced. If you care about catching up with the rest of the world in GDP terms, then your aims have been set back by the earthquakes, despite the alleged growth in GDP. (Personally I would rather we pursued goals covering education, health and happiness.)

GDP covers all the production in New Zealand, some of which is owned by New Zealanders and some by foreigners (typically foreign companies or the interest payments we pay on our offshore borrow%ings). That is the meaning of the D (domestic). In calculations of “national income”, the income attributable to foreigners is deducted from the net domestic product, and overseas income generated by New Zealanders is added. It better reflects the market incomes of the nation.

Much of the capital destroyed by the earthquakes becomes the responsibility of the overseas insurers, so the income of New Zealanders does not fall as much as the production of the economy as a whole. But while part of the costs of the economic destruction are borne by foreigners, almost all the human costs are borne by us. (So if you blow up journalists’ offices, make sure they are owned or insured offshore – and try not to blow up the journalists.)

GDP will increase if employment and output rises from the reconstruction following an earthquake. That is what happened to the European economies after World War II as they replaced what had been destroyed. That was the source of the German “economic miracle”, which ceased after 15 years when the country got back to the track it would have been on had there not been a war. They were not any better off economically from the devastation of the war. And neither are we from earthquakes.

Who Wants Asset Sales?

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

Those who favour privatisation can be divided into four camps …

Listener: 5 March, 2011.

Keywords: Business & Finance; Governance; Macroeconomics & Money;

Ideologues who hate the Government succeeding and want to scale it back, even if it is costly, as was privatising the Telecom monopoly. They would do the same to the three electricity companies. Given that the Government has just reorganised them and there is an informed (but not unanimous) view that they should be merged into a single business, it would be premature to privatise them. But when has rationality been a concern of the Ideologues?

Greedies who expect the Government to bail them out with cheap assets and fat fees. That is what happened after the 1987 sharemarket crash. The financial sector, reeling from its own incompetence, wanted some assistance. It got it from privatisation, although subsequent events added to the evidence of incompetence. (There were successful sales; my favourite is the National Film Unit, now owned by one of Peter Jackson’s companies, although we have been pouring subsidies into them, too.)

The argument this time is that the private sector has not been able to develop decent capital markets for the Greedies to benefit from the fees. I sympathise with the case for deepening the market (developed below) but it is how you do it; how the Greedies want to do it is not the right way.

Panickers who want to sell to reduce government debt to avoid the international receivers. The Ideologues and the Greedies like this argument – or any argument that leads to privatisation. But debt reductions from this source will not be enough; often they increase private debt. We need other measures, but first we need to admit the country’s finances are in a dire state. I am a cautious panicker. Some assets sales may make sense (like selling part of Solid Energy to a Chinese firm that wants to improve its security of supply). Other sales may increase the incentive to save. But if it’s a matter of selling off good-quality assets because we have screwed up the nation’s balance sheet, let’s tackle the whole problem rather than pretending privatisation will be enough.

Me, yes, me, providing it’s only a minority privatisation and we go about it the right way for the right reasons. First, every business needs a cornerstone owner committed to its future, not the flashy wideboys who flick the firm on from one temporary owner to another, damaging it each time, as happened to NZ Steel, Telecom, the railways, Air New Zealand … Often – but not always – the only available competent cornerstone owner is the Government.

Part of the past decade’s problem was that ordinary individuals (and our sovereign funds, I’ll come to them) had limited opportunities to invest here. Sure, they could put their money into banks but what if you wanted to trade off a higher return for more risk? Sadly, many invested in finance companies run by wideboys and/or, apparently, incompetents. Not only did investors lose their savings, but the savings were wasted on useless investment. Small savers deserve the opportunity to invest in good-quality companies with solid cornerstone shareholders.

Sovereign funds like the Cullen Fund (and ACC, National Provident and Government Super) and local private funds like KiwiSaver find investment opportunities limited here, so they invest offshore. The chance to invest in government-owned enterprises would mean more investing here – for “mum and dad” investors, too, although they may be wealthier than the average New Zealander; no wonder most voters are not interested.

How to do it? First, slowly – small investors are not going to find overnight the billions that are being talked about. And, second, with conditions that prevent the wideboys being interested; for example, if the Ideologues and the Greedies get their way, and a future government sells its holdings so it ceases to be a cornerstone owner, other shareholders must be bought out on the same terms.

What to do with the funds? The immediate need is to reduce government debt, but later we should reinvest them in the businesses or even – Ideologues will be appalled – use them for more public-sector commercial investment. The broadband rollout?

For Paul

This entry was posted in Miscellaneous on by .

I went to Christchurch Boys’ High School with Paul Dunlop (1943-22 February, 2011). While our paths diverged at university – after physics, he worked as an optician in the Christchurch family firm – we kept in touch. He was one of three in Christchurch’s Methodist Durham St Church rescuing a pipe organ (they were his hobby) who was killed in the Christchurch Earthquake. This is based on a note I wrote immediately after a memorial concert for the three on 4 March, 2011.

Keywords: Literature and Culture; Miscellaneous;

This evening I attended a memorial service organ concert for the three staff of the South Island Organ Co who died at the Durham St Methodist Church. One was Paul.

The venue was the St Peters Church in Willis St, Wellington, chosen because it just has had its organ restored by the company. St Peters is a gothic revival church built in heart kauri. Its beautifully done, with the wood imitating the stone features you would expect, but giving its own shine.

(The Christ Church Cathedral was to have been done in wood, but they found the stone. Other churches followed the style, including the Durham Street one.)

I’d have said there were up to 250 people there – allowing for comings and goings. Quite extraordinary really, because 5.30 on a Friday is a dreadful time with people hurrying off for the weekend, and traffic jams everywhere.

I hardly knew anyone and there was no talk; just four people playing the organ. There were candles up front to light between pieces. The concert finished in just over an hour, with the organists each lighting a candle to show the concert had ended.

The church faces east-west. Some times the sun broke through the cloud eerily lighting up the congregation, the glow taking it out of the gloom. Three times I think; once for each person?

I did not know the works that were played, but recognised the Bach – glad that dear old JS was there. Also works by Lilburn, Howells, du Bois and Franck. In truth I dont know much about organs although I understand each has a personality.

As we sat there in silent contemplation, I wonder about St Peter’s one’s. The music started off in the higher registers, and then tended to move down. It led me to think about singing at School – how we started off as trebles and then moved to the basses. It was integral to the school as a community.

I remembered some favourite lines which we sung. Only years later I learned came from Milton’s Il Penseroso:

There let the pealing organ blow
To the full voiced choir below

It was strong and complicated to sing, as we changed registers (more difficult when your voice was breaking) – and true, for it goes on

In service high, and anthems clear,
As may with sweetness, through mine ear,
Dissolve me into ecstasies,
And bring all Heav’n before mine eyes.
And bring all Heav’n before mine eyes.

And I thought of the hopes and dreams and ambitions of schoolboys, and how life is something which  happens while you are making other plans. But even if those plans never come to anything, how we did much better than our school masters would have ever thought – in our families, in our work and in our community activities. And I thought about Paul.

My Reading (nz Book Month 2011)

This entry was posted in Literature and Culture on by .

I was asked to write for the March 2011 New Zealand Books Month something about my reading.

Keywords: Literature and Culture;

There are hosts of books which opened up new vistas in my adolescence and the decade after. My reading today could not be possibly offer similar experiences; instead it enriches these landscapes. The exceptions are the books I write. As Joan Didion  said, ‘I write entirely to find out what I’m thinking’. My last major published book, Globalisation and the Wealth of Nations, taught me new ways to look at the world economy over the last 200 years – and the next 100; I may well be ten years ahead of the rest of my New Zealand colleagues. But that is cheating. The last well-read book is always enlightening. How about the current one? The Lords of Finance which describes the interwar world economy and the Great Depression, reminding us that we never seem to learn from experience.

God’s Other Country

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

The Keralan remittance and tourist economy is rather like many Pacific Island ones.

Listener: 19 February, 2011

Keywords: Political Economy & History;

The huge South Asian peninsula has a larger population than Europe and about six times the population density. Both have suffered a high degree of political fragmentation. Even under the British Raj, a myriad of South Asian entities existed before independence in 1947; today there is but India, Bangladesh, Pakistan and Sri Lanka. Even so, India’s 28 individual states show considerable diversity, just like European nations.

Tucked on the southwest of the Deccan peninsula, facing the Indian Ocean, is the state of Kerala, with 32 million people in an area a seventh the size of New Zealand. Its income is below India’s average; a person living in Kerala typically earns less in a year than we earn in a fortnight.

