Tax and Equity

This entry was posted in Distributional Economics, Regulation & Taxation on by .

PSA Journal, March 2010.

Keywords: Distributional Economics; Regulation & Taxation;

In my Commercialisation of New Zealand there is a chapter on ‘the abandoning of equity’, of how under Rogernomics social fairness went steadily down in the policy priorities. The report on tax reform by the Victoria University of Wellington Tax Working Group (TWG) confirms the relegation. Of course we all pay lip service to equity; certainly the report does. What it does not do is address the issue in any coherent way.

Perhaps that is understandable given the TWG membership of high-income older men with considerable knowledge of the taxes they faced, but little knowledge of the challenges faced by others, and absolutely no expertise in equity. The report does refer to ‘fairness’; saying ‘the tax system should be fair’ but it does not define what it means except by example, and strangely – I am being ironical – its examples are those which affect the members of the TWG.

So they are keen to reduce the tax rates on – well, er – high-income older men. Certainly there is a higgledy piggledy misalignment of rates on their top incomes (38%, 33%, 30% and, not so often mentioned, 0% for tax avoiders). Alignment makes sense since we dont want people choosing their economic activities just to reduce their taxes. But the TWG’s focus is on reducing rates rather than aligning them. They want the top rate down to at least 30 cents in the dollar (and they considered much lower rates – down to 20 cents).

They are very good at telling us what a disincentive to earn high tax rates are – although that is not so evident among members of the TWG. However the highest marginal income tax rates are not paid by those on high incomes but by beneficiaries (who are hardly considered by the report) and by those benefiting from the Working for Families income support package. Some have more than 100 cents taken for every extra dollar earned.

If the TWG really believes that high tax rates are a disincentive, you would expect it to put a lot of effort into thinking about these exceptionally high rates. Wrong. They dont affect HIOMs so their lame conclusion was ‘there should be a comprehensive review of welfare policy and how it interacts with the tax system with an objective being to reduce high effective marginal tax rates’. Bravo, except how come a group purportedly concerned with the tax system could omit such an enormous element of it?

An equity specialist on the TWG would have pointed out that there are interdependencies between these high rates and the overall income distribution. In particular, high effective marginal tax rates are a consequence of high minimum incomes in the community.  The TWG does not understand that as it lowers its marginal tax rates on the rich, it either raises marginal tax rates on those lower down the income hierarchy or it reduces the incomes of those at the bottom. (The reduction may not be on private income; it may be a reduced social wage as public services are cut.)

This truth would not have been particularly palatable to the TWG, since it would have forced it to the realisation that not only were they talking about increasing income inequality in New Zealand but they were implicitly advocating reducing the lowest incomes.

Shades of Rogernomics, whose tax reforms transferred considerable amounts from those on low and middle incomes to the rich. It is difficult to give a simple summary but by one measure the net effect was to increase the incomes of the top 10 percent of the income distribution by a fifth between 1986 and 1992, while the bottom 80 percent of the distribution paid an extra $40 a week (in current prices) to fund the tax cuts.

Will that happen again? The big difference is that while the HIOMs are no less greedy, a MMP political system restrains the blitzkriegs of Winner-Takes-All which enabled the selfish few to grab a benefit for themselves. Because the conventional wisdom did not need to analyse equity, and even dismantled some of the machinery to think about it, it has not got the intellectual grunt for the MMP world. Hence the incoherence in the TWG report.

So the tax changes promised in the May budget are unpredictable. The government has to find a way between the contradictory pressures of its MMP voters, and the desires of high-income older males which the TWG represented.

Crisis Point

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

We are paying a very high price for failing to regulate properly.

Listener: 20 February, 2010.

Keywords: Regulation & Taxation;

The global financial crisis is estimated to have cost the US Government US$90 billion, or about 0.6% of its annual output. The equivalent cost in New Zealand would be NZ$1.1 billion. But take a look at the cost of our leaky-home crisis: about NZ$11.5 billion, roughly 10 times as much.

Comparing the two figures is not quite right, since the American one does not include the private costs of the crisis, and the leaky-home figure does not include health and trauma costs. However, the comparison does suggest the failure to build watertight homes is an economic disaster with a magnitude comparable to the global financial crisis.

Our leaky-home problems began in 1991, with market extremists still triumphant, when the system of construction changed dramatically. Under the Building Act 1991, construction was regulated through a building code that set out performance criteria to be achieved, rather than prescribing the precise manner in which buildings were to be constructed. For instance, builders were just told that the structure must last 50 years, the cladding 15 years, and the walls and roofs must be impermeable to water.

The belief was that the old regime stifled the use of new materials, design and construction, discouraging innovation and raising building costs. It seemed a good idea at the time.

Little thought seems to have been given to answering such questions as “if the cladding falls off after 14 years, what redress does the house owner have?”

And if the solution is to go off to court, who exactly is to be sued: the local authority building inspector, the builder, the architect, the building-materials supplier, the developer, the homeowner who onsold it, or even the MPs and their advisers who ushered in the change of legislation? Many will have died, and the rest can’t possibly collectively find the $11.5 billion. (Suing the Government is not really an option. Parliament is too clever to allow it, yet many think the Government of the day has the greatest culpability, although were it to own up it would be the taxpayer who would pay – of course.)

Leaky-home syndrome appears to have arisen from two “cost-saving” innovations. The first was the use of a “monolithic cladding” that has proven to be not watertight unless used strictly according to specification. The second was the use of untreated timber without the realisation that the treatment for borer also better sealed the wood from water. Additionally, some house designers used the opportunities to cut back water-protecting features such as eaves (anyone would think we lived in a desert). A related problem was the collapse of the apprenticeship system and the operation of some unqualified builders.

While the 3500-odd homeowners and their families suffer personal disruption and financial stress, the individual cases are winding their way through the courts and other settlement procedures. Despite the Building Act 2004’s moves towards greater regulation, a widespread view is that more is needed.

It’s all a good example of Murphy’s Law. Not the “if anything can go wrong, it will” version, but aerospace engineer Edward Murphy’s original idea of designing your system on the %assumption that anything that can go wrong will go wrong. I doubt that this thought was uppermost in the minds of the Building Code designers back in the early 90s.

Of course, accident prevention cannot be all-encompassing. Murphy was trying to minimise crashes, and the easiest way to do this is to not let the aircraft take off. Similarly, the Building Code will pose some risks, but a lot of grief could have been prevented had the designers of the approach to building asked: “If things go wrong, what happens next?”

The Regulatory Responsibility Bill floating around Parliament aims to “improve parliamentary laws and regulations in New Zealand by specifying principles of responsible regulatory management”. However, from a leaky-building perspective, this legislation is likely to prove ineffective.

It would not have made a single difference to the adoption of the Building Act or Building Code, or resulted in a single additional watertight home. That is surely a test of its relevance. If it would have been useless for dealing with one of our greatest past crises, it is unlikely to be much use in preventing future ones.

Footnote: My column of March 20 footnoted that this column may have understated the magnitude of the problem. The cost range is now put at $11.3-22.8 billion. Some 7500 houses are being dealt with, but the eventual total may be nearer 110,000.

See also <a href=http://www.eastonbh.ac.nz/?p=1099>“Regulating Lessons From the Leaky Home Experience”</a>

Growth and Depressions in New Zealand’s Economic History

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

Asia-Pacific Economics and Business History Conference, 17-19 February 2010.

Keywords: Political Economy & History;

Introduction

I originally said I would recycle the paper It’s the Same this Time? which I gave in November 2008 shortly after it became evident to everyone that the world economy was about to enter a severe recession – if it was not already in it. At that time some people were trying to draw comparisons with earlier downturns. Most of them had little economic history and, other than a vague notion there had been the ‘Great Depression’ of the 1930s, were depending on their experiences of the last decade or so, when there had been business fluctuations which seemed mild in comparison to what this one seemed likely to be.

That is why the earlier paper began with a discussion on the post-war business cycle. To cleanse the young’s minds from the view that this was the only kind of fluctuation; that this time – 2008 and after – it was going to be different..

The paper’s title, ‘It’s the Same this Time?’, refers to what are said to be the four most dangerous words in banking ‘this time it is different’. My conclusion was ‘yes this time it is the same; yes, this time it is different’. I cannot simply recycle the paper because it is too long. Moreover in the fifteen months since I gave it, I have collected more evidence and had more time to think about the issues. In November 2008 we were scrambling around, even for those of us who had been expecting a severe downturn for some months – in my case since August 2007.

Even then I was aware of a couple of ambiguities in the paper. I omitted discussing the case that the whole of the period from 1920 to 1935 was one of depressed conditions with the Great Depression at a desperate end. One might argue the same story for the Long Depression which became particularly desperate towards the end when the Auckland economy joined southern New Zealand following the Australian economy – to which Auckland was linked – going into a downturn in the late 1880s. And one might want to draw the same conclusion about the growth retardation from 1966 with the Rogernomics Recession again the more difficult phase at its end.

Regrettably there is a question of terminology – what constitutes a depression and what constitutes a recession? Leaving aside the use of the recession term as a phase of the traditional business cycle perhaps we might call a long shallow depression a  ‘long recession’. That would mean there has been only one depression – in the 1930s – so its adjective ‘great’ is redundant.

While this might seem to be a matter of words, but it affects the way we think and make comparisons. It may be that we are wrong to chop up the economy into depression and recession periods on one hand and times of prosperity on the other. I have considerable respect for the Schumpetarian view that the boom and bust are intimately connected. That might tell us something about the current downturn, that it is a reaction to the long boom of the 1998 to 2008 period, with the significance that it might presage a longer downturn or recession, sometimes summarised as the L outcome.

Long Term Growth Trends

Difficulties with data complicate linking booms and busts in New Zealand. Properly estimated official volume aggregate output (GDP) figures go back only to March year 1955 There are nominal estimates derived from incomes and output going back to 1919, which can be converted into volume figures by using an output deflator. Before then – back to about 1860 – the nominal output figures are synthesised from money multipliers and converted into volume output using the consumer price index. Angus Maddison uses estimates derived this way by Keith Rankin.

Recently David Greasley and Les Oxley have been estimating volume of output in the pre-official period using individual sector outputs based on volume of production indicators. Thus far they provided estimates for only some sectors. With the addition of the service sectors New Zealand may well have reasonably reliable output series back to 1870.

So at the moment we have two unsatisfactory series of GDP per capita. Fitting a polynomial to them gives two different accounts of the long run trend of New Zealand, although they both recognise the Long Depression of the 1880s and the Great Depression; their accounts after 1955 are similar since they are using the same data.

The Maddison-Rankin Series.

The Maddison-Rankin data trend line in per capita GDP might be interpreted as follows. While there is little evidence of economic growth in the nineteenth century, and evidence of a shallow ‘Long Depression’ to 1895, after that New Zealand goes into a long growth upswing, despite various recessions and depression.

Perhaps the series tells a story of a Rostovian take-off into sustained growth. If so, the key to the takeoff is not the one described by Rostow of institutional change generating sustainable growth. Instead technological innovation had refrigeration opened up the shipping of meat and dairy products to Britain supplanting the nineteenth century economy of wool to the south and quarrying to the north. Wool remained the most important export by value but it was now a joint product with sheep meats.

The trend line shows a climacteric in the 1960s, with a slow down in the economic growth rate, presumably as a result of the fall in the structural price of wool in 1966. The slower trend after that has various fluctuations around it. The economy seems to run above the long term trend in the 1998 to 2008 period although we need some further observations before we can decide whether that was a fluctuation or there was a growth recovery.

As someone who has argued the case that there was a structural break in the New Zealand economy when the wool price fell in 1966. I am not uncomfortable with the notion of the climacteric, although I did not envisaged it before I looked at the Maddison-Rankin series.

A climacteric adds to the difficulties of the conventional wisdom sustaining its account of the reasons for New Zealand’s relatively poor quality economic performance in recent decade. However the conventional wisdom has never been strong in economic history.

The Greasley-Oxley Series.

The Greasley-Oxley series covers the 1870 to 1939 period so it tells the same story afterwards, although its climacteric in the 1960s is not as strong. A complication of the series is that while it is is based on outputs rather than money multipliers, it currently covers only the primary and manufacturing sectors, and it is possible that when the service sectors are added the growth pattern may appear a little different (although various tests I have applied suggest that it will not). A more serious problem is that it has yet to incorporate the wool inventory build up during wool during the First World War (although I have made some very crude adjustments).

There is no Rostovian ‘takeoff’ in the Greasley-Oxley series, or – what amounts to the same thing – there are two. Again there is an evident lift in economic performance from 1895, but this time the growth boom seems largely exhausted sometime in the 1905 to 1910 period. After that there is little substantial economic growth until the late 1930s. The interwar depression might be seen as an output plateau, ending in the Great Depression.

The Greasley-Oxley GDP per capita is about 30 percent higher in 1900 than the Maddison-Rankin. By 1939 they have to be at the same level, so the Greasley-Oxley series is going to grow markedly slower – say about half the long term rate – than the Maddison-Rankin one. So it does not show the takeoff. (Part of the divergence may be explained if the sectors G-O omits grow faster than the commodity sectors.)

There has been little enough research on the economy in the early twentieth century to do other than hazard some hypotheses to explain the Greasely-Oxley series – assuming that the plateau of the economic stagnation from 1905 to 1935 is not a statistical artefact, Among the hypotheses are

– New Zealand farming had exhausted the available land which had been extended as a result of refrigeration;

– there were no significant technical changes;

– the manufacturing sector never took over as a significant engine of growth;

– there was market saturation in a slowly British market.

Such possibilities have to be addressed – and the Greasley-Oxley series will be improved. In the interim we must be cautious as the pattern of long run economic growth in New Zealand.

Recessions and Depressions in New Zealand

Recessions and depressions are a monetary phenomenon, so while no doubt the pre-market of the Maori had it fluctuations, they were due to natural shocks. There were fluctuations in the market economy before 1870 but there are poorly quantitatively tracked and probably all the result of external shocks. I am also going to omit discussion on the shorter business cycle fluctuations – those we might characterise by a V.

That leaves five longer New Zealand recessions or depressions for comparison purposes:

– The Long Depression approximately 1878-1895

– The Interwar Depression which ended in 1935 but may have started as early as 1905;

– The Great Depression from 1929 to 1935, which was the tail-end of the Interwar Depression;.

– The Post-climacteric Recession, (the ‘Third Great Depression’) from 1966 to 1994;

– The Rogernomics Recession from 1987 to 1994, which was the tail-end of the Post-climacteric Recession.

There is some overlap, so I am going to confine the comparators The Long Depression; The Great Depression and The Rogernomics Recession. I now briefly describe each.

The Long Depression of the 1880s

Following the failure of the City Bank of Glasgow in October 1878, and three further bank collapses in December, there was a tightening in the London money market. New Zealand had spent the previous decade relying on borrowing in London to support the Vogel boom. The tap was turned off and there was a credit contraction. Trading bank advances, which had almost trebled between 1870 and 1879, fell 15 percent in the following year, and while there was some subsequent growth, New Zealand struggled through the next decade in ‘The Long Depression’.

There are two other elements crucial to this story. First, wool prices had been falling since 1873. So while the Long Depression was precipitated by a monetary crisis overseas, the independent terms of trade deterioration compounded the misery. Second, there had been land speculation in the 1870s, and land prices were out of line with the returns from farming them. Owners were thus saddled with excessive interest payments on overvalued land (and falling output prices). Banks were faced with the dilemma of carrying such owners and some banks failed with the New Zealand Government bailing them out.

Factor and product prices were flexible in those days, and there was a general lowering of price levels. However debts are usually set in fixed nominal terms, and so are inflexible. One of the greatest problems in each depression has been how to realign debts with actual prices; sometimes bankruptcy is the only option.

