Catholic Theology on the Economy

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While many of the world’s Christian religions seem preoccupied with personal issues that Jesus, their founder, barely touched upon, they must engage with economic issues too.

Robert Prevost, chose the name Leo on becoming the 267th Bishop of Rome – the Pope – in homage to Leo XIII (in office 1878-1903) who issued the 1891 encyclical Rerum novarum or the Rights and Duties of Capital and Labour. A foundational text of modern Catholic social teaching it covered the relationships and mutual duties between labour and capital and between government and its citizens, arguing there needs to be some amelioration of ‘the misery and wretchedness pressing so unjustly on the majority of the working class.’ It reflects the Church coming to grips with modern industrial society. While it rejected unrestricted capitalism, it affirmed the right to private property; while rejecting Marxism (unrestricted socialism), it supported the rights of labour to form unions.

Its theses have been developed by three further encyclicals, the most recent of which was John Paul II’s 1991 Centesimus Annus: The Centenary of Rerum Novarum. (See my discussion on the encyclical here.) Its publication coincided with the enactment of the Employment Contracts Act, which New Zealand’s Catholic bishops had already rejected as inconsistent with their Church’s teachings. (An even greater irony was that all three key politicians promoting the act – Jim Bolger, Bill Birch and Ruth Richardson – had Catholic upbringings.)

In 1986, a few years before, the United States Catholic bishops published a pastoral letter Economic Justice for All. Its thinking almost certainly impacted on Centesimus Annus. It certainly impacted upon Robert Provost, then working in Peru and America, who became a bishop in 1989.

It is a fascinating document for even a non-Catholic economist because it is grappling with issues central to how to organise an economy, applying the social teaching to a practical challenge. The letter was written at a time when the Reagan administration was implementing libertarian policies of laissez-faire capitalism, and it may be interpreted as a reaction to what was seen as hostility towards the Catholic Church’s teachings on social justice.

The letter was greatly influenced by American philosopher John Rawls, whose seminal Theory of Justice, has been described as the most important book on political philosophy written in the twentieth century. (Rawls contemplated becoming an Episcopalian priest. His analysis goes back to Immanuel Kant who goes back to Jesus’s ‘do to others …’)

The bishops say that they have not written ‘a blueprint for the economy. It does not embrace any particular theory of how the economy works, nor does it attempt to resolve the disputes between different schools of economic thought. Instead, the letter turns to Scripture and the social teachings of the Church. There, we discover what our economic life must serve, what standards it must meet.’

They set down those standards as:

(i) Every economic decision and institution must be judged in the light of whether it protects or undermines the dignity of the person.

(ii) Human dignity can be realised and protected only in a community.

(iii) All people have a right to participate in the economic life of society.

(iv) All members of society have a special obligation to the poor and vulnerable.

(v) Human rights are the minimum conditions for life in community.

(vi) Society as a whole, acting through public and private institutions, has a moral responsibility to enhance human dignity and protect human rights.

The bishops go on, ‘In Catholic teaching, human rights include not only civil and political rights but also economic rights …. all people have a right to life, food, clothing, shelter, rest, medical care, education, and employment.’

Here are some quotations (in page order) when they apply these principles:

‘Sustaining a common culture and a common commitment to moral values is not easy in our world …. One of our chief hopes in writing this letter is to encourage and contribute to the development of the common ground.’

‘Social justice implies that persons have an obligation to be active and productive participants in the life of society and that society has a duty to enable them to participate in this way.’

‘The obligation to provide justice for all means that the poor have single most urgent claim on the conscience of the nation.’

‘The Church fully supports the right of workers to form unions … to secure their rights to fair wages and working conditions. … Unions may also legitimately resort to strikes where this is the only available means to justice owed to workers. … No one may deny the right to organise without attacking human dignity itself.’

‘The Catholic tradition has long defended the right to private ownership of productive property. … Support of private ownership does not mean that anyone has the right to unlimited accumulation of wealth. Private property does not constitute for anyone an absolute and unconditional right. No one is justified in keeping for his exclusive use of what he does not need, when others lack necessities.’

‘The common good may sometimes demand that the right to own be limited by public involvement in the planning or ownership of certain sectors of the economy.’

‘The Church’s teaching opposes collectivist and statist economic approaches. But it also rejects the notion that a free market automatically produces justice.’

‘Full employment is the foundation of the just society. … We believe that 6 to 7 percent unemployment is neither inevitable nor acceptable. While a zero unemployment rate is clearly impossible in an economy where people are constantly entering the job market and others are changing jobs, appropriate policies and concerted private and public action can improve the situation considerably, if we have the will to do so. No economy can be considered truly healthy when so many … people are denied jobs by forces outside their control. The acceptance of present unemployment rates would have been unthinkable twenty years ago. It should be regarded as intolerable today.’

‘We find the disparities of income and wealth in the United States to be unacceptable. Justice requires that all members of our society work for economic, political, and social reforms that will decrease these inequalities.’

In summary, those who describe as Marxist the Catholic social teaching that Robert Prevost espouses are demonstrating their intellectual limitations.

I leave readers – and time – to judge to what extent Leo XIV promotes such sentiments but draw attention to a couple of issues which are yet to be addressed:

The bishops are largely writing about the US. How to apply their approach – and that of the encyclicals – to the whole world? (Recall Robert Prevost’s time in Peru.)

The bishops are largely writing about the present. How to apply their approach – and that of the encyclicals – to intergenerational equity and sustainability? (Appointed at the age of 69, Robert Prevost is likely to be in office in the 2040s.)

One hopes Leo XIV will have some responses.

Note: For my 1989 critique of Economic Justice for All – this column is an exposition – see here.

A Commentary on Treasury’s Long-term Insights Briefing

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A note prepared for some colleagues

As its subtitle says, the Treasury’s 2025 Long-term Insights Briefing: Sustainable and resilient fiscal policy through economic shocks and cycles focuses on economic shocks and cycles. This commentary takes a slightly different point of view because it includes all shocks to the economy, not just economic ones. Among the non-economic shocks which may require a fiscal response are natural disasters, pandemics including biosecurity invasions, and warfare. (There are also technological shocks which are not covered much in this paper. They tend not to be as abrupt.)[1]

To be explicit about economic cycles, the author was initially trained in very traditional economic theory which saw the ‘trade’ cycle as endogenously repeating itself.[2] However, the practical experience suggested that the cycle is usually a response to an exogenous shock. Moreover, it is typically damped with only a single fluctuation of any significance.[3] This commentary focuses on responding to such shocks.[4]

Kinds of Shocks

Shocks to the economy are common. A useful parallel is that New Zealand experiences about 20,000 earthquakes a year.[5] However, the vast majority are small and are easily accommodated, just as a household deals with the local dairy running out of bread or the slightly large shock of the dairy closing down. Most shocks do not require central government intervention.

There are only around 400 earthquakes in an average year – just over one a day – above Magnitude 4. There are about two annually of Magnitude 6 or more, only some of which are in areas with significant population.

The nation copes with these larger shocks by constructing resilient buildings and infrastructure and by precautionary activities such as earthquake drills, insurance, and prepared emergency services. Generally, these measure are sufficient to cope with a moderate shock. However, an earthquake in a populated locality – as happened in Canterbury in 2010 – requires some, sometimes substantial, central government responses.

Dealing with Small and Moderate Shocks to the Economy

The parallel is not exact but it draws attention to the gradation of shocks, and the gradation of preparedness and responses.[6] There has been greater reliance on flexible market mechanisms, since – say – 1984, for dealing with the more frequent small and medium shocks thereby leaving the primary responses to local initiatives in the private sector (and local authorities). On the whole that has been successful and central government has been able to be less involved. That does not apply to the bigger shocks.

Moreover, there have also been developed public institutional arrangements which have supported the strategy by cushioning the cycle which follows a shock: the Natural Hazards Commission[7] and, the soon-to-be-introduced, Depositor Compensation Scheme.[8] Progression in the tax revenue system is another automatic stabiliser although, because the system is less progressive than it was before 1984, its contribution is modest. Changes in timing of the administration of the tax regime means it is not as pro-cyclic (anti-stabiliser) as it once was. Similarly, the benefit system is an automatic stabiliser but because it is less generous than in the past, it now has a weaker contribution.

There remain some pro-cyclic (anti-stabiliser) arrangements. The one I am aware of is that under Working for Families, when a worker gets laid off, they lose the support and suffer a major decrease in spending power. [9]

Perhaps the Reserve Bank’s independent setting of the OCR is a kind of automatic stabiliser. It is discussed further below.

Recommendation: The aim should be to design the economy so that small and moderate shocks are left to the private sector and to automatic stabilisers to deal with.

Dealing with Medium and Larger Shocks

Medium and larger shocks are rare. That means we have less experience of them. The largest ones tend to have unique characteristics.

It is a natural response of the economics profession to tackle a new event by resort to theory. To markedly misquote Keynes, ‘I do not know which makes an economist more out of touch with reality – to know nothing but theory, or nothing but history.’[10] Any theoretical understandings need to be supported by understandings of past relevant shocks. (This was brilliantly illustrated by the successful US response to the Global Financial Crisis, which was led by economists who had researched the Great Depression.)

Recommendation: The Treasury should maintain an extensive archive of studies of significant economic and non-economic shocks – including those which occurred overseas. It should commission studies to pull the literature together and to review New Zealand ones for which there are not currently comprehensive studies.

While each study will reveal nuances, there will also be some general lessons.

The first lesson is that we don’t always understand the nature of a shock when it occurs. The 1966 Wool Price Crash was initially treated as temporary. Decades after it happened, the New Zealand Planning Council still did not understand its significance.[11] It could be argued that there was little public appreciation that the Darfield Earthquake of 2010 could be followed by an even more damaging one a few months later. Initially the nature of the Covid19 virus seems to have misunderstood.[12] Sometimes there is an over-reaction to a shock.

I am not sure how to deal with this issue except to encourage approaching each new shock with a supple and open mind – and to reread a lot of the background literature (as proposed to be collected in an archive). Robust automatic stabilisers are useful at this point of ignorance – especially for avoiding overreactions – but they may not be enough.

The second lesson is that any response has significant time lags. (Soberity of response may not be assisted by public demands that ‘something should be done’ immediately!)

After the initial shock there is typically weeks and months in each of the following stages.

            1. Identification, analysis and policy formulation;

            2. Political agreement to the policy response;

            3. Implementation of the policy response;

            4. The policy response coming into effect.

It is not uncommon for there to be confusion between when a policy is implemented and when it takes effect. An example is that the Reserve Bank can react quickly to shocks by changing its OCR. Financial markets immediately respond. However, the effect of a change in the OCR on the real economy typically takes months and even years. Another example is that it is common for the media to seek a response to a tax change days after the formal change of a rate has been implemented.

The lags can influence the choice of effective policy responses. For instance, varying income tax rates and benefits to change disposable income may take longer than changing the OCR, but the resulting change in aggregate demand is likely to be quicker.[13]

The third lesson is that the political response of ‘never waste a crisis’, generates a danger of compromising the sustainable economy and its fiscal position. For example, wrongly in my view, there were permanent cuts in income tax rates as a part of the response to the GFC which made fiscal management difficult for some time after. What was needed was a single and substantial cash injection (see the previous endnote).

Given that we will often be unsure initially about the exact nature of the shock, and that in many cases it will be damped to a single cycle, the immediate need – automatic stabilisers aside – is changes of setting which are short term or reversible. These include one-off income support measures (discussed above). Another one is to introduce a committed policy earlier (like a benefit hike on 1 January rather than 1 April).

An interesting example is that, despite it rarely being mentioned as one of its strengths, it is accepted that the Reserve Bank can move its OCR setting in both directions – including increasing it and later reversing the the setting. It is much more difficult to do this with income tax rates.

Another short-term reversible instrument is that the government can speed up payments.[14] Some government agencies have projects standing by for early implementation if need be. (In practice after many shocks – natural disasters, say – they will reprioritise projects to release resources in order to deal with the emergency. On the other hand, terms of trade shocks, say, may initially be dealt with in part by bringing projects forward.)