What distinguishes Kerala is its unusually high human development. Its literacy rate is 95%, its life expectation 76 years (New Zealand’s is 80, but the Maori rate is 73). Not only are these figures well above the Indian averages, but they are above the Chinese ones, too. On other health measures, such as infant mortality and low body weight, Kerala also does well. It is the only Indian state rated “high” on the human development index, which combines income with health and educational attainment.

How well women are doing is often a good test of developmental success. The women of Kerala have (slightly) higher literacy than men, and this is the only Indian state with more women than men, indicating good women’s health and limited pre-selection of gender via abortion and infanticide. (China has a similar female deficit to India.) Kerala’s fertility ratio is close to the replacement level, indicative of modern attitudes. (But its divorce rate seems about triple the Indian average; perhaps men find it difficult to adjust to “developed” women.)

Since women tend to drive their children’s education, their success gets passed on to the next generation. In 1817, the area’s young female ruler, Rani Gouri Parvathi Bai, called for a universal free state education system for boys and girls, saying, “There should be no backwardness in the spread of enlightenment” – this was well before the English Education Act of 1870 (and ours of 1877).

Kerala’s success has come about because its government has cared. It had the first Communist party in the world to be democratically elected to office – and more importantly, the first to give up office following an election loss. It implemented the reforms mandated by the government of India’s first prime minister, Jawaharal Nehru: universal free schooling, limitations on the size of land holdings, redistribution of the surplus land to the landless, guarantees for the rights of tenant cultivators, rural development schemes and collectivisation. In other states, the forces of reaction and privilege resisted such changes.

Yet successful human development has not generated high economic performance, for the state has been unsuccessful in attracting the industries that lead India’s economic development. Perhaps this is because Kerala is out of the way, the roads are terrible after the monsoon or it’s prone to industrial unrest.

Aside from the subsistence sector, the largest economic activity is tourism. Even bigger, though, are the remittances from Keralans who work in the Middle East (and elsewhere in India), thereby capitalising on their education and health.

This is the modernising sector in Kerala’s traditional economy. Despite being mainly offshore, it puts pressure on the state’s political economy, as the funds are used for conspicuous consumption, especially housing that makes Auckland’s Paritai Drive seem modest.

Sadly, little seems to be invested in Keralan industry, so any trickle-down effects (or “linkages” as economists are wont to call them) are weak. (Allow central government transfers instead of aid, and the Keralan remittance and tourist economy is rather like many Pacific Island ones.)

The signs around Kerala say “God’s Own Country”. If so, God is more interested in human development than %material output.

This is the second of a series on India, made possible by a travel grant from the Asia New Zealand Foundation.

Imbalances in a Small Open Economy: New Zealand and the Great Depression

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

Paper to the 2011 Asia-Pacific Economic and Business History Conference,  San Francisco, February 2011. (Revised March 2011)[1]

Keywords: Macroeconomics & Money; Political Economy & History;

The International Context

There is a considerable – and partly contested – historiography of the interpretation of the events which surrounded the worldwide Great Depression. It is usually said to have started with the Wall Street Crash which began on ‘Black Tuesday’, 29 November 1929, although, like New Zealand’s, the United States economy was weak before that date.

Aggregate output for the 34 Western European economies and their ‘offshoots’ (Australia, Canada, New Zealand and the United States) fell almost 16 percent between calendar year 1929 (mainly before Black Tuesday) and 1933, the nadir year for the totality of the 34. The population rose almost 3 percent so the overall fall in per capita GDP was 18 percent. The same data base shows a fall in NZ GDP of 9 percent with a rise in population of over 4 percent, and a fall in per capita GDP of 13 percent. Despite the myth, it is not evident that New Zealand was the hardest hit of the Western-type economies, for the data base has Austria, Canada and the United States with greater falls in per capita output, and the Netherlands about the same.[2]

The New Zealand based data tells broadly the same story although, as usual for early periods, it is fragmentary and incomplete.[3] Between March year ending 1929 and the nadir year of March ending 1933 (a different period from that in the previous paragraph), the estimates suggest a nominal reduction of output of about 29 percent and a real fall of about 11 percent. Meanwhile population had risen about 5 percent.

Per capita production measures do not capture the fall in effective income because the terms of trade fell about 36 percent, so that exports earned less relative to imports. The fall in per capita GNE – a better measure of the change in the standard of living – seems to have been about a quarter. (Easton 1996:61)

We do not have the data to make equivalent adjustments for the other economies, but it is very unlikely that any were as impacted as heavily as New Zealand by a terms of trade fall (possibly Australia aside). Indeed some were better off, for they were getting their pastoral products cheaper and would have had an income gain from their terms of trade. In any case, any effect would have been small because of the composition of their exports and imports. (Some poorer countries not included in the 34 would have suffered more like Australasia, because the price of their exports plummeted too.) Even so, almost certainly the United States and Canada experienced a greater fall in their real incomes (that is, after adjusting for the terms of trade).

International comparisons of unemployment are very limited. Keith Rankin estimates that unemployment rose to about a third of the labour force. (Rankin 1990) The consequence of the hardship that went with the contraction is that policy discussions on the period tend to focus on the inadequacy of the macroeconomic response.

We shall have a little more to say about this and the related issue of whether the burden was shared equally, but the analysis fails to observe that there were severe economic and financial imbalances in the early stages of the contraction and that the focus of policy was on addressing the imbalances whose adjustment was inhibited by various market price rigidities, so that policy interventions were required. Without these measures, any subsequent expansion of the economy would not have been sustainable, even had there been appropriate policy instruments to stimulate it. (As we shall explain, there were not.)

As well as correcting and expanding the historical record, this paper illustrates that on occasions analysis based on one commodity economies can be misleading. Towards its end the paper considers to what extent its conclusions are pertinent to the issues facing economic management during the current long recession.

Background: The New Zealand Economy in the 1920s and 1930s

In the 1920s the New Zealand economy had one of the highest per capita incomes in the world. The Maddison real GDP estimates bracket it with Australia, Belgium, Canada, Netherlands and the United Kingdom but behind Switzerland and the United States. To a degree the economy was different from these others. New Zealand’s was smaller; Switzerland’s population, the next largest among those mentioned, was 2.5 times bigger.

New Zealand’s structure was colonial. Some 80 percent of its exports were sold in the single British market; there were only four basic export commodities – butter, cheese, meat and wool – all sold in auction markets.

Monetary arrangements were equally as colonial – akin to the sterling balance arrangement by which Keynes characterised the Indian economy. (Keynes 1924; Tocker 1924; Ashwin 1930) There was no independent national monetary authority but the local banking system was regulated by the London market. In practice the New Zealand government was the main net borrower of sterling funds on the London market, its spending in New Zealand providing the banks with the foreign exchange they required which they did not get from their exporters. There were local financial markets, but given the exchange rate arrangements as explained below, it was effectively a colonial outpost of the London market (perhaps in a similar manner to Scotland’s, except as we shall see, New Zealand had a little more flexibility in its exchange rate arrangements).

The 1920s

The New Zealand economy was subdued in the 1920s, probably because of its dependence upon the stagnant British economy. The available (annual) estimates tell slightly different stories, but collectively they suggest that output per capita hardly rose; one shows per capita GNP falling from 1924/5 (that is, for the year ending March 1925), for the other three the contraction into the Great Depression begins in 1928/9 or 1929/30. (Easton 2011)

A separate issue was land prices. I calculated that the average return on farming for the 8 years to 1929/30, was 4.7 percent p.a. (after allowing a return for the self employed farmer’s labour). At the time mortgage interest rates were nearer 6.5 percent p.a while the value of all (not just farm) land was rising about 0.5 percent annually. The implication is that a farmer would do better to put the equity in the bank and get a less stressful job. That was true even before the shattering impact of the depression on farm finances. Even more concerning was the debt to equity ratio. In 1929/30 and 1930/31 it averaged 60 percent. Some farmers would, of course, have debt well in excess of that ratio. (Easton 1980)

The Impact of the Great Depression

There is little quarterly data to track the New Zealand contraction. Perhaps because the economy was already in difficulty the incoming government after the November 1928 General Election, had been elected on a promise to borrow from the London money market an additional £7m a year – about 2 percent of GDP. (The actual promise was £70m in a year, but this was probably a misreading of speech notes – it won the opposition the election.) At the time Government overseas debt was close to 100 percent of GDP. The funds were to be used for capital works to develop the New Zealand economy (especially extending the railway system) but, of course, there was also the short term benefit of jobs.