The Great Depression of the 1930s

New Zealand had entered the Great Depression with excessive debt, and the fall in both export and import prices disrupted the relationship between external and internal prices, and hence debt and domestic prices. Because the prices were relatively inflexible downwards (and debt values perhaps moreso) markets adjusted with falling output and rising unemployment.

Much of the policy activity of the period was to re-balance relative prices. This realignment of nominal price relativities is central to a sustainable Keynesian expansion. The conventional account of New Zealand in the Great Depression is based on a simple model in which a single commodity can be expanded and contracted by demand management. However an open economy must have multiple commodities, for otherwise it would not be necessary to export and import. A multi-sectoral analysis in which the relative prices between sectors and the debt they carry is a critical part of the story of the Great Depression. Fortunately the economist advisers of the 1930s grappled with it.

The Rogernomics Recession 1986-1994

The Rogernomics recession came at the end of the long adjustment to the climacteric of the 1960s. Per capita output fell every year between 1986 and 1994. Unemployment exceed 10 percent of the labour force between March Quarter 1991 and June quarter 1993 peaking at 11.4 percent. This was probably higher than at any previous time in New Zealand’s history – the Great Depression excepted – although labour market conditions were so different in the nineteenth century as to make the comparison limited.

There is no agreement as to why the Rogernomics Recession occurred. Although it is in living memory many current commentators just ignore it. In my view it was in part a working through of the climacteric, but its intensity was compounded by poor economic management – especially in regard to the exchange rate and fiscal and monetary policy which interacted with it.

Is it the Same This Time?

Table 1 compares the three substantial depressions which New Zealand has faced.

Table 1

The Long Depression

1878- mid 1890s

 The Great Depression

1929-1935

 Rogernomics

Recession 1986-1994
Economy before Boom Weak Weak
International

Monetary Crisis?

 Yes Yes No, but World share market crash in October 1987.
International

Recession-Depression?

 Yes Yes Not really
Terms of Trade Fell, some recovery Fell and recovered Steady
Domestic Price Alignment Probably not serious Major measures to deal with it Real exchange rate over-valued
Debt Problem? Farm debt too high;

Excessive Government borrowing

 Farm debt too high;

Excessive Government borrowing

 Not a serious problem, except during 1986-7 financial speculation
Economic Management Hardly existed, fiscal stringency Good, but limited by institutions Poor

This Time 2008-

So while many of the economic mechanisms were the same, there were differences in external circumstances, terms of trade, debt and economic management. Closer inspection suggests the first two depressions/recessions had similarities, but the third was different. How do those previous experiences compare with what we are now heading into?

Earlier Economy

There is no doubt the New Zealand economy was booming in the 1998 to 2008 period. some might say it was overheated.

External Circumstances

The a monetary crisis with weak and insolvent major financial institutions seems to have been largely resolved, but there is the concern that there will be a second phase sovereign debt crisis. Even if there is not , the monetary and fiscal authorities have to unwind the support they have been giving the financial sector and the economy as a whole. The world economy is now in recession, perhaps it is in the recovery phase although the subsequent expansion may be weak in output terms (or highly inflationary), or perhaps different in ways we cannot anticipate.

Terms of Trade

There has been some falling off in commodity terms of trade from recent high levels. Some of the falls, such as for oil, are of benefit to New Zealand. There is no reason to believe that the current export price trends are a deteriorating as they were in 1873, 1929 or 1966 (except that we might expect energy prices to rise). There is some reason to believe that the food price terms of trade may be secularly rising.

Internal Price Alignments

Assessment of the domestic price structure is complicated by the real exchange rate, which undergoes medium term cycles. The rise in the 2000s choked off export growth and tipped the New Zealand economy into a growth slowdown – even a recession – before the world recession started. The exchange rate seems to be too high, and there has to be a doubt that the export sector cannot lift the economy out of the downturn even if the world economy recovers. If it cannot, there will be parallels with the Rogernomics Recession.

Debt

Compared to previous depressions the government and the business sectors appear to have favourable debt levels. However the household sector is holding unusually high debt by past standards., largely secured against over-priced housing, although there is some consumer debt with little security except that the consumer is employed. Most  is owed to banks. Insofar as they are protected by the Reserve Bank, the private sector debt becomes a public sector problem.

While most consumer debt is legally secured against housing, it is largely serviced from labour earnings. As long as unemployment remains tolerable, the housing debt problem is manageable for most individuals, although there are some who are over-borrowed against their human capital. The macroeconomic challenge may be whether New Zealand can rollover its international debt at reasonable cost.

The banking system seems sound, but there have been collapses in the non-bank financial sector, a little reminiscent to what happened to some banks in the Long Depression, except there have been no government bailouts. There is a worry that some framers have paid too much for their land and carry too much debt – shades of the Long and Great Depressions.

Government Macro-economic Management

Its current quality is too soon to tell.

Conclusion

Table 2 puts the previous sections discussions in the context of Table 1.

Table 2

Depression/ Recession Long Great Rogernomics

Recession 1986-1994

 This one? 2008-
Economy before Boom Weak Weak Strong
International Monetary Crisis? Yes Yes Not really Yes
International

Recession-Depression?

 Yes Yes Not really Yes
Terms of Trade Fell, some recovery Fell, some recovery Steady Probably not a long term problem
Domestic Price Alignment Not serious? Major measures Real exchange rate over-valued Exchange rate
Debt Problem Farm

public

 Farm

public

 Sharemarket Household

Overseas

Farm?
Economic Management Hardly existed Good Poor ?

As I said, I finished the original paper with ‘Yes this time it is the same; yes, this time it is different.’ While nothing has happened in the last fifteen months to revise this assessment, additional pondering suggests that the Long Depression may be the best comparator with the current downswing. The difference, which may save us from the prospect of a 17 year stagnation, is that 125 years ago there was a parallel European long depression (but not an American or US one). We may hope that this time the world economy will soon be stronger.

Regulatory Lessons from the Leaky Home Experience

This entry was posted in Regulation & Taxation on by .

Policy Quarterly, Vol 6, No 2, May 2010., based on a paper presented to a seminar  on 16 February, 2010.

Keywords: Regulation & Taxation;

I begin this paper with a manufacturer’s warning: that I use the term ‘regulation’ slightly differently from the way it is used in some other papers presented in this symposium, coming as I do as an economist from the tradition of mathematical systems analysis. By that tradition’s standards, a market is a regulatory system, so it finds limiting the use of the term ‘regulation’ to just statutes and the regulations that are derived from them. It also recognises that some administrative practices are regulatory. The legal framework for regulation may be quite adequate but the administrators may fail to implement it effectively. So when I write about the global financial crisis being a result of regulatory failure I am allowing that the law, the market and the administration may all have had a role in that failure. Thus the statement has little informational content; its importance is that when we try to disentangle what happened, or remedy it, we do not concentrate on one element of the regulatory system: they are intricately interrelated.

Behind this is a view that much public policy is concerned with designing or improving the regulatory system of the economy (and sometimes of non-economic activities). Typically, the change is not the imposition or removal of regulation, but a modification of the current regulatory system to one which is intended to be more effective. In particular the so-called ‘deregulation’ of 1984–1994 is better thought of as a change in the overall regulatory system, with greater emphasis on market regulation. Hence my preference for calling this ‘market liberalisation’. Even the most extreme proponents of this liberalisation knew that there was a need for law to enable the effective working of markets.

Humpty Dumpy said that he could make words mean what he chose them to mean. While that may be true, the danger is that others will misunderstand what their meaning is and that they get trapped into sterile and misleading uses. That has happened, I think, with ‘regulation’.

The size of economic crises

I do not propose to give much attention to the global financial crisis, whose regulation is outside the scope of this symposium. But we might note that the direct cost to the United States government its the bailouts are estimated at US$90 billion, or about 0.6% of US annual output. The equivalent cost in New Zealand would be NZ$1.1 billion. The cost of fixing leaky buildings is put at least ten times as much. There are a variety of estimates, depending on assumptions, but currently the lowest is NZ$11.3 billion (i.e. 6 % of annual GDP), with estimates going up to $33 billion (18% of annual GDP), based on 110,000 dwellings costing an average of $300,000 to fix or replace.

Comparing the two figures is not quite right, since the American one does not include the private costs of the crisis, and the leaky building figure does not include health and trauma costs. However, the comparison does suggest that the failure to build watertight homes is an economic disaster comparable in magnitude locally to the global financial crisis internationally.

Thus, the leaky buildings episode is a major instance of regulatory failure in New Zealand. This paper uses the experience to evaluate the proposed Regulatory Responsibility Bill.

Leaky homes: the beginnings

There is no authoritative account of how the leaky building syndrome (LBS) arose. Here follows a sketch, with particular attention to the role of regulation.

Home construction is a long-established industry, which historically might be characterised as a craft one. Technology was slowly changing, and learning was on the job, with a increasingly formalised system of apprenticeship training. Quality control was by reputation, by professional membership of organisations such as the Master Builders Association (which has been around for over 100 years), and by local government which approved plans and had building inspectors check a builder’s work. Typically the inspectors were retired builders – retired perhaps because of physical infirmity but very knowledgeable about building practices. (The role of the building inspector was nicely recalled by one person who said the builder of his now 30-year-plus-old home was described by his building inspector as ‘your friend’. No doubt some builders took a less charitable view of the inspector.) Some new housing also involved architects or engineers.

Until the late 1980s, local authority by-laws prescribed the manner in which construction was to be carried out, although different councils prescribed different building methods, a heterogeneity which the building industry found unsatisfactory. Of course mistakes were made, but they were not widespread and the building industry learned from them and corrected its methods.

From about the 1970s the rate of technological innovation in house construction began to accelerate. Probably at some point it became evident that ‘learning on the job’ would no longer be sufficient to ensure that the new technologies could be used effectively, although it is not clear what happened instead. By 1979 the innovation challenge was sufficiently serious to be mentioned in public fora.

Various institutions had been developed to protect new house purchasers, including the Building Performance Guarantee Corporation. This was decommissioned in 1987. By doing this the government may have markedly reduced the Crown’s financial exposure to risk from poor quality building and, with hindsight, the enormous LBS bill. Had the Building Performance Guarantee Corporation existed in the 1990s, it might have identified the problem earlier or even encouraged better standards of building. (The parallel here is the Earthquake and War Damage Corporation (now the Earthquake Commission), which has insufficient funds to deal with a major earthquake but deals expeditiously with the consequences of smaller ones, while pursuing an active programme of prevention.)

Another institution disestablished in the late 1980s was the Ministry of Works and Development. This decision is usually seen as reflecting the downgrading of engineering relative to accounting in the priorities of policy makers. The extent to which it had an impact on the housing construction sector is unclear, so it is uncertain whether the LBS can be grouped with the Cave Creek tragedy and the Auckland CBD blackout. However, the Ministry of Works and Development’s disestablishment symbolises the fact that engineering standards became less significant in public policy thinking.

Some of the functions of the ministry, including those involving housing construction, were transferred to the Department of Internal Affairs which established a Building Industries Commission, whose 1990 report is discussed below.

Other events of the 1980s also contributed to the concatenation which led to the LBS. One was the reform of local government, which must have led to upheaval in many planning approval offices and among building inspectors. There is a view that funding was reduced, so there was poorer supervision. A second was the labour market upheaval in the late 1980s, as many workers were laid off, which may have resulted in many under-qualified workers becoming self-employed builders. A third was the reduction in apprenticeship training.

Leaky buildings: the 1990s

In January 1990 the Department of Internal Affairs’ Building Industry Commission reported. Its general recommendations were incorporated in a bill introduced into Parliament by the Labour government later in the year, to be passed under the National government, with bipartisan agreement, as the Building Industry Act 1991. Instructively for this story, the report’s proposal to reintroduce something like the recently disestablished Building Performance Guarantee Corporation was not proceeded with.

The system of regulating dwelling construction was changed dramatically through a building code which set performance criteria to be achieved rather than prescribing the manner in which buildings were to be constructed. For instance, builders were told just that the structure must last 50 years, the cladding 15 years, and that the walls and roofs must be impermeable to water. The belief was that the old regime had stifled the use of new materials, design and construction, thereby discouraging innovation and raising building costs. Under the new regime new methods would be introduced more easily. The minister in charge of the bill, Graham Lee, who was once a builder, said its most important element was the development of private building inspectors. (If only that had been correct.)

The act came into force in 1992 with the introduction of the Building Code. There is a view that the code was the ‘cause’ of LBS. However, as the preceding section indicates, there were numerous factors coming together which led to the failure.

The early 1990s was a period when the market extremists were still triumphant, and there was frequent reference to ‘light-handed regulation’, referring to a regulatory system in which the government is not very active but the regulation is based upon normal market practices, including litigation for breach of contract (perhaps under the Consumer Guarantees Act in cases where the contract was not very elaborate). Ideally, the threat of litigation is sufficient to ensure that the contractor maintains the agreed standards.

It appears that little thought was put into considering the issue of what redress the house owner would have if the performance standards were not attained. Suppose the cladding fell off after 14 years? Under light-handed regulation the aggrieved party can take the matter to litigation, but who exactly is to be sued? The above account suggests that there are many involved, and all, to some extent, may be at fault: the local authority, its building inspector, the builder, the architect, the buildings material supplier, the developer, the home owner who onsold, and even the legislators and their advisers who passed the relevant legislation. In such situations fault can be very difficult to establish in law. A favoured explanation is James Reason’s ‘Swiss cheese causative model’, in which there are a series of slices with holes in them and a particular untoward event occurs when there is an alignment of the holes. While this may be useful for explaining a single event, its relevance to explaining a repeated failure is less clear. The LBS involves thousands – perhaps over 100,000 – homes. Alignment of the holes in all these cases cannot be an unfortunate coincidence. The failure was systemic.

Given so many potential groups at fault, and given that the building failures took time to identify, that litigation is not always quick, that many of those involved will have passed on and companies will have disappeared, and that in any case they cannot possibly collectively find the $11–$33 billion required to fix the problem, outcomes for the victims of LBS have frequently been unsatisfactory and costly. (Suing the government is not really an option. Parliament is too clever to allow that, yet many think the government of the day has the greatest culpability – although were it to own up it would be the taxpayer who would pay. In any case the current Minister for Building and Construction has said (New Zealand Herald, 27 February 2010) that the fiscal realities are that even the government’s pockets are not that deep.)

The Swiss cheese model which might be useful for a particular court case is not particularly helpful when the cases get repeated. In the end one must ask why there was no self-correcting mechanism. Or, to use a much-loved New Zealand image, why there was inadequate fencing at the top of the cliff instead of relying on courts at the bottom.

The LBS appears to be associated with at least two innovations which, no doubt, were cost-saving at the time. The first was the use of a ‘monolithic cladding’ which has proved not to be watertight unless it was used strictly according to specification. The second was the use of untreated timber, without the realisation that treating for borer also better sealed the wood from water. Additionally, some house designers cut back water-protecting features such as eaves.

The problems of construction may not be confined to leaky homes. They extend to apartments and may involve commercial buildings. The collapse of the apprenticeship system and the operation of some not-very-qualified builders has meant that the quality of the workmanship has not always been high. The use of other new materials, often imported – following the ending of import controls – means that poor and unsustainable construction may plague other elements of the housing stock in a manner similar to leaky houses.

Ironically, the LBS should not have been as much of a surprise as it was. The Canadians experienced it too, but a little earlier. I have heard it claimed that there were people who knew of the construction failures long before they were a public issue, but their response was inadequate. If that is true, then a further regulatory failure was that there was a political environment in which individuals were discouraged from speaking out.