An obvious but critical caution is that the intervention should match the shock. I am not accusing officials of making that mistake, but I was struck that following the recent world price shock, much of the commentariat were arguing for what amounted to the Reserve Bank reversing it. It does not have the heft. Instead, and more correctly, the Bank was concerned to ensure that the external price shock should not trigger ongoing domestic inflation.[15]

Recommendation: Treasury should be sure the government has the capacity to institute, reasonably quickly, various easily reversible interventions.

Responding to a Longer Term Impact

If the shock has a longer term impact it is likely to have unique features which are difficult to prepare for (although a resort to the archive may turn up some useful parallels). Best wishes to those charged with advising them.

However, there is one critical policy issue which is likely to occur to some extent for every largish shock. The government almost certainly will contemplate that it may have to increase its domestic and/or external borrowing. Preserving the capacity to borrow in normal times is critical. That means managing fiscal and monetary policy in a prudent way which is respected by potential lenders. Similarly, there must be an acceptable level of public debt, the assessment of which will include the degree of government’s contingent liabilities and other implicit liabilities – such as the need to bail out private banks to preserve the payments system and public confidence. During the GFC New Zealand was one of only a handful of countries with which the US Fed was prepared to arrange currency swaps. This is one good test of the quality of New Zealand’s fiscal and monetary management and its respectable debt level.[16] A small economy on the margins of the world has little more to offer.[17] Debt crises – shocks induced by New Zealand borrowing – have been an integral part of New Zealand’s economic history.

Recommendation: The Government must maintain the quality of New Zealand’s fiscal and monetary management and a respectable level of debt in order to cope with largish crises which are likely to involve borrowing.

Endnotes:

[1] This paper does not refer much to the ‘Rogernomics shock’ of the late 1980s, which I have studied. It was a unique event in which political decisions played such an important role. I have yet to review the economics of the Covid shock.

[2] E.g. J.R. Hicks The Trade Cycle (1950). In fairness, I was aware of Frisch’s work on trade cycles as responses to exogenous shocks, but it was not taught.

[3] B.H. Easton, In Stormy Seas. (Although published in 1996, the subsequent experience is consistent with its generalisations.)

[4] The LTIB gives more weight to endogenous cycles than to exogenously induced cycles. My judgement of their importance is the other way around.

[5] About the same number as the breaths a person takes in a day. Both are quite normal.

[6] There is a useful list of relevant shocks since 1987 on page 23 of the draft of the 2025 LTIB. Most are judged to be small by their fiscal impact. Typically, the listed do not cost much in fiscal terms – at most around 1% of GDP. (The costs to the private sector are only partially quantified.) There are two ‘biggies’: the Canterbury Earthquakes in 2010-2011 (11.3%) and the COVID-19 pandemic of 2020-2022 (20.4%). Curiously, neither the International Share Market Crisis of 1987 nor the Global Financial Crisis of 2008-2009 is listed. (I would also include the Asian Financial Crisis of 1997.) The list does not include big earthquake shocks in low population areas with low fiscal impact and, fortunately, there have been no major tsunamis or volcanic episodes in the period, Droughts are a potential shock but they are not so instantaneous.

[7] There is an odd feature of the NHC which is opposite to the generalisation here. The NHC involves the government covering the first $300,000 loss following a disaster, and private sector insurance for losses above that amount (if it is taken out). The usual way the New Zealand arrangements work is that the private sector covers the initial losses and the public sector covers the larger ones.

[8] The proposed Social Unemployment Insurance Scheme would have had a similar role, but it is not currently being proceeded with.

[9] The effect could be moderated by a system which extended the WFF support following an involuntary layoff, for, say, six months; most of those laid off will have found new work by then.

[10] What Keynes actually said was ‘I do not know which makes a man more conservative—to know nothing but the present, or nothing but the past’. (1926).

[11] I confess that I did not pick up its significance until 1974 (although I was not in New Zealand when the crash happened). It forced me to shift my thinking from a macroeconomic model with a single commodity to one with multiple commodities. (In Stormy Seas 1996)

[12] Fortunately, the policy response based on the misunderstanding also applied for the actual virus. I plead guilty to the initial misunderstanding too.

[13] I understand that today Inland Revenue can change tax rates and benefit levels quickly compared to after the GFC when a single lump sum income injection, similar to the Australian response, may have been a more effective means of stimulating aggregate demand.

[14] Currently, Inland Revenue has about $160m of outstanding tax refunds.

[15] This is an example of the confusion between a change in a level (e.g. a price shock) and the rate of increase of the level (inflation) – between speed and acceleration. This mistake is unlikely to be made by a trained economist, but policy managers need to be mindful that it is common in the public’s mind (and in that of some of the commentariat, alas).

[16] It might be worth noting that responding to a shock with borrowing will increase the debt level, and raise questions about further lending for a second major shock which occurred before the target debt level was restored. One of the difficulties dealing with the Canterbury 2010-11 earthquakes was that the fiscal position was still recovering from the response to the GFC.

[17] Private (Debt) Worries, Listener, 11, November 2000

Seeking Fiscal Balance.

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Should we pursue a ‘Golden Rule’ where any public borrowing for consumption is temporary?

This columnist is a fiscal conservative who is cautious about government borrowing for public consumption. I was not originally. The Keynesian model I first studied said borrow as much as is necessary to sustain demand. But the model was of a closed economy. In a small open economy, borrowing blows out through the external current account which can lead to painful interactions with overseas creditors. (Keynes was well aware of the issue. His macro-model was designed to show that even if there was no external sector, there could still be depressions. In his days the additional spending was often in investment in government businesses and infrastructure.)

As my thinking progressed, I realised that there was also a moral problem. We are not immortal. When we borrow for today’s consumption, we are leaving future generations with a debt they have to service. I am very uncomfortable with such a strategy.

Fiscal conservatism can be simplified to the ‘Golden Rule’ of fiscal management. It is articulated in various forms; one is that the government should not borrow in the long term for consumption. It acknowledges it may be necessary to borrow, or draw down reserves, in the short term for a crisis but in the medium term, say five years, it should repay the debt or rebuild the reserves.

Actually, the spirit of fiscal conservatism is not too different from Richard Thaler’s summary of observed human savings behaviour. (Thaler was awarded the Nobel Prize in economics for his research in behavioural economics.) His household rules were:

1 Live within your means. Do not borrow to increase consumption except during well-defined emergencies (such as unemployment).

2 During emergencies cut consumption as much as possible.

3 Keep a rainy day account equal to some fraction of income. Do not raid the account except in emergencies.

4 Save for retirement in ways that require little self-control.

5 Borrow only on the security of a real asset.

These rules are heuristic but they are near enough to optimal for practical purposes and are understandable and relatively easy to follow. You probably usually follow them.

The Golden Rule of fiscal management is also a near-optimal heuristic with the merit that it can be readily understood by the public. There are lots of nuances in its implementation which I have set them aside for this exposition.

Fiscal conservatism is not (neoliberal) Austerianism. It accepts that a country may want to spend a lot on public consumption – which Austerians may deplore – but argues that such spending must be offset by comparably high taxation (and other revenue), which Austerians deplore even more. It argues that the government can (and should) borrow, but only for investment which will benefit future generations, like on infrastructure for educational and healthcare buildings, storm, fresh and waist water and transport. Austerians think that such investment should be provided by the private sector. The record of the last four decades shows that strategy results in underinvestment.

The Golden Rule says that the current public debt target of the government is a muddle because it does not distinguish between debt arising from borrowing for consumption and debt matched by capital assets. Just suppose the government took the underinvestment in infrastructure seriously, deciding to address it by a major capital works program. Currently it would be thwarted by the public debt target even if the program met every criterion that commonsense advanced.

This is not an argument against the current accounting conventions, although the public accounts could be rearranged to present the fiscal situation in a more understandable way to the public. The government is required to present an Investment Statement at the end of the year. Hopefully it will be more transparent than last year’s.

What the Golden Rule approach is objecting to is the way the government states its debt track (as it is required to do by the Public Finance Act). Rather than state a debt target, it should state it was committed to the Golden Rule and that any necessary temporary borrowing to deal with a crisis (such as an earthquake) would be repaid in five years (say). Infrastructural investment program would go ahead as much as available resources allow.

It may be tinkering with this idea already. Last year’s Fiscal Strategy report said the government had a ‘net worth’ target. (It was 40 percent of GDP.) Net worth is the aggregate of public assets less public debt. Unfortunately, the statement has little explanation or analysis.

In particular, if the government’s net worth target is 40% of GDP and its debt target is 30% then it has a gross public asset target of 70%. (be warned; definitions are tricky here.) There is no exploration of what that currently means or whether the 70% target makes sense. But observe that if the government were to borrow more for infrastructure, both its gross assets and gross debt would increase by the same amount, so that net worth would be the same, although providing the investment was effective, the economy would be better off. Perhaps the government should replace the net debt target with a net assets guideline.

Borrowing is not free. The resulting debt has still to be serviced and that would come out of the consumption budget. Historically we followed a similar practice when overseas borrowing went into a separate ‘works’ account which funded public works (which in the old days included building power stations). The debt was serviced from the rising government revenue generated by the economic growth and development stimulus to which the infrastructure contributed.

When the overseas borrowing ran out – as it did in 1929 – the government promptly closed down its public works program, dumping its workers into unemployment. I recall this event not as a warning – it is very unlikely to happen today for a number of reasons, including the benign vision of Keynes – but to remind you that the pursuit of the Golden Rule being proposed here is an evolution of a practice which worked pretty well in the past, and is likely to benefit Aotearoa New Zealand in the future.

Alan John Gray, b January 13, 1937; d January 10, 2025

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Post 8 May 2025

Dr Alan Gray’s achievements were never officially recognised by any royal honour or honorary doctorate. Extraordinary really, given the length and weight of his list of achievements.

They include being central to the establishment and administration of two palliative care units: Mary Potter Hospice in Wellington and the King Faisal Specialist Hospital & Research Centre in Riyadh, each being their country’s first.

He was medical director of the Cancer Society during the Cartwright committee hearings and was vigorous in his pursuit of the prevention of cancer – particularly the campaign against smoking – and its early detection including by breast and cervical screening.

He founded and led the Coalition for Public Health, probably contributing more than any other single person to the rejection of the proposed commercialisation (Americanisation) of the public health system (although there were many others who made impressive contributions).

He was once congratulated by journalists for his role in the sacking of a struggling Minister of Health because of the pressure the CPH had put on the government.

Once asked whether it bothered him that he was not given wider public recognition, he said it didn’t, he “just wanted to be listened to”. But there was another dimension of the man. Walk with him along the street and he would be repeatedly stopped by those who wanted to thank him for his kindness and concern as oncologist and radiologist to them or a family member, or by a doctor or nurse who appreciated him as a colleague.

He almost did not make the medical profession. His father died when Alan was in his early teens and he left school at 15 to run the family farm. He loved farming, but he did University Entrance by correspondence, going on to do a medical degree at the University of Otago and then Fellowships in Radiotherapy, Internal Medicine and Oncology.

His medical interests were wide. He spent some years in Saudi Arabia. Above his desk was the call-back list by specialties. He was the only one on three of them – oncology, radiology, palliative care – no other doctor was on more than one. He was frequently informally consulted by friends about various medical issues.

He would give clear guidance (but always referring them to the doctor in charge of the case) or would look the issue up and come back to the questioner. After retirement as a clinician he was an external clinical adviser for ACC and would devote hours in a medical library reading the literature relevant to the case.

Although he might be thought of as a Wellington doctor, he at various times practised in Auckland, Hamilton, Nelson, Palmerston North and the Wairarapa, as well as Canada, England and Saudi Arabia. He was really a kind of specialist general practitioner – a general internal physician particularly skilled in the treatment of cancer with its many impacts on the body’s function and the patient’s and their family’s wellbeing.

Perhaps he retired at 67 because his approach was holistic, while professional specialisms were getting narrower and it was increasingly hard to meet the high standards of broad knowledge that he expected of himself.

So he went back to his farming, managing a flock of Wiltshire sheep – the fifth generation of his family to work that block of land. It was sustainable management and the family covenanted the bush on the land as a nature reserve. He supported his Pauatahanui community just as he had supported patients and medical colleagues.