In the event the ambiguity did not matter. What the incoming government did not know was that the New Zealand economy was already having difficulty borrowing in London. The details are contested, but the outgoing Government appears to have known that its recent borrowing had been considered excessive and it may have given confidential assurances that it would borrow little extra on the London money market in the immediate future. In any case there was £24m of loans coming due for repayment. A planned loan of £5m was increased to £7m, ‘but hopes of a large infusion of capital were dashed.’ (McKinnon 2003; 104) Spending on capital works would have to be curtailed. These financial difficulties occurred before the Wall Street Crash although the spreading financial turmoil added to them.

Dramatic falls in external prices were more attributable to the Crash. At the end of 1929 export prices began falling.[4] They had long been volatile but when they bottomed in mid-1932 the fall was close to half. Just because prices fall, wool does not stop growing, nor do cows stop producing milk,. (Animals can be slaughtered, but in the short run that lowers meat prices as market supply increases.)

Prices of New Zealand imports did not fall so precipitately – about 15 percent from peak to trough. Faced with falling prices, manufacturers cut production and laid off staff (animals cannot be treated this way) thereby reducing supply. That is why the medium term supply elasticities are higher for manufacturing ones than farm ones, and their prices do not fall so precipitously.

So soon after the Wall Street Crash New Zealand faced increased difficulties with its already struggling offshore borrowing program, while the pastoral export sector which earned its international exchange faced severe reductions in demand and prices.

Interlude: Sharing the Burden

The New Zealand economy faced a substantial adjustment. A central issue for political and economic management is the sharing of the burden. Much of the legitimate criticism of the period could be around the fairness of the sharing. Some economists made the point even at the time. (e.g. Fisher 1932) That belongs to another paper, although we shall return to it briefly at the end.

The Imbalances

So the New Zealand economy faced three major imbalances at the beginning of the Great Depression.

1. A fiscal imbalance arising from reduced revenue as the economy contracted, together with reduced offshore borrowing. There were no automatically compensating spending changes

2. A commodity price imbalance arising from the fall in the price of exports on one hand, with also a lesser fall in the price of imports. That meant that the price of non-tradeables was too high. Note that if export and import prices fall by the same amount, non-tradeable prices might be expected to have to fall by roughly that amount. When there is a change in the terms of trade – a twist in the external price structure – it is less clear how far non-tradeable prices should change.

3. Asset values, especially in the export sector – (i.e. land values) – were excessive.

The simple story of a contraction assumes that there will be smooth adjustment of prices and expenditures which would eliminate these imbalances. In practice many of the automatic market mechanisms did not come into operation because of various institutional arrangements, including:

1. Of course fiscal adjustment always requires a conscious political decision, since public spending does not automatically contract in line with the fall-off in revenue and loan monies. Note that some spending is even less flexible; in particular a unilateral repudiation of foreign debt obligations could generate loss of reputation and future difficulties for offshore borrowing. It far easier to cut back domestic public expenditures.

2. At the time there was considerable wage downward rigidity from:

– public sector wages which, ultimately, were set politically;

– private sector wages, for the Court of Arbitration, in effect, established legal minima for nominal industrial wages.

3. As to be explained, the exchange rate was near fixed. A related consequence of the exchange arrangements, also discussed below, was that there was a floor on interest rates, and limitations on the possibility of inflation as long as the arrangements were maintained.

4. While asset prices are in principle flexible – although individual asset holders may be reluctant to sell below some perceived value – many assets had a mortgage or some other contractual liability registered against them. If asset values fall below the value of the liability, the asset holder is bankrupt. The complexity will be further reinforced if the contractual interest rates are fixed, while nominal interest rates are falling.

These rigidities were addressed as follows:

Fiscal Imbalances

There were cuts in spending. The main expenditure adjustment was reduced public works. In 1928/29 it was £15.3m, in 1932/3 it was £3.5m. Across all current expenditure the nominal cut was 24 percent.

Land taxes and income tax rates were raised during the contraction. It is difficult to quantify precisely their effect given the complexity of the rates, and that incomes and prices were falling. There was also imposed an unemployment levy from December 1930. At first it was purely a poll tax on adult males, initially £1 10s, to be paid in quarterly instalments of 7s 6d each. The weekly sustenance allowance was set at £1 1s. At best – assuming there was not allowance for wife or children – the scheme could cope with 2.7 percent unemployment among its members. As the proportion rose, the finances of the system began collapsing and from August 1931 an emergency unemployment surcharge was levied on all wages and salaries (so including women and youth) at the rate of 3d in the pound (i.e. 1.25%). This was the forerunner of the social security tax introduced in April 1939.

Public income support and pensions were cut in 1932 (and sometimes before), typically by 10 percent, with additional cuts in concessions and abatement exemptions, so the effective nominal cuts were greater.

In summary, desperate measures were taken to maintain fiscal balance. From a base of £264m in June 1929, gross central government debt peaked at £352m in 1934 or by a third including some rise as a reult of the 1933 delavulation. (Since nominal GDP had fallen the debt-to-GDP ratio had risen from 168 percent to 248 percent in 1933.) However by Keynesian standards it could not be said the fiscal stance was expansionary. What was restricting a more expansionary stance was overseas borrowing. Offshore net central government debt rose from £134m in June 1929, peaking at £156m in 1932, and was back to £137m in 1934. In 1929 half of the public debt was offshore; by 1934 it was below 40 percent.[5]

Wages

Public sector labour costs were also addressed as a part of the fiscal restraint. Public servant wages were unilaterally reduced in early 1931 by 10 percent. In March 1932 there were further cuts varying between 5 and 12.5 percent.

Work scheme costs were addressed too in order to stay within budget as unemployment rose. In November 1930, the daily rate for those on relief was cut from 14s 0d to 12s 6d (11 percent) for married men and 9s (36 percent for single men). Later the 9s 0d rate would be cut to 7s 6d for single men in the main towns, 6s 0d in the secondary towns, 5s 0d in the smaller towns and 3s 9d in the rural areas and Maori pa. Work was available for only 2 days a week. Rates were higher for married men and higher if they had children; they also could work more days a week. (Sutch 1966:131)

Nor were private sector wages immune, as employers felt the squeeze of falling prices while wages initially remained rigid. They had been set through a system of awards (legal documents) agreed between employers and workers under the umbrella of the Court of Arbitration. Following a change in legislation which altered its powers, the Court issued in May 1932 a general order reducing all rates in awards and agreements by 10 percent. In April 1932 an even more radical change to the Industrial Conciliation and Arbitration Act removed the general jurisdiction of the Court unless employers and workers jointly referred a dispute to it (there were exceptions, including for female workers). Employers could now make offers on a take-it-or-leave-it basis while workers had little redress. (Woods 1963:126-9)

The available wage data reports only the private sector awards but does not include pay rates for those not covered by them (their numbers probably increased under the new arrangements). They record a reduction in the nominal wage rate for adults of 17 percent between 1930 and 1934. While the cuts were long bitterly remembered there is rarely recall that consumer prices fell 21 percent over the same period, so that effective wages rose slightly. Keynes’s notion of a money illusion applied in practice in New Zealand. (Martin 1994)

Monetary and Exchange Rate Management

Earlier we drew an analogy of New Zealand’s monetary arrangements at the end of the 1920s with Scotland. We could have also drawn parallels with a state of the US such as Colorado or, in contemporary terms, with a small nation in the European Monetary Union. Scotland and Colorado are a useful reminder that a sovereign nation, which in effect New Zealand was (despite some formal connections which were not severed until 1948), does not necessarily have control over its economy (as recently observed by some small nations in the EMU).

According to the law at the beginning of the Great Depression, a trading bank’s note issue was not to exceed three times its gold reserves, nor should its ‘debts, engagements and liabilities’ exceed three times its coin bullion and public securities in New Zealand. Neither provision had much effect. What regulated a bank’s behaviour was the funds held in London, which were, in effect, the settlement cash with other banks. It is perhaps a little more complicated than this, because four of the six trading banks were Australian owned and a fifth also operated in Australia, but the simplification will suffice here.[6] (Hawke 1973:16)

What determined the additions to the London funds was the net surplus of exports over imports, less the net sterling debt servicing (interest), plus the new sterling loans (mainly by the government). While in most years of the 1920s, the value of exports exceeded imports, they did not return enough to also cover debt servicing, with the deficit in the current sterling account being offset by government borrowing. Without such borrowing there would be a reduction in the London funds which would compromise the soundness of the trading banks unless some action were taken (such as reducing advances in New Zealand) which typically would contract production. (Moore & Barton 1935:358)

Rather than a fixed exchange rate, the regime involved a small discount of sterling versus New Zealand pound.(i.e. New Zealanders would pay more New Zealand currency for sterling). In the 1920s, up to October 1928, the telegraph exchange rate had been typically £100 British sterling costing about £100 15s 0d of New Zealand currency. It began inching up. By April 1930 the British sum cost £105, in January 1931 it cost £110. (Hawke 1973;19) The rise in the premium meant that an exporter received more New Zealand currency from the London sale of their product, a small recompense for the sharp drop in their auction prices, but nonetheless some.

