Needs to Know

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

Calculating the human condition 

 

Listener: 10 January, 2009 

 

Keywords: History of Ideas, Methodology & Philosophy;  

 

Social scientists use American psychologist Abraham Maslow’s “hierarchy of needs” as a way of characterising the human condition. 

 

Self-actualisation 

▲ 

Esteem 

▲ 

Love 

▲ 

Affection & Belonging 

▲ 

Safety Needs 

▲ 

Physiological Needs 

 

Often represented as a pyramid, this condition has physiological needs such as food, water and shelter at its base. A central role of an economy is to provide these basic needs. 

 

The next layer up are safety needs, although we don’t think a lot about them until, say, there is a crime or accident in our neighbourhood. Meeting these needs usually requires resources – jails and safety equipment, for instance – but economics is not at the centre of these issues. Criminology is quite a separate discipline. 

 

Perhaps economics has even less to say about the middle need in the hierarchy of five – love, affection and belonging, as people seek to overcome feelings of loneliness and alienation. This involves both giving and receiving. Although Christmas presents may be a part of this, successful ones are an expression of something deeper. 

 

The second-to-top step in the hierarchy – when the first three classes of needs are (near to being) met – is the need for esteem, which covers self-esteem and the esteem a person gets from others. Humans have a need for a stable, firmly based, high level of self-respect and public respect. Until those are fulfilled, the person feels inferior, weak, helpless and worthless. When these needs are satisfied, the person feels self-confident and valuable in the world. 

 

At the top of the pyramid is the need for self-actualisation, the realisation of one’s potentialities. The psychologists’ debate on this concept is fraught with complications, and an economist would be unwise to join in. However, I think the remark that “it is not always clear what a person wants when there is a need for self-actualisation” is insightful. 

 

The hierarchy may contribute to understanding a puzzle about economic growth – particularly the central problem of why growth does not increase happiness. -Economic growth appears to provide sufficient goods and services to meet the physiological needs, at least among rich countries (although we should never forget the billion-plus population in Africa and Asia that have not reached this level). The majority of New Zealanders must have passed the threshold some decades ago. But there is no evidence we are happier – although because of increased longevity we may be happy longer. 

 

We seem to pay more attention to law and order. Indeed good economic media stories can be relegated to below reports on crimes. Yet serious economics remains at the centre of political debates. It is just that we go into elections as woefully uninformed as our politicians and journalists. 

 

The answer to the puzzle may be in the need for esteem. We often rank people by their wealth, so an individual can obtain greater public esteem by earning and owning more, and – crucially – flaunting it. In response, we attribute to them a wisdom that wasn’t evident before they became famous. Many celebrities talk perfect tosh about the economy, but we listen with respect. 

 

Is it my memory, or is conspicuous consumption – the lavish spending on goods and services acquired mainly for showing off – more common today than, say, before 1984? Certainly, the very rich existed then, but they were mainly anonymous, as were their generous public donations. 

 

Earning public esteem by conspicuous consumption (even if it is with borrowed money) drives increasing consumption without increasing average happiness, because the public rankings remain the same. Thus the desire for economic growth does little to raise actual welfare (while depleting fixed resources and degrading the environment). That teachers- are paid less than bankers does not mean they are less socially valuable. 

 

The answer may be in “self-actualisation”, with its implication that each of us have a different potential to realise. To accept this is to abandon a public ranking based only on crude economic values, and to look for a more subtle understanding of the human condition, which Maslow’s hierarchy of needs helps us understand. 

Assessment Of the Social Impacts Of Gambling in New Zealand

This entry was posted in Health, Statistics on by .

Report to Ministry of Health by Centre for Social and Health Outcomes Research and Evaluation & Te Ropu Whariki, Massey University.
 

Keywords: Health; Statistics;
 
“The report of the project Assessment of the Social Impacts of Gambling in New Zealand was primarily written by En-Yi (Judy) Lin and Sally  Casswell with analysis by Ru Quan (Ryan) You. Brian Easton contributed the material on the economic analysis of the social cost of gambling (pg 66 – 75) with analysis by Ru Quan You. Other SHORE and Whariki researchers who  contributed to this project are: Kay Hammond, Taisia Huckle, Melissa Girling, Lanuola Asiasiga, Helen Moewaka Barnes, John Huakau, Paul Sweetsur. Professor Jurgen Rehm advised on the project during a visit to SHORE. Lorna Dyall (Ngati Maniapoto), Lanuola Asiasiga and En-Yi Lin served as cultural advisors to the project.
 

“The total sample size of the survey was 7010 and the survey consisted of
            1) a general population sample of 4650 respondents, and
            2) oversamples to allow  for separate analysis based on 1000 respondents each for the Maori, Pacific and Chinese and Korean samples.
 
“Data collection took place from  May 2007 to November 2007 using the SHORE and Whariki in-house Computer Assisted Telephone Interview system (CATI). The response rate  was 62% for the general population sample, 74% for the Maori sample, 64% for the Pacific sample and 62% for the Chinese/Korean sample.”
 

The part of the Executive Summary which summarises pages 66 to 77 is
 
 “9. Social impact
 
“Using a no-gambling counterfactual scenario the analysis has suggested that  as much as a net 2.4% of the population (74,000 of New Zealanders) had an inferior state of reported mental well-being as a result of gambling in 2006 and 2007. The main source of these numbers are from those who used EGMs and the associates of heavier gamblers.
 
“Extrapolating from the survey, about 10,000 people (just below a third of one percent of the adult population) committed  illegal activities in the last year because of gambling. 
 
“Of those who had a reduced satisfaction  with their lives because of their  gambling, the largest contribution was from those who were using EGMs and those who were associates of heavier gamblers.”
 
 
The Key Findings were 
 
“The measures developed as part of this survey and the subsequent analyses  have provided results relevant to measuring the social impacts of gambling in New Zealand. 
 
“With regard to the measures of gambling participation and heavier gambling, the loss to income ratio distinguished between gamblers and predicted different ratings of quality of life in many domains. People with higher losses to income ratio had worse physical health, worse mental well-being, poorer relationships with family/friends, poorer feelings about self, poorer overall quality of life, lower overall satisfaction with life, poorer material standard of living, poorer study/training performances, and were less likely to be employed.
 
“In terms of the modes of gambling the  results show different ethnic groups experienced different impacts to some degree but the time spent playing EGMs in bars showed up as having an impact with all ethnic groups,  and in relation to many domains of life. It was also associated with criminal behaviour. Respondents’ self ratings of whether their quality of life in various domains had been affected by their  own gambling showed widespread impact. 
 
“This study has also provided evidence of quantifiable impacts of the effects of heavier gamblers on their associates. Close family members of heavy gamblers were most negatively impacted by their family members’ gambling. 
 
“Regarding the social costs of gambling in New Zealand, this study estimated that 2.4% of the population may have had an inferior state of mental wellbeing as a result of gambling and about 10,000 New Zealanders committed illegal activities in the last year because of  gambling. The main contribution came from those who used EGMs and those who had heavy gamblers in their lives.”
 

The full version of the report is at Assessment of the Social Impacts of Gambling in New Zealand

Well Played, Bollard

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

My team of the year is the Reserve Bank of New Zealand. 

Listener: 27 December, 2008 

Keywords: Macroeconomics & Money;  

United States President-elect Barack Obama talks about a “crisis of historic proportions”. We are certainly in the midst of New Zealand’s greatest financial crisis, far more serious than the 1984 run on the dollar, which was unwound in a couple of months. 

The extent to which the crisis will shift from Wall Street (the financial sector) to Main St (the whole economy) is unclear. The hope is that the international economic crisis will be sufficiently contained, and the local financial one dealt with, so we end up with a relatively short recession rather than a depression like those of the 1930s and the 1880s. Given this threat, the shallowness of the public discussion is extraordinary. Even the Act Party campaigned in my electorate on “law and order”. Perhaps the economic issues were considered too difficult to bother the public with, although the outcome of those will have more impact on us than any other event of the year (including the election). Most journalists seem to find it all beyond them, and those commentators who aren’t there to promote their businesses are not particularly informed either. 

Perhaps the nadir was reached when, on October 8, the New Zealand Herald devoted its entire front page to a story headlined “Pressure on for BIG interest cut”, accompanied by a three-column-wide red arrow pointing down. It was indicative of the degree of newsroom panic that the page design broke one of the most fundamental rules of journalism: mixing opinion with fact. 

Sobriety returned three days later with an editorial titled “[Reserve Bank Governor Alan] Bollard right not to bow to panic attack”. 

Quite right, too. The Reserve Bank and the Treasury (joined at the hip on this crisis) know what they are doing. A major issue is how the public sector helps the private sector get through its mistakes, without dumping the entire cost on the taxpayer, while easing the economy through the recession at minimum cost. 

Various interlinked problems arise, but at the heart of ours is the amount of household debt. Most New Zealanders borrowing from a bank did not appreciate that the ultimate source of the loan was offshore. Those who want to roll over their loans – perhaps because they have a prudent mortgage or because they have over-borrowed – need someone to lend them the new money. But lenders are not as enthusiastic as they once were. 

What makes it tricky is the loans have to be paid off in foreign currencies, but the Reserve Bank can issue only New Zealand dollars. Once the international markets have settled down, the foreign money will be there, but the interest charges may be burdensome. 

The wrong decision could add tens of dollars to your weekly mortgage, and millions of dollars to the annual tax bill. The technical issues are complex, but the officials – unlike the press – are not panicking even if they are worried. So far they appear to have succeeded, although the razzmatazz of politics has gone on as if there is no economic problem. 

Officials will have been scrupulous in working within the law, and they will have been briefing opposition finance specialists (including Bill English when National was in Opposition). The task has been to get the job done democratically without inducing unnecessary anxiety in the people. 

I would nominate Alan Bollard for man of the year, except he would say it is all thanks to his team. So, although we have had some stunning sporting performances in the past 12 months, I propose the Reserve Bank of New Zealand as 2008 Team of the Year. 

Next year the financial crisis will spread into the economy, although we don’t yet know how seriously. I hope that in 12 months’ time I can recommend the Treasury, led by Secretary John Whitehead, as the team of 2009. 

 

Not So Simple

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

Why we shouldn’t have a tax cut right now. 

Listener: 13 December, 2008 

Keywords: Macroeconomics & Money;  

With the world in financial turmoil and entering an economic downswing, many of those who once abused Keynesian economics are now clamouring for what they think are Keynesian policies. Unfortunately, their view of Keynesian economics was overly simplistic when they criticised it, and so are the policies they are now proposing. 

In the past, governments deliberately kept public debt low, for the day – expected by Keynesians – when it would be necessary to borrow to sustain the economy during a long, deep recession. That day seems near. We must expect that public debt will rise (even in proportion to GDP). But what will the deficit spending be on? Will the debt liability be matched by assets on the other side of the balance sheet? 

That is why Keynesians do not lightly advocate a cut in taxes. A higher public deficit means increased government debt, which represents an increased burden of debt servicing and repayments. Their preferred strategy for boosting spending has been additional investment, with the idea that the extra productive capacity will generate the future tax revenue to service the debt. 

Immediately after World War II, Keynesian governments built hydro-power stations in New Zealand and steel mills in Britain to sustain the economy, reduce unemployment and add to productive capacity. This strategy is more difficult these day, since a lot of state-owned enterprises have been privatised, and those that are still publicly owned cannot have their investment plans readily directed by the Government. 

Instead, the Government has talked about increasing spending on infrastructure. Although some will be commercial – broadband and energy – much of it will not contribute to additional tax revenue. It should contribute to economic growth, but that does not automatically mean more tax payments. 

For instance, a bypass that reduces traffic jams may mean less revenue, because the vehicles will run more efficiently and use less fuel, and their owners will pay less tax. Motorists may be better off with quicker rides and business improved with cheaper trucking, but this will not directly generate extra tax payments, and those indirectly generated may not cover the cost of the debt servicing. Future generations may have to pay higher taxes, but any grumbling will not be justified if travelling is easier and business costs are lower. 

The situation is further complicated by the time taken to get the investment on infrastructure in place. The previous Government ramped up infrastructural spending (which is why it could not cut taxes as generously as some insisted). More new projects may take years to come on line, although some are already under way. 

There may not be the skilled workforce to implement them. There is a myth that during the Depression, professors helped build the roads. One might allow today’s academics to use a shovel and wheelbarrow, but I am not sure they are fit to drive a bulldozer. 

There is probably some infrastructural spending that can be used to tide us over the gap. Making housing energy-efficient and dry would be a good start, especially if there are courses to give the unemployed the skills to retrofit houses under a master craftsperson’s supervision. Indeed, should we not be absorbing the unemployed in programmes that upskill them for the future? Some environmental spending may be also beneficial using the skills available, but we need to avoid the low priority, make-work jobs that were fashionable in the late 1970s. 

Except for improved state housing, such programmes will not add to government assets. But they will add to the nation’s assets, including its human capital, and will increase our welfare in the long run. Better to spend on them than encourage consumption without matching increases in production – even as the baubles of electoral bribery. 

<>Of course, there are times when taxes should be cut. But not when the additional consumption is offset by climbing public debt. The critics of Keynesianism were right to caution against such simplistic thinking. There are better ways to handle this downswing than to implement such simplifications.

Deed Of Agreement

This entry was posted in Political Economy & History on by .
Between Brian Easton and Penguin Publishing in Relation to Matters Concerning Roderick Deane: His Life and Times, by Michael Bassett and Judith Basset,
 

Keywords: Political Economy & History;
 

APPENDIX I: DEED OF AGREEMENT
(OCR of Original ) 
 

THIS DEED is dated the 17th day of October 2008
BETWEEN     BRIAN HENRY EASTON of Wellington Economist (Easton)
AND               PEARSON NEW ZEALAND LIMITED at Auckland (Penguin)
 

BACKGROUND
A.        Michael Edward Rainton Bassett and Judith Ola Basset, both of Auckland, Historians (the Bassetts) are the authors and Penguin is the publisher of a book entitled “Roderick Deane: His Life and Times” (the book).
B.        Easton is an independent scholar, ceonomist and former director of the New Zealand Institute of Economic Research.
C.        The subject of the book, Roderick Sheldon Deane (Deane) was a trustee of the New Zealand Institute of Economic Research when Easton was its director.
D.        At page 115 of the book the Bassctts stated “A clutch of left-wing economists, including Brian Easton, David Sheppard, Mervyn Pope and Suzanne Snively, wrote to Lange blaming Deane for the foreign exchange crisis and suggesting he be sacked.”
E.         At page 122 of the book the Bassetts stated “In left wing circles, several people, including Brian Easton of the Institute of Economic Research, had identified Deane as a proponent of deregulation and a threat to the old-style orthodoxy.”
F.         Easton advised Penguin those statements were incorrect, claimed they were defamatory of him and sought a correction and apology (the latter to be effected, in part, by the inclusion of an erratum in published copies of the book).
G.        Penguin referred the matter to the Bassetts
H.        Penguin has advised Easton that it no longer holds any copies of the book, the remaining copies having been forwarded to the Bassetts and Deane for their personal use and that there is no reference to the book on its website.
I.          The panics have agreed to settle Easton’s claim on the terms appearing below
 

OPERATIVE CLAUSES
1.  Penguin shall cause to be published in the Independent and The Press newspapers and on the Scoop website the following retraction and apology (the retraction):
In the book “Roderick Deane. His LjJP and Times “, it was stated that a letter signed by Dr Brian Easton and three others was sent to the then new Labour Prime Minister David Lange in 1984 warning him about the use of Dr Deane as an advisor. It is conceded that no physical evidence that Dr Easton, in fact. did so and no evidence can be found other than Dr Deane said Mr Lange mentioned it to him. Dr Easton refutes having ever written such a letter or co-signed one. In the circumstances, an apology is extended to Dr Easton for suggesting that he either wrote or signed such a letter.
2.         Penguin shall forward to the institutions set out in the Schedule to this deed a copy of the retraction for insertion in the copy (copies) of the book held by those institutions.
3.         In the event the book is reprinted, Penguin shall ensure the references to Easton are omitted.
4.         Penguin shall pay to Easton the sum of […] plus GST thereon as and for his costs together with […] for disbursements.
5.         These agreements shall be in full and final settlement of all or any claims which Easton has or may have against Penguin arising from the publication of the book.
Signed by
            Brian Easton and
            Geoff Walker, director of Pearson New Zealand Limited.
 

Agreed Letter
 

3 October, 2008
 

The Chief Librarian
 

RODERICK DEANE: His Life and Times — Michael and Judith Basssett
Dr Brian Easton has drawn to our attention to errors in the abovenamed book which we published in 2006. We have agreed to request you insert the attached errata at pages 115 and 122 of the copy held by you.
We shall be pleased if you would do so accordingly.
p.115 — The sentence “A clutch of left-wing economists, including Brian Easton, David Sheppard, Meivyn Pope and Suzanne Snively, wrote to Lange blaming Deane for the foreiqn exchange crisis and suggesting he be sacked.”
Erratum “Brian Easton was not a signatory to any such letter.”
p.122 — The sentence ‘in left wing circles, several people, including Brian Easton of the Institute of Economic Research, had identified Deane as a proponent of deregulation and a threat to the old- style orthodoxy.”
Erratum “Brian Easton did not identified Deane as a proponent of deregulation or a threat to the old- style orthodoxy.”
Yours faithfully
 

The Playground Series

This entry was posted in Literature and Culture on by .
Contribution to the catalogue of the Vivian Lynn exhibition at the Adams Art Gallery, VUW (October 2008 – March 2009).

Keywords: Literature and Culture;

It is said that if you remember the 1960s, you were not there. The 1970s were  much more problematic, not least because of the new wave of feminism. What was a man to do but take the kids down to the park and watch them play? Others saw a different playground; at least Vivian Lynn did – more intense, more socially threatening. The lazy rhythm of children on swings becomes one of tension and anxiety in her Playground IV.

The first I saw of the series was Playground V in a sociologist’s house. The triangular image has always stuck in my mind, reminding me of the cone of the space exploration vehicle, but here the people are exposed outside rather than protected inside. The friend explained that the people climbing the merry-go-round wheel was a representation of a society where everyone was striving to get to the top, although they could not all make it. Had he been a psychologist he might have thought instead of Abraham Maslow’s pyramid hierarchy of needs with its ultimate object of self-actualisation;  now that was something to do with the 1970s I think –  or was it the 1960s?

