<>Making the emissions trading scheme “affordable” may hit future generations hard. <> <>Listener: 10 October, 2009. <> <>Keywords: Environment & Resources; Distributional Economics; <> <>Global warming is a consequence of a market failure: polluters emit chemicals without having to pay the price of their emissions. Some sort of taxation regime would no doubt make the world better off, but this particular market failure is so difficult to deal with for two main reasons. <> <>First, although the warming is happening globally, no international regime exists to deal with it in the way we could deal with people polluting the local river. Second, polluters are getting freebies that others have to pay for. These “others” often are still not born and/or have much less political clout than the polluters. <> <>New Zealand is such a tiny part of the world economy that our emissions are negligible; the temptation is to ignore the problem. Idealists argue you should clean up your own mess, just like Robert Fulgham in All I Really Need to Know I Learned in Kindergarten. Realists know that the US and the EU – economies large enough to affect the rate of global warming – will require their suppliers to also curb their emissions, restricting the imports of the non-compliers. (Then there are the “deniers” who, a bit like those who argued in the 1930s that Hitler had peaceful intentions, see the global warming issue as so difficult that they reject the compelling scientific evidence that it is human-driven.) <> <>My preference is for a cap and trade scheme, in which polluters are given a capped entitlement (which decreases over time) to emit greenhouse gases. They may trade part or all of this entitlement providing they can keep under their (now reduced) cap. That provides a market incentive to reduce emissions, and a market signal to those who consume emitting products that they must pay for their pollution. <> <>Others argue for a tax (which has attractions given the dire state of the Government’s finances). Advocates want the polluters to pay more directly. They see entitlements as subsidising polluters – which is true. <> <>But it’s the politics that is the problem. Under any emission trading scheme (ETS), the way the burden is shared makes the whole thing very contentious. I’m willing to compromise in the short-run, to get a sustainable, effective long-term regime. Even so, polluters want the implementation of any scheme delayed, putting off their day of reckoning and dumping it on the yet-unborn. <> <>Yet if we are making future generations better off by slowing down the rate of global warming, then we are making someone else worse off today. Each proposed regime has different winners and losers. The lines of disagreement do not follow conventional political boundaries. <> <>For instance, some Maori see opportunities for being paid for their forestry schemes, as they’re carbon sinks. Other Maori forestry owners want to convert their forests into dairy farms, which would require them to pay for the reduction in their carbon sinks. <> <>The farm sector mutterings seem to be that they cannot stop their cows belching, so it is pointless to try and they should be left out of the ETS. However, I am continually struck by the sector’s technological innovations. Farmers will reduce their emissions in the long run. They probably have more to gain from the ETS than any other sector, since it will be farmers’ exports that are clobbered by countries restraining their emissions. Even so, like everyone else, the farmers would rather someone else paid. <> <>In the international regime, if we do not restrain our emissions, we will have to buy carbon credits offshore. In some cases, businesses will be doing the buying, and they will pass the costs on to their customers. Electricity prices are expected to rise by 5% – but the users will pay for only half of the emissions. To cover the deficit, the New Zealand Government will have to buy carbon credits – paying for what the private sector is not. <> <>Ultimately, then, it is taxpayers who will pay for this uncompensated pollution. Except the purchase of the carbon credits will probably be funded by borrowing, so the ultimate payers will be future generations. <> <>The original point of the exercise may have been to minimise the cost of today’s pollution for future generations, but it looks as if they will bear much of the cost of the resulting debt, instead.
A Gritty Commitment to Social Commentary
Introduction to Telling Stories: Janice Gill
Keywords: Literature and Culture;
A good way into seeing Janice Gill’s paintings is to begin with Real, Real Unreal (101). Superficially it is about an art opening (at, as it happens, Galerie Legarde – later the Brooker Gallery – in Kelburn). Across the back of the galley are identifiable Gill paintings. The beautiful people of Wellington, wine glasses in hand, are in the space in front. They are not looking at the paintings, but talking to one another, as is not unusual at openings (if a little flustrating to the artist). Outside on the pavement – for we see the opening through a window from across the road – is a woman, a bag lady, walking along Upland Road with her wheeled trolley – apparently even bag ladies in Kelburn are mechanised – as oblivious to those inside, as they are to her. Yet she is the implicit subject of the exhibition paintings.
For they all refer to isolated women. On the left of the back wall is the woman plus baby of Wedding Breakfast (103) with the husband blocked off; in the full picture there are indications the marriage would not last (it didnt). Centre left is Anti-wallflower Academy (84); whatever the absurd loneliness of the incompatible couple at the dancing lesson, the real sadness is the women in the window in the top left hand corner looking down at them. On the right is a 40 Years On (102), sometimes referred to as New Zealand Gothic. But only the woman is seen, and unlike Grant Wood’s American equivalent, she is separated from her husband. (40 Years On was finished after Real, Real Unreal; in the full version the wife is right up next to the husband.)
Centre right is Going On (86), an elderly women walking slowly with her bags down an alley way. There is a blue sky behind her; we are uncertain what sort of sky confronts her when the alley ends. It was painted after her interregnum in Christchurch, saying‘whatever you may think of my work, I an going on with my painting right to the end’. Fortunately Nelson skies are blue.
To make a confession, Janice and I lived in Christchurch at the same time in the late 1970s (although we did not know each other then). It was a traumatic experience for her. In Southland’s Winton she had been a ‘folk’ artist painting scenes of the life around her. In Christchurch she was confronted by bag ladies and such likes, which she captures in her ‘Coca Cola Series’ (81, 83, 88, 89, 90, 91), drifting around inner Christchurch. (Significantly the series ends with Going On; her last ‘Christchurch’ painting.) Humbling for me, this Christchurch lad can easily identify the Cashel Street location of Daily Beat, Beaten Daily (91) – as easily as I can Galerie Legarde – but I have no memory of ever seeing the down-and-outs of Christchurch that she painted; I was as blind as those at the opening.
There is, of course, a fourth group in the picture; the painter on the other side of Upland Road and the viewer looking over her shoulder. Standing outside painting is usual for the viewer, but the ornate verandah post on the right which gives the painting depth, forces us to think we are in that depth.
It is a Cartier-Bresson moment. Janice’s eye clicks like a camera on an slightly absurd and yet socially insightful moment. Almost all her paintings belong to that genre.. The American series (129-135) contains no New Zealand content, but the Gill camera kept clicking away.
More like a novelist than a photographer, she rearranges the ‘facts’.She must have been inside the gallery when the original event happened, but she places herself (and the viewer) well outside. A verandah post may still be there, but three others have disappeared. (The aesthetically challenged city council has since dumped a rubbish bin in between them.) Instead, in order to give an unobtrusive left-side balance, about a quarter of the front of the gallery is set back – in fact the street front of the building is unbroken. Those who attend an opening are rarely as colour coordinated as in this picture.
Thus there is a painterly craft beneath the apparently simple naivety of her style. Her spatial perspective using layers is more Eastern than Western. That the bag lady is deliberately larger than the gallery-goers (relative to a Western perspective) is to emphasise her significance. But, as Grim Procession (200d) shows, Janice can paint Western perspective if required. The colours appear simple – their coordination is not. The shading is graded in contours to give consistency with the sharp edge. A 1986 Melbourne retrospective of recent Australian paintings was called ‘Sharp Edge, Colour Field’. So too is a Gill, except both the sharpness and the colour could also refer to her social commentary. Bag ladies are brighter for her than they are for the population at large. (The Christchurch colours were darker.) Another Gill trademark is the ‘Galerie’ on the window; in later works any commercial lettering is sometimes ‘reflected’.
The title of the work poses the question of what is real and what is unreal. We can juggle the possibilities; perhaps the beautiful people are unreal; perhaps it is the paintings on the walls. Perhaps it is the bag lady outside; because we dont see her? Perhaps even – perish the thought – we the viewers of the painting are not real.
If this Gill painting had a subtitle, it would be Inside and Outside, with the people in the gallery and the works they can afford on the inside, and the bag lady and the viewer on the outside. Janice Gill is always on the outside looking in, although there are a handful of self portraits (107, 108, 112, 126).
Yet there is a sense that every bag lady is her – not physically, for she dresses smartly enough with bright painterly colours – but empathetically. She does not have to ask for whom the bell tolls. Surprisingly perhaps, the first occasion a bag lady appears in a picture is in New Zealand Dream (18), painted when she was aged 22 still in Winton, indicating she was beginning to realise she was an outsider in a small town of 2000, even if she did not escape it for another seven years. Bag ladies and their kin become much more common thereafter.
So folk images become replaced by social commentary, although the basic notion of a narrative is never lost. Each painting is a short story, like the O’Henry stories read to her in childhood. This book elaborates Janice’s narrative, but each viewer has her or his own.
It is a lot harder to have a picture of a bag lady hanging up in the living room – unless she is Minnie Dean. A painter needs a gritty commitment to social commentary since it forecloses commercial opportunities from the beautiful people. (But not a single one in the gallery scene is portrayed satirically.)
Janice did not much like Christchurch, some 200 times the size of Winton – there are no loving Christchurch scenes — and at the end of 1978 she moved to Nelson, only 30 times as big. The Nelson paintings mix local scenes with bag ladies and other marginals. There are fewer urban landscapes and buildings compared to the Winton years; perhaps painting social activity is easier when one is not meeting exactly the same people of one’s childhood over and over again; perhaps it is easier to be an outsider in a larger community.
The canvas broadens. A new genre is the ‘suits’ – men and women, any personal identity submerged under the suits they wear. (95, 96, 145, 147, 158, 1712, 174, 177) Why did she became aware of suits in Nelson rather than Christchurch? A bigger town is more compartmentalised: one guesses she did not spend a lot of time in Christchurch International Airport or Hereford Street. Her world of suits and her world of bag ladies are in closer proximity than most of us think. There but for fortune …
I am not sure whether those her ‘suits’ pictures of the mirror glass offices of the finance sector (sometimes the suited figures are relaced by those that they oppress) in the 1990s recall the 1987 crash or predict the 2008 one. (from 145) Certainly they are a bridge between them.
Janice’s output diminishes from 1988 with fewer and smaller paintings, as the OOS following the farm accident limited her painting time, and revised her painting technique. The narrative retains the sharp eye and the social field, but she becomes as well integrated into Nelson life as an outsider can be.
The oeuvre may understate her life in the Labour Party – as an activist and as the local political organiser to three MPs. She may have helped form the only new branch of the Labour Party in the difficult times after the 1987 election; it was women’s branch to relieve the oppression of Rogernomics.
Is Janice a feminist? Use of the term is fraught with difficulties . There is little doubt that Janice the woman is empathetic with those women in difficult circumstances, but men can also be sensitively painted. L.S. Lowry would have responded to the man in Community Care (146); would he have been as responsive to the woman in New World in the Morning (161)? It is important to Janice that All Solo Mothers are Not the Same (141), each of her marginalised subjects is an individual (and often identifiable) person; although the suits are not always.
So while Janice is capturing the social life and people of of Nelson just has she did for Winton. Her Nelson is bouncing along, and occasionally illustrates a particular event. The first such picture is Election Night at Richmond in 1981 (107); thereafter other references to national events appear. But the heart of the narrative is people struggling through their lives. Her Labour Party is about these people; when it neglected them, she turned from the party. She returned when Helen Clark became its leader.
There are timeless quality to her Winton paintings; even the myths of Minnie Dean and Hokonui whiskey seem suspended in the same eternal space. The Nelson pictures are of an evolving community; the Burgess gang myth adds to the length of its evolution. O’Henry’s stories paint pictures of people living in a definableAmerican city. Janice Gill paintings tells just as compassionate and humorous stories of people living in a Nelson.
Targeting the Minimum Price Of Alcohol
This paper was prepared in October 2009 for the Law Commission when it was reviewing alcohol policy. It is released under the Official Information Act.
Keywords: Health; Regulation & Taxation
Terms of Reference
The Law Commission has asked for a report describing how a minimum price regime for alcoholic beverages might be implemented, and what would be its benefit (especially in relation to a reduction of harm) and its costs.
Executive Summary
1. At the lowest price demand for absolute alcohol is probably more price elastic (more sensitive to price) than other beverages. These ‘cheap drinks’ are therefore of particular interest to pricing policies for alcohol control purposes.
2 . It appears that cheap drinks contributes more than proportionally to harm from alcohol misuse.
3. A Sheffield University study has quantified the effects of Scotland raising the minimum price of absolute alcohol. It found reductions in mortality and morbidity, and in public spending on health care and crime and from employment related harms. The magnitude of the reductions depends on the minimum price level.
4. This suggests that alcohol control policies should seek to increase the minimum price of absolute alcohol.
5. The report explores the possibility of regulating the minimum price of alcohol by a Retail Price Maintenance (or a price control regime which sets a minimum price)
6. The benefits of regulating the minimum price of alcohol include
– reduce their consumption;
– reduce the harm from cheap drinks;
while
– increasing on-licensing drinking;
– with little impact on moderate drinkers.
7. However, regulating the minimum price of alcohol would also involve
– administrative difficulties;
– a regime which conflicted with the economic policy of the last twenty-five years (although the different regime might be justified by having a particular social purpose);
– changing the balance of economic power in the supply chain, probably to the detriment to the consumer;
– increasing the revenue and profits of suppliers without their providing any additional services to consumers;
– providing the incentive and the funds (from the increased profit) for suppliers to market cheap drinks more vigorously, thereby increasing sales of the cheap drinks, and increasing harm.
8. The report also considers using excise tax to set a minimum price for absolute alcohol.
9. The benefits of using a taxation regime to set a minimum price of alcohol include
– reduced consumption;
– reduced harm from cheap drinks;
– simpler to administer (although there would need to be an additional effort to obtain minimum price information);
– the revenue from the additional outlays would go to the exchequer to be used for reducing other taxes and/or increasing public spending and/or reducing the deficit.
10. However using a taxation regime to set a minimum price of alcohol would also involve
– a smaller increase in on-licence drinking than from regulating the price of alcohol to the same minimum level;
– a greater impact on moderate drinkers, although this could be offset by the recycling of the additional excise revenue.
11. This report sets out possibilities and feasibilities. It makes no recommendations.
Introduction
In recent years there has been an increasingly realisation that alcoholic beverages, like all consumer purchases, involve a bundle of characteristics. Confining the concern – as for most of this report – to off-licence purchases the characteristics can be reduced to the quantity of absolute alcohol (which is easily measured) and quality. Quality is rather poorly defined, but explains why individuals pay more than the minimum price for an alcoholic beverage, since they are also purchasing desire this intangible quality.
Formally then (but put simply) the beverage purchaser is making a decision involving three characteristics – the quantity of absolute alcohol, the beverage quality and expenditures on other products .
The analysis is a little tricky since the absolute alcohol and the beverage quality cannot be purchased independently of one another. This report eschews the mathematical formulations, but their essence is that an increase in excise duty which increases the overall price of alcohol beverages may not necessarily reduce consumption of absolute alcohol (or not reduce it by much). Rather, purchasers may reduce their consumption of the beverage quality while maintaining the consumption of absolute alcohol by shifting to lower beverage quality products. Of course some purchasers will reduce absolute alcohol consumption in order to maintain a higher beverage quality, but the insight from the analysis suggests one of the reasons why the consumption of absolute alcohol is relatively price inelastic (that is total consumption does not change much when prices change).[1]
The one group of consumers who cannot trade quality down are those are already consuming beverages for which there are no lower beverage quality. Such beverages are identified by their having a low price of absolute alcohol since the product does not contain anything but the minimum beverage quality. The beverages are typically sold off-licence, since an on-licenced premises sales are more expensive because of the cost of supply of drinking facilities (which are a part of beverage quality).
As a consequence, it seems likely that the consumption of those who drink the cheapest alcoholic beverages is more price elastic (sensitive to a change in price) than those who consume more beverage quality.
There has to be a lot of conjectures in such analyses. The comprehensive empirical evidence does not exist, mainly because it is very hard to get relevant data bases. While there is a vast literature on aggregate demand for alcohol beverages , there are only a handful of studies which assess the impact of price changes on particular fractions of drinking, and each is subject to some flaws.
Even so, on the basis of what is known and the general theory of consumer behaviour it seems likely that those alcoholic beverages which are purchased primarily for their absolute alcohol content (i.e. having a minimum of beverage quality) are likely to be more price elastic compared to other alcoholic beverages.
It follows that pricing strategies for alcohol control purposes are likely to have their maximum impact on the cheapest beverages measured by absolute alcohol content.
Cheap Drinks As A Source of Harm From Alcohol Misuse
The Law Commission’s Alcohol in Our Lives describes the harm that alcohol use and misuse generates. Probably all consumption causes some harm although it may be an offset by benefits.
At one stage alcohol control policy tended to focus on reducing the aggregate consumption of absolute alcohol. Subsequently, there has been greater attention to targeting certain types of drinking or situations which involved drinking, where it is believed that the greatest harm occurs. (The Law Commission report is an example of this approach.)
Under the new approach it is thought that the targeted interventions will be insufficient to reduce harm to acceptable levels. without forgoing the benefits from consuming alcohol. The approach therefore still requires an excise duty on alcohol. In New Zealand the level of the duty is largely related to the level of absolute alcohol, although there are various ‘anomalies’. [2]The justification for the regime is that absolute alcohol is the best indicator of harm that can be readily taxed. (Note that for a given level of harm, the success of the targeted interventions reduces the necessary excise duty.)
The proposal for a minimum price for absolute alcohol arises from the belief that cheap drinks contributes more than proportionally to harm from alcohol misuse. In particular cheap drinks are associated with binge drinking, heavy drinking and alcoholism. The belief is that if the cheap end of alcoholic beverages were more expensive, there would be less drinking of them, and less harm.