In September 1931 British sterling abandoned the gold standard. New Zealand (and Australia and some other countries) by pegging their currency to sterling, also broke the link with gold. In December 1931 the Australian government pegged its pound to 16s sterling, a devaluation of 25 percent. This triggered a debate in New Zealand as to whether it should do the same. The details need not detain us – it lasted almost a yeart because some of the key politicians being overseas in various international negotiations for much of 1932 – but the outcome was a change of Minister of Finance in January 1933 following a devaluation to £NZ125 to 100 sterling, so it was now at the same rate as Australia’s pound.

This had the effect of transferring some of the burden of the fall in export prices to the domestic sector which now had to pay more for its imports. (It also gave some relief to businesses competing against imports.) However there was an increasing burden on those with foreign debts, including the government, for their debt servicing costs rose.

There is an international debate as to the consequences of abandoning the gold standard, which concludes that those which did so early recovered fom the depression shocks earlier. (Eichengreen & Sachs 1985; Campa 1990; Bernanke 1995) Britain began expanding as early as 1932 and Australia expansion began not much later.[7] New Zealand followed Australia; it may well have been expanding before the devaluation, although whether that expansion was sustainable has not been evaluated. [8]

Interest Rates

International interest rates were falling. In 1933 short term British interest rates were down to 0.5-0.6 percent p.a., from 3.5-4.25 percent in the late 1920s. (They had been higher in 1929.) Long term rates had fallen from near 4.2 percent p.a. to 3.2 percent.[9]

There is no readily accessible figure for New Zealand, but the average coupon rate on outstanding foreign and domestic debt was 4.5 percent p.a. for March year 1929 and 4.1 percent for March year 1934.[10]

The only long-term domestic interest rate measure available is the nominal rate on new mortgages. In 1929 it averaged 6.5 percent p.a.; by 1934 it was down to 5.6 percent p.a. Given that it was a period of deflation, new debtors were facing double-digit real borrowing rates, as indeed were those with long term mortgages locked into the old higher rates.

The 1931 Finance Act (there was subsequent legislation amending and enhancing the provisions’ scope) cut interest rates on (just about) all mortgages executed before April 1932 by 10 percent. (There were minimum floors of 6.5 percent for chattel-mortgages, 5 percent p.a for other mortgages, excepting the case of income-tax free company debentures where the minimum was 4.5 percent p.a. There were provisions for appeal by a mortgagee for relief.)

This did not address the capital value of a mortgage. From early 1931 there were legal provisions culminating in the consolidating Mortgage and Tenants Relief Act of 1934 which allowed a distressed mortgagor to approach an Adjustment Commission (or a court if there was not a voluntary settlement) to limit a mortgagee’s power of foreclosure, to postpone the payment of interest or principal, to reduce the rate of interest to remit any arrears of interest and to extend the period of table mortgages. By July 1935 there had been almost 27,000 applications to the Commission of which almost 15,000 had been referred to the courts involving almost £33m of principle. (There are no estimates of the stock of mortgages, but in the 1928 to 1931 period the typical value of new mortgages registered was near £33m a year, a similar order of magnitude; in the following four years considerably fewer – say a quarter by value – mortgages were registered.) Just under a half of the applications were granted; a quarter of interest in arrears was remitted and around two fifths had their interest reduced. Fewer leases – just over 2000 – were dealt with, with similar success rates. (NZOYB 1936:567-571)

Even so, the Dairy Industry Commission concluded that in 1934 ‘at least 50 percent of the dairy farmers of the Dominion are, in varying degrees, unable at the present time to meet their financial commitments’. (1934, p.52) It was not until 1938 that the Adjustment Commissioners completed their work.

While the measures are typically recalled in equity terms, those that affected farms rather than urban properties (half?) were efficient insofar as they probably maintained effective productive capital, which tends to deteriorate when the usual foreclosure processes occur. (McDonald & Thomson 1987) Bankruptcies were low – in the period less than 1000 a year – and their debts proved were low too – typically under £1m a year. They peaked in 1931. (NZOYB 1936:581)

The willingness for the state to revise private contracts – and that the intervention was broadly acceptable to the public – reflected a national pragmatism, although it is instructive that capital sums were not generally revised. (In the early 1920s, returned soldiers recently settled on farms with government debt found themselves struggling, and there had been a systematic writing down of their liabilities and interest commitments. This time the approach was applied to private contracts as well.)

Perhaps as an aside the New Zealand banking system showed considerable stability with no banking failures or rescues. This is consistent with the findings that the key factors elsewhere were macroeconomic policy – especially exchange rate policy – and banking structure, but not the existence of an active lender of last resort. (Grossman 1994) However, in the Long Depression of the 1880s and 1890s two New Zealand owned banks had to be rescued at considerable cost to the taxpayer.

The Role of Economists

The Great Depression was a learning experience for New Zealand policy makers. They were unprepared for it; there may have been only one economics graduate in the public service when it began (Bernard Ashwin in the Treasury).

Economists played an increasing role. The professors of economics were involved in policy advice, especially in their membership of the 1932 Economic Committee which recommended the exchange rate change. Dick Campbell was Gordon Coates’ private secretary when he became Deputy Prime Minister in September 1931, Bill Sutch joined Coates’s office – he was now Minister of Finance – in August 1933 and Horace Belshaw in 1934. Academics – notably Douglas Copeland of the University of Melbourne, James Hight and Albert Tocker of Canterbury University College, and Alan Fisher of the University of Otago, as well as Belshaw from the Auckland University College – also played an important advisory and public commentary role. (Economic Committee, 1932; Fisher, 1932)

Such policy advising economists as there were inevitably focused on righting the imbalances rather than addressing macroeconomic management as we know it today; there were simply not the policy instruments. Insofar as they had a macroeconomic policy, it was to develop the institutions which would improve management in future downturns, most notably the establishment of a central bank which would give greater independence of monetary policy. The Reserve Bank of New Zealand was established in 1934, although it took time to phase in its effectiveness. (Hawke 1971)

The popular vision that the economic management could have done more to expand the economy fails to grasp that there were not the means to do so. Spending more (or taxing less) would have created a financial crisis because offshore lenders would have been unwilling to finance the required sterling borrowing to pay for the consequent imports. Instead policy addressed such imbalances it could, providing for the sustainable expansion from 1934.

It is more arguable that the impact of the measures was unfair. Was the balance between the sacrifices between town and country, between the tradeable and non-tradeable sectors, between capital and labour; between those with jobs and those without fair? Could wealth owners have been given a ‘haircut’ by a wealth tax or by writing down some debt? That is a political judgement which economists need to approach cautiously; in any case there has been no close analysis of equity impacts.

What we can say with greater certainty, is that on the day the handful of economists acquitted themselves reasonably well in difficult and novel circumstances.

Conclusions

What can we learn here with relevance to the current long recession? Undoubtedly the fiscal lesson is understood well enough. A small country dependent on offshore funds may be very restricted over what it can do fiscally. (Today this may apply when the offshore borrowing is largely private rather than public.) But that lesson is well enough understood by Scotland, a part of the United States or a country on the margins of the European Monetary Union, all of which have less exchange rate flexibility.

Changes in external prices do not appear to be as great a problem in current circumstances. If anything there has been a tendency for commodity prices to rise. Thus New Zealand has not had to deal with a deterioration in its terms of trade, although net commodity importers may face difficulties. More complicated pressures from maintaining the balance between tradeable and non-tradeable prices may arise if there are medium-term changes in the exchange rates; there may be lessons from the 1930s here. If there is worldwide inflation, who knows?

What is useful to observe here is the amount of trouble that New Zealand went to, to get its debt levels manageable, if necessary by modifying private contracts. It would be difficult to test rigorously the counterfactual proposition that had there been no direct intervention New Zealand’s recovery from the Great Depression would have been later and less sustained. (An alternative strategy might have been a conscious promotion of inflation which would have devalued the debt, as argued by Eggertsson and Krugman (2010). However, given its monetary arrangements, that was not a practical option for small economy like New Zealand – and probably is still not unless there is worldwide inflation.)