I suppose the sociologist or the psychologist might also be taken by the chair ride of Playground II with its passengers isolated from one another – perhaps lone commuters in their cars. That was the first time I noticed the commentary image at the foot of each print. This one shows a fallen child with a buzzy-bee,  presumably run over by the crashed car. The child is naked; so are the androgynous people.

When some friends gave a print to the Department of Economics at the University of Canterbury when I left, we chose the snakes and ladders of Playground III, a reminder that life is less determinant than its portrayal in economic models. It is a strange picture with the traditional ups, and downs replaced by plankton and deep sea creatures which morph into supermarket staples repeated, as in Andy Warhol print. Around the border are labels: ‘consume’, ‘loss’, ‘success’, ‘expand’, ‘pollute’ ‘waste’. ‘pay’, ‘wait’, ‘advance’, ‘progress’, ‘consume’, ‘shop’, ‘buy’, ‘penalty’, ‘profit’, ‘success’, ‘interest’ – the only use of text in the series.

The footnote comment is a seesaw controlled by a couple of giant fingers. Some see the fingers of capitalism (an economist might say ‘the market’) but I have always thought of them as belonging to fate. It may not seem so in the celebrity-driven  2000s, but there is a lot of luck in whether you make it or not.

Playground I uses the seesaw motif.  Those on the upswing are straining, those on the down seem happier. The footnote comment is the only case of an unequivocal gender image: a woman running away from the playground. In the first print, we may take it that she is having nothing of the world the series portrays.

The print in my office is Playground VI, with machinery which on closer inspection proves to be made of human bodies; I am reminded of the treadmills of the prison of Oscar Wilde’s  Ballad of Reading Gaol. I acquired it while working through the Ricardian/Marxian theory of embodied labour in capital. The print captures the idea beautifully.  It is  a terrible tribute to the costs of industrialisation and of a modern economy.

Mind you, the labour theory of value is not comprehensive, because it does not include natural resources. That does not make the image any less powerful, but it reminds us that the environment in the 1970s was not as prominent an issue as it is today, although it is sneaking in, as the sea creatures and the cats eye shells in the footnote to Playground VI signal. .

No doubt the artist, like the rest of us,  was going through a transition then. Yet the prints stand independent of her personal concerns. My responses to the works are – shall we say – very 1970s. The pleasures of being with the kids at the playground were a distraction from the great forces shaping society – but perhaps ultimately more rewarding.

Dispute over Errors in Deane Biography Settled

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

Press Release: 12 December, 2008.
 

Keywords: Political Economy & History;
 

The dispute between Brian Easton in regard to the 2006 publication of Roderick Deane: His Life and Times written by Michael and Judith Bassett and published by Penguin Books has been resolved to Dr Easton’s satisfaction.
 

He objected to the two things written about him in the book.
 

‘… Brian Easton, David Sheppard, Mervyn Pope and Suzanne Snively wrote to [David] Lange [in July 1984] blaming Deane for the foreign exchange crisis and suggesting he be sacked.’ (Page 115)
 

Dr Easton is adamant that he did not write nor sign any such letter. Challenged, the Bassetts have been unable to provide physical evidence of any such letter; that is now acknowledged. Easton adds that he has also looked for evidence that there may have been a letter signed by others but has been unable to find any. He says that while David Sheppard and Mervyn Pope are dead, as best search as has been possible found no evidence of any such a letter. Suzanne Snively is equally emphatic that she did not write nor sign any such letter. When asked about it before he died, David Lange forcefully rejected the notion that there was any such letter.
 

 ‘… Brian Easton of the Institute of Economic Research had identified Deane as a proponent of deregulation and a threat to the old style economic orthodoxy.’ [In about September 1984,]  (Page 122)
 

Again the Bassetts were unable to provide any evidence for the statement, and Dr Easton has no evidence or recollection of his having done so at this time.
 

Dr Easton says that if true, both statements would reflect on his judgement and competence, especially as at the time he was the Director of the NZ Institute of Economic Research and Dr Deane was on the Board of Trustees of the Institute. That the claims remain of contemporary relevance over two decades after the alleged events is indicated by two reviewers of the book explicitly mentioning the letter, associating Easton with it.
 

While many might think such gross inaccuracies were defamatory since they might mislead readers about  Dr Easton’s character and performance, Easton has pursued these egregious errors as a scholarly matter. He is therefore satisfied by the publisher’s apology, by their sending a letter of correction to all research libraries which hold the book, and by their writing a letter of correction to those publications with reviews of the book which repeated  the inaccuracies.  (They also paid Dr Easton’s legal expenses.)
 

Dr Easton’s satisfaction with the settlement is, however, subject to the disappointment that it has taken so long to settle. ‘In my view, a mark of scholarship is that when one makes mistakes one corrects them promptly.’

Prospects for the New Year

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

Address to the Wellington Branch of the Institute of Directors, 4 December, 2008. 

Keywords: Macroeconomics & Money; 

When I was invited to address you, it was suggested I should – in the spirit of the season – say something light. After all, we are about to break for a few weeks to be spent with family and friends and, hopefully, enjoying our favourite recreations. 

But I am afraid the international financial system does not take any such break. It is quite possible that there will be another stage in the international crisis while we are on holiday; perhaps a major financial institution or productive business announcing its difficulties and having to be rescued. Any collateral damage may impact on your businesses. Over the holiday period, chief executives will be on call, as will the chairs of your boards. Let us hope that they will not be called. 

Being a director is a very responsible duty, so I think it appropriate that I do not just wish you the season’s cheer, but reflect on recent developments in order to give you some framework to think about 2009. 

We need to be cautious. Had I told you last year that Citigroup, which on some measures was the world’s largest bank, would have to be bailed out in 2008, because of its unsatisfactory balance sheet, you would have doubted my judgement. Yet last month it was, to the tune of a couple of hundreds of billions of dollars. We can but speculate what will happen in 2009, but everyone is cautious about getting mixed up with a financial institution which could prove just as problematic. 

This international crisis began in August 2007, so it is now going its sixteenth month. In that time, the world’s central banks have flooded the world with liquidity making it extremely easy to obtain cash, but we dont seem to be anywhere nearer the end of the financial crisis. 

The reason is, I think, this is not just a liquidity crisis which is about access to cash, but it is a balance sheet crisis for the assets of a business include items which have a longer maturity than cash. Many financial institutions have in their balance sheets assets which are described as ‘toxic’; which they cannot sell, for no one knows what they are worth, and so , for no one will buy them. And certainly we do not how much they are worth in total, No amount of additional liquidity will address their weaknesses. 

The result of too many poor quality assets on balance sheets is that private financial institutions are unwilling to deal with others – central banks aside – on a long term basis, because they are not certain of the soundness of the counter-parties. Pumping additional liquidity into the system does not address this lack of confidence in those longer maturity assets in the balance sheets, and so the entire financial system is gummed up, except for very short term deals. 

I do not think the world is going to resolve this fundamental problem, until it uses a Swedish type approach where each problematic financial institution is split into a ‘good bank ‘and ‘bad bank’, thus separating out the toxic assets, and enabling the good banks to function as confident providers of credit. For various reason the financial authorities in the key jurisdictions – the US, Britain and the European Monetary Union – have been reluctant to do this, and have instead made marginal responses which have not resolved the financial crisis. 

Until there is some quarantining of the toxic assets from sound assets, the world’s financial system is not going to function properly. As Winston Churchill is alleged to have said, America will do the right thing, but only after it has tried everything else. That seems to be true for most monetary authorities, 

Fortunately toxic assets are not a direct problem in New Zealand. Our trading banks do not seem to have any – although like all good banks they have bad debts for which they prudently make provisions. Insofar as there were any toxic assets in New Zealand, they were simple ones held by finance companies. Those finance companies with noxious assets have fallen over, and while that is disrupting, especially for their depositors, through a combination of good luck and good management their collapse has not impacted on the integrity of New Zealand’s core financial system, 

New Zealand’s problem is its overseas debt, which has to be rolled over in the next year or less. Our roll-over requirements are huge for an economy of our size. One estimate is about $NZ90 billion over the next year. As long as there is an international financial crisis of confidence, even banks without toxic assets will have trouble borrowing offshore. A crucial analytic point is that the roll-overs involve US dollars, but our central bank can only issue New Zealand dollars. 

I wont go through here the various options of how we might reconcile this imbalance, but let me just say I am confident that our Reserve Bank, with the support of the Treasury, is working its way steadily through them. They are not panicking, but I am sure they are worried. Think of them as swans, sailing serenely above the water line and paddling like fury below. We may be proud of, and confident in, the competence of our officials working on the financial crisis. There will be more officials than the RBNZ governor on call over the holidays. 

But the swan is sailing against a strong international tide. Its inevitable that financial difficulties are going to impact on the real economy. 

The New Zealand business cycle has been in a downswing for most of the 2008 year as a result of a slow down in export sales, stagnation of consumer spending and cut-backs in private investment, especially residential construction. The export growth slowdown partly reflects the high exchange rate of recent years. Recent falls will give it some lift, although firms may face supply-side restraints. In any case the world too is in recession, so there is a fall-off of export demand. The consumer stagnation probably reflects caution, and some consumers trying to get out of excessive debts. It aint going to be easy, especially as unemployment is rising. 

So economic growth is unlikely to recover much next year, especially – as you will be already aware – because businesses are having trouble obtaining credit, compounding the normal cash shortage experienced in a recession. That means they will be further cutting back on investment and selling out of inventories, both of which have flow-on effects to other businesses and employment. 

So the firms on whose boards you sit, face substantial challenges in 2009, even if the overseas authorities start to address the fundamentals of the international financial crisis. That is a good reason for directions, board chairs aside, to have a good relaxing break. You will be working hard and responsibly for the rest of next year. As one economist said to me ‘prepare for the worst, and hope for something better.’ And be grateful that those on call over the holiday season will look after our interests while the rest of us can relax.  Go to top 

 

Trading Places

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

Economic geography is all location, location, location 

Listener: 29 November, 2008 

Keywords: Globalisation & Trade; 

When I was awarded a Marsden Grant to study globalisation in 2004, I was pretty clear about the -subject’s economics. As the costs of distance (such as transport costs) fell, the opportunities and benefits from trade rose, and that would transform society. 

You will find this elegant and revealing analysis in the first non-introductory chapter of my book Globalisation and the Wealth of Nations, applied to the arrival of refrigeration in New Zealand. 

While studying, I was awarded a Distinguished Fulbright Fellowship to visit the US. As so often happens, spending time away from home provides major insights (thank you, Fulbright New Zealand), which transformed my thinking. The next chapter uses the US to illustrate that when there are economies of scale – average costs fall as the scale of production increases – the effects of falling costs of distance are even stronger. Economies of scale are integral to the theory of the firm, but they introduce such nasty complications into “general equilibrium theory” (which includes the theory of international trade) that even non-ideologues tend to underplay their significance. 

\Paul Krugman had studied such effects in a seminal paper in 1980. One of the “curiosities” of postwar globalisation is intra-industry trade, in which the same product is exported between two countries – eg, Volkswagens to France and Renaults to Germany. (There is a chapter in the book discussing the principle.) Depending on definitions, up to a quarter of the world’s merchandise exports involve intra-industry trade, and the proportion is growing. It is a phenomenon that changes the way we think about economic development and trade. Sadly, much of New Zealand’s thinking is trapped in David Ricardo’s 19th-century paradigm of “comparative advantage” in which unlikes are traded, with little recognition of the importance of “competitive advantage” that is based on, and extends, Krugman’s thesis. 

In 1991 Krugman went on to consider the economies of agglomeration, which are economies of scale for the production costs of a region rather than just a firm. Densely populated areas have lower production costs (which need not be outweighed by the diseconomies of congestion). The “new economic geography” revolutionised the way we think about location. Certain sorts of activities cluster in cities. My book applies the notion to New York, but you may have noticed that, in a number of columns, I have applied the same analysis for Auckland as a global city. 
Economies of scale effects are difficult to analyse. Too often superficial economics ignores them, putting them in the too-hard basket. Some of the findings are almost counter-intuitive – eg, as the costs of distance fall, a point is reached when the price of food rises relative to the price of manufactures. Yet the empirical evidence is that, coupled with the falling costs of distance, they shape the world in which we live. 

Krugman’s innovations simplified the complexity of the analysis, but still there are puzzles. (My book aimed to make the key ideas available to the general public, while avoiding getting bogged down in the mathematics; there is none in the book, except hidden in the verbal analysis.) 

So it was absolutely right that the committee in charge of the economics prize in honour of Alfred Nobel gave this year’s award to Paul Krugman “for his analysis of trade patterns and location of economic activity”. In a way, it was a brave decision for a usually timid committee. Krugman has a second profession as a columnist for the New York Times, where he has been perhaps the world’s most outspoken and cogent liberal critic of the Bush Administration. (When his -columns are not political they are very fine expositions of economics ideas – perhaps he should get a Nobel Prize for literature, too.) 

Krugman has not stopped at revolutionising international trade theory. Even in the 1970s he was presciently studying international financial crises. In the 1990s he was a major expositor of Japan’s economic stagnation, and the difficulties Asian economies were in. He is a shrewd critic of the US health system. Whatever his political views, his analytic ones still have much to tell us. 

 

‘it’s the Same This Time?’

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Cycles and Depressions in New Zealand History

This is a revised version of a paper given to IPS seminar, 22 November 2008. It is similar to the article published in Policy Quarterly, Volume 3, No 1, February 2009, pp.17-23.

Keywords: Macroeconomics & Money; Political Economy & History;

Introduction

It is said that a banker’s most dangerous expression is ‘It’s different this time’, a phrase used to justify repeating actions which proved mistaken in the past. The economist’s approach is a little different. Ideally, the same basic model should apply on all occasions. However each time its application differs because

– the parameters are different;

– the external shocks are different;

– the policy institutions (and therefore their reaction functions) are different.

As we face what may be the greatest financial crisis which New Zealand has ever experienced – albeit not necessarily the greatest economic crisis – we can try to use the experiences of the past to identify the underlying issues and the potential policy responses.

New Zealand has experienced cyclical economic downswings since it became a market economy two hundred years ago. Not all are particularly well evaluated. Perforce, this paper confines itself to those for which there is sufficient scholarly work.  I start with short-run cyclical fluctuations, then turn to the three major periods of long depression in New Zealand’s post-1840 history.

The Standard Post-War Business Cycle

The best studied short-run fluctuations are those of the post-war business cycle.  Recent work by Viv Hall and John McDermott (2007 and forthcoming) identifies 11 cycles (excluding the current one), which implies an average length of about five years. Others including myself (Easton 1980, 1997) have identified up to perhaps another six smaller cycles, which would reduce the average to three years. So there is some disagreement about what constitutes a business fluctuation, and they are not very regular.

That means they are not simply the theoretical ‘trade cycles’ described in the seminal paper by Paul Samuelson (1939), which showed that under certain circumstances interaction between the orthodox consumption multiplier and the investment accelerator generates a regular sine wave.

The irregularity of New Zealand’s business cycle tells us that while Samuelson’s mechanisms may be important, the New Zealand business cycle is not based on a self-sustaining process but is likely to be a consequence of external shocks, as in the model identified by Ragnar Frisch (1933). The impression is that the mechanism is strongly damped: each shock generates a single fluctuation, with subsequent ones obscured by the next shock. The irregularity also tells us that the New Zealand business cycle cannot have been simply induced by the an election cycle.

Nor are the fluctuations a regular sinusoid about a trend. Rather, the peak phase tends to be a growth plateau of four to twelve quarters, so it is difficult to identify a peak. The trough is much sharper – it can usually be identified to within a three month period. This suggests that the characteristic shock induces a downturn, from which the economy recovers to running at its growth capacity until another shock ensues. This has some of the characteristics of the theory of the trade cycle proposed by John Hicks (1950).

Crucially, the business cycle and growth trend are not independent of one another, but are intimately linked. The longer the economy is on the growth plateau, the stronger the trend growth rate.

The best account of the cycle mechanism in New Zealand is still that of Eric Haywood and Colin Campbell (1976, 1978), written in the pre-1985 fixed-exchange-rate environment. The external shock which precipitated the typical business downswing was a fall-off in the price of exports (relative to import prices). The export sector suffered a loss of revenue, which caused both a reduction in spending (including on investment) and rising borrowing from the banks and other sources of finance. But the lending capacity of the banks was limited because they experienced a drain of foreign funds, as receipts from exports were lower than the outgoings for imports and debt servicing.

Because the exchange rate was fixed this deficit of foreign funds had to be covered by government offshore borrowing. The government, facing falling receipts itself, would reduce its spending, adding to the downward pressures from the export sector. Domestic sectors would face reductions in spending and so there would be a general contraction in production. At some stage these processes would reach a lower limit – as they do in the Samuelson and Hicks  accounts of the business cycle – and the domestic upswing would begin, especially if there was a recovery in the terms of trade.

Here I make three modifications to the Haywood-Campbell analysis. First, there is an inventory cycle which is shorter, but of considerable amplitude, which exaggerates the underlying shock. Second, Schumpeterians would argue that the downswing was important in extinguishing less productive firms which survived during the boom. The released resources – labour and capital – would be transferred to more productive firms in the upswing.

The third caveat is more complex. Haywood and Campbell were writing before the floating exchange rate. Under the fixed-rate regime, banks facing a shortage of foreign funds obtained them from the Reserve Bank; hence the government’s need to borrow foreign currencies. Today we have a floating exchange rate, and in principle the Reserve Bank need not borrow offshore.

How the economy fluctuates under a floating exchange rate has not been properly evaluated; the long rogernomics recession involved some other events which complicate the analysis, and the fact that the Australian economy sailed through the Asian crisis while the New Zealand economy did not suggests that policymakers got it wrong.  (The downswing, troughing in first quarter 1998, involved an unfortunate monetary policy response guided by a Monetary Conditions Index which was mathematically wrong, without theoretical foundation and empirically untested.)

In summary, the postwar business cycles all display the same internal economic mechanisms, although the external shocks may have differed, and different policy mistakes may have been made. But monetary phenomena were endogenous – albeit in different ways reflecting different institutional arrangements – both before and after the floating of the exchange rate. This endogeneity of money was not true for the first two major downswings New Zealand experienced before the war.’

