From the section ‘The Economy and the City’ released February 2010.
Keywords: Distributional Economics
Te Ara is New Zealand’s On-line Encyclopaedia. The primary author of its section on the Income and Wealth Distributions ( www.teara.govt.nz/en/income-and-wealth-distribution ) was Brian Easton.
For other of his contributions
The Economy: www.teara.govt.nz/en/economy
New Zealand’s economic history: www.teara.govt.nz/en/economic-history
From the section ‘The Economy and the City’ released February 2010.
Keywords: Political Economy & History;
Te Ara is New Zealand’s On-line Encyclopaedia. The primary author of its section on New Zealand’s economic history ( http://www.teara.govt.nz/en/economic-history ) was Brian Easton. <
For other of his contributions
The Economy: http://www.teara.govt.nz/en/economy
Income and Wealth Distributions: http://www.teara.govt.nz/en/income-and-wealth-distribution
Our economy is suffering from some severe imbalances that are hindering an upswing.
Listener: 6 February, 2010.
Keywords: Macroeconomics & Money;
The so-called recovery of the New Zealand economy could turn out to be L-shaped. Under this scenario, after the economy reaches the bottom of the contraction, it doesn’t move into an upswing, either rapidly (the V scenario) or sluggishly (U). Instead it bumps along the bottom, with short-term upswings followed by downswings or stagnation. The bottom could last a long time. It took seven years of the Rogernomics Recession of the 1980s and 1990s before the economy hit an upswing, and the Long Depression, which began in 1878, lasted 17 years.
The L scenario may apply to the global economy as a whole, or perhaps to some key economies such as North America and Europe while Asia expands. But let’s assume a steady upswing for the world. The New Zealand economy could still suffer an L.
This prognosis arises because the economy is suffering from some severe imbalances that have to be addressed before a smooth upswing is certain. Based on the long-term trends, house prices may be overvalued by as much as 50%. They are unlikely to collapse, and though they may bump around a bit, their trend may be stagnant for while. It may make sense to buy a first house, or to change your house for family or employment reasons, but there is probably not a lot of prospect in investing in rental housing for capital gain.
Interest rates are also out of kilter. The world monetary authorities are deliberately keeping them low to prevent a return to a global financial crisis. But as the world economy expands, they will increase. Ten-year government bond yields recently crept above 6% a year. That they are so near the floating interest rate for first mortgages says there is an imbalance. Householders are going to be paying higher interest on their debts.
Another source of the upward pressure on interest rates is that the banks have been borrowing short term where rates are cheapest.
That puts financial stability at risk, so the Reserve Bank is making banks borrow longer and therefore more expensively. Before you shout “unfair”, remember that financial instability comes at a cost to the taxpayer – and threatens your job.
Overpriced housing is not the only thing undermining the robustness of householders’ balance sheets. Many are suffering from collapsed investments in finance companies. Households are carrying too much debt given the true value of their assets, and most people are not saving enough for their hoped-for retirement incomes. The resulting stronger savings and weaker consumption will weaken any domestic expansion.
Businesses are also struggling, perhaps no more than expected during a deep recession, but business investment seems unlikely to pull us upwards. More businesses are going to fall over, some weak finance companies are still out there and some farmers have too much debt. Community organisations are suffering from a lack of donations and sponsorships.
The Treasury’s December “Half Year Economic and Fiscal Update” suggests government borrowings are too high, and public spending has to be pulled back (and/or taxes increased). So we cannot expect the Government to inject any more oomph into the economy, either.
Exporting should provide a bit of much-needed oomph, although that is being compromised by the high New Zealand dollar, which reflects the dreadful state of our foreign balance sheet and our propensity to keep borrowing offshore. This is yet another imbalance of the economy, mirroring those in household, business and government balance sheets.
See the problem? All the conventional sources of an economic expansion are weak. Some people will beat up the economy for their short-term profit, but the imbalances mean any short-term expansion will be undermined in the medium term (the W scenario).
And yet, and yet. The capitalist system is a bit like a bicycle – riddled with imbalances. When it is standing still, it falls over; when it is moving forward the imbalances don’t seem so severe – until it stops, and then it falls over, big time.
Paul Samuelson, 1916-2009.
Listener: 23 January, 2010
Keywords: History of Ideas, Methodology & Philosophy;
We called it “Sam”, but its official title was Economics. Written by Paul Samuelson, it’s the book that – as author Robert Heilbroner put it – “changed our vision of economics from the dismal science to a study of social possibilities”. The first edition of 1948 is said to have set a model for presentation, lucidity and humour for all textbooks. Eighteen editions later, it has sold over four million copies in 40 languages.
Samuelson says he “sweated blood” writing it to pay for raising the triplets from his wife’s fourth pregnancy. His wife also deserves a mention for her contribution to his earlier work. His first (1947) book, Foundations of Economic Analysis, includes the tribute: “My greatest debt is to Marion Crawford Samuelson whose contributions have been all too many. The result has been a vast mathematical, economic, and stylistic improvement . the quaint modern custom of excluding the value of a wife’s services from the national income [cannot] condone her exclusion from the title page.”
Writing the textbook probably turned the powerful applied mathematician into such a good stylist. He was not a policy-oriented economist, preferring to seek deep insights rather than shallow recommendations. Economics “was about discoveries and not merely opinions”. He became the most influential 20th century economist on other economists. John Maynard Keynes has had (and still has) more direct influence on macroeconomic policy, but Samuelson’s impact was wider, including on welfare economics, microeconomics and trade theory.
It was Samuelson who introduced Americans to Keynesianism, creating the “neoclassical synthesis”, which combined Keynes’ macroeconomics with the theory of how individual markets work. He did it with a lightness of touch: “The stock market has forecast nine of the last five recessions.” Even monetarism – the analytic rather than ideological version – is founded on his synthesis.
He grew up with his Polish Jew immigrant parents in the Midwest, graduating from the University of Chicago. Initially he resisted Keynes’ theories, but after four college summers on a beach – it was pointless to look for work when friends were being turned down so many times – he saw the logic of Keynes’ explanation of the Great Depression. His Keynesianism evolved and later in life he criticised its earlier version.
It is said that when he finished the oral exam for his Harvard doctorate, the interviewing panel asked itself whether it had passed. It failed by not offering him a job. Instead he went to the nearby Massachusetts Institute of Technology, whose economics department then topped his alma maters’ in the rankings for decades.
One can’t be an economist today without admitting Samuelson’s influence. The citation for his Nobel laureate said: ” more than any other contemporary economist, he has contributed to raising the general analytical and methodological level in economic science”. That was because he focused on analysis rather than policy. He boasted he had never spent a week in Washington. His students – including Paul Krugman and Joseph Stiglitz – carry his work forward.
The enfant terrible became the enfant terrible emeritus. At 89, he published a paper that explained how offshoring does not always lead to an improvement in welfare. The result was already there in his pioneering international trade theory of the 1950s, but those ideologically over-committed to free trade overlooked it. He said, “Politicians like to tell people what they want to hear – and what they want to hear is what won’t happen.”
Despite his dazzling learning, insight, energy (his collected works are in five huge volumes), humour, profundity and amazing inventiveness, he was a humble man, telling his students that economists had much to be modest about. He recently commented: “What we know about the global financial crisis is that we don’t know very much.”
In the stressful “capital reversing” debate (don’t ask), he contributed to a serious analytic error (again, don’t ask), but he wrote the best explanation correcting it. He finished the retraction with: “If all this causes headaches for those nostalgic for the old parables of neoclassical writing, we must remind ourselves that scholars are not born to live an easy existence. We must respect, and appraise, the facts of life.”
Samuelson also said: “I don’t care who writes a nation’s laws if I can write its economics textbooks.” It was a great textbook, one he said aimed never to teach anything that had to be unlearned. Yet he taught us so much.
Children’s classic The Wind in the Willows is also a fable for adults.
Listener: 9 January, 2010.
Keywords: Literature and Culture; Macroeconomics & Money;
The “Poop-poop” rang with a brazen shout in their ears, they had a moment’s glimpse of an interior of glittering plate-glass and rich morocco and the magnificent motor-car, immense, breath-snatching, passionate, with its pilot tense and hugging his wheel, possessed all earth and air for the fraction of a second, flung an enveloping cloud of dust that blinded and enwrapped them utterly, and then dwindled to a speck in the far distance, changed back into a droning bee once more. . there was a heartrending crash – and the canary-coloured cart, their pride and their joy, lay on its side in the ditch, an irredeemable wreck. The Rat danced up and down in the road, simply transported with passion. “You villains!” he shouted, shaking both fists, “You scoundrels, you highwaymen, you – you – roadhogs!”
Although The Wind in the Willows immortalises “roadhogs”, apparently author Kenneth Grahame initially wrote “stockbrokers”. Children may not have understood Grahame’s concern about the invasion of the countryside by the finance industry – he grew up in rural tranquillity on the banks of the Thames at Cookham, which is now part of the urbanised “stockbroker belt” of London. But his earlier term gives an interesting interpretation of the children’s classic.
Unlike Ratty, Toad was not angered by the first automobile he ever met causing his beautiful caravan to overturn. He “sat straight down in the middle of the dusty road … stared fixedly in the direction of the disappearing motor-car. He breathed short, his face wore a placid, satisfied expression, and at intervals he faintly murmured ‘Poop-poop!'”
This dedicated follower of fashion chased after cars in a wildly picaresque journey of dishonesty and damage that ended in prison. Deceit and generosity of friends enabled him to escape, but the Toad Hall he returned to had been taken over by the crude denizens of the Wild Wood. In a scene paralleling the homecoming of Odysseus, Badger, Ratty, Mole and Toad reclaim the Hall by driving the weasels out. For all their bombast, the Wild-Wooders prove shallow and ineffective.
From this perspective The Wind in the Willows is a story of modernisation in which the Edwardian life Grahame so valued is being transmuted by technology and by those with shallower values than Toad’s friends. As it turns out, it is the prudence of Toad’s father, who put in the secret passage, that enables the friends to spring the surprise attack. Whether the Wild-Wooders were mere roadhogs, stockbrokers or even the working class (as some commentators suggest) is unclear. Toad’s apparent submission to his friends’ values at the end may be yet another of his deceits. The reader is left with the expectation that come the next fashion, Toad will be off again.
While he was writing the book, Grahame was the secretary of the Bank of England, the UK’s central bank. It was a senior role involving maintaining the records and the correspondences of the institution before computers, or even typewriters, took over. Fortunately it was then a gentlemanly pursuit and gave him the time, while conserving his energy, to write the nostalgic novel.
You may think the job was routine or even boring. Maybe. But a few years before Grahame retired, a madman broke into his office and fired three shots, which fortunately for him – and lovers of his book – all missed.
Central banks, including the Reserve Bank of New Zealand, still have these secretaries. As a general rule they don’t write novels, but they are likely to concur with at least one of The Wind in the Willows’ messages: the world is changing; the much loved environment of your childhood is evolving; the society in which you grew up is passing.
As the Prince told his nephew in Giuseppe Tomasi di Lampedusa’s novel The Leopard, “If we want things to stay as they are, things will have to change.” But the fundamental values of friendship and common sense – and perhaps scepticism towards fashion – are still of immense relevance, especially for dealing with unprincipled roadhogs, financiers and Wild-Wooders.