The success and speed of an economy (and the world) in addressing the imbalances which become apparent,  may be a principle determinant of the course and length of a depression or long recession. This may be done directly by market mechanisms, or indirectly by government actions if there are rigidities which a long recession/depression experiences exposes or creates. This is not to deny, say, the Schumpeterian analysis where certain sorts of imbalances drive the economy (or, more colourfully, that an economy is like a wobbly bicycle which needs to go forward to stay upright). But it is to argue that macroeconomic management – fiscal and monetary measures – by itself may not be particularly effective unless the underlying structural imbalances are also addressed

Bibliography

Ashwin, B. C. (1930) ‘Banking and currency in New Zealand,’ Economic Record, November 1930.

Bernanke, B. (1995) ‘The Macroeconomics of the Great Depression: A Comparative Approach,’ Journal of Money, Credit, and Banking (1995): 1-28.

Campa, J. M. (1990) ‘Exchange Rates and Economic Recovery in the 1930s: An Extension to. Latin America,’ Journal of Economic History 50 (September 1990): 677-682.

Dairy Industry Commission (1934) ‘Report’, AJHR, H-30.

Department of Statistics/Statistics New Zealand (various) New Zealand Official Year Book

Easton, B. H. (1980) ‘Three New Zealand Depressions’, in W. E. Wilmott (ed) New Zealand and the World: Essays in Honour of Wolfgang Rosenberg.

Easton, B. H. (1996) In Stormy Seas: The Post-War New Zealand Economy.

Easton, B.H. (2011) Growth and Recessions of Economic Output: 1861-1939, http://www.eastonbh.ac.nz/?p=1403 Economic Committee (1932) Report.

Eggertsson, G. B. & Krugman, P. (2010) Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach.

Eichengreen, B & J. Sachs (1985) ‘Exchange Rates and Economic Recovery in the 1930s,’ Journal of Economic History (December 1985):925-946.

Fisher, A. G. B. (1932)’The New Zealand Economic Problem – A Review,’ Economic Record, May 1932.

Grossman, R. S.. (1994) ‘The Shoe That Didn’t Drop: Explaining Banking Stability During the Great Depression,’ Journal of Economic History 54 (September 1994) 654-682..

Hawke, G. R. (1973) Between Governments and Banks; A History of the Reserve Bank of New Zealand.

Keynes, J. M. (1924) Indian Currency and Finance.

McDonald, B. & D. Thomson (1987)’Mortgage Relief, Farm Finance, and Rural Depression in New Zealand in the 1930s’, NZJH, 21/2, Oct 1987, p.228-250..

McKinnon, M. (2003) Treasury : The New Zealand Treasury, 1840-2000.

Martin, J. E. (1994) ‘The Removal of Compulsory Arbitration and the Depression of the 1930s,’ NZJH 28/2, Oct 1994.

Moore, B. A. & J. S. Barton (1935) Banking in New Zealand.

Rankin, K. (1990) Labour Supply in New Zealand and Australia, 1919-1939.

Statistics New Zealand/Department of Statistics (n.d.)

http://www.stats.govt.nz/browse_for_stats/economic_indicators/nationalaccounts/long-term-data-series.aspx

Sutch, W. B. (1966) The Quest for Security in New Zealand, 1840 to 1966.

Woods, N. S. (1963) Industrial Conciliation and Arbitration in New Zealand.

Tocker, A. H. (1924) ‘The Monetary Standards of New Zealand and Australia’, Economic Journal, XXXIV.

Endnotes

[1] I am grateful to Elizabeth, Caffin, Peter Lindert, Malcolm McKinnon and the participants at the conference for numerous helpful suggestions and assistance

[2] Data from the Maddison data base: http://www.ggdc.net/MADDISON/oriindex.htm

[3] Data not otherwise sourced comes from the long term data base of Statistics New Zealand: http://www.stats.govt.nz/browse_for_stats/economic_indicators/nationalaccounts/long-term-data-series.aspx

[4] The data is annual or biannual so quarterly turning points are difficult to identify.

[5] The devaluation relative to sterling raised the value of the London based debt in New Zealand currency.

[6] See Bernard Ashwin’s explanation to the monetary committee in 1934 (AJHR 1934-35, B-3),

[7]  Maddison data base

[8]  There is not the quarterly data to be able to date precisely the turning point.

[9]  http://www.measuringworth.com/interestrates/

[10]  Calculated from data in various NZOYBs.

Db, Nordmeyer and Me

This entry was posted in Miscellaneous on by .

Keywords: Miscellaneous;

In July 2009 I was approached by Colenso BBDO in regard to an advertisement they were doing for DB involving the 1958 ‘Black Budget’. They explained they wanted to promote the contributions of Morton Coutts, the man who – among other things – sometime earlier invented the continuous fermentation method of brewing beer. (He deserves to be in the Dictionary of New Zealand Biography; he is not there, having died in 2004 at the age of 100 too late to be included.) Apparently he created DB Export as a response to the higher excise duties of the Budget, although the details of what exactly happened are murky.

They asked me to talk on the impact of the budget on domestic sales. Many years ago I had looked at this issue in my Consumption in New Zealand, and come back to it over the years. Later they asked me to comment on Arnold Nordmeyer the Minister of Finance who delivered the budget. I explained that although I may not be the country’s top expert on him although I had written about him in The Nationbuilders, and just read the recent biography by Mary Logan. We decided to go ahead with him too, to reduce the number of interviews.

Treating it as a standard request from a journalist I prepared for the interview by checking some of my earlier writings and refreshing my memory on others’ writings about Nordmeyer. I cannot remember for sure, but almost certainly I reread the 1958 Budget, and possibly some other material on it. I do remember I prepared some graphs and data on the impact of the higher excises on alcohol consumption.

The video interview was held in the family room in the house, and was pretty straight forward as I recall – or rather I dont recall, so it must have been straight forward.

Later I received an email from Colenso BBDO thanking me for the contribution, saying they put two minutes of an edited section of the interview on the web, and offering me a fee which I declined, saying ‘I am happy to leave my contribution in the common domain, as if it were a news interview’. What I was avoiding, was some notion I was a paid performer for an advert.

When the advertising campaign came out, I paid it so little attention I dont recall it, nor what it was saying. Some people approached me about my contribution. I checked the video (http://dbexportbeer.co.nz/The-Untold-True-Story/video-gallery.aspx). Obviously it is edited and does not cover everything I discussed. For instance, one person complained that I said the tax hikes were ‘severe’; perhaps it is not clear in the video that I am talking about a far wider range of taxes than those on beer. The main omission from the interview is that all references to the excise duty hike contracting volume consumption of beer (and tobacco) are omitted. (Perhaps it is relevant to mention here that I have long argued for excise taxation to regulate the social costs of alcohol misuse and tobacco use, probably more than any other economist – at least in public, for who knows what goes on in Treasury.)

Apparently there were some problems with the advertisements. I am unable to judge them because I have not seen them. Some complaints were made to the Advertising Standards Authority who on 11 February, 2011 announced their decisions, upholding some and rejecting others. (See http://www.asa.co.nz/decisions_to_media.php#top, decisions 10/677, /695, /696, /697, /707, /726, /746 and /765.)

On occasions somebody who does as much public comment as I do will end up in productions which are subject of complaint to the Advertising Standards Authority, the Broadcasting Standards Authority or the Press Council. That is a risk one takes. Making a contribution does not mean one agrees with the editorial approach or conclusion, nor with the content from any other contributor. To require that would severely limit the open debate which New Zealand so desperately needs.

Whether the production is complained about or not, my responsibility is confined to what I say and the accuracy with which my contribution is reported. I need also to be careful that the producer and production platform are of appropriate standard, although making that judgement is much harder.

The Foundations Of Social Welfare in New Zealand

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History, Social Policy on by .

Paper to a Student Group from Carleton University, 10 February 2011.

Keywords: History of Ideas, Methodology & Philosophy; Political Economy & History; Social Policy;

Europeans were greatly puzzled by the American debate over President Obama’s health reforms, for almost everyone there assumes the public sector should actively promote universal health care. Clearly that is not the norm of thinking in the United States (although the Canadians would be far more sympathetic to the European view). My point is not to suggest that the US is out of step with the rest of the rich world but to suggest that social policy differs between countries because of different social philosophies which rise out of different experiences and different histories. To understand the system you have to know something about its history and how it has been shaped by these experiences, and what the resulting philosophies are.