The Long Depression of the 1880s

There were short-run fluctuations throughout the nineteenth and early twentieth century. Some were externally generated, as in the late 1840s which left Maori stranded with provisions for ships which did not arrive because of a financial crisis in Britain. Some were home-generated downturns which occurred when temporary unsustainable activities ran out of resources – the whale or alluvial gold quarries – or a boom from war or borrowing came to an end, or when settlements ran out of their initial capital for investment.

However the Long Depression of the 1880s and the Great Depression of the 1930s involved more complex processes under monetary arrangements which were different from the post-WWII ones. There was then no central bank in New Zealand. Rather the trading banks held sterling reserves. A run-down of these balances (as when export revenue fell relative to import revenue) led the banks to contract domestic lending. New Zealand was on a ‘sterling’ standard, not a gold standard.

In October 1878 the City Bank of Glasgow failed with a capital deficiency for its liabilities of £12.4m were covered by only £7.2m of assets. There had been deliberate falsification in the accounts, and all the directors were jailed. There being unlimited liability, about 1000 shareholders were ruined. (What must have been exceptionally galling was that so skillful were the deceptions that on the last day £100 shares were trading at £236.)

New Zealand was affected in two ways. First, the Bank had made speculative investments in Australia and New Zealand, in the hope of recouping banking losses. Second, and following three further bank collapses in December, there was a tightening in the London money market. New Zealand had spent the previous decade relying on borrowing in London to support the Vogel boom. The tap was turned off and there was a credit contraction. Trading bank advances, which had almost trebled between 1870 and 1879, fell 15 percent in the following year, and while there was some subsequent growth, New Zealand struggled through the next decade in ‘The Long Depression’.

There are two other elements crucial to this story. First wool prices fell. Although they had been falling since 1873, the further fall of a third between 1878 and 1886 reduced the banks’ sterling receipts and the income of farmers (and of those whom they purchased from). So while the Long Depression was precipitated by a monetary crisis overseas, the independent terms of trade deterioration compounded the misery.

Second, there had been land speculation in the 1870s, including irresponsible lending by banks (as the City of Glasgow Bank story suggests) but also fueled by the government borrowing of the Vogel era. As a result land prices were out of line with the returns from farming them. As a bank inspector (W.G. Rhind) commented about Hawkes Bay, the land prices were ‘enormous’ and fictitious’, and ‘most monstrous payments’ were being made, thanks to settlers holding ‘the most sanguine, not to say wild ideas of the importance of the place’.

Owners were thus saddled with excessive interest payments on overvalued land. Banks were faced with the dilemma of carrying such owners, or bankrupting them and taking over the land, possibly unable to onsell it, and probably having difficulty maintaining its productive value without a committed farmer. Some banks later failed. But because they were a peripheral part of the London banking system there was no great financial shock, although the New Zealand Government bailed them out.

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

The Great Depression of the 1930s

The toxic combination of international monetary turmoil, slumping export prices, and excessive domestic debt levels was repeated in the Great Depression of the 1930s.  This time the monetary crisis almost certainly contributed to depressing the terms of trade.

My analysis suggests that the Great Depression was in fact part of a longer Interwar Depression, but I won’t pursue that here. (Easton 1997) Certainly the debt problem was prior, for farm land prices were too high. In the 1922-9 period the return on farmer equity averaged 3.4 percent p.a. whereas they were paying 6.5 percent p.a. on farm mortgages; retirement would have given them better return. Future productivity and prices lifting incomes might have changed the balance. Such optimism proved illusory. In the four years after March 1930, the returns on farming did not even cover the value of the labour of the typical farmer, let alone give a return on the capital.

The fall in farm output prices (even relative to input prices) was caused by the world economic crisis which had been precipitated by the 1929 Wall Street Crash. (It is now generally accepted that the causes of the crisis were more complex than the crash by itself.) It is harder to stop farm production than factory production – harder to layoff livestock than the workforce – so there tends to be an oversupply of farm products relative to manufactures, which drives down their relative price. With land prices – or, more accurately, the farm debt secured on land – already too high, the fall in output prices was a recipe for disaster.

The government position was not wholly robust either. During the 1928 election campaign, Joseph Ward promised to borrow £70m. He probably intended to do so over ten years, and so was nominating a rate not unlike that of the previous decade. The borrowed funds were used for the works program. When the money dried up, the programs were cut and workers laid off.

Government borrowings in the London financial market were first deposited with the Bank of New Zealand (the trading bank the government partly owned), and became part of its sterling balances. The money used in New Zealand which ended up in one of the other five trading banks would be transferred to their London sterling balances. Funds used to purchase imports would end up in a foreign trading bank, reducing the aggregate sterling balances in London. Thus the Government’s sterling loan would be run down, initially to other New Zealand banks, later to those outside the New Zealand system.

Similarly export receipts would end up in one of the local bank’s London accounts, be transferred to other banks’ accounts as the exporter spent the money in New Zealand, and drain away as the money was outlaid on imports.

So long as banks had a surplus of sterling balances they could make advances to New Zealanders, knowing that the surplus would be drained to other New Zealand banks and, eventually, outside them. If there were no additional funds coming in from government loans, and if export receipts fell (as they did by over a third between 1929 and 1931 from £55m to £35m in the year), the banks would have to contract their advances.

On top of the reduction of expenditure because farmers had less income, there was a reduction in funds for investment (including on public works) while trade credit was harder to obtain. The same economic mechanisms which we later see in the post-war business cycle generated an economic downswing. The fall from the peak in the year ended March 1930 to the trough in 1934 amounted to around 12% in real GDP terms (and more than double that relative to the trend rate of growth).

It is common to criticise the policies of the government of the early 1930s. Perhaps they were not fair, failing to share the burden of adjustment equally. The social hardship they caused is well recorded; the worst hardship was from unemployment. Some of the criticisms are extravagant. It is true that wages were cut by government fiat, but they followed prices down and real wages were broadly maintained.

The government did not pursue expansionary measures, for without sufficient control over the monetary system they could not practice macroeconomic management. Indeed they had so little influence that the foreign reserves (sterling balances) of the trading banks rose between 1930 and 1935. Unlocking  the reserves for public policy purposes required a central bank.

New Zealand had entered the Depression with excessive debt, and the fall in both export and import prices disrupted the relationship between external and internal prices. Much of the policy activity of the period was to regain the balances between debt and domestic prices and within the price system. The devaluation of the exchange rate, the cutting of wages, the Mortgagors and Tenants Relief Acts all had this purpose. This realignment, plus new policy institutions such as the Reserve Bank, provided the foundation of the expansion for which the subsequent Labour Government is renowned.

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

The Third Depression 1966-93

Describing the period from 1966 to 1993 as a ‘depression’ may seem artificial, It certainly was a period of high unemployment, and poor economic performance. What distinguishes it from the earlier depressions is that the world economy prospered so New Zealand grew slower than they generally did. It may be better to describe it as a period of slower economic growth – even a climacteric or retardation in the trend of economic growth – or a structural adjustment  responses to a new world situation (poorer prices for New Zealand’s key exports). It is included here because some commentators have the compared the period – especially the Long (Rogernomics) Recession of  1986 to 1993 – to the current economy situation. This depression began with the fall in the auction price of wool in December 1966.  It was a structural change – except for the 1971-2 world commodity boom, the relative wool price never recovered. The price shock came not from some international monetary crisis but was particular to the industry: competition from synthetics.

As about two fifths of export receipts in the 1960s came from wool, a structural price fall of around 40 percent meant a 16 percent loss of export receipts. It was actually worse than that, because in 1966 another 20 percent of receipts came from sheep-meats, so the sector which dominated exports was devastated. (Today sheep meats contribute about 15 percent of the receipts from the exports of goods and services, with wool providing a further 5 percent.)

The permanent price collapse meant that much of the capital value in the industry had to be written off.  The downswing proved longer than usual, which inhibited physical investment and innovation. As the rest of the world economy prospered, New Zealand’s stagnated, and so it declined in the world rankings of income per head.  Over the decade after 1966 the New Zealand GDI per capita fell about 15 percent relative to the rest of the OECD.  Following the downswing of the later 1970s, there was a temporary recovery from the world commodity boom in 1971-2 which switched over into the sharp downswing of the 1973-4 oil shock; New Zealand followed. The economy was weak in the late 1970s and unemployment more apparent.

While the standard economic mechanisms of all the early postwar downswings occurred, the structural price collapse in the economy’s leading sector triggered a major long-term restructuring of New Zealand’s external economy. By the end of the 1970s it had moved from being one of the most concentrated exporters, by both product and destination, to the middle of the OECD pack. However the domestic restructuring was slower.  The available economic analysis was only of limited help, because it was trapped in a single commodity model. (That epitome of conventional wisdom, the Planning Council, appears to have never grasped the significance of the terms of trade.)  Instead the question of who was to bear the burden of the deficit was resolved by ongoing inflation, which allowed each group in the economy to shift the burden temporarily elsewhere. Ultimately it was the fixed interest investors who suffered.

The dominant politician of the day, Robert Muldoon, his childhood scarred by the Great Depression and naturally conservative, found it politically easier to protect weak industries than to have their workers redeployed into more productive enterprises.

So for over two decades there were two largely unanswered questions:

– How was the reduction in effective incomes to be shared among the different parts of the economy?

– How were the domestic labour and other resources to be redeployed (noting that the diversification muddied the distinction between the external economy and domestic economy which had previously existed)?

Growth was stronger in the early 1980s (partly as a result of the ‘Think Big’ major projects, which proved less valuable than expected, when oil prices fell in the mid 1980s). Then the ‘Rogernomics’ policy regime of almost unconstrained market liberalisation heralded a ‘long recession’ from 1987 to 1993.

The new regime addressed the outstanding questions. In the process of quenching inflation it reduced real benefits, and wages at the lower end of the pay spectrum. Workers locked up in the protected firms were dumped onto the labour market. In the 3¾ years from 1988, the equivalent of 43 percent of the labour force registered with the Department of Labour as unemployed (multiple registrations not included).

While the changes involved some fundamental modifications to employment and government spending arrangements, monetary arrangements were central. Following the floating of the New Zealand dollar in March 1985, the trading banks purchased their foreign currency directly on the market rather than from the Reserve Bank as had been the rule in the fixed exchange rate regime. The exchange rate varied depending on the supply and demand for currencies and the expectations of their future.  Export profitability is the inverse of the (real) exchange rate, so a high rate means low export returns, especially following the withdrawal of the subsidies. As the Government allowed the real exchange rate to rise following the 1984 devaluation, export growth slowed down. The New Zealand economy downsized with per capita GDP falling in each of six years, costing another 15 percent of per capita GNI relative to the OECD.

In the floating regime borrowing was an individual matter and its wider implications were ignored. There was, for example, no certainty that the exchange rate would support the export sector sufficiently to ensure that the economy could grow.  The consequences for the export sector were evident as early as 1985.  A high exchange rate was key to the anti-inflation strategy, since the cheaper imports pressed down on import competing sectors – most of which closed down – while raising real wages without raising nominal wages, for those who still had jobs.

Foreign borrowing fueled a speculative financial bubble which burst in October 1987 when the world’s share markets collapsed. This was a financial rather than a monetary crisis, and New Zealand’s monetary system was not seriously compromised. However the local share market failed to recover with any of the vigor of its counterparts, demonstrating that it was artificially stimulated by the market liberalisation and the easy borrowing. There was no underlying strength or robustness in an economy whose tradeable sector was being undermined by the same high exchange rate which was a result of the capital inflows which fueled the speculation.

In summary, then, New Zealand’s third depression was a response to price misalignment, initially from the collapse in the wool price, but subsequently from an over-valued exchange rate. Debt was a problem insofar as it reflected outdated price relativities, but except in the 1986-7 financial boom and bust it was not a major factor. It is hard to blame the rest of the world for New Zealand’s difficulties in this case; local policy responses certainly exacerbated them.

Is it the Same This Time?

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

Table 1

<> <>The Long Depression
1878- mid 1890s
<>The Great Depression
1929-1935
<>The Third Depression
1966-1993
<>International Monetary Crisis?
<>Yes
<>Yes
<>Not really
<>International Economic Crisis?
<>Subsequently
<>Subsequently
<>No
<>Terms of Trade
<>Fell, some recovery
<>Fell and recovered
<>Fell
<>Domestic Price Alignment
<>Probably not serious
<>Major measures to deal with it
<>Real exchange rate over-valued
<>Debt Problem?
<>Farm debt too high;
Excessive Government borrowing
<>Farm debt too high;
Excessive Government borrowing
<>Not a serious problem, except during 1986-7 financial speculation
<>Economic Management
<>Hardly existed, fiscal stringency
<>Good, but limited by institutions
<>Poor

This paper’s aim has been to identify the key elements which contributed to previous New Zealand depressions. It turns out that while many of the economic mechanisms were the same, there were differences in external circumstances, terms of trade, debt and economic management. Closer inspection suggests the first two depressions were similar, but the third was different. It is included here because its institutional arrangements are closer to today’s circumstances and because it is more prominent in the popular memory.

How do those previous experiences compare with what we are now heading into?

External Circumstances

There is no doubt that the world is facing a monetary crisis, and it is probably optimistic to assume it will be soon over, for there are almost certainly consequential collaterals which have yet to work their way through. Arguably the world is better placed to deal with the crisis than on previous occasions; arguably this crisis is more widespread and complex than on previous occasions.

The world economy has entered a recession. The late 2008 central forecasts suggested the world recovery will begin by early 2010. That may be optimistic. Nor can we rule out that the subsequent expansion will be weak in output terms or highly inflationary, or perhaps different in ways we cannot anticipate.

Price Alignments

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

Assessment of the domestic price structure is complicated by the real exchange rate, which undergoes medium term cycles under the current macroeconomic policy framework. The rise in the 2000s choked off export growth and tipped the New Zealand economy into a growth slowdown – even a recession – before the world recession started. There has been a subsequent fall in the exchange rate in part as the cycle enters the next phase, but probably also because of capital flow responses as a result of the world monetary crisis. The exchange rate is near the middle of its ‘normal’ range whereas recently it was at the top. It seems likely to fall further as the cycle continues.

We do not know how quickly the export sector will respond to this more favourable exchange rate. It almost certainly faces a reduction in world demand which will impact on different sectors quite differently.

The fall in the exchange rate suggests there may be upward movements of domestic prices, although these may be moderated by the fall in world commodity prices.

Debt

By the standards of previous depressions the government and the business sectors appear to have favourable debt levels. However the household sector is holding unusually high debt by past standards. This is largely secured against over-priced housing, although there is some consumer debt with little security. It is almost all owed to banks. Insofar as they will be protected by the Reserve Bank, the private sector debt becomes a public sector problem.

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

Mention has to be made of the non-bank financial sector. It would appear that much of it was over-borrowed, invested in schemes which would never give an adequate return except on implausible assumptions of capital gains. Much of that has been wiped out with defaults but the offset is many households have lost substantial deposits, and are the poorer.

Government Macro-economic Management

Its current quality is too soon to tell.

Conclusion

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

Table 2

<> Depression
<>Long
<>Great
<>Third
<>This one? 2008-
<>International Monetary Crisis?
<>Yes
<>Yes
<>No
<>Yes
<>International Financial Crisis?
<>Yes
<>Yes
<>Minor
<>Yes
<>Terms of Trade
<>Fell, some recovery
<>Fell, some recovery
<>Fell
<>Probably not a long term problem
<>Domestic Price Alignment
<>Not serious?
<>Major measures
<>Exchange rate
<>Exchange rate
<>Debt Problem
<>Farm debt,
public debt.
<>Farm debt,
public debt.
<>Financial speculation
<>Household
Overseas
<>Economic Management
<>Hardly existed.
<>Good
<>Much poor
<>?

In conclusion: Yes this time it is the same; yes, this time it is different.

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References

Campbell, C. and Haywood, E. (1978) The International origins of New Zealand’s Business Cycle, Welington: NZIER Research Paper No 36.

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

Easton B. H. (1997) In Stormy Seas, Dunedin: Otago University Press.

Frisch, R. (1933) ‘Propagation Problems and Impulse Problems in Dynamic Economics’, in Economic in Essays in Honour of Gustav Cassel, London: Allen & Unwin, London.

Hall, V.B. and McDermott, C.J (2007), ‘A Quarterly Post-World War II Real GDP Series for New Zealand’, Motu Working Paper 07-13, http://www.motu.org.nz/publications/workingpaperseries/.

Hall, V.B. and McDermott, C.J. (2006), The New Zealand Business Cycle, Working Paper 21/2006, Canberra: Center for Applied Macroeconomic Analysis (CAMA), Australian National University, http://cama.anu.edu.au/publications.asp; revised version forthcoming in Econometric Theory.

Haywood, E., & C. Campbell (1976) The New Zealand Economy: Measurement of Economic Fluctuations and Indicators of Economic Activity, 1947-74, RBNZ Research Paper 19.

Hicks, J.R. (1950), A Contribution to the Theory of the Trade Cycle, Oxford: Oxford University Press.

Samuelson, P.A. (1939) ‘Interactions between the multiplier analysis and the principle of acceleration’, Review of Economics and Statistics, 21.

Sinclair, K. & W. Mandle (1961) Open Account: a History of the Bank of New South Wales in New Zealand, 1861-1961, Wellington: Whitcombe and Tombs.

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Swing Low

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Is the global “millennium recession” arriving too late?

Listener: 15 November, 2008.
Keywords: Macroeconomics & Money;
The world “millennium recession” I wrote about in 2002 never eventuated. So what happened to it?

The short answer is that the Bush administration increased the US Government deficit by spending more (especially on warfare) and cutting taxes (so Americans had more money to spend). This huge expenditure -injection increased production in the US and the rest of the world. Given the -multiplier (the additional spending by producers because of the stronger economy), the world economy lifted and a recession seemed to have been avoided. Or was it only deferred?

Because US dollars are the international medium of exchange, a US public deficit injects cash into the world economy as the US Government pays its bills -without a corresponding revenue inflow. This raises the threat of inflation. To reduce that possibility, the US Government sells bonds (fixed-interest debt securities) to absorb the money. Although bonds can’t be used to pay bills, they can be converted easily back into cash, especially if interest rates are low. So the result of the US deficit is an enormous increase in the world economy’s liquidity.