With no real economic strategy, the Prime Minister is playing a dangerous game.
Listener: 26 December, 2009.
Keywords: Political Economy & History;
The reason the Government is thought to have a secret agenda is that it has no agenda. It has instincts, and commitments to keep, including ones to those that helped elect it, such as the well-off, business and farmers. And it has political debts to pay. The Hollow Men has a useful account of the insurance industry lobbying the National Party; one assumes it is now influencing the proposed changes to ACC.
When Act Party leader Rodney Hide said Prime Minister John Key “doesn’t do anything” whereas “Act did everything and we are hated”, he was broadly right. Key has no real economic strategy; he is an incrementalist – one step at a time, steady as she goes. Act has a comprehensive strategy. People don’t like it, and the last time it was applied it failed miserably.
The Tiggerish prominence of Hide in the political scene gives the impression that Act has more influence than it has, and that National’s hidden agenda is the Act one. But National will pick and choose.
That’s why National’s relations with the Maori Party are so important. The latter was seen as a centre party that would balance Act’s tug to the right. However, the Maori Party is not so much centre as broad-spectrum, covering the left to the right. A third of the voters who ticked a Maori electoral candidate, giving the party five seats, supported Labour with their party vote. Had these people also given Labour their electorate vote, the Maori Party would have won only three seats.
The party finds it difficult to make decisions unless it can find a Maori dimension. When it came to ACC, it could not find one, and the Government teamed up with Act.
Those who think National has a secret agenda recall radical Ruth Richardson and her ideological kin (who today support Act). But as Key has repeatedly said, his government will not “embark on a hugely radical, disruptive policy agenda”. Key’s approach is in the tradition of Keith Holyoake, one of our great prime ministers, who may have had a vision and certainly stayed a little ahead of the rest of the country. But as Barry Gustafson’s Kiwi Keith shows, he hid behind cautious incrementalism when responding to the challenge.
As National politicians sometimes explain, National was elected without a comprehensive policy framework. Of course, it had bits and pieces from its time in Opposition, some of which officials regret but are dutifully trying to implement, and others that officials see as a welcome step forward. The party view was that you could not form a policy framework in Opposition, so instead you won office and then got officials to develop one consistent with your instincts and visions. But that still has not happened. (In contrast, and as Hide was saying, Act had far more of a framework.)
Perhaps it was a good thing that National did not have too many ideas in Opposition. When it got into government, it found an economic situation quite different from what was expected. Sometimes it appears to be hoping the recession was a hiccup and things will soon be back to normal – but that’s not what the fiscal forecasts are telling us.
Key’s gratuitous trashing of the Treasury’s emission trading scheme projections may have been convenient at the time, but he undermined his ability to use Treasury estimates (which are usually the best there are) in the future. The episode nicely illustrates the Prime Minister’s need to be less day-to-day and more long term. It is this lack of strategy that leads to the belief of a hidden agenda.
It is easy for Father Christmas to maintain immediate popularity by buying off dissenters, but Key compromises the long-term fiscal position. Finance Minister Bill English may not be “the Grinch”, but Old Mother Hubbard – to mix the metaphor – knows the cupboard is increasingly bare.
Next year, there will be a tussle to resolve the tension between giveaways and fiscal prudence. Our great prime ministers are those who have stood shoulder to shoulder with their finance ministers and restricted spending to what can be afforded. They have not always been our most popular in the short run.
Concluding remarks for ‘The ACC Debate: How Do We Pay for ACC?’, sponsored by the ACC Group. 15 December 2009, Auckland.
Keywords: Social Policy;
I am honoured to be asked to attempt to make some concluding remarks to such an interesting conference, and privileged to follow Sir Owen Woodhouse. We are so fortunate that we still have him with us to remind what his proposals were about, and the extent to which we have pursued them and – I am afraid – sometimes ignored them.
Sir Owen mentioned that lawyers had considerable difficulty with the notion of cause, on which the fault principle was founded and which his Commission’s proposals rejected; I am glad to say sir, that major contributions to the analysis of cause came from the great economists David Hume and John Stuart Mill – both of which support the lawyers’ doubts.
It is proper in Sir Owen’s presence we should look at the fundamental issues, even if we cannot attain the penetrating insight and creativity that Sir Owen’s commission attained some forty years ago.
However before making my summary offering I should mention there is a complementary question to the topic of how we should pay for ACC, one which Richard Gaskins was in part addressing. It is ‘who pays for accidents?’ Some of the current changes the government to ACC do not reduce the costs of the accidents – in the way that the Woodhouse Commission’s emphasis on prevention and rehabilitation was intended to – but shift their cost from the public purse onto the individual and their families – a privatisation of some social welfare. We need to keep prominent in any discussions the question of ‘who pays for accidents?’
My remarks here mainly address the elephant in the room, here today and in every discussion on ACC funding. It’s a huge elephant; it’s the social security system, and its presence poses the question, why dont we fund social security and accident compensation the same way?
Treasury economists might explain the difference as means of a raising taxation by stealth while that pre-funding of ACC (and the Cullen Fund) are a means of squirrelling away part of the fiscal surplus so that the reduce taxes-for-any reason brigade could not get at it. They might go on to argue that the ACC levy system reflected that the compensation was earnings-related in contrast to the flat-rate benefits paid from general taxation. (Perforce the public account does not have to fund earnings related sickness benefits.) They might also argue that the ACC levy system provides incentives to minimise accidents. (Others might say they are weak and that the prevention activities of ACC are much more important.) I am not sure what the economists would say if asked why we dont have an earnings-related sickness compensation system, other than that it would be very expensive. So the official’s explanation would have some validity but it would leave many unanswered questions and inconsistencies.
The ACC Minister and the Chairman of the ACC board explain the difference by that one is social security the other is social insurance, but that is a labelling exercise and does not explain why the labels apply. They may be saying that ACC is just anther way of doing the old private insurance scheme. Grant Duncan talked about how the rhetoric of the motor cyclists was based on the fault system which is an indication of this. However a number of today’s speakers (including Susan St John, Richard Gaskins and Sir Owen himself) were adamant that the Woodhouse Scheme not about doing the old ways better, but doing it differently as well as better.
A historian would point out that the two systems have different origins.
ACC is the successor of the older scheme which began before there were effective means of delivery so the clumsier tort litigation and private insurance had to be used. But that does not mean that those arrangements should be persisted with, any more than we should use horses and buggies to deliver the crippled worker’s bag of coins because that was the way things were done in the nineteenth century.
Social security is an example of doing things better, replacing the Poor Law. As we know it, the welfare state began with the Old Aged Pension in 1898 in response to an aging crisis. Because we always leave things to too late there could be no pre-funding for it or for the Widow’s Pension in 1911 and so on. So it was paid out of the current public revenues. There was a prefunding element in the 1938 Social Security Act, reluctantly adopted because New Zealand’s London bankers required it. But the social security fund simply involved paper transfers and quickly became farcical. It, and the social security tax, were abandoned in 1968. More fundamentally, for most New Zealanders, Social security reflects a quite different conception of government support for those in need.
Now we might reverse the issues covered today and ask if ACC prefunding is such a wonderful scheme, why dont we prefund social security, so that whenever a child is born or a migrant arrives the state invests in a fund to pay for their future public costs.
The exercise would involve mind boggling complexities providing a guaranteed career for actuaries. It would also pose considerable fiscal and macroeconomic challenges. They are already there in the current ACC scheme, but less evident because it is much smaller than social security. Since in the past such practical considerations have not hindered much more extremists changes, why not this time?
It is easy to dismiss this as irony, a series of paradoxes which have little relevance for the immediate political pressures on the scheme. But that is always the way we seem to operate – ad hoc responses to current pressures. Richard Gaskins and Susan St John were right to go back to basics, but it is not simply a question of original intention.
Trying to think about the elephant, I was struck by how much of the discussion is constrained by the accounting and actuarial framework that is used. It seems to me that Michael Littlewood’s (quite orthodox) description of the government balance sheet had a major gap when it omitted the sovereign right to tax. While I dont know how to include it – Jeff Chapman [who attended the conference and chaired the early-1980s committee which set the framework for the government accounts] might be able to help here, Gilling’s Law says how you score the game determines how the game is played. If we leave the sovereign right to tax out we play the game differently. It is implicitly there in the welfare state accounts, and explains why it is pay-as-you go. But it is not there in the ACC accounts, and so we play a different game, or at least the minister wants us to. Meanwhile those who criticise the current ACC funding system do so from a perspective that implicitly incorporates a sovereign right to tax.
So here is the challenge: suppose we were to start afresh to design a welfare system in which there was a continuity between the accident provisions and the other provisions (perhaps within existing fiscal parameters). What would it look like? Who knows? One thing I am sure is it would not look like the current ACC system. But to do so would give a context in which to debate the current issues in a comprehensive rather than ad hoc way. It would be to harness the elephant in the room.
Finally as the last speaker, it is my pleasant task to thank the Retirement Policy and Research Centre and Claire, Michael and Susan for an excellent and well organised conference. I know the issues it was intended to raise will progress as a result.
Sue Bradford’s departure leaves a huge gap in the Greens, and Parliament.
Listener: 12 December, 2009.
Keywords: Regulation & Taxation; Social Policy;
To work properly, the market must be “complete” – that is, all possible transactions must be able to be carried out. For example, those who invested in finance firms such as Bridgecorp should have been able to buy insurance to protect them if the company went bust. The world needed similar insurance for Lehman Brothers, the New York investment bank whose collapse almost brought down the international financial system. But then we would have needed insurance in case the counterparty in the deal went bust, and then . it’s an infinite regression.
In practice, only a few reiterations of insuring the insurer were needed, but because there were not enough, the global financial crisis occurred. Why there were not enough reiterations is to do with transaction and information costs, but that is for another column.
However, the finance markets are not the only ones sufficiently incomplete to damage economic welfare. Because the market for pollutants is incomplete and polluters are not charged for their emissions, a person can get away with dumping on the neighbours – and in the case of carbon emissions, on the whole world and on future generations.
This has led to cap-and-trade schemes, and other measures such as individual tradable quotas for fish and water, which force resource users to take into fuller account the consequences of their actions. But even these measures may not complete the market, since future generations cannot participate in it. As a consequence, we have the sustainability provisions in the Resource Management Act.
Another example of incompleteness, this time in the political market, is that children don’t vote. Had they taken part in the smacking referendum, the outcome may well have been different. It is not sufficient to say that parents represented their children; that was the justification for not giving women the vote, since it was said men took their wives, mothers and daughters into consideration when they voted.
That children don’t vote has a major impact on economic policy. It is no accident that children are associated with poverty in New Zealand. Before the Working for Families package, over 80% of the poor were children and their parents. Although the package has taken some families out of poverty, those with children almost certainly continue to dominate the poor. Their parents vote, but it is twice as expensive per vote to support children as, say, the elderly.
Market completeness, or more precisely the lack of it, has a major effect on our economic and public life. It is one reason we have governments. Very often they fill in for market failure (so any collapse of private retirement savings is backstopped by New Zealand Superannuation) or increase the completeness of markets (such as by reducing transaction costs). Sometimes they stand in for those who don’t have a say, such as future generations.
It is also a reason for the existence of a political party such as the Greens, whose theme is that market incompleteness damages things that are important to us and future generations.