These effects are explored in Sheffield Alcohol Policy Model of the University of Sheffield, prepared for the Scottish Government which is proposing to introduce a minimum price regime. [3]
Here are the simulations based on a minimum price of 40p per unit. ( A unit is 10 mls of absolute alcohol – say a ‘standard drink’). This is substantially higher than current minimum prices, which are below 25p per unit.[4]
The estimates are particular to Scotland which has different drinking patterns from New Zealand. However in order to get a sense of the magnitudes involved, it may be useful to note the Scottish population is slightly larger than New Zealand’s (around 5.2m against 4.3m) while the British pounds could be multiplied by 2-and-a-bit to convert into New Zealand dollars. The Scots consume absolute alcohol more per head than New Zealanders.
Under the minimum unit price of 40p, overall consumption falls 2.7%, and is estimated to be reduced by on average 22 units per person per year. Consumption reductions are greatest for harmful drinkers (3.7 units per week), who are 6 percent of the population over 11 years old. Hazardous drinkers, who are 21 percent of the population, drink 0.5 units less. Moderate drinkers, who are 64 percent of the population, are affected in a small way (approximately 0.1 units less per week). [5]
While off-licence consumption falls in volume terms, it rises slightly in value terms (i.e sales) because of the rise in price. On-licence drinking increases in volume and value terms. It could be argued this is a desired effect since, probably, supervised on-licensed drinking is less harmful than unsupervised off-licenced drinking among some drinking groups.
The effects on health are estimated to be substantial with deaths estimated to be reduce by approximately 40 within the first year of implementation and a full effect after ten years of around 210 a year. Deaths are differentially distributed across the groups, with approximately 10 amongst moderate drinkers, 60 amongst hazardous drinkers and 140 amongst harmful. drinkers. Illness also decreases with an estimated reduction of 1,500 chronic and 500 acute illnesses at full effect. Hospital admissions are estimated to reduce by around 800 in year 1, and a full effect after 10 years of 3,600 a year.
The societal value of these harm reductions were estimated as £540m in total over the 10 year period modelled. In the first year, the estimated societal value of the harm reductions were as follows: NHS cost reductions, crime costs saved (£1.0m), and employment related harms avoided (£20.5m). (Note the substantial gains from employment related effects including higher employment.) Additionally there are improvements in the quality of life estimated as £8.6m for health and £0.7m from reduced crime. The societal value of harm reductions is distributed differentially across the groups, with harmful drinkers accounting for £360m of the total value, hazardous drinkers accounting for £110m and moderate drinkers £70m.
However, overall revenue to the British Treasury (from excise duty and VAT receipts) falls by approximately £4m, although there are offsetting expenditure gains from the lower demand for public services.
These figures are indicative and subject to wide margins of error. But they illustrate how, and in some of the ways, a minimum price of absolute alcohol reduces harmful drinking with a relatively low impact on moderate drinkers (and a positive impact on non-drinkers). [6]
The analysis also implicitly draws attention to three major problems with the strategy.
First, harmful drinkers are drinking over 12 times as much as moderate drinkers (6.0 units a week vs 5.1 units). The difference remains almost as large after the minimum price is imposed (61.3 vs 5.0).
The implication that a minimum price for absolute alcohol will reduce harm and harmful drinking, but it will not eliminate it.
Second, the policy is not tested for effectiveness against any other policy – such as a general increase in excises.
Third, total sales increase £87m or 3.4 percent (on a fall in the volume of 2.7 percent). Since revenue to the Treasury falls, the supply industry is receiving a substantial boost in its revenue (and hence its profits, for there is no increase in its costs). There is little discussion in the report as to what happens to the additional industry profit, although it becomes a critical issue when the policy option is evaluated (below).
A Minimum Price Strategy – The Resale Price Maintenance Option
What has been thus far demonstrated is that higher prices for cheap alcoholic beverages has some beneficial outcomes in terms of reducing harm. This section looks at how this objective might be pursued by a regulated minimum price, and the consequential problems.
Most of the advocates of a minimum regulated price do not discus in detail how the policy could be implemented. They seem to have in mind a kind of price control. New Zealand abandoned price controls for products sold in shops over twenty years ago, and there is a diminishing capacity on the part of the bureaucracy to implement such a regime. In any case, the proposal involves setting a minimum, rather than maximum, price.
Alternatively, the minimum price could be regulated via a system of resale price maintenance. This is probably more administratively practical; all its weaknesses apply also to the price control option.
Resale Price Maintenance (RPM) occurs when a supplier of goods specifies the minimum price at which a reseller can sell those goods. The practice is prohibited under section 37 of the Commerce Act 1986 (and so if it was to be used it would, as in the case of the price control option, require separate legislation). The primary policy reason for the prohibition is that RPM restricts the reseller’s ability to compete with others on price and therefore is an anti-competitive conduct.
The application of RPM to maintain a minimum price for absolute alcohol would involve the wholesale suppliers of alcoholic beverages requiring their retailers to sell the products at a set minimum price which would be regulated by an authority to have the effect of setting a minimum price for absolute alcohol. Presumably the system would only apply to those products which are at the cheap end of the market, although it may not be easy to define the line between that for which the RPM applies and that for which it does not.
There is only a handful of large suppliers of alcoholic beverages and sales are dominated by a handful of supermarket and off-licence chains. Any application of RPM to some or all alcoholic beverages sold off-license would involve a change in the balance of market power between wholesalers and retailers. There is no systematic study of the existing situation, so it is not possible to assess the implications of such a change, although it seems likely that consumers would be worse off.
An even more serious problem may be that, as the Sheffield study draws attention to, the RPM (or a price control) raises the revenue from sales, and hence the profits of those who supply the alcoholic beverages.
What the industry would do with these additional profits is uncertain, but there would an incentive for it to vigorously market the now more profitable beverages which have a set minimum price. Insofar as the marketing was successful, some or all of the gains from reduced harm from cheap drinking could be wiped out. Presumably there could be restrictions on marketing – realistically on all marketing, since again the boundary between cheap and moderate liquors would be difficult to define.
Were that successful the public might still object to a policy regime which gave the alcohol supply industry gratis increase in profit at their expense. It is possible – although not obviously so – that an ad hoc taxation regime could be implemented to pull back theses profits from the producers. It is likely to be fraught with difficulties, including how to treat offshore producers.
In summary while a RPM regime would be feasible – and is administratively more practical than a minimum price control regime – it is subject to major weakness including changing the balance of market power within the supply chain and increasing industry profits. While it is not possible to assess the first effect, measures to reduce the second would involve increasing interventions and may not be successful.
Either the price control or RPM regime would be quite out of character with overall economic policy of the last two decades. This, does not in itself, preclude the use of such mechanisms, if the social gains were substantial enough. (That tradeoff is a political judgement.) However, as the next section shows, there may be a more practical alternative.
This said, the Scottish government is further advanced in its planning of a minimum price scheme, although details are not yet available. It will be facing the same challenges and developments there should be monitored.
A Minimum Price Strategy – Targeting Excise Duty Option
The following section is illustrated by the effects of the policies on a 330ml bottle of 4% aabv beer costing $1.33. [7] The illustration is indicative. Nor should the illustration of a minimum price of alcohol at $1.20 per standard drink (10 mls of absolute alcohol) be considered a proposal. The purpose of this report is to set out the principles behind a minimum price strategy. If it is decided to proceed with one, the choice of levels is for a later stage in the policy development.
An alternative to a regulated minimum price in order raise the price of cheap alcoholic beverages is to target excise duty to attain this objective.
One of the current purposes of the excise duty regime is to raise the price of absolute alcohol, in order to discourage consumption and thereby reduce harm. Because it is a largely uniform rate on absolute alcohol, it raises the price of cheap drinks more than those which are higher priced (which are also charging for their beverage quality).
The level of the excise duty has a substantial impact on the price of cheap drinks. For instance including the GST on the excise duty, over a quarter of the price of a $1.33 a 330ml bottle of 4% aabv beer can be attributed to excise duty. [8]
The level of excise duty rate can only really be explained in historical terms. In the far past it was set by politicians making a nice judgement between what they thought was politically feasible and the excise revenue that they needed for fiscal purposes. Subsequently the rate was updated for inflation – as is now done annually – plus any further change as the balance between political feasibility and the desperation for revenue changed.
There has been some consideration as to whether the aggregate revenue from excise duty covers the fiscal costs of harm from alcohol but that calculation has not been decisive in setting the duty rate. (In any case, the economic logic is that tax revenue should also cover some of the private costs of alcohol harm.)
Thus there remains a question as to what is the proper excise duty rate. Insufficient is known in order to identify some optimally appropriate rate (e.g. one which gives the maximum social benefit from the consumption as offset by consequential harm). But the logic of the earlier part of the report is that perhaps the minimum price of absolute alcohol should be taken into consideration.
Suppose it was decided that the minimum price for 10ml of absolute alcohol was to be $1.20. (This price is chosen entirely for illustrative purposes and is not a recommendation.) The calculations for beer are below, but for comparison purposes it would raise the minimum price for a 750ml bottle of 12.5% aabv wine to $11.25.
Suppose, too, the previously discussed 330 ml bottle of beer with an aabv of 4 percent was the cheapest source of absolute alcohol. It contains 13.2 mls of absolute alcohol. That would set its price in the minium price regime at $1.584 (1.32 X $1.20), or 25.4 cents higher than its current resale price. Instead of using a regulated price in which the additional 25.4 cents (less GST) would go to the suppliers, the excise duty could be increased by 67 percent to 63.1 cents (including GST) on the bottle and the increment in revenue would accrue to the government.
Accordingly the excise duty on beer would be raised from $25.4756 per litre of absolute alcohol, to $42.5443 per litre (with GST additional). The broad effect form this example would be to increase the price of every standard (10 ml of absolute alcohol) drink by 19 cents(including GST), plus whatever margin the suppliers paced on them, irrespective of the beverage quality.
This change involves only an existing administrative system (and a simple amendment to the Customs and Excise Act 1996) , so it could be readily and effectively introduced.
(At the time of the new legislation it would also make sense to remove some of the anomalies– especially the ones which favour wine – and, arguably, to introduce a lower (or zero) rate for low alcohol beer. The spirits excise rate – i.e. the rate for alcoholic beverages over 14% aabv – would be aligned so that the cheapest available source of absolute alcohol would be the same as for beer and wine.)
The current practice for increasing the duty in line with consumer inflation could be continued.
However there is no reason to expect the cost of beverage production and distribution would increase at the same rate as inflation while it is possible that overseas sources of alcoholic beverages could undercut existing prices.
Means of observing the lowest price source of absolute alcohol include.
1. inspection; or
2. requiring retailers to report their lowest price beverage; or
3. using point-of-sale electronic records.
In the event of a the lowest price falling below the target minimum price (after adjusting for consumer inflation) it would be necessary to raise further the excise duty.
The major weakness of this regimen compared to the regulated minimum price is that according to the Sheffield University analysis the regulated price regime would have little impact on moderate drinkers rasing their prices only a little. There are two responses to this.
The first is that the revenue accrues to the government who will recycle it via tax reductions and expenditure increases. Moderate drinkers and non-drinkers could be net beneficiaries from these changes (as well as from a general reduction in harm).
The second is that it might be possible to construct a drawback arrangement whereby , as the price of the absolute alcohol rises, the excise duty gets phased down. It may not be practical since it probably would have to be applied at the wholesale level (and hence would not discriminate in favour of on-licence drinking) and there may be opportunities for gaming the system especially as the excise is levied at the wholesale stage but the relevant price is the retail one. Note also moderate drinkers on modest incomes would be paying more excise duty per unit of absolute alcohol than those who could afford dearer drinks.
It should also be noted that there will not be as strong an incentive towards drinking on on-licenced premises as for the regulates prices option.
Conclusion
Undoubtedly alcohol control policies need to pay attention to the minimum price of absolute alcohol, for it appears that cheap drinks contribute a more than proportional share of the harm from alcohol misuse. than the more expensive ones.
However a regime which raises a the minimum price of alcohol involves practical difficulties.
A regulated minimum price regime is likely to affect the balance of market power between producers and retailers, while increasing the profits of the supply industry; some of the additional profits may be used for increased marketing. The regime has two major advantages, in addition to the reduction of harm which comes from a higher minimum price. It favours supervised on-licence drinking and it has a low impact on moderate drinkers.
An alternative would be to use excise duties to raise the price of the cheapest drink to some desired level. This is far more administratively straight forward than a regulated minimum price, although it involves additional effort collecting price information. In contrast to the regulated price option, it does not favour on-licensed drinking as much, and moderate drinkers are also affected by the higher excises. Even so most are likely to be better off when the additional revenue is recycled (via lower taxes and/or higher public expenditure) and by the reduction in harm that consuming cheap drinks causes.
This report sets out possibilities and feasibilities. It makes no recommendations.
Endnotes
[1] Another reason is container size. The mathematical analysis assumes that the beverage is available along a continuous spectrum. In practice it is purchased and drunk by the can or bottle or glass.
[2] There is a differential rate between spirits and other alcohol based beverages. While the rate seems to have arisen from historical circumstance, it could be justified by observing that were there to be a uniform rate, spirits would be relatively cheaper, and that (depending on the assumptions about the rate) would lead to a higher rate of absolute alcohol consumption or higher average prices.
[3] But see Model-Based Appraisal of Alcohol Minimum Pricing and Off-Licensed Trade Discount Bans in Scotland: A Scottish adaptation of the Sheffield Alcohol Policy Model version 2 ScHARR, University of Sheffield, September 2009. http://www.scotland.gov.uk/Resource/Doc/285795/0087053.pdf
[4] The simulations include the effects of of other minimum prices, and also of prohibiting discounting.
[5] The remaining 9 percent of the population over 11 are non-drinkers.
[6] Note however that moderate drinker outlays rise by 2.2 percent.
[7] The example was chosen because it is an example in another Law Commission paper.
[8] The actual excise duty is currently 33.6 cents plus 4.2 cents GST a total of 37.8 cents on the bottle – the proportion is therefore 28 percent.