Now I am talking here to a group of American students. You will have particular views about social security based on the American experience. I am not arguing your views are wrong; today I am simply asking you to suspend your views in order to understand New Zealand’s social welfare system. I am not going to talk about the details of the system. Rather I want to talk about the historical context in which it evolved. You might think that because New Zealand is a new world country like America the historical contexts are the same. We shall see that they are very different. I start by identifying three major ones.

The first is, Maori aside, New Zealand government preceded New Zealand society. We usually think of New Zealand government beginning on 6 February 1840 with the signing of the Tiriti o Waitangi, which led to the British representative, Captain Hobson establishing a government at Kororareka in the Bay of Islands near the Treaty Grounds, and a year later moving the capital to Auckland. At the time the European population of New Zealand was less than 2000; if you exclude sojourners and men who would never marry, the numbers were even smaller. It is true that about a week before, the New Zealand Company began its first settlement in Wellington, but the lead time was trivial and in any case by 1843 the Company was in financial difficulties and later it was taken over by the British government.

Bruce Jesson, one of New Zealand’s most perceptive public intellectuals, described the consequence of government preceding society as the ‘hollow society’, by which he meant that it contained individuals and there was the central government but not much in between. Such social institutions as there were depended on the government, rather than rising organically out of the people. The reflex reaction of New Zealanders has been to operate directly with the government, even in situations where other countries may use social institutions independent of it. Faced by a social problem they almost always turn to the government to deal with it. This puts social institutions under the government, and strengthens the government’s hold on them, restricting their organic growth and further reinforcing the hollowness of society.

Contrast that approach with America’s. Your settlements began over 100 years before the government of the United States was established and in that period your settlers created social institutions that they needed to look after themselves. An illustration of this is that not only the American constitution was hotly debated in town halls, with many of the objections encapsulated in the Bill of Rights. In February 1840 there were not any town halls in New Zealand. In 1852, when the first constitution was imposed on New Zealand, there was no representative government here; the statute was actually passed by the British Parliament.

The second major difference is that the majority who came here in the nineteenth century came as assisted immigrants under schemes promoted either by the New Zealand Company and related organisations, or by the provinces and the New Zealand government. There is no data here, and to be confident I need to exclude sojourners (but acknowledge that some of the assisted returned too) and also men who were never married. A lot of these temporaries came and went in the early 1860s when gold was found. I treat men without wives as temporary because they typically would have no progeny’ which is integral to an ongoing society.

Assisted immigration was crucial to New Zealand because we were the furthest outpost from Europe, so it was easier and cheaper for those who wanted to migrate to go to North America. In effect we (and Australia) had to pay people to come here. (As an aside, because they were selected there is some evidence that they were a better quality of migrant on some measures – but I would not make too much of that.)

So, as John Martin in a recent book, Honouring the Contract, argues the assisted immigrants who came to New Zealand felt that the government who brought them had a moral obligation to provide circumstances which would give them a living. Of course they accepted that they had an obligation to seize the opportunity – nobody owed them a living. But what if there were no opportunities?

Almost from the beginning there was a dearth of opportunity. Most New Zealand settlements lapsed quickly into a slump, once the temporary demand from the initial injection of immigrants and capital came to an end. So, for instance, within a couple of years, the unemployed settlers of Nelson were demanding that the New Zealand Company, which had brought them out, should give them jobs, as the private sector was not generating enough of them. The Company did so by using its capital to employ them to build roads; no wonder it later went bankrupt.

The Canterbury Province was an exception because it was founded at the same time as the Victorian gold rushes and benefited from provisioning them, thereby missing out on the usual slump. Even so, the Provincial Superintendent had to warn men that if they rushed off to the goldfields on the other side of the Tasman, they could not expect the local government to look after their wives and children; it did, to some extent, of course.

The myth is that New Zealand was founded to escape the British – call it ‘Victorian’ – poor relief, which was seen as punitive. Being able to farm one’s own piece of land moderated the need for relief, but the destitute still existed and the localities coped with those in need as best they could.

Some of the traditional British approaches could not be used. You could not dump responsibility for a man onto his family if he did not have one, or it lived elsewhere. You could not send people back to their parishes, because they were on the other side of the world. Because there was no established church, and the other denominations jealously guarded the principle of a secular society, it was not possible to create parishes for poor relief. You could not even use independent local agencies. The original constitution had established a set of provinces – not unlike the states of America – but in 1876 they were abolished by an act of the national parliament.

Time out for the American perspective. Can you imagine in 1876 – Ulysses Grant was president – the American congress abolishing, virtually overnight, all the states of America and there being nary any dissent? That is a real indication of just how powerful and centralised the government of New Zealand had become.

So New Zealand was founded with a powerful central government and a population which looked to it when it needed help. On their own, New Zealanders could be fiercely individualistic, but once a social problem arose, the demand was for a collective solution in which the government played a central role. It was a demand based on a moral obligation which the assisted immigrants and their children thought was a part of the deal of being brought out here.

The third particularity is the response to the question as to what sort of policies they demanded? With occasional exceptions, New Zealand’s approach to social problems has been essentially practical with a focus on simple short-term solutions with little attention to long term complexities. I dont want to get into a dispute about which country is the most pragmatic, but let me illustrate the New Zealand approach with a couple of quotations which typify public policy to this day.

The first comes from a French political analyst, André Siegfried, in his book Democracy in New Zealand published in 1905:

“Their outlook, not too carefully reasoned, and no doubtful scornful of scientific thought, makes them incapable of self distrust. Like almost all men of action they have a contempt for theories: yet they are often captured by the first theory that turns up, if it is demonstrated to them with an appearance of logic sufficient to impose upon them. In most cases they do not seem to see difficulties, and they propose simple solutions for the most complex problems with astonishing audacity.”

This view of New Zealanders is not unique. Samuel Butler wrote a utopian novel Erewhon. The title, the name of the utopia, is almost ‘nowhere’ spelt backwards. Butler developed a Canterbury sheep station between 1860 and 1864 before returning, a wealthy man, to England to write. His 1872 novel is set in a Canterbury landscape, and it is not implausible he is writing about the early settlers. Of them he might have said:

“It will be seen … that the Erewhonians are a meek and long-suffering people, easily led by the nose, and quick to offer up common sense … when a philosopher arises among them …”

Exactly as Siegfried was to articulate three decades later. For a third example, skip forward to the 1930s, to the major housing construction program. I once asked an economist involved with it what were its intellectual underpinnings. He was Bill Sutch, one of New Zealand’s most able public intellectuals, and probably the first New Zealander to read Maynard Keynes’s General Theory. I asked in the expectation he would refer to Keynesian theory but, no, Sutch explained that at the time they saw a demand for housing, there were unemployed builders, there were unused materials, there was vacant land so they provided the credit to bring them together. As simple and practical as that – not a hint of deep Keynesian theory.

I am sure there are parts of the American population who would be sympathetic to this approach, but it is hardly the basis of the thinking underpinning the US constitution; Hamilton, Jay, Jefferson and Maddison were fine intellectuals,. Today America has outstanding think-tanks and high quality debate which outsiders like me follow, plunder and adapt. New Zealand has no such rich theorising, partly because we are small and partly because we prefer practical people over public intellectuals even, if as Keynes says, they depend upon defunct intellectuals. We dont have quality think-tanks either; instructively the best we have are government agencies – independent think tanks would be filling in a hollow in society.

So there are three particularities of New Zealand compared to the United States:

– a hollow society in which there are few social institutions which are independent of the government;

– a belief that the government has a moral responsibility to help people help themselves;
– a practical rather then cerebral approach to policy making.

I now highlight some of New Zealand’s history of social security to illustrate how these particularities led to particular policy outcomes.

A watershed moment was in 1898 when the Old Aged Pension was introduced. It’s need had been debated in previous years with particular attention to whether the elderly should be supported on the basis of need or as a right of citizenship. The government began to run fiscal surpluses towards the end of the 1890s, and some was used to pay a benefit to those over the age of 65 who were in need. Some groups, such as Asiatics, aliens, alcoholics and those of doubtful moral character, were excluded and the criteria included a residence requirement and restricted the entitlement to those with low incomes and little wealth.

The needs argument seemed to have won. Certainly there were needs. The men without families who had arrived in the gold rush period thirty years earlier, were aging and poor relief could not cope with them. The introduction of the state pension for the elderly markedly reduced the number with whom charities needed to deal.

But the notion of a universal entitlement never went away. Over the years the restrictions have been lifted, and the level relative to wages raised. Today New Zealand Superannuation has a not ungenerous benefit to everyone over the age of 65, although it is treated as taxable income so it is not as valuable to the rich as to the poor.