In effect, the US is the world’s banker. Other countries – China, Japan and the Middle East oil producers – ran large -savings surpluses that they chose to invest in the US, keeping -interest rates low. It might seem unwise to invest in a bank that was spending the proceeds on wars in Afghanistan and Iraq, and on goods and services for Americans. I suppose the -assumption was that the US would honour its debts by taxing its -citizens in the future.

In fact, the -overseas investors in the bank took a slight pounding from the falling US exchange rate. If inflation is the falling value of money, this was a form of inflation.

Flush with this liquidity, the US financial institutions (and their equivalents in Europe and elsewhere) used it as a base to generate all sorts of fancy financial assets, including sub-prime mortgages, many of which are called “toxic assets” today. There’s a lot of talk about the need for better financial regulation. I don’t dis-agree, but given the surplus of liquidity (cash and near cash), I’m sceptical that any regulation could have prevented all the abuses. It was a bit like putting -teenagers into a casino with their pockets full of chips and telling them to restrain themselves.
Artificial profits for the financiers was the result of these toxic investments. One estimate is US$5 trillion over five years. It may not be right, but let’s use it for illustrative -purposes. Double or treble that figure to allow for the -multiplier production that the -artificial profits stimulated. This would add about 3-5% to GDP.

What we are now seeing is the -unwinding of those artificial profits. But the US$5 trillion must be removed from the financial assets of the world first. Hence the balance-sheet crisis.

Unfortunately, the same mechanisms that lifted GDP by the artificial -profits are now working in reverse. That means that the world GDP has to be reduced by about 3-5%. Getting down to the lower level involves a growth slowdown that we call a “recession”. Of course, the international economic managers (many of whom got us into the mess) may cock things up further.

Economies do not mete out justice, especially in a downswing. That means many people will suffer despite not having particularly benefited from the upswing. Meanwhile, some of those who benefited will hardly be touched on the downer. No one said the world was fair.

You may have noticed that many countries, including the US, are trying to get out of this mess with the same sort of deficit spending that got us into it. This is one of the reasons there is some urgency in getting better international financial regulation, so financiers cannot misuse the liquidity being generated.

Even so, some downswing is unavoidable. You might say the Bush measures deferred the millennium recession, rather than prevented it. Pessimists might argue that the deferring will lead to a depression.

Responding to a Severe Recession

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

Notes for an IPS Seminar 6 November, 2008.
 

Keywords: Macroeconomics & Money; Social Policy;
 

This One Will Be Different
 

New Zealand is going into what seems likely to be a long recession. We dont know how long nor how deep, nor the precise events that will drive it. There is not space to review this proposition, but it is most unlikely to be like any previous downswing. For instance in the last 80 years there has been the Great Depression of the 1930s, the postwar stagnation, the downturn of the late 1950s, the adjustment to the wool price shock of 1966 which included the sharp rise in unemployment of the late 1970s, the long (rogernomics) recession, and the Asian crisis of 1997-8. Each’s start-out points and external shocks have been so different from the others, that despite the same general economic (and political) mechanisms driving them, they provide only very limited guidance to public policy responses at this stage.
 

Beware the Habits of the Past
 

It is easy to ignore the particular aspects of this downswing, and to advocate the same policies that one was advocating in the expansionary phase. Or to assume the policies which would have been relevant in some previous recessions will be effective this time. Instead, we need to think about developing a policy framework which is responsive to the new evolving circumstances, rather than repeating the nostrums from the past.
 

Priorities in a Policy Framework
 

This is my guess of the priorities:
            1. Maintaining employment while allowing restructuring process to proceed.
            2. Coming out of any recession with a stronger national balance sheet than we went in.
            3. Sharing the misery and the opportunities.
 

1. Employment as a Priority Goal
 

All the research indicates that prolonged employment can be extremely psychologically and socially damaging, while unemployment lowers incomes and pressures the fisc. On the other hand we should not lock up the labour into businesses which are not viable in the long run, by protecting them. (This is what happened following the wool price shock until, eventually and devastatingly, during the long (rogernomics) recession almost half the labour force ended up registering as unemployed with the Department of Labour.) We need to move labour out of failing industries and firms and shift them to expanding ones, or hold them for a period in activities which are beneficial to them and the nation (such as upskilling and boosted infrastructural investment).
 

An issue which will complicate analysis is that compared to earlier downswings, the labour force is increasingly heterogeneous; so are the demands for labour. The Great Depression story of the professor who ended up on a road building gang may be mythical, but it reminds us that road building today is too skilled a task to simply employ academics.
 

Traditionally unemployment is the last indicator to turn down. Providing panic does not precipitate an early decline, we have time to plan ahead.
 

2. The Nation’s Balance Sheet
 

New Zealand came out of the Great Depression with strong overseas reserves but, on the physical and social measures of the extended balance sheet it, was worse off than it was when it went in. Infrastructure (including housing) was depleted and the workforce was less skilled. (Probably there was more environmental depletion too, but I have never seen this discussed).
 

I dont see that we should give up the ‘economic transformation strategy’ (or whatever policy is to follow it). There will be some re-prioritisation as public sector investment fills the gaps as private investment retreats; its regional pattern may change as opportunities arise in depressed regions. Among the re-prioritisations may energy conservation, house renovation, environmental protection, public transport extension and upskilling of the workforce.
 

The financial balance sheet of the government will look worse at the end of the recession with relatively more public debt. But we should aim to have public and private sector assets (including human capital and better housing) which offset the additional debt.
 

3. Sharing the Miseries and the Opportunities
 

There will be a struggle between those who want to protect the poorest and those want to enrich the better off. That’s politics (even if an economists tires of the self-serving using bad economics to promote their interests). It follows from the previous two (higher)) priorities that we should be hesitant to reflate the economy through consumption-led expenditure since it will compromise the government and national finance balance sheet without the offsetting asset gains. If such a reflation becomes necessary, let’s aim to make sure that the additional consumption is shared roughly equally rather than proportionally to existing incomes.
 

In the case of dealing with house mortgage failures, in the first instance the burden should be carried by the lenders. Not only did they unwisely advance what will prove to be irresponsible loans, but the bailing out of the financial sector suggests that some of their protected equity should be shared with struggling home owners.
 

************
This policy framework is general rather than specific. I should mention that in another venue I am working on macroeconomic policy (and no doubt in a third I shall be working on growth strategy.) Getting them all to mesh may require  a fourth venue.

Future Shock

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

Hard times are ahead – and they won’t be over soon. 

Listener: 1 November, 2008. 

Keywords: Macroeconomics & Money; 

The financial boom is over, as is its artificial stimulus of the world economy. Its excesses are unwinding in a broadly predictable manner. I can’t tell you the exact timing, nor the details. but we have many more phases to go despite repeated promises it is all over. 

The Liquidity Crisis: The liquidity crisis started in August 2007, when financial institutions could not convert good–quality assets into cash. Central banks responded by pumping more cash into the system. However, the liquidity crisis has not gone away, because of the next stage, which is … 

The Balance Sheet Crisis: Balance sheets match assets against liabilities. Sometimes they don’t match properly, when some of the assets prove to be of poor quality (their value is uncertain). If others fear a financial institution has a poor-quality balance sheet, they won’t trade with it. The institution may go bankrupt, in which case its shareholders lose their equity, and investors lose much of the value of their deposits. It may be taken over or nationalised. The Government may split it into a “good bank” and “bad bank”, with the latter containing the poor-quality assets. The share-holders may lose some of the value of their equity (depending on the generosity of the Government). 

The Run on the Banks: Even banks with good-quality balance sheets suffer when investors panic because of false rumours and start withdrawing their deposits. As the bank will not be able to cash up its assets (say, mortgages) as quickly, it runs short of cash. It may sell some assets to other institutions, including the central bank. In order to prevent these runs, which can be deeply disruptive, the individual depositors in all rich countries have received guarantees from their governments. New Zealand’s guarantee seems comprehensive. If the banks are even more problematic, the Government may inject equity into the bank (purchasing -preference shares), in effect partially nationalising it. 

Contagion: Runs on banks can be irrational, so they will happen elsewhere. We await difficulties in Asia and Latin America, which will be compounded if they also have balance-sheet problems. 

International Difficulties: Some central banks may find themselves in difficulties (short of the required foreign currency), as happened during the crises of the 1990s. The International Monetary Fund, the US Treasury and the European and Japanese central banks (among others) get called in. Iceland may be only the first. 

Collateral Damage: This occurs as innocent institutions find themselves caught short. The State of California cannot raise its usual seasonal borrowing; Americans dependent on company pension funds will be in trouble. 

The Economic Downturn: The world economy is already moving into recession with workers in the finance, real estate and building industries being laid off. Those who have lost savings are -cutting back their spending, and corporations are having difficulty borrowing for new investment. New Zealand will suffer reduced income from its exports, especially tourism as wealthy overseas travellers put off holidays, and as commodity products prices fall. As more people become un-employed there is a danger of a downward spiral. This is when government should increase public and private spending, although the package should depend on the particular circumstances. 

Recession or Depression? We don’t know which. Any world recession will probably be long – perhaps two years. 

The Ideological Crisis: For the past half century, the most raucous ideology has been that the private pursuit of greed is socially beneficial. Its advocates seem so shocked by what is happening (or fearful of losing their fortunes), they are just as keen to use governments to protect their interests as are the ordinary people they used to abuse. The succeeding ideology may be a modified form of social capitalism. It may last half a century (as occurred after the Great Depression in the 30s). 

The New World Order: The US economy will not be as dominant in the evolving world economy. Instead five or so big economies will compete for power. 

 

The Future Of Auckland.

This entry was posted in Globalisation & Trade, Governance, Growth & Innovation on by .
Presentation to Auckland Regional Council: 29 October. 2008.

Keywords: Globalisation & Trade; Governance; Growth & Innovation;

Aucklanders sometimes talk about wanting to have a ‘world class city’. Since any city can be world class in its class, that is not a very ambitious goal. The issue is in which class does Auckland want to be? Today I set out two ambitions for Auckland. The first is as New Zealand’s premier gateway city; the second is as its premier global city.

The Premier Gateway City?

Auckland was not New Zealand’s first gateway to the world. That was the Bay of Islands. Nor is it New Zealand’s only gateway city; for instant were it not the capital, Wellington would be only a gateway city.

Auckland is the major gateway city with New Zealand’s largest port (the Ports of Auckland),and  its second largest port (Auckland International Airport). It is also has an important communications hub at Warkworth. One guesses the latter two roles will continue into the indefinite future, given the population in the north of the North Island, and the fact that Auckland is New Zealand’s major population centre closest to the Pacific.

However the dominance of the Port of Auckland is less certain. The obvious alternative contender is the Port of Tauranga, which is already New Zealand’s largest export port, and could well become its largest import port as communication links improve its locational competitiveness. I return to this possibility when I discuss what constitutes Auckland.

One of the characteristics of a gateway is that it is the first stop for migrants. Many stay there and do not move on, although their children may. This is already evident for the Auckland urban area, for two out of five of its residents are born overseas. Allow for their children born in New Zealand and the inflow of Maori from rural regions, and the multi-ethnicity of Auckland makes it a very different city from any other New Zealand one.

A crucial role of a New Zealand gateway is the exporting of the produce of the countryside. Auckland (and Tauranga and Whangarei) will remain important gateways even if the balance of resource production – from farms, fisheries, forests, mines, possibly oil – tips toward the south. However the rest of this paper, while recognising the central role of primary production in New Zealand’s future, is concerned about whether there is another leg to our economic development. If there is, Auckland has a critical role as a global city.

New Zealand’s First Global City
Gateway cities are headquarters city. The existence of a numerous corporate headquarters may be a defining feature of a global city. But they change the very character of the city.

1. Headquarters require specialist business, communications, design, financial and information services, so a cluster of specialist suppliers surround them.

2. Their workers have particular life style needs, so there has to be a rich supply of cultural institutions,. That includes not only opera, theatre and art galleries (and sporting venues and leisure facilities like beaches), but the global city will have business providing personal needs such as fashion design and quality restaurants – the city becomes a centre of commercial creativity.

3. Their workers will demand quality core education for their children and, while it is not inevitable, many of those children will go onto local tertiary institutions, which will also supply key workers for the businesses from the general population. In any case there will have to be quality universities because headquarters and their clustering businesses need them. The first global city is also likely to have the country’s premier tertiary health care facilities too.

Historically global cities have had a manufacturing base. It may not necessarily be large and growing in the future. There are forces which are shifting manufacturing offshore to low wage countries. The city’s growth will be in services.

In any case there is an ambiguity of what constitutes manufacturing. Global cities will have businesses which create design and prototype manufactures and services, and then move them elsewhere at the mass production stage. The activity arises because of that intensity of specialist services, and the supporting creative and educational activities.

What is going on here is that there is an increasing role for knowledge related activities, and – ironically as the world globalises – a premium associated with face to face activities. Despite globalisation, people remain important.

Economists talk about the ‘economics of agglomeration’, in which production costs in an urban area fall as size increases. The theory emphasise that the relevant externalities for the formation of business clusters include::
1. Mass production (the internal economies that are identical to scale economies at the firm’s level);
2. Availability of specialised input services;
3. Formation of highly specialised labour force and the production of new ideas, both based on the accumulation of human capital and face-to-face communications;
4. The existence of a modern infrastructure.

The infrastructure dimension is critical. Diseconomies of congestion can choke the economies of agglomeration. The economic history of New York is the tension between the countervailing forces in which congestion kept limiting the city’s growth and then some innovation – elevators for instance – enabled the city to be even larger. The next step may have been broadband.

The experience of New York reminds us that governance is critical too. If Auckland cannot get a system of government which is not dependent on squabbling parochial interests, it will not become a proper global city, because it is not large enough for the economies of agglomeration to outweigh poor governance. .

The effect of an headquarters city is to generate opportunities for other sorts of businesses, which are only tangentially connected to the headquarters activities. For example, if the biotechnology industry to succeed in New Zealand will require a significant activity in Auckland, because of the strong education and health service base, and some key specialist business services in finance and law. The industry needs a critical mass so there are those specialist services, and also so that biotech startup business can fit into the niches of the industry. That all requires a big urban centre.

The Boundaries of Auckland

There’s the rub. Is Auckland large enough to be a global city? Auckland is not large by international standards, which is why it has to do everything else better to make up for it not having the same cost-reducing economies of agglomeration. But it can also bulk itself by a wider definition of what constitutes Auckland. For instance, in the case of biotechnology Auckland is on the small side compared to its overseas competitors. Add Hamilton and the size is looking more competitive, especially given the Waikato University and Ruakura expertise.

That leads one to think of Auckland as being surrounded by a ring of urban centres – Hamilton, Rotorua, Tauranga and Whangarei – which are really a part of the same city when they are working together in global terms.

The issue is nicely illustrated in the tension between Ports of Auckland and Port of Tauranga. It may be that Tauranga will become the bigger gateway port for the North Island. That would, of course, require strong transport connections between Tauranga and Auckland. It also requires Auckland to think outside the narrow region. Outsiders are continually struck about how parochial Auckland is. Sometimes its concerns seem to be confined to the isthmus of Auckland, sometimes even only the CBD.

If Tauranga becomes the more important sea gateway, that does not mean there will be no role for Ports of Auckland. The proposed system of freight consolidating depots wants to use a port on the Manukau to give better access to the west North Island, and there will remain port activity in the Waitemata, including cruise ships. Instead of seeing this shift to Tauranga as a threat, Aucklanders might think what they could do with the port land released; they might well value the resulting reduction in freight congestion on their roads.

What Auckland needs is a vision that ‘what is good for New Zealand is good for Auckland’. The rest of New Zealand would reciprocate with ‘we need to make sure Auckland becomes a global city.’

Where do the boundaries of Auckland end? It depends a bit on the activity. The rule for just-in-time production may be overnight delivery. It wont be long before almost the whole of the North Island is in that range of Auckland. The Island needs a quality freight network – road and rail (shipping for slower freight). In the light of those two principles the previous paragraph enunciated, it means that the Transmission Gully is as important to Auckland as the Waterview Tunnel is to Wellington.

When it comes to people movement, the rule seems to be the comfortable day-return commute. Aside from the dreadful connection between the Auckland’s international airport and its CBD, that means that Christchurch business and professionals are already a part of the Auckland knowledge network and so, almost, is Dunedin.

The Alternative to Auckland as a Global City

However, Sydney is on the cusp of the day-return to Auckland, and we must contemplate the possibility that instead of Auckland being a global city surrounded by a ring of secondary cities which strengthen its size and effectiveness , it will be a secondary city to the Sydney hub (while remaining a gateway city for New Zealand).

No New Zealander can contemplated such an outcome with equanimity. But it is a possibility, especially if we tackle the future of Auckland with small mindedness, short-term thinking and parochialism.

Medium Term Economic Issues: a Loose List.

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

Keywords: Globalisation & Trade;  Growth & Innovation;
 

1. Macroeconomic Issues
            1.1 The International Financial Crisis is leading to a world economic recession. Nobody knows how deep or long it will be. It is bound to impact on New Zealand and will take up a lot policy time in the near future.
            1.2 A major strategic issue is the extent to which the growth strategy should be maintained (perhaps with reordering of immediate priorities to reflect different opportunities) and the extent to which it will be abandoned for other objectives.
 

2. Resources
            2.1 What further initiatives need to be taken to allow for the rising price of oil, and hence energy generally, in the medium term. (Note it will not rise indefinitely since alternatives will cut in.)
            2.2. What is the total impact from this on food (especially given the alternative of biofuels) and related resources (wood)?
            2.3 The impact of global warming and the mitigation policies need to be taken into account.
            2.4 The world is facing a water shortage (which the rising cost of energy will exacerbate). Is New Zealand well placed to seize its comparative advantage here.
            2.5 As ocean stocks of fish deplete, the price of fish will rise. New Zealand has one of the few fishing regimes which is pretty well sustainable.
            2.6 It seems likely that there are substantial oil or gas reserves offshore (especially in the Great South Basin) which will become commercially exploitable as the oil price rises and the technology of search and recovery improves.
 