Funding the Health Sector
<> Paper to the ‘Funding in the Health Sector Conference’: 28 September, 2009 <> <>Keywords: Health; <> <>Why is health funding a problem? The easy answer – the answer popular in the public policy debate – is to talk about the size of the health services sector, the proportion which is publically funded, especially in a context of the totality of government funding. Projecting those figures out, we find that if trends continue, as they are likely to, spending will rise with the likelihood that taxation levels will have to rise to fund public health care. <> <>The Report of the Ministerial Review Group – the Horn Report – is a recent example. In my view it was misleading. The report says New Zealand spends a high proportion of its national income on health, It is higher than the OECD average and — with the exception of the US, Switzerland, France, and Germany — it is not materially different from the highest in world. The latest Ministry publication is only up to 2005. It reports that our health spending relative to GDP was 11th in the OECD (out of 29) so there is another five ahead of us as well as the ones mentioned. (In any case the international figures are not too accurate or comparable.) <> <>Spending on health has also been growing much faster in New Zealand than it has in other countries, especially when compared with income growth. Since 1995, growth in health spending has exceeded growth in national income by 30% in New Zealand versus an OECD average of 18%. Notice the starting date of 1995. Health spending had been heavily cut back under the previous National government, so some of the subsequent growth in spending was no more than a catch up. Nor is it entirely clear that out health care spending has grown faster than everyone else in the OECD. As a proportion of GDP between 1996 and 2005 (the Ministry tabulation period), the following countries had a greater health expenditure growth measured by change in share of GDP: Belgium, Greece, Luxembourg, Portugal, Switzerland and the United States. Britain was the same. That makes us 7th equal. <> <>Why Health Spending Rises <> <>In summary then, we were a highish spender on health care relative to GDP, but we we are not an extreme. The problem of growing health care spending is not a peculiarity of New Zealand – the problem applies throughout the rich world. The reasons are much the same. <> <>First, health is labour intensive so it does not obtain the productivity gains that a goods-based industry does. The cost pressures are exacerbated because (especially) medical skills are internationally very mobile so we have to pay near-US rates for skilled medical personnel. Under the Obama expansion the rates are likely to go higher. Technological innovation is another factor. While sometimes the new methods are cost saving, more frequently they extend the quantity and quality of life, so they increase demand for health care. <> <>Those factors add to the main reason for the strong health care growth. Too much of the health funding debate has a narrow focus which seems to imply that the problem we face is that individuals making unreasonable demand for health care services. We need to see the demand for health care in a wider context rather than blaming the public. <> <>It is a perfectly rational to want more health care services. Increased material consumption in affluent societies does not add to individual happiness. The longest available series is from the United States. It shows that happiness has not risen at all over the last 60 odd years, and yet material consumption has doubled. There are various ramifications; today I focus on the implications for health care. <> <>First, the sick are less happy than the well. For instance, based on some work that Ryan You and I did at the Massey Centre for Social and Health Outcomes, Research and Evaluation, a person unable to work because they are sick is 15 percent less happy on average than someone who is employed, retired or is a mother looking after children. Reduce sickness and we increase happiness. Second, while we may not be able to increase the average level of happiness, we may be able to prolong it. Life expectancy has been rising – it now averages over 80 years at birth, up from 70 years half a century ago. That is another 14 percent additional happiness per average life. <> <>So while increased material consumption may not add to our happiness, diverting resources from it to effective medical care may reduce mortality and morbidity, which will add indirectly to happiness. It is a perfectly rational strategy to increase spending on health services. <> <>Moreover it is not unusual for some component of our overall spending to increase faster at the expense of the rest – automobiles were an example in the middle of the twentieth century. The ordinary economic mechanisms of the market coped reasonably well, because in order to buy the cars we desired, we cut back on purchasing other things. (Of course the cars required the government to provide roads for our cars. The government is never far away.) <> <>So what’s the problem with health services? The difficulty arises because particular health care needs – in some objective medical sense – vary from person to person. We want a high quality health care system, but hope that we never have to use it, comforted by the thought that it is there if we need it or, indeed, if people we care about need it, <> <>There are a couple of almost equivalent means of evening out the erratic incidence of health , ensuring the facilities are there if we ever need them. One is to raise taxes to pay for the services, the other is to use some sort of comprehensive insurance scheme. They have a common problem. <> <>When you buy a car, you use your own funds and thereby reduce what else you can purchase. Thus your spending is constrained and you choose a car you can afford. You may want a Rolls Royce, but it is probably too expensive. It would be near enough true to say that a society purchases the cars it can afford. <> <>For either taxpayer or insurance funded health care the link between an individual’s consumption and the individual paying for the services is broken. This is inevitable if we allocate the care on the basis of medical need rather than ability-to-pay. I am not uncomfortable with that principle, but the neat market mechanism which links the affordability of consumption to the amount which is supplied is broken. Were we to purchase cars the way we fund health services, every one would have a Rolls Royce. Not surprisingly, given the funding arrangements, everyone demands a Rolls Royce health service when they are in need. <> <>Just about everywhere, once a certain level of affluence is reached, the health system respects medical need over ability-to-pay. Now there is no automatic mechanism constraining the total demand health services to what the community can afford. Once the pure market solution is abandoned – and we accept that medical need should have a role in the provision of health care – there is the problem of how to constrain the provision of services to within the capacity of the community to provide them. We need to find another rationing mechanism. Otherwise everyone will have Rolls Royces, and the taxpayer or insurance fund will have gone broke paying for them. <>No country has found a satisfactory alternative. All their solutions have weaknesses which the market mechanism overcomes, except the market mechanism has the overwhelming weakness that it relies on ability-to-pay. <> <>When proponents of the conventional wisdom grumble about rising demand for health care they are avoiding the embarrassment that the market mechanism does not work. So they push their failure to design a market based rationing system onto people’s failure to perfectly reasonably demand a medical need as the criterion for access. <> <>Recall that America is the greatest capitalist economy in the world, that its single largest industry is the health sector, that no other affluent country has pursued market solutions more vigorously and, yet, America has considerable government regulatory intervention and public funding. Even more damningly, it is almost universally acknowledged that America’s health care is extremely expensive and inefficiently delivered – and inequitable. Despite having some of the most impressive medical centres in the world, the average American gets a much poorer health care deal than in any other rich country with which mortality or morbidity comparisons can be made. The other countries do better, but they do not have a perfect solution; that includes New Zealand. <> <>Isnt medical insurance a market solution? That is a question about a comprehensive system where everyone has medical insurance which funds (just about) all the provision of health services. New Zealand medical insurance operates differently; it assumes there is a taxpayer funded health service and tops up the constrained public provision for those who purchase the private insurance. <> <>In a comprehensive national health insurance system with total coverage so that nobody is left out there remains a disconnect between the funder of any individually provided service and the individual paying for it. The pure market’s reconciliation of demand and the funding is still lost. <> <>Can We Get A Better Funding System? <> <>The best we seem to be able to do is incrementally improve the health delivery and funding system leaving the rationing system to various ad hoc interventions. This rules out the switch from taxpayer funding to a comprehensive national insurance system as was overwhelmingly rejected by the public in the early 1990s. <> <>In any case, I cannot see a lot of difference paying for health care through taxes and paying for it through a system of national health insurance. The purest may think the former is a drag on the taxpayer, but the latter still involves compulsory levies. A purist might say they are not taxes; the general public does not see much difference. Differences could be teased out but the time can be better used by exploring funding possibilities in a taxpayer dominated system, and then looking at the problem of constraining public expenditure. <> <>Should we require the sick to fund some of the health care services themselves, thereby relieving the taxpayer? But might the charges be so onerous that some people – especially the poor – do not take the treatments up? Surely we do not want individuals failing to use necessary health services because they cannot afford it. <> <>There are various places in our system where the sick are expected to pay. Nobody, for instance, thinks aspirins should be paid for by the national health. Over-the-counter pharmaceuticals enable one to avoid going to the doctor thereby wasting her or his and the patient’s time and minimizing the financial cost to the public funder too. It also reflects a view that the individual should have the maximum control over their treatment. <>There are also co-payments including for general practice services and pharmaceuticals. (We try to protect the poor’s pockets with a community services card.) Typically these co-payment type charges are at the simple end of the medical spectrum, and low. They probably save the funder some money, but not much. To what extent it discourages some from taking up necessary medicine, to the detriment of their health, and sometimes resulting in higher health expenditures later is not known. <> <>There are also a group of treatments which are not deemed sufficiently medically necessary to be on the public health. They include alternative medicines and also some treatments by the medical profession which are thought discretionary rather than for medical need – most cosmetic surgery for instance. In such cases the treated pay. <> <>Another cause of payment is where it is accepted the public funder should provide, but perhaps because of timeliness or convenience, or even to have the doctor of one’s choice, the patient purchases the treatment in the private sector. Often the treatment is paid by supplementary private insurance. <> <>Additionally there are those treatments which are not provided by the public funder because they are not considered cost effective enough. The public or insurance funder has to have a set of core services they will fund. However, with the exception of pharmaceuticals available to general practitioners, this set of acceptable treatment is not listed or, if there is a list, it is not readily publicly accessible. The set of permitted treatments may even have fuzzy borders with different DHBs – and even different clinicians – having differing views of what it may contain. <> <>It has been proposed the list of what is (or should be) available be codified. The Horn committee is the latest to recommend this, while there was a major attempt in the 1990s proposals to do this, although the core services committee abandoned the attempt to the extent of renaming itself. There are two major problems. <> <>First, what can be effectively delivered keeps evolving, so any codification would have to be continually updated. Second, any list generates difficult-to-contain political pressures. We see this in the vigorous lobby for a new drug by the drug company and patients when Pharmac is consider whether to add it to the list. <> <>Yet the implicit list of what the public funder will provide – the explicit rationing system – is critical to the way the public health system works. Which explains the demand for its codification. <> <>Reprise <> <>Let me summarise where we have got to. <> <>We have a funding problem which arises because the public understandably and legitimately want to spend more on health care in pursuit of a better quality of life. We cannot rely on the usual market mechanism of user pays, because of the erratic incidence of the demand for treatment and an unwillingness to accept ability-to-pay as a rationing device. <> <>Co-payments provide limited funding possibilities, but they shift the balance back towards an ability-to-pay with the possibility that some potentially necessary treatments will not occur. <> <>Instead there has to be some public funding agency – based on taxes or (probably compulsory) insurance – to fund the necessary treatments. Since an ability-to-pay rationing system does not apply, it has to be replaced by some other rationing mechanism. Since the agency cannot fund everything, there has to be a list of what they will fund. Its size determines the cost to the funder. Generally that list will be implicit and fuzzy, <> <>The expectation is that the list will increase over time. Together with demographic change and the rising relative costs of health services, health care outlays will probably rise relative to other expenditures. That means that the taxes or insurance payments to pay for them are going to rise over time – probably faster than incomes. For a taxpayer funded system that means rising tax rates to pay for health. <> <>So the rationing list, or at least its contents, is at the heart of the funding challenge. Can we restrain what is on it? That is what most of today’s conference papers are about. <> <>Restraining the List <> <>I used to challenge my fifth year medical students by leaving on the board for the entire lecture ‘either clinicians take responsibility for the resources they use, or some one else will make the treatment decisions’. The students would be very uncomfortable. Were they not going into a career whose ethic was to give the best possible deal for each patient? Why should they take into consideration the cost of the resources they were using. Yet if they did not, a manager would decide whether the resources would be available for the treatment. That is the story of the last twenty years, as managers have been imposed in order to restrain expenditure of health care. <> <>The students were not greatly mollified when I explained that using resources on one patient took away resources from other patients. The medical professional’s focus is on the patient – as it should be. But the treatment takes place in a wider context. If clinicians dont think about the wider context, someone else will do it for them. <> <>I would explain how the Pharmac system worked. Then Pharmac had a capped budget. It chose to fund only those drugs which in total value came under the cap. Rationality required that some criteria had to be used to decide which drugs were included on their list. The exact criteria are complex, but an important element is that the spending has to generate enough medical welfare per unit of input. If a new medicine came along which the million dollars could result in 300 quality adjusted life years being saved, then the drug is likely to be adopted; if a million dollars spent only gave an extra 100 quality adjusted life years, then it is unlikely to be put on the schedule of drugs which GPs could prescribe. (In practice Pharmac might try to beat down the price of the drug – this is an aspect of the system we dont need to pursue today.) <> <>If a drug meets the criteria it goes onto a Pharmac list, and a GP can use it without the patient paying (or paying much). Thus doctors do the best they can for their patient within the confines set by Pharmac. A similar approach is proposed for medical equipment, although the gains will not be as big as for pharmaceuticals. <> <>The arrangements inside hospitals are different. Since the 1970s most hospitals have a preferred drugs list, which the specialists can use without restraint. They may only use pharmaceuticals which are not on the list with the approval of senior clinicians. Thus decisions of the individual doctor are subject to a collegial review. <> <>The preferred drugs list led to major savings; I cant help wondering whether a similar practice could be introduced for all treatments in hospitals – that is the most expensive can only proceed after collegial review. The effect of the medical protocols is much like this, but protocols are not universal and perhaps those that exist could take more notice of the costs of treatment. You will observe that the approach does not rule out any available treatment; it uses a collegial oversight to control resources: better than an accountant, economist or manager. <> <>Clinical responsibility has got lost in the managerial turmoil of the past few decades. Even the Horn review was too top-down. How can we tackle a health problem unless the clinicians own it? The bureaucrats want to rationalise their safety committees. It is far more important that those interfacing with their patients work in, and promote, a safe cultural environment than having a committee hidden in the bowels of hospital bureaucracy or in Wellington. The Horn report does encourage ‘clinical leadership’ but every clinician has to be involved – to own the problem. <> <>Another weakness in the current system that have to be addressed is over-treatment. It comes in a variety of ways. GPs still tell me they sometimes feel pressured by their patients to prescribe unnecessary drugs. Perhaps the prescription charge is a means of reducing the pressure. <> <>A bigger problem may be ‘supplier induced demand’ or SID. That occurs where the clinician persuades the patient they need some treatment which an objective panel of colleagues would say is unnecessary. That usually requires patient ignorance – a general problem. Second, it probably requires that there is a third party funder – the taxpayer or insurance. If patients have to pay themselves, they are likely to be more cautious than if someone else pays the bill. Third, it requires an incentive structure which encourages clinicians to supply the unnecessary treatment. Among the possible incentives are professional status from doing advanced – albeit ineffective – treatments. However probably the most common reason for SID is when the clinician’s income increases as a result of the treatment. This is said to often happen in the American health system, where supply is more profit driven. Does it it happen in New Zealand among some of our private providers where remuneration includes a profit element? The SID problem may belong more to the private insurance industry than the taxpayer. <> <>The third over-treatment problem is where the patient chooses to have less treatment than is the medical standard, but the doctors insist otherwise. There is some evidence that the elderly want less treatment than they did when they were younger; they may be more interested in care and comfort than prolongation of a poor quality life. Sometimes clinicians may press on them treatments which they do not really want. An anecdote involving a younger patient will illustrate. Bridget, a university teacher, was a feisty woman who got terminal cancer in her forties. Her chemotherapy was perhaps offered a bit too persistently. Towards the end Bridget had to say to her doctor ‘all my life I have prided myself at my ability to convey my ideas. I do realise that I may be losing it a little, but what part of ‘NO’ do you not fucking understand?’ This is a commendable example of a patient owning the problem; one of the strongest reasons for patient consent and involvement in treatment is that they then can own it. <> <>Using ineffective treatments is over-treating. Most treatments do not go through the rigorous evaluation that Pharmac applies to pharmaceuticals. It is quite likely that some regularly provided treatments dont work – at least in certain circumstances. Frequently the clinician proposing the treatment does not know it doesnt work. We need more attention to evidence-based medicine. <> <>Conclusion <> <>I have looked at some of the ways we can improve the effectiveness of health care provision. And we should. But there is a gloomy conclusion to this paper. <> <>Suppose the result of these measures was to represent a ten percent reduction in health care outlays for the same health outcome. (Ten percent is the sort of target you might expect given the Pharmac experience.) That would be a significant saving to the taxpayer, but – a large BUT – in the long run the gains will be overwhelmed by the rising demand for health care and the rising relative cost of the services provided. So the measures delay but do not resolve the pressures that the taxpayer (or a national health scheme ) is under. I am confident I have not solved the problem. Neither has anyone else. <> <>Even so, we should vigorously pursue a strategy of ensuring that every treatment is effective and desired, while we seek to limit public funding without shifting the back to an ability-to-pay basis. <> <>Endnote: I am grateful for comments on an earlier draft by Rob Bowie and Elizabeth Caffin. <> <>Go to top
Economics As a Science