We might summarise the conclusion by noting that when Marcellus in Hamlet said ‘Something is rotten in the state of Denmark’, he was not referring to the buildings but to the governance.

The Major Projects

The LBS may not be the greatest regulatory failure in to New Zealand’s economic history – even ignoring macroeconomic crises such as the Great Depression, which, in any case, can be attributed to a severe external shock arising from offshore regulatory failure. Although there is no authoritative estimate of the collective cost to the economy of the energy-based Major Projects (Think Big) programme, it is likely to have been of a similar order of magnitude as leaky buildings.

The Major Projects taught some of us an important lesson. In the early 1980s, considerable effort was put into evaluating the public return on the investments and there was much debate on the criteria to measure this. However, with hindsight we know the evaluation exercises missed the point. Suppose the assumptions were not fulfilled. Who would bear the cost of the failure?

Those doing the evaluations in the private sector were unaware that the downside risks were not borne equally, while those in the public sector, who did know, did not seem to have taken these asymmetries into account. In particular, it turned out that if there were cost over-runs (there were some), or the world price of oil was lower than projected (as it proved to be), the cost of the failure was borne almost entirely by taxpayers and consumer-motorists, because the corporate investors had their returns guaranteed – one way and another – by the state.

There is a parallel here with the leaky buildings. As in the case of the development of the Building Code, insufficient attention was paid to what would happen if something went wrong. It is true that in both cases there were means to settle the failure. In the case of the Major Projects the financial deficits were covered by taxpayers and motorists. In the case of leaky buildings, a slow, cumbersome and expensive process of litigation is settling the costs of redress erratically. Part is borne by the house owner, part by the private suppliers and the local authorities, with the central government offering to pay about 10%. Many would say that the costs are not being borne equitably.

Murphy’s law and regulatory assessment

This is all a nice example of Murphy’s law. Not the ‘if anything can go wrong, it will’ version, but Edward Murphy’s original aim to design a system on the assumption that anything which can go wrong will go wrong. I doubt that this thought was uppermost in the minds of the designers of the Building Code, and I don’t recall much attention to it in the evaluation of the Major Projects.

Of course, accident prevention cannot be all-encompassing. Murphy was in the aircraft industry trying to minimise crashes; the easiest way to do this is to not let planes fly. Similarly, there are going to be some risks from the building code. However, a lot of grief could have been prevented had its designers asked ‘if things go wrong, what happens next?’ That so few aircraft crashes have occurred compared to the total number of flights, and that even fewer have led to death, indicates the value of the design principle that Murphy enunciated.

Should we build Murphy’s design principle into our policy process? The evidence is that we have often not done so in the past. As far as I can judge, it is not there in current policy evaluation, and it was certainly not in terms of the two major regulatory failures I have just identified.

The Major Projects were handled outside the legal process as entirely an administrative matter. As it happens, some of the omissions are covered by the 1989 Public Finance Act, in so far as the risks the government exposed itself to should now appear as contingent liabilities in the government accounts. However, I am not sure whether the guarantees the government gave, which ended up as additional costs to motorists, are covered by the new procedures. The precise guarantees could not occur today, because of the greater use of market regulation – such as there being no restrictions on imports of oil. They resulted in tax increases which would not have been anticipated at the time of the agreement, and so would not be mentioned under the contingent liabilities provisions.

However, the LBS, with the benefit of hindsight, is very revealing as to the inadequacy of our approach to regulation in the early 1990s. It demonstrates is that ‘light-handed regulation’ with recourse to the courts if there is failure may not always be an adequate answer.

Regulatory impact analysis

Suppose the Building Industries Act and the Building Code had been reviewed under the current regulatory impact analysis procedures. It would be too much to expect the review to forecast the LBS, but reasonable questions, like our earlier one – what if the cladding fell off the house after 14 years? – would have anticipated the issue of what happens if the construction did not meet the performance standards in the code. (Note the importance of the time horizon: if the cladding fell off during the construction process there is a reasonably effective redress process.)

The checklist in the Treasury’s Regulatory Impact Analysis Handbook is set out in the appendix to this article. While each of its items may be reasonable in its own right, at no point is the evaluator asked to consider what might go wrong and what would be the consequences if that happened. The analysis is not interested in what redress process might be triggered if something goes wrong. (One colleague argued that the going-wrong issue is implicitly in the handbook, and she explicitly teaches it in her training sessions. So much the better for her students, but I have no doubt the checklist dominates consultants’ thinking when they are doing regulatory impact reports.)

The handbook is a lineal descendant of the project evaluation approach that was used in the Major Project appraisals. It does not require a cost-benefit analysis (although these are sometimes included for particular cases), but it adds the sort of caveat analysis which should be done with a cost-benefit analysis (but was often not in the early 1980s). The handbook shows no evidence of having learned the chief lesson of the application of cost-benefit analysis to the Major Projects – to ask what happens if things go wrong? The basis of the approach seems to be that ‘the policy will work, but there may be some collateral impacts. Please identify them.’ Thus, the handbook approach would have done nothing to prevent the LBS, nor the enormous costs which it has generated.

The proposed Regulatory Responsibility Bill

The Regulatory Responsibility Taskforce submitted a Regulatory Responsibility Bill in September 2009. Again we ask: would the bill, were it a statute at the time, have done anything to prevent or forewarn of the inadequacies of the Building Act and the Building Code?

Again, the answer is no. The bill establishes a set of principles, not one of which addresses the issue of what happens if some statute or regulation fails to deliver on its intent. From this perspective the proposed Regulatory Responsibility Bill is ineffective. It would not have made a single difference to the adoption of the Building Act or the Building Code, nor resulted in a single additional watertight home. This is surely a major test of its relevance. If the proposed bill would have been useless for dealing with one of our greatest past crises, it is unlikely to be much use for preventing future ones.

One could well argue that that is not the intention of the bill, whose purpose is described as ‘to improve the quality of Acts of Parliament and other kinds of legislation by specifying principles of responsible regulation …. and requiring those proposing new legislation to state whether the legislation is compatible with those principles … and granting courts the power to declare legislation to be incompatible with those principles’. If so, the bill has the wrong name, not only in terms of the definition of regulation given earlier in this article, but also in terms of the normal meanings of the narrow legalistic term regulation. Its title is a Humpty Dumpty exercise of choosing a phrase which appears to mean something quite different to the public generally. I leave others to find a more appropriate name, but the proposed bill seems to me to be more one about legislative process than one about regulatory responsibility.

This failure is all the more surprising given that three of the members of the taskforce were deeply involved with the Major Projects. They were on the side of the angels, but are repeating the previous mistake by assuming that the intent of the policy will be carried out, rather than asking what happens if the policy outcome is different from the intent. As the taskforce report makes clear, this proposal belongs to the same stable as regulatory impact analysis, the lineal descendent of the cost-benefit analysis which was so misleading during the Major Projects debate.

Conclusion: the Murphy gap

What this paper has identified is a major gap in the formal policy process. Let us call it the ‘Murphy gap’. There is not built into the policy process a test of what happens when a policy outcome differs from that which was promised. Of course it is rare for promises to be exactly attained, but what we have shown is that in the case of the Building Code (and the Major Projects) the failure was very large – gigantic. While in principle it could have been anticipated, it was not.

Neither the Regulatory Impact Analysis Handbook nor the proposed Regulatory Responsibility Bill address the Murphy gap. One might argue that by ignoring it, and yet giving the impression that they provide a comprehensive review of regulatory impact, they exacerbate it by complacency.

Who knows whether a current or future piece of legislation (and associated regulations) may result in a failure with an economic impact the size of the Major Projects, the LBS or the global financial crisis? There is still no systematic way of such a possibility being brought to the attention of those who are passing or implementing the laws. From this perspective, the proposed bill is irrelevant as a means of improving regulatory responsibility.

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Appendix: Checklist in the Regulatory Impact Analysis Handbook (pp.33-4)

Will any policy options that may be considered, potentially

  • Take or impair existing private property rights?
  • Affect the structure or openness of a particular market or industry?
  • Impact on the environment, such as regulations that affect the use and management of natural resources?
  • Have any significant distributional or equity effects? …
  • Alter the human rights or freedoms of choice and action of individuals?
  • Have any other significant costs or benefits on businesses, individuals or not-for-profit organisations? …

Is the evidence-base for the effectiveness of different policy options weak or absent?

Are the expected benefits or costs of the policy options likely to be highly uncertain?

Is the success of any of the options likely to be dependent on other policy initiatives or legislative changes?

Are any of the legislative options likely to have flow-on implications for the future form or effectiveness of related legislation?

Are any of the legislative options likely to be novel, or unprecedented?

Are any of the legislative options likely to be inconsistent with fundamental common law principles?

Are any of the legislative options likely to be inconsistent with New Zealand’s international obligations, or New Zealand’s commitment toward a single economic market with Australia?

Are any of the legislative options likely to include a new power to create delegated legislation, or grant a broad discretionary power to a public body?

Are any of the legislative options likely to include provisions that depart from existing legislative norms for like issues or situations?

Are there other issues with the clarity or navigability of, or costs of compliance with, the current legislation that it might be good to address at the same time?

Will people with expertise in implementation provide input on the policy design before policy decisions are taken?

Are implementation timeframes likely to be challenging?

Are the actual costs or benefits highly dependent on the capability or discretionary action of the regulator?

Acknowledgements

This has proved a bigger project than I initially expected, partly because there are many differing viewpoints and professions involved. I am grateful to the following without whom this article would be less comprehensive in both content and analysis: Rob Bowie, Elizabeth Caffin, Peter Foster, Geoff Fougere, Paul Grimshaw, Roger Hay, Warwick Massey, Julienne Molineaux, Diane Salter, John Tizard, and public servants who were involved in the management of the LBS crisis, but being still active must remain anonymous.

References

Building Industry Commission (1990) Reform of Building Controls, Wellington: Building Industry Commission

Commission of Inquiry into the Quality of Condominium Construction in British Columbia (1998) The Renewal of Trust in Residential Construction (the Barrett Report), Government of the Province of British Columbia

Easton, B.H. (1999) Reforms, Risks and Rogernomics, http://www.eastonbh.ac.nz/?p=43

Easton, B.H. (2010) ‘Crisis Point’, New Zealand Listener, 20 February

Grimshaw, P. (2009) ‘Towards New Zealand’s building regulation reform’, paper delivered at the Building Regulation Forum, 17-18 November

Howden-Chapman, P., J. Bennet and R. Siebers (eds) (2010) Do Damp and Mould Matter? Health impacts of leaky homes, Wellington: Steele Roberts

McGregor, A. (2006) ‘Accidents, failures, mistakes and leaky buildings’, paper delivered at the IPENZ national conference, Wellington, March

New Zealand Treasury (2009) Regulatory Impact Analysis Handbook, Wellington: The Treasury

Overview Group on the Weathertightness of Buildings (2002) Report to the Building Industry Authority (the Hunn Report), Wellington:

PriceWaterhouseCoopers (2009) Weathertightness: estimating the cost, report for Department of Building and Housing, Wellington: Department of Building and Housing

Reason, J. (1990) Human Error, New York: Cambridge University Press

Regulatory Responsibility Taskforce (2009) Report of the Regulatory Responsibility Taskforce

Te Ara: Income and Wealth Distributions

This entry was posted in Distributional Economics on by .

From the section ‘The Economy and the City’ released February 2010.

Keywords: Distributional Economics

Te Ara is New Zealand’s On-line Encyclopaedia. The primary author of its section on the Income and Wealth Distributions ( www.teara.govt.nz/en/income-and-wealth-distribution ) was Brian Easton.

For other of his contributions

The Economy: www.teara.govt.nz/en/economy

New Zealand’s economic history: www.teara.govt.nz/en/economic-history

Te Ara: Economic History

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

From the section ‘The Economy and the City’ released February 2010.

Keywords: Political Economy & History;

Te Ara is New Zealand’s On-line Encyclopaedia. The primary author of its section on  New Zealand’s economic history ( http://www.teara.govt.nz/en/economic-history ) was Brian Easton. <

For other of his contributions

The Economy: http://www.teara.govt.nz/en/economy

Income and Wealth Distributions: http://www.teara.govt.nz/en/income-and-wealth-distribution

An L-ish Future?

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

Our economy is suffering from some severe imbalances that are hindering an upswing.

Listener: 6 February, 2010.

Keywords: Macroeconomics & Money;

The so-called recovery of the New Zealand economy could turn out to be L-shaped. Under this scenario, after the economy reaches the bottom of the contraction, it doesn’t move into an upswing, either rapidly (the V scenario) or sluggishly (U). Instead it bumps along the bottom, with short-term upswings followed by downswings or stagnation. The bottom could last a long time. It took seven years of the Rogernomics Recession of the 1980s and 1990s before the economy hit an upswing, and the Long Depression, which began in 1878, lasted 17 years.

The L scenario may apply to the global economy as a whole, or perhaps to some key economies such as North America and Europe while Asia expands. But let’s assume a steady upswing for the world. The New Zealand economy could still suffer an L.

This prognosis arises because the economy is suffering from some severe imbalances that have to be addressed before a smooth upswing is certain. Based on the long-term trends, house prices may be overvalued by as much as 50%. They are unlikely to collapse, and though they may bump around a bit, their trend may be stagnant for while. It may make sense to buy a first house, or to change your house for family or employment reasons, but there is probably not a lot of prospect in investing in rental housing for capital gain.

Interest rates are also out of kilter. The world monetary authorities are deliberately keeping them low to prevent a return to a global financial crisis. But as the world economy expands, they will increase. Ten-year government bond yields recently crept above 6% a year. That they are so near the floating interest rate for first mortgages says there is an imbalance. Householders are going to be paying higher interest on their debts.

Another source of the upward pressure on interest rates is that the banks have been borrowing short term where rates are cheapest.

That puts financial stability at risk, so the Reserve Bank is making banks borrow longer and therefore more expensively. Before you shout “unfair”, remember that financial instability comes at a cost to the taxpayer – and threatens your job.

Overpriced housing is not the only thing undermining the robustness of householders’ balance sheets. Many are suffering from collapsed investments in finance companies. Households are carrying too much debt given the true value of their assets, and most people are not saving enough for their hoped-for retirement incomes. The resulting stronger savings and weaker consumption will weaken any domestic expansion.

Businesses are also struggling, perhaps no more than expected during a deep recession, but business investment seems unlikely to pull us upwards. More businesses are going to fall over, some weak finance companies are still out there and some farmers have too much debt. Community organisations are suffering from a lack of donations and sponsorships.

The Treasury’s December “Half Year Economic and Fiscal Update” suggests government borrowings are too high, and public spending has to be pulled back (and/or taxes increased). So we cannot expect the Government to inject any more oomph into the economy, either.

Exporting should provide a bit of much-needed oomph, although that is being compromised by the high New Zealand dollar, which reflects the dreadful state of our foreign balance sheet and our propensity to keep borrowing offshore. This is yet another imbalance of the economy, mirroring those in household, business and government balance sheets.

See the problem? All the conventional sources of an economic expansion are weak. Some people will beat up the economy for their short-term profit, but the imbalances mean any short-term expansion will be undermined in the medium term (the W scenario).

And yet, and yet. The capitalist system is a bit like a bicycle – riddled with imbalances. When it is standing still, it falls over; when it is moving forward the imbalances don’t seem so severe – until it stops, and then it falls over, big time.

A Good Keynes Man

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

Paul Samuelson, 1916-2009.