3. Globalisation
            3.1 Globalisation is driven by the falling costs of distance. The rising price in oil is likely to slow down goods and people movement, or even stagnate it for a while (but probably not longer than a decade).
            3.2 Improvements in efficiency will, to some extent, offset any rise in transport fuels.
            3.3 Service tradeables involving ICT are much less affected by fuel cost rises.
            3.4 Do we give any credence to the theory that the next phase of globalisation will reverse the fall in the secular decline of food terms of trade, and instead have the price of manufacturing fall relative to the price of foodstuffs (and other resources)?
3.5 What will happen to trading arrangements?
            3.6 What will be the pattern of future export destinations?
            3.7 Is there any limitations on how much we should expose the New Zealand economy to overseas forces?
            3.8 What is the relevance of intra-industry trade to New Zealand?
 

4. One Leg or Two?
            4.1 Whatever happens, one leg of the future New Zealand economy will be dependent upon its resource base (including tourism).
            4.2 To what extent should New Zealand be a commodity exporter living on the rents from the commodities, rather than a sophisticated processor of them. (e.g raw wool for auction with the alternative of Icebreaker)?
            4.3 Has traditional manufacturing much of a future of New Zealand (except where it has to be located close to the consumer), given that low-cost producers can ship increasingly more cheaply..
            4.4 Is there a second leg to be based on creativity. quality, innovation and knowledge? Can we think about it more rigorously than the platitudes in the previous sentence?
            4.5. To what extent is the production of sophisticatedly processed commodities and a strategy involving a second leg different?
            4.6 And how does the non-tradeable sector (mainly services) fit in?
            4.7 To what extent, and by how much, will changes in the pattern of production matter?
            4.8 Or can we continue to think and strategise about a single aggregate measure of production like GDP? (How how far out can we think about a single commodity economy?)
 

5. Production Techniques
            5.1 What manufacturing will become more decentralised as a result of cheap information flows (note that music and literature as examples where this is already happening).
            5.2 Will production economies of scale become more or less important?
            5.3 Will regional economies of scale (agglomeration) become more or less important?
            5.4 If regional economies of scale remain important, what does that say about the future of Auckland? (And what do we mean by ‘the region of Auckland’?)
            5.5. Do we have to develop Christchurch as a second agglomerative node?
            5.6. How important is infrastructure and networks? We need to think about these in their particularities instead of as a single concept, since different types have different economic implications.
            5.7 How do we encourage and sustain first movers (i.e. producers who start on a new product first)?
 

6. Factor Inputs: Labour
            6.1. It is a platitude to say that labour will have to become more skilled. Can we be more precise?
            6.2 What about degrees of specialisation and flexibility? Iusnt there a conflict here?
            6.3 Dont we need some relatively low skilled workers – say in residential day care homes?
            6.4 Is migration just a matter of avoiding us paying for the training of skilled workers (and supplying low-skilled workers we cannot provide ourselves), or does it have any other purposes?
 

7. Factor Inputs: Capital
            7.1 Will savings recover to more positive levels (and in which sectors – household, business, government)?
            7.2 To what extent is savings and investment inhibited in New Zealand by a lack of (or narrowness of) opportunities?
            7.3 What should be the balance between savings invested in New Zealand and invested overseas.
            7.4 Are there any limits on foreign investment in New Zealand?
            7.5 What will regulation of the financial industry look like after the international crisis settles down?
 

8. Technology
            8.1 It is a tautology to say that (per capita) economic growth is a matter of ‘higher productivity’ (which I suppose is why we can all agree on it). It is not a platitude to say that it dependent on the application of new technologies.
            8.2 What are the key (across industry) enabling technologies likely to be ? (Possibly biotechnology, design, information and communications technology and new materials?)
            8.3 Where do the new technologies come from? Have we the right balance between those that come from overseas and those which are domestically generated.?
            8.4 Can we imporove the uptake of foreign technologies (including the speed of uptake)?
            8.5 Have we a labour force (managers and those on the ‘shop floor’) who are sufficiently responsive and able to take up the new technologies.
            8.5 The adoption of new technologies usually involve some sort of investment (even in the most prosaic instances). Have we got the right capital flows to enable this?

Kerr-ching!

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

Choosing the vanilla type of financial institution has its advantages. 

Listener: 18 October, 2008 

Keywords: Macroeconomics & Money; 

The more speculative end of the financial system is a casino, according to economist John Maynard Keynes. You gamble with your money: if you’re lucky you win more; if not you eventually lose it. 

The plain vanilla end of finance does a useful job. Trading banks lend others’ deposits, spreading and reducing the risk from the individual lending directly, and taking a margin for the service. Some argue that the fancy hokey-pokey end does this too, but I can’t believe the enormous payments to some players are offset by the -economic gains from the risk reduction. It’s a casino making a marginal contribution to the economy but a whopping contribution to some, to the cost of others. 

Investors/gamblers would not stay long if the casino was that transparent. And so it takes their money in exchange for financial assets – let’s call them IOUs. The value of the IOUs seems higher than the money the investor puts in, and therefore they are happy until the financial wheel stops spinning, as it did in August last year. 

Suddenly investors find that many of the counter-parties (the “I”s in the IOU) cannot pay real money, because it has been taken by those lucky enough to have got out with the cash. (They say they are clever, but luck is probably more important.) The money has been transferred from the modest many to the rich few. 

So those who invested in financial companies that have fallen over are, -typically, holding worthless or near-worthless deposits (which are but examples of IOUs). Worldwide, there are trillions of dollars of them, and these investors are going to have lower incomes – lower than when they began speculating in the financial casino. 

It gets worse if the holders of the IOUs borrowed to fund their gambling spree, so they have real debts offset by the worthless IOUs. That is the stage we reached last month. No longer was the world -financial system just in a liquidity crisis where no one was willing to buy the IOUs. As the value of the IOUs has fallen, financial institutions are finding their balance sheets compromised. 

This includes the once-mighty Lehman Brothers investment bank. (Note these institutions are not trading banks, but dealers in the fancier IOUs.) Its shareholders lost their money (shares are IOUs) and so may many of the depositors (the big investors), who will have inferior balance sheets. That could have knock-on effects. An almost similar situation applied to Merrill Lynch and the Halifax Bank of Scotland, which were bought by sounder institutions that paid what they judged the IOUs were worth, reducing the value of the businesses to the shareholders. 

Some institutions were so big that the private sector could not buy them. So the US government – presiding over the greatest capitalist economy in the world – is now the owner of the world’s largest insurance company and mortgage banks. (At least our Government’s nationalisation gave it a railway and an airline, not a pile of IOUs.) The US Government plans to buy up the junk IOUs, putting them into a separate public institution, hoping to recover much of their value in the long run. Its balance sheet includes the sovereign right to tax, so the loss will be paid for by taxpayers, some of whom haven’t even been born. Someone must pay for the wealth of the lucky billionaires. 

Why does the US Government bother? Partly because it’s privatising profits and nationalising losses. But by quarantining the junk in the public sector, the private-sector balance sheets are strengthened, -reducing the danger of their financial collapse and a serious international depression, as occurred in the 1930s. 

<>The financial casino may be over for now, but the wheel of economic fortune wobbles on. I can’t tell you whether we will experience a depression or a long slow world recession. I do know we are not through it all yet. Despite the collapses of last month, we may not even be through the worst.

Evidence to the Human Rights Review Tribunal

This entry was posted in Health, Social Policy on by .

The case involved a number of parents of disabled adult children who claimed that the Ministry of Health discriminated against them, by not paying them for services for which it would pay outside carer. For more detail see http://www.eastonbh.ac.nz/?p=1396 . My role was a very small one dealing with the costs.

Keywords: Health; Social Policy;

I.                               My name is Brian Henry Easton. I am an independent scholar based in Wellington, working in the areas of economics, statistics, public policy and history.

II.                            I have been asked by the Director of Human Rights Proceedings, who is acting on behalf of nine named plaintiffs and others affected by the Ministry of Health policy not to allow payment to family caregivers, to respond to the statements of evidence presented by the Ministry of Health for this hearing by way of an evaluation of the financial and public policy implications if the Plaintiff’s case were to be successful.

III.                         In preparing this evidence, I have been provided with most of the plaintiffs’ and the defendant’s evidence to be given to the Tribunal and the 3rd amended Statement of Claim and Statement of Reply to the 2nd Amended Statement of Claim.

IV.                         I am Fellow of the Royal Statistical Society and a member of the Royal Society of New Zealand, both of which have codes of professional ethics to which I adhere. These codes complement the Code of Conduct for expert witnesses of the High Court, which I also follow.

My Background

V.                                Over the years I have worked in many areas which are relevant to this evidence, including the evaluation of health care services (I was on the International Working Party on the Social Costs of Drug Abuse which led to a WHO report), distributional economics (including social security), and public policy analysis. Among the relevant public agencies I have worked for are the Accident Compensation Corporation, the Ministry of Health, and the Ministry of Social Development (and/or their predecessors). Details are in my full Curriculum Vitae, which is available on request.

VI.                             I have degrees in mathematics and economics from the University of Canterbury and Victoria University of Wellington. My senior degree is a D.Sc. from the University of Canterbury. I am a Fellow of the Royal Statistical Society, a Charted Statistician and a Distinguished Fellow of the New Zealand Association of Economists.

VII.                          Before I was an independent scholar, I was Director of the N. Z. Institute of Economic Research when it was the premier centre of applied economics in New Zealand. I have also held teaching or research positions at the Auckland University of Technology, Georgetown University, Harvard University, the Institute of Development Studies at Brighton, Massey University, the National Institute of Economic and Social Research, the University of Auckland, the University of Canterbury, the University of Melbourne, the University of Sussex, and Victoria University of Wellington.

VIII.                       I am currently an associate of the Stout Research Centre at Victoria University of Wellington, an adjunct professor of the Centre for Public Policy at the Auckland University of Technology, an honorary fellow of Social and Health Outcomes, Research and Evaluation at Massey University, and an honorary research fellow of the Wellington School of Medicine of the University of Otago. I am on the Prime Minister’s Growth and Innovation Advisory Board, and this year I am the J. D. Stout Fellow. (Past fellowships are listed in my Curriculum Vitae.)

IX.                             When introducing myself to the Tribunal, I would like to add a little of my whakapapa. My father, Harold (Harry) Easton, was a psycho-paediatric nurse at the Templeton Hospital and Training School for over twenty years until his retirement. Dad was not an enthusiast for deinstitutionalisation, the policy of the late 1980s which has led eventually to this hearing. But I have no doubt that, had it happened on his watch, he would have given the same professionalism, commitment, generosity, kindliness and the respect for all human beings which he gave to those he looked after, and which he practised throughout his life. I would do my father less than justice if I were not offering the same to this Tribunal.

My Understanding of the Issue Under Consideration

X.                                I have read the evidence to be presented to the Tribunal including the Claim by the Plaintiffs and the Reply by the Crown.

XI.                             I am struck that there is no common agreement among those who have provided evidence as to the fundamental issues of the case. It is therefore necessary for me to set out my understanding. I eschew the legal aspects of the case (although I have read the law and some related decisions), and focus on it in a public policy framework as follows.

XII. The Ministry of Health will not pay family members to provide the support services it provides to disabled adults. (The approved exceptions appear to be so rare that for practical purposes it is may be treated as a blanket prohibition.)

XIII.                       The Plaintiff’s case is that such a policy is unnecessarily discriminatory and in breach of human rights legislation. The Plaintiff parents say that they should have the opportunity to provide the paid disability support services which their adult child has been assessed as requiring.  Additionally the Plaintiff parents argue that on the occasions they provide the services which are designated for paid non-family providers, but which for various reasons, are not provided, they should be paid for providing them. Those Plaintiffs who are adults with very high disability support needs say that they should have the opportunity to choose a family member to provide them with their paid disability support services.

XIV.                       Some of the Ministry evidence I have read seems to be based on the premise that the Plaintiffs are asking for a payment for their ‘reasonable care’, the phrase used by Ms Davis when explaining the policy framework. It is ‘ based on the expectation that in general families will provide a reasonable level of support for their disabled family member, so that the assistance will step in only where the needed in addition to this support.’ (Para 19). She does not define the term ‘reasonable’, but I take it she means that it is reasonable for the family to provide the services without remuneration.

XV.                          My understanding of the Plaintiff’s claim before this Tribunal is that they are not asking for payment for reasonable care. This case is about the provision of care for which it would be not reasonable to expect the family to provide without remuneration. In my opinion some of the evidence provided by crown witnesses does not make this distinction.

XVI. In my evidence I shall assume that the basic policy framework of Ministry of Health (and other government agencies with responsibilities for the provision of services to the community of disabled persons) does not change.

XVII.                    In my opinion the effect of a ruling from the Human Rights Review Tribunal that the blanket prohibition on family members being paid to provide the Ministry funded disability support services is inconsistent with s 19 of the New Zealand Bill of Rights Act, would  result in the following essentially marginal changes within the framework.

– family members would be able to be paid providers of the Ministry funded support services;

– family members would be renumerated at the same rate as non-family care-givers.

– where the non-family support fails to be provided, the family members who provides it would be remunerated at the same rate.

XVIII.                 My conclusion is that the result of a Tribunal finding favourable to the Plaintiffs is that the cost to the Ministry of Health would be negligible, other than in so far it would expose failures in the current delivery of the support which the existing policy envisages. I was also unable to identify any other public policy concerns arising from the change.

The Data Base

XIX.                       Given my task is to estimate the costs of a Tribunal finding favourable to the plaintiffs, it is necessary to construct a data base. In his evidence, Mr de Raad provides one which I shall largely draw upon.

XX.                          His database is an amalgam of a surveys disability surveys from Statistics New Zealand (para 26) and Ministry of Health expenditure data (para 29).

XXI.                       The Statistics New Zealand 2006 Disability Survey is based on two surveys:, the Household Disability Survey 2006 and the Disability Survey of Residential Facilities 2006.

XXII.    .           I observe that the Cabinet Paper Improving Long-term Disability Supports: Maintaining Momentum similarly observes ‘While agencies are each making improvements to their data , they have yet to develop or adopt standard cross-sectoral data definitions on disability matters. … It is therefore difficult to gather and analyse disability supports data routinely across agencies …’ (para 21) 1 The data bases only fail to cohere, but they are incomplete. This gives little comfort that we have a seamless disability service.

Disability in the Statistics New Zealand surveys is defined as follows:

A disability is any self-perceived limitation in activity resulting from a long-term condition or health problem; lasting or expected to last six months or more and not completely eliminated by an assistive device.

More details:

A functional concept of disability was used in these surveys:

” . any restriction or lack (resulting from impairment) of ability to perform an activity in the manner or within the range considered normal for a human being.” (WHO)

XXIII.                 This is the World Health Organisation (WHO) definition … Using this concept, a disability was defined as any limitation in activity resulting from a long-term condition or health problem. The focus was, therefore, not on identifying the nature of the disorder or disabling condition, but rather the limitation resulting from it.

People were not considered as having a disability if an assistive device (such as glasses) completely eliminated their limitation. A concept of time was included as an additional filter; the disability must have lasted or be expected to last for six months or more.

Disability was determined by responses to a series of questions that assessed difficulties performing certain day-to-day activities. Answers reflected respondents’ own perception of their situation and were, therefore, subjective..

XXIV.                 The data provided was categorised by severity of disability. This was defined in the 2006 Survey as

Support level is a measure of the level of support required for people with disability. Respondents were classified as having ‘low’, ‘medium’ or ‘high’ support needs based on their need for assistance and/or special equipment relating to their disability. Those with a ‘medium’ support needs used, or had an unmet need for, some type of assistive device, aid or equipment. Those with a ‘high’ support needs received daily assistance with tasks such as bathing, preparing meals etc. In the 2001 Disability Survey this was called ‘severity’ with the categories ‘mild’, ‘moderate’ or ‘severe’.

XXV.                    The 2001 terminology was defined as follows:

Severity [as] a measure of the intensity and extent of the disability of the respondent. Respondents have been assigned a rating of either ‘mild’, ‘moderate’ or ‘severe’ based on their need for assistance and/or special equipment relating to their disability. Those with ‘moderate’ disabilities use, or have an unmet need for, some type of assistive device, aid or equipment. Those with ‘severe’ disabilities receive daily assistance with tasks such as bathing, preparing meals etc.

XXVI.                 The Survey reports the following for those under 65 whose disabilities are not due to ageing or injury. (Although the plaintiff s are concerned with the adult disabled, like Mr de Raad I have included children under the age of 15, on the basis that any Tribunal decision is likely also to apply to them.)

Table 1: Number of Disabled People by Age, Level of Disability and Support Service, 2006

Degree of Disability No or Minimal External support Funded Home Based support Residential Care Total
Mild

127,200

127,200
Moderate

123,100

3,200

100

126,400
Severe

30,200

7,200

1,000

38,400
Total

280,400

10,500

1,100

292,000

Notes: Under 65 only. Disabilities are not due to aging or injury.

Sources: 2006 Disability Survey (see also Table 1 of de Raad’s evidence).

Mr de Raad also supplies estimates based on Ministry of Health data.

Table 2: Number of Ministry of Health Clients Disabled People by Age, Severity and Service Intensity, 2006

Degree of Disability Low Use non-Residential High Use non-Residential Residential Total
Mild

3,985

3,985
Moderate

3,750

3,297

7,047
Severe

969

7,203

6,888

15.060
Total

8,704

10,500

6,888

26,092

Notes: Under 65 only. Severity level is calibrated based on data from HDS and DSFR.

Sources: Table 2 of de Raad’s evidence..

I.                                   There are major discrepancies between the two tables which probably cannot be explained definitions or by Mr de Raad’s construction. Suppose we treat the Statistics New Zealand survey as reasonably accurate. Then

– The Ministry of Health considers it is servicing in residential care about 6 times as many people under the age of 65 as the Statistics New Zealand found in their survey. (This may reflect different definitions of residential care. For instance the Ministry may treat a community living in a flat under supervision as residential while Statistics New Zealand may not.))

– It would appear that there is a substantial number of those with severe disability – perhaps over 23,000 – who the Ministry seems to be aware of.

– The majority of the missing is group appear to be without minimal or any external support (although this arise from the way Mr de Raad has constructed his table).

– There are even greater numbers – perhaps 120,000 – of those with a moderate disability who are not receiving any Ministry of Health support.