It is based on a non-contributory pension scheme funded out of general taxation. It could not be contributory in 1898 since the need was urgent and the elderly were long past the stage when they could contribute. Subsequent attempts to introduce one, either as a supplement to the existing state pension in 1975 or a replacement in 1998, were rejected by the voters. As a result there is no comprehensive occupational pension scheme; typically only retirees who were public servants and the highest echelons of management have significant contributory pensions. They are a minority of the population. In 2006 the government introduced a voluntary occupational based contributory scheme, but that wont have much impact on retirement incomes for decades.

New Zealanders consider the state provides New Zealand superannuation as a matter of right. A political party which advocated curbing the scheme would not attract a lot of support. Over a hundred years ago some practical decisions were taken to meet a particular social problem and those decisions shape a key public policy to this day.

Thus evolved a system of universal non-contributory flat-rate benefits based on entitlement which became characteristic in New Zealand’s social security system, although over the years there have been variations in income testing (such as treating it as income for taxation purposes). The approach also applies to health care. There is no formal incomes test on public health provision, although there is the option of the individual skipping over a public waiting list by purchasing private care if they can afford it.

There is no point in today’s context of detailing the extension of the income maintenance system to other benefits. However I want to illustrate the utter pragmatism of New Zealand by describing how another part of the income support system was, almost absent mindedly, added without anyone noticing that it involves quite different principles.

In 1896 an explosion at the Brunner coal mine on the West Coast killed 65 miners. At the time the national population was about three-quarter of a million so one in a twelve thousand died in the worst mining disaster in New Zealand’s history. A Workers Compensation Act followed shortly after in 1900. It was based on earlier British legislation, and unlike the Old Age Pension it was contributory and earnings related. Again the scheme has evolved. I dont need to go into its historical detail, nor into a variety of extensions and complications, but basically today we have the Accident Compensation Scheme which involves comprehensive no-fault coverage for injury from all accidents, in which the compensation is earnings related and which is funded from levies.

The social security system and the accident compensation do not sit easily together. Consider two people each of whom has lost a leg and is suffering an identical degree of handicap. If the amputation was due to a medical condition the sufferer could be entitled to a flat rate benefit and various services; if it was due to an accident the sufferer will receive a more generous treatment including higher income and be entitled to better rehabilitation and support services. New Zealanders are well aware of the inconsistency but to mesh the schemes effectively together involves either a very great cost to the public purse if the social security entitlement s are to be brought up to the accident ones, or a considerable loss of entitlements if the accident compensation system is downgraded.

Another example of the difficulties which pragmatism often induces evolved out of the widows benefit introduced in 1912. Over the years its scope was extended to cover other solo mothers such as women with their partners in mental hospitals or prisons. Men in equivalent situations became entitled too.

Notice that while the event which precipitated the entitlement was fairly well defined, say the death of partner, there was a problem if the woman got involved in another relationship – particularly if it was not legally acknowledged. Initially one could use the morals clause to deal with such instances; when it was revoked as an inappropriate judgement for a government to make – recall New Zealand is a secular state – the law was revised to exclude those who were in a marriage-like relationship. That requires a degree of judgement by the authorities, and led to a series of problems of application.

One case was sufficiently well documented for me to form the opinion that the solo mother had drifted into a marriage-like association with a man, but when the social worker advised that was the situation, it literally broke up the relationship. The law today sets the definition for a couple in terms the actual nature of the relationship rather than its legal status. Thus an unmarried couple living together are likely to be treated as married; a married couple living separately may – depending on the exact circumstances – be treated as singles.

Probably nowhere in the modern world can the state deal well with the intricacies of intimate relations, and everywhere there are various ad hoc decisions, some of which can be quite repressive.

In the mid-1960s a new problem arose concerning solo mothers with insufficient income because, one way or another, the father of the children would not support her – perhaps he had deserted them, perhaps the mother was not married. A discretionary grant was introduced, but in 1973 this was converted into a statutory Domestic Purposes Benefit which meant the authorities had much less discretion as to who was entitled to the income support.

From one perspective this was a further extension of the approach begun in 1912 giving state support to solo parents. However, no one at the time, as far as I can recall, observed that a fundamentally new principle had been introduced. Previously the entitlement was based upon something happening to the beneficiary over which they had little control – like one’s husband dying. (The principle of entitlement being based on events outside one’s control applied throughout the system; for instance it is time – one’s age – which determines entitlement to the state retirement pension.) However under the extension the parent could take an action which gave them a benefit – for instance she could get pregnant without the father being willing to support her and the child; she could leave her partner taking the children with them. Under the new regime she would be entitled to a benefit. The technical term for this is ‘moral hazard’, but in order to avoid righteous indignation I call it ‘behavioural response’, that is, you can change your entitlement by your personal behaviour. The issue of this behavioural response – it applies elsewhere in the benefit system – has never been sorted out. Perhaps given the complexity of the human condition it is impossible to do so completely, but any progress requires a careful analysis which practical men and women have yet to do.

Instead they add to the system making it more complex, more administratively onerous and less workable. I’ve already mentioned that unemployment entitlements may also engender a similar behavioural response since solos and couple could choose to stay on the benefit rather than seek work. To discourage this, the ‘working for families’ support was introduced in 2005, raising the income of working families with children relative to beneficiary families – presumably to encourage the latter to seek work. The scheme is incredibly clumsy. It is said that a committee designed a camel – a calumny on the ship of the desert; the committee that designed the Working for Families package designed a pushmi-pullyu.

To give an example of its two headedness, the scheme requires a decision as to whether two people are in a marriage-type relationship. In order to minimise the cost of the scheme the Department of Inland Revenue will declare a couple in particular circumstances as not married. Meanwhile in order to minimise benefit entitlements Work and Income New Zealand may declare the same couple as married. So one’s marital status may depend on which department of state is reviewing you. Coming to think of it, the pushmi-pullyu is much better designed.

I want to finish by trying to explain how this increasing muddle occurred, but at the same time giving you a bit of the historical background. In 1938 the first Labour government passed the Social Security Act which extended and consolidated the haphazard collection of income support which had come into the existence over the years. (As an aside, the term ‘social security’ came from the US.) It proved a robust piece of legislation for over three decades, with a variety of minor extensions. A curious feature was that there was no overarching explanation of the principles which underpinned the system. Prime Minister Michael Joseph Savage, the politician who it is most associated with it, described it as ‘Applied Christianity’ but as noble a notion as that is, it is not very helpful when you want to think about, say, how to organise a Domestic Purposes Benefit.

In 1969 a Royal Commission was established to review the Act (which also contains health provisions). Its 1972 report includes the following codification of the system:

“These are the essential principles on which we consider our social welfare system and its administration should be based:

(a)        The community is responsible for giving dependent people a standard of living consistent with human dignity and approaching that enjoyed by the majority, irrespective of the cause of dependency. We believe, further, that the community responsibility should be discharged in a way which does not stifle personal initiative, nor unduly hinder anyone trying to preserve or even enhance living standards on retirement or during times of temporary disability.

(b)        Need, and the degree of need, should be the primary test and criterion of the help to be given by the community irrespective of what contributions are made.

(c)        Coverage should be comprehensive irrespective of cause wherever need exists, or may be assumed to exist.

(d)       Identification and measurement of need is essential if the primary test is to be observed. We believe that this is best done by establishing categories of people who are most likely to be unable to derive adequate incomes from the market system, or who are most likely to face unusual expense in maintaining an acceptable standard of living. It is still necessary either to:

(i) Discriminate between those falling within a category (for example, the aged, the widowed, the sick) who need or do not need help, or to find out how much help is needed (the selective approach); or to

(ii) Assume that need exists, and therefore dispense with further discrimination where the expectation of need within a category is high enough, and other considerations (such as the effect of taxation) are favourable. (This is the universal approach.)

(e)        The aims of the system, 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.

(f)        Social security cash benefits are only one aspect of the total problem of maintaining incomes and raising living standards. Taxation, wages, employment, economic development, education, health, housing, social services, and cultural policies are all also of great importance. There is a manifest need therefore to co-ordinate those areas which impinge on, one another.

The first thing is to observe is that the welfare system had been operating for a third of a century without any such systematic account of what it was actually about. That’s pragmatism for you.

Second, while one might want to do a bit of fine tuning – for instance I’d put the aim of the system first– I reckon it’s a pretty good account of what New Zealanders want from their welfare system. I dont know what an American would think about it since it places government responsibility right at the theoretical centre.