In his late 70s he learned he had incurable myeloma – a blood cancer. He prepared for the inevitable by slowly winding down, handing over the farm to a sixth generation when he was 83.

He never gave up his interest in medicine. His immediate reaction to the End of Life Choice referendum was to oppose the proposal. His deep commitment to medical ethics with its Hippocratic Oath, together with his involvement in the development of palliative care, meant he thought that doctors should not take lives.

However, he came to see that the choice was about providing the quality of life which had been his primary concern throughout his medical career; he voted for the proposal.

As he neared his 88th birthday he found the side effects of his medication were becoming increasingly unbearable and he chose the end-of-life option. He died with the same dignity which had he had given to so many of his patients and those who use benefit from the palliative care he pioneered.

He leaves behind Christine Stanley, his daughters Ruth, Christine, Toni, and Hannah, grandson Deejay, his farm dog Belle and a lifetime of achievement.

– Written by Brian Easton with assistance of Alan’s family, friends and colleagues.

A Patient-centred Healthcare System Needs to Support the Culture of Healthcare Workers

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This note is work in progress which I circulated to some colleagues.

This paper is about the importance of culture in the healthcare system. It argues that the changes to it should focus on enhancing a patient-centred approach by paying more attention to the culture of the medical professions. Without doing so, the changes in the structure and administration of the system will be largely ineffective while additional spending will be less effective.

To begin with a parallel, familiar to most clinicians. The patient comes in with a number of health concerns. The clinician goes through them, explains how each can be treated and adds something like: ‘These treatments will alleviate your health problems but they won’t resolve them because you are smoking, you are drinking too much, you are not getting enough exercise and you are overweight. You need to address these lifestyle issues if you want the treatments to work fully.’ The patient explains, impatiently, that they just want the treatment which they will pay for if necessary; they are quite happy with the way they live.

Culture – one’s lifestyle – is an important component of one’s health. And the culture of those who work in the healthcare system is critical to the system’s success. Yet it is rarely discussed and usually ignored when further change to the system is being considered.

The rhetoric is of ‘patient first’, although that is rarely mentioned when the changes are being made. Patients and the professional culture are connected. As Simon Sinek put it:

Senior doctors and especially hospital administrators don’t know what their job is. When you ask them ‘what is their priority’, the say ‘patients’. It’s not. It is to take care of the people who work in the hospital – of the people who take care of the patients. Every administrator, every senior doctor, every senior nurse should be preoccupied with one thing and one thing only: are my doctors OK, are my nurses OK, is my staff OK? And if they get that right, they will devote their time and energy taking care of each other and the patients. We have a broken system in which they think money is more important …

This is not the impression one gets of the current state of the New Zealand healthcare system. It seems designed to suppress that wisdom. The 2023 centralisation of the public healthcare system created layers of management which are unconnected with the medical staff. Meanwhile local management, who are able – if they are so inclined – to take care of the people who work with patients, have been disempowered.

It is illustrated by medical professionals so frustrated by their working conditions that they are continually appealing to the media, presumably on the basis that the Minister of Health will respond from the public pressure and direct a response from the upper echelons of the healthcare system. Presumably the professionals have failed to get adequate responses at the local level either because the administration has not the authority or it has not the empathy and understanding.

The administrators’ difficulties are compound by the cult of the generic manager which focuses on generic skills rather than specific knowledge about the activities and purposes of the agency – in this case the healthcare system – they are managing; sometimes their ignorance leads to patients dying (as the Stent enquiry instanced).

Perhaps the strongest tension is between the administration’s concern to restrain expenditure to stay within its budget and the quite different culture of the healthcare professions. Its ethic says that faced with a patient in need – say with a heart attack – the medics should give their total commitment without a thought of the cost, or a concern that any of their efforts may reduce the resources available to others in need of healthcare.

In the decades of teaching health economics, I began with writing on the board ‘either healthcare workers take responsibility for the resources they use or accountants will make treatment decisions’. The students listen dutifully but rarely incorporate the principle in their practice. Today many decisions about the availability of healthcare are, in effect, made by accountants – as in ‘waiting times’.

There is no easy resolution to this tension, but it would be reduced if the administrators talked more with the healthcare workers instead of announcing decisions on high about resource deployment – such as staffing and expenditure cuts. Not only would this lead to a better understanding among the workers (and perhaps even some improvement in the way resources are used) but it is likely to lead to a coalition between administrators and healthcare workers going to the public and politicians for more funding.

So how do we put patients at the centre of the healthcare system? An obvious step is to have enough healthcare workers to treat the patients. Unfortunately, the task of workforce planning has been neglected for decades and there is no easy remedy. Creating a culture more favourable to the workers would be a help, given that some workers say they are leaving the sector because of their employment conditions. (But it will not be enough.)

Favourable working conditions are part of the Sinek criteria. The best way the administration – in this context including the Minister of Health – can put the patient at the centre of the system is by supporting healthcare workers because they put patients at the centre. (Most do, although there are odd exceptions especially in the private sector.)

It is partly an attitude from the administration. Their management ethos has to change to one where they are more knowledgeable about what they are administering and the staff in it, moving away from the principles which drive the cult of the generic manager. That does not mean doctors and nurses would be running the health system but its administrators need to have more knowledge of healthcare and empathy with healthcare workers. Perhaps there would be some merit in the management style in which administrators have to spend a day a week, say, as orderlies on hospital wards.

That strategy requires decentralisation so each administrator is closer to the healthcare patient-face. And that implies we need to return power and agency to localities, in effect re-establishing the District Health Boards (even if generic managers will insist on calling them something else). Critically that would enable the administrators of these decentralised agencies to work more cohesively with their healthcare workers.

This would be a big change. Cultural change – in this case it is actually cultural rebalancing – is much harder than structural change driven from the top.

However, there is one structural change which might be helpful in addition to the decentralisation back to localities. DHBs, or whatever they may be called, have major property obligations – including entire hospitals. It may be useful to separate their property activities into a separate entity – even a publicly owned corporation. That would concentrate the focus of the administration on funding and staff. (There would, of course, be a bilateral relationship between the administration and the property relationship.) I put this proposal forward tentatively. Perhaps initially we should experiment with the administration separating out its property activities internally.

I conclude by repeating the main focus of the paper. Whatever the structural and funding problems the healthcare sector faces, a greater priority is to place patients at its centre and that requires a different relationship between the administration and healthcare workers than currently exists.

Are We Paying Enough Attention to the Working Class?

This entry was posted in Distributional Economics, Political Economy & History, Pundit on by .

A major American study suggests they are not

This column is about the white working class. In the US 2024 elections they mainly voted for Donald Trump. Had they voted with the white middle class, Trump would have lost the election with only 42 percent of voters instead of the 50 percent he actually won. (Because so many potential voters dont vote, he only won 32 percent of all. Kamala Harris won 31 percent and non-vote 37 percent.) The equivalent class may also be important in many other Western democracies including New Zealand.

I am going to analyse it by reporting on a remarkable study, Deaths of Disease, by two Princeton University economists, Anne Case and her husband Angus Deaton. (Deaton was the 2015 Nobel laureate in economics ‘for his analysis of consumption, poverty, and welfare’; his 2023 Economics in America: An Immigrant Economist Explores the Land of Inequality deserves a review in its own right.)

The study started off as a curiosity question when the two wondered why the suicide rate in the Montana county in which they were holidaying in 2014 was four times that of the New Jersey county which was their main home. Fortunately, they could pursue their question without having to get funding so they published their conclusions just a year later; had they gone through New Zealand’s clumsy research-funding system they would have still been waiting for permission.

Curiosity research often gets the researcher nowhere, but it can open up unexpected insights. Thus it was with this question.

Earlier I described the study in class terms. Official death certificates don’t record an individual’s social class. But American ones record their educational attainment. Case and Deaton divide the white non-Hispanics into those with a four-year college degree and those without, which is a not unreasonable proxy for class, and focus on the mid-life 45-to-54-year-olds. The white non-Hispanic working class made up about 38 percent of US voters, more than the corresponding middle class with college degrees (33 percent) or the others (29 percent) – mainly Blacks and Hispanics.

Initially the researchers’ concern was suicide but they broadened their study to include deaths from drug overdoses and suicides – the ‘deaths of despair’ – and pursued many other health and lifestyle measures to understand what was going on. Their repeated finding is that while the indicators for the White working class are worse than those for the White middle class, as one might expect, the working-class indicators are deteriorating over time, whereas the middle-class ones are stable or improving. This is particularly true for the deaths of despair, which almost trebled between 1995 and 2018 for the White working class but were stable for its middle class.

The effect is so strong that since 2000 US White non-Hispanic men and women (of both classes) in mid-life have experienced continual increases in mortality and morbidity, while US Blacks and US Hispanics, as well as all subgroups of populations in other affluent countries, show the opposite trend.

The researchers consider why. It turns out that White working class (age-adjusted) life satisfaction is also falling while that of the corresponding middle class is stable. (That for Blacks is rising – although as a rule the Black indicators are worse in level terms). So are their median earnings while those for the white non-Hispanic middle class are rising.

After a careful review of the available evidence, Case and Deaton do not attribute the deaths of despair to poverty, falling real incomes or increasing inequality. (This is especially surprising given Deaton’s expertise in poverty as the Nobel citation indicates; Case’s is in health and labour economics. I should not be surprised if Deaton is sceptical about those who cite rising inequality as the cause of everything going wrong but don’t understand the measure and provide no causal evidence.) They cite other groups, such as US Blacks, whose economic and health indicators are worse than for whites and yet they are showing gains.

Instead Case and Deaton argue that the ultimate cause is people’s sense that life is meaningless, unsatisfying or not fulfilling, and it lacks the basic economic security that makes these higher order feelings more likely. In particular, they suggest that working conditions for these people have deteriorated, citing technological change, globalisation and weakening unions.

I was reminded of a study of the determinants of why ex-prisoners lapsed back into crime. It was not only those that were unemployed but also those who had poor-quality jobs. Those with good-quality jobs with rich networks of workmates were much less likely to return to crime.

The research was first reported before Trump was on the serious political horizon and did not have had him or political voting particularly in mind. Yet, as the opening paragraph points out, it sheds some light on Trump’s support. It is an odd reversal that today the Democrats support clusters around the well-off and the Republicans seem to represent the working class (although the cautious might distinguish Trump from traditional Republicans).

It seems likely that the White non-Hispanic working class are consciously rejecting the Democrats, perhaps partly because the party is still dominant for other racial groups but also because the Democrats are so dominated by middle-class values and perceptions that they are not addressing the concerns of the depressed working class.

I am struck by how many diagnoses of the Democrats’s failure are supercilious about the working class – along the lines that the poor fools are persuaded by populism. Well yes, but the populist politicians are seemingly addressing their concerns, while the supercilious ignore them. That is not to say that the populist policies will effectively meet working class needs if they are applied. But at least it thinks it is being listened to.

Trump’s assault on the independence of US universities is an example. In my view the attack is politically motivated, aiming to undermine liberal democracy (also with long-term repercussions on US economic growth). But the white working class might well ask ‘what has Harvard ever done for me other than ignore my needs?’ (That is not quite true, but there is the ring of truth.)

Dos this American situation apply elsewhere? It is generally accepted that there is rising populism throughout the world and one can at least conjecture its success arises from its seeming to address the concerns of the marginalised, which are neglected by the elite. If you look at its account of democracy – which might be judged self-centred and self-satisfied – one might conclude that a benevolent dictator is attractive (although it is rare for dictators to remain benevolent – Pope Francis may be the exception). I was struck that many Brexit voters seemed to be saying ‘up you’ to the British elite, especially the London-based financial sector.

Does the situation apply to Aotearoa New Zealand? Talking about social class here is a bit like talking about sex in Victorian times. One doesn’t, even though it is a powerful driver of life. I am struck, for instance, how discussions on Māori socioeconomic status are really about a Māori working class, ignoring that there is a thriving Māori middle class, and that much of the analysis applies to the non-Māori working class. (This is not to ignore that there are particular Māori issues, just as the US has extraordinary challenges from its past – and consequently current – treatment of its First Peoples and Blacks.)