II.                                It may be useful to repeat at this point the Statistics New Zealand definitions

-Those with a ‘medium’ support needs used, or had an unmet need for, some type of assistive device, aid or equipment. Those with a ‘high’ support needs received daily assistance with tasks such as bathing, preparing meals etc. (See my para 25).

III.                             The implication is that many people with moderate severity will not appear in this table. Ms Davis estimates says that there are approximately 30,000 disabled people using Ministry funded services provided under the disability support services framework’, which is a figure similar to the 26,000 in Table 2. She adds that ‘[t]his does not include those who use only the equipment modification services’.

IV.                         The discrepancy between the estimates of those with severe disability cannot be so easily explained. Presumably some of those not being supported by the Ministry are receiving support from family and friends or voluntary agencies or another government agency (such as the DHB, or Work and Income New Zealand).

V.                                An alternative possibility is the Statistics New Zealand survey is based on subjective self-categorisation, here there is a tendency to overstate needs relative to what an objective assessment might conclude. Such a conclusion is more consistent with common sense. Were the widespread discrepancy between the tables the result of the failure to provide support, any such failure could not be simply the Ministry’s but the entire primary health care service which would appear – if the SNZ estimates are consistent with the Ministry definitions – failing to make aware those they serve of the Ministry support services available to them.

VI.                             It is not necessary for this case to reconcile the tabulations for the purposes of this claim. Suppose the Ministry of Health is failing to identify large numbers who are entitled to its support services. That is clearly a matter of public policy concern, but it is not the focus of the claim which is about those who are in existing receipt of support.

VII. In the event that the Tribunal’s decision were to encourage others in need to apply for their support entitlements, then while this may be fiscally expensive, this reflects neither a change in the policy framework nor the Tribunal’s decision but a reduction in the failure of delivery coverage within the framework

VIII.                       Therefore my subsequent analysis will be based upon the Ministry of Health tabulation (Table 2) and I refer only to the Statistics New Zealand tabulation (Table 1) when Mr de Raad uses it.

The Cost to the Ministry of Health of the Claim

IX.                             Mr de Raad identifies four possible responses if the family of the disabled are paid on a basis similar to other service providers. I shall follow his categorisation.

Switching Care-givers

X.                                Some families with disabled people which currently have a non-family provider would choose to have a family one. Mr de Raad rightly concludes that whatever proportion takes this option, the cost to the Ministry would be negligible, since it would simply be swapping one paid provider for another. (paras 34.1 and 41-48).

Residential Clients

XI.                             There are (about 7000) disabled people who currently live in residential care. Ms Davis points out that the ‘critical point [for moving into residential care] is usually around night care. The person may need a lot of support during the night, which their family can no longer provider safely.’ (para 95) She goes on that the Ministry simply cannot afford to fund permanent night time care for individuals in their own home.’ (para 96) She adds the ‘other tipping point can be where the person needs to be lifted or needs to be supervised constantly.’ (para 97) I think it would be fair to assume that she intends that the sentiment expressed in paragraph 96 also applies to paragraph 97.

XII.                          Mr de Raad suggests that if the family was paid for the care, some would be taken home. He sets a range of $0m to $243.3m for this possibility. The higher cost is because residential care is considerably cheaper than home care because of economies of scale. (para 34.4 and 62-73). In my view the upper limit is far too high.

XIII.                       It assumes that this switch would happen to up to 50% of residential clients. Mr de Raad offers no evidence for the proportion that might switch, and I too have been unable to find any which might enlighten us. I would make but two comments.

XIV.                       First, anecdotally (and consistent with the evidence of Susan Atkinson and Linda Stoneham), in my experience families do not put a family member into a residential care lightly, and rarely is finance a major factor. In both these cases care-giver health was the catalyst. In my experience the situation described by Ms Davis (my para 38) are typical – the tipping point is reached when the family can no longer cope.

XV.                          Hence, I am extremely sceptical that were the financial situation more favourable, the factors determining the family decision would have changed sufficiently dramatically to reverse the decision. The 50% figure seems unreasonably high. It is evident from a description of the caring work carried out by the plaintiff parents that it is extremely demanding and common sense (and some of their experiences) suggests hat many families simply do not have the physical or emotional resources to do it.

XVI.                       Second, Mr de Raad assumes a higher rate of compensation for the family which takes the member back from residential care than for the care in the residential home. His paragraph 65 suggests $495 per day, or over $180,000 a year. This is because the care-giver in the home is looking after more people than a family care-giver looking after a single person. (Incidentally, Mr de Raad seems to ignore the lower capital costs of home care.)

XVII.                    In practice it is highly unlikely that the state would fund home care at more than three times the residential care rate. As Ms Davis says such a policy would be beyond the ability of the state to afford it.’ Nor are the plaintiffs asking for such a policy.

XVIII.                 Standard public policy principles (and common sense) would normally recommend setting a home care rate comparable to (not exceeding) the per capita residential care rate (perhaps allowing for capital and other items). The principle would be that if the family can and is willing to do the task at the same cost as the state, then it should be able to, although as I have conjectured it seems unlikely that many would take this option.

XIX.                       Were this comparable funding regime adopted, the cost to the state of transferring the care of a disabled person from the state to their family would be negligible.

High Use non-Residential Clients Seeking More Funding Support

XX.                          Mr De Raad, considers the category of ‘High Use Non-Residential Clients Seeking More Funding Support’ which amounts to 10,500 people and which costs about $86.7m p.a. Outlays on those judged with moderate disability average $4,749 p.a per person and those with severe disability $9,988 p.a per person. (paras 34.2 and 49-50 and tables 2, 3, 4).

XXI.                       He points out that they ‘also receive some care from [unpaid] intermediate family members in preference to more care from [paid] outsiders’ and ‘the policy change is likely to induce [sic] those clients to seek funding for that unpaid care.’. I take it he means that the family members are already carrying out caring tasks including those which Ms Davis defined as ‘reasonable’ and would expect, under the policy if implemented, to be paid for those tasks.

XXII.                    However, that is not the Plaintiff’s claim. They are asking only that they reimbursed for the services they provide when the Ministry of Health support services fail to provide them, when in the terminology of Ms Davis, they provide an ‘not-reasonable’ level of support. (para 19).

XXIII.                 The cost of this reimbursement is difficult to estimate as we do not know how often the state provided support services fail.

XXIV.                 According to Mr de Raad’s Table 3, the total cost of the currently supplied services are $86.7m p.a.. Suppose that the support services fail to function 10 percent of the time. In that case the annual reimbursement to family members for covering the failure would be $9.6m making a total outlay of $96.3m ($96.3m X .9 = $86.7m).

XXV.                    That figure averaged across 10,500 families (see my Table 2) amounts $917 p.a. or $17.65 a week per family, although there would be considerable variation between families. Noting that Mr de Raad reports that pay rates for non-family support are as high as $24.20 (para 43) this quantum would amount to less than an average of one hour per week.

XXVI.                 Suppose that the hourly rate of pay was $24.20 In this case the cost to the Ministry to provide its support services when it fails amounts to an annual aggregate of $13.2m. (13.2 = 24/17.65 X 9.63).

XXVII.               I have set out the relevant calculations, so that if there are more precise estimates of the failure rate, the Tribunal can calculate the relevant cost. Alternatively, if the Tribunal requests, I am happy to do the calculation in supplementary evidence.

XXVIII.             I should emphasise that the 10 percent and 1 hour per week figures are illustrative, and I would welcome a more precise figure.

XXIX.                 I will return to the question of the extent to which these, which reflect a failure to provide services according to the existing policy framework, in the conclusion when I review the aggregate costs of this policy.

XXX.                    Mr de Raad, using a policy assumptions which the Plaintiffs are not advocating, proposes a cost range under this head of $8.7m to $78.0m p.a. It is clear that in terms of the Plaintiff’s claim the upper bound is far too high, and that – if the delivery failures are low (say less than 5 percent) – the lower bound is too high also.

Responses by Clients Currently Receiving No of Minimal Services.

XXXI. .               Mr De Raad reports 271,696 disabled people aged 0-64 were not receiving any funded support, including 29,321 with severe disabilities. These figures come from his (and my) Tables 1 and 2. For instance, 29,321 is approximately equal to the 37,400 which Statistics New Zealand estimates are the 37,400 people under the age of 65 who have severe difficulties not due to age or injury and are not in residential care (Table 1) less the 8,172 who are currently covered by the Ministry of Health’s support programs (Table 2).2 (para 34.4 and 51-61)

Mr De Raad again argues that if the Plaintiffs are successful, then up to 90 percent of the 29,000 odd of the severe disabled would apply for the support services and then arrange for the family to fund them. That means he judges there are as many as 26,400 of the disabled who are eligible for the Ministry of Health support services on the criteria of the current policy framework, but are not receiving them. If he is right that is a terrible indictment of the Ministry since it would imply their service was providing for less than a quarter of their target population.

XXXII.               In my experience a program is thought to be doing very badly if it covers only three quarters of the target population. Therefore to illustrate the general principle I propose to take this 75% coverage ration as a worse case scenario. This means that there are 2700 disabled who are eligible but are not in receipt of support services. (8172 = .75 X {8172+2724}) .

XXXIII.             (Regrettably this assumption implies that 300 would receive low use non-residential support and 2400 would receive high-use non-residential support, whereas common sense suggests the balance is likely to be the other way around, since those in greater need are more likely to apply for coverage. This mechanical assumption means any estimate I derive will be on the high side.)

XXXIV.             The cost of the better coverage is $25.0m per year. (25.0 = {1-.75}/{.75} X {$2.0m + $71.9m}, the latter figures coming from Mr De Raad’s Table 3). Recall this is a worse case scenario in terms of the likely Ministry of Health failure, and is an overestimate in terms of its mechanical allocation between low-use and high-use care.)

XXXV.               We also need to estimate the effect of the failure to deliver support to the additional covered. Using the parameters of the previous section, the estimates would be $3.2 p.a. (for the 10 percent assumption) or $4.4m p.a. (for the one hour a week assumption.), that is in proportion to the additional spending.

XXXVI.             Mr de Raad, using policy assumptions which the Plaintiffs are not advocating, proposes a cost range under this head of $11.4m to $271.7m p.a. It is clear that in terms of the Plaintiff’s claim his upper bound is far too high.

Total Costs

Using Mr de Raad’s categories we get the following aggregate cost

Switching Care-givers

Negligible

Residential Clients

Negligible

High Use non-Residential Clients Seeking More Funding Support

$9.6m to $13.2m p.a.

(Depends on delivery failure assumptions)

Responses by Clients Currently Receiving No or Minimal Services.

<$25.0m p.a plus

(Worst case scenario)

$3.2.m to $4.4m

(Same assumptions as previous category)

XXXVII.           This suggests the total cost to the Ministry would be less than, say, $40m a year, and possibly much less.

XXXVIII.         Before considering the wider government implications it is necessary to consider whether this is a cost of the Tribunal deciding for the Plaintiffs or whether it should be attributed to other factors.

XXXIX.             For the costs do not arise from the Tribunal’s decision per se. They reflect a failure of the implementation of existing policy. It is possible that as a result of the decision more people will identify their entitlements but that should not affect the judgement of the human rights involved. In other words, we need to separate out the Human Rights case from the public policy issue that there appears (according yo Mr de Raad) to have been a failure to deliver a service to all those for whom it is entitled.

XL. If the Tribunal’s decision were to reduce delivery failure within the existing policy framework, thereby improving coverage, that would appear to be a happy outcome.

The Costs to the Government

XLI.                        This claim specifically involves the Ministry of Health, but there may be knock-on affects on other government agencies including the District Health Board and the Accident Compensation Corporation. No evidence has been presented to demonstrate this will happen, although Mr de Raad hazards that ‘the impact [on DHBs] could be at least as great as the impact on the Ministry of Health funded services, and potentially up to twice as much again in terms of increased costs.’ (para 17) Unfortunately he gives no indication from where he got his guesstimates.

XLII.                     I would make two observations. First, the DHB support may explain some of the inconsistencies between the two data bases. In which Mr de Raad’s figures involve double counting.

XLIII.                  Second, it seems likely that the analysis I have given of the Ministry of Health costs applies broadly to the District Health Board ones. If they do, then the costs to them of the Tribunal findings are negligible, except as insofar they result in a better coverage of existing policy.

XLIV.                  The same is likely to apply for any additional costs to the Accident Compensation Corporation from any Tribunal decision favourable to the Plaintiffs. .

XLV.     .               I observe there is a case for reducing any cost estimates to the government as a whole by about 20 percent for the income tax the parents will pay on any earnings.3.This offset arises where the family care-giver is not in the workforce. It does not apply to non-family care-givers because they are already in the workforce and it is usual to assume that insofar as the family care-giver replaces them, they will take up employment elsewhere.

XLVI.                  This may be seem a little paradoxical, but it reflects the particularities that family members are unlikely to withdraw from the paid workforce, on receipt of the payments which the scheme offers them, which for many will be low. In any case many of the recipients would not be in the paid workforce. On the other hand a non-family support person is servicing a number of clients, and is an active member of the paid workforce, who will look for more work if any of their current clients are supported in the future by family members.

XLVII.               Ms Dwyer is exactly wrong when she cautions against the policy because of the aging of baby boomers. (para 61) The proposed policy will release non-family care-givers for caring for the elderly. I add that it would be most unfortunate if policy was designed to privilege the elderly at the cost of the younger disabled. Great

XLVIII.             In summary, the previous section estimated that under various assumptions, a favourable decision to the plaintiffs might be associated with additional outlays which could cost the government as much as $40m, or $32m net of additional income tax receipts. Additionally Mr de Raad suggests the figure be doubled for a parallel response to outlays by DHBs, although he gives no indication of where he got his twice figure and he may be double-counting.

XLIX.                  In any case, all this expenditure is a response to increasing the coverage of the scheme, reflecting a failure of the current delivery provisions, rather than any significant change in the policy. and should not be attributed to any Tribunal decision, per se.

L.                                 If, nevertheless, the Tribunal may wish to take this sum into account in making its decision. Unless further evidence is provided, the amount (of say $32m-$64m p.a.) should be taken as a maximum net fiscal cost; the likely outurn would be less.

LI.                              In my opinion, and experience, such a sum is within the normal fiscal parameters of the annual budget policies, and therefore is not sufficiently large to trigger a defence  that fiscal reasons for the policy cause it to be a justified limitation on the right to be free from discrimination.

LII.           .               In coming to this judgement, I am aware that in a typical year there is a additional government spending available for new policy. In the 2008 budget the amount available for new funding on health activities amounted to $750m in the 2008/9 year.4 Under the current policy framework I would expect similar amounts in each of future years. Thus the $32m, (possibly $64m), but probably much less, is a one-off small proportion of the new spending on health in any year and it would not exclude other substantial health initiatives.

LIII.                        In any case, the additional spending is the consequence of existing, not new, policy.

Quality Consideration

LIV.                        It is proper to ask whether the policy modification, whatever the cause, will improve the quality of the government spending.

Improved Coverage

LV.                           Improving delivery coverage of existing policy must surely be an improvement in quality.

Quality of Care

LVI.                        There will be an increased proportion of support services provided by family members.  I have looked at the evidence of Ms Dwyer, Mr Gourley and Dr Watson all of whom address the issue to some degree. Ms Dwyer’s evidence, in particular, and Ms Butler for the plaintiffs, cite research that suggests that generally many of the disabled are more satisfied by family provision than by outside provision. This suggests that there will be an improvement in the quality of care if as a result of the Tribunal’s decision, more of the support is provided by family members.

LVII.                     All three witnesses argue, however, that their experience and the available evidence, does not justify the payment to family members for caring for their disabled relative. I did not find their explanations compelling. for they largely seem to be attached to the end of the evidence, rather than develop organically out of it.

LVIII.                  But rather than demonstrate this, I observe that the conclusion is irrelevant to the Plaintiffs’ case. They are not asking for payment for all their caring services – which are the concerns of the three witnesses – they are asking that they be allowed to be provided the additional support services specified by the Ministry of Health as required by their relative’s well being, and that when they do so, they be paid at standard Ministry rates.

LIX.                        In any case there is a major weakness in the conclusions. Public policy analysis is not about arguing this or that option is not perfect – perfect policies do not exist. It is about comparing the merits of two imperfect policies. None of the three witnesses make such a comparison. It is evident from the Plaintiff’s evidence that sometimes the outside support has been less than intended. The public policy issue is the degree that the less-than-perfect family support will be superior to the less-than-perfect outside support. On the witness evidence I have read it is hard not to conclude that in many cases it will be.

LX.                           Thus whatever the conclusion that three expert witnesses come to about paying for all care, and irrespective how it is related to the rest of witnesses’ evidence, or that it fails to compare with the alternatives, their conclusions are not relevant.

LXI.                        What is relevant to the quality issue is that insofar as they address it, the witnesses’ evidence supports the conclusion that usually a family member gives as good or better care of a disabled person than an outsider.

Increased Choice for the Disabled.

LXII.                     It is public policy to give the disabled as much choice as in practical. A blanket prohibition against family care-givers reduces that choice.

Alignment of Incentives

LXIII.                  Currently when the outside care-giver fails to deliver the required support (and instead it is provided free by the family member), the Ministry saves the expenditure. This has the unfortunate consequence that the incentives are for the Ministry not to deliver the support to meet an acknowledged need. In my experience of officials, such a saving rarely over-rules their professionalism and commitment to those in need. Even so, as far as possible financial incentives should align with those characteristics.

LXIV.              In this respect it is also important to note that the direct supply of the provider services are a layer removed from officials, being done by agencies created in the community for this purpose and where, as such, on the ground budget operational pressures may have more bite.  I note the reply statement of Peter Atkinson in para 6 wondering what happened to the under-spending and a cynic wondering if a bonus scheme was operating for agencies who didn’t spend their allocation.

LXV.                 If the Ministry had to pay family members who act as backup when the outside support fails the disabled person there would be a better alignment of incentives.

Conclusion

LXVI.                  In summary there would be three quality gains if family members were permitted to provide the Ministry of Health assessed support and were paid for it:

– better delivery coverage ;

– better quality of care;

-increased choice for the disabled;

– better alignment between the financials and professional delivery.

Overall Conclusion

LXVII.               I have tried to assist the Tribunal by setting out the modification to practices which would occur if they rule in favour of the Plaintiffs.