Third, application of the principles still evolves a lot of decisions about categories, levels and administration. The Commissioners would have been comfortable with the notion that such things would change over time reflecting changing social evolution, so those decisions will evolve.

But, fourth, while it provided a sound foundation for the welfare system New Zealanders might desire, the Royal Commission’s principles tell us little about the structure which should be raised up from the foundations.

Instead there was a continuation of the social evolution of the previous third of a century. In practice there have been some revolutionary changes which the resulting structure has proved inadequate to deal with. Here are some of the big ones:

1. Unemployment, while low by international standards, is now a fact of New Zealand life. Before 1968, during the heyday of the system, unemployment was very low. There were so many jobs available that when a jobless worker came in the appropriate response was not ‘Are you entitled to a benefit’, but ‘Get a job’. On one occasion, when the population was near three million, there were but two people on the unemployment benefit.

(Indeed the Royal Commission remarked that it was inconceivable that the Government would allow high unemployment. Subsequent events proved it had surprisingly little control over unemployment in the long term.)

One implication of higher unemployment is that opportunities for behavioural response are magnified. New Zealand has much the same problem as every other rich country: how to get the right balance of incentives and pressures to ensure that the unemployed diligently look for work and accept it, rather than staying on the benefit.

2. Before 1972 it could be reasonably assumed that mothers, even wives, did not work. Today most do, even those with young children. About 45 percent of the workforce are women although they dont work as long hours as men.

Again that is not too different from other rich countries, but it raises a number of problems for a non-contributory system. Being in work is now a much more fluid phenomenon; how is the administrative system to define full-time work and the entitlements for compensation or income support when it ceases? And how is it to provide for a couple when a partner is working and the other is unemployed or sick or whatever? It is not such a problem in a contributory system such as accident compensation because entitlement is based on work record.

3. Since the Royal Commission, we have realised that our support for the elderly is sufficiently generous to mean that serious deprivation is largely a child phenomenon – on international measures among rich countries. we have one of the highest poverty rates among children. The last time I estimated the poverty rate – admittedly before the Working for Families package – I found that over 80 percent of New Zealand’s poor were children and their parents. Moreover in contrast to the popular perception, more were in two parent families than one, in Pakeha families than Maori, in their own house (with a mortgage) than renting, and with the head of the family earning rather than being on a benefit. The rhetoric talks about where there are the highest rates of poverty, but not where there are the highest numbers. The defining characteristic of being poor is a family with children.

There is not the time to untangle what is going on. However, as I observed back in the 1970s the welfare state had evolved predicated on a man being able to provide an adequate standard of living for his family. Even if that was true in the past it is certainly no longer today.

I have less competence on my final two dramatic changes, so we proceed with caution.

4. We seem to have had a rise in drug and alcohol addiction and psychiatric cases, and these are more likely to end up beneficiaries. The traditional welfare system was ever designed to deal with such groups and it seems probable that it is designed no better today.

5. The Maori began pouring into the cities from the countryside in the 1970s just as unemployment started rising. My impression is that Maori social structures are still struggling with that transition. The same may be true for Pacific migrants. Regrettably, there is surprisingly little research about these great migrations which is relevant to the welfare state.

To this list I could add many other factors which the plain vanilla welfare system of 1938 to 1972 finds it difficult to deal with – factors like increasing income and social inequality, the rising demand for skills in the labour market, international labour mobility, the aging of the population and fiscal stress. Let’s leave them all here and ask how are these dramatic changes being dealt with?

You might expect a rich intelligent public debate addressing the fundamental issues, but that rarely happens in a hollow society of practical people.

Think of the income maintenance system as a many-floored building built on foundations such as those set down by the Royal Commission principles. Each floor needs to be built to serve its purpose but also as a sound basis for the floor above it. What is happening is that rather than looking at the structure as a whole, the public debate is about what is happening on the top floor of the building. Everyone acknowledges that there is something terribly askew up there, but they give no attention to the adequacy of the floors below. Instead the left says the system should be more generous and the right says it should be more selective.

Practical men and women dont think systematically about these things. This is well illustrated in the report of last year’s Welfare Working Group which hardly looked at any of the fundamental issues I have just listed. When it held a conference the empirical research papers came from overseas, the majority of the New Zealand contributions were of (not very informed) opinion which practical people give a status at least equal and often in priority to the evidence.

This is not just a problem of the political right. When the Labour Party, which created the 1938 Social Security Act, was in power from 1999 to 2008 its advisers were largely practical men and women who could neither think analytically, and did not encourage others to do so – the unkindly would even say they discouraged them. In a hollow society dominated by the government that effectively stifled all public discussion. The Fifth Labour government does not have a proud record of innovation in social security – the clumsy, inept, ineffective and costly Working For Families package symbolises its failures.

What we have got are some serious institutional disfunctionings which are causing unnecessary hardships and inefficiencies. But there is a deadlock of ignorance about addressing them systematically so instead practical people propose superficial short term fixes. The situation is neither peculiar to New Zealand nor to social welfare.

At which point I return to my central thesis. The social problems the welfare state addresses may be near universal, but New Zealand will tackle them, and perhaps resolve them, in quite different ways from other rich societies. Of course we can learn from them, and adapt their more successful resolutions. Which is why international touring courses such as you are on are an important part of your education; to enable to think outside your own society, and in doing so to appreciate its unique and special qualities, and yet to learn from others.

Possums in the Headlights

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We need to do what is necessary now, before we head down Greece and Ireland’s path.

Listener: 5 February, 2011.

Keywords: Macroeconomics & Money;

If you look at countries’ foreign liabilities in relation to the size of their economy, you will see several were bunched together in 2009: Greece, Ireland, Portugal, Spain and New Zealand. Oh, I know, we say we’re not like those others, which have suffered pressure from the world’s bankers, because we have relatively low public (government) debt.

But as Iceland and Ireland showed, private debt, where we lead the other four, can quickly turn into public debt. Hopefully it won’t in our case, but because it could, the credit-%rating agencies have put us on credit watch. (Don’t blame the agencies; they are only saying in public what those who lend to us are saying in private.)

We have a two-sided debate about the state of the economy. On one side is a group of insiders and informed who will find nothing startling in the previous paragraphs; they are already anxious.

On the other, the wider public commentary ignores the warning signs and goes on as if nothing has changed much since 2007. It acknowledges the global financial crash, but because the world avoided another great depression, it believes things are back to normal, albeit in a world in which the East Asian economies provide more of the economic thrust than the Western ones. There may have to be a tweaking of policy but this side’s expectation is for the New Zealand economy to return to an expansionary phase of indefinite “onwards and uppishness” (as Rex Fairburn wrote).

The cautious view is that although we may muddle through, the international receivers are likely to get around to us at some time, and we will suffer the unedifying treatment Greece, Iceland and Ireland are experiencing and which Portugal, Spain and others are lined up for.

It may be merely a matter of “when”, determined by how high we are on the country list, not “if”. The wise thing is to start doing what is necessary now, rather than waiting to be told. The earlier we start, the better. If we do the adjustment ourselves, we can do it at less social cost and more slowly. The international receivers are mainly concerned about their loans, not the quality of life of New Zealanders.

This alternative strategy is sometimes referred to as “rebalancing the economy”. More brutally, it involves abandoning overseas borrowing for consumption, and instead staying within the income we produce while reducing our offshore lending.

That means we have to export more and save more. Everyone is saying that, of course, but aspiration is not the same as execution, although an ineffective response to aspiration may have the international receivers executing us. The world does not owe us a living.

The uninformed public discussion is dominated by those who failed to warn us of the dangers before the global financial crisis. No, I am not referring to those who grumbled that our growth rate was too low. I mean those who did not mention the savings problem, the poor export performance and the rising overseas debt before the global financial crisis – some still do not. To preserve the tatters of their public credibility, they are not going to admit their failures.

We would make progress if, before these people repeated their nostrums, the journalists asked them when they first drew the public’s attention to these issues. That would collapse the optimistic and platitudinous contributions.

But it is election year. The incumbents and their acolytes will give assurances that keeping on keeping on will be sufficient. Meanwhile, the Opposition and its acolytes say the continuation policy needs a bit of tweaking or offer panaceas that address the issues even less. The tone of public comment this year is likely to be “it’s too hard, let’s leave it till 2012”, hoping that the international receivers will be too busy with other countries to turn their attention to New Zealand.

President John Kennedy once found the White House gardeners downing tools at knock-off without completing their planting. “We’ll leave it till tomorrow,” they said, “it takes years for a tree to grow.” “That’s why,” Kennedy replied, “it should have been planted yesterday.”