<> Paper to the Skeptics Society – 26 September, 2009 <> <>Keywords: History of Ideas, Methodology & Philosophy; <> <> <>Today I want to reflect on the extent to which economics is a science and the extent to which it is not. In doing this I come from the approach of someone who was trained a scientist, who continues to think of himself as one, and who is heavily influenced by the philosophy of Karl Popper. I suppose that makes me a sceptic. <> <> <>The point about a sceptic is that they are continually testing the theories they hold against the facts, and trying to improve them. As such, they are what Thomas Kuhn called revolutionaries, challenging and replacing the conventional wisdom. I take it that the Skeptics Society consists of fellow iconoclasts. Today I am going to address some of these false gods directly. Perhaps you hold some dear. Please understand I am just applying the standards of scientific scepticism to them as you expect to be applied elsewhere. <> <> <>Popper points out that even though you know your theories will be replaced by better ones, hold on to the best you have until a better one comes along. Towards the end of this presentation I will talk of some examples where scientific economics has held – even still holds – theories knowing their weaknesses, and where we may make progress in the not too distant future – one hopes. <> <> <>Popper said the most important Platonic dialogue is The Apology in which Socrates reflects on the Delphic Oracle’s utterance that he is the wisest of men. He concludes that he is only wise because he knows how ignorant he is. As another of my heroes, Isaac Newton described himself, he was ‘only a child playing on the beach, while vast oceans of truth lie undiscovered before me.’ <> <> <>Newton also said ‘If I have seen further than others, it is by standing upon the shoulders of giants.’ That is one of my themes today. Science is the accumulation of wisdom. We would do well to recall and understand the giants of our science before we claim some particular insight. Some of the greatest minds of the last two hundred years were economists – some were scientists. <> <> <>I want to begin however, talking a bit about the contrast between the subtlety of economics and the crudity of its critics. A couple of examples will illustrate my point. <> <> <>I am frequently told that economists believe that per capita Gross Domestic Product is the measure of welfare of a nation. That is a strange claim since every economist knows that the more relevant measure is Net National Income because GDP includes depreciation and it measures the income of a region not of the people who belong to the region. They differ because of, among other things, some of the profits of the region go to investors outside it. <> <> <>Such things are overlooked by the critics, but even more extraordinarily, they only rehash what economists have always known. I do mean ‘always’. The creator of the statistical base out of which GDP comes was Simon Kuznets who wrote in his original report in 1934 ‘the welfare of a nation can scarcely be inferred from a measurement of national income’. But you wont find him quoted in the standard critiques of GDP, nor John Kenneth Galbraith who wrote an elegant chapter decrying its use as a measure of welfare in his Affluent Society some fifty years ago. <> <> <>I am not denying that some people use GDP as the measure of welfare, or that GDP is an economists’ measure. My point is that properly trained economists use it for other purposes – the purposes for which it was designed. Politicians, journalists and business people like to talk about GDP as if it is a measure of welfare and bolster their ignorant use by claims that economists agree with them, even when they dont. <> <> <>You might say, why in the last 75 years have economists not constructed a better measure of welfare? The short answer is that we have tried, and we have not been able to develop a satisfactory one. <> <> <>Today there is another attempt going on by a committee led by Joseph Stiglitz and Amartya Sen, two other giants of the profession – I shall name only giants today. Their preliminary report was released about a week or so ago. What I found interesting is that they have concluded there is no single measure of economic welfare, and are looking for a number of indicators. <> <> <>Which rather undermines all the critics who have their own single measure which they claim is better than GDP. There is no unique single measure of a nation’s welfare. Had there been economists would have developed it – around 74 years ago. One must never assume that the best economists are as stupid as their critics. <> <> <>Now I am going to use the concept of GDP later today. I will use the measure as an indicator of market activity, which is what economists designed it for. Couple of caveats – I shall be referring to annual market activity, and when I make comparisons through time I shall be referring to volume GDP, that is production adjusted for the change in prices. Sorry to be tedious – but I am an economist and have to understand such things. Incidentally, GDP was originally derived for tracking unemployment. Today we know that it is not a very good short run indicator for this purpose, that economic activity and unemployment track differently. So even if the activity contraction has ended we may expect rising unemployment for a while yet. <> <> <>My second illustration is that I am often told, by those who have not studied economics, that economics depends upon unlimited economic growth. That cannot be true since many giants of the economics profession – Thomas Malthus, David Ricardo, Karl Marx, John Maynard Keynes and Joseph Schumpeter, for instance – were stagnationists who expected economic growth to come to an end; Keynes wrote of the ‘euthanasia of the rentier’. What he meant, and others thought too, was that as capital was accumulated, the return on capital would fall, until there would be no incentive to invest, and economic growth would stop. This is a consequence of the laws of thermodynamics. As Paul Samuelson has pointed out, economics is grounded in those laws – without them there would be no trade-offs, a fundamental notion of economics. <> <> <>The difficulty with this stagnationist approach was that per capita incomes in the rich world quadrupled in the 180 years between Ricardo and Schumpeter. You can set up auxiliary hypotheses to explain the inconsistency but in the 1950s, as the data became available, it became evident that a theory of economic growth dominated by pure capital accumulation was inconsistent with the facts. <> <> <>We now know, following a famous 1956 paper by Bob Solow, that what he called ‘technical change’ adds to economic growth. By technical change he meant ‘a shorthand expression for any kind of shift in the production function. Thus slowdowns, speedups, improvements in the education of the labour force, and all sorts of things will appear as “technical change”.’ <> <> <>The story of how the scientific community has misinterpreted this economic research for its own political purposes belongs to another occasion. The point to be made here is that it is simply not true that economics says that economic growth is necessary. When there is no more technical change, the growth may stop but there will still be a role for economics. <> <> <>Were the critics a little sharper, a little more subtle, they could instead argue that the current economic system is dependent upon economic growth. The technical mechanism is that the true profit rate is close to the growth rate; so no growth, no profits. When growth exhausts itself the nature of the economic system would change. If you want to pursue the implications of that you might read – well, er – Malthus, Ricardo, Marx, Keynes and Schumpeter. <> <> <>So there are two kinds of economics. One is what competent economists do, and the other is articulated by the politicians, journalists and business people who have misunderstood professional economics, often for self-serving ends. This self-serving is the key reason why this misrepresentation dominates the public discourse. Why bother to get it right if ignorance supports one’s ends? It is the scientist who pursues getting it right as an end in itself. <> <> <>I was taken by a history of Lysenko whose pseudo-science, which confused phenotype with genotype, was imposed for political ends to the detriment of Soviet Agriculture. What struck me was that a large proportion – perhaps 95 percent – of the Soviet biological profession simply accepted the faulty paradigm. Of the remainder, about half got on with doing proper science and the other half ended up in Siberian concentration camps – or worse. But that so many Soviet biologists got it desperately wrong does not prove that biology is not a science. <> <> <>I’d like to think that there would be a higher proportion of the economics profession who could see the fallacies in an imposed economics paradigm, and certainly fewer of us end up in concentration camps. One day there will be a very interesting analysis of how so many economists were misled into thinking the macroeconomics which has led to the current crisis had so much validity. But not all did, and economics can claim that it is being corrected by the facts. <> <> <>Notice that I am distinguishing between what economics is and what economists – and others such as business people, journalists and politicians – think. If you use a definition that economics is what economists do, then deciding whether economics is a science becomes a question of whether economists are scientists, an empirical question. <> <> <>Probably all the giants of economics were scientists in the sense that they practised a scientific method which Popper would recognise. When we look at shorter members of the profession – even those who were followers of the giants – we observe another way of pursuing economics. <> <>To make the division clear, I shall contrast sceptics with the believers. Sceptics are the scientists who are continually testing the hypotheses they hold against alternative hypotheses. For them knowledge is tentative but it also progresses as it replaces existing hypotheses with better ones – typically as a result of an encounter with facts. <> <> <>On the other side there are the believers, who hold a known truth which is invulnerable to challenge. Facts do not challenge their truths, or cause them to be replaced with a better ones. Rather the task is to explain the facts within the framework of belief; if necessary they will ignore inconvenient facts. <> <> <>Let me give some examples. Suppose the belief is in the literal veracity of the bible. The biblical account of the development of the world is inconsistent with the theory of evolution. Therefore the theory of evolution is wrong and the challenge becomes to explain why it is wrong thereby keeping the integrity of the literal veracity of the bible. <> <> <>Or consider the right wing economic philosophy which rejects taxes and other forms of economic intervention. Economics has a well established and rigorous theory that if pollution generates costs to others, then an effective way of improving economic welfare is to use taxes and such like. Global warming appears to be a straight forward example of pollution generating costs to others. So the extreme right challenges the premise that global warming is caused by human actions. Thus they see no need to impose taxes and other economic interventions to deal with this problem. That seems to be the position of the New Zealand Act Party. <> <> <>A third example is the belief in the policies which we call Rogernomics, and which are more widely known as ‘neo-conservative economics’. They were applied in New Zealand between 1985 and 1993, and so the Rogernomics believers conclude they worked because their theory says so. As it happens the economic growth rate for New Zealand did not speed up under Rogernomics. Indeed per capita GDP stagnated from 1985 to 1993, so it was the same in 1995 as it been eight years earlier. It was in that period that we got badly behind Australia. <> <> <>I should like to tell you how Rogernomes explain this stagnation since they said their theory promised economic growth. I’d really like to know, since I have a theory which explains why the stagnation happened and I would like to test it against alternative theories. Unfortunately the Rogernomes simply ignore the fact of stagnation. I know of no case of any of them mentioning it, let alone gives any account of why it happened contrary to their theory and promises. <> <> <>You will detect here the frustration of a scientist. I get better theories by comparing mine with others using the facts that test them. But how can I do that if they ignore the facts? <> <> <>There is also a policy issue here. It is hard not to conclude that Rogernomics and its Ruthanasia successor failed. There is currently a committee to consider how we might speed up economic growth and catch up with Australia in GDP per capita terms. At least three of its five members were Rogernomes. It will be interesting to see to what extent they address the failure of the policies they advocated in the 1980s and 1990s. <> <> <>Another group you need to be wary of is those who are paid by their employers to represent their business interest. While they they do a good job, sometimes they reflect the firm’s or sector’s interests. <> <> <>More fundamentally, as Galbraith pointed out, we are the slaves of the conventional wisdom which is a mix of what Keynes called the thinkings of ‘defunct economists’, our aspirations which are not always based on reality, and the theories which support the hegemony of the dominant interest groups of a society. <> <> <>While I was meditating on such things – indeed while I was writing this paper – journalists announced the ‘recession was officially over’ because GDP increased 0.1 percent between the March 09 and the June 09 quarter. <> <> <>What gave the journalists the authority to claim that the recession was officially over? There is no official definition of a recession in New Zealand; there is not even a standard one. The journalists probably did not have the foggiest idea of what economists mean by a ‘recession’, other than they knew it was a bad thing. <> <> <> <>The number which led to these pronouncements was a minuscule plus 0.1 percent of GDP, but equally it could have been presented as minus 0.2 percent of GDP per capita, Moreover, there is a margin of error for any figure the Government Statistician reports, and the quarter by quarter GDP change is subject to a large one. They are also subject to revision – five of the eight quarters of the last two years were revised with the new announcement. Or had you realised that the average growth rate in the last decades boom was about 0.9 percent a quarter,. So the June quarter outcome was not only that output per head was falling, but since economic capacity is continuing to grow, the underutilised capacity in the economy was growing too? Bad news for the unemployed and putative unemployed. <> <> <>You can infer that I am a little irritated by the way the media handled the story. Nobody likes a recession, but the subtlety of the economist’s analysis is lost in the crudity of the journalists’ anxiety that the recession – whatever they mean by it – is over. We sceptics cannot be sure of course, but do not be surprised if this week’s hoopla seems silly in a year’s time. As the Minister of Finance said ‘Tough times are still ahead’. Probably. My assessment is that there are very tough times still ahead of us. <> <> <>Mechanical measures and definitions do not properly reflect the evolution of the economy. If someone said that a eutrophied lake was saved because the oxygen level was no longer diminishing, a limnologist would think them as uninformed (at the kindest). This is equivalent to the announcement the recession is over, Economies are just as complex as ecologies. <> <> <>(The commentary on the following day was more informed, including my talking to Katherine Ryan on Radio New Zealand’s Nine to Noon program at a level – I hope – intelligible to the public but which most economists would appreciate. If I dont they soon tell me.) <> <> <>My irritation arises, not only because of the poor quality of so much of the commentary, but because it sets the tone for the public. I am likely to be deluged in the next few weeks by sentiments of ‘hooray the recession is over and things are getting better’, followed up a little later by ‘you economists misled us, things have not improved that much’. <> <> <>We did not mislead you. You chose to listen to people who were commenting beyond their competence. That’s not the economists’ fault. Nor is it our fault if the public relies on the same people to initiate them into the mysteries of GDP and economic growth. If one listens to dwarves the stories are going to be a bit short of genuine content. <> <> <>So we face a confusing stories. Much of economics may be scientific but many economists are not, and in any case most of the public learn their economics from those who could not possibly be considered professional economists. <> <> <>As one last attempt to convince you that economics is a science – and like all sciences complex and subtle – let me look at three areas where economics is progressing. Note how in each case the evolution is due to a dialogue between theory and fact, and how like all scientists I make no apology if the current theory is to be replaced by a better one, albeit one which stands on the shoulder of the old one. <> <> <>I promised to finish off with some examples of well held economic theories which are under pressure at the moment. I’ll give three. In the nature of things, some of the people I am going to mention are not quite the giants I have been mentioning, but I need to give you some pointers. They are all pretty tall. <> <> <>Economic Behaviour <> <> <>First there is the theory of individual economic behaviour. For a long time economists have held, in an increasingly rigorous form, the notion of rational economic man – homo economicus. He – he is always male – takes all that is known into consideration .and pursues his own self-interest by maximising his utility which reflects only his welfare and does not vary through time. A little introspection suggests that we dont actually do this; the theory held on for the simple scientific reason that there was not a better one to replace it. When we use it for policy purposes, many of us make ad hoc adjustments to bring homo economicus closer to actual behaviour. <> <> <>Recently some economists have been looking at the psychological literature to obtain insights into human behaviour. Among my heroes are Richard Thaler, Matthew Rabin and Daniel Kahneman the psychologist who received the so-called Nobel prize in economics in 2002 (the Prize awarded by the Bank of Sweden in honour of Alfred Nobel). <> <> <>While economics has not yet got a rigorous theory, it is certainly making progress. I tell you this example to illustrate that economics evolves. I admit there is a lot of resistance to behavioural economics. It includes those who are comfortable with the old paradigm and dont want to learn anything new. (Keynes remarked we rarely learn anything fundamental after the age of 30.) It also includes those with a political agenda who think that behavioural economics justifies the state over-ruling individual preferences (it doesnt). So, Lysenko like, their politics overrules science. Meanwhile you will find increasing application of the theory; the Kiwi saver scheme was influenced by Thalerian principles, although hardly anyone mentioned it. <> <> <>Happiness and Material Consumption <> <> <>My second example illustrates that economics, like other sciences, can have an anomaly which has yet to be resolved. Two hundred years ago, Jeremy Bentham said the more you consumed the happier you were. That has been a central assumption in economics ever since. But is it true? <> <>We have only had the data to test the proposition in recent years. The most important involves asking whether people are happy and comparing their responses with their incomes, after controlling for other variables. There is some research which indicates that the subjective responses are consistent with objective data, but of course the area is treacherous. <> <> <>When we pull together the available evidence we find that a rise in average material consumption in poorer societies seems to be associated with rising average happiness. However that does not seem to apply to affluent societies. The best example from the longest data series is that levels of consumption have doubled in the United States over the last 60 years, but there has been no rise in average happiness there. <> <> <>Even so, while rising average incomes do not increase happiness over time, those with higher incomes at any point in time are happier than those with lower incomes. But not that much happier. Some work Ryan You and I have done (you’ll have to go to the original paper to get the details) shows that the happiness score goes up from 8.1 to 8.3 when annual income rises from $20,000 to $120,000 – by 0.2 points on the 0 to 10 scale. In contrast happiness falls by 0.5 points if an employed person becomes unemployed, which suggests that a job is far more important for happiness than the income it generates. Even more dramatically, the happiness of a married woman who becomes separated falls 0.6 points on average and the man who moves from married to separated falls 1.2 points. <> <> <>So income is not as important in determining happiness as a range of other – not economic – things. Insofar as income is important, it seems to be because it demonstrates one is higher up the pecking order, rather than the additional material consumption it generates. What this all means is unclear. Its an anomaly. Probably the best source if you are interested in the subject is Richard Layard’s book Happiness although I dont agree with everything he says. (I’m a sceptic.) <> <>The Global Financial Crisis <> <> <>My third example is a major row going on in economics which has been precipitated by the Global Financial Crisis. The disagreement has long been there but new facts and new events have exposed it. It would take me a whole of the afternoon to explain the dispute, but I have to be brief. <> <>Following the Great Depression of the 1930s, Keynes wrote his General Theory of Employment, Interest and Money. (no mention of GDP, you’ll notice) which became the basis for what we know as the Keynesian paradigm of how the macro-economy works. By the 1960s it was challenged by monetarism (the expression was not invented until 1968) which evolved to a point where it is said the founders such as Milton Friedman would no longer recognise it. This alternative paradigm (there is quite a lot of the Keynesian apparatus in monetarism) became dominant for policy purposes at the US Federal Reserve and in the popular press and business community, but not in the academy which divided between – in the jargon – ‘saltwater economists’ who were Keynesians (generally) working in American universities on the east and west coasts and ‘fresh water’ ones who were anti-Keynesians usually working in inland American universities. <> <> <>In the academy this was all good competitive fun, with lashings of rhetoric – and some (I’m afraid) personal abuse. In the policy domain there was an uneasy truce. The arrival of the Global Financial Crisis has now turned the truce into open public war. Think of the disagreement whether light was a wave or a particle – but shift it to the twenty-first century with its greater and instantaneous public communication and of a more immediate policy concern. <> <> <>I’ve tried to put the argument fairly, but I dont want to seem to be sitting on the fence. Briefly my position is I am with the Keynesians, although I have doubts about American Keynesianism which is too influenced by the peculiarities of the US government arrangements. Moreover I dont think the Americans have thought enough about the particularities of their economy whose currency is also the international means of exchange. I warned you that economics can be complex and subtle. <> <> <>You may be surprised that I should be Keynesian given that Keynes published his book almost three-quarters of a century ago, about the same time as Bohr’s complementarity, Heisenberg’s uncertainty, and Pauli’s exclusion principles and Schrodinger’s equation They all remain in the foundations of quantum mechanics but the subject has evolved. So has economics. <> <> <>An even better example might be that this year we celebrate the 150th anniversary of Darwin’s On the Origin of Species. The book still speaks to us, even if the theory has had to be enriched by a host of subsequent research. Keynes’ General Theory has a similar status. <> <> <>So let me finish this brief discussion with the cryptic remark that I reckon that progress will not just happen with the Global Financial Crisis testing the two paradigms. There will have to be a new theoretical innovation based upon some previously unavailable empirical data. I speculate that it will be the incorporation of balance sheets into Keynesianism. Keynes knew about them, but there was not enough material to incorporate them into his account – except crudely. <> <>However there is a bigger lesson here. Paradigmatic battles are not resolved as easily in the social sciences as they are in the natural sciences – although none of them has lasted as long as the one about the nature of light. It is worth recalling Plank’s law: “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” <> <> <>That may be true in physics. It is even more so in the social sciences. <> <> <>Conclusion <> <> <>What I have tried to do today is answer the question of whether economics is a science. My conclusion is that there is a strongly scientific element in much of economics and many economists are scientists. Regrettably though, many of those who use economics do not do so in a scientific way, which is why it is right to be sceptical about what you are told are economic truths. But that does not mean that none exist. <> <> <>Go to top
They Say It’s All Your Fault
<>Spending on health care is rising rapidly – but there’s one thing we could do. <> <>Listener: 26 September, 2009. <> <>Keywords: Health; <> <>We are told that the health-care sector is a drag on the economy. It is growing faster than the economy as a whole and is chewing up a fifth of core Crown spending. A couple of decades out it may be taking as much as 40% of a larger public budget. <> <>The trouble is that you (yes, I mean you, dear reader) want the health care. The evidence suggests you do not benefit much from rising material standards of living. Instead you want to live longer and more healthily. And that’s what’s been happening. Life expectancy for newborns has been rising – it now averages over 80 years – and my impression is that today’s unwell experience a better quality of life. <> <>That spending on health care is rising faster than total spending may seem a perfectly sensible development to ordinary people. If the demand for chocolate chippies doubled over 20 years because people wanted to consume them, we would have no qualms. But we have two reports – from the Ministerial Health Review Group and a private consultancy – that blame the difficulties the health system faces on your increasing desire for health care. Shame on you! <> <>The failure might better be attributed to the inability of the market – or any system – to deliver good health care efficiently and fairly. It is the largest single industry in the US, the world’s greatest capitalist economy. Yet America’s health care is extremely expensive and inefficiently delivered. Despite having some of the most impressive medical centres in the world, the average American gets a much poorer deal than people in all other rich countries with which comparisons are usually made. <> <>There is no ideal system. Every country has its own institutional quirks, which make reform very difficult. You are not to blame for the mess. Our desires to have more spending on health at the cost of less other material consumption seem quite reasonable. It’s just that no one can work out how to effectively deliver the reasonable demands. <> <>There’s not a lot of difference between a public funding system and a comprehensive private insurance one. I would caution against insurance or health-care provider systems based on competition between suppliers. It is easy to promote their strengths or identify their weaknesses, but providing a balanced account of both aspects is messy. In the rhetoric of vigorous political debate, who wants to acknowledge a mess? <> <>The ministerial review, Meeting the Challenge, is a great disappointment. You can’t have 170 recommendations that are all bad, but few seem to tackle the real issues. Some seem to have a hidden agenda, especially the one about resurrecting the health funding agency of the 1990s, with its funder-provider split. The 1990s reforms promised 20-30% productivity improvements, but there were none. This time the promised gains – if any – are not quantified. <> <>On the other hand, the review does not have the 1990s’ passion for “competition”, which works – if at all – in only very narrow parts of the health system. The focus seems to be more on co-%ordination. <> <>The review’s top-down approach is a major limitation. How can we tackle any real health problem unless the clinicians own it? The bureaucrats want a rationalisation of their safety committees. Far more important than having committees hidden in the bowels of hospital bureaucracies, or in Wellington, is that those who deal directly with patients work in and promote a safe environment. <> <>I trust our clinicians to supply good health care far more than I trust bureaucrats and managers. Some humility from the latter would be welcome. But clinicians are not particularly sensitive to cost-effectiveness. Obviously we have to restrain what can be offered. Leaving non-clinicians to do that doesn’t work. Our clinicians have to own the restraint, too. At the moment they don’t do that very well. <> <>As for you, dear reader, if you expect better health care without higher taxes and/or increasing insurance payments, then it really is your fault.