That is what made MP Sue Bradford so special. The anti-smacking legislation was one of her many achievements, although by no means her most important. She had outstanding political skills that enabled her to locate consensus for progressing her aims. For instance, she had an important role in the select committee on the consumer-credit legislation – such a lot of Parliament’s best work is hidden in such places.
Most of all, she had a commitment to that which is left behind by the market: children, other marginalised groups such as those with or recovering from mental illness, and areas of the environment. However, even she did not extend to the problem of the incompleteness of the financial sector, and we have yet to recover from the free-for-all of the 1990s.
There is no obvious replacement among the Greens now that Bradford has left Parliament. She was such a force for social justice that the rest of the caucus could turn their attention to other matters. I hope they fill the vacuum she has left in Parliament, while she continues to advocate for the marginalised in her next career. Meanwhile the problems of incomplete markets continue to bedevil us.
Paper for NZIIA Seminar “New Zealand and the BRIC Group”, 24 November 2009
It may be useful to first read New Developments in Trade and Trade Theory.
Keywords: Globalisation & Trade;
I begin with a question; its answer eventually leads to an extraordinary scenario for the future of the world. ‘What two countries had the largest manufacturing sectors 200 years ago?’ To avoid it being a trick question, your answer may use today’s national boundaries.
The short answer is that the two countries were China and India, which between them had over half the world’s manufacturing. Of course the industries were primitive compared with today’s, but that was true everywhere.
Manufacturing Output (World Total Share: Percent),
|
1750 |
1800 |
1860 |
1913 |
1938 |
|
| Britain |
1.9 |
4.3 |
19.9 |
13.6 |
) ) ) 92.8 ) ) |
| Other Europe |
21.3 |
25.8 |
33.3 |
43.0 |
|
| US & Canada |
0.1 |
0.8 |
7.5 |
32.9 |
|
| Japan |
3.8 |
3.5 |
2.6 |
2.7 |
|
| China |
32.8 |
33.3 |
19.7 |
3.6 |
3.1 |
| India |
24.5 |
19.7 |
8.6 |
1.4 |
2.4 |
| Other |
15.6 |
12.6 |
8.4 |
2.8 |
1.7 |
Source: B. H. Easton (2007), Globalisation and the Wealth of Nations, p.180.
Yet a mere 60 years later they had lost their dominance and were down to about a quarter of the world’s manufacturing with over half supplied by Europe including Britain. Just fifty years later, at the time of the First World War, China and India’s share was under 5 percent, Europe still provided half, with the United States (and Canada) providing about another third.
What is striking is that before the age of globalisation, manufacturing was distributed according to population. But as the world economy integrated, manufacturing concentrated in a few regions. My interest today is not why manufacturing ended up in the North Atlantic economies – something economic histories detail. The critical fact, here, is that in a relatively short period the manufacturing sector shifted from one based on where the population was, to a much greater locational concentration. Up to the era of globalisation population attracted manufacturing; after it manufacturing attracted more manufacturing
I am now going to describe an economic model which explains that shift. Not in detail, because the mathematics is a bit demanding – you can find the details and extensions in my book Globalisation and the Wealth of Nations and the mathematics in The Spatial Economy, Cities, Regions and International Trade, by Mashito Fujita, Paul Krugman, and Tony Venables. You will observe that one of the latter authors was awarded an economics prize in honour of Alfred Nobel last year, an indication that the model I am using is pretty well established, if not in New Zealand.
I am not using the model just because it gives a good explanation for the past. It also has intriguing predictions for the future, suggesting the same forces which concentrated industry in the past two centuries, eventually lead to a return to a world economy of manufacturing occurring where the population is concentrated – to a recovery of India’s and China’s place in the industrial world.
The model is based upon two economic processes. The first is the falling costs of distance. The second is the economies of scale which exist in manufacturing, so that as production increases in a factory or localised industry the average cost of production falls. The two coming together leads to a concentration of manufacturing.
Economies of scale are of little use if high transport costs mean that the factory has only a small market. As distance costs fall, the business can sell more and reap the economies of scale. Because these scale effects apply to industries as well as industrial plants, businesses cluster together, reducing their costs, reinforcing the concentration, especially as labour is attracted to the industrial centres.
Those who miss out on the industrial concentration – we know with hindsight it included China and India – are forced to remain in farming. But farming experiences diminishing returns – the more workers on the land the lower their average productivity. So the farm labour experiences low wages, and countries without a concentrations of industry are relatively poor. Ironically the successful manufacturers draw labour off the land, so the reverse happens there and farming in those countries ends up with high productivity.
Add in stories about capital formation, technological innovation, and service industries which reflect affluence and population; one has a portrait of the last 200 years of the world economy, especially if we extend farming to all resource industries and note that falling costs of distances – such as by telecommunications – makes some services tradeable like manufacturing.
The model considers what happens as costs of distance continue to fall. One possibility is that a region will move out of low income farming into high income manufacturing. That is what happened to the US in the late nineteenth century and to Japan throughout the twentieth. We sometimes forget that a century ago Japan was among the poorest countries in the world.
More subtly, the region of industrial concentration spreads out as congestion costs rise in the heartland. So the industrial revolution which began in Britain now extends to Finland and Spain; industry in the United States moved out from the north east to the south and west; Japan offshored industry to Korea and Taiwan.
Intriguingly, the model I have been using predicts a dramatic change when costs of distance fall far enough. At some point agricultural nations are able to use their low wages to undercut the products manufactured in the rich countries despite their higher industrial productivity. The poor agricultural nations become manufacturers too, and the cumulative causation from the industrial economies of scale and shifting workers out of farming into manufacturing now favours them. The model predicts the world will eventually to the pre-globalisation pattern of manufacturing (and tradable services) located where the population is.
Since about half the world’s population is in India and China, that is where manufacturing is going to relocate. Or rather, that is where it is relocating, for the trends the model predicts have been happening for about two decades.
There are a numerous predictions and challenges from this model. I have not time to look at them all, even important ones like how will rich economies response to this shift? Today I look at just two critical developments pertinent to this seminar.
The first is that we may expect a reversal of the long term fall in the terms of trade for foodstuffs (and other resources). As poor countries shift labour out of farming, their foodstuff production declines, while the higher incomes factory workers eat more food. With the supply shortage the price of food goes up, while the prices of manufactures now made with cheaper labour go down.
This pattern of rising relative prices for food has been happening for the last two decades coinciding with the shift of manufacturing to the poor economies. That is important for New Zealand’s prospects but it also says something about Brazil’s and Russia’s. Neither has a large enough population to be a great centre of manufacturing.
No doubt Russia could eventually join the European industrial centre as congestion further spreads out manufacturing. But first the growth will be in the emerging economies of East-central Europe, the Balkans and, even possibly, North Africa.
Brazil might hope to benefit from the US industrial centre spreading out. But the first beneficiary should be Mexico with the North America Free Trade Agreement as a facilitator. Mexico’s hopes of attracting US industry were cruelly dashed, when America leapt over the neighbouring country, and sourced instead from China.
Where Brazil and Russia fit into the world economy is a larger version of the same role as New Zealand. We and they (and Australia) have large resources relative to our populations so we are resource providers. Whether that will give us the sort of standard of living we aspire to is a matter which belongs to another venue. It is some comfort that unlike in the twentieth century the terms of trade for our exports may well favour us in the twenty-first.
The second development is that if manufacturing becomes based upon population, no country has a monopoly of the population, so no country is going to have a monopoly of economic power, There will be no hegemonic economic leader in the third century of globalisation as there was in the first two.
It is hard to get one’s head around this. American airport stores are stacked with books whose theme is that another economy is contesting for America’s economic supremacy: Brazil, Europe, Japan, Russia have all been fashionable – the current focus is China. But each book assumes that there will be a hegemon so the immediate future is a contest between the current holder and the next challenger.
What the books dont contemplate is that there are a number of challengers and the outcome will not be a single leader but an ongoing contest for leadership between four or five large economies – America, the European Union, China, Japan and (probably) India – which together make up two thirds of the world’s production. I am guessing that Brazil and Russia are too small to be top tier.
Share of World GDI (measured in the same – PPP – prices)
| 1956 | 1981 | 2006 | |
| United States |
25.8% |
21.2% |
19.6% |
| European Union* |
28.8% |
26.1% |
19.0% |
| China |
5.4% |
5.4% |
16.8% |
| India |
3.9% |
3.3% |
6.1% |
| Japan |
3.7% |
7.9% |
6.1% |
| Brazil |
1.7% |
3.0% |
2.4% |
| Russia** |
6.5% |
5.1% |
2.4% |
| Rest of World |
24.2% |
28.0% |
27.7% |
| TOTAL |
100% |
100% |
100% |
Source: Maddison Data Base (European Union* & Russia** figures for 1956, 1981 are on 2006 boundaries). Note that the shares would be different if exchange rates were used.
How this contest will work out is deeply problematic. Much of the contesting will be political, but even there economic theory provides some guidance. We know a lot about competitive markets with many small firms, we know a lot about markets dominated by a monopoly; we even know a bit about markets dominated by a duopoly. But behaviour in a market with five major players is so very complex it is extremely difficult to make predictions.
Is that the world we are going into? Well no, we are already in it. The outcome of the Uruguay Round ultimately involved a settlement between America and Europe. That has not been possible in the Doha Round because, while China and Japan remain quiescent, India and Brazil, in association with other economies, have enough leverage to influence the outcome – or rather because they have enough leverage there has been no outcome.
Again the end of a single global leader is a far more complex issue than we have time to pursue today. I want to draw attention to but two issues.
The first is that it is going to be very difficult for the current hegemon to adapt to the loss of power. I observed Britain in the 1960s and the 1970s – even today – struggling with the fact it was no longer the economic hegemon it had been before the First World War, a fact obscured in the inter-war period by America’s insularism. It will be even more difficult for Americans suffering the same fate, because the world they understand is being replaced by a quite different, multipolar, one. The friends of America are going to have to put a lot of effort supporting it through the transition; pretending it is not happening is not support.
But, second, the multipolar world presents a challenge to New Zealand. In the past our international relations – economic, diplomatic and security – have depended upon a patron which was the hegemon. First it was Britain, then America together with the American acolyte Australia as a sub-patron.
How do we act when there is no hegemon? Do we stay with one of the big five or do we try go with all five or some of them? Sometimes a coalition of smaller states may matter, as Brazil is demonstrating in the Doha round. This issue of functioning in a multipolar world is going to puzzle New Zealand’s foreign policy for many years to come. We will not be alone, but given our unusual geographical isolation and odd economic structure we will have to find a unique solution to living in a world very different from that which we are used to. .
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Economic recovery means government spending restraints and higher taxes.
Listener: 21 November, 2009.
Keywords: Macroeconomics & Money;
In Through the Looking Glass, Humpty Dumpty warns us to be careful with the meaning of words. So what to call a world economy generally turning to custard? No one wanted to call it a “depression” because of the overtones of the Great Depression of the 1930s. The “global financial crisis” describes neutrally what caused the custard, but not its course. Commentators hit on the term “recession”.
Recession does not have a precise meaning in formal economics but usually refers to that phase in the business cycle between the boom and the trough, when economic activity does not grow as fast as usual and may even contract. In the US, a recession is usually said to occur when GDP (total market activity) declines for two successive quarters. Normally the economy rebounds so quickly – the so-called V-shaped recovery – that not a lot of attention is given to the trough phase before the rebound. If the recovery phase of the business cycle is slower, but “normal”, it might be called U-shaped.
