What Happens After Oil Production Peaks

“Peak Oil: Economic, Political & Environmental Impacts” Monday 26th September, organised by the VUW chaplaincy.

Keywords: Environment & Resources;

When we were young we assumed that our parents will live for ever. As adolescents, we realise they will die one day, but at a time so far in the future it hardly seems relevant. As mature adults we realise that day is closing in, and we wonder what it will be like when they go. And so they pass on, but you survive in the world without them – perhaps, like me, missing them.

It’s the same with oil. In our ecological childhood we thought the supplies were eternal. Later we worked out they were finite, but we thought it was a long way off before they ran out. Nowadays we know that one year the world’s total oil production will peak, and decline thereafter. My co-presenter Bob Lloyd has gone through the evidence. It is clear there is considerable room for disagreement. Some experts think it will be this year or next, others think the peak is decades off. In 1979, British Petroleum experts predicted it would happen in 1985.

Our understanding is not helped by those who cry wolf, promising that the peak would be soon, and the world will end shortly after. Any market it subject to ups and downs, but that does not prove that there will be a fundamental change in the near future. Its like the busy bodies who remind you of your parents’ impending demise every time they get the flu. I still await the doomsayers, who predicted in 1981 that oil prices would soon double, to come back to me.

In fact the oil price today is about back where it was in 1981 relative to other prices. That is a problem just as a parent in bed with the flu is a problem. But your doctor does not announce the parent is mortal and doomed. He, or she, examines the patient and diagnoses what is going on.

The diagnosis is that the world economy is in an upswing, particularly as a result of the US and Chinese economic booms and so it is using more oil. However, we seem to have the production capacity to produce enough oil, although there is not much of a margin. Where there is no margin is in refining capacity. During the last decade, it has been growing more slowly than demand and we seem to be in a situation where world demand for oil products exceeds what can be supplied, even when the Gulf of Mexico refineries return to full production after their hurricanes. More refineries can be built, but that takes time, so prices may be high for a while. But price spikes from such short term phenomenon do not presage the end of oil.

There are other events which could cause such oil price spikes. Terrorism taking out a major installation; a shipping accident blocking the Straits of Hormuz at the entrance of the Persian (or Arabian) Gulf.

Even so, Bob’s paper indicates, one day – probably in our lifetime – the world’s total oil production is going to peak.

The world as we know it will not end the following day. (In any case, the peak will involve a higher level of production than today, with probably some time before it is back at current levels or lower.)

The production peak will have been signalled by rising oil prices, which will encourage further production from old fields. As the price of transport fuels continue to rise tar-sands become commercially exploitable. Substitutes – bio-fuels, coal, electricity and gas, possibly hydrogen – also become commercial, while some static fuel sources – solar energy and wind – will enable other energy forms to be switched to fuel.

When I last looked at the likely economic cost of the supply of suitable substitutes for oil, I got an estimate near $US70, around about what it is now, when they would be commerically viable. That does not mean they will cut in tomorrow. First, the figure was a projection of what the likely cost of supply would be five or so years out. It is a bit higher at the moment. Second, this is a long run figure, which is not comparable with short term peaks. Third, it takes time to build the production capacity of the alternatives.

However, the best I could judge, around $US70 a barrel was the long run level for liquid fuels, even after oil production peaks. That does not mean we wont get price spikes above that on occasions. But the likelihood is that as the new alternate fuels cut in the cost of transport energy as oil phases out will be substantially higher than it has been over the last few years, and comparable to what it is currently is.

The higher prices means users will be more fuel efficient. As a result our ways will steadily – but probably slowly – change. We will use smaller more fuel efficient cars, and drive less while walking, biking and using public transport more. Houses on the outskirts of town away from public transport will become less attractive, and their relative price would fall. Inner city accommodation may boom.

Because some of the alternative fuels have non-transport uses (and elsewhere in the world fuel oil is used for home heating and industrial production) the price of other energy forms would also rise. Heating your home would be more expensive so people would dress warmer. Air conditioning would be reduced – people may stop living as much in subtropical climes (and also the colder ones). Temperate zones would become fashionable again.

Industry would look for more energy efficient production methods; we would cut back our consumption of energy intensive products like aluminium. Some products currently made offshore would be made locally to conserve costs of transport, although information industries would remain footloose.

After oil production peaks the world as we know it would not end. It would change steadily – as it usually does.

My intuition – I have never seen any projections – is that there will be a period of slower economic growth associated with the shift to less energy intensive technologies and changes in the expression of demand. Essentially there would be a slowing down or even a reduction of productivity during the transition. I dont know how long it would be – at least a decade I would guess. The world economy would be more difficult to manage, but there need not depression. Recall the late 1970s, when there was a world productivity slowdown.

A more serious term threat is that some country – or some interests in some country – will think it can secure its energy supplies by invading a net energy producer. In principle this involves only a change in ownership of the resource, not its long term usage. In practice war can be very disruptive, the costs far outweighing the returns.

That is what we learned from the Second World War, which in part was a struggle for control of resources. Fortunately Germany now knows that lebensraum can be better pursued by commercial market transactions: Japan learned the same about its Co-prosperity Sphere. Some of the American Right, with ‘might equals right’ just under its rhetoric, have yet to learn that markets are more efficient than war. But many Americans have. Let’s hope their good sense prevails.

So what to do? That is where the timing of the peak is important. Just how close does it have to be before one starts planning for the higher fuel prices that go with it. The problem is some of the adjustment will involve capital goods that will exist for a very long time. This is especially true for housing – both in terms of location and insulation. It may be for some transport. And business plant and equipment may also require forward planning.

The public sector has an important role. It seems likely that our transport infrastructure has got so far behind, much of what we are putting in today will still be viable in a decade, even if fuel prices are much higher. But we would need more public transport, and that may mean putting in the infrastructure now. On the other hand we need to be careful that we dont spend a fortune on infrastructure that is underutilised as people instead turn to fuel efficient cars, bike, walk, and inner city accommodation.

And we need to be realistic. Many will not give up their cars, although they will use them less. Perhaps we should focus on better commuting, so there is more fuel available for leisure.

The oil price spike may be a blessing, because it stimulates people to think about the longer term. Some have transferred to public transport – will they stay their when the spike settles back? Others will be reconsidering their location. Hopefully the public sector too will be stimulated to think more ahead.

But as the Hitchiker’s Guide said in large friendly letters ‘Dont Panic’. The depletion of our oil reserves is a problem, but it is not an unresolvable one, although we will resolve it better as we plan ahead.

To illustrate the orders of magnitude, let me talk a little about what may be a real panic. While global warming has been a concern to some for some time, my impression is that the evidence is accumulating that serious warming is occurring, and insofar as this has been precipitated by human actions, those actions are unlikely to be reversed in the near future.

(Oh yes, I am aware that there is an interdependence between global warming and oil consumption. But I skip that intricacy for a larger issue.)

The global warming problem is more serious because, unlike the oil peak which can be largely dealt with by the market mechanism, there is no natural homoeostatic mechanism to move the world back into medium term equilibrium. The necessary measures involve a political will which thus far the world has not shown, with at least two major blocs with different policies – perhaps neither able to slow down the warming. In contrast with peak oil there is a market mechanism which will cope without a lot of government intervention, although some intervention will ease the transition and help us cope better.

In the case of global warming, it is the other way around. It requires government intervention which may be facilitated by the use of market mechanisms. Thus global warming is potentially a far greater threat than the oil production peaking. Moreover unlike the peak, the warming process is not in the future but already underway.

That is not to say that we should ignore the oil production peaking. It is inevitable and the world will have to adjust to it. So while we need to ignore those who misleadingly cry wolf, we should and respond to a real threat. But it is not the greatest threat that the world economy or ecology faces.

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Heart Gains: David Hay, Pioneer Cardiac Physician

Listener: 24 September, 2005.

Keywords: Health;

Although we think of lung cancer as the disease of tobacco, the weed is associated with other cancers, with respiratory disease (such as emphysema), and with heart and circulation conditions (cardiovascular disease). Not only do the chemicals in tobacco smoke trigger mutations within cells that lead to cancer, and damage the lungs, but they also stiffen the walls of the blood vessels. That requires the heart to work harder, so smokers are more prone to coronary heart disease (CHD) and stroke. Stopping smoking is the best way of preventing heart disease.

So it is not so surprising that New Zealand’s anti-tobacco campaign was led by cardiologist Sir David Hay, of Christ-church, who has just published his memoirs, Heart Sounds. Hay became a cardiac physician in the 1950s, when the eminent British epidemiologist Sir Richard Doll, who died a few months ago, began reporting his ground-breaking work, which showed that smoking causes early mortality. Hay returned from his British training in 1955 convinced that New Zealanders had to quit smoking. As the first medical director of the New Zealand Heart Foundation, he had a leading role in the campaign.

It makes good sense for a heart doctor to recommend smoking cessation. Cancer physicians welcome quitting, too, but the mutation that triggers the cancer or the undermining of the lung may be not reversible, although cessation stops further mutations and damage. The news from cardiologists is even more heartening.

Within a year of quitting, the excess risk of CHD caused by smoking is reduced to about half. It continues to decline gradually. After 15 years of abstinence, the risk of CHD is similar to that of persons who have never smoked. The risk of stroke for ex-smokers takes five to 15 years to return to that of never-smokers. (The current state of knowledge is summarised in a recent National Heart Foundation technical paper authored by Dr Hay, although he is officially long-retired.)

It is a standard joke that your GP will advise you to stop smoking, even if a cigarette has never passed your lips. Breathing in other people’s cigarette smoke also raises disease risks. One study found that nurses regularly exposed to second-hand smoke at work were almost twice as likely as the unexposed to suffer heart disease.

The shift in attitudes to smoking has been brought about by the efforts of many people. GPs discouraged their patients from smoking. Public health physician Murray Laugesen at the Ministry of Health, oncologist Alan Gray first medical director of the Cancer Society, and university epidemiologist Robert Beaglehole played vital roles. So have numerous lay-people, particularly Deirdre Kent, first director of ASH (Action on Smoking and Health), which Hay helped found. Their concern and passion enabled politicians to institute measures to reduce smoking (including raising excise duties on tobacco). The anti-smoking campaign is probably the single most important health measure taken in the past 30 years.

Hay’s genial book throws light on medicine over the past 50 years, with frequent apologies for past practices that would be unacceptable today; there have been improvements in how we treat patients.

The reflection is more strident in the penultimate chapter’s “personal prescriptions”, when the autobiographer becomes the passionate physician giving firm advice on how to look after one’s heart. The gentle humour remains, as Hay starts by confessing that he, too, has trouble with his weight. (He experimentally smoked as a teenager, but never as an adult.) For the chapter is about changing diet, increasing exercise, and that damned controlling of weight, as well as not smoking. Hay was also a pioneer in the promotion of behaviour change. Much of what he suggested is today’s conventional wisdom – his advocacy helped make it so.

This leads to the economic problem of the ageing population, as greater longevity imposes a heavier burden on the economy. However, we all benefit if loved ones survive longer because of taking David Hay’s advice, so that is a challenge economists can live with.

Building Coalitions: the Banzhaf Index

On Friday 23 September, 2005, this was put on the No Right Turn website . It used the election night seat outruns. I have updated it to the final election seat outturns, and added a subsequent comment.

Keywords: Political Economy & History; Statistics;

One of the advantages of MMP is it enables us to think more systematically about the political process (although given much of the nonsense that is being written at the moment, it does not appear to force us to). What this note sets out is a a mathematical procedure which enables us to think systematically about coalitions (although, and as I shall explain, like most mathematical models it has imitations) .

However, first a word about its progenitor, John F. Banshaf III, a remarkable professor of law at George Washington University who is known as the ‘Ralph Nader of the Tobacco Industry,’ “the Ralph Nader of Junk Food,’ ‘The Man Who Is Taking Fat to Court’ and ‘Mr. Anti-Smoking’. (He is also Faculty Advisor for the GWU Volleyball Team.) Earlier he had been an electrical engineer and obtained the first copyright ever registered on a computer program. He also developed a method for measuring the power of parties negotiating coalitions – the Banzhaf Index.

The Banzhaf Index

I use the Banzhaf Index in the current New Zealand political situation. I take the current allocation of seats. The specials may change the numbers but not the principles illustrated here.

There are eight parties vying for power, with a total of 121 seats. Each may be in or out of a coalition, so in total there is the possibility of 28 or 256 coalitions (including the zero when nobody joins). There are 128 of these in which the coalition has the required 61 votes or more to govern.

Of course not all parties belong to all the possible successful coalitions. Labour with 50 votes is in 72 (or 78%) of the coalitions. The figures for all the parties are shown in column 4 (and column 5) of Table I.

However, this does not discriminate between the importance of a party in a coalition. For instance in the coalition of all parties with 121 seats, if Progressives with their one seat walk out the coalition still has 120 seats, more than enough to govern.

So the Banzhaf index involves counting the number of times of a party to walk out of a coalition with the result that it loses its majority. In the current situation, any party can walk out of the ‘All’ coalition and it would still have a majority. (Were Labour to walk out, there would still have 71 (121-50) votes).

As it happens Labour is required in 72 of the 128 coalitions, while the Progressives are required in only 5 of them. (Column 6). The Banzhaf index adds the number of times this happens for all parties (237) calculates each party’s total as a proportion of the grand total, and calls the level of power of each party relative to the rest. (So Labour’s relative power is 72/237 = 30.4%).

TABLE I: Illustrating the Banzhaf Index

Party Seats % Coalitions % Vetos %
Labour 50 41.3 100 78.1 72 30.4
National 48 39.7 92 71.9 56 23.6
NZ First 7 5.8 82 64.1 36 15.2
Greens 6 5.0 78 60.9 28 11.8
Maori P 4 3.3 74 57.8 20 8,4
U Future 3 2.5 70 54.7 12 5.1
ACT 2 1.7 68 53.1 8 3.4
Progressive 1 .8 66 51.6 5 2.1
TOTAL 121 100.0 124 100.0 236 100.0

The final column in bold shows the Banzhaf index of the power of each party in coalition forming.

We have the well known phenomenon that smaller parties seem to have power out of proportion to their votes.

Incompatibles

The previous section was highly idealised, assuming that the parties are only interested in power and have no principles (or backers, which is often the same thing). Sometimes parties are incompatible and wont go into coalition together.

So lets add some of those principles as follows:
1. Progressives always go with Labour
2. ACT and the Greens never go with each other
3. The Maori Party wont go with National because it wont entrench the Maori Seat provision.
(I can easily add some more, but this illustration suffices.).

Now there are only 26 viable coalitions, and as Table II shows Labour is in 90.6% of them.

TABLE II: Banzhaf Index with Some Political Restrictions

Party Seats % Coalitions % Vetos %
Labour +
Progressive
51 42.1 24 90.6 22 41.5
National 48 39.7 14 52.8 10 18.9
NZ First 7 5.8 18 67.9 10 18.9
Greens 6 5.0 12 45.3 5 9.4
Maori P 4 3.3 8 30.2 4 7.5
U Future 3 2.5 14 52.8 2 3.8
ACT 2 1.7 7 1.7 0 0.0
TOTAL 121 100.0 26 100.0 53 100.0

The final column in bold shows the Banzhaf index of the power of each party in coalition forming.

Not surprisingly, those parties which do not rule out partners as a matter of principle generally have a higher proportion of vetos and more power relative to the unrestricted case. Conversely those that rule out some options have a lower proportion of the vetos and less power. Sometimes the bigger party has which has restrictions has less power than the smaller pragmatic party.

The exception is ACT. Through a quirk of the numbers, a party with 2 seats is unable to veto any coalition.

Minority Government

Banzhaf designed his index for one-off situations. It is usually illustrated in the American literature, by the Electoral College for the US President, which comes together, votes on the sole matter of who is to be the next president, and then dissolves.