New Zealand Catching Up with Australia
<>Notes for Seminar 22 September, 2009.
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<>Keywords: Globalisation & Trade; Growth & Innovation;
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<>While there is much talk about New Zealand catching up with Australia in per capita GDP terms there is not a lot of careful economic analysis. The accompanying graph shows the record over the last forty odd years. In 1967 Australian and New Zealand per capita GDP was roughly the same. After that Australia grew faster than New Zealand. Initially the growth difference arose because Australia had a mining boom, while New Zealand had a collapse in the price of its main export of the day – crossbred wools.
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<>The New Zealand diversification from the dependence on wool was largely over by the mid 1970s, and there was some recovery in the Muldoon years. However from the mid 1980s there was a long decline which started with those policies we call Rogernomics. The decline bottomed out at the end of the 1990s, and through most of the last decade New Zealand grew at the same rate as Australia – perhaps a fraction faster. Last year the New Zealand economy contracted while the Australian economy grew. I have not incorporated the 2009 figures but the same thing is happening this year.
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<>Had I time I could detail the various ups and downs but the pattern is clear enough. New Zealand has experienced a long term decline relative to Australia. Note that the peaks and troughs reflect phases of the business cycle. It is the trend which is important.
<>
<>I’ve added in blue the trend if we are to attain the 2025 goal of per capita GDP parity with Australia. It is a big challenge. Given the likely Australian growth rate, we shall need a volume GDP annual growth rate near 5 percent allowing for population growth. (Instead of declining relatively about 0.85 percent p.a. we need to improve, relative to Australia, by 1.85 percent p.a. That means a per capita growth of about 4 percent p.a., a volume GDP growth rate near 5 percent p.a.)
<>
<>Attaining the goal is not a matter of arithmetic. It requires a change in real economic behaviour. When proper economists do the calculations we find that the target is probably impossible. One study recalled the aspiration of the magic bus. ‘I want it I want it; but you cant have it’. The fastest 17 years growth New Zealand experienced relative to Australia was to 1906 following the refrigeration boom. That was 2.3 percent p.a. Since then the best we have done was 1.3 percent p.a to 1959.That is about two thirds of the aspirational growth target of being 1.9 percent p.a. faster than Australia.
<>
<>How can those in the external sector of the public service contribute to accelerating the growth rate? Increases in volume GDP are critical, but your most important contribution could be lifting the price we get for our exports – improving our terms of trade. While I dont want to deny that bilateral and plurilateral free trade agreements have a role, the big one for New Zealand is the multilateral Doha round. On behalf of all New Zealanders I wish you the best in your endeavours.
<>
Reliving the 70s Horrors
<> <>If nothing is done, our credit rating will be downgraded and interest rates will rise. <> <>Listener: 12 September, 2009. <> <>Keywords: Macroeconomics & Money; <> <>When the economy plunged in 1975 as a result of the first international oil shock, the Labour Government increased public borrowing. But when the world economy recovered, the New Zealand fiscal deficit remained large, with the incoming National Government increasing spending by making (what is now) New Zealand Superannuation universal for everyone over 60. <> <>Prime Minister and Finance Minister Robert Muldoon took some fiscally prudent measures after his election in 1975 – although we are still recovering from his cutback on infrastructural spending. But these measures were insufficient, and he became timid after his party won fewer votes than Labour in the 1978 election (but more seats under the quirky winner-takes-all electoral system). <> <>So in the late 1970s, every Treasury official was faced with trying to haul back government spending and raise government revenue. What they managed to do was not enough, so Treasury scouted around the world to borrow the funds to cover the internal deficit and the external one (on the current account of the balance of payments). Big spenders and tax cutters loathed the officials, who wanted to spend small and hike taxes. In the end it was inflation, rather than political leadership, that solved the shortage of tax revenue over spending, devaluing the incomes and assets of fixed-income savers. <> <>Although committed to a career of research and teaching, rather than giving policy advice, I had a deep empathy for those Treasury economists. Like them, I knew political procrastination simply compounded the problem for the future. I – and most of them – had a deeply moral objection to piling up the costs of one’s failures onto children and the unborn. Much of the pain of the 1980s occurred as we dealt with the legacy of the Muldoon debt – although we worsened it by adopting some silly policies. <> <>Fast-forward 30 years and we find today’s economy in a similar situation – and possibly worse, for households are also not saving. Again the country has a large fiscal deficit that can be resolved only by political leadership. <> <> <>A month ago I thought gloomily that we might repeat the experiences of the late 1970s. The Government would tinker with spending cuts and revenue raising, but nowhere near enough to address the size of the deficit. Perhaps the Government – Micawber-like – would hope something turned up, or that it could at least hide the problem sufficiently to get re-elected in 2011. That would make being a Treasury official very miserable. <> <>Instead, coming to the rescue is – of all things – a credit-rating agency. The smallest of the big three, Fitch, has put us on credit watch. In time, Nos 1 and 2, Standard & Poor’s and Moody’s, may join them. We have very high overseas debt, which we are not addressing, and the ongoing fiscal deficit is making it worse. If nothing is done, our credit rating will be downgraded and interest rates will rise. <> <>The Government has already responded. In an unprecedented speech to the National Party conference, Finance Minister Bill English said there was no possibilities of tax cuts for at least five years. (He thought there might be a place for a change in the tax mix, but that’s another column.) He suggested there may be opportunities to increase revenue “without actually raising the tax burden”. We shall see. <> <>Even so, to avoid a credit downgrading we are also going to have to cut government spending. I don’t know what, and I don’t know when. But I do know that even if it is phased in, it will create difficulties for ordinary New Zealanders – which is why I favour raising taxes as part of the adjustment. <> <>Drastic measures are necessary if we are to avoid a repeat of the Muldoon years. My job here is to explain the reasons for the measures and evaluate their impact. I will be arguing for a coherent macroeconomic strategy, something we have not had for ages, and a fair sharing of the burden of adjustment. <> <>I should not be surprised if some of today’s Treasury economists agree with much of this column. The ones of 30 years ago certainly would.
Weighing Human Costs Critical
<>Letter to National Business Review, 11 September, 2009 <> <>Keywords: Health; <> <>Dear Editor, <> <>In his profile of me (4 September 2009), John Bishop compares my estimate of the cost of alcohol misuse ($16.1b) with that of the BERL estimate ($5.3b). Aside that they are for different years, and in different prices, they are not comparable because the BERL figure covers only tangible losses (that is lost of effective production) whereas mine also includes intangible losses, that is the shortening of life and the reduction of the quality of the life of the living as a result of alcohol misuse. <> <>Because of the widespread morbidity and mortality that alcohol misuse generates, and because we greatly value human life, the loss of the intangibles are far greater than the loss of the tangibles. Hence the substantive difference between my and the BERL estimate. <> <>It would be foolish to ignore these intangible losses when we undertake social cost exercises. For instance the tangible costs of gambling abuse are small; the effect is mainly redistributive, rather than loss of effective production. But the human costs are substantial. To ignore them would be to conclude there is no problem gambling. <> <>Brian Easton <>Wellington
Drinking and Self Assessed Welfare: a Statistical Analysis
This is the draft of a paper for 2009 Conference of the New Zealand Statistical Association, 3 September 2009. The presentation was a PowerPoint based on it. It is part of a study of the impact of drinking by associates undertaken by the Centre for Social and Health Outcomes, Research and Evaluation (SHORE), Massey University.
Authors: Brian Easton and Ru Quan (Ryan) You (with Sally Casswell and Taisia Huckle)
Keywords: Health; Statistics;
Introduction
An earlier paper described the 3068 respondent sample survey on which this is based.
This report focuses on drinking behaviour. Respondents were asked about their own drinking and also whether they had associates who were heavy drinkers, as well as their personal characteristics and self-assessments of their personal well being.
The statistical method is to use the various responses to predict the personal well being variables. Insofar as the equation is valid, the impact of each of the independent variables can be assessed. This enables the consequences of drinking or of associating with drink to be evaluated.
The primary purpose of the survey was to assess the effects of drinking associates on aggregate welfare. It also gave some useful insights into the effects of self drinking behaviour.
The Variables
Each respondent was asked on 12 dimensions of life including satisfaction with life as a whole (sometimes abbreviated to ‘happiness’). The responses were on a 0 to 10 scale. (Casswell, Huckle &You 2009) Note that the personal wellbeing responses are subjective, although there is some evidence that they correspond reasonably well to an objective assessment (where one exists)..
We asked whether the respondent had drunk alcohol in the last year. (We asked also of those non-drinkers were they ex- drinkers. but their responses have not been evaluated yet.) Drinkers were then asked a series of questions which in this report are summarised as
The frequency of drinking occasions (reported here as occasions per week);
The typical number of drinks on each occasion (reported here as 15ml of absolute alcohol drinks).
While there are problems with individual’s recall of their drinking behaviour although because of the way respondents are asked, SHORE surveys elicit far greater aggregate coverage than many other surveys.
Additionally respondents were asked about associates who were heavy drinkers. Their responses were categorised as:
Level 0: no heavy drinkers among associates (71.6%)
Level 1: associated with heavy drinkers not living or occasionally lived in the same household (15.4%)
Level 2: heavy drinkers sometimes living in the same household (7.5%)
Level 3: heavy drinkers living in the same household for more than half of the time (5.5%)
There is also an adjustment for multiple heavy drinking associates.
(For details see Casswell et al 2009)
Additionally they were asked for various (largely objective) personal characteristics. These are described in You & Easton (2009).
The Impact of Self Drinking
The approach is similar to Ryan & Easton (2009) with the following adaptions.
– we need to avoid the situation of a drinker who drinks nothing.
– the amount and occasions variables are cardinal;
– the occasions and amounts variables are related, at least through having a common intercept.
We found the following equation from worked well, where
Y is the normal logit of the dimension of life variable;
Z the other demographic variables;
A is the amount drunk on a typical occasion
F is the frequency of occasions
u is a random variable with the usual properties.
Y = a0 + b*Z + a1A + a2A2 + a3A3 + f1F + f2F2 + f3F3 + u,
and where the as and fs are constants to be estimated – we estimated them differently for men and women.
We found a cubic polynomial satisfactory. In some cases a shorter one would have worked, but for consistency we maintained them all at order three.
Interpreting the data the following should be kept in mind.
– it would be very rare for someone to have been surveyed while they were drinking; this is about responses to drinking when one is not drinking;
– this probably does not measure long term welfare effects of drinking, and certainly does
not measure any long term effects on health (such as cirrhosis of the liver).
We found that as a rule regularity of dinking did not greatly affect personal well being after we controlled for other characteristics) . For instance, consider the impact on the life satisfaction of a woman who imbibes 15ml of absolute alcohol each occasion by the number of days a week she drinks. It rises slightly, suggesting the regular drinker – of one glass – is likely to be happier than the infrequent drinker. Given that the zero is the never drinker, you can see the modest drinker is slightly better off. This low gradient was generally true for men, and for other life dimensions. However it is not always so that drinkers – even moderate drinkers – are better off than never drinkers.
(Note that this assessment does not include any effect of long term physical health nor the impacts of the drinking on others.)
The male response was also largely unaffected by the frequency of drinking, but they reported that they were less satisfied with life than non-drinkers.
A stronger effect comes from looking at the number of drinks per occasion. While moderate drinkers were sometimes higher on the dimension of life measure than non-drinkers, sometimes lower, those that drunk more were always lower than those that drank less except that the functions tended to flatten out for very large drinking, perhaps because we did not have a lot of observations.
When we looked at women assessed by the quantity of their drinking. we found those who frank more were increasingly less satisfied with life. Those who drank a single drink once a week or two drinks on a daily basis were happier than a non-drinker with the same characteristics. Bigger drinkers were less happy.
Men also show as strong a decline although unlike the women all drinkers report a lower satisfaction of life than for never drinkers (on average). This strong downward slope is universal across all dimensions of personal. However, there is not the time/space to present the individual results – in any case this is a statistics conference concerned with general principles of method, rather than detailed results.
Care needs to be taken in interpreting these graphs. It would be easy to misinterpret them as indicating that a person can raise their personal wellbeing by reducing the quantity they drink each occasion, moving back up the graph line.
However seductive as such a conclusion may seem, the graph lines are not causal relationships. They may be thought more of as sophisticated correlations. We cannot tell whether they are saying that the unhappy drink, and the unhappier they are the more they drink, or whether those who drink make themselves unhappy. Probably both effects are then in the curves.
Unfortunately, this is survey data, and it is never easy to identify causal relationships from cross-sectional data.
However, if this research strengthens anyone’s resolve to reduce their daily alcohol consumption to a modest (or even zero quantity) , the decision would be beneficial even if the conclusion cannot be statistically validated.
The Impact of Drinking Associates
Again the procedure is similar to Ryan and Easton (2009) where each person has a set of personal characteristics (vector) Z, with their drinking associates status indicated by (H1, H2, H3) which has Hx either 1 (associates have the characteristic) or 0.
If each’s person level of welfare on some dimension is given by Y as before, and using the same notation. then we estimate assume that
Y = a + b*Z + h1H1 + h2H2 + h3H3 + u,
Once the coefficients have been estimated the impact of heavy drinkers on the personal wellbeing of New Zealanders can be calculated. Here is an example for Satisfaction with Life.
The mean for satisfaction with life was 7.5 out of 10. (logit(.75) = 1.098).
The coefficients in the equation for H1, H2, H3 were – 0.048, -0.111, -0.353, and they apply to 15.4%, 7.5%, 5.5% of the population, giving a weighted average change of -.035.
It follows that were there no heavy drinking associates the mean of the scored satisfaction with life would 1.098 + 0.035 = 1.133 in logit form, or 0.756 (Since Probit(.756) = 1.133), or 0.85 percent higher.
This gives some credibility to Easton’s guestimate that associates reduced the quality of life by about 1 percent (or it shows that he was very lucky). Easton (1995) too that not all the dimensions of life experience a similar reduction and religious and spiritual values actual rise. ‘God our help in ages in past’?
Conclusion
The SHORE Survey has provided a rich data base. While its primary purpose is to evaluate the impact on the associates of heavy drinkers, it can also be used to investigate the impact of self-drinking and demographic characteristics on personal wellbeing. In two of the cases – the impact of heavy drinkers on others and impact of demographic characteristics on personal welfare, the conditions are probably such that we can say with some confidence that we are observing causal relationships. However in the case of the self-drinking the causality is likely to be in both directions and we are left with intriguing speculations we cannot verify.
Characteristics Associated with Happiness
This is the draft of a paper for 2009 Conference of the New Zealand Statistical Association, 3 September 2009. The presentation was a PowerPoint based on it. It is part of a study of the impact of drinking by associates undertaken by the Centre for Social and Health Outcomes, Research and Evaluation (SHORE), Massey University.
Authors: Ru Quan (Ryan) You and Brian Easton (with Sally Casswell and Taisia Huckle)
Keywords: Health; Statistics;
Introduction
This paper reports results from a survey whose primary concern was the impact of drinking on personal welfare. In order to investigate the impact of drinking, we have to control for demographics variables since they influence both drinking behaviour and general behaviour. In this paper we report on how those characteristics influence one particular indicator of welfare – satisfaction with life which, following economics practice, we sometimes abbreviate to ‘happiness’ (although psychologists warn they are not quite the same thing). In particular we control for other characteristics (and drinking) so that the interaction between variables is allowed for (for instance widows tend to be older than married, so the happiness of widows may reflect their age rather than their marital status).
The Survey
The general population survey was conducted using the SHORE/Whariki in-house Computer Assisted Telephone Interviewing System during 2008/9. The primary survey population included people aged 12 to 80 years living in private residential dwellings with a connected landline telephone in New Zealand, although a feasibility survey of a secondary random sample of residents with cell phone only access is currently being conducted.
The survey instrument, which was developed in collaboration with our Australian colleagues who are doing a parallel survey included measures of quality of life using the Personal Wellbeing Index and the EQ5-D. Respondents were asked about their drinking behaviour and the heavy drinkers in their lives. Questions on demographic variables were also included
Altogether there were 3068 responses with a 64 percent response rate.
The Focus of this Paper
While the primary purpose of the research project is to evaluate the impact of drinking of associates, it was necessary to control for demographic variables. The drinking behaviour is reported in a subsequent paper. This paper focuses on the relationship between the various personal characteristics and their responses to the satisfaction with life question. Time precludes reporting similar results for the other dimensions of personal well-being.
The satisfaction with life question was:
I am now going to ask you how satisfied you feel on a scale of Zero to 10.
Zero means you feel completely dissatisfied. 10 means you feel completely satisfied and the middle of the scale is 5 which means you feel neutral (i.e neither satisfied nor dissatisfied).
Thinking about your own life and personal circumstances, how satisfied are you with your life as a whole?