Listener: 23 January, 2010

Keywords: History of Ideas, Methodology & Philosophy;

We called it “Sam”, but its official title was Economics. Written by Paul Samuelson, it’s the book that – as author Robert Heilbroner put it – “changed our vision of economics from the dismal science to a study of social possibilities”. The first edition of 1948 is said to have set a model for presentation, lucidity and humour for all textbooks. Eighteen editions later, it has sold over four million copies in 40 languages.

Samuelson says he “sweated blood” writing it to pay for raising the triplets from his wife’s fourth pregnancy. His wife also deserves a mention for her contribution to his earlier work. His first (1947) book, Foundations of Economic Analysis, includes the tribute: “My greatest debt is to Marion Crawford Samuelson whose contributions have been all too many. The result has been a vast mathematical, economic, and stylistic improvement . the quaint modern custom of excluding the value of a wife’s services from the national income [cannot] condone her exclusion from the title page.”

Writing the textbook probably turned the powerful applied mathematician into such a good stylist. He was not a policy-oriented economist, preferring to seek deep insights rather than shallow recommendations. Economics “was about discoveries and not merely opinions”. He became the most influential 20th century economist on other economists. John Maynard Keynes has had (and still has) more direct influence on macroeconomic policy, but Samuelson’s impact was wider, including on welfare economics, microeconomics and trade theory.

It was Samuelson who introduced Americans to Keynesianism, creating the “neoclassical synthesis”, which combined Keynes’ macroeconomics with the theory of how individual markets work. He did it with a lightness of touch: “The stock market has forecast nine of the last five recessions.” Even monetarism – the analytic rather than ideological version – is founded on his synthesis.

He grew up with his Polish Jew immigrant parents in the Midwest, graduating from the University of Chicago. Initially he resisted Keynes’ theories, but after four college summers on a beach – it was pointless to look for work when friends were being turned down so many times – he saw the logic of Keynes’ explanation of the Great Depression. His Keynesianism evolved and later in life he criticised its earlier version.

It is said that when he finished the oral exam for his Harvard doctorate, the interviewing panel asked itself whether it had passed. It failed by not offering him a job. Instead he went to the nearby Massachusetts Institute of Technology, whose economics department then topped his alma maters’ in the rankings for decades.

One can’t be an economist today without admitting Samuelson’s influence. The citation for his Nobel laureate said: ” more than any other contemporary economist, he has contributed to raising the general analytical and methodological level in economic science”. That was because he focused on analysis rather than policy. He boasted he had never spent a week in Washington. His students – including Paul Krugman and Joseph Stiglitz – carry his work forward.

The enfant terrible became the enfant terrible emeritus. At 89, he published a paper that explained how offshoring does not always lead to an improvement in welfare. The result was already there in his pioneering international trade theory of the 1950s, but those ideologically over-committed to free trade overlooked it. He said, “Politicians like to tell people what they want to hear – and what they want to hear is what won’t happen.”

Despite his dazzling learning, insight, energy (his collected works are in five huge volumes), humour, profundity and amazing inventiveness, he was a humble man, telling his students that economists had much to be modest about. He recently commented: “What we know about the global financial crisis is that we don’t know very much.”

In the stressful “capital reversing” debate (don’t ask), he contributed to a serious analytic error (again, don’t ask), but he wrote the best explanation correcting it. He finished the retraction with: “If all this causes headaches for those nostalgic for the old parables of neoclassical writing, we must remind ourselves that scholars are not born to live an easy existence. We must respect, and appraise, the facts of life.”

Samuelson also said: “I don’t care who writes a nation’s laws if I can write its economics textbooks.” It was a great textbook, one he said aimed never to teach anything that had to be unlearned. Yet he taught us so much.

Watch out for Weasels

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

Children’s classic The Wind in the Willows is also a fable for adults.

Listener: 9 January, 2010.

Keywords: Literature and Culture; Macroeconomics & Money;

The “Poop-poop” rang with a brazen shout in their ears, they had a moment’s glimpse of an interior of glittering plate-glass and rich morocco and the magnificent motor-car, immense, breath-snatching, passionate, with its pilot tense and hugging his wheel, possessed all earth and air for the fraction of a second, flung an enveloping cloud of dust that blinded and enwrapped them utterly, and then dwindled to a speck in the far distance, changed back into a droning bee once more. . there was a heartrending crash – and the canary-coloured cart, their pride and their joy, lay on its side in the ditch, an irredeemable wreck. The Rat danced up and down in the road, simply transported with passion. “You villains!” he shouted, shaking both fists, “You scoundrels, you highwaymen, you – you –  roadhogs!”

Although The Wind in the Willows immortalises “roadhogs”, apparently author Kenneth Grahame initially wrote “stockbrokers”. Children may not have understood Grahame’s concern about the invasion of the countryside by the finance industry – he grew up in rural tranquillity on the banks of the Thames at Cookham, which is now part of the urbanised “stockbroker belt” of London. But his earlier term gives an interesting interpretation of the children’s classic.

Unlike Ratty, Toad was not angered by the first automobile he ever met causing his beautiful caravan to overturn. He “sat straight down in the middle of the dusty road … stared fixedly in the direction of the disappearing motor-car. He breathed short, his face wore a placid, satisfied expression, and at intervals he faintly murmured ‘Poop-poop!'”

This dedicated follower of fashion chased after cars in a wildly picaresque journey of dishonesty and damage that ended in prison. Deceit and generosity of friends enabled him to escape, but the Toad Hall he returned to had been taken over by the crude denizens of the Wild Wood. In a scene paralleling the homecoming of Odysseus, Badger, Ratty, Mole and Toad reclaim the Hall by driving the weasels out. For all their bombast, the Wild-Wooders prove shallow and ineffective.

From this perspective The Wind in the Willows is a story of modernisation in which the Edwardian life Grahame so valued is being transmuted by technology and by those with shallower values than Toad’s friends. As it turns out, it is the prudence of Toad’s father, who put in the secret passage, that enables the friends to spring the surprise attack. Whether the Wild-Wooders were mere roadhogs, stockbrokers or even the working class (as some commentators suggest) is unclear. Toad’s apparent submission to his friends’ values at the end may be yet another of his deceits. The reader is left with the expectation that come the next fashion, Toad will be off again.

While he was writing the book, Grahame was the secretary of the Bank of England, the UK’s central bank. It was a senior role involving maintaining the records and the correspondences of the institution before computers, or even typewriters, took over. Fortunately it was then a gentlemanly pursuit and gave him the time, while conserving his energy, to write the nostalgic novel.

You may think the job was routine or even boring. Maybe. But a few years before Grahame retired, a madman broke into his office and fired three shots, which fortunately for him –  and lovers of his book –  all missed.

Central banks, including the Reserve Bank of New Zealand, still have these secretaries. As a general rule they don’t write novels, but they are likely to concur with at least one of The Wind in the Willows’ messages: the world is changing; the much loved environment of your childhood is evolving; the society in which you grew up is passing.

As the Prince told his nephew in Giuseppe Tomasi di Lampedusa’s novel The Leopard, “If we want things to stay as they are, things will have to change.” But the fundamental values of friendship and common sense – and perhaps scepticism towards fashion – are still of immense relevance, especially for dealing with unprincipled roadhogs, financiers and Wild-Wooders.

Good Grief

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

With no real economic strategy, the Prime Minister is playing a dangerous game.

Listener: 26 December, 2009.

Keywords: Political Economy & History;

The reason the Government is thought to have a secret agenda is that it has no agenda. It has instincts, and commitments to keep, including ones to those that helped elect it, such as the well-off, business and farmers. And it has political debts to pay. The Hollow Men has a useful account of the insurance industry lobbying the National Party; one assumes it is now influencing the proposed changes to ACC.

When Act Party leader Rodney Hide said Prime Minister John Key “doesn’t do anything” whereas “Act did everything and we are hated”, he was broadly right. Key has no real economic strategy; he is an incrementalist – one step at a time, steady as she goes. Act has a comprehensive strategy. People don’t like it, and the last time it was applied it failed miserably.

The Tiggerish prominence of Hide in the political scene gives the impression that Act has more influence than it has, and that National’s hidden agenda is the Act one. But National will pick and choose.

That’s why National’s relations with the Maori Party are so important. The latter was seen as a centre party that would balance Act’s tug to the right. However, the Maori Party is not so much centre as broad-spectrum, covering the left to the right. A third of the voters who ticked a Maori electoral candidate, giving the party five seats, supported Labour with their party vote. Had these people also given Labour their electorate vote, the Maori Party would have won only three seats.

The party finds it difficult to make decisions unless it can find a Maori dimension. When it came to ACC, it could not find one, and the Government teamed up with Act.

Those who think National has a secret agenda recall radical Ruth Richardson and her ideological kin (who today support Act). But as Key has repeatedly said, his government will not “embark on a hugely radical, disruptive policy agenda”. Key’s approach is in the tradition of Keith Holyoake, one of our great prime ministers, who may have had a vision and certainly stayed a little ahead of the rest of the country. But as Barry Gustafson’s Kiwi Keith shows, he hid behind cautious incrementalism when responding to the challenge.

As National politicians sometimes explain, National was elected without a comprehensive policy framework. Of course, it had bits and pieces from its time in Opposition, some of which officials regret but are dutifully trying to implement, and others that officials see as a welcome step forward. The party view was that you could not form a policy framework in Opposition, so instead you won office and then got officials to develop one consistent with your instincts and visions. But that still has not happened. (In contrast, and as Hide was saying, Act had far more of a framework.)

Perhaps it was a good thing that National did not have too many ideas in Opposition. When it got into government, it found an economic situation quite different from what was expected. Sometimes it appears to be hoping the recession was a hiccup and things will soon be back to normal – but that’s not what the fiscal forecasts are telling us.

Key’s gratuitous trashing of the Treasury’s emission trading scheme projections may have been convenient at the time, but he undermined his ability to use Treasury estimates (which are usually the best there are) in the future. The episode nicely illustrates the Prime Minister’s need to be less day-to-day and more long term. It is this lack of strategy that leads to the belief of a hidden agenda.

It is easy for Father Christmas to maintain immediate popularity by buying off dissenters, but Key compromises the long-term fiscal position. Finance Minister Bill English may not be “the Grinch”, but Old Mother Hubbard – to mix the metaphor – knows the cupboard is increasingly bare.

Next year, there will be a tussle to resolve the tension between giveaways and fiscal prudence. Our great prime ministers are those who have stood shoulder to shoulder with their finance ministers and restricted spending to what can be afforded. They have not always been our most popular in the short run.

Social Security and ACC

This entry was posted in Social Policy on by .

Concluding remarks for ‘The ACC Debate: How Do We Pay for ACC?’, sponsored by the ACC Group. 15 December 2009, Auckland.

Keywords: Social Policy;

I am honoured to be asked to attempt to make some concluding remarks to such an interesting conference, and privileged to follow Sir Owen Woodhouse. We are so fortunate that we still have him with us to remind what his proposals were about, and the extent to which we have pursued them and – I am afraid – sometimes ignored them.

Sir Owen mentioned that lawyers had considerable difficulty with the notion of cause, on which the fault principle was founded and which his Commission’s proposals rejected; I am glad to say sir, that major contributions to the analysis of cause came from the great economists David Hume and John Stuart Mill – both of which support the lawyers’ doubts.

It is proper in Sir Owen’s presence we should look at the fundamental issues, even if we cannot attain the penetrating insight and creativity that Sir Owen’s commission attained some forty years ago.

However before making my summary offering I should mention there is a complementary question to the topic of how we should pay for ACC, one which Richard Gaskins was in part addressing. It is ‘who pays for accidents?’ Some of the current changes the government to ACC do not reduce the costs of the accidents – in the way that the Woodhouse Commission’s emphasis on prevention and rehabilitation was intended to – but shift their cost from the public purse onto the individual and their families – a privatisation of some social welfare. We need to keep prominent in any discussions the question of ‘who pays for accidents?’

My remarks here mainly address the elephant in the room, here today and in every discussion on ACC funding. It’s a huge elephant; it’s the social security system, and its presence poses the question, why dont we fund social security and accident compensation the same way?

Treasury economists might explain the difference as means of a raising taxation by stealth while that pre-funding of ACC (and the Cullen Fund) are a means of squirrelling away part of the fiscal surplus so that the reduce taxes-for-any reason brigade could not get at it. They might go on to argue that the ACC levy system reflected that the compensation was earnings-related in contrast to the flat-rate benefits paid from general taxation. (Perforce the public account does not have to fund earnings related sickness benefits.) They might also argue that the ACC levy system provides incentives to minimise accidents. (Others might say they are weak and that the prevention activities of ACC are much more important.) I am not sure what the economists would say if asked why we dont have an earnings-related sickness compensation system, other than that it would be very expensive. So the official’s explanation would have some validity but it would leave many unanswered questions and inconsistencies.

The ACC Minister and the Chairman of the ACC board explain the difference by that one is social security the other is social insurance, but that is a labelling exercise and does not explain why the labels apply. They may be saying that ACC is just anther way of doing the old private insurance scheme. Grant Duncan talked about how the rhetoric of the motor cyclists was based on the fault system which is an indication of this. However a number of today’s speakers (including Susan St John, Richard Gaskins and Sir Owen himself) were adamant that the Woodhouse Scheme not about doing the old ways better, but doing it differently as well as better.

A historian would point out that the two systems have different origins.

ACC is the successor of the older scheme which began before there were effective means of delivery so the clumsier tort litigation and private insurance had to be used. But that does not mean that those arrangements should be persisted with, any more than we should use horses and buggies to deliver the crippled worker’s bag of coins because that was the way things were done in the nineteenth century.

Social security is an example of doing things better, replacing the Poor Law. As we know it, the welfare state began with the Old Aged Pension in 1898 in response to an aging crisis. Because we always leave things to too late there could be no pre-funding for it or for the Widow’s Pension in 1911 and so on. So it was paid out of the current public revenues. There was a prefunding element in the 1938 Social Security Act, reluctantly adopted because New Zealand’s London bankers required it. But the social security fund simply involved paper transfers and quickly became farcical. It, and the social security tax, were abandoned in 1968. More fundamentally, for most New Zealanders, Social security reflects a quite different conception of government support for those in need.

Now we might reverse the issues covered today and ask if ACC prefunding is such a wonderful scheme, why dont we prefund social security, so that whenever a child is born or a migrant arrives the state invests in a fund to pay for their future public costs.

The exercise would involve mind boggling complexities providing a guaranteed career for actuaries. It would also pose considerable fiscal and macroeconomic challenges. They are already there in the current ACC scheme, but less evident because it is much smaller than social security. Since in the past such practical considerations have not hindered much more extremists changes, why not this time?

It is easy to dismiss this as irony, a series of paradoxes which have little relevance for the immediate political pressures on the scheme. But that is always the way we seem to operate – ad hoc responses to current pressures. Richard Gaskins and Susan St John were right to go back to basics, but it is not simply a question of original intention.

Trying to think about the elephant, I was struck by how much of the discussion is constrained by the accounting and actuarial framework that is used. It seems to me that Michael Littlewood’s (quite orthodox) description of the government balance sheet had a major gap when it omitted the sovereign right to tax. While I dont know how to include it – Jeff Chapman [who attended the conference and chaired the early-1980s committee which set the framework for the government accounts] might be able to help here, Gilling’s Law says how you score the game determines how the game is played. If we leave the sovereign right to tax out we play the game differently. It is implicitly there in the welfare state accounts, and explains why it is pay-as-you go. But it is not there in the ACC accounts, and so we play a different game, or at least the minister wants us to. Meanwhile those who criticise the current ACC funding system do so from a perspective that implicitly incorporates a sovereign right to tax.