Nobody seems to think the world is getting a V-shaped recovery – although some countries are, especially China (and, hence, Australia). Optimists think the general recovery will be U-shaped, although there is a fear it may be W-shaped: a recessionary downswing, followed by a short recovery and then another downswing. If so, we would be some distance off a ?prolonged recovery.
This view arises from a belief that the fiscal injection (more government spending and lower taxes) – especially by the Americans – has been enough to prevent a slump into a depression, but has been insufficient to lift the economy onto a sustainable growth path. The gloomier among us think such fiscal injections are not sustainable without generating inflation. Even if economic activities bottom out, the economy may not grow fast enough, and other important indicators of poor economic performance – unemployment, company closures and mortgage foreclosures – would continue to rise; these indicators do not turn around until well into the recovery phase of the business cycle.
If the recovery is very weak, the economy runs along in a way sometimes described as L-shaped. It can last quite a while; the Rogernomics Recession ran about seven years (longer than the Great Depression, but not as deep), and the Long Depression of the 1880s almost 17 years (but also shallower than the 1930s). Notice that “recession” and “depression” in the previous sentence are not simply referring to the downswing but also to the trough and the early part of the recovery.
The claim that New Zealand’s recession has ended depends upon minuscule growth in a single quarter of GDP, a statistic subject to measurement error. Many will continue to suffer as unemployment, mortgage defaults and business collapses continue to rise. Possibly there may be only a breather before there is a second downswing into that double-dipper W.
The global financial crisis may be over – regulators seem confident the big banks are largely sound (that includes New Zealand’s) – but there may be more failures in the secondary banking sector. The New Zealand Treasury has set aside a substantial $800 million in case it is called upon to fund your guaranteed deposits in other financial institutions.
The international bankers seem to think things are back to normal and have gone back to paying themselves extravagant bonuses. Having transferred the failures of their excesses to the taxpayer, they think they can return to the excesses.
Suppose we are in a recovery phase that will start off slowly and quicken – U-shaped, as opposed to W- or L-shaped. It still won’t be easy. Not only will lay-offs continue for some time, but floating-rate mortgage holders may find their interest rates increasing – perhaps to above 8% – as the world monetary authorities, of which our Reserve Bank is part, attempt to mop up the liquidity they have been injecting.
Along with the US and Britain, New Zealand is among the economies where the fiscal injections are excessive and will have to be restrained back to a sustainable path. In plain English that means more vigorous government spending restraints, curbs and, even, higher taxes.
<a name=”TOP”></a> NZIIA Mini-seminar on New Zealand’s Overseas Trade: Policies and Practices One Hundred Years Experience of Overseas Trade Development. 9 November, 2009
Keywords: Globalisation & Trade;
Three centuries ago, there was little international trade. Almost all involved ‘absolute advantage’, the exchange of products which could not be locally produced. Because the cost of transportwas high, the products had to be valuable. Thus spices from the east came to Europe from the east in exchange for silver it had seized from America.
About two centuries ago, the cost of transport – all the costs, so call them the ‘costs of distance’ – began to fall, opening up the possibility that international trade on the basis of ‘comparative advantage’. Now an economy might import a product which it could make itself – even which it could make more efficiently – because it used less resources to produce the exports which it could exchange for the import.
It is instructive that Adam Smith, who identified the significance of economic specialisation , did not support international trade, for in his day the costs of distance were high so it was not particularly relevant. Forty years later, as the costs fell, David Ricardo set out the theory of comparative advantage.
Over time, the falls in the cost of distance have been dramatic and transforming. Europeans would hardly have come to New Zealand if sailing around the world had not simplified. Refrigeration was to dramatically change New Zealand from an economy based on sheep stations in the nineteenth century to family farms in the twentieth, a change which impacted on the fundamentals of its politics and society, as well as the economy; this is a major theme in the story of New Zealand which I am writing.
Costs of distance have continued to fall. For instance our tourist industry – inbound and outbound – depends on low costs of international travel; it costs much the same in nominal dollars to fly about the world as it did forty years ago, even though prices have generally increased by twelve and more times.
Subject to one caveat, we can expect the costs of distance to continue to fall, often with surprising consequences. The introduction of the world wide web has made the cost of information flows near zero, enabling a raft of service industries to become internationally footloose. As a consequence we are seeing offshoring of parts of the service industry, just as occurs with manufacturing. Another increasing phenomenon is value chaining, where the components of a product are created in countries different from where they are assembled. Both could have considerable implications for New Zealand economy; are there opportunities here we have yet to seize?
The caveat is that it is possible that following ‘peak oil’, the price of transport fuels may rise sufficiently to reverse the falling costs of distance. When I looked it at this scenario, I concluded that the rise is likely to be offset by medium term technological improvements in energy use So we might get a period of a decade, say, in which the effective costs of distance stagnate. Even so there would be ongoing progress, because the existing possibilities have not yet been exhausted; in any case fuel costs have little impact on information flow costs.
While there are still gains to be made from international trade based on comparative advantage, competitive advantage is becoming increasingly important. Sixty years ago, trade between countries was based upon the exchange of different products, and there was hardly any intra-industry trade. Today two countries may sell the cars they make to one another. Nowadays about a quarter of internationally traded goods is based on intra-industry trade, the exchange of similar products. That probably also applies for services.
Just as David Ricardo developed a theory to explain comparative advantage trade a bit after it began, about three decades ago there evolved the New (International) Trade Theory. Last year its significance was recognised when Paul Krugman became a Nobel Laureate. At the heart of the New Trade Theory is economies of scale. To reap them one needs large markets, so the falling cost of distance is crucial. But their effect is much more complicated than in the comparative advantage case.
At the firm level economies of scale explains why a firm cannot provide unlimited variations in its products. It would be far too costly to offer you a car in any shape, size, colour and trimmings. By standardisation the firm can get the costs of the range it produces down. The consequence is that you may prefer another manufacturer’s car with a different mix of those characteristics. That manufacturer may be offshore. And so we get intra-industry trade in cars – and many other products – once production economies of scale are important.
There are also agglomeration economies of scale for industries, where industry costs are lower when they are clustered in a common area. This explains why there are concentrations of population and industries in particular locations, despite the diseconomies of congestion. A branch of the New Trade Theory is known as the New Economic Geography.
The New Trade Theory has hardly impacted on New Zealand’s economic thinking. We are so focused on classical comparative advantage that we seem unaware of the extraordinary changes in economic theory and in the international economy we live in. I can identify but one policy area where there has been some impact.
The proposals to reform Auckland’s governance were in part based on the New Economic Geography. Even so, much of the concern was to see Auckland as a gateway city, not a global city. My impression is that Aucklanders still have not faced up to all the implications of what it means to be a global city; while Christchurch, which should be our second one, is even more backward in its thinking.
We hardly care about New Zealand’s dismal intra-industry trade performance. Perhaps the national judgement of the irrelevance of the new patterns of trade is correct. Perhaps New Zealand’s destiny is to be a comparative advantage trader in the international economic regime. It has suited us well in the past, and there may remain a future for such suppliers, although the real challenge may be how to be a high income comparative advantage exporter. But I sure wish that we made a conscious decision to pursue a comparative advantage strategy and ignoring competitive advantage, rather than choosing it by inertia and default.
For even if we pursue the comparative advantage strategy we need to be aware that the international economic regime is changing under the forces which the New Trade Theory. Economic activity is relocating away from the North Atlantic economies to – especially – Asia. The European Union and the United States will remain important parts of the world economic and political order, but with the rise of China and India plus Japan, the North Atlantic will not be the hegemonic power that the US is and Britain was. But that is another seminar. <a href=article1046.html> It is the implicit theme of the one which the NZIIA is holding in 15 days on the BRICs.</a>
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<a name=”TOP”></a> Conference to Celebrate 25 Years of the St Andrews Trust for the Study of Religion and Society, 7 November, 2009.
Keywords: History of Ideas, Methodology & Philosophy;
I am traditionalist enough to begin a presentation in a church with a biblical text. Verses 5 to 10 of chapter 6 of the first pastoral epistle from Paul to Timothy read:
“5: Perverse disputings of men of corrupt minds, and destitute of the truth, supposing that gain is godliness: from such withdraw thyself.
“6: But godliness with contentment is great gain.
“7: For we brought nothing into this world, and it is certain we can carry nothing out.
“8: And having food and raiment let us be therewith content.
“9: But they that will be rich fall into temptation and a snare, and into many foolish and hurtful lusts, which drown men in destruction and perdition.
“10: For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.”
The last verse is often misquoted as ‘money is the root of all evil’. The difference is important. Paul is not ruling out that money may be a useful part of an economy and of society, a means to an end. The evil arises when it becomes an end in itself. The Rev John Murray, who once chaired the trust reminded me that Jesus said:
“No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and Mammon.” (Matthew 6:24; Luke 16:13)
Money is vital for a modern economy, because a medium of exchange makes specialisation possible. Without money, exchange would depend upon a coincidence of wants. Without it we would have to be largely self-sufficient in our production and consumption and our standard of living would be much lower. Paul was not proscribing money , nor the economic organisation of specialisation which money makes possible.
There is a difference between money today and two millennia ago. In those days the money was – in the jargon – ‘fully backed’. Its coins were made of metal equal to their face value. Thus the denarius of the bible was made of silver – it was a day’s pay for a labourer. We have since realised that the material content of a coin – or even more so a note – need not be equal to its face value. What is required is that the community trusts that the money will be valued at its face value – thus saving the use of gold, silver and copper in the coin. Ultimately a currency’s value is that the government will accept it in payment of taxes – giving an unexpected meaning to ‘Render unto Caesar the things which are Caesar’s.’ (Matthew 22:21)
It is not a great stretch of Paul’s meaning to replace the term ‘money’ with ‘wealth’ (or Mannon). The epistle says we need sufficient to live with, but if we pursue wealth after that sufficiency we tread a path of destruction and perdition. That is not a bad description of what has increasingly happened in recent years. Instead of using money as a means to help attain a sufficiency, it has become an end in itself.
Today’s seminar is about responding to the recession. I want to talk about the Global Financial Crisis, which is a far greater challenge than the recession. Recessions are common. There has been about twenty in my lifetime – say one every three and a bit years. For about a third of the life of the St Andrews Trust the economy has been in recession. Recessions are an ordinary part of the economic life. A Global Financial Crisis – the last was eighty odd years ago – is a stimulus to ask fundamental questions about the economy.
So in the spirit of the Pauline epistle let us ask what is the purpose of an economy? You will appreciate that as an economist I am operating outside the normal competence of my profession. What I hope to do is give you some background to build a better understanding.
Utility and Happiness
Although there have been numerous modifications to the initial idea, most of economics is built around the notion that individuals maximise something called ‘utility’, which is their response to the various things they consume. A simple summary of the underlying philosophy might be ‘more means better’; for utility assumes that the greater the consumption the better off one is.