0 = Completely dissatisfied , 1, 2, 3, 4, 5= Neither satisfied nor dissatisfied, 6, 7, 8, 9, 10 = Completely satisfied.
(also scored Refused Don’t Read & Don’t know or Don’t Read)
Respondents generally scored a 7, 8 or 9.
Notice that this scale is over a finite interval. Consequently the reported variable was scaled to unity and transformed into a normal logit (say Y = LN(x/10/(1-x/10)) where x is the reported score.
The impact of the demographic variables (Z) was estimated with the equation
Y = a + b*Z + u,
Where u was a random variable with the usual properties of being normally distributed.
Results
All the results reported here are relative to a person who is a 50 year old female of Pakeha ethnicity, who is employed as a professional with a university degree, on an income of $60,000 p.a. and who does not drink. On average she would report a satisfaction with life score of 8.2. In the tables bold marks the base category.
An asterisk (*) indicates that the other status is significantly different from this at a 5 percent significance level. Note that two estimates may both be significantly different from the base, but not from each other.
Gender
If the base female is 8.2, the male with otherwise similar characteristics is 8.4. This is not statistically significantly different. It is common to find on average males are less happy than females, but this is because they have more unhappiness prone characteristics rather just their gender.
Life Satisfaction by Gender
Age
A quadratic fitted age against life dimension was statistically significantly with a minimum at 48 years old. Thus a person is happier when they are young, their happiness declines progressively as they get older, until they are about 50, and then increases again. Note that sample consists of those in their own homes (which may be important in interpreting older people’s life satisfaction, and who are not dead (which almost certainly is).
Life Satisfaction by Age
Ethnicity
The only ethnic group which is statistically different from the base (is Pakeha) was Asian. This is a cultural response; Asians always tend to score in the middle of survey scales, whereas in the case of happiness non-Asians tend to score more at the top. This is a reminder that there are cultural elements to the responses.
Note that the estimate does not tell us that, in actuality, Maori are as happy as Pakeha, only Maori with the same demographic characteristics are the same.
Life Satisfaction and Ethnicity
Marital Status
Marital status matters. The married are more satisfied with life on average. and this is statistically different from other the states. Women who are separated (or widowed or divorced) are statistically less happy than married women but much the same level of happiness applies to single women. Separated men are even less happy than women, but single men are about half way between married men and separated men in life satisfaction terms.
Life Satisfaction and Marital Status
Employment Status
It turns out that the only two employment situations which are statistically different from being employed full time are being sick or being a full time male parent.
Life Satisfaction and Employment Status
Education and Training
Other than men with a trade certificate, educational and vocational training has little direct effect on one’s satisfaction with life. It may have an indirect effect since marital status, employment status, occupation and income are all affected by qualifications.
Life Satisfaction and Education and Training
Occupation
Occupations divide into two categories. Occupations higher in the hierarchy – professions and their allies and skilled workers – are more satisfied with life than those lower in the occupational hierarchy — trades workers and labourers
Life Satisfaction and Occupation
Incomes
A statistically significant quadratic on log income gives the patters shown in the following table. Certainly one’s happiness rises with increased income, but the increase is surprisingly small. For instance quintupling income form $20,000 p.a. to $100,000 per year, increases happied by .2 units, whereas being sick relative to being employed reduces it by six times that and being single relative to married three times that. One might conclude it is happier to be married healthy and poor than living alone sick and ric – on average of course. .
Life Satisfaction and Income
Conclusions
1. The results are not markedly different from similar overseas studies.
2. There are New Zealand studies but they tend to ignore the interaction effects.
3. For small changes the impacts are additive so that other combinations of characteristics can be calculated providing the total change is not to large (where the log-normal effects become non-linear).
4. A similar analysis can be done for other dimensions of personal welfare.
5. This is preparation for the main purpose of the survey which is the impact of drinking on personal welfare.
Response by Recipient Of 2009 Economist Of the Year Award
3 September, 2009 at the NZIER AGM
Keywords: Miscellaneous;
I am deeply touched and honoured to be awarded this generous prize, and embarrassed by the even greater generosity of the accompanying citation.
Normally it would be a time to mention all those who have mentored and supported me over the years. It is a very long list and includes people in this room. Thankyou for being here. However I thought it appropriate on this occasion to mention but one mentor, without whom I would have never got here tonight. It is the NZ Institute of Economic Research.
The Institute was conceived by Professor Horace Belshaw as a source of independent public good research, recommended by the 1956 Royal Commission on Money and Banking, and established some 51 years ago. Initially it pursued its public good objectives by publishing research and by training recent graduates. I was one of the beneficiaries of this program and I thank Jim Andrews and Gert Lau – the first chairman and deputy-chairman of the Board of Trustees – and Conrad Blyth and Alan Catt – the first director and deputy-director – for giving me that opportunity and that training in applied economics. Perhaps I can also mention John Mowbray, who was later to give me the opportunity to direct the Institute. This evening shows, I hope, that their faith in me was justified.
And as an ex-director, may I, with the three other ex-directors in the room, wish the best to the new director Jean-Pierre de Raad and his team in the pursuit of the Institute’s objectives? I hope they have as much fun as I did – but less stress.
The Institute has extended beyond its initial activities of publishing research relevant to the public debate and training young economists including nowadays taking on summer interns, while its education activities now extend to information on its website. It tells a lot about person as to where he or she first looks in an annual report. I went to page seven where the Institute lists it Public Good Work. Even those who focus on the accounts will observe that they include a line item of Public Good Costs, in effect the part of the Institute surplus which is devoted to public good activities
The award I have just received is a further contribution by the Institute to promoting the public good in economics. I know how hard it is to find resources to promote it. And yet we must – my current program is writing a history of New Zealand from an economist’s perspective and analysing the macroeconomics of the crisis we face. I promise that as respect for the award and for the objectives on the Institute I shall invest the prize in further research for the public good. I thank the Institute for the contribution.
I shall cherish the citation forever.
2009 Nzier Economics Award
Citation of Award made on 3 September, 2009 at the NZIER AGM
Keywords: Miscellaneous;
The NZIER Economic Award’s Operating Guidelines enjoin the Awarding Panel to “look for outstanding contributions to the advancement of economics and its applications in New Zealand”. To qualify for the Award, a contribution “must advance economic matters of direct relevance to New Zealand”, and must be “likely to be of long term lasting importance to New Zealand”.
The recipient of the 2009 Award has made outstanding contributions, amply meeting these requirements, in the fields of the economic history of New Zealand, the collection and evaluation of long-run economic statistics relating to New Zealand, and the stimulation and informing of debate about economic questions affecting New Zealand among the interested public.
Our knowledge of the economic history of New Zealand would have been considerably poorer without the recipient’s work on social policy and the welfare state in New Zealand, and on the impacts of world economic events on New Zealand’s economy, international trade and capital flows. His written works, under such attention-demanding titles as The Commercialisation of New Zealand, In Stormy Seas: The Post-war New Zealand Economy, The Whimpering of the State: Policy after MMP, The Nationbuilders, and Globalisation and the Wealth of Nations have kept the lessons of economic history for New Zealand in the minds of decision-makers and policy-crafters. His focus on those lessons has no doubt been of value in his work as a member of influential economic policy review panels, including the New Zealand Growth and Innovation Advisory Board.
Reliable conclusions cannot be drawn from history, at least in economics, without a deep and accurate understanding of the statistics available from the periods under study, and of the quirks and unpredictable figures which they sometimes contain. The Award’s recipient is a Chartered Statistician, and a Fellow of the Royal Statistical Society. His knowledge of significant economic statistics concerning the New Zealand economy is exceptional, and is widely admired by other researchers, not least because of his unfailing willingness to explore those statistics and discuss them.
The “advancement of economics and its applications in New Zealand” requires decisions to be made, often in a political context. If politics is indeed the art of the possible, then the boundaries of what is politically possible, let alone desirable, will be widened if the interested and influential public has an adequate understanding of the reasons why certain actions might be considered by policymakers, and of what the consequences of those actions might be, or might be hoped to be. The Award’s recipient has been an outstanding economic journalist, and a participant in public economic debates, bringing unusually broad perspectives to issues of lasting importance, for over 30 years. The public of New Zealand has benefited greatly from his tireless work, and from the exceptional clarity of his writing. He has indeed “advanced the study and understanding of economic matters directly or indirectly affecting New Zealand”, as the Award seeks to recognise and promote.
The NZIER Economics Award for 2009 is accordingly given to Dr Brian Easton
Less Equal Than Others
When I was working on the problems of inequality and poverty in the 1970s, my colleagues joked I was a social economist, even if they spent more time in bars, for social economics was seen as peripheral to the centre of economics. Never mind that it covers about three-quarters of Government spending.
But my colleagues’ jesting also reflected a discomfort with the issues that social economics raises. Homo economicus is an isolated being, whereas humans (including even economists who don’t go to bars) are intensely social. As economics spread its interests, it needed to broaden its account of how humans behave.
Recent research on inequality has increasingly confirmed this challenge. Richard Wilkinson’s book The Impact of Inequality notes that societies with great inequality are more prone to poor health, social hostility and crime. The cause seems to be stress, because those lower in social rankings suffer from the comparisons (the stress of keeping up with the Joneses) whereas those at the top are keen to show off. In a more equal society, the rankings are not as clear, conspicuous consumption is less effective at driving spending, and there is less stress, better health, less crime, less hostility and more social cohesion.
My initial research into recent trends in New Zealand society suggested economic inequality diminished after World War II, probably because we had full employment and as a society we cared about fairness.
However, from the mid-1980s economic inequality increased sharply, caused mainly by a tax regime more favourable to the rich and by lower real (inflation-adjusted) welfare benefits. More recently, the inequality has increased slowly. The more-market economy seems to be favouring skilled workers and senior managers, while we do little to even up their gains. (Not maintaining the wage relativity for benefits has not helped.)
Some evidence suggests the turmoil of the late 1980s increased the mortality rates of the poor. A scientist might hypothesise that recent increases in violent crimes were a result of the rising inequality, but would do so cautiously.
A second source of discomfort arises because the issue of equity gives policy advocates some tricky issues to grapple with. The giant of distributional economics, University of Oxford’s Tony Atkinson (I’ll break a column rule and mention he was knighted; social economics has a higher status elsewhere), reminds us that economics is a moral science. “Many of the ambiguities and disagreements about economic policy stem not from differing views about how the economy works but from differing values.”
The mantra “cut taxes for the rich” looks less attractive if one has to say “cut taxes for the rich and increase inequality”. Better to avoid it, especially in the form “cut taxes for the rich, increase inequality and imprison the criminals”.
So assessing social inequality involves deep philosophical issues that add to many of today’s economists’ discomfort because, with a few exceptions, they are not conversant with philosophy, despite some of the profession’s greats, such as John Stuart Mill and Amartya Sen, having contributed to it.
Which makes Dunedin student Sophie Elliott’s essay “Why Measure Inequality? A Discussion of the Concept of Inequality” all the more remarkable. It was published on the Oxonomics website (oxonomics.typepad.com) shortly before her murderer was convicted. Written as an University of Otago term essay when she was only 21 – a baby in economic terms – it was described by her teachers as “easily the best essay on equity and equality either of us had ever read”. Atkinson wrote: “Sophie’s essay is a testament to the way in which clear thinking and hard analysis can contribute to advancing our understanding of these crucial issues.”
We cannot measure the loss to Elliott’s family and friends, and to those she would have made had she the future she deserved. She is also a great loss to the economics profession.
Another Think Coming
Unfortunately, there’s no magic bus to accelerate us to Australian levels of income.
Listener: 15 August, 2009.
Keywords: Growth & Innovation;
Sometime in the 1960s, New Zealand economic growth went through a “climacteric”, a point when the growth rate started slowing down. Think of it like driving your car up a hill. Once it starts running out of momentum from the run-up, it decelerates.
The climacteric probably occurred when the sheep-based economy that had driven New Zealand for a hundred years ran out of puff as synthetics took over from wool. But more research needs to be done to help us understand the details.
Now National and Act have agreed to set a “concrete goal of closing the income gap with Australia by 2025”, 16 years away. The historical record shows the divergence from Australia began in 1966, 43 years ago. So they expect we will catch up two-and-a-half times faster than we got behind. Yeah, right.
Some people think they have the answers, but only because they don’t bother with research. The facts present them with too much of a challenge.
When politicians claim their policies will accelerate economic growth, how do they know and, more important, by how much? Take some contentious public policy issue – say changing the Resource Management Act (RMA). Advocates of the change say this will enhance New Zealand’s economic growth prospects. It would be helpful if they were to specify the amount.
I cannot think of any rigorous scientific means of calculating how much. Proponents and opponents of such reforms typically depend on a handful of anecdotes linked by faith. One approach is the Delphic technique whereby a panel is asked to guess.
Recall the political advertisement that listed a number of policies with a claim of how much each would accelerate the economic growth rate? There is no way the numbers could have come from a scientific forecast; perhaps a group of advertising executives made them up to suit the client.
So, yes, the composition of the panel counts. One consisting of businesspeople guessing the impact of the RMA changes will have quite a different forecast to one consisting of, say, greenies.
This shows how critical the Government’s proposed “2025 Commission” (or whatever it to be called) will be. It’s purpose will be to tell the Government how to attain income parity with Australia by that year. By choosing the right members, the Government should be able to get the answer it wants.
However, the commission faces a number of sobering reports that have tried to work out how much productivity could be accelerated. One of my favourites – I was not involved – is nicknamed the “magic bus”, referring to the song by the Who, which goes: “I want it, I want it – you can’t have it!”
One of its many merits is that it goes as far back in time as the official data allows – before the climacteric of the 1960s. Far too many other productivity studies use too short a time frame, leaving out or ignoring the periods of poor performance that contradict the efficacy of the policies being explicitly or implicitly advocated.
It is going to be a real challenge for the 2025 Commission to meet the Government’s requirements and maintain high standards of analytic rigour.
Finance Minister Bill English has given the commission an out by saying he wants more “freethinking”. No, he was not saying the country is so broke it can’t afford to pay Treasury officials. Rather he wants independent, creative and – may I surmise – rigorous thinking.
That means any member of the commission – indeed the entire commission – is being invited to say there is little we can do to attain income parity with Australia by 2025. That is the research evidence, and is almost certainly what any freethinker will conclude.
New Zealand and the European Union Edited by Matthew Gibbons.
Pearson Education New Zealand. 163pp. $53. ISBN 978-0-7339-9383-1.
Review for New Zealand Journal of History, 43, 2. (2009) p.226-227.
Keywords: Globalisation & Trade; Political Economy & History;
New Zealanders have difficulties with the notion of Europe, despite the vast majority being of some European descent and the culture primarily deriving from Europe albeit with Pacific and, latterly, Asian modifications. (A further substantial contribution is from North American, itself largely European derived.) It is partly the problem of a fish coming to terms with water, but it is also because the locus of New Zealand’s Europe is the British Isles which is perhaps the least European part of Europe. So rather than see the European Union as a cultural, economic, political and social idea – a grand conception to resolve a millennium and more of warfare and cultural conflict – New Zealanders tend to see it as an economic entity only, rather as the British do.
As it happens, a crucial element of the mechanism for the resolution of aeons of conflict has been economic integration. The first institution in the development of the EU was the European Coal and Steel Community which aimed to so integrate France and Germany’s industries so that they could never go to war again – a view consistent with the notion that markets resolves certain sorts of conflicts and trading partners dont (or cant) war. Then there was the European Economic Community; many New Zealanders continued to use the term long after it became obsolete over a quarter of century ago. It would be difficult to justify the EU’s anthem – Beethoven’s Ode to Joy – in terms of a customs union.
It is perhaps, then, not surprising that the ambitious title New Zealand and the European Union should be of a book largely about New Zealand’s economic relations with the EU. Five of the six contributions on that topic and only one – the fifth chapter – is on ‘people to people and political links’. That chapter is superficial and disappointing, drifting into a discussion on marketing of tourism, but neglecting many cultural aspects. It does not even mention that New Zealanders can speak more European languages (other than English) in total than they can speak Maori.
After an introduction by Matthew Gibbons, Carol Neill provides a detailed statistical account of New Zealand’s pastoral exports to the EU-15 (the membership before the enlargements since 2005) followed by Gibbons’ overall review of the pattern of merchandise trade in the second chapter. Chapter three and four, also by Gibbons, cover expert opinions and exporting to the new EU countries. To one’s amusement, Gibbons finds that the forecasts of ‘experts’ reported in the earlier Frank Holmes and Clive Pearson Meeting the European Challenge, proved to be not very successful. (The new book is much more satisfactory than its 1991 predecessor, which was widely greeted with disappointment.)
The final chapter by Caroline Saunders is about New Zealand’s access to European markets for its agricultural products. This is a matter of very great importance, but it is not only the access to European markets. Europe has been a major dumper into third markets of the surpluses arising from its agricultural protection and subsidisation. In the 1950s Europe was a net importer of dairy products; today its dairy exports are at a similar order of magnitude to New Zealand’s, thereby driving down our returns. Saunders reports that the EU promises to eliminate subsidised exports by 2013.
Neither individually nor collectively do the chapters address what seems to me to be the central problem of trade relations between the two entities. It is true that the book points out the fall in overall share from about 80 percent of all merchandise exports going to the current members of the EU in 1960 to about 20 percent today. Of course there is pride in the diversification to new markets and new products which the falling share implies and it is easy to explain it in terms of British decline and protectionism. But it is generally accepted that New Zealand’s exports have not grown fast enough, so we could have had the diversification together with more success in European markets. Why did we not? It is even more surprising that this decline has not been a matter of national angst. After all, the EU is a slightly bigger economy than the US by output (though its larger population means it has a lower per capital income).