I suspect the politics of the working class is muted in New Zealand by MMP, with a number of parties vying for the populist vote. I leave you to judge to what extent the Labour Party is neglecting the working class but note that it still seems more dependent upon unions than the US Democrats. I cannot help wondering whether the success of gangs is because they give some meaning, life satisfaction and fulfilment to their members. I observe that international success, such as in sport, gives even the marginal a temporary meaning to their lives.

Case and Deaton think that there are no quick fixes to the sad state of the White working class. It is the result of decades of disadvantages; solving it will require patience and perseverance. True here (true for Māori). But we can do better, by paying attention to their needs.

There is an irony in Trump’s strategy. He pays attention to the working class in the way that the Democrats do not. And he thinks he is addressing their concerns by promising jobs in a manufacturing sector extended by border protection (although even if he succeeds, he overlooks that the majority of jobs and job growth in a modern affluent economy are in the service sector). Presumably, his hope – as foreshadowed by Orban in Hungary – is to use his successes to embed a hegemonic dictatorship.

Populism is a shallow philosophy but it works – temporarily anyway – at the ballot box. We threaten the viability of liberal democracy if we do not respond more creatively than currently.

Dealing with Property in the Public Healthcare System

This entry was posted in Health on by .

This note is work in progress which I circulated to some colleagues.

One of the management learnings from the 1970s and 1980s is that if managers were given multiple objectives they pursued none of them well. They are likely to prioritise some objectives over others even though they may not be the most important to the agency they are meant to be managing and even then they often pursue them badly.

One response is to give management a single objective. Commonly in the Rogernomics era that single objective was a profit one, even when it had little to do with the agency’s real purpose, as in the case of the health system. That continues to hang over today’s public healthcare system which is often so preoccupied with its finances that it overlooks its primary purpose is to provide healthcare. I have discussed this in another paper; this one has a narrower focus, which is that one of the ways of reducing the problem of multiple management objectives is by separating out some activity with a single objective, thus relieving the managers of the central agency of trying to trade off on that dimension.

In particular, the public health system has a substantial involvement with property and equipment. I have suggested that the administrations of healthcare should be relieved of that  responsibility by placing it into a separate entity which would sell its property services to the healthcare providers. In proposing this, I am mindful how property issues often grow to dominate healthcare managers’ concerns, especially new buildings, while the maintenance of existing buildings may be neglected in order to conserve scarce funds. A separate institution’s stewardship is likely to be much more balanced.

What I have in mind is something like the corporatisation of the 1980s of the healthcare property activities into property companies with independent boards of governance consisting mainly of people experienced in property management.

This is only a schematic proposal and the details have to be developed. They include:

            – whether there should be a single property agency or separate ones for each region;

            – the balance of responsibilities between the minister-politician and corporation-business;

            – the interaction, including charging, between the healthcare agency (HealthNZ or the replacements of DHBs) and the property corporation. (This will be complicated because the relationship is between a monopoly provider and a monopsony purchaser);

            – how equipment responsibilities will be divided between the two.

I do not want to minimise the challenge such questions pose. I note they are already resolved in the private healthcare sector. Its experience is likely to provide a useful model.

While thinking this through, I realised that corporatisation may have implications for fiscal management. That begins with the ‘selling’ of the transferred property assets to the property corporations as occurred in the 1980s. This is one-off and need not be pursued here.

However, once the public property corporations are self-managing, they will have the power to borrow from the private financial sector in a manner similar to a conventional private property company. (I imagine that for big transactions they will still need ministerial approval – just as the private sector (implicitly) requires shareholder approval. The minister-shareholders will also have a practical lever when it is necessary to advance some equity funding.)

That may mean that if the public property corporations are SOEs (state owned enterprises) their borrowing may not necessarily appear as government borrowings in the ‘net Crown core debt’. The effect of the corporatisation would be to reduce that debt and – even more importantly – it would free up borrowing for capital expansion in the public healthcare sector from being affected by the net Crown core debt target. (One perhaps should be reminded that the government is talking about a capital investment program in public healthcare of around $20b in the planning horizon.)

The point here is not to advocate an arithmetical means of getting around the government’s commitment to a debt target (that issue belongs to another conversation). Rather, it is to make the case that borrowing for investment in (healthcare) infrastructure should not be included in that target. I am reluctant in this note to develop the issue but essentially the restriction on borrowing implied in the debt target should be on borrowing for consumption (it is known as the ‘golden fiscal rule’).

This already happens in effect. Very often when HealthNZ outsources treatment to the private sector, it is doing so because it is undercapitalised in the public sector and it is, in effect, using capital funded from private sources. (Medical staff are mobile between the two sectors – capital is not.) The effect of the proposed corporatisation of the public healthcare’s property would be that instead of relying on the private sector to provide the capital, a public sector agency would.

The 2025 Budget in a World of Trade Warfare.

This entry was posted in Globalisation & Trade, Macroeconomics & Money, Pundit on by .

The budget runup is far from easy.

Budget 2025 day is Thursday 22 May. About a month earlier in a normal year, the macroeconomic forecasts would be completed (the fiscal ones would still be tidying up) and the main policy decisions would have been made (but there would still be a lot of policy detail to be worked on).

This is not a normal year as Donald Trump zigzags from policy to policy. One shant be surprised if the macroeconomic forecasts are under major review right up to the time they go to press and, despite Prime Minister Christopher Luxon spending a lot of time overseas, there may yet have to be a major policy redirection. Expect the debt track to be modified even if the debt level will remain the government obsession.

For this is the most volatile budget buildup time that I can recall, as Trump’s volatility impacts on the entire international economy and financial system. For this is the most volatile budget buildup time that I can recall, as Trump’s weaving impacts on the entire international economy and financial system.

It is not just that it is already difficult to know the timing of the impact of the announced tariff increases, but Trump is promising more (or perhaps he isn’t). His (unpredictable) decisions will affect the latter part of 2025, which will impact on exchange rate and interest rates. If one knew for certain, one could make a tidy killing in the financial markets – I remain poor. Additionally, there is the impact of the tariff changes on exports and imports. Even international services seem to be affected.

Much of what is happening is captured in the notion of an international trade war. Minister of Foreign Affairs Winston Peters objects to the term; I think he is concerned that it may result in panicked attitudes, responses and policies. However, for the cool-headed analyst there are useful lessons from traditional warfare.

Warfare involves sacrifices. Fortunately, trade wars do not involve the loss of lives (directly) but they do involve the economic losses from reductions in output – even Trump acknowledges that (but he promises that won’t apply to the US in the long run – don’t bet on how long it will be).

Warfare outcomes are contingent. The British won the Battle of Waterloo against the French because the Prussians arrived in time. The Duke of Wellington said that ‘It had been a damned nice thing – the nearest run thing you ever saw in your life.’

There are retaliation decisions being made now by all sides which will alter the course of the trade war. We will know the good ones at the end. But the decisions – good and bad – are being made now.

Wellington also said, ‘My heart is broken by the terrible loss I have sustained in my old friends and companions and my poor soldiers. Believe me, nothing except a battle lost can be half so melancholy as a battle won.’

Yes, there may be victors, but no one wins a war except in the sense that the other side is defeated (which seems to be the Trump objective – cost irrelevant).

(A further generalisation is that wars accelerate technological innovations which flow on to civilian life. An example is how air warfare led to giant leaps in aircraft design; the Ukrainian invasion is likely to generate parallel development in drones. Not sure of that insight’s relevance here but keep it in mind.)

A world war changes the whole world order (as we saw after World War II). The outcome of an international trade war is uncertain. My guess is that the US will play a lesser role in the future – although that is not Trump’s intention. However, China may not play as great a role in the new world order as it hopes. Perhaps the lesson of not allowing anyone to be too dominant has been learned.

New Zealand’s objective has to be a world economic order based on the rule of law, which is more protective of the interests of small countries, in contrast to a world where bullies rule. Our contribution to attaining it is likely to be small, although Prime Minister Luxon is making an effort. He might recall – hardly anyone else does – that towards the end of his time as Prime Minister, Rob Muldoon got very involved in trying to resolve the international debt crisis – with little effect. New Zealand is too small to be significant. A return to a rules-based world economic order may be achievable but New Zealand may have more influence working with other small-economy nations than spending its time schmoozing with the biggies.

Many of the lessons from the warfare parallel belong to a longer-term time horizon and will not be important in framing the budget. Even so, the short-term impact of the trade war on exports, exchange rates, prices, and interest rates will.

Even if they were not, the 2025 budget would have been a challenge. The economy has been weaker than was expected a year ago. That reduces tax revenue and lifts some welfare spending which means that government borrowing is likely to be higher than the government wants. The effort to cut back government spending will continue although some of the big spending ministers – defence, health, housing, transport – are pressing for their portfolios to spend more.

The trade war need not be all bad news. The Chinese rejection of US soybeans may lift its demand for NZ foodstuffs, offsetting our marketing difficulties in the now more protected US markets. Or perhaps it won’t. Unable to export to the US, the Chinese may send us cheaper electric vehicles. But the gain may be offset by a lift in the NZ exchange rate.

International interest rates are expected to rise. As a net borrower internationally, New Zealand will suffer; that includes the fiscal position.

The rates have not been helped by Trump demanding the US Fed reduce them, and threatening to replace the Fed’s chairman. Whether he can or not is almost irrelevant. Financial markets are spooked, with the added complication that while the usual financial refuge during times of uncertainty is US Treasuries (government bonds), this time they are a source of uncertainty.

Whatever you think of our politicians, spare a thought for the Treasury accountants and economists preparing the budget. The technical issues require judgments beyond the call of duty. If I were one of them, I would probably be thinking that a mini-budget towards the end of the year must be an option – it need not be called that, of course – and that the May budget should be framed to give flexibility to cope in an exceptionally volatile world.

Viennese Refugees Who Changed the Way We Think

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

Four eighty-year-old books which are still vitally relevant today.

Between 1942 and 1945, four refugees from Vienna each published a ground-breaking – seminal – book.* They left their country after Austria was taken over by fascists in 1934 and by Nazi Germany in 1938. Previously they had lived in ‘Red Vienna’; ruled by Social Democratic Workers’ Party between 1918 and 1934, which had a brilliant record housing the population (but could be intrusive at the personal level). It never won over the countryside; hence the 1934 reversal.

Red Vienna was a world-leading centre of intellectual activity in architecture, economics, music, philosophy, psychology, science and sociology.** Contemporary thinking is still shaped by them. Other outstanding contributions came from Sigmund Freud, Erich Korngold, Marie Jahoda, Paul Lazarsfeld, Arnold Schoenberg, Erwin Schrödinger, and Ludwig Wittgenstein (and many other economists). Alas, it all fell apart with the fascist takeover, which was not only strongly anti-semitic but intolerant of dissent. Those who did not die (including in concentration camps), fled.

Hence the four refugees and the books they published, each of which was influenced by the writer’s personal experience.

Karl Popper’s The Open Society and Its Enemies was actually written in New Zealand. At the core of his thesis is that a totalitarian society led by people who have preconceived theories is unable to adapt to change. Implicitly, he is celebrating Red Vienna, which was an open society, and criticising what came after. His totalitarian societies are on the left as well as the right. The book juxtaposes Plato (i.e. Hitler) with Hegel (Stalin). If he were alive today, Popper might cite many current instances.

Friedrich Hayek’s The Road to Serfdom is not unrelated – he suffered from the rise of Austrian fascism too, although he was not a Jew – arguing that the abandonment of individualism and classical liberalism inevitably leads to a loss of freedom, the creation of an oppressive society, the tyranny of a dictator, and the serfdom of the individual. He especially condemned central planning which was popular not only in Stalin’s Russian but throughout the West. I doubt that anybody today supports the kind of central planning he was railing against but the theme of the dangers of empowering the state over the individual remains relevant.

Margaret Thatcher famously wrote: ‘the most powerful critique of socialist planning and the socialist state which I read at this time and to which I have returned so often since [is] The Road to Serfdom’. More moderate thinkers also found it valuable. Keynes wrote that ‘Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement’. although he did not think Hayek’s philosophy was of much practical use.