The New Zealand situation is different because the parties meet again after every election and, as we shall see, the prospect of that affects how they behave now. Moreover, the coalition process is an ongoing one in the intervening three years, particularly when there is a minority government, as there has been in eight of the last ten years and there is likely to be over the next three (and probably after).

We can adapt the index as follows. Let’s assume that Labour remains a minority government with the Progressives. It has to seek coalitions of the remaining six parties in parliament (that is the government has to raise at least another 11 votes).. There are coalitions available to it for this purpose Table III shows the calculations for the minority parties.

The Labour and Progressive row is deleted. The theory is not robust enough to measure the power of an incumbent minority government, which has a whole range of institutional instruments which enhance the power from their seats. However the Banzhaf Index can be used to measure the relative power of those outside government, as Table III shows.

TABLE III: Banzhaf Index for Relative Strengths of Outside Parties (assuming Labour and Progressives form a minority government)

Party Seats % Coalitions % Vetos %
National 48 68.6 32 62.7 13 34.2
NZ First 7 10.0 30 58.8 9 23.7
Greens 6 8.6 29 56.9 5 13.2
Maori P 4 5.7 28 54.9 5 13.2
U Future 3 4.3 27 52.9 3 7.9
ACT 2 2.9 52 21.0 1 2.6
TOTAL 70 100.0 52 100.0 38 100.0

The final column in bold shows the Banzhaf index of the power of each party to influence the minority government.

Table III suggests that while National has more than two thirds of the seats outside the minority government, it has only just over one third of the power to form a coalition to influence the minority government. All the other parties have correspondingly more power.

National Remains Outside

However, this requires cooperating with the government which, for reasons good or bad, National has not done so in the past. Suppose they refuse to join in. Table IV shows the relative power of the remaining parties outside parliament (assuming that ACT is willing to cooperate).

TABLE IV : Banzhaf Index for Relative Strengths of Outside Parties (assuming Labour and Progressives form a minority government and National is not willing to cooperate).

Party Seats % Coalitions % Vetos %
NZ First 7 31.8 28 73.7 18 36.0
Greens 6 28.0 26 68.4 14 28
Maori P 4 18.2 24 63.2 10 20.0
U Future 3 13.6 22 57.9 6 12.0
ACT 2 9.1 20 52.6 2 4.0
TOTAL 121 100.0 38 100.0 50 100.0

The final column in bold shows the Banzhaf index of the power of each party to influence the minority government.

The outcome is that the power of the remaining parties is close to their proportion of seats. Moreover, their power is higher than if National was a player. In effect National not joining in gives the others more power, for three or so years anyway.

Conclusion

The above has tried to clarify the current state of the coalition discussions using the Banzhaf index of power. It shows that if there is a minority Labour led government, and National does not join in the coalition making on a one policy basis, the role of the minor parties is strengthened.

There are at least two further caveats in this assessment. The theory is really about a series of one night stands. Coalitions, even those between those inside and outside government, often have more of a marriage element, insofar as one party may compromise against its immediate interests in order to get overall gains in the long run.

Second, while National will not join in the public glare of the House, as is well known that Select Committees are considerably more cooperative. No doubt the coalition principles explored here are relevant, although the caution about the ‘one night stand’ assumption applies here too.

Notes

The theory of the Banzhaf index .

A computational algorithm is available. This makes some assumptions which results in estimates not quite as precise as those given here, which are derived from a spreadsheet. This more tedious procedure gives the user a better feel of the underlying theory, and also allows the introduction of the incompatibility restrictions.

Read more about John F. Banzhaf III. Its enough to make someone need a hamburger. ☺

Added later
As I tread to explain the Banzhaf Index is a bit stiff and clunky. It does not quite match reality. But it does enable one to think systematically about coalition, which is more than many commentators have been doing. Indeed it is more than many politicians may have been.
As I tread to explain the Banzhaf Index is a bit stiff and clunky. It does not quite match reality. But it does enable one to think systematically about coalition, which is more than many commentators have been doing. Indeed it is more than many politicians may have been. While revising for the final counts, I came up with the following simplification:

Given a Labour+Progressive Government, the following partners would give it a majority in the house:

National;
New Zealand First + Greens;
New Zealand First + Maori Party;
New Zealand First + United Future;
Greens + Maori Party;
Greens + United Future + ACT.

All are not equally likely.

I also looked at abstentions. (The Banzhaf index in its current form does not alolow for this).

If New Zealand Future or the Maori Party abstain, there are no new combinations;
If the Greens abstain, New Zealand First by itself of Maori Party + United Future + Act would also give the government a majority;
If United Future abstains, then New Zealand First + ACT give a majority;
If ACT abstains, then Greens + United future give a majority.
If New Zealand Future and the Maori Party abstain, then the Greens by themselves give the government a majority.

And so on. If it is a minority government these combinations can go on for ages ☺.

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The Economics and Politics Of Globalisation

Revised version of Paper for NZIIA Seminar “The Economic and Social Impacts of Globalisation” 21 September, 2005.

Keywords: Globalisation & Trade;

 

The Economics of Globalisation: An Introduction is a version of this paper with a more detailed economic analysis

Introduction

The Royal Society of New Zealand awarded me a Marsden Fund grant to study globalisation. The study is a continuation of my earlier research program, especially that which is summarised in my book In Stormy Seas with its central message that the fate of New Zealand will be largely a consequence of what happens overseas, together with our ability to seize the opportunities and manage the problems those events create.

The study is founded on five themes.

1. Globalisation is the economic integration of economies – regional and national economies.

2. Globalisation began in the early nineteenth century, so the phenomenon is almost two centuries old. Since globalisation is an historical phenomenon, focusing on the last few decades throws away a rich source of insights.

3. Globalisation is caused by the falling cost of distance: transport costs, plus the costs of storage, security, timeliness, information, and intimacy. This gives a driver for the globalisation process.

4. Globalisation is not solely an economic phenomenon. It has political, social and cultural consequences.

5. The policy issue is not being for or against globalisation, but how to harness it to give desirable outcomes.

The structure of the program is it first develops the economic analytics, and then explores political and social consequences such as nationalism, sovereignty, policy convergence, cultural convergence, and diasporas.

The Underlying Economics

Much of New Zealand economic thinking is trapped in economic models which have been superceded in the last thirty on years. This does not mean the old theories are wrong, so much as that they can be advanced. Many of the policy stances that are derived from the superceded theories are still valid, but the current understandings are richer and more nuanced. In particular, I know of no reason to abandon the strategy of global connectedness, which is one of the principles of the government’s growth and innovation framework.

The new analysis focuses on economies of scale and the costs of distance, phenomenon which are largely ignored by the superceded theory. Their interaction generates outcomes which can be quite different from the standard theory without costs of distance and only diminishing returns. Sometimes the outcomes are not obviously intuitive to the well trained economist.

The Costs of Distance

The costs of distance are more than transport costs. They include storage, security, timeliness, information, and the loss of intimacy that separation causes. A paper ‘Trade Costs’ by James Anderson and Eric von Wincoop, calculates that the average American manufacture has a mark-up of 55% from the factory door to the final domestic retail price. The price of an export involves a 170% markup, or 74% more than the domestic sale.

Analytically the costs mayf distance (or trade costs) may be treated as a tariff. (Recall that costs of difference are sometimes called ‘natural protection’). Total costs of distance far exceed tariffs.

Moreover, they are coming down. While we can not measure the fall in the costs of distance precisely we can observe it schematically. In 1855 it took around three months to get from New Zealand to Britain, whether it was sending a package, a person or a message. Let’s represent the time by a line across the page:

************************************************

Today it takes only a month to get to Britain by ship. That’s because ships are faster, and they can go through the Panama Canal. That line now looks like:

**************

But that is misleading in regard to people and light valuable goods. Once they went by ship to London too. Today they can fly to London in less than two days. Compared to the 1855 their world looks like:

*

Yet information can be sent in vast quantities almost instantaneously via the world wide web. On the same scale that time is represented by something smaller than the full stop which ends this sentence.

A practical illustration of the implications of the falling costs of distance is that New Zealand’s second largest import port by value and our third largest export port by value is Auckland International Airport. Even that underestimates its importance, because it does not include the value of the tourism that passes through it. Perhaps one day Auckland International Airport will be our largest export and import port. It may not hold that position for long, when the broadband connection with the rest of the world generates an even greater flow of business.

Some Economic Analysis

I now skip through the economic analytics by referring to some, but not all, of it.

One describes how falling costs of distance changed an entire political economy, using the impact of refrigeration on New Zealand, which changed the effective cost of distance for meat and dairy products from prohibitive to negligible. That shifted the New Zealand political economy from the quarry to the sustainable settlement based on processed grass which dominated 80 years of our history.

The New Zealand experience can be explained by the traditional comparative advantage model. It does not explain urbanisation which depends on industry economies of scale (agglomeration), where as an industry increases in size in a location it experiences falling costs. Agglomeration is a super-multiplier, which enhances any initial superiority of location, although it can be offset by congestion costs. The cost and quality of future governance is also important. The book’s illustration is New York, but recently I have been applying the analysis to Auckland.

A later chapter describes how many services have become internationally tradeable. In recent years, as telecommunications costs have collapsed, so parts of the service industry need no longer be located near the customer. Such offshoring is not a new phenomenon, but an extension of the relocation of manufacturing which has been going on for a couple of centuries. Thus the offshoring of ICT services to Bangalore parallels the offshoring of manufacturing to China.

One of the peculiarities of the new theory is the location of some industries are not determinant but accidental. Why should Nokia, the world’s largest mobile phone company, be located in Finland? The answer may be that economies of scale and low distance costs creates the possibility that some industries simply occur in particular locations as the result of accidents of history and path dependence. (Fisher and Paykel is a New Zealand parallel. Why should we be good at whiteware?)

This explains the role of competitive advantage. In contrast, comparative advantage generates deterministic locations. But suppose accidence results in industry starting up in a particular place. How does it maintain its predominance, when other businesses and locations can replicate its production processes? Dominance can be maintained by the first mover if it continues to innovate ahead of its rivals. That is the core of competitive advantage.

Another peculiarity of this theory, and the modern world, is intra-industry trade (IIT), which traditional theory based on comparative advantage does not predict. IIT occurs when two economies export and import the same product. Whereas it hardly existed internationally in 1950, it is now thought that about a quarter of the international trade in goods is IIT. (The other quarters are oil, primary commodities, and other manufactures). We need to be aware that New Zealand has one of the lowest levels of IIT among rich economies.

In preparation for my final discussion in this paper, I need to mention the chapters on technology transfer and the related Convergence Club where countries which are high income at one point in time, tend to remain high income thereafter. In contrast, very few companies which were top a century ago, or even a quarter of a century ago, even exist today. Economists are comfortable with this high business turnover. Why dont countries experience a similar turbulence in their ranking? Again this is not predicted by comparative advantage.

Prospects and Strategy for the New Zealand Economy

Before concluding this part I want to say something about its implications of the theory for the New Zealand’s economy’s prospects and strategy.

In their The Size of Nations, Alberto Alesina and Enrico Spoloare argue that middle sized countries (New Zealand would be on the lower end of the group) tend to have a better economic performance than larger economies, because they are simpler to govern. Much of the research on economic growth focuses on the market sector ignoring the public sector, or seeing it as a handicap. Instead, they argue the public sector is important, and that the less heterogeneous the population the more efficient the sector is. In simple terms New Zealand has a comparative advantage in its public sector.

Middle sized countries face a tradeoff of a more efficient public sector with less economies of scale in market production. The resolution is specialisation in production, with international trade converting the production into a more general mix of consumption. The paradox, lurking throughout the book, is that smaller nation-states may be able to survive, but only by abandoning some sovereignty by participating in international trade. Global connectedness is critical.

The Consequences

The second part looks at the consequences of the economic processes I have just described.

It begins with nationalism. The nation-state is a relatively recent phenomenon, no more than a couple of centuries old. Germany did not exist as a state in 1805. Two hundred years later it has many of the state’s ‘traditional’ functions subordinated to the European Union. Nation-states are a response to the falling costs of distance, which made smaller communities part of larger communities. I discriminate between ethnic nationalism and civic nationalism. The former defines national identity by membership of a racial, ethnic, or religious type. The latter defines itself by membership of the community, and is far more tolerant of diversity. Although the nation-state is changing, thus far the research suggests it will continue to play an important part in people’s lives. Hopefully, it will be increasingly based on civic nationalism.

So I have to explore the meaning of sovereignty, making the distinction between de facto and de jure sovereignty, which often gets lost in popular discussions. The example is the measurement of time. New Zealand has the de jure power to opt out of the international calendar and time system. In practice it would be so unwise that it lacks the de facto power to do so. The same applies to international economic agreements, such as the aborted Multilateral Agreement on Investment, once they are implemented.

This leads to two questions, whose answers to seem to be intimately tied up with the future of the nation-state.

The first is whether cultural convergence is inevitable? Will eventually the entire world – or perhaps initially just the rich world – have a common culture? That Canada has a long and large trading history with the US, and yet remains culturally independent suggests ‘not necessarily’.

The second question is whether there is policy convergence under globalisation. Does everywhere end up with essentially the same policy? It appears that policy convergence in some areas seems all but inevitable, although it can be very slow, as in the case of international trade in agricultural products. However there are some areas where policy convergence appears to be unnecessary, as in much of the health system. And there are policy areas where the outcome is not obvious. Is the social market economy a phase which globalisation will drive out of existence as countries compete to the bottom of raw market solutions? I have yet to answer that question.

The final chapter in this sequence reflects on the role of borders. While jurisdictional authority seems important, I am increasingly thinking that labour mobility is key to many of the politico-economic policy issues which globalisation raises.

That leads to a discussion on kinds of nations. Should New Zealand join Australia, the United States or the European Union or stay outside? What are the viable options for nations in a globalised world? My preliminary thinking is, that in economic terms anyway, it is not necessarily in New Zealand’s interests to abandon its de jure sovereignty, nor is it necessarily inevitable.

Patterns of World Development

I have yet to disentangle the story of gainers and losers from globalisation. So here I onlly look at patterns of world development.

To begin with two long term well-established trends. The first arises from the sharp divergences in income and productivity in the world today. We might expect their distribution to be clumped in the middle with a few extremes at the top and bottom. Instead it is U shaped: a lot of people and countries are at the bottom, more – albeit fewer – at the top, but very few in the middle.

As the convergence club recalls, the reality is that those countries which were poor a hundred years ago, are typically still poor, unlike the era before globalisation, when the relative differences between the top and bottom income countries were tiny in comparison to what they are today. We might have expected economics forces – international trade, international migration, international investment and technology transfer – to have diminished the differences. That is what the advocates for tree trade say. But the convergence club persists. Why?

The second long term trend is that the shifts in the geographical distribution of manufacturing. As the following table shows before globalisation began two countries, India and China produced more than half of the world’s manufactures. Two hundred years later the contribution of the two countries was insignificant. This contrasts starkly with the far greater stability of world population shares.

Manufacturing Output (By World Share: Percent) 1750-1938

Year India China Rest of
Periphery
Developed
Core
1750 24.2 32.8 15.7 27.0
1800 19.7 33.3 14.7 32.3
1830 17.6 29.8 13.3 39.5
1880 2.8 12.5 5.6 79.1
1913 1.4 3.6 2.5 92.5
1938 2.4 3.1 1.7 92.8

Source: Simmons (1985), p.600.

It would be easy to dismiss the change as a consequence of the transformation from handcrafts industry to factory production. But the location of manufacturing type activities may be driven by accident and time dependence.