Any systematic analysis needs to look at shares by export product for all the world’s economies. There is a methodological issue here. Today no bilateral trading arrangement (or indeed a cultural or diplomatic one) is so strong that it can be evaluated without reference to other parties – to the rest of the world. I am not even sure that was true when New Zealand was a colony of Britain.
There are of course, particularities which explain some of the decline (Neill nicely sets out the pressure on wool from synthetics), but what must be feared is that New Zealand lost the huge European market because it could not produce the sophisticated products that Europe wanted, nor cope with its complex and heterogeneous markets. Such a gloomy conclusion would suggest that the previous government’s Economic Transformation Strategy would have fallen foul of our lack of the necessary skills (and even energy and innovation). More cheerfully Gibbons reports European growth in the share of tourists, our single biggest exchange earner. It is also possible we do well in other ‘invisibles’ to Europe; unfortunately the incompleteness of the data makes it difficult to be sure.
The failure to pursue – not just in this book, but generally – the big economic question of why we have not been more successful exporting to Europe is all the more surprising, given New Zealand’s obsession with the EU as an economic entity. Because of our affections for our cultural roots and the commonalities of our visions in the world order (in addition to the need to have an international counterbalance to the US) a New Zealander might hope for an ongoing and constructive relation with the EU. But it has to be multidimensional and, hopefully, it wont be based on the single (and declining) dimension of trade (and investment which hardly comes into the study).
This, then, is a monograph rather than a book. It contains much useful (some original) material on economic relations which will contribute to a comprehensive study of New Zealand and the European Union. But it is a long way from the promise in its title.
New Insights into the Experienced Generations
<>Speech to Launch the Report “New Insights into the Experienced Generation” for the Hope Foundation, 30 July 2009 <> <>Keywords: Social Policy; Statistics; <> <>This report represents a further step to our understanding of ourselves as a society. Only a few decades ago we treated all New Zealanders as the same, with the implicit assumption that they were moderately affluent white men, whose age did not matter because they all followed the All Blacks. Slowly and increasingly we have come to realise that ours is a community of diversity. It is no longer unnoticed that half the population lacks a Y chromosome, that brown skin does not only mean a good sun tan nor does yellow necessarily mean jaundice, that different generations differ in a variety of ways, and that there were rich and poor as well as the moderately affluent. <> <>This report shows that so complex is New Zealand society, even those categories are not fine enough. Once we treated the half a million seniors as a single entity. The report shows there are groupings within them. To a lesser or greater degree an individual may belong to more than one group – any statistical technique has to draw lines to categorise – but the report underlines that not all the elderly are the same. <> <>Our more subtle political commentators knew this. There are those who claim to speak for all the elderly. On certain matters – say the level of New Zealand Superannuation – the vast majority of the over 65s have a common interest. But the political polls show, and the political parties know, that on many issues the older generations are as divided as the rest of us; there can be no one spokesperson who represents them all. <> <>What the Nielsen survey has done is identify five subgroups of roughly equal size. These categories reflect attitudinal differences rather than the standard demographic and financial differences which an economist uses. <> <>Four of the five groups have much the same age profile – although Kiwi Battlers tend to be a little older. <> <>Four of the five groups have much the same income – the exception is Affluent Investors, whose income tend to be about 50 percent higher than those in the other four groups. Even the groups’ average investments – excluding pension entitlements and housing – are more together than one might expect. Home ownership is clustered too: 83 percent of the Kiwi Battlers live in their own homes and so do 93 percent of the Affluent Investors. <> <>Again, excepting the Affluent Investors, the seniors experience similar financial pressures, Typically just over about 40 percent of each of the four groups are finding their current financial situation a struggle, either having no spare money and feeling like they are going backwards, or they typically manage to meet expenses but have nothing over. Under 10 percent – again the affluent investors excepted – have few financial concerns. The figures are probably not very different for the rest of the population. <> <>I am not surprised at this clustering of the financial variables of four-fifth of the elderly. A few years ago I was working on health and the financial characteristics of the population, and we trialed our statistical analysis on the over 65s. We, unexpectedly, found no relationship between health and income for those in the bottom four quintiles, although those with top incomes were healthier. We concluded that the incomes of the majority of the majority of the elderly were so clustered together on the income dimension that it was not good predictors of their behaviour. <> <>Affluent investors aside – as in our study, they are almost exactly a fifth – this study separates the remainder mainly by non-economic variables. At which point an economist should perhaps go silent, except I am also a social statistician. So what does the survey tell us? <> <>To my surprise, the four groups are not divided by two dimensions, but by three. <> <>The first dimension on which they are all divided into two groups is health. The behaviour of Active and Awares and the Paradoxical Pensioners conform more to the recommendations of health professionals than do Traditionalists and Kiwi Battlers. <> <>It is the environment which distinguishes the Actives from the Paradoxical. The Actives and Aware are pro-Green while the Paradoxical Pensioners think the threats to the environment are exaggerated. <> <>The other two groups are both less concerned with environmental pressures. What seems to separate them is that the Traditionalists are more likely to have an active social life, while the Kiwi Battlers appear more isolated – which may not be surprising given that they are more likely to be living alone, are older and are poorer. Even so they, and all the other groups, are likely to make charitable donations or do voluntary work. It is possible that Traditionalists evolve into Kiwi Battlers as they get older. <> <>Affluent Investors fit into this pattern as follows. Their health activities are similar to the Actives and Paradoxical and they seem socially integrated, but the report does not tell us about their environmental concerns. <> <>In summary, the divisions reported here are those you might expect if you looked at most age groups in our society. Just as New Zealanders are diverse as a whole, so are the seniors. They have particular concerns, of course – the level of New Zealand Superannuation, aging and perhaps becoming isolated. But on many dimensions they are much like their children and grand children. <> <>If there is any evident social problem this survey points to (other than like many New Zealanders not all seniors have good health practices) it is the Battlers – an eighth of a million of them. As well as being isolated and lonely, nearly two thirds of them say they are not sure who they can trust and over half think things are changing too fast. They are not poor by the standards of New Zealand’s families with children, but they may well be poorer in spirit. <> <>It may be a little comfort to the Minister of Finance that money is unlikely to be the solution to their social isolation. All New Zealanders may need to make an effort to interact with the elderly a bit more, although I cant help thinking that the more convivial retired elderly may also have a major role here. <> <>Like all good research, the survey answers a few questions and raises more. We know a lot more about the over 65s – in a particular they are a diverse lot. The Hope Foundation may want to do more investigation on those who are socially isolated and lonely.
Hollow Auckland
There are at least three good reasons that the restructuring of our largest city will fail.
Listener: 25 July, 2009.
Keywords: Governance; Growth & Innovation;
Author Bruce Jesson once said New Zealand was a “hollow society”. He meant that although we had a central government and individuals, the social institutions between them lacked independence. The government preceded most settlers, so their social organisations were not able to evolve organically but depended on central government.
There are some exceptions. Iwi were here before Governor Hobson, and have survived as organic institutions, despite having had their resource base stripped away by the settlers. Treaty settlements have recapitalised them, leaving them increasingly strong players in New Zealand social and political life.
Business was dependent on the central government up to the 1980s. The Rogernomics revolution removed state protection and intervention, leaving business largely to fend for itself. Its success has given it a robust independence, which it uses in the political arena to further its objectives.
Apart from a few exceptions, most of our social institutions are still very dependent on central government, not least because they have few independent sources of funding. As a consequence, the political structure of New Zealand is immature, without the checks and balances that come with comprehensive independent social organisations.
This is well illustrated by local government. Central government often treats local authorities with contempt – or at least doesn’t bother with the niceties of consultation. It needs local bodies to do the mundane roading and drains, while you want them to reflect your community, provide wider services and protect you from the excesses of Wellington.
Earlier this year the Government withdrew a local authority petrol tax without consultation; shortly after that it suspended democracy in Auckland overnight. It is now imposing its will on the governance of Auckland without significant consultation. It does not even have the fig-leaf of the royal commission’s soundings to cover it, since its proposals barely connect with the commission’s. Whatever happens, Super-Auckland will not be an organic body of its citizens. (And it will be underfunded, which, no doubt, will result in public assets being privatised.)
One can understand the Auckland business community’s impatience with the existing governance of the city. Take roading. Although the main moan is that the local bodies have been unable to come up with a decent transport network for commuters, central government is also to blame, given the funding problems. Auckland business needs a road network for its trucking – public transport is no solution here – and is fed up with the ongoing failure of the governance to meet its reasonable demands.
With business now one of the powerful organisations in the hollow society, it is no surprise that the structure of Super-Auckland reflects business preferences, especially its strong centre and the weak role of citizens. I don’t recognise any known robust political form in the proposed structure. The closest may be a business, but frankly that is not a very good fit, either. The proposal is an ill-thought-through compromise.
My guess is that ultimately the proposed governance structure will fail for at least three reasons. First, its implementation is too hurried, and there will be unnecessary – and even catastrophic – mistakes. Second, without a proper local mandate, the citizens of Auckland will find the new arrangement alien and will eventually revolt, especially as the mistakes become evident.
Third, central government is setting up a powerful political entity that will ultimate challenge it. Compared with the central government, there appears to be no comparable local body in size and scope anywhere else in the world – capital cities excluded – and the Mayor of Super-Auckland may be said to be elected by more people than the Prime Minister. Central government will limit Auckland’s independence by controlling its funding, and – as Jesson would say – then what?
I am reminded of the health sector re-dis-organisation of the early 1990s. Badly designed, too hurried and imposed without any popular mandate, it damaged the provision of healthcare for the rest of the decade, not to mention prospects of the National Government that tried to implement it. Yet this Government seems determined to ignore the lesson.
It has been said those who don’t learn from history are condemned to repeat their mistakes; the first time is tragedy, the second time farce. And it will be a melancholy one in the case of Super-Auckland.
Was Paul Right?
<>Sea of Faith Conference: 18 July, 2009. Auckland <> <>Paul, Timothy Money and the Economy discusses the same biblical text, but in terms as to what it reveals about Paul’s views of the economy. <> <>Keywords: History of Ideas, Methodology & Philosophy; <> <>I thought good context for today’s paper would be a biblical text – verses 6 to 10 of chapter 6 of the first pastoral epistle from Paul to Timothy <> <>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 society, a means to an end. The evil arises when it becomes an end in itself. <> <>Today’s seminar is about responding to the recession. I want to do so in the spirit of the Pauline epistle by suggesting that it is a good time for us to ask, what is the purpose of the economy? We are going to have a lot of people telling you what we should or should not do but they will fudge as to what is the point of it all, ignoring the purpose and focusing on the technical. Instead let’s call upon your expertise – the informed reflection of those concerned with spiritual values – to try to provide some guidance on where we should be going. <> <>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 than we currently have. <> <>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 the response to the various things the individuals 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. <> <>(In most of this paper I shall refer to income more often than consumption, although it is consumption that gives utility. There is a technical reason for this; what is not consumed is saved, and generally economists treat savings as deferred consumption, and that generates utility too. So it turns out that income is a better measure of utility than consumption.) <> <>I dont have time to go through the caveats of this analysis – economists have many caveats – but ultimately they conclude 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 directly measure happiness by asking people how happy they are. I am going to report on some New Zealand research from Massey University’s Centre for Social and Health Outcomes Research and Evaluation. The 3000 plus person survey was not directly concerned with the issues I am about to discuss. Its pioneering focus was on the impact of alcohol consumption on the welfare of the associates of drinkers. But we needed to ask whether the associates have less satisfaction with their life – are unhappier – than those who do not have drinkers among their family, friends and colleagues after we allow for the individual’s economic and social characteristics (so that we can ensure that they do not contaminate our conclusions). It is these effects which I shall now report. <> <>First consider gender. It turns out that women say they are happier than men, all other things we can measure being equal. (As it happens there is not a statistical difference but the finding is consistent with international surveys.) <> <>Second, we found the internationally characteristic pattern by age. The young are happier, but as they grow older, they are 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 late teenage levels. <> <>On the whole of ethnicity does not matter. Our Pasifika people are about as happy as Pakeha, Maori are slightly less happy, but not statistically so. (That is, after the differences in the social characteristics are controlled for – and of course these differences are large.) However, Asians report themselves as less happy. The Asians in our research team tell us this is a cultural response; apparently Asians always tend to score in the middle of survey scales, whereas in the case of happiness non-Asians tend to score more at the top. <> <>This is a reminder that there are cultural elements to the responses. As far as we know this does not undermine the findings I am reporting since we are controlling for ethnic differences. However it not impossible that the male-female difference, say, is also ‘cultural’, although it not clear how one would test this objectively. <> <>Marital status matters. One of the strongest effects from our survey and from the international literature is that the divorced and single are less satisfied with their lives than the married are. Do remember 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. Perhaps the sample is not large enough to capture with statistical certainty the slightly higher happiness of the better educated. It is also possible that education opens up opportunities for other things – marriage, employment and income – which do enhance happiness (but whose effect is measured directly). But we also need to recall the conclusion of John Stuart Mill, Bentham’s godson and intellectual successor, who said that ‘it is better to be a human dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied’. <> <>There are two economic variables in the data set. As far as employment status is concerned, the sick and unemployed are markedly 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. <> <>Utilitarian analysis would predict that the higher the income the happier one is. The survey broadly confirms that pattern but the gains in happiness are surprisingly small compared to the variables I have just described. For instance a person on $15,000 a year with a job is likely to be happier than an unemployed 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 data I have been describing is cross-sectional; a snapshot of what individuals reported to us last year. As it happens the American government – mindful that their declaration of independence says a fundamental right is to pursue happiness – have been surveying Americans for the last sixty odd years. In that time their real incomes have tripled on average. But the average level of happiness has hardly changed (albeit it fluctuates a little from year to year, and the relative happiness of some subgroups has changed). <> <>We get a similar picture of average level of happiness by country. We might expect countries with higher average incomes (say measured by National Income per capita) to have higher average happiness. Among rich countries – New Zealand and those like us – that is not true. There are inter-country differences in average happiness but they are not explained by differences in average real incomes. The rule seems to be rich countries are all about equally happy, with particularities which cause differences which are nothing to do with income <> <>This is a bit of a setback for economics. For two hundred years it has assumed that ‘more is better’, but the evidence is that higher incomes does 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 an economist to realise that phenomena other than income ones, such as marital status and employment are far more important than income is when it comes to determining life satisfaction. <> <>Inevitably economists dispute what this means. This is not a central debate within the profession, although more that a handful of economists observe there is an anomaly and think it should be addressed. (Many scientific disciplines have such anomalies for long periods.) Rather than go through the debate, let me give you my explanation. <> <>While, as I mentioned earlier, average happiness in rich economies does not rise as the economy gets richer, that is not true for those economies which are poorer – say below two-thirds of the New Zealander’s average income. Below that threshold there is a strong correlation between happiness and income. As income and consumption rise, people in economies below the threshold say they are happier on average. <> <>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. However at a certain point one reaches a threshold and 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 seems to be among those that are now comfortably above the threshold. <> <>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 the notion of a ‘hierarchy of needs’ as first proposed by the American (Jewish) psychologist Abraham Maslow. <> <>It is a framework widely used by other social-science disciplines, although it is a little too timeless, ignoring longevity, perhaps assuming it does not change much. In fact there appears to be a correlation between income and health and life expectation. I leave that for another venue. There is a story about employment, but that too will have to be left for another day. Today I am going to just explore the implications of the hierarchy of needs for income. <> <>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. What seems to have happened is that in the rich world the economy now does that pretty successfully. They are above the first step of the hierarchy of needs, although 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 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. Criminology is quite a separate discipline. <> <>Having said that, I should mention a recent development, which I am cautious about; it is plausible but it does not have the same rich data base that the happiness research depends upon. What, Richard Wilkinson in his The Impact of Inequality, among others, argues is that the degree of social inequality in a society affects the health and welfare of the society. <> <>Using data bases from country comparisons, from the states of America, and from comparisons of cities it appears that the higher 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 the rise in income equality in the late 1980s and early 1990s triggered the phenomenon increasing demand for law and order. <> <>Apparently the higher the degree of social inequality the harder it is to secure the second step on the hierarchy of safety needs. I shall return to this finding shortly. <> <>The next step up – it’s the middle step of the hierarchy – is love, affection and belonging. Perhaps 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 enable the time and reduce the stress which makes effective love, affection and belonging possible. <> <>The second to top step in the 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 average incomes do not increase happiness, that any point in time those with higher incomes are happier. This suggests that one component of happiness is your income relative to others, and that perhaps once some threshold is past – the threshold implied by Maslow’s first step of meeting physiological needs – 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. In response we attribute to them a wisdom, which was not evident before they became famous. As Tevye noted that 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,/ like a Solomon the Wise/ … And it won’t make one bit of difference if I answer right or wrong./ when you’re rich, they think you really know’. 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. 