Joseph Schumpeter’s Capitalism, Socialism, and Democracy also bears the marks of his Viennese experience. It saw success of capitalism leading to a form of corporatism and a fostering of values hostile to it. The intellectual and social climate needed to allow entrepreneurship to thrive would not exist in advanced capitalism. There would not be a revolution. Capitalism’s collapse would come about as majorities voted for the creation of a welfare state and placed restrictions upon entrepreneurship, eventually destroying the capitalist structure.

That is not quite what happened. (Those who predict the future almost always get it wrong.) A quarter of a century after his death in 1950, there began a reaction against the welfare state, probably as a consequence of technological innovations from computing and the global net. But if the technological innovations slow down, Schumpeter’s thesis may become relevant again.

Central to Schumpeter’s analysis is that the political economy of society evolves. Denying that evolution, closed societies attempt to control it, slow it down and direct it into a dead end. Independently from Popper, Schumpeter is implicitly celebrating the open society, fearful that changing politics will close society down. (Which Western governments are currently attacking the viability of their universities?)

The role of the changing political economy is developed over a much longer period in Karl Polanyi’s The Great Transformation. It is the least known of the four books; perhaps it is the most insightful.

Polanyi’s thesis was invaluable to me when writing In Open Seas: The Economic History of New Zealand. Most of our ancestors who arrived in the nineteenth century had left societies which were already transforming market economies. However, as my book illustrates, Māori experienced the full transformation from pre-market to market society in situ. It was not only fascinating to describe it, but it alerted me to traces of pre-market and partial market behaviour in the immigrant population too. (For instance, small farmers were near subsistence until the arrival of refrigeration.)

Polanyi points out that pre-market societies were based on ‘reciprocity’, ‘redistribution’ and ‘householding’ (I would say villages/kainga) across personal and communal relationships. Economists might describe them as ‘multilateral’.

Industrialisation and the increasing extension of the state undermined these social tendencies, replacing them with formal institutions that aimed to promote a self-regulating market economy, fundamentally altering humankind’s economic relations. In particular the shift from the gift exchange economy to the commercial market one – the great transformation – reduced the importance of interpersonal relationships and anonymous exchanges became much more important. While the shift facilitated the specialisation which is a key element of raising productivity they also impacted on the wider human condition.

The focus on the exchange of goods and services through market-based price mechanisms creates bilateralism and contractualism does not always work – not everywhere. I am hesitant to say too much but I observe that the social work profession (in say, Oranga Tamariki) is torn between treating the child in the multilateral context of an extended whanau and in a one-to-one bilateral context. The tensions exist elsewhere. It is not uncommon to see a multilateral issue being resolved (or attempted to be resolved) with a bilateral solution. (The most common public evidence is in Māori protests, which are often about preserving communal entitlements.)

Polanyi goes on to argue that modern society (he calls it ‘Market Society’) is not the discrete combination of the modern market economy and the modern nation-state but a single human invention. Social protectionism is the natural response to the ‘free’ market attempts to separate itself from the fabric of society; it is a ‘double movement’. Like Schumpeter, he sees capitalism and the welfare state as integral in social evolution.

Soberingly, Polanyi argues that markets cannot be understood solely through economic theory. Rather, they are embedded in social and political logic, which makes it necessary for economic analysts to take politics into account when trying to understand the economy. (They don’t always.)

As in the case of Schumpeter, today’s world looks very different from the one Polanyi was writing about two decades before he died in 1964. But all four books contain a truth which gives an insight into today’s world and the one we are evolving into. The challenge is to use them for the foundation for its analysis. That requires an open mind.

* A fifth seminal book written about the same time by Viennese refugee Oskar Morgenstern (with John von Neumann) was Theory of Games and Economic Behavior but it is in a different area of economics.

** See Richard Cockett’s Vienna: How the City of Ideas Created the Modern World.

The Centre Cannot Hold

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

A distinguished economist on the tensions of centralisation

Newsroom. 16 April, 2025.

It was not originally envisaged that the government of New Zealand would be highly centralised. The Colonial Secretary’s instructions to Hobson are about a minimalist state. That explains the provisions in Te Tiriti o Waitangi which allocate ‘kawantanga’ to the Crown and ‘rangatiratanga’ to Iwi and localities. Both terms can be translated as ‘sovereignty’. Hence the claim that the Crown has sovereignty under Te Tiriti while Māori claim they never seceded sovereignty.

Later, the 1852 Constitution provided Māori with considerable autonomy and created provinces. The autonomy was never pursued and the provinces were abolished in 1876. New Zealand became increasingly centralised. Today it is judged one of the most centralised of all democracies.

The centralisation reached a high point under the Muldoon government in the 1970s. The Lange-Douglas fourth Labour government rolled some back with market liberalisation although even here it used its central powers to dictate a priority for business solutions.

The preference for centralised government continues. It was a default response to a policy failure by the Ardern-Hipkins Labour Government. Examples in my just published book, In Open Seas: How the New Zealand Labour Government Went Wrong: 2017-2023, include Health NZ, Three Waters, the mega-polytechic, the RNZ-TVNZ merger and the treatment of local government.

The Luxon coalition government has wound back, or promised to wind back, some of the Labour policies, but in the case of Health NZ it has intensified central control by appointing a commissioner. Various ministers – even ACT ministers – have taken on detailed political control.

This centralisation is causing serious tensions in New Zealand’s governance. There has been some progress with rangatiratanga. The treaty settlements have established many iwi as economically viable entities. But they are not rich enough to give widespread support to their members. The government has also delegated traditional functions (with funding) to agencies such as Māori Urban Authorities, which are a modern version of (urban) Iwi.

Decentralisation to localities has been less successful with the government happy to order local authorities around. Sometimes they are fighting back. Auckland is proving particularly recalcitrant.

A couple of decades ago, Treasury concluded that New Zealand development needed a world-competitive economic hub. This led to the merging of the fragmented local authority structure into the unified Auckland Council. The Key-English National government overruled some of the Royal Commission’s recommendations – even those supported by the locals – demonstrating the centre’s willingness to use its power. A subsequent Labour minister decided that the second Waitematā crossing would be a cycleway. The locals told him to get on his bike. Central government faces that Auckland is too big and organised to be easily bullied. Other local authorities are less fortunate.

Centralisation has arisen because of the smallness of the country and the lack of independent local funding. Central funding goes with ministerial responsibility. Decentralisation of local government requires decentralisation of funding, as is happening with Māori. Without it we are going to have increasing tensions.

* Based upon a chapter in the recently published Open Seas: How the New Zealand Labour Government Went Wrong: 2017-2023 by Brian Easton (Copy Press, $45), available in selected bookstores.

Countervailing Trumpian Sense

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

A modest attempt to analyse Donald Trump’s tariff policies.

Alfred Marshall, whose textbook was still in use 40 years after he died wrote ‘every short statement about economics is misleading with the possible exception of my present one.’ (The text book is 719 pages.) It’s a timely reminder that any short analysis of Trump’s tariff initiatives is likely to be misleading and any long one will be so riddled with caveats that it will be impenetrable.

Over the period during which this column was drafted and checked, there were numerous developments in US tariff policy. It’s become a bit of a rolling maul in which it is not clear whether the man with the ball even knows which kind of football he is playing. The aim of this column is to set out some of the analytic issues which are likely to be relevant, irrespective of where the ball runs.

Who Ultimately Pays a Tariff?

Suppose the US imposed a tariff of 10 percent on New Zealand’s exports of casein to it. New Zealand producers could not pass the additional cost on because they are competing with other exporters. They would have to reduce their price to the US supplier; they would pay the tariff. Suppose instead, that the tariff was imposed on all external suppliers and there was no US production of casein. Then the tariff would be passed on to US consumers. In casein’s case, there is some US production so the burden will be shared between foreign producers and American consumers.

The balance of the sharing will depend on numerous factors (and change over time) so we cannot tell. Trump sometimes talks as though the tariff will be borne by the external producers but his promise of a positive output response by American producers requires domestic prices to rise. Most commentaries, including the Fed’s (the US central bank), expect the US prices to rise so at least some of the tariff is to be paid by US consumers.

(Hardly as an aside, at some point raising tariff rates become ineffective, because people just stop exporting. The US rate on China is now 140 percent. China’s response is likely to be much more selective – and hurtful.)

Does that mean there will be American inflation?

The general view is that the price rises from the tariff will trigger further domestic price rises, so there will be some inflation. That probably means the Fed will raise its interest rates, which will impact on the world as a whole. We don’t know by how much.

What about the exchange rate?

There is a scenario which expects the US dollar to rise against other currencies. If that were to happen by 10 percent, that would offset a tariff hike of 10 percent (there are caveats). But US exporters would get a lower return. In effect they would carry the burden of the tariff. However, at the time of writing, the US dollar has fallen relative to other major currencies (much to everybody’s surprise). It’s not obvious why it has. Capital markets are fickle; they may be losing confidence in the US dollar as a safe haven. The effect of a fall in the US exchange rate is to add to inflationary pressures.

Why then are share prices volatile – all over the place?

They began falling when Trump announced his ‘reciprocal tariffs’ (more below), probably because investors were mystified by what he meant. Investors like certainty in public policy. They fell further after the more detailed announcement and then recovered a bit when he had the tariff pause.

Falling share prices do not cause a recession. Rather, in this case they signal that shareholders expect a recession, probably because of an expectation that the tariff hikes and the resulting tariff war will cause a recession (or worse).

This collapse was compounded by volatility in the bond markets, with interest rates rising. The danger they would cause a significant financial crisis enabled US Treasury Secretary Scott Bessent to persuade Trump to pause his more extreme tariff hikes (China excepted.) On is reminded of the remark of Clinton’s political adviser James Carville ‘I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.’

But wont the tariffs create new opportunities for capital investment?

That is Trump’s intention – in the US anyway. But the policy is so badly worked through, that businesses seem to be putting their investment plans on hold in the expectation there will be further developments. Among them are that Trumps’s tariff implementation is incomplete, not covering some countries* and products**; he is likely to have to change some of what has been announced; they may also change because of US legal*** and political**** developments. Moreover, many tariffed countries promise to retaliate while Trump counter-promises to escalate if they do. A prudent business will hold over its investment plans; how consumers will respond is more speculative.

(* Including Belarus, Cuba, North Korea, Russia.

** Including copper, oil, pharmaceuticals, semiconductors, wood products, and some minerals not available in the US.

*** Including that Trump is taxing without representation.

**** Including that Trump may lose much authority following the 2026 congressional elections.)

What about the (temporarily suspended?) reciprocal tariffs on top of the 10 percent?

They add to the complexity. And they certainly don’t make rational sense. I won’t go on about them but just add one further illustration. New Zealand exports more to the US than we directly import. (We were fortunate not to face a higher tariff because of this fact.) However, we indirectly import from the US by purchasing products from Australia which started off in America. Trump’s strategy focuses on bilateral exchanges and ignores that we live in a multilateral world.

Doesn’t the Trump strategy mean that since I run a deficit with my supermarket, I should charge them a reciprocal tariff?

Your parallel is bizarre enough to illustrate the underlying thinking. To extend it, you will ultimately pay the tariff levy, not the supermarket.

But I buy things from the supermarket because I want them.

Absolutely, and so does the US from the world’s ‘supermarkets’. That is because US consumers (and the American Government) choose to spend more than their revenue. Trump’s tariff policies are not doing very much to address the excess spending. Probably it will continue.

One further complication is that Trump’s tariffs focus on goods exports and imports. They ignore services which the US exports more than it imports.

Why is that?

One reason is that services are hard to tariff. A customs officer can see a container crossing the border. But how to tariff an American tourist who buys services offshore?

The other main reason is that Trump seems to have a fetish about manufactures (just as he has one about property). If so, it would be a very distorted view of the US economy where nowadays 70 percent of its production is services and 30 percent goods. It is almost as if Trump has not grasped that the world has changed since he was at university 60 years ago.

You seem very gloomy.

Most serious commentators are. The expectation is that the world is going into a Trump-induced recession – possibly a prolonged one – and that, when it comes out of it, the world economy in general and the US in particular will be less productive. The size of the downturn may depend upon whether the reciprocal tariffs proceed. But there is still the 10 percent general tariff and higher ones on aluminium, cars, steel and China (also on select Canadian and Mexican goods), plus the promised ones on the current omissions.