I dont have time to go through the caveats of this analysis – economists have many caveats – but ultimately it concludes that an approximate indicator of the total utility in a community is measured by aggregate total output, such as GDP (perhaps with modifications like for environmental degradation) and that a market economy (with modifications) is the best way to produce the maximum GDP – that is, maximum utility
Utility was thought to measure happiness. Jeremy Bentham, the founder of utilitarianism, said ‘happiness is the greatest good’. He is even better known for ‘the greatest happiness of the greatest number is the foundation of morals and legislation’. Two hundred years ago it was assumed the more one had the happier one was. But is this true?
Today we can directly measure happiness by asking people how happy they are. The New Zealand and international research can be summarised as follows
– Women say they are happier than men, all other things we can measure being equal.
– The young are happier, but as they grow older, they become less happy, hitting the bottom at the age of about 50. After that, life satisfaction starts improving again – for the over 65s their life satisfaction is about the same as at late teenage levels.
– On the whole of ethnicity does not matter, all other things being equal (although of course they are not)
– One of the strongest effects is that the divorced and single are less satisfied with their lives than the married are. These are averages; of course there are some married couples who are deeply unhappy, and there are singles and divorced who are on top of the world. But as a general rule, the married are happier.
– There appear to be few differences in satisfaction with life by educational attainment. However education may give one life opportunities which affect happiness.
– Thus, those in higher skilled occupations are happier than those in lower skilled ones.
– As far as employment status is concerned, the sick and unemployed are unhappier that those working, whether part or full time. Those studying or parenting are much the same as those working; the retired are likely to be slightly happier.
– The evidence supports the utilitarian view that the higher the income the happier one is. However the effect is surprisingly small, compared to the variables I have just covered. For instance a person on $15,000 a year with a job is likely to be happier than a sick person on $30,000; a person on $50,000 a year who is married is likely to be happier than a single person on $100,000 a year.
The small benefit in life satisfaction from additional income is even more paradoxical if we look at happiness and income through time. The American government have been surveying Americans for the last sixty odd years. In that time their average real incomes have tripled. But the average level of happiness has hardly changed.
We get a similar picture of average level of happiness by country. If Bentham and economics were right, we might expect countries with higher average incomes to have higher average happiness. Among rich countries – New Zealand and those like us – that is not true. There are country differences in average happiness but they are not explained by differences in average real incomes. All rich countries are about equally happy; the particularities which cause differences are nothing to do with income
So while for two hundred years it has been assumed that ‘more is better’, the evidence is that higher incomes do not seem to mean greater happiness, whether we are looking through time or between countries.
That higher incomes within a country generate a little more happiness at a point in time, suggests there is a relativity effect which I shall try to explain. But whatever that explanation, it is humbling for economist and would-be economists to realise that phenomena, such as marital status and job satisfaction are far more important than income is when it comes to determining life satisfaction.
While, as I have already mentioned, average happiness in rich economies does not rise as the economy gets richer, that is not true for those economies which are poor – say below two-thirds of the New Zealander’s average income. Below that threshold there is a stronger correlation between happiness and income by country. As income and consumption rise, people in economies below the threshold say they are happier.
What this suggests is that Bentham may have been right in his time, when ‘more’ did mean better. Increased production meant people ate better, were better clothed and lived more comfortably. Above a material threshold more spending does not increase happiness because the material requirements of life are already met. America seems to have been at that stage for about sixty years. We dont have the same longitudinal data for other rich countries, but New Zealand is among those that are now comfortably above the threshold.
The Maslow Hierarchy of Needs
Once a country is above the threshold what is the purpose of the extra production? To try to answer this (albeit only in part given the time I have) I am going to use a framework widely used by other social sciences; the notion of a ‘hierarchy of needs’ as first proposed by the American (Jewish) psychologist Abraham Maslow.
Maslow’s hierarchy of needs involves five steps. At the bottom are physiological needs such as food, water, and shelter. A central role of an economy is to provide these basic needs. The rich world’s economies has done that pretty successfully, and most of their people are above the first step of the hierarchy of needs. However we should never forget that most of the world’s population live in countries which are not so rich, where their basic needs are not met, and where they are, on the whole, not so happy.
The second step up the Maslow hierarchy involves safety needs although perhaps we dont think a lot about them until, say, there is a crime or accident in our neighbourhood. While responding to these needs usually takes resources – jails and safety equipment for instance – economics is not at the centre of these issues.
Social Inequality
There is a curious paradox involving crime and social inequality. Richard Wilkinson in his The Impact of Inequality argues that the degree of social inequality affects the society’s health and welfare. Let me as a social scientist say I am cautious about his work, for while the findings are plausible they do not have the same rich data base that the happiness research depends upon.
Using data bases from to compare countries, the states of America and cities it appears that the greater the social inequality, the worse is average health (which is where the research area is most worked through). But the murder rate is also likely to be higher when there is greater social inequality, while there is also likely to be greater social hostility and lower social trust. In a different venue we might ask whether New Zealand’s rise in income inequality in the late 1980s and early 1990s triggered this phenomenon, increasing demand for law and order.
Apparently the greater the degree of social inequality the harder it is to secure the second step on the hierarchy of safety needs. So you may want to justify reducing social inequality in order to increase community welfare. That is a pretty self-serving reason for thinking about social inequality. The biblical tradition against social inequality is in different – ethical – terms.
I am going to ask my good friend Robin Lane to paraphrase from the Jerusalem Bible some verses from the prophet Amos. Robin was not only a minister of St Andrews but he was Chairman of the Trust during some of its most difficult financial years.
“Listen to this word, you cows of Remuera
Lolling in your summer palaces on Waiheke,
Oppressing the needy, crushing the poor,
Saying to your husbands,
‘Bring us a glass of Bollinger’!
…………………
The day is coming to you now
When the your bonds will turn to dust,
And homes will go in mortgagee sales.”
(Amos 4:1-3)
“I despise your prayers to the GDP,
Your worship of the share market.
No more chanting about your stinking bonuses.
But let justice flow like water
And integrity like an unfailing stream.”
(Amos 5:22-24)
Amos is arguing is that the rich and powerful should be concerned with those less well-off for reasons of righteousness, not because it is their advantage to increase safety. Admittedly the prophet argues that if the privileged dont, the wrath of God will come down upon them. In this more secular age one might see in Wilkinson the mechanism by which this wrath will be expressed. But Amos’s concerns are ethical, not instrumental ones.
Both Amos and Wilkinson are talking about living in a community. Instructively, the middle three steps in Maslow’s hierarchy involve genuine community. This contrasts with the first step of the primary physiological needs where in principle the economy which provides them may lack community – and many economic theories present an economy as independent of any society.
The next step up – it’s the middle step of the Maslow hierarchy – is love, affection and belonging, very much involving community relations. Economics has little to say about this need for people to seek to overcome feelings of loneliness and alienation. The Beatles tell us that ‘Money Cant Buy Me Love’; perhaps I should leave it there, except to note that money may provide the time and reduce the stress which makes effective love, affection and belonging possible.
The Importance of Self Esteem
The second to top step in the Maslow hierarchy is esteem, which covers both self-esteem and the esteem a person gets from others. Humans have a need for a stable, firmly based, high level of self-respect and public respect. Until they are fulfilled, the person feels inferior, weak, helpless and worthless. When their esteem needs are satisfied, the person feels self-confident and valuable as a person in the world.
At this stage economics comes back. Recall that while over time high average incomes do not increase happiness, at any point in time those with higher incomes are happier. One explanation for this – the currently most compelling in my view – is that higher income relative to others gives one greater self-esteem. So once the threshold required to meet Maslow’s first step of providing for physiological needs is passed, the value of income and wealth is that it helps enhance one’s self esteem.
We often rank people by their wealth, so that it appears that an individual can obtain greater public esteem by earning and owning more. Money may not be able to buy you love, but it seems to be able to buy public respect – or at least many people operate as if it can.
There are a couple of points here. First, if the only dimension of self esteem is income and wealth, then we have a striving to increase the inequality in order to obtain a higher ranking of public esteem. But recall that greater inequality increases crime, thereby undermining the second step of the hierarchy of safety needs.
Second, in order that income and wealth justify public esteem we have to believe that those with high incomes (which may accumulate into great wealth) represent some general benefit to the public. Economists have spent much time trying to establish whether this is generally true, although there is Hume’s problem that an ‘is’ cannot convert into an ‘ought’ – how the economy works does not tell us about what is ethical or good and bad.
Obviously in some cases income is associated with the social contribution. I hazard that Peter Jackson has made a greater contribution to the world welfare than most of us, although it is not clear that his contribution is in proportion to his income. However that is certainly not true for many others. It hardly explains the bonuses of those in financial institutions whose actions have contributed to the Global Financial Crisis. Nor can one easily say of those who have inherited wealth that their holdings in some way represent their personal merit. So we should be very cautious about assuming that high income or great wealth reflect social merit, and it would be unwise to assume that such people are automatically worthy of public esteem.
Those who desire public esteem from their wealth need to demonstrate it. Hence the importance of ‘Rich Lists’ – of showing off. Another way is by possessing what economists call ‘positional goods’ whose purpose is to demonstrate the wealth of the owner or consumer – to flaunt it. (Thorstein Veblin, called the phenomenon ‘conspicuous consumption’.) So the rich get bigger cars, not because they need them, but because the owner needs to publicly display that they are higher in the social ranking than the mass of car owners. Some people seem to have more houses than they can possibly use. Jewellery, designer clothes, expensive parties and so on are all potential positional goods too.
Positional goods are not confined just to the very rich. Recently, I was looking at housing in the more middling part of the market, and was struck that while recently constructed homes were larger, the additional space is not particularly functional. One can only live in a certain area – the rest is for display; ‘look at my house, it shows how well off I am. Dont you think more highly of me?’
This demand for positional goods becomes a major driver of economic growth, as we require more of them to demonstrate our position, and catch up on others. But the additional positional goods give only temporary relief. The higher incomes and technological innovation which economic growth generates continually undermine their value since those who are lower ranked acquire the positional goods too. Soon everyone can have a bigger car.
You observe this in the evolution of holiday homes. As they have become more common, the very rich have found their territories invaded by those they judge of lesser standing, so they move on, and on. Perhaps it is to a holiday home at a more remote location, or to a third one, or a yacht. So once the basic needs are met, there is no general rise in happiness over time. Yet that demand for self esteem from positional goods drives the rising production of material output.
At a certain point the prime positional good seems to be money itself. What strikes one about the bonuses that those in financial systems paid themselves is that they could not possibly spend them usefully. A million dollar bonus has not been unusual – that is what an unskilled worker earns in a lifetime.
This cult of the pursuit of monetary wealth and its accompanying driver of greed has become the religion of the modern capitalist state. Hardly any of those scrambling for the vast sums asked whether they were worth it in absolute terms. What was important to them was their ranking in the hierarchy, with the certainty that they ranked well above the ordinary public. Those with such wealth thought it somehow indicated that they were of greater value, ignoring the epistle’s cautions.
Their strategy for community esteem succeeded. We rarely mention that the rich’s achievements had an element of luck, and that they may have – as the epistle says – gained their goals in ungodly ways. Instead we attribute to them desirable characteristics, such as wisdom, beauty, intelligence and virtue which would not be evident were they ordinary citizens. As Tevye, from The Fiddler of the Roof, observed: if he were a rich man ‘the most important men in town would come to fawn on me/ they would ask me to advise them,/ … And it won’t make one bit of difference if I answer right or wrong./ when you’re rich, they think you really know’.