We can, albeit clumsily, provide a simple model which describes what happens as the costs of distance falls to the manufacturing (relocatable industry with economies of scale) in two identical countries. Initially, the two economies have the same level of manufacturing, but as trade costs decrease, the share of manufacturing goes through a critical point and suddenly one country (arbitrarily) ends up with all the manufacturing, and the other with none.

The manufacturing country is better off. In the formal model the labour force qualities are identical but after the bifurcation workers in one gets paid more than the other, because of the higher productivity of manufacturing and the restriction on labour migration between the countries. In effect, the costs of distance enable the prosperous workers to capture some of the rents from the economies of scale. There are bells and whistles – physical capital, technology, human capital, governance – that can enrich the story. One might speculate that it is not impossible that incomes in the loser economy may stagnate or even decline. Paul Samuelson’s recent paper on offshoring shows that this can happen in the standard model, via terms of trade shifts.

A fuller more complex model might have many bifurcations. The accelerated growth we see among some East Asian economies in the last two decades may be an example of this shifting from one branch of the overall bifurcation to another. Perhaps the economic dominance of the developed core is but a transition in the history of the world economy.

One is reluctant to push the model too far, and the practical world is smoother than its sharp changes. But it might explain the transition from the beginning to end of the nineteenth century as reflecting two sides of the bifurcation.

Models with bifurcation are not common in economics, and their properties are not well understood. In this case as the costs of distance falling, suddenly the model’s bifurcation snaps back, to equal shares of manufacturing for the two idealised countries. The intuition is that when costs of distance are near zero, manufacturing settles to where the population is, and where there are lower wages.

Assuming this is the underlying process, we cannot be sure how long it will take to return to the end outcome of manufacturing shares more closely reflecting population shares. Given that it took over one hundred years to create the developed core, it seems likely that it will take at least a hundred years to end it if that be the destiny. The latter transition may take even longer for today’s core economies have accumulated advantages in physical, social and human capital. But that need not persist forever.

And some other factors may slow down or reverse the process. There may be an minimum to how low distance costs can go. Perhaps costs will rise with higher fuel costs or the needs for security against terrorism. Path dependent theories of growth precipitated by exogenous events leave open many possibilities. It will be our descendants, four and more generations on, who may be able to be more definitive.

China and India

Certainly this chapter will be speculative, but it is a speculation constrained by the discipline of modelling. It reinforces the suspicion that China and India are going to play a more prominent role in New Zealand’s and the world’s future.

So let me a couple of caveats. If China and India are going to become relatively more important in New Zealand’s economic future, which countries are going to become relatively less important? The obvious candidate is Australia.

That is likely to happen with current developments in trading arrangements: China joining the WTO, the Doha round, and free trade agreements with China. If we stop thinking in terms of a two country world, but a three country one – a shift from bilateralism to multilateralism in our modelling and thinking – we see that New Zealand is likely to lose market share for Australian manufactures to China as well as some manufacturing activities in New Zealand.

To go a step further, suppose China and India become major suppliers of general manufactures (including relocatable services) to the world. General manufacturing will almost cease in New Zealand, the exceptions being products that have to be manufactured close to consumers, and the early processing of natural resources to reduce the costs of transport (like stripping water out of milk). Is there room for any other manufacturing? Or will New Zealand revert to being a natural resource exporter (including tourism) with domestic production dominated by services that cannot be relocated.

The analysis is complicated by that the individual phases in manufacturing processes may no longer be under one roof, with components, sourced from different businesses and even different countries given the falling costs of distance, assembled elsewhere. New Zealand may get into some parts of the action, but not others. The offshoring of the manufacturing of swandri clothing to China, while the design and royalties are retained in New Zealand may be a precursor of the future economy.

This challenge is not peculiar to New Zealand. It seems possible that at least in the medium run technologically advanced, highly skilled, innovative manufacture will remain in rich countries. What are we going to do about ensuring New Zealand has such a sector? That, in my opinion, is one of the key objectives of the government’s Growth and Innovation Framework.

Conclusion

Globalisation is going to change dramatically the New Zealand economy. We can resist it temporarily with protection, but that is not a long run solution. Better to engage. To do so requires a more sophisticated understanding than we currently have. Certainly scholars are struggling with the underlying issues, but my impression that policy makers are hardly addressing them, trapped in economic theories which are as Maynard Keynes famously described as ‘defunct’.

I am not yet sure of the study’s policy implications. Anyone with a policy agenda can use the currently available analysis on globalisation to support theirs.As always, my approach, is to push the analysis as far as I can, before coming to policy conclusions, if any.

Ultimately, the cheerful conclusion may be that size need not be a handicap to New Zealand (and any distance handicap is diminishing). However to seize the opportunities, we need to understand better the processes causing them and try to avoid being entrapped by old theories which poorly describe the rich complexity of the world in which we live.

What National’s Tax Cuts Are Worth: the Population Distribution

Some calculations I did for my own satisfaction

Keywords: Regulation & Taxation;

Forgive my statistical pedantry, but John Key recently stated something like ‘the average earner would getting tax cuts of $25 a week’. What he meant was that ‘on average earners were getting tax cuts of $25 a week’.

This led me to wonder what the average earner would receive. ‘Average’ is a tricky concept here. The only sensible meaning in the Key formulation is the earner in the middle of the earnings distribution.

I have the 2001 Census returns for full time workers, adjusted for average earnings increases since then to the 2006 (March ending – the one we are in) year. It is not perfect, because there has been a lot more employment since 2001, which would tend to be at the lower end of the distribution, skewing it down. (Which means the following is generous to Key’s claim.) Moreover, there has probably been an increase in wage dispersion – that is skill rates rising relative to unskilled rates – which does not affect the results very much, providing we are mainly concerned about the middle of the distribution. Additionally, the Census responses are subject to error. I checked it – for these purposes – and found this data base gave an average tax reduction to full -time workers of $26.70, close enough to the Key figure given the upward skewness of the distribution I am using relative, to the actual distribution, and confirming these results are going to be mildly favourable to National.

According to the data base, the median earner is going to earn $38,600 this year (742 p.w.) . Such an earner is going to get a tax cuts of $15.20 a week, less than two-thirds of the figure that Key accidentally stated.

Or to put it the other way around, in order to get a tax cut of $25.00 p.w., the worker has to be earning at least $42,350 p.a. ($814 p.w.).

Having done these calculations, it occurred to me that it might be useful to prepare the following table. The first column shows the tax cut; the second column shows the income required to attain that tax cut (in the March 2008 year); the third column shows the proportion of full-time earners who would receive the cut; the fourth column shows the proportion of all adults (over 15 years old) who would receive the tax cut. I dont think anyone would be surprised at the figures, but they give a quantitative estimate of what will be intuitively understood.

Proportion in Receipt of Tax Cut

Tax Cut ( p.w.)Income Required (p.a.)Full-time EarnersAll adults (>15)
More than $10At least $29,50068.2%36.5%
More than $15At least $38,65049.8%28.9%
More than $20At least $40,50046.3%25.7%
More than $25At least $42,35043.7%24.1%
More than $30At least $43,20042.0%23.3%
More than $40At least $47,93034.4%18.9%
More than $50At least $63,94021.1%11.6%
More than $70At least $81,15015.3%8.4%
More than $90At least $98,5006.3%3.5%

Then I realised I could manage the data al little differently to calculate who got a share of the total tax cut. The results are as follows:

Share of Total Tax Cuts

Decile All adults (>15)
Top 45.5%
2nd 23.4%
3rd 11.2%
4th 7.0%
5th 5.3%
6th 3.9%
7th 2.7%
8th 1.0%
9th 0.0%
Bottom 0.0%
TOTAL 100%

No one will be surprised to observe that the top 20 percent of the population get over two thirds of the value of the total cuts (and so the bottom four fifths get the remaining third).

Note.: The data base was constructed by Anita, who used it to discuss gender differences in Tax Cuts and Social (In)equality

Everything in Moderation

Canadian intellectual John Ralston Saul in conversation with Brian Easton about globalism, ideologues and rediscovering moderation.

The full edited version.

Listener: September 10, 2005.

Keywords: Globalisation & Trade; History of Ideas, Methodology & Philosophy;

EASTON: You are a very cosmopolitan person. Canadian father and British mother. You have a degree in French from London, you’ve worked in Paris. You have a Chinese-Canadian wife. You’ve written successful novels as well as international bestsellers on contemporary issues, beginning with “Voltaire’s Bastards”, through another three to your latest, “The Collapse of Globalism”. Yet you seem to be a Canadian nationalist

SAUL: The non-ideological reality is that people come from somewhere. It is an impossible romantic dream that you can be from nowhere. I’ve always believed that the way human beings really live is that they come from somewhere and it colours or shapes the roots of what they think and then you try to find how that fits into the common good.

Your “Reflection of a Siamese Twin” explores Canada’s national identity. You said, “Some countries such as Canada are on the leading edge of how to build a society with a constantly evolving set of citizens and cultures.” That’s a claim New Zealand might want to make, too.

Canada and New Zealand are in a small group of countries that have decided they want immigration and they want the immigrants to be citizens. The approach is part of positive nationalism. It’s a theory that is both international and national at the same time. A Canadian Prime Minister, Sir Wilfrid Laurier, said, keep what you are, protect what you are, but also become something new.

You have to be relaxed, you have to give people the time to adjust. That is getting away from that awful purist nationalism of “now that you’re here, you’re this”. Rather, “On the day you become a citizen, you inherit the total history of the country.” It’s not a buffet table. You don’t get to choose the good stuff and the bad stuff. You have to help work the whole thing out. In addition, you bring all this new stuff with you. This may create new problems, but it may also help us deal with what we’re working with in our past. You keep the old and you build onto the new.

The last time we seriously tried to do that was just before the 16th-century wars of religion. This is both hopeful that we’re back at it again, and frightening because it failed last time. We have an astonishing opportunity to undo the damage that started with the wars of religion and to really re-embrace the humanist idea of complexity and multi-level ideas of belonging in a sophisticated internationalism. I find people very relaxed about multiplicity. It is the elite who created negative nationalism.

It’s really all about balance. Today’s ideological positions are such that when you make moderate statements, you find yourself treated by the ideologues as being romantic, backward, dangerous, extremist. My whole discourse – it goes through my novels as well – is all about the nature of moderation, the nature of choice, of multi possibilities. The point is – this takes me back to the idea of positive nationalism – you can’t have choice if you don’t have a mechanism for choosing. The economic-led theory removes the possibility of a rooted citizen making choices that give directions to governments.

One of the most important decisions indicating the new direction that the world is taking is the recently internationally agreed to Cultural Diversity Convention. In 1995, culture was included in the World Trade Organisation. Commercial tribunals started saying that subsidising magazines was an unfair trade practice. Now, you have the right to protect your Maori culture without it being treated as a subsidy.

This agreement removes culture from economics. I don’t mean there is no economics in culture, but it is no longer the prism through which we see culture. You remove whole sectors of civilisation from economics as a primary means of identifying them. You say culture exists in its own right. It’s pretty self evident, but that wasn’t the case in 1995.

Your book “The Doubter’s Companion” is an excellent introduction to your thinking. It rejects the notion that the globalist’s economy is inevitable. That is really what your new book is about, isn’t it?

An ideologue tells you that you must see the world through something very specific. Everything then is filtered, sifted, limited or defined by that prism. Globalism as we have experienced in the past two to three decades is about seeing everything through the economic prism.

We have an opportunity, because the ideologues of the past 25 years have run out of steam. One of our biggest problems is that politically, but also in the administrative forums, we are surrounded by people who made their careers on the basis of the inevitability argument and all the language that goes with it. They don’t have the imagination to change vocabulary. So they are preventing us from dealing with what is before us. The ability to change your mind in public is a sign of intelligence.

The G8 has now written off the debt of 18 countries. What they can’t bring themselves to say is, “We could have done it this way in the 1980s.” The reason they did not do it then was that they believed in the argument of inevitability. They actually are better than they think. They are no longer acting like castrati; they’ve got their balls back.

Your new book quotes New Zealand all out of proportion to our importance (but totally in line with our self-importance). You’ve used New Zealand as an example of people who have changed their mind, haven’t you?

In a way, yes. It doesn’t mean that you’ve abandoned the international marketplace or that you don’t want to trade or that you’ve become protectionist. It means that you’ve decided again that you can set policies that will work for New Zealand.

It’s all about being moderately sensible. People have lost the habit of moderate thought. Can we get to the point of emotional and intellectual being where the ability to assume moderation is no longer considered extreme?

Let’s use some really basic words like “dignity”, which is what you have to have. We have to belong somewhere because it is one of the ways that people feel they know themselves. It’s a form of dignity. You don’t get dignity from a sort of floating construction of wealth.

The most interesting conversation that is not taking place is that almost all of our economic theory was based on the civilisation of scarcity of production. Today, we’re in surplus in almost every way. And that is at the heart of what is not functioning.

I know people who made their fortune by the time they were 45, when they sold their businesses. They don’t know what to do. The reason they don’t know is because they’re not rooted any more. Is my approach 19th-century nationalism? No. Is it a humanist concept of belonging to society? Yes. Is that what allows you to build some sort of international arrangement? Yes.

I’ve got one last question that comes from journalists. How come your wife, who is a journalist, became the Canadian Governor-General?

The new one who’s just been named is also a journalist, a 48-year-old woman immigrant – a refugee from Haiti. As is her husband and he is a philosopher.

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The full edited version.

Everything in Moderation

This is the full edited version of Canadian intellectual John Ralston Saul in conversation with Brian Easton about globalism, ideologues and rediscovering moderation, from which the Listener version of September 10, 2005 was extracted.

Keywords: Globalisation & Trade; History of Ideas, Methodology & Philosophy;

EASTON: It strikes me that you are a very cosmopolitan person – Canadian father and a British or English mother

SAUL: She was the daughter of an officer in the Indian army. The Scottish army officer family probably skipped a generation, most of them ended up in India.

You have a degree in French from London, you’ve worked in Paris, you have a house there as well as in Canada. You’ve written about North Africa and South East Asia.

I spent a lot of the 1980s actually in South East Asia. I never lived there but I’d go for a month, two months, three months at a time.

That was with an oil company you were working with?

No I’d just go on my own..

You have a Chinese-Canadian wife. You’ve written successful novels as well as internationally best-sellers on the contemporary issues, beginning with “Voltaire’s Bastards,” through another three to your latest “The Collapse of Globalism”. Yet you seem to be to an intensely Canadian nationalist. New Zealand historian, Keith Sinclair, said every page of his history of New Zealand was illuminated by his nationalism. Your works are like that too aren’t they?

The non-ideological reality is that people come from somewhere. It is an impossible romantic dream that you can be from nowhere. In a sense that was the failure of the internationalist movement after the Second World War which is the reaction of a many decent good people to the catastrophe of nineteenth century nationalism. They said ‘now we belong to the world’. There was a the sort of United Nations movement which was thousands of good people doing good things but rootless. In a sense the worst abuses of the globalist period were made possible by the fact that so many of the internationalists who preceded them didn’t have any purchase anywhere. They couldn’t really make a counter argument about internationalism which touched people where they lived. It was too abstract and too romantic.

I’ve always believed that the way human beings really live is that they come from somewhere and it colours or shapes the roots of what they think and then you try to find how that fits into the common good. The common good may be in your town and it may be in your area or your country or it may be in your world. There are great truths about democracy and yet every history of democracy starts out in very, very different circumstances. It works its way through the particularities of where people belong and it is only once it has worked its way through those particularities that it starts to resemble the democracies in other places. Suddenly you find that experienced democracies can sit down and talk to each other even though their basis is totally different because the core of it shares something but it has to grow out of those different experiences. That is where you get this difference between positive nationalism leading to real internationalism versus negative nationalism which does not work at the international level in any humanist way, or a sort of pretending people don’t come from somewhere which leads to romantic internationalism. So you’ve kind of got three possibilities, the book talked about the first two.