What does that mean for the Global Order?

That’s a future column but, briefly, rather than making America great again, Trump may be accelerating its downward slide.

Footnote: One of Trump’s Rose Garden statements was that with tariffs ‘we can be so much wealthier than any country, it’s not even believable’. That short statement may be correct.

A Culture of Wokeness

This entry was posted in Literature and Culture, Political Economy & History on by .

This was offered to a media outlet but they chose another piece. Based on the Epilogue of ‘In Open Seas’.

Because New Zealand is very centralised, its central government has considerable influence over the public discussion. Thus, a change of government, as happened in 2023, may change greatly the tone and even direction of cultural development. The influence can be subtle – few ministers are direct contributors or, apparently, even consumers of culture. But who they appoint to make the awards and grants greatly affects the outcomes. Clumsy appointments distort the development. The instances are legion.

            For instance, in October 2022, Creative New Zealand announced it would no longer fund the Sheilah Winn Shakespeare festival, a 31-year-old competition in which secondary-school students performed excerpts from Shakespeare’s plays. So great was the outcry that the Ministry of Education announced it would fund the program instead (at the cost of $31,000 a year).

            CNZ’s strategic-advisory-panel dismissal of the proposal included the incendiary phrase that it was ‘located within a canon of imperialism’. To what extent the advice influenced the Board’s final decision is not known.

            Who were on the CNZ’s panel and board need not detain us, except to draw attention to the considerable discretion in its selection. For instance, had either included one of New Zealand’s internationally eminent Shakespeare scholars, we may be sure that there would have been a different outcome. As politicians are quick to point out, the CNZ board would have made independent decisions. But the politicians’ appointments shape the advisory systems; too often they have been the mediocre and the woke.

            What does ‘located within a canon of imperialism’ mean? The eminent Indian economist and philosopher, Amartya Sen, observed that Beethoven was an Indian; in which case he was also a New Zealander. So is Shakespeare. Does Shakespeare belong to a canon of imperialism? (Does the Bible?) And if he does, how is New Zealand to relate to such a canon? Critics of the CNZ decision drew attention to the central role of Shakespeare in shaping the language that New Zealanders use and the way he frames our understanding of the human condition. I draw attention to another critical feature of Shakespeare, so obvious that it is frequently overlooked. Shakespeare was engaged with the rest of the known world; the majority of his plays are based on foreign sources.

            Nowadays others engage with Shakespeare. During the just related fracas, state-funded NZ Opera was performing Verdi’s Macbeth, the cast of which included young New Zealanders who will go on to prosper overseas. (One was Māori.) At least six of Shakespeare’s plays are translated into Māori, including Romeo and Juliet published in te reo a few months after the CNZ brainstorm.

            The ‘canon of colonialism’ becomes an excuse not to isolate from the world rather than engage with it. Attempts to do so can be damaging. Promoting local need not lead to mediocrity. New Zealand authors, almost all of whom have received some public funding, contribute to the international literary scene, some spectacularly.

            Sadly, ‘located within a canon of imperialism’ is one of those phrases intended to close down discussion, to wipe out everything that has gone before. I saw this at a seminar early in 1984, in which a future Rogernome announced that there was no economics before 1975 worth studying. Were that true, it meant that all the knowledge held by those older than him was obsolete and he did not have to master any of it. Of course it was not true, which was demonstrated shortly after by the Rogernomes, who depended on recent economic theory without understanding the context in which it had developed; the result was that economic liberalisation was managed badly.

            The downgrading of the significance of the intellectual past exempted the advocates from mastering the evolution of their discipline. Not having a grasp of the past means one cannot learn from it. Too often a vaguely and inaccurately recalled past ends up as ‘truthiness’.

            Each generation self-promotes. Patricide (or matricide) is the easy strategy. But that is not true for those who aspire to excellence. For example, at the age of 75 Picasso painted a series of 58 works analysing, reinterpreting and recreating Velazquez’s Las Meninas (the ‘Ladies in Waiting’). He had first met the painting sixty years earlier.

            Appointments of mediocrities to position of influence reflect wokeness, like gender and ethnicity or safe friends of the appointee. That leads to the failure to seek and celebrate excellence. It clings to the conventional wisdom blocking out innovation and the first rate. It avoids critiquing the work of the mediocre, which is a necessary part of progress.

            While this mediocrity rules, Little New Zealanders huddle down at the end of the world, ignorant and frightened of everywhere else, too lazy or intellectually underpowered to engage. Instead, they try to close down discussions on alternatives. Underlying this inferiority complex is a terrified vision that New Zealanders are not good enough to engage with the rest of the world – the mediocre may well not be.

            Refusing to engage with alternatives is too common in New Zealand, especially if one is in a position of power. That is exactly what the Rogernomes did, refusing to discuss challenges to their paradigms. They used their political power and appointments – instead of rational argument – to repress those who disagreed with them. The Rogernomes’ strategy undermined quality economics. It became difficult to offer a coherent alternative as neo-liberal economics proved not to work. The uninformed commentariat took over.

            There is a third way, captured by the ambition of  a provincial English art gallery which wanted ‘a rigorous international programme, but to still feel very local’.

            Our greatest artist, Colin McCahon, illustrates what can be achieved. Despite physical isolation, he followed overseas art trends closely in 1930s magazines. Trips to Australia and the United States in the 1950s enlarged his international understanding but the response when he returned was his alone. He located biblical events in New Zealand landscapes; he used passages from the Bible in his paintings and he used waiata. An eminent American art historian bracketed him, as local as he was, with Jackson Pollock and Mark Rothko – one could hardly do better.

            I don’t want us to live in a pitiable country dominated by introverted, mediocre Little New Zealanders terrified of the great world outside; nor do I want to join it as a Colonial, slavishly and obsequiously imitating offshore fashions. I want the people I care about to live in a nation where if you can make it here, you can make it anywhere.

Resource Management and Property Rights

This entry was posted in Environment & Resources, Pundit on by .

While there have been decades of complaints – from all sides – about the workings of the Resource Management Act (RMA), replacing is proving difficult. The Coalition Government is making another attempt.

To help answer the question, I am going to use the economic lens of the Coase Theorem, set out by Ronald Coase who was the 1991 Nobel economics laureate ‘for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy’.

One form of the theorem is that providing property rights are fully allocated and transaction costs are zero, the ultimate use of a resource in a market economy is independent of how the rights were initially allocated. What the theorem means is that the final use of a piece of land will be irrespective of who initially owned it. So, the RMA (or whatever) will hardly necessary, if the underlying conditions are met.

I am not going to prove the theorem or explore its intricacies. The point for this column’s purposes is that it highlights the importance of property rights and transaction costs in the way that markets work.

That we should keep transaction costs to a minimum is a no-brainer (unless you belong to one of the professions which benefit from the litigation). The focus on the replacement to the RMA has been an attempt to reduce those costs and the time it takes to make a decision (which is another transaction cost). Many see the issue as clumsy administrative design but there is a deeper problem.

Who possesses the relevant property rights? We could, I suppose, compile a sort of doomsday book which listed all the property rights involved. That task would be impractically enormous. So, the law sets down a process to identify the property rights. It is an exercise which takes up time and money – transaction costs.

You may be surprised that the property rights of a resource are not well specified. Is not, for instance, a person’s house their castle with which they can do what they like? As minister responsible Chris Bishop said, ‘your land is your land, until you affect other people.’

Unfortunately, the last five words complicate the issue. (I give an example as a footnote.) In practice there are restrictions on what you can do to your property because that may affect others. You may also have joined with your neighbours in challenging a consent on some local development. In effect, you are claiming a property right on the resource. One of the roles of the various hearings is to decide how valid such claims are.

The issue becomes even more difficult when the use of an environmental resource is the issue. Individuals may have strong views on these – perhaps some landscape is precious to them, perhaps it is a heritage building. Again, they are claiming what amounts to a property right.

A particularly difficult issue involves Māori claims of kaitiakitanga (guardianship, protection, stewardship) in their rohe. They are claiming a general property right. Traditionally a Māori community transferred ownership of some of its property, it never transferred kaitiakitanga. Today Māori insist they never relinquished it when their lands were involuntarily taken from them. I leave it to anthropologists, historians, the Waitangi Tribunal and the courts to decide what happened when the transactions were voluntary. (Many transactions were ambiguously ‘voluntary’.)

The current RMA recognises to some degree the implicit kaitiakitanga property right Māori hold in regard to resources. The identification and application of that right adds to transaction costs. As occurs when you attempt to restrict your neighbour or when you, in particular, and greenies, in general, make claims about the future of some environmental or heritage resource. (A further complication is that the sustainability requirements in the RMA give, in effect, property rights to future generations.)

Economists do not have any great expertise in the initial allocation of property rights. Indeed the Coase Theorem says economists interested only in efficiency do not need to. (Any insights they have on equity are shared with many other disciplines.)

Observe that an easy resolution to reducing transaction costs is to eliminate some of the property rights implicit in the RMA. That seems to be one of the changes in the Coalition proposals. And of course, if some property rights are eliminated then other ones are strengthened. It is a kind of privatisation – some people are to lose their property rights (or those they think they have) without compensation.

When the minister talks about ‘property rights’, he is referring only to private property rights, Collective ones are barely mentioned. Expect a lot of public dispute when the Coalition proposals are progressed.

To put the issue in a wider context. One of the ongoing features of economic change over the last few centuries is the replacement of community processes and decision-making (and hence property rights) by individualistic ones. Economics has a theory which suggests that this change increases material output (say, measured by GDP), although the redistribution consequences may be judged inequitable. You will find echoes of this theory in the Coalition’s defence of their resource management proposals. (Recall Keynes’ practical men and women being unwitting slaves of defunct economists.) One of the features of the Coalition’s economic management is the prioritisation of material output over the wider notion of wellbeing that the Ardern-Hipkins Government was pursuing.

As this column has argued, material output is not the same as community wellbeing. It is a political choice which public policy pursues; the Coalition Government knows its answer.

Footnote: As in the case of healthcare, RMA reports focus on failure and rarely mention successes. I did exactly this when I reported that a friend’s elderly garage was munted by an earthquake. He wanted to demolish it so that it did not crash onto a neighbouring property. The consent took a long time. (Fortunately, an earthquake in the interim did not do the demolition, despite it having no consent.) My friend was irritated by the clumsiness of the procedure. But the bare fact he wanted to demolish the garage could disguise a range of other scenarios which affected his neighbour negatively. (I leave your imagination to write the comic novel.) How was the consenting authority to know? And if there was no ‘consenting’ process, how were neighbours to obtain redress if their interests were damaged?

Public-Private-Partnerships?

This entry was posted in Governance, Pundit on by .

New Zealand’s economic development has always been a partnership between the public and private sectors.

Public-Private-Partnerships (PPPs) have become fashionable again, partly because of the government’s ambitions to accelerate infrastructural development. There is, of course, an ideological element too, while some of the opposition to them is also ideological.

PPPs come in so many different forms that it is tedious to characterise them all. Some of those forms have been used in the past. For instance, the First (Savage-Fraser) Labour Government wanted to accelerate house building to catchup from the housing deficit caused by the Great Depression. It turned to Fletcher Building. (There was even a – rejected – proposal to nationalise the company.)

More recently, the Third (Muldoon) National Government arranged for various companies to develop projects to utilise its energy surplus (including its gas from the Maui gas field). Think Big failed because when the new businesses came online, the world price of oil had fallen and was only about a third of the level that the investments had assumed. Even worse, the Government had given guarantees so that it took the downside risk of low oil prices. It cost taxpayers a fortune.

Those guarantees were secret. That cannot happen today because the law now explicitly states that to be legally valid, any government guarantees must be reported to Parliament. (They are listed in the government accounts as ‘contingent liabilities’.)

Even so, the Think Big failure remains a reminder that a PPP are often about sharing future risk (such as cost overruns, unexpected events – such as delays from Covid lockdowns – and uncertainty about future demand, prices and costs of borrowing). A nice example was the broadband roll out where, in effect, the government accepted the take-up risk, which the private sector was not prepared to bear, but was able to ensure the construction risk remained with the private sector.