So here is the challenge: suppose we were to start afresh to design a welfare system in which there was a continuity between the accident provisions and the other provisions (perhaps within existing fiscal parameters). What would it look like? Who knows? One thing I am sure is it would not look like the current ACC system. But to do so would give a context in which to debate the current issues in a comprehensive rather than ad hoc way. It would be to harness the elephant in the room.

Finally as the last speaker, it is my pleasant task to thank the Retirement Policy and Research Centre and Claire, Michael and Susan for an excellent and well organised conference. I know the issues it was intended to raise will progress as a result.

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The Complete Package

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

Sue Bradford’s departure leaves a huge gap in the Greens, and Parliament.

Listener: 12 December, 2009.

Keywords: Regulation & Taxation; Social Policy;

To work properly, the market must be “complete” – that is, all possible transactions must be able to be carried out. For example, those who invested in finance firms such as Bridgecorp should have been able to buy insurance to protect them if the company went bust. The world needed similar insurance for Lehman Brothers, the New York investment bank whose collapse almost brought down the international financial system. But then we would have needed insurance in case the counterparty in the deal went bust, and then . it’s an infinite regression.

In practice, only a few reiterations of insuring the insurer were needed, but because there were not enough, the global financial crisis occurred. Why there were not enough reiterations is to do with transaction and information costs, but that is for another column.

However, the finance markets are not the only ones sufficiently incomplete to damage economic welfare. Because the market for pollutants is incomplete and polluters are not charged for their emissions, a person can get away with dumping on the neighbours – and in the case of carbon emissions, on the whole world and on future generations.

This has led to cap-and-trade schemes, and other measures such as individual tradable quotas for fish and water, which force resource users to take into fuller account the consequences of their actions. But even these measures may not complete the market, since future generations cannot participate in it. As a consequence, we have the sustainability provisions in the Resource Management Act.

Another example of incompleteness, this time in the political market, is that children don’t vote. Had they taken part in the smacking referendum, the outcome may well have been different. It is not sufficient to say that parents represented their children; that was the justification for not giving women the vote, since it was said men took their wives, mothers and daughters into consideration when they voted.

That children don’t vote has a major impact on economic policy. It is no accident that children are associated with poverty in New Zealand. Before the Working for Families package, over 80% of the poor were children and their parents. Although the package has taken some families out of poverty, those with children almost certainly continue to dominate the poor. Their parents vote, but it is twice as expensive per vote to support children as, say, the elderly.

Market completeness, or more precisely the lack of it, has a major effect on our economic and public life. It is one reason we have governments. Very often they fill in for market failure (so any collapse of private retirement savings is backstopped by New Zealand Superannuation) or increase the completeness of markets (such as by reducing transaction costs). Sometimes they stand in for those who don’t have a say, such as future generations.

It is also a reason for the existence of a political party such as the Greens, whose theme is that market incompleteness damages things that are important to us and future generations.

That is what made MP Sue Bradford so special. The anti-smacking legislation was one of her many achievements, although by no means her most important. She had outstanding political skills that enabled her to locate consensus for progressing her aims. For instance, she had an important role in the select committee on the consumer-credit legislation – such a lot of Parliament’s best work is hidden in such places.

Most of all, she had a commitment to that which is left behind by the market: children, other marginalised groups such as those with or recovering from mental illness, and areas of the environment. However, even she did not extend to the problem of the incompleteness of the financial sector, and we have yet to recover from the free-for-all of the 1990s.

There is no obvious replacement among the Greens now that Bradford has left Parliament. She was such a force for social justice that the rest of the caucus could turn their attention to other matters. I hope they fill the vacuum she has left in Parliament, while she continues to advocate for the marginalised in her next career. Meanwhile the problems of incomplete markets continue to bedevil us.

A Multipolar World Economy?

This entry was posted in Globalisation & Trade on by .

Paper for NZIIA Seminar “New Zealand and the BRIC Group”, 24 November 2009

It may be useful to first read New Developments in Trade and Trade Theory.

Keywords: Globalisation & Trade;

I begin with a question; its answer eventually leads to an extraordinary scenario for the future of the world. ‘What two countries had the largest manufacturing sectors 200 years ago?’ To avoid it being a trick question, your answer may use today’s national boundaries.

The short answer is that the two countries were China and India, which between them had over half the world’s manufacturing. Of course the industries were primitive compared with today’s, but that was true everywhere.

Manufacturing Output (World Total Share: Percent),

1750

1800

1860

1913

1938
Britain

1.9

4.3

19.9

13.6

)

)

) 92.8

)

)
Other Europe

21.3

25.8

33.3

43.0
US & Canada

0.1

0.8

7.5

32.9
Japan

3.8

3.5

2.6

2.7
China

32.8

33.3

19.7

3.6

3.1
India

24.5

19.7

8.6

1.4

2.4
Other

15.6

12.6

8.4

2.8

1.7

Source: B. H. Easton (2007), Globalisation and the Wealth of Nations, p.180.

Yet a mere 60 years later they had lost their dominance and were down to about a quarter of the world’s manufacturing with over half supplied by Europe including Britain. Just fifty years later, at the time of the First World War, China and India’s share was under 5 percent, Europe still provided half, with the United States (and Canada) providing about another third.

What is striking is that before the age of globalisation, manufacturing was distributed according to population. But as the world economy integrated, manufacturing concentrated in a few regions. My interest today is not why manufacturing ended up in the North Atlantic economies – something economic histories detail. The critical fact, here, is that in a relatively short period the manufacturing sector shifted from one based on where the population was, to a much greater locational concentration. Up to the era of globalisation population attracted manufacturing; after it manufacturing attracted more manufacturing

I am now going to describe an economic model which explains that shift. Not in detail, because the mathematics is a bit demanding – you can find the details and extensions in my book Globalisation and the Wealth of Nations and the mathematics in The Spatial Economy, Cities, Regions and International Trade, by Mashito Fujita, Paul Krugman, and Tony Venables. You will observe that one of the latter authors was awarded an economics prize in honour of Alfred Nobel last year, an indication that the model I am using is pretty well established, if not in New Zealand.

I am not using the model just because it gives a good explanation for the past. It also has intriguing predictions for  the future, suggesting the same forces which concentrated industry in the past two centuries, eventually lead to a return to a world economy of manufacturing occurring where the population is concentrated – to a recovery of India’s and China’s place in the industrial world.

The model is based upon two economic processes. The first is the falling costs of distance. The second is the economies of scale which exist in manufacturing, so that as production increases in a factory or localised industry the average cost of production falls. The two coming together leads to a concentration of manufacturing.

Economies of scale are of little use if high transport costs mean that the factory has only a small market. As distance costs fall, the business can sell more and reap the economies of scale. Because these scale effects apply to industries as well as industrial plants, businesses cluster together, reducing their costs, reinforcing the concentration, especially as labour is attracted to the industrial centres.

Those who miss out on the industrial concentration – we know with hindsight it included China and India – are forced to remain in farming. But farming experiences diminishing returns – the more workers on the land the lower their average productivity. So the farm labour experiences low wages, and countries without a concentrations of industry are relatively poor. Ironically the successful manufacturers draw labour off the land, so the reverse happens there and farming in those countries ends up with high productivity.

Add in stories about capital formation, technological innovation, and service industries which reflect affluence and population; one has a portrait of the last 200 years of the world economy, especially if we extend farming to all resource industries and  note that falling costs of distances – such as by telecommunications – makes some services tradeable like manufacturing.

The model considers what happens as costs of distance continue to fall. One possibility is that a region will move out of low income farming into high income manufacturing. That is what happened to the US in the late nineteenth century and to Japan throughout the twentieth. We sometimes forget that a century ago Japan was among the poorest countries in the world.

More subtly, the region of industrial concentration spreads out as congestion costs rise in the heartland. So the industrial revolution which began in Britain now extends to Finland and Spain; industry in the United States moved out from the north east to the south and west; Japan offshored industry to Korea and Taiwan.

Intriguingly, the model I have been using predicts a dramatic change when costs of distance fall far enough. At some point agricultural nations are able to use their low wages to undercut the products manufactured in the rich countries despite their higher industrial productivity. The poor agricultural nations become manufacturers too, and the cumulative causation from the industrial economies of scale and shifting workers out of farming into manufacturing now favours them. The model predicts the world will eventually to the pre-globalisation pattern of manufacturing (and tradable services) located where the population is.

Since about half the world’s population is in India and China, that is where manufacturing is going to relocate. Or rather, that is where it is relocating, for the trends the model predicts have been happening for about two decades.

There are a numerous predictions and challenges from this model. I have not time to look at them all, even important ones like how will rich economies response to this shift? Today I look at just two critical developments pertinent to this seminar.

The first is that we may expect a reversal of the long term fall in the terms of trade for foodstuffs (and other resources). As poor countries shift labour out of farming, their foodstuff production declines, while the higher incomes factory workers eat more food. With the supply shortage the price of food goes up, while the prices of manufactures now made with cheaper labour go down.

This pattern of rising relative prices for food has been happening for the last two decades coinciding with the shift of manufacturing to the poor economies. That is important for New Zealand’s prospects but it also says something about Brazil’s and Russia’s. Neither has a large enough population to be a great centre of manufacturing.

No doubt Russia could eventually join the European industrial centre as congestion further spreads out manufacturing. But first the growth will be in the emerging economies of East-central Europe, the Balkans and, even possibly, North Africa.

Brazil might hope to benefit from the US industrial centre spreading out. But the first beneficiary should be Mexico with the North America Free Trade Agreement as a facilitator. Mexico’s hopes of attracting US industry were cruelly dashed, when America leapt over the neighbouring country, and sourced instead from China.

Where Brazil and Russia fit into the world economy is  a larger version of the same role as New Zealand. We and they (and Australia) have large resources relative to our populations so we are resource providers. Whether that will give us the sort of standard of living we aspire to is a matter which belongs to another venue. It is some comfort that unlike in the twentieth century the terms of trade for our exports may well favour us in the twenty-first.

The second development is that if manufacturing becomes based upon population, no country has a monopoly of the population, so no country is going to have a monopoly of economic power, There will be no hegemonic economic leader in the third century of globalisation as there was in the first two.

It is hard to get one’s head around this. American airport stores are stacked with books whose theme is that another economy is contesting for America’s economic supremacy: Brazil, Europe, Japan, Russia have all been fashionable – the current focus is China. But each book assumes that there will be a hegemon so the immediate future is a contest between the current holder and the next challenger.

What the books dont contemplate is that there are a number of challengers and the outcome will not be a single leader but an ongoing contest for leadership between four or five large economies – America, the European Union, China, Japan and (probably) India – which together make up two thirds of the world’s production. I am guessing that Brazil and Russia are too small to be top tier.

Share of World GDI (measured in the same – PPP – prices)

1956 1981 2006
United States

25.8%

21.2%

19.6%
European Union*

28.8%

26.1%

19.0%
China

5.4%

5.4%

16.8%
India

3.9%

3.3%

6.1%
Japan

3.7%

7.9%

6.1%
Brazil

1.7%

3.0%

2.4%
Russia**

6.5%

5.1%

2.4%
Rest of World

24.2%

28.0%

27.7%
TOTAL

100%

100%

100%

Source: Maddison Data Base (European Union* & Russia** figures for 1956, 1981 are on 2006 boundaries).  Note that the shares would be different if exchange rates were used.

How this contest will work out is deeply problematic. Much of the contesting will be political, but even there economic theory provides some guidance. We know a lot about competitive markets with many small firms, we know a lot about markets dominated by a monopoly; we even know a bit about markets dominated by a duopoly. But behaviour in a market with five major players is so very complex it is extremely difficult to make predictions.

Is that the world we are going into? Well no, we are already in it. The outcome of the Uruguay Round ultimately involved a settlement between America and Europe. That has not been possible in the Doha Round because, while China and Japan remain quiescent, India and Brazil, in association with other economies, have enough leverage to influence the outcome – or rather because they have enough leverage there has been no outcome.

Again the end of a single global leader is a far more complex issue than we have time to pursue today. I want to draw attention to but two issues.

The first is that it is going to be very difficult for the current hegemon to adapt to the loss of power. I observed Britain in the 1960s and the 1970s – even today – struggling with the fact it was no longer the economic hegemon it had been before the First World War, a fact obscured in the inter-war period by America’s insularism. It will be even more difficult for Americans suffering the same fate, because the world they understand is being replaced by a quite different, multipolar, one. The friends of America are going to have to put a lot of effort supporting it through the transition; pretending it is not happening is not support.

But, second, the multipolar world presents a challenge to New Zealand. In the past our international relations – economic, diplomatic and security – have depended upon a patron which was the hegemon. First it was Britain, then America together with the American acolyte Australia as a sub-patron.

How do we act when there is no hegemon? Do we stay with one of the big five or do we try go with all five or some of them? Sometimes a coalition of smaller states may matter, as Brazil is demonstrating in the Doha round. This issue of functioning in a multipolar world is going to puzzle New Zealand’s foreign policy for many years to come. We will not be alone, but given our unusual geographical isolation and odd economic structure we will have to find a unique solution to living in a world very different from that which we are used to. .

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The Shape Of Things to Come

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

Economic recovery means government spending restraints and higher taxes.

Listener: 21 November, 2009.

Keywords: Macroeconomics & Money;

In Through the Looking Glass, Humpty Dumpty warns us to be careful with the meaning of words. So what to call a world economy generally turning to custard? No one wanted to call it a “depression” because of the overtones of the Great Depression of the 1930s. The “global financial crisis” describes neutrally what caused the custard, but not its course. Commentators hit on the term “recession”.

Recession does not have a precise meaning in formal economics but usually refers to that phase in the business cycle between the boom and the trough, when economic activity does not grow as fast as usual and may even contract. In the US, a recession is usually said to occur when GDP (total market activity) declines for two successive quarters. Normally the economy rebounds so quickly – the so-called V-shaped recovery – that not a lot of attention is given to the trough phase before the rebound. If the recovery phase of the business cycle is slower, but “normal”, it might be called U-shaped.

Nobody seems to think the world is getting a V-shaped recovery – although some countries are, especially China (and, hence, Australia). Optimists think the general recovery will be U-shaped, although there is a fear it may be W-shaped: a recessionary downswing, followed by a short recovery and then another downswing. If so, we would be some distance off a ?prolonged recovery.

This view arises from a belief that the fiscal injection (more government spending and lower taxes) – especially by the Americans – has been enough to prevent a slump into a depression, but has been insufficient to lift the economy onto a sustainable growth path. The gloomier among us think such fiscal injections are not sustainable without generating inflation. Even if economic activities bottom out, the economy may not grow fast enough, and other important indicators of poor economic performance – unemployment, company closures and mortgage foreclosures – would continue to rise; these indicators do not turn around until well into the recovery phase of the business cycle.

If the recovery is very weak, the economy runs along in a way sometimes described as L-shaped. It can last quite a while; the Rogernomics Recession ran about seven years (longer than the Great Depression, but not as deep), and the Long Depression of the 1880s almost 17 years (but also shallower than the 1930s). Notice that “recession” and “depression” in the previous sentence are not simply referring to the downswing but also to the trough and the early part of the recovery.

The claim that New Zealand’s recession has ended depends upon minuscule growth in a single quarter of GDP, a statistic subject to measurement error. Many will continue to suffer as unemployment, mortgage defaults and business collapses continue to rise. Possibly there may be only a breather before there is a second downswing into that double-dipper W.

The global financial crisis may be over – regulators seem confident the big banks are largely sound (that includes New Zealand’s) – but there may be more failures in the secondary banking sector. The New Zealand Treasury has set aside a substantial $800 million in case it is called upon to fund your guaranteed deposits in other financial institutions.