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 in some way 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. There is Hume’s problem that an is cannot convert ‘is’ into an ‘ought’ – how the economy works does not tell us about what is ethical or good and bad. Economists partly get around this by the notion of utility as a measure of worth, yet it may be an increasingly flawed theory. Even were it not, the economist’s argument that one’s income reflects one’s value to society proves circular. It says high incomes reflect contribution to society because we say so. That teachers are paid less than bankers does not mean they are less socially valuable. <> <>Obviously in some cases the income is associated with the social contribution. Let me 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. For instance 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. <> <>In summary, we should be very cautious about assuming that high income or great wealth reflect social merit, and be unwise to assume that such people are automatically worthy of public esteem. <> <>Those who desire public esteem from their wealth have two not incompatible strategies which I shall call demonstration and contribution. After all how can one obtain the public esteem from one’s wealth unless it is demonstrated? Hence the importance of ‘Rich Lists’ – showing off. <> <>Another means is 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 bigger ones, but 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. But jewellery, designer clothes, expensive parties and so on are all positional goods – perhaps even that my mobile phone is cleverer, or at least more expensive, than yours. <> <>The difficulty with this positional goods strategy is that higher incomes and technological innovation undermine them. 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 home at a more remote location, or to a third home, or a yacht. <> <>Positional goods are not confined to the very rich. I was recently looking at housing at a more middling part of the market. I was struck by how those homes have been constructed to be larger in recent years, but usually 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?’ <> <>We are beginning to get here modern day version of Paul’s love of money. It may not be able to purchase love, but it seems to be able to purchase social esteem. This seeking of public esteem by way of display – of positional goods – is one of the drivers of economic growth. It gives temporary additional happiness – only a little – but it is continually undermined by economic growth raising all incomes and so enabling those who are lower ranked to acquire the positional goods too. Thus once the basic needs are met, there is no general rise in happiness over time. <> <>Just to complete the story, another way of adding to one’s self esteem is by using the income and wealth to contribute to society. I certainly dont want to play down the genuine charitable aims of the rich, especially by those who are a little embarrassed by their wealth. But charity was once more circumspect. Is it my memory, or is conspicuous consumption more common today than, say, before 1984? <> <>Earning public esteem by conspicuous consumption (even if it is on borrowed money) drives increasing consumption without increasing average happiness, because the public rankings remain the same on average. Thus the desire for economic growth does little to raise actual welfare (while depleting fixed resources and degrading the environment). <> <>Perhaps the most obscene example of this ranking by wealth/income was the way that the money markets were organised to give bonuses to those in the financial sector which involved sums out of line with any realistic assessment of what the recipients were contributing. Hardly any of those in the scramble for the vast sums asked whether they were worth it in absolute terms. What was important was their ranking in the hierarchy together with the certainty that they ranked well above the ordinary public. <> <>So money became the ultimate positional good, with the love of it as the root of the evil. It led to the financial boom and now the bust of the Global Financial Crisis. <> <>We can go all to manner of controls to try to prevent this happening again, but it 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. going back to the traditional virtues. Accepting this means abandoning public ranking based only on crude economic values. It requires more subtle understanding of the human condition, and one in which there is not 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 was. <> <>We are increasingly moving outside my professions competence; perhaps it is the time to pass these matters to the floor. Except that I have yet to explain the top of Maslow’s hierarchy of needs He argued that 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. This audience is far more competent than I to discuss such issue. So perhaps I shall leave the last word to Paul. 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. <> <>Footnote: I was asked whether there was a resolution in terms a better measure of output than GDP. All the proposed measures assume more means better, and miss the conclusion of the end of a variety of ways one should be given self respect, and can attain self-actualisation. . <> <>Go to top
Equity and the Tax System
Tax, Saving Welfare and Retirement: Have We Lost our Way? Symposium, Retirement Policy and Research Centre, University of Auckland, 16 July, 2009
<> <>Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Maynard Keynes <> <>Keywords: Distributional Economics; History of Ideas, Methodology & Philosophy; Regulation & Taxation; Social Policy; <> <>I was invited to give this paper because a few months ago I wrote a Listener column (4 April 2009) in which I pointed that a recent Wellington tax symposium had hardly discussed equity. Contributors advocated tax reform – as they have done for some 25 years – and their apparently sensible proposals have been ignored. When one has been advocating change for a quarter of a century and made little progress, it is time to step back and wonder why. I suggested it was because the reformers were not paying attention to equity, but their political masters had to. <> <>The Wellington Seminar is not alone. In May the government announced a tax working group to advise them. It would be fair to say that not a single one of the group (perhaps aside from its officials) has any expertise in equity issues. The IRD recently put a list of six factors contributing to a good tax system. The last was ‘A good tax system is characterised by high levels of voluntary compliance and is thus perceived as broadly fair’, a grudging acknowledgement that equity (albeit an odd notion of and justification for equity) might be taken into consideration but it was not a high priority. <> <>Yet, equity – or at least self interest – is never far from any discussion on taxation. Politicians do not over-rule reformers out of cussedness, but because equity is an important component of the tax system. So how did economics get into a muddle of ignoring equity considerations? (I leave how politics did, to another venue.) <> <>It is useful to go back to Arthur Pigou’s magisterial Economics of Welfare published in 1920, which derived many welfare rules, from the assumption that an additional dollar was less valuable to a rich man than a poor man. But, said those who came after him, how do we know that to be true; what is the scientific basis for comparing the standard of living of different people? And if we have no scientific basis to make comparisons, surely economists are no better placed than others, to make comparisons of well being. <> <>Instead economists tried to build welfare economics around another objective which seemed to be much less contentious. Pareto Efficiency, named after the Italian economist Vilfredo Pareto, says that economic situation One is superior to economic situation Two if somebody is better off, and nobody is worse off in situation One compared to situation Two. <> <>It is a strong requirement, because it is hard to think of practical policies that do not make someone worse of. There is even an economist’s principle which states this. Rabin’s Law is that all existing policies are Pareto Efficient, that is if you change the policy it will make someone worse off. Perhaps there are a few exceptions, following the introduction of a new technology or a new situation, but they are very rare. If we taught equity properly in economics we would not only teach Rabin’s Law, but as a matter of course we would assess who were better off and who were worse off when policy changed. <> <> <>An extension of the Pareto criteria is that the winners in a policy change from situation Two to situation One could compensate the losers so they were no worse off. When they applied the compensated criteria economists found that many – but not all – of the Pigou welfare rules gave Pareto optimal with compensation. <> <>However there were many other areas of policy where this new approach did not work. Yet economists wanted to give, or were asked for policy advice. So they sought to relax the rigorous requirement of Pareto Efficiency with compensation. One option was that after the policy shift from situation Two to situation One there was still a sort of gain, even though those worse off were not compensated. I think what the proponents had in mind was that it was someone else’s job to make the interpersonal comparisons and decide whether the improvements in the better-offs more than compensated for the losses of the worse-offs <> <>Where compensation need not happen, the notion is sometimes called ‘efficiency’, although I should warn that there are so many meanings of ‘efficiency’ floating around in economics that it is a very treacherous term. The basic idea of the various notions is getting more output for a given set of inputs (or resources). Is so increasing efficiency seems to be a reasonable objective. Few would advocate waste as a social objective. <> <>This narrow definition of efficiency is the underlying notion of those who advocate tax changes to increase GDP. The evidence is equivocal as to whether, within practical ranges, the average level of a tax system affects the level of output. That is a (very heated) debate for another day. To do it today would be to avoid facing up to equity, which might be an explanation as to why the debate is so heated. (It is evident from the studies that the winners will gain much more than the GDP increase, so others will be worse off. Even if there was a gain it would not be a Pareto efficient one.) <> <>(I also need to warn you that while we treat GDP as a simple measure of output, its level depends upon the relative prices in the system, and they can alter the level of GDP. This is a bit technical – those of you who puzzled over the Scitovsky criteria, in which welfare loci crossed, were struggling with this problem. I mention it as a warning; often underpinning simple economics are some very complex and subtle goings-on.) <> <>I have seen the GDP efficiency criteria – summarised as ‘a dollar is a dollar’ – called ‘Hume’s Law’. This is not a general term. David Hume is more famous for the insight that ‘is’ and ‘ought’ are conceptually different and should not be interchanged; a lesson lost on many economists, especially those who are advocating policies which they pretend to be pure value-free economics. <> <>The ‘dollar is a dollar’ formulation illustrates the problem of this GDP efficiency notion. Suppose a dollar was taken from each of the hundred poorest people in the land as was given to the richest man in with a gain of one dollar (say from administrative savings), so he was $101 better off. GDP would be a dollar higher too, and there would be an ‘efficiency’ gain – that is an increase in GDP. The explicit notion is a dollar is just as valuable to the rich as to the poor. Is it not extraordinary how step by step one set of principles which favoured the poor were reversed into a set which favoured the rich; how in the name of being ‘ value free’ the opposite set of values were introduced? <> <>So would the society be no worse off if we took a dollar from one hundred poor people, and gave it to a rich man? Pigou would not think so. Is the marginal value of a dollar to the rich exactly the same as the value to the poor? That seems unlikely given the universally accepted principle in economics that marginal utility diminishes for each individual as they consume more. Pigou has been upside-downed, and interpersonal comparisons have been sneaked back in. <> <>Earlier I warned that efficiency is a treacherous term. For instance, is there an efficiency-equity trade-off, the notion that if the economy pursues equity there will be a reduction in efficiency? But surely the advocates of equity want to pursue their ends in a way which is efficient. So what could efficiency-equity trade-off mean? <> <>The paradox may be resolved by observing that the term ‘efficiency’ is used here in two ways. <> <>The claim of an efficiency-equity trade-off is actually a belief that an economy which pursues equity will have a lower GDP than if it ignored equity – GDP is reduced if one pursues fairness. As I have said, a comprehensive review of the research literature does not support this conclusion. But suppose the volume of output would fall is the income distribution was made a mite less unequal. Then there would be a efficiency-equity trade-off with ‘efficiency’ meaning GDP. <> <>The second use of efficiency in the expression that the advocates want to pursue equity as efficiently as possible. That simply means they want to do it in an effective way as possible. Of course. But the meaning of efficiency here is not the same as GDP efficiency. (A diagrammatic representation off the argument. <> <>There is an even greater paradox. Consider a change which is Pareto efficient when there is compensation. For instance, suppose a tariff reduction gives an increase in output, but workers in the previously protected industries have to shift to lower wage ones. A way to compensate them would be to tax the winners on part of their increment, and recycle the takings to those who are worse off. But so we are told, taxation reduces efficiency. Which means that even though the proposed policy change is Pareto efficient, it cannot be implemented in a Pareto effective way because there could be no compensation. <> <>The fact is that policy proponents have economic values which underpin their recommendations. They need admit to the values they hold. (Hume would remind them that such values do not come out of any empirical knowledge but out of an ethical belief.) That would involve a radical change to the existing policy debates. Admitting one has values which underpinned the policy recommendations means that someone with different values might recommend different policies. Better to pretend to be value free while pursuing values which are in one’s self interest or the interest of one’s client or patron. <> <>This conclusion should be no surprise. In 1971, economist James Mirrlees, a Nobel laureate, wrote ‘An Exploration in the Theory of Optimum Income Taxation’ which shows the optimal tax structure depends on the nature of the social welfare function – there are very few general results. <> <>Where there are general results, they are often uncomfortable for those who want to reform the tax system, and tend to get ignored. Here is a simple principle I learned about thirty years ago, but which is still ignored. I present it at the simplest level. <> <>Suppose one wants to give everyone a guaranteed income which is a certain proportion of the average after-tax income of the population; suppose it is funded by a proportional income tax. I shall assume that there are no government services, only transfers. (Other government spending can be added with little extra cost with no increase in insight.) <> <>Suppose we identify everyone in the population with a number i, there are n people and their market income is Yi. The total income to be allocated will be ΣYi, summed across all n observations. <> <>The average income is therefore ΣYi,/n Let’s call it Y*. <> <>We set the minimum income as mY*, where m is the target proportion of the minimum income as a proportion of the average income. <> <>Then each person’s after tax income is the sum of their guaranteed income polus their market income after tax, or <> mY* + (1-t)Yi,. <> <>Summed across all people we get the total income is Σ(mY* + (1-t)Yi,) which can be arranged to <> nmY* + (1-t) ΣYi, <>or <> (1 + m – t) ΣYi, (since nY* = ΣYi,). <> <>Since we have no government spending, the total after tax income equals the total before tax income so <> <> (1 + m – t) ΣYi,= ΣYi,, <> <> or <> m = t. <> <>That is the average tax rate equals the ratio of the minimum to average income. That is an important enough conclusion to put in capitals. <> <>THE AVERAGE TAX RATE <>EQUALS <>THE RATIO OF THE MINIMUM TO AVERAGE INCOME. <> <>When I have asked people, they have typically said they think a minimum to average income ratio of about 60 percent seems reasonable, so their logic is that the flat tax rate has to be 60 percent. <> <>This is a very high rate. across the board, but it is an underestimate. <> – it ignores that government services also have to be funded from taxation, <> – it ignores the cost of administrating the tax system <>AND (a very big ‘and’ you notice) <> – it assumes there will be no behavioural response so that individuals faced by high marginal tax rates will not reduce their effort to make market incomes (however some may have an income target and may increase their effort). <>Collectively, then, we have to conclude that a flat tax has to be at least the ratio between the minimum and average incomes. <> <>Is the problem the flat tax? Could a cunningly designed variable tax avoid the high rates? It turns out that for any income distribution with some people with low market incomes, somewhere in the tax system there has to be a marginal tax rate which is at least that of the ratio of minimum to average incomes. <> <>I have tried various ways of lowering marginal taxes for a minimum guaranteed income. One solution is that each person should be taxed with a lump sum based on their particular earning ability, a result which will be no surprise to tax afficionados. Unfortunately it is impractical since in order to be equitable we have to know what each individual’s income earning capacity. <> <>One can,. of course, reduce the ratio so the minimum income is lower thereby reducing the required flat tax rate. That may be unacceptable in social terms – although one cannot help thinking that was a major driver when the real value of social security benefits were slashed in 1991. It was thought that increasing the wage-to-benefit gap would encourage people to move off the benefit in order to increase their income. However they were not able to reduce the gap sufficiently (in any case it is impractical to expect all beneficiaries to go to work), so to the pull effect of the higher income has to be supplemented by the push factor of the system trying to get individuals off the benefit. <> <>A way to get the average tax rate down would be to divide the population into those we expect not to work those we expect to work. Only the first group get a guaranteed income, the second get a guaranteed job. That is how we ran the social welfare system when there was full employment. The unemployed who turned up to the Department of Social Security were told to get a job, and they usually did. Alas that option is not so possible in today’s economy with its more dynamic labour market, and with greater difficulty maintaining full employment. Even so, I have wondered whether, in more benign times, this distinction might be useful in a redesign of the welfare state. <> <>In the interim we are stuck with high effective marginal tax rates, somewhere in the income redistributional system. It is to cry crocodile tears to argue that we should reduce top tax rates and to worry about the high EMTRs on those on low incomes. Those high rates can only be ultimately reduced by reducing the minimum accessible income or by increasing tax rates further up the income. <> <>My intention here has not been to advocate a minimum guaranteed income but to explore its implications for the tax system. Those who do advocate a minimum income are probably ‘Rawlesians’, that is followers of John Rawles’ principle that one should organise society by paying attention to the needs of the poorest. (I happen to be a Rawlesian for distributional objectives; I only mention this because I dont want to pretend I am entirely value free, even if the above analysis is.) <> <>What distributional principle is followed by those who pursue efficiency and a dollar is a dollar is harder to discern, especially as they are not forthcoming about the ideology and values which underpin their policies. Some seem to me to be so pro-rich they might be called anti-Rawlesian; the rest might just need to be more explicit. <> <>This is not a trivial matter. The tax reforms in the late 1980s and early 1990s gave a measurable boost to the after-tax incomes of the highest decile. In fact their incomes continued to rise in real terms at about the same rate as they had previously, for the effect of those tax reforms was to transfer income from the bottom 80 percent of the distribution to those on top incomes. Since the economy as a whole was contracting – GDP per capita fell every year for six years in a row – those at the bottom experienced even greater real income falls. One consequence is those on high incomes have quite a different memory of the period to the rest of the community. They were shielded from the fact that average after-tax and benefit incomes fell. For the rich the reforms were a triumph, for the rest they were an economic disaster. <> <>Another lesson from this period is that the lowering of the tax rates on higher incomes led to no discernable improvement in the economy as a whole contradicting the claim that tax cuts improve economic performance. The memory the rich have of the period shields them form this reality too, making it easier for them to claim tax cuts improve efficiency. they did not on any measure in the late 1980s and early 1990s. <> <>The last two paragraphs are based on well established estimates of the income distribution. But we dont discuss them – even though they are revealing about the political economy of the times as well as the impact of tax changes – because we are unwilling to discuss equity. <> <>That is the theme I finish on. It is time that advocates of policies were more explicit about their values and how their value-based policy proposals impact on the welfare of the various groups in the community – on the economic distributions. Recalling Rabin’s Law they need to be more explicit on who is going to benefit from their policies and who is going to be made worse off. This outing would be a big challenge to the profession since we lack many of the tools to carry out this evaluation, and where we have tools the policy advocates usually lack the skills to apply them. But we can develop them. <> <>It is a terrible criticism of the policy community to say this, but it has been lazy, unwilling to use the tools available to better understand the policies that are being advocated let alone develop better ones, or incompetent unable to use the tools. <> <>This paper began quoting Keynes’ remark that practical men and women are but slaves to some defunct economist (or other intellectual). One of the reasons I have gone through, in more detail than usual, the development of welfare criteria is because I wanted to bring to light some of the defunct economist which today’s practical policy advocates call upon. <> <>So how are we to get equity back into the tax reform discussion? One is from these kinds of presentations – but that is water dripping on a stone. There is another way. Suppose every time a policy was advocated, someone of goodwill but without a policy agenda asked the advocate – in public – that since Rabin’s Law said someone was going to be worse off from the policy change, would they list who would be worse off from their proposals? <> <>After a stunned silence (or lots of ‘ers’ and ‘ums’) the advocate may well nominate a few – an inadequate few, but it is a beginning. Persistence will eventually draw more out, and slowly and reluctantly a higher standard of identification of the winners and losers will be attained. Equity considerations would once more be included in the tax reform debate. <> <>Go to top