The private sector is never enthusiastic at taking on these risks but neither should the public sector be. Trying to cover all these uncertainties is why a PPP agreement often ends up hundreds of pages long.

PPPs were popular in Europe about a quarter of a century ago. Members of the EU were required to constrain their government borrowing to 3 percent of GDP. However, the definition of what was government borrowing did not include the implicit borrowing that occurs under a PPP. It was like your bank asking for a list of all your debts but ignoring anything bought on hire purchase.

New Zealand’s public accounting does not allow such elementary lapses. The public accounts include an item covering the government exposure to PPPs. Here is a list from Note 17 of the Financial Statements of the Government of New Zealand as at 30 June 2024.

               Transmission Gully State Highway        $1,392m

               Puhoi to Warkworth State Highway       $1,157m

               Waikeria Corrections Facility   $1,045m

               Education Assets                                       $   934m

               Auckland South Corrections Facility $    373m

               Auckland Prison                                         $    350m

               Total public private partnerships           $5,251m

Of that total, $3.6b still has to be paid by the Government to the private sector and the liability is included in total New Zealand public debt.

So PPPs are not a means of off-balance sheet borrowing. As the Government’s New Zealand PPP Framework: A Blueprint for Future Transactions states:

               PPP procurement should not be categorised as a financing tool. While the PPP model utilises private finance in support of achieving these enhanced outcomes, spreading infrastructure related cash flows through project finance arrangements is not the purpose of PPP procurement (if it were, this outcome could be achieved more efficiently through general Crown borrowing to finance infrastructure needs).

               Having private capital at risk for delivery performance offers significant benefits by creating stronger commercial incentives. … With “skin in the game,” they are motivated to prevent performance or availability failures, ultimately enhancing overall accountability and reliability …

               PPP will not be appropriate for all projects. It should be considered alongside a suite of other procurement and delivery options, all of which will have pros and cons depending on unique project characteristics.

I guess there is a bit of leeway about what is meant by ‘enhanced outcomes’. For instance, there is much grumbling about how quickly the road surfaces of Transmission Gully have deteriorated (some are already being replaced). What seems to have happened is that in order to meet their construction deadlines and avoid lateness penalties, the contractors skimped on the sealing. However, the contract arrangements require them to maintain the road for some decades, so the resealing is at their cost, not the public’s.

The Transmission Gully contract would be a fascinating case study on how PPPs work, much more use than, say, various studies of British PPPs, which have often proved to be costly disasters through poor management (and are regularly cited by opponents as examples of the dangers of PPPs). There is a Transmission Gully Post-Construction Review from which we can learn lessons. Unfortunately, the contractors and the government are in dispute so it says is not comprehensive. That there is such litigation is a reminder that PPPs can go very wrong.

So PPPs are not a solution to New Zealand’s infrastructural woes. They may make a contribution. But that contribution does not include getting around the debt targets we have set ourselves – hire purchase is out.

There is a European view that those governments who could do PPPs successfully did not need them. In contrast, those who needed PPPs had little chance of successfully pulling them off. Which category do you think New Zealand is in?

PPPs require careful management. We may have some people in the public sector who have the necessary skills and experience but they will not be able to handle all the projects which the government is keen to progress. Using the insufficiently skilled and inexperienced will lead to the kind of disasters that occurred in Britain. Like the sign on so many roadworks, ‘proceed with caution’. But you still roll the vehicle carefully forward.

Note. It would help public discussion and understanding to provide a supplementary account to the main government accounts which set out the government’s infrastructure balance sheet (including its size and the debt which might be attributed to it), and the changes over time. Personally, I would be much more comfortable about the government increasing its borrowing if I knew that it was borrowing to upgrade infrastructure.

Further Reading. The following may be useful

NZ Government: New Zealand PPP Framework: A Blueprint for Future Transactions.

Public Sector Vol 40:2 has a number of articles on PPPs

Craig Rennie: When should you use a PPP? – A bluffer’s guide.

Why Do Cryptocurrencies Appear to Be So Valuable?

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

It is said that economists know the price of everything and the value of nothing. That may be an exaggeration, but an even better response is to point out economists do know the difference.

They did not at first. Classical economics thought that the price of something reflected the objective cost of producing it – as in the ‘labour theory of value’. (Note the word ‘value’ which was for long interchangeable with ‘price’. Indeed economists still confusingly call the ‘price theory’, ‘the theory of value’.)

However, classical theory generated numerous paradoxes. Clearly water is much more valuable than diamonds. One can go without the latter all one’s life but you need water every day. Yet the price of water is trivial compared to the price of diamonds. Or consider a work of art. The price of the Mona Lisa is fabulous, but you can get good ‘counterfeit’ copies for the cost of production – which involves about as much labour as Leonardo’s original. So why is the original so pricey?

The paradox was resolved in the late nineteenth century by three economists working independently of one another: William Stanley Jevons of Britain, Carl Menger of Austria and Léon Walras of Switzerland. They saw the price reflecting what the market was willing to pay for it. On this foundation rose the formidable edifice of neoclassical economics (which is not the same as ‘neoliberal economics’ although some people confuse them).

I’m going to skip much of the edifice and focus on its central insight that the price is a subjective assessment not an objective fact, especially in regards to financial assets. To begin with a banknote.

A $100 banknote costs about 2 cents to produce – that is its ‘objective’ cost. Yet everyone ignores the 2 cents and focuses on its $100 subjective price. (If there is anyone who does not, I am happy to purchase from them any banknotes they have at the objective price with a handsome margin – say at 5cents.) The immediate reason we work with the subjective price is because we believe it, just as Jevons, Menger and Walras proposed. The belief is underpinned by governments accepting their banknotes at face value for settlements of its accounts such as tax payments.

A banknote is but one example of a financial asset which costs little to produce compared to its face value. Often its subjective price is underpinned by something more tangible. In the case of a mortgage, it may be a house which the mortgage holder acquires if the mortgagee fails to service their mortgage.

A shareholder may believe there will be a flow of future dividends from the company’s profits. Moreover, if the company fails, the shareholder is entitled to a share of the breakup value of the company (which is often less than the total value of the shares). In practice, the shareholder can sell the share to someone else who assesses its price on a similar basis. Thus, the price reflects the subjective sentiments of many would-be purchasers.

What then, are we to make of the share price of, say, Amazon which has never paid a dividend and whose share price – just under $U5 as I write – far exceeds the tangible assets which back it? It might pay a dividend one day, but the skyhook which holds the share-price up is the market sentiment that the share-price will rise and shareholders will benefit from the capital gain.

Or consider a cryptocurrency (such as bitcoin) which has even a less objective value compared to its price than a banknote and, typically, has no tangible assets backing it. So why do people hold a cryptocurrency (currently a bitcoin is over $NZ84,000)? It is because there are others willing to pay that amount when the cryptocurrency is offered on the market. Since they can never expect to get a dividend, one assumes purchasers expect the market price to rise (that is, others will pay a higher price one day), and they can convert their purchase into ordinary currency which they can use to purchase something more tangible.

This is a kind of Ponzi scheme for which investors get their return by selling out to an incoming investor who in turn hopes to sell out at a higher price to a later incoming investor. It requires a long-run rising price for the cryptocurrency. Stein’s law says if it can’t go on forever, it won’t. At some point the appreciation will cease, the price will stagnate and crash.

(There is no theory which predicts exactly when the crash will happen. If there was, users knowing when there will be a crash, would bail out a little before, causing the crash earlier, so the forecast would be wrong.)

Does the crash matter? There have been three major crashes of bitcoin (as an example) in the past. Its price fell about eight-tenths (in $NZ) between December 2017 and December 2018; it fell almost five-tenths in May 2021; it fell about seven-tenths between November 2021 and October 2022. (Other cryptocurrencies have slightly different stories.) In none of the three cases were there widespread repercussions to the rest of the financial system (although individual holders suffered). This was partly because cryptocurrencies are marginal in the totality of the giant financial system, but critically, there is not enough interdependence with it. In simple terms. investors in crytpocurrencies do not seem to be borrowing to invest. It is the borrowing which causes a proper financial crash as the holders’ losses ripple out through the system, impacting on innocent people who had not realised that their savings were tangentially involved in cryptocurrency speculation.

In the Minsky cycle of speculation, financial markets go into a phase in which there is heavy borrowing by investors; hence the big crash which follows. I do not know whether the cryptocurrency markets have reached that stage. (Another complication is when there is fraud, embezzlement and theft.)

The purpose here has been to illustrate how a market can flourish even when what is being transacted has no ‘objective’ value in the sense which classical economics understood it. (Ironically, though, David Ricardo who set out the Labour Theory of Value, made his fortune on the share market.) It was understanding of the subjective theory of value (price) which enables us to understand better how financial markets work.

The price of financial assets reflects the sentiment of those in the market; they may be totally detached from the tangible and objective. But that sentiment can be like reef fish, quickly switching from one direction to another. Sometimes a switch crashes the financial system which impacts on the real economy.

Footnote: Cryptocurrencies can – like a banknote – be used as a medium of exchange for purchasing or paying off debt. That is not a major feature (except for paying debts in dark markets). It is suggested that the government could accept cryptocurrencies for payment of debts to it. (This is different from banks exploring whether they can efficiently use blockchains in conventional currencies.) A prudent government would immediately switch the cryptocurrency it receives into a more conventional currency. Thus its holdings would be small – till money. El Salvador proposed to make bitcoin legal tender. Its economy is a bit of a financial basket case. When it was recently bailed out by the IMF it was required it to scale back its crypto ambitions. The IMF was wary of lending while bitcoin was legal tender because its volatile price posed a risk to financial and fiscal stability. My personal view is that a government should not get into investing in financial speculation, no matter how promising the gains might appear to be in the short run. Recall how Nick Leeson brought Barings Bank to its knees.

Note The prices used here applied at 21 March, 2025

How Well in the New Zealand Healthcare System Doing? An International Comparison

This entry was posted in Health on by .

Published by AHAA (Apologies for the tabulation presentations.)

Introduction

By way of background, doing some unrelated work I came across some international data on the healthcare sector which seemed to contradict my, and the conventional wisdom’s, view of the healthcare sector. Broadly, it is that the sector has been underfunded. That is not what the international data seems to say. By international standards New Zealand healthcare funding appears satisfactory – no worse generally than average. Why then is there so much grumbling which seems to suggest the healthcare system is in crisis?

Data is always treacherous because of data definitions and structural change over time; international comparisons are even moreso. I proceed with care – and honesty (hence the more conversational tone). The first part of the paper summarises the data. My commentary on its interpretation is in a second part.

OECD: New Zealand’s International Ranking: Health Spending of GDP

Each year the OECD produces a survey of healthcare indicators. The latest is Health at a Glance 2023. It contains many comparisons for the 38 OECD countries (and 10 others which, being much poorer, I ignore). Figure 7: [Public and Private] ‘Health expenditure as a share of GDP’. Table 1, derived from it, ranks the top 13 countries.

I was astonished that New Zealand was so high – seventh. I do not put a lot of weight on the exact ranking. It bounces around from year to year. Moreover, the differences between the 5 and 11 ranking are small after allowing for measurement difficulties. Such cautions do not alter the conclusion that New Zealand is well above (say 16 percent) the OECD average at a level not incomparable to that of countries whose healthcare systems are often admired.

1. Health Expenditure as Percentage of GDP: 2023

<> 1 United States 16.7 2 Switzerland 12.0 3 Germany 11.8 4 France 11.6 5 Canada 11.2 6 Japan 11.1 7 New Zealand 11.0 8 Austria 11.0 9 Belgium 10.9 10 Sweden 10.9 11 United Kingdom 10.9 12 Netherlands 10.1 13 Finland 10.1   OECD38 9.5

International Ranking: Comparable Health Spending per Capita

Table 1 is important for fiscal managemeny. [1] Three adjustments are made in Table 2 which refines the understanding for health policy purposes:

            – total actual spending (not relative to GDP);

            – valuing the spending in the common (PPP) prices, removing country-cost differences;

             – converting the spending to age-adjusted per capita. (A country with an older population has its health spending scaled down relative to a country with younger population because its health needs are relatively higher.)