What you call positive nationalism might also be called call civic nationalism. [Conversely JRS’s civic nationalism is sometimes called ‘ethnic nationalism’ – added in editing. BHE]

You might call it civic nationalism. It has to do with accepting that do come from this place and therefore you have an obligation to ensure that it works. If it doesn’t work then you are really being very, very egotistical to say you can make it work somewhere else.

Yet there is a sense that Canadians identify themselves in contrast to the US. Do we define ourselves nationally in terms of somewhere else

When I go to see people where they live – including New Zealand, Australia, and France – in normal conversation with people they don’t really define themselves that way. What you’re describing is a terrible failure. Maybe it’s a leftover of that old pure nationalism of the eighteenth and nineteenth century. It began by saying ‘we are pure and we are better than …’ and now it is ‘we define ourselves in comparison to … ‘ There is some of that left over, but it’s really not very interesting. What is interesting is the ability to say ‘they do it that way and we do it this way. That may be good or bad but how do we get along?’

I was told that Canadian support for gay marriage is a way of distinguishing itself from America.

I don’t think it is quite that pure. What happens is that as you move along and experiences get longer and the relationships get older. People start to understand almost instinctively what they do which is true to them. It may not be true to the others so they are conscious that in doing this they know that it differentiates them but they are not doing it because it differentiates it but they know it will differentiate them.

I don’t think they are doing it for them, that would be insulting to someone who is gay to say well we’re only doing this because we want to be different from the Americans. They know that in doing it it increases the definition of different.

I enormously enjoyed your “Reflection of a Siamese Twin: Canada at the End of the Twentieth Century” which explores the roots of Canada’s national identity. You said in ‘some countries such as Canada are on the leading edge of how to build a society with constantly evolving set of citizens and cultures.’ That’s a claim New Zealand would probably want to make too. We are a nation of immigrants too. [In fact New Zealand has a higher proportion of foreign born 19.6 percent than Canada (18.2 percent] But Canada seems to take their immigrants more seriously. Is not half of Toronto born outside Canada?

It will soon be over half. It’s a 250,000 immigrants in a year plus 30,000 refugees so that’s 280,000 from I don’t know how many countries. The biggest numbers are in Toronto, Vancouver, Montreal and Calgary. But the medium sized cities are also desperate to get the immigrants. In a country where freedom of movement is basic, how can you encourage immigrants to go to smaller cities and not go to Toronto.

We need to help migrants understand that they’ll probably have a more interesting time in smaller communities. They may be much more successful much faster because they won’t get caught in big groups so they find a place for themselves much faster. In the last five years we have been working on this much more seriously. They have reception committees, I don’t know what you do, the citizenship ceremony which in Europe they send them a letter. We have a ceremony and those ceremonies are increasingly becoming big public celebrations. It’s one thing I really believe in.

Canada and New Zealand are in a small group of countries which have decided they want immigration and they want the immigrants to be citizens.

The most interesting phenomenon psychologically is that you invite people to come in order to become citizens. Yes, you want them to work; yes, you know they are going to produce wealth and you know they are going to work harder than people who are born here in general. Let’s face it. On average, immigrants work harder and create more wealth than people born here. We know this: we have a long history to prove it. So we are inviting them to become citizens.

It is part of the positive nationalism. When I say that in Germany, I say that in Holland, their eyes go like this because they just can’t get the theory. It’s a theory of movement which is both international and national at the same time and you’re also saying to them something very interesting. It’s in Louis-Hypollyte la Fontaine’s address to the electorate of Terreborne [Canada] in 1840. It’s in a speech by Sir Wilfrid Laurier, a great prime minister at the time of the federation and the creation of Alberta and Saskatchewan in 1905. They were mainly people who had come between 1890 and 1905. He said “We do not anticipate, and we do not want, that any individual should forget the land of their origin or their ancestors. Let them look to the past; let them also look to the future; let them look to the land of their ancestors, but let them look to the land of their children.”

I was struck how bilingual Canada is. I heard people on the streets of Ottawa chatting in French. You don’t hear people speaking Maori on the streets of New Zealand’s capital city.

Thirty percent of the Ottawa population are Francophones. Today there are a million to a million and a half Francophones outside of Quebec. Things have been worse. The great novelist Gabriel Roy’s describes in her autobiography in St Boniface on the south side of the river they were all Francophones. But as they crossed the bridge when they went to shop on the north side, they started speaking English because they would not be served in French in the stores. Today it is completely different. It would be good to be heard speaking French and people should be embarrassed if they couldn’t help you.

We try to make sure that a primary immigrant to Canada will have one of the two languages. But of course once they are there, they are going to want their wife and children to come and they may not. But they’ll get it in the public schools so it’s not a big deal. Their grandmother may not, but the children will have it.

You have to be relaxed, you have to take the time, you have to give people the time to adjust. That is getting away from that awful purist nationalism of ‘now that you’re here, you’re this’. The other way of putting it is that on the day you become a citizen you inherit the total history of the country. So you are now responsible for all of the anti-Semitism of the past. You are now responsible for all the evil done to our originals, the ceasing of the lands of the Japanese. You are personally responsible for everything wrong done in this country. It’s not a buffet table. You don’t get to choose the good stuff from the bad stuff. You have to help work the whole thing out. In addition you bring all this new stuff with you. This may create new problems but it may also help us deal with what we’re working with in our past. It’s that process of just continually rolling, you keep the old and you build onto the new. You have to be relaxed about it.

Audrey Hepburn said “I do not believe in collective guilt, but I believe in collective responsibility.”

Absolutely, that is exactly right.

There are people today who will say ‘oh my god you know these people are going to bring certain attitudes that are very backward towards women’ for example. The answer is that once you’re a citizen you are perfectly within your rights to go out and try and convince the population through the democratic process to alter their approach. The likelihood of there being a backwards step on women is pretty small but you’re going to learn through the democratic process what it is to ask citizens to agree with you. What we’re describing here is the way in which societies have to function and they function in detail, they function locally, they function through new people coming and fitting in and what all of this does is it breaks the sort of great abstract theories of we will be driven by economic forces. It makes it nonsense because that’s not the way societies work.

The last time we seriously tried to do what countries like New Zealand and Canada are trying to do now was just before the sixteenth century wars of religion. This is both hopeful that we’re back at it again, and frightening because it failed last time. There is no question that just at the moment when we’re trying to do these creative positive relaxed things out of the blue we see the return of precisely that dark side of pure religious belief. It’s in every country. It’s in our country as much as elsewhere. Look at Islam but it is as much in Christianity. It’s everywhere.

Do you know the biggest selling book in the United States is from the ‘left behind’ series by Tim Lehay. It’s about the direct will of God. The devil is elected Secretary General of the United Nations. You know he’s the devil because he speaks more than one language. This kind of stuff is big.

We have an astonishing opportunity to undo the damage that started with the wars of religion and to really re-embrace the humanist idea of complexity and multi-level ideas of belonging in a sophisticated internationalism. By sophisticated I’m not talking about PhDs. I’m talking about what I actually find when I go into homes or in small towns and I find people very relaxed about multiplicity. I find the elite uptight. It is they who created the wars of religion. It is the elite who created negative nationalism, it is not the people. The people got backed into the corner.

Sarajevo in Yugoslavia is interesting because it was on the road from Constantinople to Rome. I’ve only been once and they talk about the valley where there were shells from both sides. That valley is actually is very narrow and it is through that valley that the road passed. In Sarajevo there is the temple with a church side by side. The place worked until whatever you put the blame down to ugly nationalism came back and destroyed it. Now they are trying to put it back together again, rebuilding the town as it had been for 2,000 years. This is really the opportunity that we have now. If we are as I think we are in this in between.

I understand your argument about globalisation and trade but I think that the counter weight to that is what else happens.

I don’t want to talk too much about myself, but to make myself clear. There are two key issues that come from economics of globalisation. One of whether is policy convergence is inevitable, the other one is whether cultural convergence is inevitable. The chapter about Canada in my book is to say ‘Canada has existed next to the US for ever so long and theirs is the greatest trading boundary in the world and yet there has not been a cultural convergence.’ Nor does globalisation mean across-the-board policy convergence. Let me go on to your latest book, “The Collapse of Globalization”, although in a way you have already been talking about it. It seemed to me that the book is actually a celebration of nationalism or perhaps even the modern redemption of nationalism.

It’s really all about balance. If you look at everything I’ve written it’s all about seeking a balance. What I think is fascinating about this period is that the ideological positions are such that when you make moderate statements about choice and about people at a national level – you talk in a moderate complex manner – and you find yourself treated by the ideologues as being romantic, backward, dangerous, extremist, spineless, can’t come to terms with reality. Whereas my whole discourse – it goes through my novels as well – is really all about the nature of moderation, the nature of choice, of multi-possibilities. The point is – this takes me back to the idea of positive nationalism – you can’t have choice if you don’t have a mechanism for choosing. What the economic-led theory, eye-of-the- needle theory, does is that it removes the possibility of a rooted citizen making choices which will give directions to governments in terms of the type of water in a local swimming pool, what we will do about debt in Africa, what kind of terrorists or absence of terrorists we should have.

One of the most important decisions made in the last five years which indicate the new direction the world is taking very clumsily and confusedly is when 127 countries meeting in Paris signed a cultural diversity convention (3 June 2005).

Starting with anti-land mines and international criminal court, this is the third, not-economically-based, major international treaty since 1995. It was pushed by Canada and France. I feel quite good about it because in a way it was one of our ideas. What it does is recognise the right to protect culture, not in a nationalist negative way, but to ensure that your own culture can function and sub factors of your culture. It might be smaller groups, it might be Maori language, or one of our 56 or 57 languages.

So you have the right to protect your Maori culture, and to help build it and it is not in any way, shape or form to be treated as subsidy. From the beginning of globalisation we moved towards that moment in 1995 when culture was included in the WTO. It was included in things like intellectual property and so on. We started getting cases taken to the various commercial tribunals (by the Americans mainly) saying you are subsidising your magazine trade and that is an unfair trade practice. And they won. Every one of those cases they won.

This agreement removes culture from economics. I don’t mean there is no economics in culture but it no longer is the prism through which you see culture. It is a very, very important decision, needless to say virtually uncovered by our newspapers because they don’t understand the theory of what makes economics dominant. What makes it not dominant is that you remove whole sectors of civilisation from economics as a primary means of identifying them. You say culture exists in it’s own right. It’s pretty self evident, but that wasn’t the case in 1995, so it’s a very major decision.

You’ve been criticised for the meaning of globalism, the fact that you don’t properly define it, But you do so in “The Doubter’s Companion: A Dictionary of Aggressive Common Sense”. The book is an excellent introduction to the principles that underpin your thinking.

It’s also saying this is a terrorist tool – linguistically, for a verbal terrorist.

Before I go to globalism I must commend your remarks about economists: ‘The social scientist most given to wild guesses and imaginary facts presented in the guise of inevitability and exactitude”. Although Keynes remarked that we all depend upon defunct economists. In a sense that you’ve got that problem too. To move on, the book defines globalism.

With a lot of irony and humour.

That is what makes the book such a great read. It says ‘The global economy is usually presented beneath four banners. The first is the global economy is inevitable.’ That is really what your new book is about isn’t it? That it need not be inevitable in a certain kind of way.

If you are in ideologue your ideology tells you that you must see the world through something very specific. Everything then is filtered, sifted, limited or defined by that prism. Globalism as we have experienced in the last two to three decades is about seeing everything through the economic prism.

Why through the economic prism? Because those economic forces are inevitable. What I’m saying is that this is an ideological position. Am I speaking in favour of protectionism? No. Am I speaking against international commerce? No. Am I against the market place? No. Nowhere in any of my books do you find me making a statement against competition, in fact my criticism of the transnationals is that they are not a private enterprise. For me one of the most interesting things I say in the book is that we’ve actually returned to a mercantilist period and that the transnationals are the modern equivalent of the British East India Company and the Hudson Bay Company. They are profoundly anti-capitalistic and anti-competition and anti-efficiency.

Let’s face it the humanist argument is about the willingness to live with tension and doubt, the willingness to live with choice and the willingness to live with the possibility of difference. If this is not problem and you know it’s always there, it is not always the winning school but if ever there were an era when it was possible this is the era.

We have an opportunity because the ideologues of the last 25 years have run out of steam. They are protesting and they are huffing and puffing and blowing. One of the biggest problems is that both politically, but above all in the administrative forums, we are surrounded by people who made their careers on the basis of the inevitability argument, the prism argument and all the language that goes with it. A lot of them don’t have the imagination to change vocabulary and it’s too late in their careers to change without the quicksand opening up beneath them. This language they use is their theoretical solid ground and so they are preventing us from dealing with what is before us. They just have to hold on to this sort of language. I just saw something written by the former number two of your Reserve Bank, an interesting guy. [Rod Dean] He’s sort of talking about some of the things I said and you can just feel he is holding on to this language. He just can’t let go and be more relaxed about it.

Actually there is a problem, which comes through very well in the last few days as we discuss the era of David Lange [who died a few days earlier] and that is to admit one is wrong. We’re all getting together and rewriting history in order to hide our failures.

I really like to know who thought up the good ideas, who thought up the bad ideas. I love in a meeting saying I was wrong because it gives people the sense that you can be wrong in public. What is the matter with being wrong? It’s good to admit it fast so nobody dies, if you’re in that kind of position which I’m not. The ability to change your mind in public is a sign of intelligence.

The G8 has now written off the debt of 18 countries. They seem to have done it relatively cleanly in spite of some language. What they can’t bring themselves to say, which would be very helpful is to say, is ‘we could have done in this way in 1980, in 1981, in 1982, in 1983 and why didn’t we do it then’. The real question is not what they’ve done. It is why didn’t they do it before.

The reason they didn’t do it before was because they believed in the argument of inevitability. They actually are better than they think they are, because they have their courage back. They are no longer acting like Castrati: they’ve got their balls back. They are doing things again which globalism told them they couldn’t do and the technocrats told them they couldn’t do and the economists told them they couldn’t do. They couldn’t do any of these things for 25 years and suddenly they are doing it even if it’s only a tiny little thing.

Instead of saying you know it really feels good that we’re doing something intelligent and policy driven and we’re not listening to the technocrats, we’re not listening to the people who say we don’t have control. We have control and we’ve done this now we have to do more. It would help them to do more if they could admit that they had been weak not efficient, not strong but weak for 25 years.

Consider De Gaul, a very interesting public figure who was only in office for ten years and got a few things wrong but a lot right in those years. He ‘s great strength was his ability to change his mind in public. He had an elegant way of doing it but he never lied about changing his mind, he never tried to pretend that that’s what he always meant. He simply produced the intellectual argument for changing his mind. There are other people like that, I can think of examples in Canadian history which won’t be interesting here.

There is one thing about what you were saying about economists. We are in a specialist society. Everybody feels obliged to stick to their turf. If they move outside of it they are dumped on for being unprofessional, romantic whatever. Except over the last 25 years economists who pronounce on everything under the sun and they are supposed to be taken seriously. They pronounce on prostitution, they pronounce on agriculture and areas they know nothing about. This is like the priest, this is the proof that it’s an ideology as opposed to anything sensible and moderate.

Why should we be in the least bit interested by the opinion of some guy who sits at his desk and crunches numbers and tells us he has a serious opinion about the way people live in villages in Indonesia? He’s never been to Indonesia, he knows nothing about Indonesia, he doesn’t know anything about their religion or culture, and therefore his predictions will usually be wrong. What we’re living now is not that economics are unimportant or that global trade is unimportant but that these sort of ideas about how this is going to fit together has been put together by people who actually don’t understand how it could fit together because they don’t understand for one thing the cultural differences or links.