The international bankers seem to think things are back to normal and have gone back to paying themselves extravagant bonuses. Having transferred the failures of their excesses to the taxpayer, they think they can return to the excesses.

Suppose we are in a recovery phase that will start off slowly and quicken – U-shaped, as opposed to W- or L-shaped. It still won’t be easy. Not only will lay-offs continue for some time, but floating-rate mortgage holders may find their interest rates increasing – perhaps to above 8% – as the world monetary authorities, of which our Reserve Bank is part, attempt to mop up the liquidity they have been injecting.

Along with the US and Britain, New Zealand is among the economies where the fiscal injections are excessive and will have to be restrained back to a sustainable path. In plain English that means more vigorous government spending restraints, curbs and, even, higher taxes.

New Developments in Trade and Trade Theory

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<a name=”TOP”></a> NZIIA Mini-seminar on New Zealand’s Overseas Trade:  Policies and Practices One Hundred Years Experience of Overseas Trade Development. 9 November, 2009

Keywords: Globalisation & Trade;

Three centuries ago, there was little international trade. Almost all involved ‘absolute advantage’, the exchange of products which could not be locally produced. Because the cost of transportwas high, the products had to be valuable. Thus spices from the east came to Europe from the east in exchange for silver it had seized from America.

About two centuries ago, the cost of transport – all the costs, so call them the ‘costs of distance’ – began to fall, opening up the possibility that international trade on the basis of ‘comparative advantage’. Now an economy might import a product which it could make itself – even which it could make more efficiently – because it used less resources to produce the exports which it could exchange for the import.

It is instructive that Adam Smith, who identified the significance of economic specialisation , did not support international trade, for in his day the costs of distance were high so it was not particularly relevant. Forty years later, as the costs fell, David Ricardo set out the theory of comparative advantage.

Over time, the falls in the cost of distance have been dramatic and transforming. Europeans would hardly have come to New Zealand if sailing around the world had not simplified. Refrigeration was to dramatically change New Zealand from an economy based on sheep stations in the nineteenth century to family farms in the twentieth, a change which impacted on the fundamentals of its politics and society, as well as the economy; this is a major theme in the story of New Zealand which I am writing.

Costs of distance have continued to fall. For instance our tourist industry – inbound and outbound – depends on low costs of international travel; it costs much the same in nominal dollars to fly about the world as it did forty years ago, even though prices have generally increased by twelve and more times.

Subject to one caveat, we can expect the costs of distance to continue to fall, often with surprising consequences. The introduction of the world wide web has made the cost of information flows near zero, enabling a raft of service industries to become internationally footloose. As a consequence we are seeing offshoring of parts of the service industry, just as occurs with manufacturing. Another increasing phenomenon is value chaining, where the components of a product are created in countries different from where they are assembled. Both could have considerable implications for New Zealand economy; are there opportunities here we have yet to seize?

The caveat is that it is possible that following ‘peak oil’, the price of transport fuels may rise sufficiently to reverse the falling costs of distance. When I looked it at this scenario, I concluded that the rise is likely to be offset by medium term technological improvements in energy use So we might get a period of a decade, say, in which the effective costs of distance stagnate. Even so there would be ongoing progress, because the existing possibilities have not yet been exhausted; in any case fuel costs have little impact on information flow costs.

While there are still gains to be made from international trade based on comparative advantage, competitive advantage is becoming increasingly important. Sixty years ago, trade between countries was based upon the exchange of different products, and there was hardly any intra-industry trade. Today two countries may sell the cars they make to one another. Nowadays about a quarter of internationally traded goods is based on intra-industry trade, the exchange of similar products. That probably also applies for services.

Just as David Ricardo developed a theory to explain comparative advantage trade a bit after it began, about three decades ago there evolved the New (International) Trade Theory. Last year its significance was recognised when Paul Krugman became a Nobel Laureate. At the heart of the New Trade Theory is economies of scale. To reap them one needs large markets, so the falling cost of distance is crucial. But their effect is much more complicated than in the comparative advantage case.

At the firm level economies of scale explains why a firm cannot provide unlimited variations in its products. It would be far too costly to offer you a car in any shape, size, colour and trimmings. By standardisation the firm can get the costs of the range it produces down. The consequence is that you may prefer another manufacturer’s car with a different mix of those characteristics. That manufacturer may be offshore. And so we get intra-industry trade in cars – and many other products – once production economies of scale are important.

There are also agglomeration economies of scale for industries, where industry costs are lower when they are clustered in a common area. This explains why there are concentrations of population and industries in particular locations, despite the diseconomies of congestion. A branch of the New Trade Theory is known as the New Economic Geography.

The New Trade Theory has hardly impacted on New Zealand’s economic thinking. We are so focused on classical comparative advantage that we seem unaware of the extraordinary changes in economic theory and in the international economy we live in. I can identify but one policy area where there has been some impact.

The proposals to reform Auckland’s governance were in part based on the New Economic Geography. Even so, much of the concern was to see Auckland as a gateway city, not a global city. My impression is that Aucklanders still have not faced up to all the implications of what it means to be a global city; while Christchurch, which should be our second one, is even more backward in its thinking.

We hardly care about New Zealand’s dismal intra-industry trade performance. Perhaps the national judgement of the irrelevance of the new patterns of trade is correct. Perhaps New Zealand’s destiny is to be a comparative advantage trader in the international economic regime. It has suited us well in the past, and there may remain a future for such suppliers, although the real challenge may be how to be a high income comparative advantage exporter. But I sure wish that we made a conscious decision to pursue a comparative advantage strategy and ignoring competitive advantage, rather than choosing it by inertia and default.

For even if we pursue the comparative advantage strategy we need to be aware that the international economic regime is changing under the forces which the New Trade Theory. Economic activity is relocating away from the North Atlantic economies to – especially – Asia. The European Union and the United States will remain important parts of the world economic and political order, but with the rise of China and India plus Japan, the North Atlantic will not be the hegemonic power that the US is and Britain was. But that is another seminar. <a href=article1046.html> It is the implicit theme of the one which the NZIIA is holding in 15 days on the BRICs.</a>

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Paul and the Modern Economy

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

<a name=”TOP”></a> Conference to Celebrate 25 Years of the St Andrews Trust for the Study of Religion and Society, 7 November, 2009.

Keywords: History of Ideas, Methodology & Philosophy;

I am traditionalist enough to begin a presentation in a church with a biblical text. Verses 5 to 10 of chapter 6 of the first pastoral epistle from Paul to Timothy read:

“5: Perverse disputings of men of corrupt minds, and destitute of the truth, supposing that gain is godliness: from such withdraw thyself.

“6: But godliness with contentment is great gain.

“7: For we brought nothing into this world, and it is certain we can carry nothing out.
“8: And having food and raiment let us be therewith content.

“9: But they that will be rich fall into temptation and a snare, and into many foolish and hurtful lusts, which drown men in destruction and perdition.

“10: For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.”

The last verse is often misquoted as ‘money is the root of all evil’. The difference is important. Paul is not ruling out that money may be a useful part of an economy and of society, a means to an end. The evil arises when it becomes an end in itself. The Rev John Murray, who once chaired the trust reminded me that Jesus said:

“No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and Mammon.” (Matthew 6:24; Luke 16:13)

Money is vital for a modern economy, because a medium of exchange makes specialisation possible. Without money, exchange would depend upon a coincidence of wants. Without it we would have to be largely self-sufficient in our production and consumption and our standard of living would be much lower. Paul was not proscribing money , nor the economic organisation of specialisation which money makes possible.

There is a difference between money today and two millennia ago. In those days the money was – in the jargon – ‘fully backed’. Its coins were made of metal equal to their face value. Thus the denarius of the bible was made of silver – it was a day’s pay for a labourer. We have since realised that the material content of a coin – or even more so a note – need not be equal to its face value. What is required is that the community trusts that the money will be valued at its face value – thus saving the use of gold, silver and copper in the coin. Ultimately a currency’s value is that the government will accept it in payment of taxes – giving an unexpected meaning to ‘Render unto Caesar the things which are Caesar’s.’ (Matthew 22:21)

It is not a great stretch of Paul’s meaning to replace the term ‘money’ with ‘wealth’ (or Mannon). The epistle says we need sufficient to live with, but if we pursue wealth after that sufficiency we tread a path of destruction and perdition. That is not a bad description of what has increasingly happened in recent years. Instead of using money as a means to help attain a sufficiency, it has become an end in itself.

Today’s seminar is about responding to the recession. I want to talk about the Global Financial Crisis, which is a far greater challenge than the recession. Recessions are common. There has been about twenty in my lifetime – say one every three and a bit years. For about a third of the life of the St Andrews Trust the economy has been in recession. Recessions are an ordinary part of the economic life. A Global Financial Crisis – the last was eighty odd years ago – is a stimulus to ask fundamental questions about the economy.

So in the spirit of the Pauline epistle let us ask what is the purpose of an economy? You will appreciate that as an economist I am operating outside the normal competence of my profession. What I hope to do is give you some background to build a better understanding.

Utility and Happiness

Although there have been numerous modifications to the initial idea, most of economics is built around the notion that individuals maximise something called ‘utility’, which is their response to the various things they consume. A simple summary of the underlying philosophy might be ‘more means better’; for utility assumes that the greater the consumption the better off one is.

I dont have time to go through the caveats of this analysis – economists have many caveats – but ultimately it concludes that an approximate indicator of the total utility in a community is measured by aggregate total output, such as GDP (perhaps with modifications like for environmental degradation) and that a market economy (with modifications) is the best way to produce the maximum GDP – that is, maximum utility

Utility was thought to measure happiness. Jeremy Bentham, the founder of utilitarianism, said ‘happiness is the greatest good’. He is even better known for ‘the greatest happiness of the greatest number is the foundation of morals and legislation’. Two hundred years ago it was assumed the more one had the happier one was. But is this true?

Today we can directly measure happiness by asking people how happy they are. The New Zealand and international research can be summarised as follows

– Women say they are happier than men, all other things we can measure being equal.

– The young are happier, but as they grow older, they become less happy, hitting the bottom at the age of about 50. After that, life satisfaction starts improving again – for the over 65s their life satisfaction is about the same as at late teenage levels.

– On the whole of ethnicity does not matter, all other things being equal (although of course they are not)

– One of the strongest effects is that the divorced and single are less satisfied with their lives than the married are. These are averages; of course there are some married couples who are deeply unhappy, and there are singles and divorced who are on top of the world. But as a general rule, the married are happier.

– There appear to be few differences in satisfaction with life by educational attainment. However education may give one life opportunities which affect happiness.

– Thus, those in higher skilled occupations are happier than those in lower skilled ones.

– As far as employment status is concerned, the sick and unemployed are unhappier that those working, whether part or full time. Those studying or parenting are much the same as those working; the retired are likely to be slightly happier.

– The evidence supports the utilitarian view that the higher the income the happier one is. However the effect is surprisingly small, compared to the variables I have just covered. For instance a person on $15,000 a year with a job is likely to be happier than a sick person on $30,000; a person on $50,000 a year who is married is likely to be happier than a single person on $100,000 a year.

The small benefit in life satisfaction from additional income is even more paradoxical if we look at happiness and income through time. The American government have been surveying Americans for the last sixty odd years. In that time their average real incomes have tripled. But the average level of happiness has hardly changed.

We get a similar picture of average level of happiness by country. If Bentham and economics were right, we might expect countries with higher average incomes to have higher average happiness. Among rich countries – New Zealand and those like us – that is not true. There are country differences in average happiness but they are not explained by differences in average real incomes. All rich countries are about equally happy; the particularities which cause differences are nothing to do with income

So while for two hundred years it has been assumed that ‘more is better’, the evidence is that higher incomes do not seem to mean greater happiness, whether we are looking through time or between countries.

That higher incomes within a country generate a little more happiness at a point in time, suggests there is a relativity effect which I shall try to explain. But whatever that explanation, it is humbling for economist and would-be economists to realise that phenomena, such as marital status and job satisfaction are far more important than income is when it comes to determining life satisfaction.

While, as I have already mentioned, average happiness in rich economies does not rise as the economy gets richer, that is not true for those economies which are poor – say below two-thirds of the New Zealander’s average income. Below that threshold there is a stronger correlation between happiness and income by country. As income and consumption rise, people in economies below the threshold say they are happier.

What this suggests is that Bentham may have been right in his time, when ‘more’ did mean better. Increased production meant people ate better, were better clothed and lived more comfortably. Above a material threshold more spending does not increase happiness because the material requirements of life are already met. America seems to have been at that stage for about sixty years. We dont have the same longitudinal data for other rich countries, but New Zealand is among those that are now comfortably above the threshold.

The Maslow Hierarchy of Needs

Once a country is above the threshold what is the purpose of the extra production? To try to answer this (albeit only in part given the time I have) I am going to use  a framework widely used by other social sciences; the notion of a ‘hierarchy of needs’ as first proposed by the American (Jewish) psychologist Abraham Maslow.

Maslow’s hierarchy of needs involves five steps. At the bottom are physiological needs such as food, water, and shelter. A central role of an economy is to provide these basic needs. The rich world’s economies has done that pretty successfully, and most of their people are above the first step of the hierarchy of needs. However we should never forget that most of the world’s population live in countries which are not so rich, where their basic needs are not met, and where they are, on the whole, not so happy.

The second step up the Maslow hierarchy involves safety needs although perhaps we dont think a lot about them until, say, there is a crime or accident in our neighbourhood. While responding to these needs usually takes resources – jails and safety equipment for instance – economics is not at the centre of these issues.

Social Inequality

There is a curious paradox involving crime and social inequality. Richard Wilkinson in his The Impact of Inequality argues that the degree of social inequality affects the society’s health and welfare. Let me as a social scientist say I am cautious about his work, for while the findings are plausible they do not have the same rich data base that the happiness research depends upon.

Using data bases from to compare countries, the states of America and cities it appears that the greater the social inequality, the worse is average health (which is where the research area is most worked through). But the murder rate is also likely to be higher when there is greater social inequality, while there is also likely to be greater social hostility and lower social trust. In a different venue we might ask whether New Zealand’s rise in income inequality in the late 1980s and early 1990s triggered this phenomenon, increasing demand for law and order.

Apparently the greater the degree of social inequality the harder it is to secure the second step on the hierarchy of safety needs. So you may want to justify reducing social inequality in order to increase community welfare. That is a pretty self-serving reason for thinking about social inequality. The biblical tradition against social inequality is in different – ethical – terms.

I am going to ask my good friend Robin Lane to paraphrase from the Jerusalem Bible some verses from the prophet Amos. Robin was not only a minister of St Andrews but he was Chairman of the Trust during some of its most difficult financial years.

“Listen to this word, you cows of Remuera

Lolling in your summer palaces on Waiheke,

Oppressing the needy, crushing the poor,

Saying to your husbands,

‘Bring us a glass of Bollinger’!

…………………

The day is coming to you now

When the your bonds will turn to dust,

And homes will go in mortgagee sales.”

(Amos 4:1-3)

“I despise your prayers to the GDP,

Your worship of the share market.

No more chanting about your stinking bonuses.

But let justice flow like water

And integrity like an unfailing stream.”

(Amos 5:22-24)

Amos is arguing is that the rich and powerful should be concerned with those less well-off for reasons of righteousness, not because it is their advantage to increase safety. Admittedly the prophet argues that if the privileged dont, the wrath of God will come down upon them. In this more secular age one might see in Wilkinson the mechanism by which this wrath will be expressed. But Amos’s concerns are ethical, not instrumental ones.

Both Amos and Wilkinson are talking about living in a community. Instructively, the middle three steps in Maslow’s hierarchy involve genuine community. This contrasts with the first step of the primary physiological needs where in principle the economy which provides them may lack community – and many economic theories present an economy as independent of any society.