Table 2 shows the outcome for the top 14 countries measured with OECD = 100. [2]

2. Age-Adjusted Health Expenditure per capita 2022

<> 1 United States 153 2 Germany 131 3 France 127 4 Czech Republic 124 5 Denmark 120 6 New Zealand 119 7 Switzerland 114 8 Luxembourg 114 9 Belgium 114 10 Norway 110 11 Netherlands 109 12 Austria 106 13 Japan 102 14 Canada 102   OECD37 100

New Zealand now ranks 6, one higher than in Table 1 because its healthcare prices are relatively low and its population structure is relatively favourable compared to the rest of the OECD. (Observe how the US score tumbles because it prices are so high; it still retains its top ranking.) Allowing for measurement difficulties, New Zealand seems to rank somewhere in the 3 to 9 range.

Moser’s law says if a statistic is interesting it’s probably wrong. (If it is not, it is really interesting.) It behoves the researcher to check the quality of the data. The figure which has most concerned me here was that New Zealand health sector production prices seemed low (so that the country gets a lot of healthcare bang for its international buck). However, Japan, Czechia and Slovakia are similarly out of line.

Even so, I am cautious. New Zealand health care prices seem to be about 60 percent of the level reported to Australia. Part of those differences may indicate superior efficiency, but given over 80 percent of the costs of a healthcare service are for wages and salaries, it seems possible that New Zealand remuneration rates are markedly below Australia’s. We know that to some extent that is true, but as much as the OECD comparison suggests? I return to the cost difference issue in the commentary.

OECD: Evaluating by Outputs Rather than Inputs

The statistical conventions measure the costs of healthcare, not the outcomes. For instance, they  values an episode of surgery at the cost of doing it, rather than the benefit from doing it As far as the conventions are concerned it does not matter whether the operation is necessary, low need or high need; whether it is a failure, a moderate success or resounding success; whether it makes a significant difference such as saving a life, or a small improvement such as removing an ingrown toenail; whether it is done with consideration and respect or with brutality. (The disconnect is well-illustrated by the US top ranking in terms of resources but, notoriously, its markedly lower rank on its population’s health outcomes.) Statisticians are well aware of these limitations but there have not been the resources to tackle them.

The OECD report provides a dashboard of health indicators too complex to detail. Here are the assessments about New Zealand:

Better than OECD Average

Self-rated health

Smoking

Air Pollution

Effective secondary care (Acute Myocardial Infarction – heart attack)

Effective secondary care (stroke)

Close to the OECD Average

Life Expectancy

Avoidable Mortality

Chronic conditions

Alcohol

Population coverage for core health service

Population satisfied with availability of quality health care

Financial protection (coverage by compulsory pre-payment)

Mammography Screening

Health spending

Practising physicians

Practising nurses

Hospital Beds

Worse than OECD Average

Obesity

The above list is those where the OECD provides a judgement. The report provides many more measures. A well-resourced researcher could interrogate the data (where they are available for New Zealand) and add to the list. There is also usually enough data to make ten-year comparisons.

For this paper’s purposes it is sufficient to conclude that New Zealand health outcomes are usually close to the OECD average, but there are some areas where the country is seems to be doing better than average (and perhaps a few where it may be doing worse).

Commonwealth Fund: Health Performance Indicators

The US-based Commonwealth Fund confines its international comparisons to ten countries with six separate aggregate indicators plus an overall performance measure in Mirror, Mirror 2024: A Portrait of the Failing U.S. Health System: Comparing Performance in 10 Nations. Its focus is on how poorly the US does compared to the other nine. Here are its rankings.

<>   Overall Ranking Access to Care Care Process Administrative Efficiency Equity   Health Outcomes AUS 1 9 5 2 1 1 NETH 2 1 3 6 3 7 UK 3 2 8 1 5 8 NZ 4 5 1 3 8 3 FRA 5 6 7 4 6 5 SWE1 6 4 10 7 — 6 CAN 7 7 4 5 7 4 SWIZ 8 8 6 10 4 2 GER 9 3 9 8 2 9 US 10 10 2 9 9 10

New Zealand does well on all the dimensions – 4/10 on overall rankings, 3/10 on health outcomes – except on the equity one. [4]

As a general rule, the differences between the country measures are not very great, except in the case of the US. The study tabulates the ordinal measure of ranking but provides only graphs – not tabulations – of the cardinal measures which underlie them. The countries generally bunch together – excepting the US – so that measurement errors, which are inevitable in international comparisons, could change the rankings. They would not change the basic conclusion that New Zealand is bunched with the other nine.

Except on the ‘equity’ dimension, New Zealand does really badly. It is bottom except for the US.

Commonwealth Fund: Health Performance Indicator of Equity

Supppose the measured difference between the top of the seven countries above New Zealand (Switzerland) and the bottom (France) is X. [4] Then New Zealand is almost another 0.4X down (and halfway between France and the US. Moser’s law suggests this outcome is interesting but we need to check the data.

The report describes its equity assessment procedure as:

Our Equity domain reflects how people with below-average and above-average incomes differ in their access to health care and their care experience. Australia and Germany rank highest for equity, meaning they are the countries with the smallest differences in health care access and care experiences between below-average and above-average income residents. New Zealand and the US rank last on equity, having the highest income-related differences in reported cost-related access issues and instances of unfair treatment or feelings that health concerns were not taken seriously by health care professionals because of their racial or ethnic background.[5]

The one comment the report makes about New Zealand in terms of its equity ranking was:

Australia and New Zealand’s poor performance for rural versus non-rural respondents contributed to their lower rankings. [6]

A reference to the post-code lottery?

The extent to which the international equity measure covers New Zealand concerns such as waiting times, being forced into private treatment by lack of public supply and unmet health care needs is not clear. They may apply in the comparator healthcare services too. (One where New Zealand does badly by the comparator standards is that most have national surveys of unmet health needs.) [7]

Some Local Data.

Before commenting on these findings, a couple of New Zealand specific data bases are added.

According to the Statistics New Zealand National Accounts the contribution of the health sector to GDP has risen from 3.3 percent in the 1971/2 year to 7.2 percent in the 2021/2 year. (An endnote explains why the number differs from the one the OECD uses.[8]) That is an increase of 0.7 percentage points of GDP a decade. The linear trend has short term fluctuations around it, but it is consistent with the finding that healthcare funding has a remorseless upward trend.

A second local source of data is a release of slides by the Ministry of Health: Health System Changes Comparative Analysis between 2012/13 and 2023/24: Key metrics. [9] It has graphs of the following:

            – Vote Health Appropriation time series;

            – Caseweighted Discharges time series (2 slides);

            – Discharges and Bed Days time series;

            – Presentations to Emergency Departments (ED) time series;

            – Clinical and Non Clinical FTE time series (2 slides).

They report that over the 11 years when population had increased 17%:

            – Caseweighted Discharges had increased by 25%;

            – Discharges had increased by 30%;

            – Bed Days had increased by 21%;

            – ED Presentations had increased 29%;

            – Clinical FTEs had increased 39%;

            – Non-Clinical FTEs had increased 59% (or around 37% if a transfer of staff from the Ministry of Health and the Health Promotion Authority to Health NZ are deducted).

On these measures, treatments increased faster then the population over the period. There are other outcomes not covered by the slides – including the whole of the primary care sector.

It is true that nominal spending has risen substantially faster over the period, averaging 6.3% p.a. (excluding COVID-19 funding). The increases were smaller under National (3.4% p.a.) than Labour (9.6% p.a.) – reported outcomes were rising faster then too. There are no indications of how much this increase was due to rising prices (including remuneration catchups).

Part II: Commentary

In order to avoid rambling, I focus on but four issues.

First, the big conclusion for me is that by international standards New Zealand healthcare compares well. It is not perfect, but neither are the comparators (which certainly do not include the US). Yes we grumble – there are failings – but the aim should be to reduce the failings (knowing that the comparators also have grumblers and are trying to to reduce their failings too). But the approach should be of continuous improvement, not redisorganising – the system is not failing in a major way.

Second, the largest failing New Zealand healthcare has in international terms seems to been in equity – especially the urban-rural divide. However this is a tentative conclusion and needs to be verified – the OECD data base has some material which could be investigated. There may be a post-code lottery, but we need to understand why it exists instead of jumping to the conclusion that, say, a centralised system based in Wellington would resolve the problems facing Kaitaia or the Catlins. Not surprisingly the centralisation seems to have had no effect on post-code lottery.

Third, the apparent cheapness of our healthcare system compared to our comparators may be a concern. Medical professionals are in an international labour market and while it is is not perfectly mobile, New Zealand may be losing skilled personnel to Australia. (If we want international quality personnel, we may have to pay top international dollar.) Whatever, we do need to know more about international cost differences.

Fourth, much to my surprise, New Zealand does not seem to be under-funding its health system. The OECD data in particular suggests we are funding enough resources – compared to our comparators – (although insufficient compared to our ambitions). However accounting conventions are obscuring this conclusion. Following an examination of a batch of papers relased under the OIA, I concluded that the Minister of Health ‘had got to stop talking about a “health crisis” and focus on the funding crisis’. The findings in this paper might suggest the conclusion could have been ‘to stop talking about a “health crisis” and focus on the accounting crisis.’ Having said that, the previous paragraph might suggest we should be funding more to retain staffing from migrating. [10]

Of course, there are serious challenges facing the healthcare sector. Even if there were none we should be trying to do better. The surprising conclusion from the data is that the healthcare system seems to be doing comparatively well. [11]

Endnotes

[1] The ranking does not distinguish between public and private funding.

[2] The OECD does not give this table. I have constructed it by combining two which it does provide.

[3] The missing country arises because it was not possible to collect the data for Sweden.

[4] The report offers two rankings. Reported here is the more refined one. New Zealand does even worse on the less refined one. That the rankings jump around between the two, warns they may not be robust. However the US is bottom on both and New Zealand second to bottom on both.

[5] Some of the input data is subjective. Subjective data may be culturally biased. For instance, a few decades ago little attention would have been given to gender differences.

[6] Australian Institute of Health and Welfare, “Rural and Remote Health,” last updated Apr. 2024; and New Zealand Government, Rural Health Strategy 2023.

[7] The report sometimes specifically applauds New Zealand’s healthcare performance on some dimensions.

[8] The OECD figure includes contributions to health spending from other industry sectors as well as the health sector. Examples include outsourced food and cleaning services and building and construction.

[9] On 25 July, 2024 Lester Levy, just appointed Commissioner of Health New Zealand, stated

‘There’s pretty good evidence over the last 10 years that despite significant increases in the revenue of this and its predecessor organisations, the clinical outputs, the clinical outcomes have been relatively flat.’

<><> https://www.rnz.co.nz/news/national/523162/more-health-nz-job-cuts-to-come-commissioner-lester-levy-says

I immediately put in an OIA request for the evidence. On 5 November, 2025 (much later than provided for by the OIA), I received a reply which consisted of five slides (plus two near duplicates). Their content is reported in the body of the text. Wanting to cite the source in this paper, I asked for a website reference. The response was:

“I can advise that the presentation doesn’t have a web-source. However, the information contained in the analysis is drawn from publicly available information such as the HWIP and population statistics on StatsNZ website.”

Apparently the ‘pretty good evidence’ is not worth presenting rigorously.

[10] The international comparisons say nothing about the efficiency of administration. There is a belief that New Zealand has ended up with too many layers of generic managers (who, not incidentally, are far from ideal for managing a continuous improvement regime). There are current pressures to reduce the numbers – but not the culture which generated them. However, the substantial downsizing of the public health unit of the Ministry of Health – ostensibly to release resources for treatment – may be the opposite of the concern in the following endnote [11].

[11] I footnote the concern that within the budget envelope there may be big gains from shifting spending from expensive forms of end-of-life care (such as drugs with only marginal impacts on extending quality-life years) to the earlier task of prevention and detection. This is likely to be a common problem in all health systems. A particular problem is that underfunding primary care adds to the pressure on secondary care. Earlier we observed that ED presentations were rising at almost double the rate of the population. It is so typical of the narrowness of thinking that the targeting is concerned with waiting times at ED, rather than whether the numbers can be reduced.

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