One of the great scandals of the last quarter century is the inflating way of the real economist question. We have virtually doubled the workforce by putting women into it, at every level from head of state on down. In classic economic terms that is a real growth in income. Yet at the beginning of it the middle class family with two or three children could survive on one male salary: at the end of it it requires a salary of the man and women. In other words the value added by the women was inflated away in a quarter of a century under this economic theory. There has been no discussion about that which tells you that the economists are men.

American’s, because the constitution mentions it, surveys on happiness back to the 1950s. The basic conclusion is there has been no rise in average happiness in America in fifty years. Even more surprising, men’s happiness has risen slightly and women’s happiness has fallen slightly despite the feminist revolution. What is going on?

One of the things that is going on of course if the understanding of the word happiness has become further and further away from what meant in the eighteenth century which was something to do with public good and fulfilment in a noble sense. Now when people ask you if you’re happy it means have you had an orgasm this week. Are you buying the right kind of clothes? What does happiness mean?

Your new book quotes New Zealand all out of proportion to our importance (but totally in line with our self importance). You’ve used New Zealand as a paradigm example of people who have changed their mind haven’t you?

In a way yes. It doesn’t mean that you’ve abandoned the international market place or that you don’t want to trade or that you’ve become protectionist. It means that you’ve decided again that you can set policies which will work for New Zealand.

One of the government’s key principles is ‘global connectedness’.

That’s great.

You have a rather good quotation from Helen Clark when she became prime minister. She ‘began to try to turn a country around without succumbing to a globalist panic. She said her aims were based on a broad policy which “reduces inequalities, environmentally sustainable, improves the social and economic wellbeing of our citizens”. That sounded like a risky package’, you said, ‘in 1999. Today it sounds common place.’ I thought that was a really interesting way of characterising the paradigm shift in New Zealand capturing the sort of shift in world view which you’ve got in mind.

It’s all about being moderately sensible. Can you get to the point of emotional and intellectual being where the ability to assume moderation is no longer considered extreme? I’ve been thinking about this more and more since I finished the book.

The reviews of the kinds of books I write are often quite interesting whether they are for or against. You hear the psychology in people coming through. People have lost the habit of moderate thought. The muddiness which is liveable that comes with moderate thought. We’ve become addicted to the sort of ‘I am strong, I am a real man, and I believe in getting those barriers down and we’ll trade’. Someone like me says ‘sure trade is great, so trade. Now what are we going to talk about? Let’s talk about something interesting.’ We’re not going to spend our whole time talking about trade. We might want to talk about is: is all trade the same? does all trade create wealth? has the trade we’ve done created the wealth we want?

For me the most interesting conversation which is not taking place is that almost all of our economic theory, and certainly the economic theory of globalism, which is basically nineteenth century theory was based on the civilisation of scarcity of production. That the idea was that through, as you described so well, the growth and technology communications we would be able to produce more and trade more and we would compete as we raced up this scale out of scarcity towards self sufficiency. What has happened is we’ve gone right over the top and we’re in surplus in almost every way. And that I have a feeling is at the heart of what is not functioning, of why the incredible growth in trade isn’t producing an equivalent growth in wealth.

Let’s use some really basic words like ‘dignity’ which is what do you have to have. Back to the original question of you said that am I making a nationalist argument and I prevaricated on purpose because my answer is people to belong somewhere. We have to belong somewhere because it is one of the ways that they feel they know themselves. It’s a form of dignity. You don’t get dignity from a sort of floating obstruction of wealth.

I say somewhere in the book that I know more and more people who are very clever and quite well educated who made their fortune, usually in the high tech business, once or twice. By the time they are 45 they sold their business to another company and now they don’t know what to do. The reason they don’t know what to do is in essence because they’re not rooted anymore. I’m always saying to them well you’re free now you’ve got $12 million dollars clean you realise you could just pick a cause you know, take fifty percent of the time off and fifty percent of the time on but they can’t bring themselves to do it. They’ll give money but they can’t bring themselves to give themselves because what produced them is not rooted in anything.

Is my approach nineteenth century nationalism? No. Is it a humanist concept of belonging to society? Yes. Is that is what allows you to build some sort of international arrangement? Yes. It is real. Out of that comes a willingness to send troops abroad, to be involved in helping people rebuild their societies elsewhere, and so on.

Brecht’s play “Galileo” has a scene in which Galileo tells the priest that we have to tell people what the truth is, but the priest says people don’t want the truth, they want certainty.

It takes you right back to the fundamental Western division which is between the Plato and the Socratics. The Priest is a Platonist: the ideologues are always Platonists. They are always afraid of the people. They always believe certainty is necessary, inevitability is necessary or else there will be panic among the people. You have to limit the horizons and set them on the track. When someone like Thomas Freidman talks about the glories of globalisation he is talking like a Platonist. The very fact that he picks a title which is the flat world. I mean can you imagine anything more unconsciously stupid? In other words he picks as the dream of globalisation precisely the image used by the worst of Platonic Catholicism to say if you don’t stay home, if you sail out you will fall off the edge of the world and go to hell. That is his image of the perfect future. It indicates illiteracy but it indicates the extent of which ideologues live through fear.

Gregory Vlastos looks at ten themes in all of Plato – say citizenship, democracy, justice and so on. He takes all of his works in know the order in which they were written and he finds that Plato was a democrat and loved citizenship as a young man and as an old man hated them and in the middle he was confused. His argument is that as a young man Plato was an admirer of the real Socrates and Socrates friends were still alive. In those early texts which are humanist he is describing Socrates. In the later texts he is himself and he is describing Plato and they are complete opposites. That’s why today you can say this it’s typically Western if you have a single viewpoint(?) encompassing a single subject which has a full contradiction of Western civilisation in it. In every single subject you can take it.

I’ve got one last question which comes from journalists. How come your wife who is a journalist became the Canadian Governor General.

I don’t think it’s on topic. I think she is doing a great job.

We can’t think of any New Zealand journalist who could become a Governor General!

The new one that has just been named is also a journalist, a young 48 year old woman immigrant – a refugee from Haiti when she was young. As is her husband and he is a philosopher.

It would be really great and come back to New Zealand and talk about this whole philosophy of cultural diversity because although we’re dealing with it in different ways we have the same issues.

I’d love to come and do something which went on for, say, a week and then go and see the South Island for a week.

Thank you very much not only on behalf of “The Listener”, but also for helping me with my own thinking, both today and with your books.

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Short Listener version

What Are the Tax Cuts About?

Is National pandering to greed or promoting principle?

Listener: 3 September, 2005.

Keywords: Regulation & Taxation;

Other articles on the 2005 Election Tax Debate

In 1957 the Labour Opposition, led by an elderly Walter Nash desperate to have a turn as Prime Minister, ran its election campaign on “Do You Want £100 or not?”, promising to remit up to £100 to each income taxpayer. It was accused of pandering to greed, without any principle. In fact, the National government was offering the same total tax cuts but more directed to the rich and self-employed, whereas Labour has targeted the poor and workers. The cuts were funded by the introduction of PAYE. Without them, taxpayers would have paid double income tax in the first year: PAYE plus the previous year’s income tax.

The electorate did not understand this. They thought the infamous, tax-raising Black Budget of 1958 was to pay for the election-promised tax cuts. It was actually designed to steady the economy in the face of falling export prices that Labour learnt about when it got into office – there were no Treasury pre-election forecasts in those days.

So is the National Opposition today pandering to greed with its proposed tax cuts? Certainly, its advertising is, but perhaps underneath there is a greater principle.

This time the government is not offering matching cuts. And National is promising to fund its tax cuts from the elimination of waste and significant additional borrowing. Will its policies cause an economic crisis?

You never can tell, but we can be confident that extra government borrowing will push up interest rates, although we don’t know by how much. Were I the Governor of the Reserve Bank, I would be very uncomfortable with National’s proposed fiscal stance. (I’m also a little uncomfortable with the Labour-led government’s fiscal stance, which seems to be right near the bottom of the range of fiscal prudence.) Higher interest rates will hit mortgage holders, and discourage investment in production. The exchange rate will rise as we borrow the money to fund the tax cuts from overseas investors. Exporters’ incomes will be hit by lower returns and higher investment costs, the effect of which will be to slow export expansion and stagnate the economy.

A strong prediction, but that is what happened under Labour in the 1980s. It was a fiscally undisciplined government, borrowing heavily to fund its tax cuts, despite also cutting public expenditure. The exchange rate went up, and the economy stagnated for six years. That is one of the reasons National had to cut public spending so dramatically in the early 90s.

So better to fund the tax cuts by cutting public expenditure. Can it be done by waste elimination as National promises? Oppositions always claim that there is public sector inefficiency, but in government they are unsuccessful at eliminating it, because the next Opposition also points to inefficiency, and promises to eliminate it. As ex-Treasury Secretary and Act-list candidate Graham Scott remarked, “It has to be done with a scalpel not an axe.” Total gains from waste elimination will not be great, and the attempts will often damage public sector efficiency.

That happened to health spending in the early 1990s. The National government believed that the health sector was very inefficient, so it cut spending, expecting its managerial revolution to generate more output with less resources. It did not. It just employed more managers and provided less health care. (Ironically, National is now campaigning that there are too many managers in the health sector. As with Labour in the 1990s, Opposition parties often forget that it is their cock-ups in government they are complaining about.)

To attain its public spending cuts targets, National will have to cut efficiently administered programmes that it judges not to be priorities and thinks would be better funded by the private sector (which often means “you”, the taxpayer). National is coy about which. But cutting those programmes would be a principled shift of policy, reflecting its belief that New Zealand would be a better place if there was more private spending and less public spending. Labour states that it believes in a different balance. This is the proper stuff of political philosophy.

Would that the election campaign were to focus on such issues of principle, rather than pandering to greed.

Let’s Talk About Tax.

Ruth Laugesen, a senior writer for “The Sunday Star Times”, asked me a dozen questions for her article ‘The Truth About Tax’ of 28 August, 2005 (It does not seem to be on the Web). Here follows my full answers to her questions.

Keywords: Regulation & Taxation;

Other articles on the 2005 Election Tax Debate

1. Are New Zealanders paying through the nose when it comes to tax? No. On international measures, the total tax take in New Zealand is not high. I think we are very lucky. We have a reasonable health system, a reasonable education system, a generous minimum retirement income system. They could be better of course, but it is almost a miracle as how good they are, given the little tax we pay.

2. Everyone and his dog says you’re better off in Australia when it comes to tax. Is that true? Precise comparisons are difficult because it is not only what you pay in tax, but what you get in return. There is, however, some evidence that lower income taxpayers are better off in New Zealand and higher ones are better off in Australia. Even here there is the problem of matching incomes. When the tax cuts and other policies of the late 1980s and early 1990s stagnated the New Zealand economy (we lost 15 to 20 percent of income per head relative to the OECD), the more moderate thoughtful policies had Australia powering ahead of us. How do we factor in past New Zealand economic management failures? (Apparently I am neither everyone nor her/his dog. )

3. Why not charge everyone the same tax rate? Most countries, including New Zealand provide more income support for the poor than the rich. This is particularly true where children are involved since they cant earn income themselves (and their parents can earn only as much as parents without children).

4. National says Labour’s family tax package is effectively putting working families on welfare. Is that just spin? Humpty Dumpty said (‘in a rather scornful tone’) ,’When I use a word, it means just what I choose it to mean – neither more nor less.’If we want to describe family support as ‘welfare’, so be it. National has contributed to family assistance packages in the past (including when Bill English was Minister of Finance) with some generosity to children and without compunction about whether it was ‘welfare’ or not.

5. Labour says National’s tax package will mean cuts in health spending. Is that just spin? What we know that the big unbalanced in tax cuts of the 1980s led to significant cuts in spending on health and education in 1988 and 1991 (and major social security benefits cuts in 1991). The 2005 National package is also unbalanced. We dont know how they really plan to finance/rebalance it. They talk about waste elimination and restraining government spending (which are sort of spending cuts). What too, if like the 1980s one they stagnate the economy?

6. Do families get special handouts from the government in other countries? Is the Pope Catholic? I don’t know any rich country that does not offer some family assistance. Some do it badly of course. A few years ago we were among some of the least generous, but I have not seen companions since the working for families package was introduced. .

7. What’s the point of taxing all of us and then recycling it back to some of us in the form of family tax concessions? It is not an exact recycling. Some people are net gainers, some people are net losers. If we knew how to do this without recycling, we would. In the interim the current system is the best we have. (Would that the spin doctors tell us a better one. Have you noticed how critics get vaguer and vaguer as they move from criticism to constructive proposals?)

8. We know there’s no such thing as a free lunch. Where’s the money coming from to pay for National or Labour’s tax promises? We know the Labour promises are coming out of the contingency reserve. There is a worry they have used too much of it, and there is not enough left for real contingencies. National’s promises far exceeds the reserve. As the response to question 5 says, we don’t know how they will really finance it. I expect that when in office they will find that their current financing plans don’t work. I just hope they are courageous enough to admit their error and cut government spending by the required (presumably large) amount. Running a fiscal imbalance will severely damage the economy, as it did in the late 1980s.

9. If tax is government theft, why should we pay any at all? The statement belongs to the same rhetoric as ‘property is theft’, so why should we recognise recognise private property? We pay taxes in order to attain community goals which cannot be delivered by the untaxed market.

10. Has Labour been wasting our tax money? Every government – Labour, National or the dog’s – has some inefficient spending. So does the private sector. Every government – Labour National or the dog’s – does their best to eliminate such waste. They only partly ever succeed. (In some respects the public sector is more vigorous than the private sector in eliminating waste.) As Ex-Treasury Secretary (and ACT list candidate) Graham Scott said, “Designing tax cuts is child’s play. It is on the expenditure side where all the problems are.”

11. Is it true that cutting tax makes people work harder? The theory says it may, but the evidence is surprisingly thin and even contradictory that it does. Even more surprisingly the evidence is that high tax countries do not have an inferior economic performance to low tax countries.(If you are unsure of this, consider how much less contentious is the statement that ‘higher excise taxes on alcohol and tobacco reduces their consumption’. Economists dont argue over this – even those who smoke and drink. They scrap like the deuce over the exact magnitude of the reduction. In the case of income taxes they scrap like the deuce over whether there is any reduction.) Perhaps with lower taxes people are near their income targets, and work less. Perhaps the way the money is spent on public services offsets the income effect. (One argument – based on a Europe vs US comparison – is that high tax economies are more rigorous in their public spending than low tax ones.) Perhaps the economists’ theory of human behavior is too thin.

12. What are the chances either Labour or National won’t stick to their tax promises because they find they can’t afford them?< They wont introduce their tax cuts if: (i). They don’t get elected. (ii). Their coalition partner wont let them. (iii). There is a major crisis which gives them the excuse or requires them to tighten the fiscal stance. However, in the last case: (iv). Labour would first seek minor expenditure cuts and then probably defer the introduction of the tax cuts. (v). National would introduce its tax cuts anyway, but then vigorously go for the major expenditure cuts that would be required. Those are my guesses, but we are moving from the realm of technical economics to political economy. Go to top

Rabin’s Law

Someone (almost) always suffers when a new policy improves the lot of others.

Listener: 27 August, 2005.

Keywords: Distributional Economics; History of Ideas, Methodology & Philosophy;

Matthew Rabin is a wonderfully eccentric economist. His University of California at Berkeley website is littered with jokes. But his research on how we behave economically is some of the most interesting being done today, promising the 42-year-old a deserved economics prize in honour of Alfred Nobel.

A few years ago, economic behaviour was in the strait-jacket of “rational economic man”, a characterisation of how we function in economic situations. Its assumption that we carefully calculate to maximise our well-defined objectives is obviously not true. Following a close study of the evidence from psychological experiments, Rabin is a leading developer of a theory that offers a more realistic account of how we behave.