The ‘we’ is not just the rich, insofar as others honour the goals of the rich, even if they cannot attain them. The entire society has adopted monetary goals as appropriate social goals – consider the demand that we should accelerate the economic growth rate to join the top half of the OECD or Australia in terms of GDP per capita. That is not what Paul counselled Timothy as the way to godliness.
This is the modern day version of Paul’s concerns about the love of money. It may not be able to purchase love, but it seems to be able to purchase social esteem. Money becomes the ultimate positional good, with the love of it as the root of the evil. It led to the financial boom and then the bust.
As long as individuals think they can purchase self-esteem then the system is vulnerable to repeating the evil. No law can prevent this. Instead we need a society whose thinking is not dominated by wealth, in which we award public esteem for other attributes. Accepting this means abandoning public ranking based only on crude monetary values. It requires more subtle understanding of the human condition, and one in which there is no single dimension on which each of us could be ranked. Recall that the sweetest thing of all to Tevye was to discuss the holy books. That may not be your ultimate objective, but you can still respect others for whom it is.
The Marginalised
If there is a social hierarchy, there have to be some people at the bottom. Amos is concerned with them and how the elite ignores them. Things are not too different today.
As a rule most of our marginalised are above some economic threshold – say the standard set by Paul. Never-the-less they have limited opportunities to do fundamental things – some would call them social rights. They may have enough – perhaps just enough – for the first step on the Maslow hierarchy, but miss out on the higher steps.
That is why when we began the development of the poverty research project a quarter of a century ago, we used a relative poverty line, rather than an absolute one. The test – derived from the Royal Commission on Social Security – was about everyone’s ability to belong to and participate in society.
An elaboration of the Amos critique may be that there are two problems with out elite. First, by focussing on material wealth as the sole criterion of success in society, they diminish the self esteem of those who have little material wealth. Second they further diminish them by ignoring their needs and aspirations.
So it seems that the issue is not merely a matter of reducing social inequality. That too. But to do only that is to reinforce the notion that material wealth is the measure of all things – to serve Mammon and not God. We need to develop societies which are not governed by the sole principle of material wealth, that it is not the sole goal of community activity.
The Global Financial Crisis forcing us to think about the purpose of an economy. The Crisis is not merely a technical one to be resolved by the application of economics. It exposes an ethical crisis. While the public has had vigorous ethical disputes, they rarely touch on the economic system, other than concerns about the poor (and that in a very sotto voice). What is the purpose of an economy, is rarely addressed. Is money a mean to an ends or the end itself? By not addressing such questions we implicitly answer that what the economy is doing broadly meets our approval.
To the Top of the Hierarchy
Two millennia ago we were given a broader vision. But before coming to it let me return to the Maslow hierarchy of needs. It was self-actualisation, the realisation of one’s potentialities with the implication that each of us has a different potential to realise.
The psychologists’ debate on self-actualisation is fraught with complications, and is outside my professional competence. For a characterisation of self-actualisation I turn to Paul’s epistle to Timothy. Verse 11, which follows that condemning the love of money as the root of all evil, says:
“But thou, O man of God, flee these things; and follow after righteousness, godliness, faith, love, patience, meekness.”
I was proud that this presentation followed one by Lloyd Geering, New Zealand’s greatest public intellectual.
<a href=”#TOP”>Go to top</a>
Recent devastation in the Pacific has a parallel in the great New Zealand tsunami.
Listener: 7 November, 2009.
Keywords: Maori; Political Economy & History;
The sea grew dark and troubled and angry, and presently a great wave, which gathered strength as it came, swept towards the shore. It advanced over the beach, sweeping Titipa and all his fish before it till with the noise of thunder it struck the cliff on which the people stood. The great wave receded, sucking with it innumerable boulders and the helpless, struggling Titipa. Then another wave, greater than the previous one, came with tremendous force and, sweeping the shore, struck the cliff with a thunderous roar. This was followed by a third which, when it receded, left the beach scoured and bare. Titipa and all his fish had disappeared.
About 500 years ago the North Island and north of the South Island were hit by one or more great tsunami. Sand, gravel and stones were strewn over coastal sand dunes more than 30m above sea level. (An earlier tsunami lifted a whale 35m above the ancient sea level.)
Given the widespread impact and that most Maori lived on coasts, a third of the population may have perished, similar to the proportion killed by the Black Death in Europe 650 years ago. Economic historians ponder the impact of the plague. Since the surviving population was left with the same land and capital, labour productivity and the economic surplus would have risen, triggering the West’s subsequent economic development.
But if bubonic plague was a neutron bomb killing people, the New Zealand tsunami were more like nuclear explosions destroying capital – dwellings, gardens, canoes, land and sea life – as well as people.
If the tsunami occurred during the day, it probably killed more women and children. Some men would have been inland or fishing at sea (ironically, one of the safer places). One can imagine their emotional devastation when they returned to the kaianga to find almost nothing left.
We don’t know much about what happened afterwards. Almost certainly the people would have collected any survivors from the shore and struggled inland bewildered and grieving. Later they would have tried to link up with other settlements, finding many just as devastated.
Archaeologist and surveyor Bruce McFadgen, whose Hostile Shores is the standard reference, argues the tsunami triggered a significant change to the way Maori lived. The kaianga they rebuilt were set further back from the sea. Single-hulled canoes replaced double-hulled ones. The quality of stone adzes declined, and fishing gear, ornaments and other artefacts were simplified. The whakapapa of some tribes go back to the 15th century but no further, possibly because many of the knowledgeable were lost under the waves.
Will the same thing happen to the Samoans and Tongans? Fortunately, proportionally more survived. Another critical difference is today’s communities are far more interdependent. One takes a little comfort from how quickly the rest of the world responded.
But although the countries had an immediate need for emergency relief, they also have an ongoing need for reconstruction, not simply to replace what has been lost, but to be part of a holistic economic and social development programme. It will be of such interest to economists, I hope to be able to report on it.
Prime Minister John Key mentioned $200 million for Samoa’s reconstruction. It’s a guess, but possibly in the right order of magnitude. On a per capita basis, that’s equivalent to $40 billion in New Zealand terms and you could then treble it, say, for Samoa being a poorer economy.
The Samoans cannot do it by themselves – not quickly anyway. We are going to have to contribute, both publicly and privately. It will be easy to comfort ourselves that we supported them (and the Tongans) in their emergency and then leave it to the (miserable) aid budget and our 130,000-strong Samoan and 50,000-strong Tongan communities. The problem is not that the rest of us are ungenerous, but that we move onto other things and forget. But like the Maori, one of whose memories opened this column, those who were there never will.
<> <> Spirited Conversations: Nelson, 29 October 2009. <> <>Keywords: History of Ideas, Methodology & Philosophy; Political Economy & History; <> <>This evening’s presentation is about two terms which are homophones. I shall begin by talking about prophets – spelt p-r o-p-h-e-t-s. Later I shall talk about p-r-o-f-i-t-s. Both have a number of meanings, not least the p-h-e-t kind. <> <>For instance, the biblical prophets were men who were – as the Concise Oxford Dictionary says – ‘inspired teachers [and] revealers or interpreters of God’s will’. Typically they were telling their fellow Hebrews that they were no longer following God’s path and they should change their ways. Famously, they were without honour in their own country, because they were often in conflict with the Establishment – the Temple and the secular authorities in Jerusalem – who sometimes took action to suppress the prophets – in a notable case, crucifying one. <> <>The Concise Oxford also gives as a second distinct meaning of a prophet as one ‘who foretells events’. It comes from the notion that a prophet is close to God, and since God knows the future, He or She is able to convey some insights to a faithful servant. That was not a role given to the Hebrew prophets, although there is an obvious sense in which practical men and women who are wise and who understand, and stick, to the fundamentals are likely to predict more of the future correctly than those who ignore the basics. <> <>The notion of the prophet with the gift to see the future probably derives from the Greeks. The most famous was the Delphic Oracle dedicated to the god Apollo. It was notorious for giving ambiguous predictions. The most famous was to Croesus of Lydia who was told that if he made war on the Persians, he would destroy a mighty empire. This prediction proved to be correct, except the empire that Croesus destroyed was his own. <> <>Almost as famous is the Trojan Prophetess, Cassandra, who again got her gift of foresight from Apollo. When she spurned him Apollo, unable to reverse the gift, decreed that while her predictions would be accurate, nobody would believe her. So when she warned against bringing the Trojan horse inside Troy’s walls, she was ignored. What would a mere girl know about warfare? Today, ‘the curse of Cassandra’ applies to those who give valid warnings which are disbelieved. <> <>Often we are not aware of the Cassandras until after they have been proved correct. Here I am referring only to those who have the ‘gift from the gods’. All sorts of people make wild predictions of doom and gloom; some are going to be right by accident. Those who matter are experts who know the fundamentals and apply them more rigorously, just as the Hebrew prophets did. A modern day prophet also depends on the accumulated knowledge over the years – albeit a far more massive literature than was available to the Hebrews. <> <>In these days God seems to have withdrawn from direct involvement in human endeavour, so no-one can claim to have a special relationship which enables them to predict the future. The withdrawal has been exchanged with the gift of scientific understanding (including of social phenomena). Insofar as today’s prophets have any claim to foresight, it arises from this science, this understanding of the fundamentals, a willingness to pursue their logic rigorously and, most importantly, the courage to speak out even if the message is not acceptable to those in authority – to ‘speak truth to power’ as a recent book on New Zealand public intellectuals was titled. <> <>Certainly before the crash happened there were thoughtful economists who were aware that the international financial system was problematic. The roll call includes Robert Shiller who coined the phrase ‘irrational exuberance’, George Akerlof, Paul Krugman, Joseph Stiglitz and New Zealander Robert Wade – as impressive a galaxy of today’s economists as you are likely to come across. Their thoughtful contributions are based upon earlier economists such as John Maynard Keynes and a lesser known, but increasingly respected, Hyman Minsky. Keynes’ works seems to have been banned in some of America’s most prestigious universities. Not surprisingly their sometimes eminent economics teachers do not have an impressive record analysing the Global Financial Crisis is concerned. <> <>I do not propose to discuss much why the international Cassandras were not listened to; one example will suffice. Robert Wade, who holds a chair in economics at the London School of Economics, got into a debate with a Times journalist Anatole Kaletsky, who now admits theat he got things terribly wrong. He blames his mistakes on being misled by economists. He should have listened to Wade instead of those who spouted the conventional wisdom. <> <>New Zealand’s conventional wisdom was little better. My local paper reprinted an article by Kaletsky; it has had no off-setting contribution from Wade. Nor did it report the Cassandras at the time, nor afterwards. It is extraordinary how those who got the boom embarrassingly wrong are still uncritically given opportunities to share their ‘wisdom’. After all, they might get it right one day, mightn’t they? <> <>The journalists do not generally fess up that they have contributed to misleading you – let’s give Kaletsky credit for doing so. Nor will they go to the Cassandras that they ignored in the past. The purpose of their publications seems to be to entertain and comfort; not to inform and provide guidance about the future. In any case, like Kaletsky, how would the journalists know? They just publish the conventional wisdom. <> <>Remember that in the early 1990s the Establishment made a concerted effort to squeeze their critics out of the media. It is not clear how the media responded, but around that time the critics of the conventional wisdom found it harder to get media access. Ironically, in 1998 a now retired editor of the Dominion complained that the economy was in still in difficulties and nobody told him it would be. There were economists saying these things, warning against the