LXVIII.          The modification would not be great and the framework would remain intact.

LXIX.              I have also shown that despite the lack of good data, the fiscal costs of the modification are modest relative to additional spending on health care, and they are almost entirely due to improved coverage of delivery under existing the existing policy framework, rather than a consequence of the modification per se.

LXX.                 I have also pointed out that there will be quality gains from this modification.

LXXI.              I conclude that in my opinion there are no obvious detrimental fiscal or public policy consequences to the government of amending policy to allow family members to be paid.

Signed : Brian Easton

Date

<>1 Office of the Minister for Disability Issues (n.d. but August 2007 or later) http://www.odi.govt.nz/documents/what-we-do/2008-march-cabinet-paper-disability-supports.doc

2 There is a small discrepancy between Mr De Raad’s figure and mine of 103 which probably reflects differences in the way we treat the SNZ estimates of those in residential care.

3 The 20% is a compromise between the 19½% of the standard income tax rate, the 15% where the low income tax rate applies, and the much higher effective tax rates which apply if a beneficiary earns more that $80 a week.

4 The easiest source for this figure is the Budget 2008 Minister’s Executive Summary, p. 8.

The Trans-tasman Labour Market

This entry was posted in Globalisation & Trade, Labour Studies, Political Economy & History on by .

Contribution to a panel which is a part of the launch of the Australia-New Zealand Connections Research Centre (ANZRC), University of Canterbury, Christchurch, Friday 10 October 2008.
 

Keywords: Globalisation & Trade; Labour Studies; Political Economy & History;
 

The Trans-Tasman labour market is over two hundred years old – perhaps since the first convict fled across the sea from Botany Bay. But it is not seamless; labour markets never are. It may not be easy to transform oneself from on employer to another, or from one occupation to another, and certainly it is not easy to change regions even if the same employer and job is involved. Hence the public policy objective of removing artificial impediments to labour mobility across the Tasman.
 

To begin the analysis, let’s think about a worker moving from Christchurch to Wellington, say, and let’s largely ignore the family challenges of changing personal networks, of houses, of schools for the children, of medical care and so on. Perhaps we should not, because some of these changes are the subject of public policy. For instance, the national curriculum and schooling system makes the regional changes easier if there are children, and there is increasing compatibility of medical records. Moreover, there is a common legislation and systems for such things as house purchase and the changing over of one’s bank branch will be straight forward.
 

The Christchurch local authority will lose revenue – rates – as one leaves, and Wellington gains. Rates are partly user pays, so that demand for services goes down as somebody leaves. But that cannot be totally true since there are economies of scale and, in any case, some pay more relative to their burden and others less, and it is the over-payers who are more likely to leave. I guess we have some notion that the regional flows balance out; where it does not and there is a substantial imbalance, we tend to have a regional development support for the failing region (support, incidentally, which is rarely well designed).
 

One of the simplicities of the Christchurch to Wellington move is that a host of nation based entitlements are retained, including social security and health entitlements, Kiwisaver and, of course, the offset of income tax liability. As far as the central government is concerned it is broadly fiscally neutral to the shift of a person within the nation.
 

That does not apply when someone crosses the Tasman. The extent to which the nation-wide entitlements travel with them has to be negotiated between the governments. But the tax revenues from the individual switches from one central government to another. The international migrant from New Zealand diminishes the local tax base, just as does the national migrant from Christchurch. But this time it is the much larger national tax base, and not just that of the local authority.
 

Importantly, migrants are not a random sample of those living in a country. They tend to be the young and skilled, at the time of their life where they are net contributors to the government coffers. Those they leave behind tend to be at a stage in the life cycle when they are drawing on the government. Out migration weakens the government coffers.
 

From which it follows, that out migration weakens the origin economy. That is true even if we assume the strict economic assumption of people being paid their marginal product. If we used a more a more complex and dynamic assumption (associated with the economies of agglomeration, which are critical in the globalisation process), that one worker adds to others’ marginal product, the weakening of the origin economy is even stronger.
 

Conversely the destination economy is better off. As a general rule it is better off than the origin economy is worse off, so in a certain sense the two economies (the whole of Australasia) is better off. That is the case for freedom of migration within an economy. However the case does not apply for between economies, since one economy will be better off at the expense of the other.
 

If that is not obvious, suppose everybody under the age of 65 left Christchurch for Wellington, leaving just the retired behind. Especially if there was no New Zealand Superannuation, but in any case, Christchurch would be worse off. You will observe that what is critical here is differential migration, that some groups leave but others stay. Were the migration to be in proportion to the social groups in the community, Christchurch would be
smaller, but no worse off in the long run (if we ignore the economies of agglomeration and transition effects).
 

This conclusion is perfectly orthodox, and derives from the same models which justify free trade, but which add the extra dimension of location. Thus while you may (or may not) argue that free trade is a good thing, you cannot use the same logic to argue free migration is a good thing. Some other argument is needed – probably a non-economic one.
 

I am not sure where that leads us. It certainly suggests that  harmonising the Trans-Tasman labour market is not about increasing the economic performance of New Zealand. I wonder what the purpose is?
 

Endnote:
            My paper finished at the end of the previous paragraph. After the panel, some of the audience suggested it was incomplete because it did not answer the question it posed. That was deliberate, because I wanted to underline that the answer was not an economic one and should not be answered by an economist.
            Pressed ,I put on one of my other hats, and suggested that there is an important principle superior to economics ones of the right of free movement of people – or at least to leave a country (assuming another will take them). It is a right we upheld in the case of the rugby players who wanted too go to Apartheid South Africa, and it contrasts with the those regimes east of the Iron Curtain which placed  severe restrictions on their citizens leaving. Perhaps in the case of Australia (and elsewhere) we go a step further make sure that there is no government impediment on the New Zealand citizens migrating.
            But there may be another explanation. It would help if someone articulated it.
            However, having given this explanation, I have in a way undermined the paper. Too often Trans-Tasman practices are justified by so-called economic considerations which are not valid economic arguments. It remains my objective to challenge this lazy thinking. 
 

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Race Relations and the Economy

This entry was posted in Maori, Political Economy & History on by .
The 2008 Michael King Memorial Lecture, University of Otago, 9 October 2008. [1]
  

Keywords: Maori; Political Economy & History;
 

Michael King and I were students together. It would not be true to say we were close friends afterwards – for we lived in different parts of New Zealand and worked in different areas. But it was a friendship of genuine affection based on a mutual respect for each other’s work, and a joint understanding of the challenge of being an independent scholar in a country which gives neither independence nor scholarship much value.
 

In 2000 when I was passing through Washington, Michael, who was the Fulbright teaching fellow there, asked me to do a presentation to his New Zealand studies class on the New Zealand economy. I cannibalised my 1994 Hocken memorial lecture and it seemed to go all right, or at least, Michael seemed pleased.
 

That episode was on the path to my current project; to write a history of New Zealand from an economic perspective. My history is very much in the spirit of those who have written histories pointing out that women – say – have been omitted from conventional histories. The same is true in most New Zealand histories for the economy and I want to offset that deficiency.
 

The story of New Zealand starts 650 million years ago, when our first rocks appear. Last year, as the 2007 Claude McCarthy fellow, I wrote the history from those first rocks through to the eighteenth-century Maori economy and society. This year I am the 2008 J. D. Stout Fellow and am using the time to write what may be called the short nineteenth century from 1769, when there was the first exchange between Maori and Cook’s crew, to 1882, when the first shipload of refrigerated meat left these shores. It will take me at least another two years to bring the story up to date.
 

However this is not an occasion to tell you about my current project, so much as one to honour Michael. I am going to do this by taking a topic close to his heart where I would have valued his guidance. True, I can get some from his written works including his History of New Zealand. Still it would be better were he still here.
 

Michael achieved many things in his life, but for me his greatest achievement was in the 1970s when he made that outstanding contribution to New Zealand race relations, including major biographies of Te Puea and Whina Cooper, and the television series Tangata Whenua. He brought it together from the other side in Being Pakeha, recently revised as Being Pakeha Now.
 

Of course, many students of our generation opposed apartheid and fretted over the distinction between integration and assimilation which the Hunn report posed. But Michael went far beyond anything we did, immersing himself in the Maori community, with the aim of making Maori preoccupations more intelligible to non-Maori New Zealanders
 

Hence the topic of this presentation: ‘Race Relations’, because that was much of what Michael’s life was about, ‘and the ‘Economy’, because it enables me to continue the dialogue with Michael.
 

I have a Nigel Brown painting. Trade and Exchange, from his Cook series. It shows a Maori exchanging with a British gentleman a crayfish for an iron spike. I am wont to ask a visitor which of the two is getting the better deal. Is it the Brit who is receiving food, the very basis of life? Or is it the Maori who is receiving a capital good, which will markedly increase his productivity?
 

Economists observe it is a voluntary exchange, so their answer is ‘both’.
 

As it happens, this image of the exchange of food for metal is not historically accurate. (Nor did Brown intend it to be.) The original picture from which the image descends, shows the exchange of the crayfish for (tapa) cloth at Tolaga Bay. It was drawn by Tupaia, the Tahitian chief who escorted Cook around New Zealand on the first voyage. Perhaps the Pacific’s first anthropologist, he died in Batavia (Jakarta) on the return voyage, and never had the opportunity to apply his keen intelligence to British society.
 

However the exchange of food for metal is not ahistorical. Elsdon Best reported ‘Nicholas, who sojourned in the Bay of Islands district in 1815 … [spoke] of the natives being eager to exchange a 10 lb fish for a ten penny nail’.[2]
 

There is the overtone here, I think, that the gullible Maori was exchanging something of value for an almost worthless nail. The Maori on the other hand, would have seen the imbalance the other way around. As a part of a normal day’s catching, the fish probably took him minutes rather than hours. A metal implement would be more efficient than a stone one, whose production takes many days.
 

Exchange involves two sides – two agents, each with their own perceptions. The two sides need not have similar perceptions. If they had, there would be fewer exchanges. But there is a tendency to give an account of the exchange from one of the points of view, ignoring the point of view of the other. If the other is from a different culture, we may be teetering on the edge of racism.
 

As I have struggled to write a history of New Zealand, I have been struck how often only one side of any account is given. That is true for mine, with its focus on an economics perspective. But that perspective highlights the narrowness of other perspectives, and at least I am brazenly aware of my stance.
 

Let me give another example of how one-sided our accounts can be. I got interested in the so-called sex industry in pre-1840 New Zealand, when one report seemed to suggest it was a substantial contributor to ‘foreign exchange earnings’, as one might say in modern parlance. In the end I concluded that the report was surely an exaggeration, but trying to make sense of the industry, I was struck by how easy it was to misunderstand it. It might be presented as a food for metal exchange, but it was clearly more complex. Very often it involved a stable relationship between a sailor whose ship was in port for weeks or months, and a Maori woman – sometimes described as a ‘seasonal wife’.
 

Sure, there was an exchange of goods in the relationship – a musket and a dress seems common. But virtually all the reports we have on these relationships is by disapproving critics. I could not find an account by a sailor, although there are a couple of waiata in which the singer laments that her sailor has gone off and expresses the hope he will come back for the next season. The implication is that there is an affectionate dimension in what was a more complex exchange than a one-night stand. .
 

So the arrangement was not a wysiwyg exchange like that of fish for nail, where ‘what you see is what you get’ and then you go separate ways. In such deals the transactors may be completely unknown to one another and may never meet again; it is unlikely one will write a waiata or song about them, except as a comic turn. Ronald Coase, who was awarded a Nobel economics prize for his profound insights into the modern market economy, points out that one of the advantages of commerce is that it enables transactions to take place between anonymous agents, who may not even ever get to meet one another.
 

That was not the Maori way before the arrival of Cook. Their transactions were based on the ‘gift exchange’. The great New Zealand anthropologist, Raymond Firth, was one of the first to develop the notion, in book The Economics of the New Zealand Maori, on which my study draws. Perhaps the best way of understanding the gift relationship is that the transactors are more important than the transacted – those who are involved more significant than what is being exchanged. In commerce it is the other way around.
 

Of course there were barter transactions among the Maori, in which the individuals less known to one another exchanged for the sake of the goods. Had there not been, they could not have traded so easily with Cook and his crew. Yet it is instructive that Cook was unable to obtain any of the greenstone artifacts he was desperate to collect, probably because in those days pounamu taonga was gift exchanged, not bartered.
 

Once transactions move from wysiwyg, the exchange gets more complicated. That is why we have to have legislation like the Fair Trading Act and the Consumer Guarantees Act.
 

The most complicated early transfer was land. There has been much historical investigation around the question of whether the Maori sold land to the early settlers. If they did not, what was going on?
 

We need to be cautious about the size of the pre-contact land transfers. There were substantial transfers during the Musket Wars, which suggests that it was partly technological limitations which prevented the earlier transfers of land. The wars were over by the early 1830s, perhaps because the equally armed Maori realised that it was now a zero sum game. Had the Maori been left alone for a couple of generations, the traditional pattern might well have reemerged. Ancestral ties were integral to Maori land holdings, and after a few generations the descendants of the conquerors would have intermarried with the original land holders and so could claim the land through their whakapapa, rather than by conquest.
 

But before there could be a settling down after the Musket Wars, Europeans began to occupy the land. Initially they did so with agreement of the Maori. But what was the nature of the agreement? This is a much contested issue. But we can be confident that when Cook first arrived, Maori would have had little idea of the European notion of land alienation, given the primacy they gave to ancestral tenure.
 

Economics identifies three separate functions in the notion of ownership: possession, use and transfer. These dimensions are in (Judge) Francis Fenton’s 1858 statement:
 

Each individual has a right as against the rest of the tribe to a pretty well-defined piece of land, part of the tribal estate, which he could hold and cultivate as against any other member of the tribe; but his power extended no further. He could not alienate it out of the tribe. Such alienation must be an act of the tribe.[3]
 

Unquestionably the Maori community gave Europeans the licence to occupy and use land. Presumably the notion of transforming (as when the bush was replaced by fields) was a part of this agreement. However, the occupier did not have the right to transfer an occupation-and-use licence to another without the permission of the iwi licensor. That third dimension of ownership was not intended to be sold, but was to be retained by the iwi.
 

If consulted in this framework, the eighteenth-century Maori response is likely to have been that this is all back to front. The licence to occupy involved joining the hapu, a practice which had long applied to Maori from other hapu. (The offering of a wife from the hapu to the European occupier – not always accepted, and sometimes misunderstood – was part of the same process and would give any child of the union ancestral connections to the land.) Thus the framework for the transaction was a gift relationship, more about relationships between people than it was about property transfers.
 

So the land transaction was not wysiwyg like fish for nails. Now the difference of perception really matters. One side thought they were obtaining a permanent addition to the family; the other that they were permanently obtaining a piece of land.
 

The Waitangi Tribunal, looking at the issue in the Muriwhenua Land Report, was very critical of the Europeans for assuming that their system of land property rights applied. No doubt the new arrivals were culturally insensitive, but perhaps no more than the Maori who assumed their system of land property rights necessarily applied too. As it happened the British system dominated, to the detriment of the Maori.
 

The Tribunal overlooked one factor which must have influenced the European view. By the 1830s the Maori (in the Far North anyway) had experienced a generation of commercially transacting food and other resources for desired European commodities. It might have seemed ‘obvious’ to the Europeans coming from their different commercial background that they could treat the exchange of land in the same way.
 

But as far as the Maori was concerned, land was very different from fish, something with the benefit of hindsight – and the work of scholars and the Tribunal – we see today. Nor should the distinction surprise us. If someone wants to export (that is, exchange with foreigners) food, we are likely to applaud their enterprise. But if someone wants to exchange (sell) land to a foreigner they, as likely as not, will require permission from the Overseas Investment Commission, which – irrespective of how permissive it is – involves an acknowledgment that the nineteenth-century Maori were right to distinguish a land transfer from other potential exchange transactions.
 

It is not a novel idea that land issues dominated Maori-settler relations for the first hundred and more years of contact. Interestingly, until the late 1850s the official position was to acknowledge the differences in Maori ownership. The head of the Land Purchase Department, Donald McLean, said there was no such thing as a strictly individual right to any particular portion of land, independent of the tribal right over it.[4] The practice was to give the principal chief a veto.
                                                           
In 1862 Parliament passed the first Native Lands Act, whose purpose was that all land over which native title had not yet been extinguished would be converted into a title recognisable under New Zealand – that is British based – law. Now settlers could purchase direct from Maori, once title had been established. It represented progress for Maori insofar as the revoking the right of Crown preemption, meant they were treated less paternalistically. Initially, at least, some Maori were supportive of the legislation.
 

As Richard Boast writes – with irony – ‘[s]upposedly Maori was to get a better title than mere ‘Native’ title; they were in fact about to become the lucky recipients of the highest and best form of title known to common law: the freehold.’ [5]
 

One reason the British settlers imposed this ‘ideal’ form on Maori was because it was the best they knew, or knew how to manage. One is reminded of the corporatisation of state owned enterprises in the 1980s. The pragmatists chose to put the government businesses in the legal form of a private corporation, because it was a well understood institutional form. But is also made the businesses easier to privatise. Thus it was with Maori land. Freeholds and Crown grants were legal categories officials and settlers were used to, but they opened the way for accelerating the alienation.
 

Maori land tenure is famously intricate, so it did not translate directly into the British forms. Nor were Maori consulted over the legislation; British forms were simply imposed. McLean, who would have known better than most, rightly said the legislation would cause ‘endless complications’.[6] (This would not be the last time that parliament would forge ahead against the advice of experts who would prove correct.) Initially the title was to be determined by runanga set up by the Crown, but they had little standing among those not appointed to them. So in 1865 the Native Land Court, with permanent salaried judges, was established. Ultimately the Court and the Native Lands Acts created a new form of tenure, which today is called ‘Maori freehold land’.


  

Again in a situation familiar today, the proponent of change underestimated or ignored the costs of the transition. There was an often substantial  top slice that went to lawyers and surveyors and those who provided the litigants with hospitality as they struggled with the ambiguities of their customary practices through courts far from their homes. It is no accident that survey costs and survey liens, which could account for as much as a fifth of the land value,  feature prominently in much of the evidence brought before today’s Waitangi Tribunal.
 