The next step up – it’s the middle step of the Maslow hierarchy – is love, affection and belonging, very much involving community relations. Economics has little to say about this need for people to seek to overcome feelings of loneliness and alienation. The Beatles tell us that ‘Money Cant Buy Me Love’; perhaps I should leave it there, except to note that money may provide the time and reduce the stress which makes effective love, affection and belonging possible.

The Importance of Self Esteem

The second to top step in the Maslow hierarchy is esteem, which covers both self-esteem and the esteem a person gets from others. Humans have a need for a stable, firmly based, high level of self-respect and public respect. Until they are fulfilled, the person feels inferior, weak, helpless and worthless. When their esteem needs are satisfied, the person feels self-confident and valuable as a person in the world.

At this stage economics comes back. Recall that while over time high average incomes do not increase happiness, at any point in time those with higher incomes are happier. One explanation for this – the currently most compelling in my view – is that higher income relative to others gives one greater self-esteem. So once the threshold required to meet Maslow’s first step of providing for physiological needs is passed, the value of income and wealth is that it helps enhance one’s self esteem.

We often rank people by their wealth, so that it appears that an individual can obtain greater public esteem by earning and owning more. Money may not be able to buy you love, but it seems to be able to buy public respect – or at least many people operate as if it can.

There are a couple of points here. First, if the only dimension of self esteem is income and wealth, then we have a striving to increase the inequality in order to obtain a higher ranking of public esteem. But recall that greater inequality increases crime, thereby undermining the second step of the hierarchy of safety needs.

Second, in order that income and wealth justify public esteem we have to believe that those with high incomes (which may accumulate into great wealth) represent some general benefit to the public. Economists have spent much time trying to establish whether this is generally true, although there is Hume’s problem that an ‘is’ cannot convert into an ‘ought’ – how the economy works does not tell us about what is ethical or good and bad.

Obviously in some cases income is associated with the social contribution. I hazard that Peter Jackson has made a greater contribution to the world welfare than most of us, although it is not clear that his contribution is in proportion to his income. However that is certainly not true for many others. It hardly explains the bonuses of those in financial institutions whose actions have contributed to the Global Financial Crisis. Nor can one easily say of those who have inherited wealth that their holdings in some way represent their personal merit. So we should be very cautious about assuming that high income or great wealth reflect social merit, and it would be unwise to assume that such people are automatically worthy of public esteem.

Those who desire public esteem from their wealth need to demonstrate it. Hence the importance of ‘Rich Lists’ – of showing off. Another way is by possessing what economists call ‘positional goods’ whose purpose is to demonstrate the wealth of the owner or consumer – to flaunt it. (Thorstein Veblin, called the phenomenon ‘conspicuous consumption’.) So the rich get bigger cars, not because they need them, but because the owner needs to publicly display that they are higher in the social ranking than the mass of car owners. Some people seem to have more houses than they can possibly use. Jewellery, designer clothes, expensive parties and so on are all potential positional goods too.

Positional goods are not confined just to the very rich. Recently, I was looking at housing in the more middling part of the market, and was struck that while recently constructed homes were larger, the additional space is not particularly functional. One can only live in a certain area – the rest is for display; ‘look at my house, it shows how well off I am. Dont you think more highly of me?’

This demand for positional goods becomes a major driver of economic growth, as we require more of them to demonstrate our position, and catch up on others. But the additional positional goods give only temporary relief. The higher incomes and technological innovation which economic growth generates continually undermine their value since those who are lower ranked acquire the positional goods too. Soon everyone can have a bigger car.

You observe this in the evolution of holiday homes. As they have become more common, the very rich have found their territories invaded by those they judge of lesser standing, so they move on, and on. Perhaps it is to a holiday home at a more remote location, or to a third one, or a yacht. So once the basic needs are met, there is no general rise in happiness over time. Yet that demand for self esteem from positional goods drives the rising production of material output.

At a certain point the prime positional good seems to be money itself. What strikes one about the bonuses that those in financial systems paid themselves is that they could not possibly spend them usefully. A million dollar bonus has not been unusual – that is what an unskilled worker earns in a lifetime.

This cult of the pursuit of monetary wealth and its accompanying driver of greed has become the religion of the modern capitalist state. Hardly any of those scrambling for the vast sums asked whether they were worth it in absolute terms. What was important to them was their ranking in the hierarchy, with the certainty that they ranked well above the ordinary public. Those with such wealth thought it somehow indicated that they were of greater value, ignoring the epistle’s cautions.

Their strategy for community esteem succeeded. We rarely mention that the rich’s achievements had an element of luck, and that they may have – as the epistle says – gained their goals in ungodly ways. Instead we attribute to them desirable characteristics, such as wisdom, beauty, intelligence and virtue which would not be evident were they ordinary citizens. As Tevye, from The Fiddler of the Roof, observed: if he were a rich man ‘the most important men in town would come to fawn on me/ they would ask me to advise them,/ … And it won’t make one bit of difference if I answer right or wrong./ when you’re rich, they think you really know’.

The ‘we’ is not just the rich, insofar as others honour the goals of the rich, even if they cannot attain them. The entire society has adopted monetary goals as appropriate social goals – consider the demand that we should accelerate the economic growth rate to join the top half of the OECD or Australia in terms of GDP per capita. That is not what Paul counselled Timothy as the way to godliness.

This is the modern day version of Paul’s concerns about the love of money. It may not be able to purchase love, but it seems to be able to purchase social esteem. Money becomes the ultimate positional good, with the love of it as the root of the evil. It led to the financial boom and then the bust.

As long as individuals think they can purchase self-esteem then the system is vulnerable to repeating the evil. No law can prevent this. Instead we need a society whose thinking is not dominated by wealth, in which we award public esteem for other attributes. Accepting this means abandoning public ranking based only on crude monetary values. It requires more subtle understanding of the human condition, and one in which there is no single dimension on which each of us could be ranked. Recall that the sweetest thing of all to Tevye was to discuss the holy books. That may not be your ultimate objective, but you can still respect others for whom it is.

The Marginalised

If there is a social hierarchy, there have to be some people at the bottom. Amos is concerned with them and how the elite ignores them. Things are not too different today.

As a rule most of our marginalised are above some economic threshold – say the standard set by Paul. Never-the-less they have limited opportunities to do fundamental things – some would call them social rights. They may have enough – perhaps just enough – for the first step on the Maslow hierarchy, but miss out on the higher steps.

That is why when we began the development of the poverty research project a quarter of a century ago, we used a relative poverty line, rather than an absolute one. The test – derived from the Royal Commission on Social Security – was about everyone’s ability to belong to and participate in society.

An elaboration of the Amos critique may be that there are two problems with out elite. First, by focussing on material wealth as the sole criterion of success in society, they diminish the self esteem of those who have little material wealth. Second they further diminish them by ignoring their needs and aspirations.

So it seems that the issue is not merely a matter of reducing social inequality. That too. But to do only that is to reinforce the notion that material wealth is the measure of all things – to serve Mammon and not God. We need to develop societies which are not governed by the sole principle of material wealth, that it is not the sole goal of community activity.

The Global Financial Crisis forcing us to think about the purpose of an economy. The Crisis is not merely a technical one to be resolved by the application of economics. It exposes an ethical crisis. While the public has had vigorous ethical disputes, they rarely touch on the economic system, other than concerns about the poor (and that in a very sotto voice). What is the purpose of an economy, is rarely addressed. Is money a mean to an ends or the end itself? By not addressing such questions we implicitly answer that what the economy is doing broadly meets our approval.

To the Top of the Hierarchy

Two millennia ago we were given a broader vision. But before coming to it let me return to the Maslow hierarchy of needs. It was self-actualisation, the realisation of one’s potentialities with the implication that each of us has a different potential to realise.

The psychologists’ debate on self-actualisation is fraught with complications, and is outside my professional competence. For a characterisation of self-actualisation I turn to Paul’s epistle to Timothy. Verse 11, which follows that condemning the love of money as the root of all evil, says:

“But thou, O man of God, flee these things; and follow after righteousness, godliness, faith, love, patience, meekness.”

I was proud that this presentation followed one by Lloyd Geering, New Zealand’s greatest public intellectual.

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The Big Wave

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

Recent devastation in the Pacific has a parallel in the great New Zealand tsunami.

Listener: 7 November, 2009.

Keywords: Maori; Political Economy & History;

The sea grew dark and troubled and angry, and presently a great wave, which gathered strength as it came, swept towards the shore. It advanced over the beach, sweeping Titipa and all his fish before it till with the noise of thunder it struck the cliff on which the people stood. The great wave receded, sucking with it innumerable boulders and the helpless, struggling Titipa. Then another wave, greater than the previous one, came with tremendous force and, sweeping the shore, struck the cliff with a thunderous roar. This was followed by a third which, when it receded, left the beach scoured and bare. Titipa and all his fish had disappeared.

About 500 years ago the North Island and north of the South Island were hit by one or more great tsunami. Sand, gravel and stones were strewn over coastal sand dunes more than 30m above sea level. (An earlier tsunami lifted a whale 35m above the ancient sea level.)

Given the widespread impact and that most Maori lived on coasts, a third of the population may have perished, similar to the proportion killed by the Black Death in Europe 650 years ago. Economic historians ponder the impact of the plague. Since the surviving population was left with the same land and capital, labour productivity and the economic surplus would have risen, triggering the West’s subsequent economic development.

But if bubonic plague was a neutron bomb killing people, the New Zealand tsunami were more like nuclear explosions destroying capital – dwellings, gardens, canoes, land and sea life – as well as people.

If the tsunami occurred during the day, it probably killed more women and children. Some men would have been inland or fishing at sea (ironically, one of the safer places). One can imagine their emotional devastation when they returned to the kaianga to find almost nothing left.

We don’t know much about what happened afterwards. Almost certainly the people would have collected any survivors from the shore and struggled inland bewildered and grieving. Later they would have tried to link up with other settlements, finding many just as devastated.

Archaeologist and surveyor Bruce McFadgen, whose Hostile Shores is the standard reference, argues the tsunami triggered a significant change to the way Maori lived. The kaianga they rebuilt were set further back from the sea. Single-hulled canoes replaced double-hulled ones. The quality of stone adzes declined, and fishing gear, ornaments and other artefacts were simplified. The whakapapa of some tribes go back to the 15th century but no further, possibly because many of the knowledgeable were lost under the waves.

Will the same thing happen to the Samoans and Tongans? Fortunately, proportionally more survived. Another critical difference is today’s communities are far more interdependent. One takes a little comfort from how quickly the rest of the world responded.

But although the countries had an immediate need for emergency relief, they also have an ongoing need for reconstruction, not simply to replace what has been lost, but to be part of a holistic economic and social development programme. It will be of such interest to economists, I hope to be able to report on it.

Prime Minister John Key mentioned $200 million for Samoa’s reconstruction. It’s a guess, but possibly in the right order of magnitude. On a per capita basis, that’s equivalent to $40 billion in New Zealand terms and you could then treble it, say, for Samoa being a poorer economy.

The Samoans cannot do it by themselves – not quickly anyway. We are going to have to contribute, both publicly and privately. It will be easy to comfort ourselves that we supported them (and the Tongans) in their emergency and then leave it to the (miserable) aid budget and our 130,000-strong Samoan and 50,000-strong Tongan communities. The problem is not that the rest of us are ungenerous, but that we move onto other things and forget. But like the Maori, one of whose memories opened this column, those who were there never will.

Cassandras and the Global Financial Crisis

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

<> <> Spirited Conversations: Nelson, 29 October 2009.

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<>Keywords: History of Ideas, Methodology & Philosophy;   Political Economy & History;

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<>This evening’s presentation is about two terms which are homophones. I shall begin by talking about prophets – spelt p-r o-p-h-e-t-s. Later I shall talk about p-r-o-f-i-t-s. Both have a number of meanings, not least the p-h-e-t kind.

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<>For instance, the biblical prophets were men who were – as the Concise Oxford Dictionary says – ‘inspired teachers [and] revealers or interpreters of God’s will’. Typically they were telling their fellow Hebrews that they were no longer following God’s path and they should change their ways. Famously, they were without honour in their own country, because they were often in conflict with the Establishment – the Temple and the secular authorities in Jerusalem – who sometimes took action to suppress the prophets – in a notable case, crucifying one.

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<>The Concise Oxford also gives as a second distinct meaning of a prophet as one ‘who foretells events’. It comes from the notion that a prophet is close to God, and since God knows the future, He or She is able to convey some insights to a faithful servant. That was not a role given to the Hebrew prophets, although there is an obvious sense in which practical men and women who are wise and who understand, and stick, to the fundamentals are likely to predict more of the future correctly than those who ignore the basics.

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<>The notion of the prophet with the gift to see the future probably derives from the Greeks. The most famous was the Delphic Oracle dedicated to the god Apollo. It was notorious for giving ambiguous predictions. The most famous was to Croesus of Lydia who was told that if he made war on the Persians, he would destroy a mighty empire. This prediction proved to be correct, except the empire that Croesus destroyed was his own.

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<>Almost as famous is the Trojan Prophetess, Cassandra, who again got her gift of foresight from Apollo. When she spurned him Apollo, unable to reverse the gift, decreed that while her predictions would be accurate, nobody would believe her. So when she warned against bringing the Trojan horse inside Troy’s walls, she was ignored. What would a mere girl know about warfare? Today, ‘the curse of Cassandra’ applies to those who give valid warnings which are disbelieved.

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<>Often we are not aware of the Cassandras until after they have been proved correct. Here I am referring only to those who have the ‘gift from the gods’. All sorts of people make wild predictions of doom and gloom; some are going to be right by accident. Those who matter are experts who know the fundamentals and apply them more rigorously, just as the Hebrew prophets did. A modern day prophet also depends on the accumulated knowledge over the years – albeit a far more massive literature than was available to the Hebrews.

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<>In these days God seems to have withdrawn from direct involvement in human endeavour, so no-one can claim to have a special relationship which enables them to predict the future. The withdrawal has been exchanged with the gift of scientific understanding (including of social phenomena). Insofar as today’s prophets have any claim to foresight, it arises from this science, this understanding of the fundamentals, a willingness to pursue their logic rigorously and, most importantly, the courage to speak out even if the message is not acceptable to those in authority – to ‘speak truth to power’ as a recent book on New Zealand public intellectuals was titled.

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<>Certainly before the crash happened there were thoughtful economists who were aware that the international financial system was problematic. The roll call includes Robert Shiller who coined the phrase ‘irrational exuberance’, George Akerlof, Paul Krugman, Joseph Stiglitz and New Zealander Robert Wade – as impressive a galaxy of today’s economists as you are likely to come across. Their thoughtful contributions are based upon earlier economists such as John Maynard Keynes and a lesser known, but increasingly respected, Hyman Minsky. Keynes’ works seems to have been banned in some of America’s most prestigious universities. Not surprisingly their sometimes eminent economics teachers do not have an impressive record analysing the Global Financial Crisis is concerned.

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<>I do not propose to discuss much why the international Cassandras were not listened to; one example will suffice. Robert Wade, who holds a chair in economics at the London School of Economics, got into a debate with a Times journalist Anatole Kaletsky, who now admits theat he got things terribly wrong. He blames his mistakes on being misled by economists. He should have listened to Wade instead of those who spouted the conventional wisdom.

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<>New Zealand’s conventional wisdom was little better. My local paper reprinted an article by Kaletsky; it has had no off-setting contribution from Wade. Nor did it report the Cassandras at the time, nor afterwards. It is extraordinary how those who got the boom embarrassingly wrong are still uncritically given opportunities to share their ‘wisdom’. After all, they might get it right one day, mightn’t they?