Yet, in the long run, despite the enormous significance of this innovation, he may be best remembered for “Rabin’s Law”. Like a number of other “laws” useful in the social sciences, it is not a rigorous scientific law, but a rule of thumb alerting that something peculiar is happening when it appears to be broken. Among the others I use frequently are: there is no such thing as a free lunch. (This is sometimes said to be the fundamental law of economics.) If a statistic looks interesting, it’s probably wrong (Moser’s Law). The way you score the game shapes the way it is played. (I learnt this from accountancy academic Don Gilling.)

To which can be added: any policy change usually makes someone worse off.

I may have been at the birth of Rabin’s Law. He was giving a seminar at Harvard University. (I was attending as a Fulbright New Zealand Distinguished Visiting Fellow.) Superficially, the topic was potato chips. The concern was why we lack self-restraint, doing things in the short run that in the long run we regret – like eating too many chips (or drinking to the remorse of a hangover). The phenomenon is a challenge to the notion of a “rational economic man” who should never regret what he does, unless the circumstances change.

Responding to one interjection, Rabin remarked that the existing policy is always “Pareto optimal” (that is, someone would always be worse off if the policy was changed). Avoiding the economic jargon, it becomes “any policy change usually makes someone worse off”.

Notice, I have slipped in a “usually” that, Rabin would no doubt have added, had his formulation been less spontaneous. All the “laws” stated above have a “usually” concept implicitly in them. Sometimes there is a free lunch, but such occasions are very rare. Circumstances change, and it may be that briefly there will be the opportunity for a benefit to all.

Rabin’s Law is a particular example of this proposition. Just as the fundamental law says all opportunities for everybody being better off are quickly seized upon, the political process quickly adopts policies that do not hurt anyone. Further policy changes improve some people’s situation and worsen others.

The law is one of the most fundamental ideas in government policy. It reminds us that almost certainly any policy change will make someone worse off. The law does not say that a new policy should never be introduced. Rather, it asks who will suffer from its introduction. That might suggest seeking to soften the impact, or it might demonstrate that the policy is faulty.

It is a particularly useful rule during an election campaign, when politicians promise policy changes, perhaps because they believe in them. But their presentation of new policies will emphasise the benefits to those they are trying to persuade to vote for them (or those who provide money and resources for the campaign – an increasingly important phenomenon). Advocates are most unlikely to tell the public who will be worse off, except when they are trying to make political pariahs of the sufferers. Typically, the pariahs are only some of those who will suffer.

Very often, the policy advocate, un-aware of Rabin’s Law, will not have thought through whose interests they are damaging. Help them by innocently asking any politician expounding a new policy: “You have told us who is going to benefit from your policy, but who is going to be worse off?” Rabin’s Law says that if they cannot answer, they probably have not understood the policy.

Waste Not, Want Not: It’s Harder Than It Seems.

This was prepared as a Listener economics column on the assumption that National would propose fiscally prudent tax cuts, based on their cutting ‘waste’ (they mean ‘programs’). However, when National announced the size of its cuts, I canned the column for another. It wont be used, because its ‘news’ significance will have gone after the election, although no doubt I shall cannibalise some of it. I am putting it on the website for the record.

Keywords: Governance; Regulation & Taxation;

Other articles on the 2005 Election Tax Debate

Politicians “are talking as though it will be easy to cut enough fat from the state to pay for tax cuts – it won’t be. Believe me I’ve been there and I have done that. The combination of the State Enterprises Act, the Public Finance Act and the State Sector Act, which I helped to design and implement, brought remarkable improvements in the effectiveness of public organisations and lower costs. I wrote a textbook about it. But those systems have not been used vigorously for a while and some slack has got into the system. We can get better value for money but it has to be done with a scalpel not an axe. … Designing tax cuts is child’s play. It is on the expenditure side where all the problems are and where skill and experience are needed.” (Graham Scott)

The opening quotation by ACT party-list candidate Graham Scott, who worked in Treasury for thirteen years, seven of which he was Secretary of the Treasury, will generate a warm response from every Treasury official. Their job is to raise the tax, while all the other departments spend the revenue. The challenge is how to spend it effectively.

It is easy to confuse whether the objective of the expenditure is worthwhile and whether the expenditure on a worthwhile objective is effective. Consider hip-hop – a dance music genre with rapping, originating from black American street culture. Many readers will have views on whether such activities should be supported by the state. They could be entirely selfish – they are not interested in hip-hop, and do not want taxpayer’s money spent on something which does not benefit them directly. Or perhaps they think the state should not support art, or … There are hundreds of against reasons arnt there? Alternatively, they may think the state should support the art forms of the young and brown. Or they may see a market failure which intervention could reduce, or …

I dont have a view because I dont know enough. But the 2005 Montana Book Award judges awarded the first prize in the Lifestyle & Contemporary Culture category to Gareth Shute’s Hip Hop Music in Aotearoa remarking it is ‘an important book because it brings to light a part of contemporary culture that for many New Zealanders is vital and, for many more, invisible.’

But even if we agree that the contemporary culture of the young and brown deserves support .is the spending effective in promoting that objective? One program clearly was not. Following a parliamentary debate about its waste, the government replaced the administering system to prevent a repeat of such inefficiency. However, it did not ban hip-hop from future funding, instead requiring a higher standard of care.

Ironically, parliament probably spent more debating that wasteful hip-hop program than the amount that was wasted. But parliament was not a waste. It was the use of parliamentary scrutiny to improve spending systems.

That is a major difference between the public and private sector. Public scrutiny reduces public sector waste. The boss of the Australian insurance firm, HIH, had gold taps in his executive washroom. Shareholders, workers, and customers only found out when the firm went bankrupt. During the short period when our accident compensation system was nationalised, HIH was one of private providers. You can be rootin’, tootin’ sure that parliamentary scrutiny ensures that the publicly owned Accident Compensation Commission does not have gold taps in its executive washrooms.

Much of the waste debate confuses objective and effectiveness. The reforms Scott refers to attempted to distinguish them. Those advocating reducing waste are confusing the two. They may be favouring changing objectives with greater private spending and less public spending. Or they may be ignoring the experience that Scott and Treasury, and promising what they cannot deliver?

Different values or claims as better managers? If the first, one hopes the options are clear to voters: if the second, politicians would do well to recall the American dictum that government waste is not a layer of fat to be sliced out. It is fat stippled through prime quality meat. Removing it damages the meat.

The 2005 Election Debate on Tax and Political Philosophy (index)

Keywords: Regulation & Taxation;

In late August 2005, I found myself engulfed in the Taxation Debate which blew up during the election campaign. The following lists my contributions on this website.

On 5 July 2005, I spoke to the St Andrews Trust on Religion and Society in their election series on In Praise of Fiscal Sustainablity. It was subsequently published on the Scoop website (with pictures), and appears to have been widely read.

When I prepared the lecture, I overlooked the significance of the expenditure contingency reserve, which is the amount the budget sets aside for unexpected government expenditures. This is being used by the Labour Government to fund its election policies. As I say in one of the speeches below, this is not always a prudent thing to do. I thought I might have to modify the St Andrews speech, but as it happens – again explained subsequently – National’s proposed tax cuts are so much greater than the contingency reserve, no adjustment was necessary, if the text is read in terms of Labour’s policies at the time of the election rather than at the time of the budget.

Waste Not: Want Not was prepared as a Listener economics column on the assumption that National would propose fiscally prudent tax cuts, based on their cutting ‘waste’ (they mean ‘programs’). However, when National announced the size of its cuts, I canned the column for another. It wont be used, because its ‘news’ significance will have gone after the election, although no doubt I shall cannibalise some of it. I am putting it on the website for the record.

The replacement column Pandering to Greed or Promoting Principle? was published in The Listener in its ‘tax cuts’ issue of September 3.

Between writing these two and the publication of the second, I met an earlier invitation to speak to the Diplomatic Club of Wellington on What the Tax Debate is Really About on 25 August. As the paper explains, my original intention had been to reflect on my time in Europe as a guest of the German government and what was happening to the Social Market Economies that the citizens of Europe valued. Unfortunately I had to talk about the effects in the differences in fiscal stance between the two parties, and the philosophical exposition suffered as a result. Scoop put it on the website (with a picture).

Aboutt the same time – boy, it was a pressured week – Ruth Laugesen asked me (and Gareth Morgan and Rod Oram) a set of questions which she wrote up as The Truth about Tax in the Sunday Star-Times of August 28. Let’s Talk About Tax gives my full responses.

Inevitably there is some repetition in all this, but it would miss the point and the different voices to edit it all to a single piece.

Added on 4 September

I appeared on TVNZ’s “Breakfast” at about 7.15am on Friday September 3 to comment on the party finance spokeperson’s debate of the previous evening.. Look under the picture of the piggy and the money to “The finance debate evaluated (7:20)” for the video clip.

My main point was that the discussion, to use a polite term, had very little to do with what will be the economic issues preoccupying us in a couple of months. I listed them as:
– the poor productivity growth;
– the current account balance of payments deficit;
– the oil shock;
– inflationary pressures*;
and went on to say I was fearful that the public not understanding these issues, might vote in a way to make them worse.

* I omitted mentioning inflation, because I was thinking about it in relation to the other three. On reflection I think it should be separately listed, as I have done so here.

Added on September 6

I did some calculations of the distribution of the tax cuts, which I thought others might be interested in.

Added on October 15.

I appeared on TVONE’s ASB morning business show on Monday 12 and Wednesday 14 September to comment on (Maori and National) party manifestos, where again I emphasised fiscal prudence.

As did my first post election Listener column, It’s the Economy, Stupid: The election was not about the economy. Why? (8 October) which finished “Well, yes, we have never had [the economy] so good. But to get better is going to require some hard work, beginning with more fiscal discipline.”

The same weekend as The Listener came out Ruth Laugesen published a Focus Story in the Sunday Star Times Don’s lessons for Helen (25 September) which contained the folowing:

”Spending
“National has also set the agenda on government spending, arguing there is much government waste.
“Labour protested during the campaign that there was no fat to be cut. But Wellington economist Brian Easton expects that a Labour-led government would start a detailed review of government spending soon after coming into office.
“Easton says spending needs to be kept firmly under control to avoid pumping more money into an overheated economy.
“‘What you need is a really tough politician to chair the review,’ he says. ‘Not Michael Cullen, he is already far too busy.’
“He suggests associate finance minister Trevor Mallard would be ideal for the detailed, relentless scrutiny of spending.
“Even then, says Easton, it will be difficult to find savings in an already lean public service. He expects that, at most, savings might amount to 1% of spending, or $300 million.“

I add I have in mind the British system which use to be that the ‘First Secretary of the Treasury’ was a member of cabinet, whose primary task was expenditure control. His decisions would be appealed to the Chancellor of the Exchequer (who is the ‘Second Lord of the Treasury’, the first Lord being the Prime Minister). Mallard would do the job well, but he could not hold another major (significant spending) portfolio.

On 14 October in a speech to the New Zealand Credit and Finance Institute, Reserve Bank Governor Alan Bollard said a ‘more expansionary fiscal stance has the potential to aggravate the current account deficit as well as increasing the work monetary policy has to do in order to contain inflation. These pressures will need to be borne in mind as the incoming government considers its fiscal options.’

On the 15 of October the New Zealand Herald devoted almost all of its front page an editorial, a cartoon and the first Business Section page to the speech. Optimists may assume the national debate has finally caught up. Pessimists will observe that in a pres release later that day National says tax cuts still affordable.

Minor Parties
My focus has been on National versus Labour’s tax cuts. I have not addressed the minor party’s proposals because while they are typically more extravagant than National’s, they are less likely to be implemented, even if the minor party gets into a government coalition. But the major parties just have to be fiscally responsible, or the economy is doomed.

What the Tax Debate Is Really About

Paper to a lunch meeting of the Diplomatic Club of Wellington, August 2005, Lunch Meeting.

Keywords: Regulation & Taxation;

Other articles on the 2005 Election Tax Debate

When I offered this topic, I planned to talk about the political-philosophical implications of the New Zealand tax debate in an international context. Since then, the two major parties have released their tax proposals, and I owe my audience a commentary on the differences.

I will not say much about the unsurprising fact that the party of the left concentrates its tax reductions on those with lower incomes and the party of the right’s proposals are more generous to the rich. That is the nature of politics.

There is a bigger difference between the two on the magnitude of the tax cuts. A few decades ago you might have been surprised to be told that the party of the left was the fiscal conservatives and the party of the right was the fiscal radicals, although – taking the American experience as an example – it was President Reagan who was the radical, as has been President Bush the younger. It was President Clinton who was the fiscal conservative – courageously so in my opinion, for it is easy to be a fiscal radical and leave later generations to clean up the mess. I shant say more about the American experience, except that it is not a great help to understanding the local since the New Zealand dollar is not an international currency like the US dollar. My point here is that there has been a curious reversal of fiscal attitudes between the left and right.

Labour’s tax cuts are not only smaller but they are probably within the acceptable fiscal parameters, although they are near the bottom of the range. For Labour has raided the contingency reserve which is provided in the accounts for the unexpected expenditure which occurs after the fiscal forecasts. Not only is the amount of the reserve it is using – say 40 percent of it – but it is an annual raid, taking up the reserve in every year. That is risky to do because if anything goes wrong, a Labour government will have a far smaller margin for manoeuver.

But if Labour’s cuts just hover out of the imprudence range, National’s are much larger. They admit they are going to have to borrow to finance them. What they say is that they are going to borrow to fund capital investment , whereas Labour– the party of the left, and therefore the fiscal conservatives – are going to fund some of their investment from income, just as you would advise a household or business to do. The fact of the matter is that National’s tax cuts will raise its borrowing faster than GDP growth. Whatever the words and excuses, it’s the effect of the stimulating fiscal stance which I want to explore.

You can think about their fiscal injection in two ways. First income tax cuts will increase household’s incomes. Consumers will spend most of the additional income. But with unemployment as low as 3.7 percent (apparently the lowest in the word) , the economy cannot produce much more. That means that either there will be severe inflationary pressures, or that the extra consumption will be provided by imports or – and this is the most likely – both. Second, there is the additional government borrowing.

The two sides lead to the same prediction. Domestic interest rates will have to rise. They will have to rise as the Reserve Bank takes measures to restrain an overheated economy. They will have to rise because the government will have to persuade overseas investors to hold more New Zealand government debt. Both ways New Zealand borrowers will be hit by higher interest rates. That means mortgage holders will have higher mortgage repayments, and businesses will pay more for their borrowing and defer productive investment.

When I say higher interest rates under National’s stimulating fiscal stance, I mean higher than what they would be under Labour’s fiscal stance. I’m expecting interest rates to rise anyway, because the US Federal Reserve is having to hike interest rates given the current state of the world economy, with much liquidity sloshing around as a result of the US government deficit.

The consequence of New Zealand interest rates moving up relative to the rest of the world is that the New Zealand exchange rate will lift. It has to in order to allow in to the economy the flow of foreign borrowing and the associated imports. An exchange rate lift is bad news for exporters who are caught between lower revenue in New Zealand dollars and more expensive borrowing.

This scenario I am relating is not hypothetical. The Labour government of the 1980s ran a large fiscal deficit – larger than was admitted, because in those days the government accounts were not so transparent. It not only borrowed heavily, but it sold state assets to cover the deficit. Privatisation (selling government assets) has a similar impact on interest rates as state borrowing (selling government bonds). Domestic interest rates went up, and the exchange rate followed. The tradeable sector suffered from the high real exchange rate. It grew slowly, so did the economy, and New Zealand had six years of falling per capita real national income, when it moved from average per capita GDP in the OECD to 15 to 20 percent below the average.