Until 1873, the practice of the Native Land Court was to register up to ten names on a title. Frequently the ten were leading chiefs, indicating that Maori regarded the grantees as representative owners or trustees rather than absolute owners. But that was not how the law worked. The  individualised ten found they could sell without reference to their kin group. Some did. (The modern practice is to enter all names into the title, created a different set of problems. Some blocks today have thousands of owners; the cost of administering some Maori freehold land being considerably more than it is capable of earning.)
 

In traditional society, Maori boundaries had often been ambiguous, so that different Maori groups had overlapping interests in the land. The situation was usually workable in practice, because there were not specific usage pressures for ownership. If common sense between hapu or iwi failed, they might eventually turn to war to settle ownership disputes.
 

On the other hand the British system required precision of boundaries, with Ngati Tahi having the property rights on one side and Nga Rua on the other. Maori customary titles did not easily fit with tidy lines on a map. Instead of the traditional ambiguities being ultimately resolved by the physical warfare, the warfare ended up in litigation in the courts. Where large or valuable blocks of land were involved, there could be many claimant groups, all vigorously and tenaciously advancing their claims.
 

Such disputes occurred well over a hundred years a go. Yet they are not just of historical interest. They flared up at a Waitangi Tribunal case in which I was involved last year. In the course of the hearings, lawyer Annette Sykes became extremely emotional, saying that the Crown was doing what it did in the nineteenth century, pitting Maori against Maori. One heard the weeping in her heart for the past wrongs and their repetition today.
 

The Waitangi Tribunal issue concerned the 170,000 hectares of  Central North Island Forests, mainly to the east and north east of Lake Taupo. It was agreed that the cutting rights to the forests were owned by the Crown which sold them to forestry corporations in the late 1980s. However ownership of the land on which the trees grew was disputed. Those with the cutting rights paid a rental to the Crown Forest Rental Trust, the proceeds from which was to be released to the owners when ownership was settled.
 

But who owned the land? The answer could not be Maori generally; it had to be some local hapu and iwi if it were not the Crown. Obviously the Arawa and Tuwharetoa peoples had an interest, but they became divided within themselves. Meanwhile others – including Tuhoe to the east, Ngati Awa to the north and Raukawa to the west – had cross-claims. In the debate before the Tribunal there were extreme tensions between Maori, including the labelling of some groups as ‘kupapa’, which in Maoridom does not have the English meaning of ‘loyalist’, but something considerably less pleasant – ‘traitor’ perhaps?
 

In her submission to the Tribunal, Sykes argued that the Maori should settle these disputes themselves, rather than have the Crown impose a solution. That is the essence of the Treelords deal. As the name suggests, there are similarities to the Sealords deal where Maori had to devise a formula to share among themselves the fishing assets that the Crown handed over.
 

I do not want to imply that Sykes is entirely happy with the deal – she has publicly expressed reservations.[7] However the deal represents an attempt by the Crown to minimise imposing its judgements on Maori. Even so, I expect there to be recourse to the courts and a need for further parliamentary legislation, just as there was for Sealords. However, any legislation will enact what Maori have agreed among themselves, rather than imposing a Crown view.
 

There was another part of the story, which is worth telling. One of the precipitants of the hearing was the settlement the Crown had made with an Arawa group called Te Pumautanga o Te Arawa. Their settlement was based on the ‘fiscal envelope’ approach, of a cash grant which would be used to purchase the forest lands. The affiliate group was offered a range of forests which would cost more than the cash they had available, with the intention that they should select what they could afford. But instead of selecting from what was offered, the group purchased the lot, borrowing to cover the cash deficit .
 

That was a bit of a surprise. After all, good corporate practice is to diversify rather than putting all the eggs in a single basket. Te Pumautanga had gone against such principles by holding their entire portfolio in land, which meant they risked everything on it and what it could produce. The borrowing would increase that risk.
 

Were they being unwise? On reflection – for I too was initially surprised – I think not. The group was not approaching the issue in merely the corporate terms of the best investment. Rather they were acquiring ‘mana whenua’ – the power associated with possession and occupation of tribal land. The more land they owned, the greater their mana. So concerns of 150 and more years ago continue to influence their thinking today. And, of course, that applies not only Te Pumautanga o Te Arawa but to most iwi.
 

In my and others’ misunderstandings there is a repeat of those of the earlier land transactions. The settler perspective was that land deals were solely commercial transactions; the Maori perspective is that they are certainly not. Non-commercial aspects such as mana whenua are important too.
 

Perhaps saying the settler perspective was commercial, is an oversimplification. Underlying the settler thirst for land was the government’s pursuit of sovereignty, which was in part settled when British-based law was imposed effectively on all the land. From that perspective there was a struggle between mana whenua and imperial sovereignty, which was initiated with Te Tiriti o Waitangi, but was not resolved until much later in the nineteenth century. Once again one side imposed its view on the other side of the transaction, without realising that its view was  parochial.
 

What happened to the Maori economy following the New Zealand wars and other Maori land alienations? We know from Hazel Petrie’s work it had flourished in the 1850s, in the Auckland region;[8] and Brad Patterson confirms the same happened in Wellington. By then the Maori economy had switched from provisioning visiting ships and sailors to provisioning settlements such as Auckland and Wellington and even the goldfields of Victoria. The provisioning wound down at the end of the 1850s, in part because the settlements became more self-sufficient (and the Victoria gold rush ended), but also because the agricultural practices were often not sustainable. .
 

I can fill in details of why this happened, but the greater puzzle is why in the late nineteenth century the Maori economy did not move past the provisioning phase into the evolving New Zealand economy based on exporting wool, as did the settlers, especially as in the past they had showed such adaptability as the political economy changed.
 

The economics issue was this. The classical Maori economy was sustainable, but the New Zealand economy for at least a hundred years after Cook’s arrival was not. This was partly the increased population, but even more important was the demand for imports. Initially the foreign exchange to pay for them was generated by a variety of unsustainable economic activities: sealing, whaling, felling native timber, gold mining, kauri gum collecting, borrowing, land speculation, and warring paid by Britain. Even the early farming was unsustainable because it was based on exploitation of the soil and vegetation. Patterson called it ‘robber pastoralism’. More generally, we might describe the economy of the hundred years after Cook as ‘robber development’, although a less provocative term is the political economist’s ‘quarry’.
 

In order to survive, the New Zealand economy had to find a ‘staple’, that is a product it could export sustainably to generate the required foreign exchange to pay for imports (and the accumulated debt servicing). The way that the production of the staple was organised would shape society. The first such staple was wool. Later, refrigeration would extend it to meat and dairy products – to what Bill Sutch called ‘processed grass’. That story – and the different political economy which resulted – belongs to next year’s work. This year the sustainable story is about that first staple, wool.
 

I have been long aware of this political economy story, although I shall refine it as the book progresses. What I had not thought about, until this year, was how the Maori economy fitted in. With hindsight the answer is both obvious and intriguing. In order to develop, the Maori economy had to get into the staple too. It did not. While we dont have quantitative estimates of income, the consensus is that the Maori economy stagnated in the late nineteenth century. They largely retreated to the margins of the New Zealand economy.
 

Why did Maori not get into the staple of wool production? A popular view is that Maori were demoralised by the New Zealand Wars. That is hard to establish. Not all Maori were on the losing side or even involved, and one is struck by the subsequent displays of dignity of those that were.
 

Keith Sorrenson argued that it was not the raupatu (confiscations) which followed the wars that was critical, but the loss by Maori of their land by whatever means it was alienated.[9] Even those groups who chose a strategy of alliance with the government still tended to end up as marginalised and impoverished as the rest.
 

There is some quantified support for this thesis from Ian Pool’s work on Maori demography.[10] While the Maori population fell throughout most of the nineteenth century, he shows that the population in each region was at its most fragile at about the time the Maori land was alienated, irrespective of the form of the dispossession.
 

However, Pool argues the chief cause of the population deterioration was diseases such as measles, whooping cough, typhoid, influenza and gonorrhea, which were new to Maori, and hence far more destructive to their immunologically virgin population, especially to fertility and children. Land alienation to settlers would have been the time that the Europeans moved in, so perhaps the causality of the association which Sorrenson observed is the diseases they brought with them, rather than the land they took over.
 
But to what degree did the loss of land limit Maori opportunities? After all, Maori land holdings were greater per capita than settler ones until the 1930s. Perhaps the lands they were left with were not as fertile as those which were taken, and were further away from the main population centres. But much of late nineteenth-century Maori land is highly productive today.
 

Surely one factor was capital. Breaking in bush for sheep farming could be a tedious and expensive activity. Patterson calculates that in the heavily forested Hutt Valley, an acre took the equivalent of five or so years’ wages. The capital to do this came from merchants capitalists who were proto-stock and station agents, and who had social – even familial – links with those they financed. They were reluctant to lend on Maori land which was not owned under a simple individual title. Generally, there were not Maori who had capacity to be merchant capitalists, so there were not the financial institutions to enable Maori to develop their lands for sheep farming.
 

Another complication may be that while the hapu system may have been suitable for dealing with a seasonal industry like potato growing (which involved clearing only a small area of bush), it was neither large enough nor ongoing enough to care for livestock all year. It is perhaps instructive that Ngati Porou on the East Coast began to farm sheep successfully in the early twentieth century after its hapu became more subject to an overall iwi.
 

So there appears to be no single element in the story of the inability of Maori to shift into the late nineteenth century staple of wool. Let me add another. In 1891 one fifth (21 percent) of the settlers lived in the Auckland region, which ran from Northland to the King Country to East Cape, while over two-thirds (68 percent) of Maori lived there. Yet only slightly less than 8 percent of New Zealand’s sheep were in the Auckland region.
 

This lack of sheep was not just a Maori problem. Indeed the Auckland settler flocks were smaller – on a per capita basis – than the Maori flocks in the rest of the country. Sheep were an Auckland regional problem, not an Auckland Maori one.
 

There were subregional differences. Even though the land was still being broken in, sheep flourished in the East Cape, which had over half the Auckland flock.
 

On the other hand, the triangle from Lake Taupo to the Bay of Plenty had a very small flock. This would not surprise us today for we now know that two major volcanic eruptions, Taupo (about 200 CE) and Kaharoa (about 1314 CE), deposited layers of cobalt-deficient, soil-forming ash, on which livestock cannot thrive. Its paltry flock may even be an overestimate. Half were at Rotorua; one suspects some entrepreneurial Arawa were trying out sheep farming. Five years later, presumably having lost their flock from bush sickness, they were back to potatoes.
 

The east side of Lake Taupo, was also cobalt deficient, but the King Country, to which the Tainui Maori had retreated, had some of the largest Auckland Maori flocks, albeit considerable smaller than those to the south. The Waikato was too swampy for sheep, and the dairy industry had yet to be established, while Northland has notoriously poor quality soils.
 

The same problems applied for the Taranaki region. Including it, and excluding East Cape, two thirds of Maori were in the wrong place to hitch onto the sheep economy. In contrast, in Wellington and the South Island Maori sheep numbers were only slightly below settler ones, measured on a per capital basis.
 


Ironically then, the natural resources which had favoured the pre-contact Maori being located in the North, did not support the post-contact Maori when they needed to shift into sheep farming. What I am guessing, this is to be tested, is that in this crucial period, Maori economic development got behind the rest of the economy, and they still have not caught up.
One of the myths we have of New Zealand is that ours is a green and pleasant land. That it true to the eye, but the reality is that it was hard grind for European or Maori when it came to breaking in the land for production for the world economy. Perhaps it was a close run thing. Had refrigeration not turned up, we would be in a very different New Zealand today – less populace and probably less prosperous.
 

The Maori, even had they kept their land, would have had found it difficult to prosper, until the new technologies of refrigeration and the grassland revolutions evolved. What is remarkable is despite the population decline, despite the loss of land, despite their loss of legal sovereignty, and despite the pressures from the settlers they maintained the integrity of the communities.
 

There is an important story here. Bruce Jesson described New Zealand as a ‘hollow society’ whose social institutions were dependent upon the government rather than having grown organically out of society.
 

This is not surprising, because the government of New Zealand arrived before the vast majority of settlers. Whenever they had a collective problem, they turned to the government to resolve it, rather than developing community based institutions. When the government had the opportunity to strengthen community-based institutions, it instead tended to undermine them in favour of a centralisation of governance. The abolition of the provinces in 1876 is a good example. A more contemporary one is that independent scholars like Bruce and Michael and I have found it so hard to survive.
 

We can see the activities of the 1860s towards Maori – the land confiscations and legislation – as a part of this centralisation. But Maori were different. Their social organisations preceded the New Zealand government by hundreds of years. Despite the attack on them, particularly by alienating of land which was so central to their world, iwi continued to evolve organically. That is why Bruce and I add the caveat to the hollow society thesis that Maori were an exception.
 

More recently corporations have filled some of the hollow. The governments of the late 1980s and early 1990s encouraged business to become independent of the state, very different from before 1984 where business depended upon it. The state not only handed power to the corporations by a more market approach to economic regulation, but following the financial collapse of many corporations in 1987, it recapitalised them by favourable privatisation, subsidies to the finance rather than production sector, the encouragement of overseas investment, and the weakening of the countervailing power of the unions.
 

That story belongs to another venue – and to the history I am writing – but there are parallels in the Maoridom today. In effect the iwi are also being recapitalised, although this time the justification is Treaty Settlements intended to be part of an apology for past injustices. Their effect is to give iwi a capital base, strengthening their independence from government.
 

I do not know where this will lead. Nor am I sure where the empowered and independent corporate sector will lead either, although I can see them changing the way in which New Zealand’s politics, culture and organisations function. One example is that mediating institutions like the media and universities have become more responsive to business. Universities have also become more responsive to Maori since my and Michael’s student days.
 

Perhaps I shall be clearer about these changes by the time I have finished my study. The past sheds light upon today, and even on the future. It was with this belief that Michael wrote his historical works. I salute his achievements, and follow the same path.
 

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Endnotes
[1] Among those who commented on this paper, or assisted in other ways, are Alan Gray, Alex Trapeznik, Brad Patterson, Elizabeth Caffin, Elizabeth McLeay, James Belich, Joan Druett, Kyle Matthews, Louise Grenside, Lydia Wevers, Richard Boast, Richard Hill, Roberta McIntyre, Sarah Gaitanos, Tom Brooking. An earlier version was presented in the Stout Research Centre 2008 Research Roundup series.
[2] E. Best (1912, 2005) The Stone Implements of the Maori, p.330.
[3]  Parliamentary Papers 1860, E7, p.8.
[4] English Parliamentary Papers 1860 [2719], p.303-4.
[5] R. Boast (2008) Buying the Land, Selling the Land, p.65 (original’s italics).
[6] R. Farghar (2007) The Best Man Who Ever served the Crown? p.249.
[7] A. Sykes (2008) The Sovereignty Debate? Has it been silenced? http://indymedia.org.nz/newswire/display/75643/index.php
[8] H. Petrie (2006) Chiefs of Industry.
[9]  M. P. K. Sorrenson (1956) ‘Land Purchase Methods and the Effect on Maori Population, 1865-1901,’ J. Polynesian Society, v.65, 3, p.183-199.
[10] I. Pool (1991) Te Iwi Maori, p.76.
 

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Make No Mistake.

This entry was posted in Growth & Innovation, Listener on by .
There’s no quick fix for our differences with Australia. 

 

Listener: 4 October, 2008. 

 

Keywords: Growth & Innovation;  

 

The way we discuss our -relationship with the Australian economy might be a good indication of the shallowness of economic debate in New Zealand. It’s true that on many measures – most notably per capita output (GDP divided by the population) – Australia’s economic performance is better. But before someone promises to reduce the difference, we need to ask a few questions. 

 

First, when did the Australian economy start growing faster than New Zealand’s? 

 

The short answer is 40 years ago. Straight after World War II, the GDPs of New Zealand and Australia grew at about the same rate in population terms. But Australia’s economy began growing faster than New Zealand’s after 1966. Those who have only just become aware of the divergence and promise to fix it quickly are out of touch. 

 

Why did the divergence happen? 

 

The break at 1966 is abrupt enough to enable us to identify the reasons. The world price of coarse wools fell, undermining our sheep industry, which at that time produced more than half our export revenue. (Australian sheep produce fine wools, the price of which did not fall.) Meanwhile, the Australian mineral boom took off. Our geological record is different. Those who promise a quick fix may have to find a uranium mine. 

 

After World War II, New Zealand’s GDP per person was higher than Australia’s. Today it is about 20% to 30% lower. The economies were last near parity in 1985, but New Zealand quickly fell away during the long recession caused by Rogernomics and Ruthanasia. 

 

However, did not the Hawke-Keating -Governments in Australia pursue similar policies? 

 

Well, yes and no. They also liberalised the economy, increasing the use of markets, but they did not go to New Zealand’s extremes. They couldn’t. The Australian political and constitutional arrangements had too many checks and balances for extremism to dominate. The more careful decision-making process reduced mistakes, which riddle the New Zealand changes. (This was before MMP; now our policies have to be more carefully thought through, too.) 

 

Since its liberalisation, the Australian economy has been growing faster than the OECD average. But that may be because of the mining boom. What seems certain is that although Australian liberalisation did not harm its economy, it seems likely New Zealand liberalisation did hurt ours. 


Evidence suggests that since 2000 New –Zealand’s economy has been growing faster than Australia’s. Whether this is because of different -business cycles, or because New Zealand is now on a higher long-term growth track arising out of a more sober approach to economic management, is unclear. 

 

There’s far more detail to this -analysis, but you won’t hear it in public discussion. It’s not because of a shortage of space (my problem here). Rather, almost every pontification on Australia is by someone who is unaware there’s a systematic way of thinking about economic issues, and that it must be underpinned by a comprehensive knowledge of the facts. They are charlatans who propose quack remedies that frequently do more harm than good (remember Rogernomics?). 

 

Yes, we have a problem in terms of our economic relationship with Australia – it has been better at weeding out the quacks and is lucky to have mineral deposits. But we are ahead of them on one key mineral, water, although we may waste that advantage. And if we don’t get the relationship right, we will lose, particularly, our skilled workers and -sophisticated industries to Australia. 

 

<>It’s useless focusing only on wages and income taxes. (Most of the accounts I see – offsetting their lack of useful -information with hysteria – would fail as first-year essays.) If we want to retain people, then cultural, physical and social environments matter, too, and so do prospects. We’re not going to succeed by disconnecting our brains and putting our tongues into first gear.