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<>The journalists do not generally fess up that they have contributed to misleading you – let’s give Kaletsky credit for doing so. Nor will they go to the Cassandras that they ignored in the past. The purpose of their publications seems to be to entertain and comfort; not to inform and provide guidance about the future. In any case, like Kaletsky, how would the journalists know? They just publish the conventional wisdom.

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<>Remember that in the early 1990s the Establishment made a concerted effort to squeeze their critics out of the media. It is not clear how the media responded, but around that time the critics of the conventional wisdom found it harder to get media access. Ironically, in 1998 a now retired editor of the Dominion complained that the economy was in still in difficulties and nobody told him it would be. There were economists saying these things, warning against the irrational exuberances of the interpretation of the upswing out of the Rogernomics Recession but nobody wanted to listen – or at least the media did not want to publish what they said. As the editor said, the self -censorship was costly.

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<>‘Rogernomics Recession’? Now there is an expression you dont hear much. Yet while the rest of the world flourished, between 1986 and 1993 the New Zealand economy stagnated – for over seven years. Per capita GDP was lower at its end than at its beginning, One of the reasons we dont discuss this stagnation, is that acknowledging the recession would undermine their credibility who want to repeat policies that are associated with the period.

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<>Another reason is that the fall in incomes did not apply evenly. Generous tax cuts were given to the rich whose real after tax income continued to rise roughly in line with what they had experienced in the pre-Rogernomics era. So they dont have a sense of the stagnation and decline that the majority of the community experienced. They would be astonished that in a four year period almost half the labour force ended up as unemployed at some time or other. It understandable that those who want further tax cuts for themselves do not want to draw attention to what happened last time.

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<>What about this recession? Did anyone in New Zealand forecast it or parts of it? Almost certainly, but their forecasts were not given much prominence. For instance, in 2005 a senior funds manager predicted ‘[l]ooking forward over the next 12 months, it is highly likely that one or two finance companies will default’. In 2006 National Finance 2000, Provincial and Western Bay Finance all failed. He was not alone. Some worries even surfaced in the media. However if you offset the occasional report of a Cassandra with the deluge of reports implying the sector and finance houses were sound, you get a sense of a misleading imbalance.

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<>Even so, ordinary investors has no comeback on the journalists. The information was available to them and their advisers. But accessing it required more diligence than just lazily reading a newspaper or watching TV. Democracies dont suppress their Cassandras, they ignore them.

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<>The problem with prediction is that the future is so dependent on events nearly impossible to predict. About a decade ago I began writing about a ‘millennium recession’ based on my reading of the world economic track and the underlying imbalances that were evident then. A millennium recession did not immediately eventuate, for I failed to predict the destruction of the Twin Towers and the way it strengthened the George Bush presidency so he could drive through major tax cuts which stimulated the economy out of the recession. I hope you will forgive me for not being an expert on terrorism – the CIA failed too.

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<>I also underestimated the fiscal radicalism of the Bush junior administration. Unlike his father’s – more like Ronald Reagan’s – it increased the US Government deficit by spending more (especially on warfare) and cutting taxes. This huge injection increased production in the US and the rest of the world, the world economy lifted and the millennium recession seemed to have been avoided.

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<>Or was it only deferred? The Bush measures did not address the structural imbalances which led to my original prediction – indeed they exacerbated them. Because US dollars are the international medium of exchange, a US government deficit injects cash into the world economy. To reduce that possibility of inflation, the US Government sells bonds (fixed-interest debt securities) to absorb the money. Although bonds cannot be used to pay bills, they can be easily converted back into cash, especially when interest rates are low. So the result of the US deficit was an enormous increase in the world economy’s financial liquidity and imbalances.

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<>Meanwhile other countries – China, Japan and the Middle East oil producers – ran large savings surpluses which they invested in the US, keeping its interest rates low. It might seem unwise to invest in a bank which was recklessly borrowing from the rest of the world and spending the proceeds on wars in Afghanistan and Iraq and lending the rest so that its American owners could consume goods and services. In fact, the overseas investors have taken a pounding from the falling US exchange rate. If inflation is the falling value of money, the devaluing US dollar is a form of inflation.

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<>Flush with the liquidity at low interest, the US financial institutions (and their equivalents in Europe) generated all sorts of fancy financial assets – including sub-prime mortgages – many of which are today called ‘toxic assets’. There’s a lot of talk about the need for better financial regulation. I don’t disagree, but given the surplus of liquidity (cash and near cash), I am sceptical that any regulation could have prevented all the abuses. It was a bit like putting teenagers into a casino with their pockets full of chips and telling them to restrain themselves.

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<>The result of these toxic investments were artificial profits for the financiers (that is the f-i-t kind). One estimate is they amounted to US$5 trillion over five years. It may not be right, but let’s use it for illustrative purposes. In which case output it would have been stimulated by about 3 to 5 percent of world GDP.

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<>What we are now seeing is the unwinding of those artificial profits. But the US$5 trillion of artificial profits must be removed from the financial assets of the world first. Hence the balance-sheet crisis. The monetary authorities tried to moderate the impact of the crisis by bailing out the financial institutions overwhelmed by their toxic assets. In effect the tax payers took over the artificial profits. I’ll come to the fiscal implications shortly.

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<>Today the core of the financial system sees itself saved, and appears to be proceeding on the basis that since things are back to normal, and they can get on to their usual practices, which include paying generous bonuses. To do this they have to ignore their critics, not to mention the many angry taxpayers who bailed them out. The London Economist described the extravagant bonus payments as ‘political suicide’.

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<>But if the banking system had collapsed, the system of payments would have, and so would have the entire economy. The taxpayers had to fund institutions whose previous behaviour was at best incompetent. Taxpayers were blackmailed.

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<>There is not too much of a consensus as to what needs to be done to the financial system in terms of practical detailed policy terms. I’d like to think that the finance sector is not as out of touch and as stupid as they present themselves. Perhaps they know the game will be up, so they are robbing the tills before they are sacked. Or do they think that the financial system is so powerful and adaptable they can ride out the storm of public abuse?

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<>Cassandras point out that the imbalances which precipitated the Global Financial Crisis are still there, so the world is still vulnerable to another great crisis. Not immediately, it will take a while for the irrational exuberance to wind up again. But it is possible that when the next crisis occurs, the fiscal positions of governments will be weaker than this time, so bailouts under blackmail may be less successful.

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<>The more immediate problem is that the Global Financial Crisis has compromised the productive economy. That is what a recession is about. The shortage of credit meant that investment and trade became more limited; that means less production and fewer jobs.

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<>Now you have been told that the recession is over because that is what people want to believe. Cassandras are more cautious. They are not into bumper sticker slogans, but careful analysis. It goes something like this.

<>The notion ‘recession’ does not have a precise meaning in formal economics. It usually refers to the phase in the business cycle between the boom and the trough when economic activity does not grow as fast as usual, and may even contract. Normally the economy rebounds so quickly that not a lot of attention is given to the trough phase before the rebound. The quick rebound is often described as a ‘V’ recovery. If the recovery phase of the business cycle is slower but ‘normal’, it can be called a ‘U’ recovery.

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<>Nobody seems to think the world is getting a V recovery – although some countries are, especially China (and, hence, Australia). Optimists think the general recovery will be a U, although there is a fear it may be a ‘W’, a recessionary downswing, followed by a short recovery, and then another downswing. The view arises from a belief that America’s fiscal injection (more government spending and lower taxes) has been enough to prevent a slump turning into a depression, but insufficient to lift the economy onto a sustainable growth path. The gloomier think that such fiscal injections are not sustainable without generating inflation.

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<>The claim that New Zealand’s recession has ended depends upon minuscule growth in a single quarter of real GDP, a statistic subject to measurement error. Over the next year unemployment, mortgage defaults and business closures will continue to rise at least through to the next year. Possibly there may be only a breather before there is a second downswing into the double dipper W.

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<>If the recovery is very weak, the economy runs along a kind of bottom sometimes described as an ‘L’. Such a trough can last quite a while. The Rogernomics Recession lasted over seven years (longer than the Great Depression, but not as deep), the ‘Long Depression’ of the 1880s almost seventeen years (but shallower than the 1930s). Notice that here the terms ‘recession’ and ‘depression’ are not simply referring to the downswing but also to the trough and recovery.

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<>Sitting under this is the fiscal crisis, not only here but in other countries especially the US and Britain. One source is the cost to the taxpayers of the financial bail outs – ultimately they have to write the artificial profits off their balance sheets. A second source is that measures to soften the recession – such as tax cuts and spending hikes – have added to the government debt, and hence debt servicing in the long run.

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<>In addition, the higher GDP track from the artificial profits cannot be sustained. If the world economy is likely to track out of the recession at about 3 to 5 percent lower than it went in, government spending track has to run that amount lower too, or tax levels has to be raised.

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<>This applies as much to New Zealand as any where else. We are going to see strenuous efforts to restrain government expenditure with less public spending than was projected (or promised) before the election. Every day there are reports of government actions which are examples of this restraint but you rarely see the news item put into the context of the fiscal crisis. For instant it was recently announced that the health budget will be cut a total of $1.5 billion over the next three years below that which was previously projected. That is the health sector’s contribution to the fiscal crisis. We shall be lucky if that is the last.

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<>Compounding the fiscal crisis are the demands for tax cuts. That may well be one of the reasons the conventional wisdom plays the crisis down. It is so obsessed with income tax reductions on the rich, that it will ignore any argument which suggests they would be imprudent. Ultimately, in the current circumstances tax cuts are a kind of Trojan horse which if brought into the city will destroy the welfare state.

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<>In my judgement, the current projections suggest the fiscal imbalance is so great that the burden of adjustment should not, and cannot, depend only on expenditure side restrictions. There will have to be rises in the tax burden including the possibility of co-payments and user charges.

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<>Now this forecast may be wrong. Perhaps something will turn up. Unfortunately the most likely events are on the downside. The world economy may go into a W or a L instead of a U recovery. There is a very real danger of high inflation, because key countries cannot wind back their monetary and fiscal injections. The fear for New Zealand is that the government will maintain a high fiscal deficit which will lead to an unsustainable debt path, while the engine of growth – the tradeable sector – gets crushed by the rising exchange rate.

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<>Unfortunately the national practice is to ignore the Cassandras and stick to the safe platitudes of the conventional wisdom, to ignore anything which contradicts that – even facts if necessary – to continue to rely on the prognoses of those who did not expect Troy to fall.

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<>Of course, Cassandra was wrong for nine and a bit years. But the loss when she proved correct more than outweighed the earlier gains – a bit like a financial crisis. Taking correct prediction into account leads to more prudent actions. So why do we ignore our Cassandras?

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<>One factor is laziness. If God, or whomever, has given us powerful tools of analysis which enable us to understand better the world in which we live, its complexity is such it is easier to resort to simplifications and slogans. So we repeat the conventional wisdom ad nauseam, rather than think through a critique. We assume someone else has done it, that the journalist has checked what that the person being reported has done an evaluation. However, typically the journalist relies on reputation conferred by the Establishment on the basis as to whether the ‘expert’ is supportive of its interests. Often the so-called expert’s thinking is little deeper than the journalist’s.

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<>In the 1980s I spent a lot of time years studying the arguments of the Rogernomes, going back to the primary papers they quoted (and sometimes misquoted). Their analysis seemed wrong. I dont mean that they had a hidden agenda to transform New Zealand – they had – but even given their objectives, their analysis seemed wrong. I thought they knew something I did not and I tried to find out what it was. Eventually I concluded that the Rogernomes just did not understand what they were talking about. Instead they took short cuts to conclusions consistent with their hidden agenda. There were sometimes terrible bloopers in their arguments; although it was not considered polite to mention them in public. This was one of the reasons why the economy performed so badly when it was driven by the Rogernomes. Reality did not match their theories.

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<>The Establishment has good reasons for preferring the superficial which confirms their prejudices to deep analyses which challenge it. Their power comes from a stability – ideological stability is a crucial part of that.. Unfortunately the story changes with time over time. I am struck by how the certainties of Rogernomics have been superceded and that people who were Rogernomes a couple of decades ago, now hold almost opposite views with equal certainty. They never admit the contradiction. Rather they ignore the change, and they ignore anything which might suggest they got things badly wrong – like the Rogernomics Recession.

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<>The conventional wisdom needs to be challenged and monitored. Every society needs to have an account of itself which is both stable and yet evolves, a paradox beautifully captured in Giuseppe Tomasi’s novel The Leopard, when its hero tells his nephew: ‘In order for things to remain the same, things are going to have to change.’ It is this evolution of the conventional wisdom which makes Cassandras so important.

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<>A baser reason for ignoring Cassandras is that the much of the conventional wisdom is self-serving. Take the claim that the housing market has recovered, and now is a good time to invest in housing. The fact is that housing prices are still over valued. They are most unlikely to rise at the rate they did in the last decade – it is possible they will largely stagnate for the next three and more years. It may still make sense to purchase your own house if you are starting a family, or if your life circumstances change; I cant tell you much about such decisions for they involve personal factors. What seems certain though, is if you purchase a house as an investment for renting out and capital gains you are not going to get a great return. Such an assessment is not great news if you are in the real estate business of selling houses. Better to encourage the public to invest; you still get your margin if they lose on the investment, the principle which underpinned the sub-prime housing fiasco.

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<>It is not only the real estate industry and other industries which act in a self-serving way. Lobby groups do too; I illustrated this earlier with the refusal of those who want to run a Rogernomics agenda to acknowledge the Rogernomics Recession.

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<>There is one final and major reason why the Establishment does not like prophets. The Hebrew prophets had an agenda of social justice which aimed to draw the attention to the Establishment’s focus on its own comfort thereby ignoring the struggles of those who were less privileged and underprivileged.

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<>This is nicely captured in a some paraphrases of the Jerusalem Bible by my good friend the Reverend Robin Lane.

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<>He suggests Amos 4:1-3 might be

<>            Listen to this word you cows of Remuera

<>            Lolling in your summer palaces on Waiheke,

<>            Oppressing the needy, crushing the poor,

<>            Saying to your husbands,

<>            “Bring us a glass of Bollinger”!

<>            …………………

<>            The day is coming to you now

<>            When the your bonds will turn to dust,

<>            And homes will go in mortgagee sales.

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<>Or Amos 5:22-24

<>            I despise your prayers to the GDP,

<>            Your worship of the share market.

<>            No more chanting about your stinking bonuses.

<>            But let justice flow like water

<>            And integrity like an unfailing stream.

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<>So the Hebrew prophets are about ethical understandings – quite different from the Cassandras which are about scientific understandings. As well as recognising the Cassandras we need to recognise the Amoses, those who remind us that there is not just a world that is, there is also a world that ought to be. We need to cherish both sorts of prophets, more than we cherish profits with a f-i-t-s.

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<>Have you noticed that we do when they are dead? I guess this is when they have left this country and gone to another, so now they may be honoured.

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<>I am not asking that we necessarily believe what the prophets say – perhaps in this secular world ‘public intellectuals’ is a better name for them. I am asking to respect their role. Respect means taking their pronouncements seriously, and carefully evaluating them.

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<>There is also the need for venues for the Cassandras to engage with the public, If the media is not going to provide them, then they have to be elsewhere. Blogs provide one such places – ‘Spirited Conversations’ another.

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<>But dont reject a public intellectual the easy way, because others have, or by attacking the person not the argument. That’s lazy. Demand a higher standard from the Establishment; you dont just want lazy responses, you want them to address the issue, not to ignore it. A public intellectual cannot ask for more. But in New Zealand we give them a lot less.

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