Labour had already cut education and health expenditure in the late 1980s in order to fund its income tax cuts, but the cuts were not enough. What turned this economy around fiscally were the brutal expenditure cuts of 1991, instituted by the Bolger/Richardson government. As opposition leader Mike Moore summarised it, the fiscal deficit was replaced by a structural deficit. More accurately, the fourth Labour government’s fiscal deficit was replaced by the fourth National government’s social deficit.

So why does a Don Brash led National government take the risk of repeating the stagnation by promising these large tax cuts? Brash knows that a large fiscal deficit has the potential to generate serious macroeconomic problems. While it is unusual for the Reserve Bank, which is in charge of monetary policy, to stray into direct commentary on fiscal policy, there are enough references in its statements when Brash was its governor to indicate that the Reserve Bank takes the view that too loose a fiscal policy requires an offsetting tightening of monetary policy.

National says it is going to fund some of its income tax cuts from ‘waste’. The words of ex-Secretary of Treasury and current ACT list candidate, Graham Scott, are so relevant: “Designing tax cuts is child’s play. It is on the expenditure side where all the problems. … it has to be done with a scalpel not an axe.” My guess is that National will not improve the efficiency of government expenditure greatly – no more than is already factored into the official forecasts. What it has in mind his cutting some programs.

But we dont know which programs it will cut, except for a few which are small and will make little contribution to funding the tax cuts. And even National says its plans will not be enough to fund all the tax cuts (not to mention the various expenditure increases it has promised – roads are a big one). It is promising a strategy of heavy government borrowing.

What if we repeat the 1980s, and the borrowing lifts interest rates and the exchange rate to levels which stall economic growth (which will compromise the fiscal position even further)? What if something goes wrong with the world economy, which for various reasons seems fragile at the moment? What if both happen? Almost certainly a National led government will have to go through a major exercise of cutting government expenditure in its first three years.

We know that National is already promising expenditure restraint in comparison to Labour’s plans but, as I have said, I dont know what they will cut. They probably will have to to cut education, health and social welfare because they are such a large a proportion of total government spending. Sure there are many other programs that can be cut – on the arts, defence, the environment, recreation … – but they are rats and mice in comparison to the big three.

And it is at this point – halfway through – I come to where I intended to start my talk today.

What is going on in New Zealand is a debate which is occurring throughout the rich world. Much of it goes on in the backrooms as economists, politicians and ideologists argue among themselves. Occasionally it breaks out into the public. It was there when the Dutch and the French voted against the proposed European Union constitution, it is there as the Germans and the Japanese face a general election. It’s a debate about what sort of economy do we want? And, more subtly, it is also a debate about what sort of economy can we have?

About fifty years ago many countries embarked on an economic governance which heavily restrained the use of the market. It followed the Great Depression of the 1930s for some countries such as New Zealand. It followed the end of the Second World War for most of Western Europe (but they were also reacting to the Great Depression). For others it followed the liberation from colonial status (where economic governance was an imperium operating through the market).

The restraint of the market varied. Today I am only looking at the spectrum from the Social Market Economy illustrated by, say, Germany, to that illustrated by the US. So I am not going to talk about economic regulation in the Soviet Empire (nor what has come after it), nor some of the other developing country modes of regulation. What is evident is that over the last five decades there has been a shift in postwar economic governance towards more-market regulation of the economy. Some countries, the US is the exemplar even though it was already at that end of the spectrum , have welcomed this shift. Others – the Dutch and the French, and now with looming elections, Germany and Japan – have been far more reluctant.

This pro-market shift has been so marked, that it deserves some explanation. As an economist I am aware that over the latter half of the twentieth century my profession recovered the confidence in the market which had been severely shaken by the Great Depression. However there were also changes in the economy which were making direct regulation of the economy by central government increasingly difficult. I give just three main forces. First, increasing complexity of the production process can be partly solved by the decentralised mechanism of the market. Second, there has been increasing international interdependence via trade and capital flows, but there is no system of international governance to impose a non-market regulatory system even were the option attractive. Third is the rising affluence, as the increasingly extraordinary range of goods and services available to consumers cannot be easily regulated centrally.

Now I am a more-market economist. But anyone who says the shift to more market is an unmitigated blessing is wrong. There are tradeoffs. A market system has a much higher degree of uncertainty that a non-market system. The cynic might contrast the certainty of dollar-a-day poverty in many parts of the world, with the uncertainties of living in the affluent West, where a citizen may end up poor (although not dollar-a-day poor) or they may end up a millionaire, with their destiny partly the result of luck.

It is possible to insulate oneself from the uncertainty, but only at the expense of increasing the uncertainty elsewhere, just as you can increase your income at the expense of others. This passing the unpleasant to others is the grinding stuff of politics which, among other things, causes policy stasis and is why both the Germans and the Japanese are facing early elections. But whatever the pressure groups think and do, there is also a nostalgia on the part of the general public for the past, which is what the referendum rejecting the EU constitution was largely about.

There are two other major responses to this conservative nostalgia and its attempts to resist the forces driving the change. The right wing response – I hope the spectrum labelling is helpful rather than hinders the argument – is to welcome the changes being forced upon the economy, to argue they are inevitable, that they are the best of all possible outcomes, and are consistent with the individualistic political values of the advocates think should be adopted by society.

The left wing response has been to recognise – albeit often only dimly – the market pressures, but to seek to harness them, directing their force for social objectives, which involve a subtle notion of the individual in a community. That’s how I would characterise the ‘third way’, but I would add that much like the right wing response it often has more rhetoric than content. Genuine third way policy development is highly incremental. One may have the vision thing, but implementation is usually more complicated.

Thus far I have been talking about what is a worldwide debate, of which every country has its own version. So I turn to the New Zealand one, because it is at the heart of the economic content of the election contest, with the Tax debate as the public indicator.

As I said, New Zealand came out of the Great Depression and the Second World War with an economy which was centrally regulated. Through the next thirty years there was a slow process of greater use of the market. I am not sure whether initially that market liberalisation was faster or slower than elsewhere in the West, but it seized up after 1975 with the election of a government led by Robert Muldoon, who was – particularly in his latter years – a conservative nostalgic. It was a time of very great difficultly for the New Zealand economy. World trading relations were damaging it, and the damage was transmitted into poor economic performance and high inflation. Although there was a little liberalisation in his time – the most famous was CER with Australia – Muldoon seemed unable to offer any leadership.

In 1984 Labour Government was elected in place of Muldoon. While Labour had been a left wing party, this government was a strange mixture. (As already mentioned, it was not fiscally conservative as had been Labour under previous leaders such as Rowling in 1974-1975 and Nash-Nordmeyer in 1957-1960.) The simplest summary of its position was it recognised the need for liberalisation but extreme right-wing individualists dominated its economic policies without any mandate to implement their extremist policies.

Although there was a change of governing party to National in 1990, the ideologues remained in power until virtually the end of the 1990s. I could spend much time detailing their policies and where they went wrong – I have elsewhere – but a good illustration was the decision in 1991 to, in effect, privatise the public health system, which is at the heart of almost every social market economy. The decision was almost entirely ideological. The reforms came to grief partly because of public resistance but because it just miserably failed to deliver on any of the promises that the ideologues made for it.

In 1999, the current Labour Government was elected with a third-way philosophy. That means it is often difficult to discern what it stands for because third-way policy is essentially incremental muddle. In fairness, it has set out its vision in a document Growing an Innovative Economy. In my view it is a fine vision but the government does not transmit well. More briefly, when she was elected Helen Clark said the government’s aims were a broad policy which “reduces inequalities, environmentally sustainable, improves the social and economic wellbeing of our citizens”. There are some key phrases here which suggests she is not an inevitablist. Yet in the vision statement the ‘Growth and Innovation Framework’ includes the government’s desire for ‘global connectedness’, a phrase, which not only recognises the international market but probably reflects a more-market stance than the majority of New Zealanders hold. This is a third-way government.

As a result this Labour-led government has been considerably more generous in public spending than its predecessor. Given that it is also a fiscal conservative, there has been little room for tax cuts – the poverty oriented working family’s package aside – despite the excellent performance of the economy.

(Completeness requires me to add that in the six Labour years, real GDP has grown 20.2 percent, real government spending has risen 21.5 percent – that is higher than GDP, while real private consumption has risen 25.7 percent, that is much higher than GDP. People have raided their savings to fund consumption above income. I add that New Zealanders are no different from those in may other Western economies.)

Eave aside the rhetoric of greed, underneath the National tax cut package is the language that government spending should be restrained and cut, and that more of the nation’s spending should be in the hands of individuals. We recognise here the return of those who dominated economic policy in the 1980s and 1990s. We can say that with some confidence, because at various times when he was governor of the Reserve Bank, Don Brash stepped outside the narrow confines of monetary policy and talked about his economic prescription. A case in point was his speech to the London based Hayek Society, Friedrich Hayek being one of the leading thinkers of the right wing individualistic more-market solutions I described earlier.

I cant help thinking that National’s underlying agenda is the oft stated right wing strategy of giving substantial tax cuts and then forcing public expenditure cuts to rebalance the budget. It has not worked well in the US, but our political process is more disciplined, as we saw in 1991 when an incoming National government imposed severe expenditure cuts.

Does the public wants more money in its pocket, but having to finance expenditure currently borne by the government. Undoubtedly the public wants more money in its pocket, together with the existing level of government expenditure. Some are willing to sacrifice money in its pocket in order to maintain and increase public expenditure.

Of course, there are more-private less-public and the more-public less-private advocates. In principle the election is a test of which group is in a majority, although it is possible that other factors – including non-economic ones and a misunderstanding about the nature of the choice which the public face – may confuse the purity of the test.

Moreover, whichever government gets in, it will, unlike the government’s of the 1980s and 1990s, be an MMP government, which involves an ongoing process of building coalitions, instead of the unrestrained elected dictatorship which happened before. It is possible that the economic individualists could find themselves in office without the power to implement their policies. It is not just the coalition partner may defer on some key ones. The shifts in National’s policy in the late 1990s suggests that within the party there are those who are more comfortable with the public funding of some key public services than is the leadership of the party. However they are more favourably disposed to the private provision of those publicly funded services than would be Labour’s leadership.

Unfortunately there is much more to the economic policy debate than I have been able to cover to day, especially as I have had to detail the consequences of a loose fiscal stance. But I hope that this brief introduction to it has mapped out that New Zealand’s election is about fundamental issue of how we regulate the economy in the early part of the twenty-first century, as also are the elections at about the same time in far flung Japan and Germany, and indeed many more of the elections in many other countries over the next few years.

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Euro Quandaries: Should a Country Exit the Euro Area?

Listener: 13 August, 2005.

Keywords: Macroeconomics & Money;

When an Italian politician proposed that Italy should exit the euro area and return to the lira, specialists just laughed.

For the traveller, there is great convenience not having to change deutschmarks into lira in Rome, after a flight from Frankfurt, the great finance centre of continental Europe. Euro notes may look like play-money, but they are accepted as the real thing in 12 of the European Union member states, with another 10 to join as soon as they can. (Only Britain, Denmark and Sweden are given permanent exemptions.) European businesses producing in one of the currency-member states and selling in others may be equally pleased.

Italy is a vigorous exporter and importer, including in tourism. Why should it withdraw? Particularly as it now borrows at much lower interest rates. Under the old regime there was the real possibility that the lira would depreciate against the deutschmark. Lenders demanded a premium in order to protect their return. Today the relationship between the Italian euro and the German euro is fixed – it’s the same currency – so there is no danger of a depreciation, and no exchange-rate risk premium. The cheaper borrowing costs benefit Italian businesses and its Treasury.

However, the German Bundesbank (central bank) demanded a Stabilisation and Growth Pact as one of the conditions for joining the euro area. Germans went through two dreadful hyper-inflations in the last century. (Hitler came to power in part because the middle class had their savings destroyed by the first one in 1923.) They were intensely proud of the price stability that went with the deutschmark, and very nervous that less disciplined countries would destabilise the euro when it replaced it. So they demanded that no member country could run a fiscal deficit (broadly, the government’s spending over revenue) higher than three percent of GDP, other than in exceptional circumstances. They did not want any country issuing unlimited euro-denominated bonds at others’ expense, to finance any fiscal profligacy.

Portugal was the first to break the pact. Shortly after, so did France and, ironically, Germany. Their fiscal deficits show little sign of soon returning below the pact’s limit. That is one of the reasons that the (left-wing) German Chancellor, Gerhard Schroeder, called an early election for next month, despite his party being hopelessly behind in the polls. If he can’t get a proper mandate, the other party can clear up the fiscal mess.

There is a view that the deficit limit is too restrictive. By abandoning their currency for the euro, individual countries lose control over monetary policy, which is now set by the European Central Bank for the entire euro area. If one region is out of sync with the rest, it needs to use fiscal policy. So, it is argued, the three percent should be an average over the cycle rather than an annual maximum.

Some German economists argue that their high unemployment rate is caused by consumers not spending enough, so they deserve tax cuts. In effect, private savings are too high and the public sector should dis-save more. (Not, sadly, our problem.) Other economists think that the German cost structure is still too high and needs to be reduced, by increasing labour market flexibility so that wages can fall. Once the exchange rate is fixed, a country cannot realign its internal costs down except by deflation, which may require a fiscal nudge. The Italian cost structure may be too high, too. But those who argue for returning to the lira want to run a bigger fiscal deficit.

It seems likely that the stability and growth pact may be revised, so its fiscal limit becomes more flexible. But as countries sell more bonds to finance their deficit, lenders will require a higher interest-rate premium because of the greater risk of their not repaying their debt. That is what happens in the US, where counties and states can go bankrupt. So, although it may be easier for you to go through the euro-airport without bothering a money exchanger, macroeconomic management remains as complex as ever.

This is the last of four columns, made possible by support from the Federal Republic of Germany and its Goethe-Institut

On Being Pakeha: Some Thoughts Of a New Zealander

For Kapiti U3A, August 11, 2005

Keywords: Literature & Culture; Maori; Political Economy & History;

This paper begins with a little about my experience of growing up a Pakeha New Zealander. Although I dont think there is much of interest in me, it is perhaps worth noting that most of us have similarly conventional histories. I will then talk about my relationship with the Maori, and try to draw a few useful conclusions. I will finish with a discussion on nationalism and being a New Zealander, which is the topic I am currently working on in the context of my Marsden Research Grant on globalisation.

Growing Up in Christchurch

The Christchurch where I was born and grew up was said to be the most English of our cities. Certainly I grew up in an Anglophilic environment. My secondary school was, and yet it was also proudly New Zealand. Perhaps it belonged to the Jamie Bellich’s ‘Better Britain’ strand of nationalism, which I shall talk about.

My father was not particularly an Anglophile. His descent roots were Irish and English, but went back to the mid nineteenth century, so he gave no sense of being of British origin. He thought himself a New Zealander.

My mother was born in Yorkshire, but came out here before she was two. Obviously her mother was Anglophilic, but I have not a sense Mum was, except she drew upon English traditions. So did I, because most of the books I read were from it, although there were a scattering of American books and translation from other languages. I was not a film buff, so Hollywood or the America it portrayed hardly impacted. The big gap was New Zealand based books. They hardly existed.

I remember walking through the New Forest’ – you will recall it was new when William Conqueror created it, and yes my OE was based in England – and thinking how familiar it was from my reading, but also how alien it was to the New Zealand bush which was familiar to me.

Indeed, I was struck that England was it was not very like Christchurch. I suppose one New Zealand city had to be more like England than the rest, so perhaps Christchurch deserved the claim. But the fit was not close. I do recall coming down the hill into Salisbury and seeing this tiny little town dominated by its cathedral, and thinking ‘that’s what Christchurch looked like 80 years ago’.