irrational exuberances of the interpretation of the upswing out of the Rogernomics Recession but nobody wanted to listen – or at least the media did not want to publish what they said. As the editor said, the self -censorship was costly. <> <>‘Rogernomics Recession’? Now there is an expression you dont hear much. Yet while the rest of the world flourished, between 1986 and 1993 the New Zealand economy stagnated – for over seven years. Per capita GDP was lower at its end than at its beginning, One of the reasons we dont discuss this stagnation, is that acknowledging the recession would undermine their credibility who want to repeat policies that are associated with the period. <> <>Another reason is that the fall in incomes did not apply evenly. Generous tax cuts were given to the rich whose real after tax income continued to rise roughly in line with what they had experienced in the pre-Rogernomics era. So they dont have a sense of the stagnation and decline that the majority of the community experienced. They would be astonished that in a four year period almost half the labour force ended up as unemployed at some time or other. It understandable that those who want further tax cuts for themselves do not want to draw attention to what happened last time. <> <>What about this recession? Did anyone in New Zealand forecast it or parts of it? Almost certainly, but their forecasts were not given much prominence. For instance, in 2005 a senior funds manager predicted ‘[l]ooking forward over the next 12 months, it is highly likely that one or two finance companies will default’. In 2006 National Finance 2000, Provincial and Western Bay Finance all failed. He was not alone. Some worries even surfaced in the media. However if you offset the occasional report of a Cassandra with the deluge of reports implying the sector and finance houses were sound, you get a sense of a misleading imbalance. <> <>Even so, ordinary investors has no comeback on the journalists. The information was available to them and their advisers. But accessing it required more diligence than just lazily reading a newspaper or watching TV. Democracies dont suppress their Cassandras, they ignore them. <> <>The problem with prediction is that the future is so dependent on events nearly impossible to predict. About a decade ago I began writing about a ‘millennium recession’ based on my reading of the world economic track and the underlying imbalances that were evident then. A millennium recession did not immediately eventuate, for I failed to predict the destruction of the Twin Towers and the way it strengthened the George Bush presidency so he could drive through major tax cuts which stimulated the economy out of the recession. I hope you will forgive me for not being an expert on terrorism – the CIA failed too. <> <>I also underestimated the fiscal radicalism of the Bush junior administration. Unlike his father’s – more like Ronald Reagan’s – it increased the US Government deficit by spending more (especially on warfare) and cutting taxes. This huge injection increased production in the US and the rest of the world, the world economy lifted and the millennium recession seemed to have been avoided. <> <>Or was it only deferred? The Bush measures did not address the structural imbalances which led to my original prediction – indeed they exacerbated them. Because US dollars are the international medium of exchange, a US government deficit injects cash into the world economy. To reduce that possibility of inflation, the US Government sells bonds (fixed-interest debt securities) to absorb the money. Although bonds cannot be used to pay bills, they can be easily converted back into cash, especially when interest rates are low. So the result of the US deficit was an enormous increase in the world economy’s financial liquidity and imbalances. <> <>Meanwhile other countries – China, Japan and the Middle East oil producers – ran large savings surpluses which they invested in the US, keeping its interest rates low. It might seem unwise to invest in a bank which was recklessly borrowing from the rest of the world and spending the proceeds on wars in Afghanistan and Iraq and lending the rest so that its American owners could consume goods and services. In fact, the overseas investors have taken a pounding from the falling US exchange rate. If inflation is the falling value of money, the devaluing US dollar is a form of inflation. <> <>Flush with the liquidity at low interest, the US financial institutions (and their equivalents in Europe) generated all sorts of fancy financial assets – including sub-prime mortgages – many of which are today called ‘toxic assets’. There’s a lot of talk about the need for better financial regulation. I don’t disagree, but given the surplus of liquidity (cash and near cash), I am sceptical that any regulation could have prevented all the abuses. It was a bit like putting teenagers into a casino with their pockets full of chips and telling them to restrain themselves. <> <>The result of these toxic investments were artificial profits for the financiers (that is the f-i-t kind). One estimate is they amounted to US$5 trillion over five years. It may not be right, but let’s use it for illustrative purposes. In which case output it would have been stimulated by about 3 to 5 percent of world GDP. <> <>What we are now seeing is the unwinding of those artificial profits. But the US$5 trillion of artificial profits must be removed from the financial assets of the world first. Hence the balance-sheet crisis. The monetary authorities tried to moderate the impact of the crisis by bailing out the financial institutions overwhelmed by their toxic assets. In effect the tax payers took over the artificial profits. I’ll come to the fiscal implications shortly. <> <>Today the core of the financial system sees itself saved, and appears to be proceeding on the basis that since things are back to normal, and they can get on to their usual practices, which include paying generous bonuses. To do this they have to ignore their critics, not to mention the many angry taxpayers who bailed them out. The London Economist described the extravagant bonus payments as ‘political suicide’. <> <>But if the banking system had collapsed, the system of payments would have, and so would have the entire economy. The taxpayers had to fund institutions whose previous behaviour was at best incompetent. Taxpayers were blackmailed. <> <>There is not too much of a consensus as to what needs to be done to the financial system in terms of practical detailed policy terms. I’d like to think that the finance sector is not as out of touch and as stupid as they present themselves. Perhaps they know the game will be up, so they are robbing the tills before they are sacked. Or do they think that the financial system is so powerful and adaptable they can ride out the storm of public abuse? <> <>Cassandras point out that the imbalances which precipitated the Global Financial Crisis are still there, so the world is still vulnerable to another great crisis. Not immediately, it will take a while for the irrational exuberance to wind up again. But it is possible that when the next crisis occurs, the fiscal positions of governments will be weaker than this time, so bailouts under blackmail may be less successful. <> <>The more immediate problem is that the Global Financial Crisis has compromised the productive economy. That is what a recession is about. The shortage of credit meant that investment and trade became more limited; that means less production and fewer jobs. <> <>Now you have been told that the recession is over because that is what people want to believe. Cassandras are more cautious. They are not into bumper sticker slogans, but careful analysis. It goes something like this. <>The notion ‘recession’ does not have a precise meaning in formal economics. It usually refers to the phase in the business cycle between the boom and the trough when economic activity does not grow as fast as usual, and may even contract. Normally the economy rebounds so quickly that not a lot of attention is given to the trough phase before the rebound. The quick rebound is often described as a ‘V’ recovery. If the recovery phase of the business cycle is slower but ‘normal’, it can be called a ‘U’ recovery. <> <>Nobody seems to think the world is getting a V recovery – although some countries are, especially China (and, hence, Australia). Optimists think the general recovery will be a U, although there is a fear it may be a ‘W’, a recessionary downswing, followed by a short recovery, and then another downswing. The view arises from a belief that America’s fiscal injection (more government spending and lower taxes) has been enough to prevent a slump turning into a depression, but insufficient to lift the economy onto a sustainable growth path. The gloomier think that such fiscal injections are not sustainable without generating inflation. <> <>The claim that New Zealand’s recession has ended depends upon minuscule growth in a single quarter of real GDP, a statistic subject to measurement error. Over the next year unemployment, mortgage defaults and business closures will continue to rise at least through to the next year. Possibly there may be only a breather before there is a second downswing into the double dipper W. <> <>If the recovery is very weak, the economy runs along a kind of bottom sometimes described as an ‘L’. Such a trough can last quite a while. The Rogernomics Recession lasted over seven years (longer than the Great Depression, but not as deep), the ‘Long Depression’ of the 1880s almost seventeen years (but shallower than the 1930s). Notice that here the terms ‘recession’ and ‘depression’ are not simply referring to the downswing but also to the trough and recovery. <>
<>
<>Sitting under this is the fiscal crisis, not only here but in other countries especially the US and Britain. One source is the cost to the taxpayers of the financial bail outs – ultimately they have to write the artificial profits off their balance sheets. A second source is that measures to soften the recession – such as tax cuts and spending hikes – have added to the government debt, and hence debt servicing in the long run. <> <>In addition, the higher GDP track from the artificial profits cannot be sustained. If the world economy is likely to track out of the recession at about 3 to 5 percent lower than it went in, government spending track has to run that amount lower too, or tax levels has to be raised. <> <>This applies as much to New Zealand as any where else. We are going to see strenuous efforts to restrain government expenditure with less public spending than was projected (or promised) before the election. Every day there are reports of government actions which are examples of this restraint but you rarely see the news item put into the context of the fiscal crisis. For instant it was recently announced that the health budget will be cut a total of $1.5 billion over the next three years below that which was previously projected. That is the health sector’s contribution to the fiscal crisis. We shall be lucky if that is the last. <> <>Compounding the fiscal crisis are the demands for tax cuts. That may well be one of the reasons the conventional wisdom plays the crisis down. It is so obsessed with income tax reductions on the rich, that it will ignore any argument which suggests they would be imprudent. Ultimately, in the current circumstances tax cuts are a kind of Trojan horse which if brought into the city will destroy the welfare state. <> <>In my judgement, the current projections suggest the fiscal imbalance is so great that the burden of adjustment should not, and cannot, depend only on expenditure side restrictions. There will have to be rises in the tax burden including the possibility of co-payments and user charges. <> <>Now this forecast may be wrong. Perhaps something will turn up. Unfortunately the most likely events are on the downside. The world economy may go into a W or a L instead of a U recovery. There is a very real danger of high inflation, because key countries cannot wind back their monetary and fiscal injections. The fear for New Zealand is that the government will maintain a high fiscal deficit which will lead to an unsustainable debt path, while the engine of growth – the tradeable sector – gets crushed by the rising exchange rate. <> <>Unfortunately the national practice is to ignore the Cassandras and stick to the safe platitudes of the conventional wisdom, to ignore anything which contradicts that – even facts if necessary – to continue to rely on the prognoses of those who did not expect Troy to fall. <> <>Of course, Cassandra was wrong for nine and a bit years. But the loss when she proved correct more than outweighed the earlier gains – a bit like a financial crisis. Taking correct prediction into account leads to more prudent actions. So why do we ignore our Cassandras? <> <>One factor is laziness. If God, or whomever, has given us powerful tools of analysis which enable us to understand better the world in which we live, its complexity is such it is easier to resort to simplifications and slogans. So we repeat the conventional wisdom ad nauseam, rather than think through a critique. We assume someone else has done it, that the journalist has checked what that the person being reported has done an evaluation. However, typically the journalist relies on reputation conferred by the Establishment on the basis as to whether the ‘expert’ is supportive of its interests. Often the so-called expert’s thinking is little deeper than the journalist’s. <> <>In the 1980s I spent a lot of time years studying the arguments of the Rogernomes, going back to the primary papers they quoted (and sometimes misquoted). Their analysis seemed wrong. I dont mean that they had a hidden agenda to transform New Zealand – they had – but even given their objectives, their analysis seemed wrong. I thought they knew something I did not and I tried to find out what it was. Eventually I concluded that the Rogernomes just did not understand what they were talking about. Instead they took short cuts to conclusions consistent with their hidden agenda. There were sometimes terrible bloopers in their arguments; although it was not considered polite to mention them in public. This was one of the reasons why the economy performed so badly when it was driven by the Rogernomes. Reality did not match their theories. <> <>The Establishment has good reasons for preferring the superficial which confirms their prejudices to deep analyses which challenge it. Their power comes from a stability – ideological stability is a crucial part of that.. Unfortunately the story changes with time over time. I am struck by how the certainties of Rogernomics have been superceded and that people who were Rogernomes a couple of decades ago, now hold almost opposite views with equal certainty. They never admit the contradiction. Rather they ignore the change, and they ignore anything which might suggest they got things badly wrong – like the Rogernomics Recession. <> <>The conventional wisdom needs to be challenged and monitored. Every society needs to have an account of itself which is both stable and yet evolves, a paradox beautifully captured in Giuseppe Tomasi’s novel The Leopard, when its hero tells his nephew: ‘In order for things to remain the same, things are going to have to change.’ It is this evolution of the conventional wisdom which makes Cassandras so important. <> <>A baser reason for ignoring Cassandras is that the much of the conventional wisdom is self-serving. Take the claim that the housing market has recovered, and now is a good time to invest in housing. The fact is that housing prices are still over valued. They are most unlikely to rise at the rate they did in the last decade – it is possible they will largely stagnate for the next three and more years. It may still make sense to purchase your own house if you are starting a family, or if your life circumstances change; I cant tell you much about such decisions for they involve personal factors. What seems certain though, is if you purchase a house as an investment for renting out and capital gains you are not going to get a great return. Such an assessment is not great news if you are in the real estate business of selling houses. Better to encourage the public to invest; you still get your margin if they lose on the investment, the principle which underpinned the sub-prime housing fiasco. <> <>It is not only the real estate industry and other industries which act in a self-serving way. Lobby groups do too; I illustrated this earlier with the refusal of those who want to run a Rogernomics agenda to acknowledge the Rogernomics Recession. <> <>There is one final and major reason why the Establishment does not like prophets. The Hebrew prophets had an agenda of social justice which aimed to draw the attention to the Establishment’s focus on its own comfort thereby ignoring the struggles of those who were less privileged and underprivileged. <> <>This is nicely captured in a some paraphrases of the Jerusalem Bible by my good friend the Reverend Robin Lane. <> <>He suggests Amos 4:1-3 might be <> Listen to this word you cows of Remuera <> Lolling in your summer palaces on Waiheke, <> Oppressing the needy, crushing the poor, <> Saying to your husbands, <> “Bring us a glass of Bollinger”! <> ………………… <> The day is coming to you now <> When the your bonds will turn to dust, <> And homes will go in mortgagee sales. <> <>Or Amos 5:22-24 <> I despise your prayers to the GDP, <> Your worship of the share market. <> No more chanting about your stinking bonuses. <> But let justice flow like water <> And integrity like an unfailing stream. <> <>So the Hebrew prophets are about ethical understandings – quite different from the Cassandras which are about scientific understandings. As well as recognising the Cassandras we need to recognise the Amoses, those who remind us that there is not just a world that is, there is also a world that ought to be. We need to cherish both sorts of prophets, more than we cherish profits with a f-i-t-s. <> <>Have you noticed that we do when they are dead? I guess this is when they have left this country and gone to another, so now they may be honoured. <> <>I am not asking that we necessarily believe what the prophets say – perhaps in this secular world ‘public intellectuals’ is a better name for them. I am asking to respect their role. Respect means taking their pronouncements seriously, and carefully evaluating them. <> <>There is also the need for venues for the Cassandras to engage with the public, If the media is not going to provide them, then they have to be elsewhere. Blogs provide one such places – ‘Spirited Conversations’ another. <> <>But dont reject a public intellectual the easy way, because others have, or by attacking the person not the argument. That’s lazy. Demand a higher standard from the Establishment; you dont just want lazy responses, you want them to address the issue, not to ignore it. A public intellectual cannot ask for more. But in New Zealand we give them a lot less. <> <>Go to topOur glut of overseas borrowing is like a disease eating away at the economy.
Listener: 24 October, 2009.
Keywords: Growth & Innovation; Macroeconomics & Money;
If a large highly productive foreign-exchange-earning sector emerged, it would squeeze the existing tradeable sector: exporters, and industries that compete with imports. Not only would it earn foreign exchange more efficiently but it would compete with the existing sector for labour and materials to fuel its expansion. Ultimately, the squeeze would operate by lifting the exchange rate; the increased supply of overseas currency would drive up the New Zealand dollar, making the existing businesses earning or conserving foreign exchange less profitable.
That’s what happened about 100 years ago. Refrigeration unleashed the pastoral sector, enabling it to export meat and dairy products. Manufacturing was squeezed, falling from about 25% to 15% of the labour force. (If we exclude the freezing and dairy industries, the fall was even more dramatic.) The new growth industry was more productive than those it displaced, so the economy was better off. The only grumbles came from those in the displaced industries.
The scenario also applies when the emerging industry is mining. The exploitation of the North Sea gas fields reduced Holland’s manufacturing industry. A similar thing happened in Australia with its mineral boom.
The phenomenon is sometimes called the “Dutch disease” or the “Gregory effect” (after Australian economist Bob Gregory). It’s called a disease because when the gas or minerals run out, the country needs to expand its manufacturing industry to replace the lost earnings. But that is difficult, because of the enfeebled state of the displaced industry.
We can simplify the analysis by imagining the mine is a vault containing bars of gold, which are exchanged for US dollars to buy imports. Same conclusion: up goes the exchange rate at the expense of tradeable production; exporting and import-substituting production diminishes.
Or suppose the vault contained IOUs that could be converted into US dollars. It is another source of foreign exchange, so the analysis is much the same. The exchange rate would rise and the tradeable sector would suffer because borrowing is an easier way to get foreign exchange.
But when this vault runs out, the situation is worse. Not only has the sustainable tradeable sector been damaged, as in the Dutch disease case, but the borrowings have to be serviced (and perhaps repaid), so there is an even greater need for foreign exchange.
This lengthy introduction is to give general readers the sense of the well-established economic proposition that capital inflows (which include borrowing) lift the exchange rate at the expense of the ability of the economy to earn and conserve foreign exchange by production and sales.
That is exactly what has happened to the New Zealand economy since 2002, when we embarked on a great splurge of foreign borrowing. Not surprisingly, the tradeable sector stagnated while the internal sector expanded rapidly, its expenditure fuelled by the borrowing.
That’s not to say all offshore borrowing is necessarily bad. If the funds are invested in strengthening the tradeable sector, the foreign-exchange-earning and -conserving production is enhanced, so when the borrowing splurge is over, the strengthened industry can take over again (as well as service and pay off debt).
But this did not happen here. We spent most of our borrowing on housing, property speculation and consumption. The part that was invested went into the non-tradeable sector.
The borrowing boom is largely over, and we live with the aftermath of a weakened tradeable sector and a shortage of foreign exchange. However, “largely” may be an exaggeration; we are still borrowing offshore. Whether we can continue to do so remains to be seen (and it may get more expensive). But if we can, the rising exchange rate will once again undermine the tradeable sector – exactly as has been happening.
It is absurd to expect the Reserve Bank to hold down the New Zealand dollar while we continue to borrow heavily offshore. Admittedly, some short-term measures can influence the exchange rate, but in the medium term the Reserve Bank cannot keep the dollar low when we are over-borrowing. This conclusion involves a very different view of the monetary regime from that of the past two decades. I wonder how long it will take for those who got us into the mess by over-borrowing to admit to their errors.
<> <>Launch, Fairfield House, Nelson, 10 October, 2009 <> <>Keywords: Literature and Culture; <> <>Have you noticed that we launch a book, but open an gallery exhibition? I’m going to open this book, and I invite you to do the same. For, of course, the book is an exhibition of Janice Gill’s paintings – as many as they could decently and tastefully cram into the volume. <> <>You will find it a bit different from the standard art book which is cluttered with turgid and tendentious essays by Professors Ho Hum and Drs Impenetrable, with most of the images clustered down the back as if they do not really belong in the work. <> <>Open this book, skip the short introduction by Mr Who’s He, and you are directly engaged with Janice Gill and her paintings. You dont need art professionals or curators to intermediate between you and the paintings; you engage directly – if there is an intermediary it is Janice herself, <> <>You dont need even Janice’s text to tell you about a painting. Just look. Each painting is self sufficient, although there may be details that you did not know of, or escaped your eye. which the text may point out. <> <>However Janice’s text has another role. To provide a context or, rather, to provide two contexts. The first is her life story as an artist, while the second is a story of New Zealand seen though the eyes of someone who is both an activist involved in, and committed to, New Zealand but also a bystander observing from outside. <> <>No single story of New Zealand is comprehensive, each reflects the narrator. Janice is one who grew up in a rural town, who tried the big city and did not like it, and moved on to a thriving provincial centre – small enough to offer a community; large enough to offer variety and stimulation. Its story of many New Zealanders. They may have had the same perceptions and the same thoughts as Janice, but she recorded them. In doing so did not only capture the moments but distilled them into her story of New Zealand. <> <>The New Zealand she is portraying is not the New Zealand of how we would like it to be – or how the conventional wisdom wants to portray it. It is New Zealand as Janice sees it – from where she stands, albeit with a wry humour – of how it is for her.
<>
<> <>Although Janice describes herself as a narrative painter. Had she not been captured by colour and design when she was so young she may have been a writer. Those who know here personally will know of her excellence as a raconteur which her book well illustrates. <> <>But Janice is also a portrait painter. Not of the good and the great, but of ordinary New Zealanders. Some you will be able to identify but often they are nameless – perhaps because they are composites, perhaps because she saw them but did not ask their name. A good portrait painter has to be able to relate to its subjects. Janice is naturally with the more marginalised and the common people. But it strikes me that where she has some doubts about a character – perhaps because they were powerful and self serving – there is still an empathy with them. <> <>A good illustration of Janice as a portrait painter is from a friend of mine, who attended an opening of her works a decade ago and was struck by a particular work – The Commuter. There it is on page 39. He did not get around to purchasing it, but when a month or so ago he saw it again in the book, the rapport with the painting, and the man it portrays, was renewed. I am taking the work back to Wellington tonight for him to make a decision about its future. <> <>No doubt you will have similar responses to others of Janice’s oeuvre. You sort of know the subject, and it fits into the context of your life, just as The Commuter fits into my friend’s. Ownership of the book means you can marginally possess the work, and meld your context into Janice’s. <> <>One buys and keeps books for many reasons. In the case of an art book, one is to possess artworks that you cant in any other way. But even the possessor of some of Janice’s works will value the book, because it enables those they have to be related to others, to be a part of an overall narrative. <> <>You’ll see this when you got to your next opening of Janice’s works. An exhibition gives you something no book can. You can examine the surface of the painting; you can see the size the painter envisaged rather than that the book constrained; you can walk around – left, right, closer further – just as the artist did when she planned and painted it; you can see a different light upon it. <> <>Nelson is fortunate that next year the Suter is exhibiting a retrospect of Janice’s works – all are in the book, but of course the book has many more. The retrospective is currently in the Southland Gallery, before it comes up here. I hope you will go to it, but you will value the showing ever so much more if you have read Telling Stories – at least once, perhaps many times, lingering over the images. <> <>See you at the opening when the Suter launch’s the retrospective. But open the book first. .<>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.
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.
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.
<> 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