Perhaps it was not, but the thought gave me the realisation that while we may contest the expression ‘Mother England’, insofar as it was true, mother is the England of the nineteenth century from which were are descended. But England of today is also descended from that nineteenth century mother. New Zealand’s relationship with today’s England is as a sister or cousin, not Mother England and daughter New Zealand.

I was also struck by the heterogeneity of Britain. It was not just that I met Celts – Irish, Scots, and Welsh – who distinguish themselves from the English. So did those from the ‘provinces’ such as Yorkshire. My impression is that the ‘Home’ Counties elite did not comprehend this distinction. Arguably the English provinces are the last colonies of London.

Such fragmentation makes a mockery of the notion of a New Zealand biculturalism, even ignoring our vibrant Asians and Pacific Island communities. Those from European stock come from many different, but related cultures (as do Asians and Pacific Islanders). To lump them all into a single one is both misleading and misses out on the richness of the heritage. It is not just treating the Celts and English provincials as if they were Londoners. What about the Dutch and the Germans and the Hungarians and the Italians and the Jews and the Scandinavians (in all their nuances)? Ours is a multicultural society.

Differences within nation-states are vital to the understanding of the notion of a nation New Zealand’s population is too small and too mobile to have such significant regional differences as exist between London and other parts of Britain. Yet I am not unaware of the Christchurch perspective of the imperialism of Wellington, while there are political and literary tensions between Wellington and Auckland. And there is the town-country divide. So regional differences are here too.

Growing up with Maori

The most obvious difference in the public rhetoric is between the Maori and the non-Maori. There were very few Maori in the Christchurch I grew up in. The 1956 Census reports 851 or .4 percent of the total Christchurch population. This was partly because only a sixth (16.6 percent) of Maori lived in the 15 largest urban areas – they were then primarily a rural people. Moreover, inter-Maori warfare had devastated the South Island population, especially around Christchurch. (There are also definitional problems to which I shall return.) Christchurch ranked 9th of the urban areas by Maori numbers, which may have been the reason it was said to be so English when it is obviously not

Inevitably then, I grew up knowing very few Maori. There was only one family I recall at my high school of 1000 students. Neither of my parents were racist. I learned from Dad to take people as they are. From Mum, a feminist in word and deed, I learned not only to empathise with women’s distinctive needs, but to respect that other groups may have distinctive needs too.

My engagement with Maori really began in a short time in Wellington between growing up in Christchurch and my OE. It was not just that Wellington had the second largest urbanised Maori population. Although I dont recall it, the 1960 ‘No Maori, No Tour’ campaign had raised issues about New Zealand’s treatment of Maori as well as its relation with the outside world. We debated intensely the Hunn Report on the future of the Maori. A key element of that environment was the Wellington Teachers’ College which, was promoting Maori Studies in all its diversity. Universities did not get into Maori Studies until a decade and more later.

It was during that Wellington period I became conscious of the Maori as a policy issue. I remember explaining to a student seminar in Britain, the difference between assimilation and integration, a distinction central in the post-Hunn report debate. There was incomprehension: the British student view was the West Indians and Asians had come to Britain and would assimilate on British terms. There was no sense that their different cultures would enhance British life.

I recall being particularly shocked at the response, because at school I had written an essay about the English language which celebrated its many various origins, its ability to incorporate new words from other languages, and its adaptability. The student incomprehension seemed to deny that history. (I would not expect the same response today. Britain was going through a very difficult introspective phase in the post-colonial days of the 1960s.)

The OE increased my understanding of my nationalism. I learned that New Zealand was not a Better Britain, and could never be. But how to describe ourselves and the path we were travelling? What did it mean? What were the differences which made us distinctive from anywhere else? I was a New Zealander like Dad. It was deep inside me, at the centre of my being. What he lacked, and I lacked at the time, was how to articulate this.

I returned from Britain aware that included in our distinctiveness was our natural environment. I added our history and our values, and the way we do things. But by this time I also knew that the Maori was an integral part of New Zealand’s distinctiveness. Indeed we gave each of our children a Maori name (as well as a Scandinavian name, for they are of part Danish origin on their mother’s side) .

The Christchurch I returned to in 1970 had a larger Maori population. The 1976 Population Census records 6579 in the urban area, an eightfold increase in two decades. This partly reflected the growth of population and the urbanisation of the Maori – the proportion living in the main urban areas had doubled in the twenty years. Even so, Christchurch had only 2.2 percent of its population Maori – that is up five times – so while I was meeting more, there will still not a lot of Maori in my life. But I was engaging with them as I studied my country’s history and society.

Defining Maori and Pakeha

At that time my main research was the income distribution. I investigated the Maori/Non-Maori contrast, as I did for a number of others different groups in society such as men and women. Contrasts are important social science research methods, but I was also characterising the Maori in their own right. It is conventional to do so today, but in the 1970s, this was one of the first comprehensive quantitative analyses of the Maori in the economy.

One thing I learned was how treacherous the ethnic definitions are. Different data sources use different definitions of the Maori. Even more frustratingly the same survey over time may use different definitions. This is particularly true for the Population Census.

Today the Population Census asks for each respondent’s ethnicity, but does not set down a definition. Unlike many of its questions – such as one’s gender – the response to ethnicity is inherently subjective.

The Census also asks whether the respondent is of Maori descent (yes or no) – the only group whose descent is surveyed. Responses are used for determining the number of Maori electorates – law needs an objective criteria. However the statistics use the ethnicity responses. since there is no information about others’ descent. Analysis shows that there are people of Maori descent who do not say they are of Maori ethnicity, and people of Maori ethnicity who are not of Maori descent.

Many census respondents put down more than one ethnicity. The commonest statistical practice is to classify everyone who report Maori ethnicity as being Maori. That means people who think of themselves as Pakeha, but also ticks the Maori box, are classed as Maori. This practice of prioritisation can be misleading , in a sense overestimating the Maoriness of our population. As a friend said, ‘I think of myself as a New Zealander – Pakeha if anything. But when I’m on the Marae I’m proud of my Maori ancestry, and I’m a Maori there.’

He was, no doubt, one of the 44.0 percent of those who told the census they were Maori but also mentioned some other ethnicity. This is the highest proportion of multi-ethnicity of all the cultural groups. As a result 14.7 percent of respondents said they were Maori in the 2001 Census, but 91.8 percent gave a non-Maori ethnicity.

There is a tendency in the public rhetoric to divide us into Maoriand non-Maori. But what the statistics shows is that there is no rigid line. Ethnicity in New Zealand is much more complex than the ‘either-or’, or a single statistic.

That almost half of those we define as Maori have a richer view of themselves indicates there is considerable diversity within Maoridom, just as there is considerable diversity within any other half a million New Zealanders. To treat all Maori as exactly the same is a form of racism, akin to the thinking which underpinned apartheid. And yet how often we do that?

One of the worst perpetrators is the media, who are inclined to present one Maori as a spokesperson for all Maori. If we treat Maoridom as a unity, then we treat this Maori view as representing the Maori consensus. When the unrepresentative view is extreme, misunderstandings are heightened.

When we give Maori ethnicity priority, we find 72.8 percent of the population are classed as European in 2001. But 80.0 percent gave European as at least one of the ethnicities.

‘European’? I’m afraid that is how the Census asks us to categorise ourselves, and how it reclassifies those of us who cross the word out and write ‘Pakeha’. Statistics New Zealand recognises ‘NZ European/Pakeha’ in some of its reports. I look forward to the day, when ‘Pakeha’ is a formal census ethnicity. I am proud of my European heritage. But it just does not describe my ethnicity. I willingly adopt the term ‘Pakeha’. I am proud that New Zealand calls its oldest indigenous people by the name they gave themselves ‘the Maori’ – the ordinary people. It differs from the first people named in other new settlements – Aboriginal in Australia, Indian in North America.

We can simply reduce the misleading nature of prioritisation rule by introducing a new ethnic group, Maori-Pakeha, those who claim both ethnicities. The statistical record would have 73 percent of us Pakeha, 9 percent Maori, 6 percent Maori-Pakeha, Asian or Pacific Island, and slightly less than 1 percent other. More important, the newly defined would remind us of the ambiguities which underpin our ethnicities.

There was a Maori extremist who wanted to send everybody back to where they come from, although this is not a widely held Maori perspective. One Pakeha cartoonist had the Maori paddling their canoes back to Pacific Islands. That is a nonsense. The Maori did not come from the Pacific Islands, or China, or Africa. Their ancestors did. But they evolved into Maori here. New Zealand is where the Maori comes from.

And that applies to me too. I have European ancestry but my people have evolved into the Pakeha here in New Zealand. If I have to be sent anywhere, it is back to Christchurch – that is where I was born and grew up. That is my turangawaewae, the place where I stand.

There wis no precise date when my European ancestors became Pakeha, any more than there is one when the Pacific Island settlers became Maori. I use the convention of calling the nineteenth century settlers ‘European’, preserving the term ‘Pakeha’ for the twentieth century. This reflects that towards the end of the nineteenth century the European political economy transformed from being dominated by an unsustainable quarry into a sustainable settlement. But there is no exact date when that happened.

Transformation is crucial, not only in the past. Both Maori and Pakeha have continued to evolve. I am irritated by those who say that Maori fishing should be confined to the technologies they had in 1840. Logically that would fossilise the Pakeha into the mid nineteenth century too. I celebrate the way that Maori society has responded to new circumstances in creative ways. The theme of Giuseppe Tomasi’s novel The Leopard is ‘If we want things to stay as they are, things have to change’. The paradox summarises the attitude we all must adopt. The survival of Maoridom in the face of great external pressures is a tribute to their application of this wisdom.

Te Tiriti o Waitangi

There is a view that ‘Pakeha’ is a swear word. There is no scholarly evidence for such a derivation. We are not sure where the word ‘Pakeha’ comes from, but it is used to describe the non-Maori in the treaty signed at Waitangi. Were in 1840 ‘Pakeha’ uncouth, Henry Williams, the missionary who translated the drafts into Maori, would not have used it. And since New Zealand’s foundation document uses that word for those who were not Maori, I am happy to use the expression ‘Pakeha’ for myself.

I have written a scholarly article on that treaty, which points out that the so-called English version did not exist on the treaty grounds on the 6th February 1840, so it was not agreed to by the Maori. The English version is based upon drafts were translated by Williams into Maori, and then subsequently changed following the debate on the 5th. Whether this is important or not, I am unsure. But I am sure that we should be as historically accurate as possible on such matters.

My view is that Te Tiriti o Waitangi is not fundamentally important to the Maori. Their claims would be just as justified if there was no such treaty, and we would still have to go about remedying past wrongs.

Indeed strictly Te Tiriti does not address the high levels of material deprivation and poor health among the Maori. That is something else we need to be concerned with. Certainly the treaty has contributed to the framework to resolve the Maori claims, but had it not existed we still be obliged to deal with them. I like the wisdom, ‘I do not believe in collective guilty, but I do believe in collective responsibility’. I am not guilty for my nation’s past, but I am responsible for remedying its past injustices.

The Tiriti is important though, to the Pakeha. It is the foundation document for the governance of the New Zealand nation-state, a social contract in which the inhabitants establish an institution with the power of kawantanaga – of government – but reserve for individuals and their agencies the maximum of civil rights, including property rights – rangatiratanga. Anyone who joins the inhabitants of this nation is bound by that agreement. It is hard to think of better brief statement of the foundation of a nation. We are not here by right of conquest nor is New Zealand founded upon one.

Owing Only Your Best

I have written on my work with the Maori elsewhere. Today I want to say a little about my attitude to it, especially as many people of goodwill let themselves – and the Maori – down, by ignoring the key principle: ‘You owe them only your best.’ It is very easy to simply agree with the Maori when one knows what is being agreed to is either poorer quality than the best or wrong, or by not bothering to test the proposition.

Every day I observe examples of Pakeha articulating Maori rhetoric which is weak or even wrong. Often they know little about the topic, but seem to think if a Maori says it, it must be true. Hence my warning of the diversity within Maoridom. Agreeing with one Maori may leave the person of goodwill looking foolish. But more fundamentally, uncritically and invariably agreeing with a Maori is as racist as to uncritically and invariably disagreeing. I give just three examples.

The Myth of the Great Fleet

The first example is the myth of the Great Fleet of seven canoes which sailed from central Polynesia to New Zealand. Many Maori believe this, as do many non-Maori. Scholars – Maori and non-Maori – have known for many years that the story is a European construct, due to Sir Percy Smith, who was trying to systematise the reported Maori oral traditions. Today scholars know Smith’s synthesis was wrong.

You might say ‘it does not matter, leave the Maori to their ignorance’. But I certainly do not one day have a young Maori claiming that I, among others, tricked them by maintaining this falsehood. Moreover, out of the myth of the Great Fleet has come the notion there were people here before the canoes arrived. There is a popular view that these people were not Polynesians, but Melanesians who were conquered by the Maori. Some go on to draw the conclusion that since the Maori conquered the Melanesians, that justifies Europeans conquering Maori. There is absolutely no evidence whatsoever for this fantasy.,

Scholars are certain that Pacific Islanders sailed from central Polynesia to New Zealand, but almost certainly not in a great fleet as in the myth would have it. There were no other people in New Zealand when the Polynesians arrived,. Scholars think that the oral migration traditions probably refer to actual events, albeit ones lost in time: they may refer to migrations within New Zealand. Nor does scholarship anywhere undermine the notion that the iwi of New Zealand were loose confederations, with the name of waka. It just seems unlikely they were the vessels which brought the first Pacific Islanders here.

Let me share another concern about the myth of the Great Fleet. I am in complete agreement that we should have a Maori name for our country as well as the traditional European one of ‘New Zealand’. I hesitate over ‘Aotearoa’, which is not the Maori name for these islands when Europeans arrived, but comes from the myth of the canoes. There appears to have been no universal Maori name for what we call New Zealand. Te Tiriti O Waitangi refers to Niu Tireni. Apparently that name persisted among Maori through to at least the 1860s.

Myths are important to a nation. They are the narratives which a people relate to give a sense of where they come from, where they are, and where they are going. Myths are not inherently false. Even if much of the content of a myth does not meet the scientific criterion of truth, it contains an emotional veracity. But to be sustainable its factual underpinnings need to be true. I am all for myths about New Zealand – or for any nation – but let’s get the facts that carry them right.

So I have no problem if we all agree that the story of Aotearoa is a European construct, but nevertheless use it as the Maori name for New Zealand. But that is a very different approach to people of goodwill who seize upon the name because it is a Maori one without any awareness of its true origin. That is just political correctness.

I have gone to some length to discuss this myth. I deal with the other two examples more briefly.

Poverty in New Zealand

More than 80 percent of the poor in New Zealand are children and their parents. The majority of those poor are of Pakeha/New Zealand ethnicity. Poverty is not a particularly Maori phenomenon. It is true that an individual Maori is more likely to be poor than the individual non-Maori, but in total number there are more of the non-Maori poor because there are more non-Maori.

Confusing poverty with Maoriness leads to faulty analysis. Poverty cannot be caused by race if it is widespread in the majority. Such a confusion leads to poor quality policy. It may result in targeting rich Maori as well as poor ones, and failing to target poor non-Maori.

The confusion, and its various relatives, has been socially divisive. A public rhetoric which closely associates Maori with the poor, is not only misleading. It also leaves the poor non-Maori feeling excluded, an exclusion which is a seedbed for racial antagonism. The public’s response to Don Brash’s Orewa speech of 2004 reflected those feelings of exclusion.

In the long run, exaggerations are of no benefit to the Maori either. Not only do they add to communal tensions, but they distort the way we think of things. To repeat, public rhetoric needs to be consistent with the reality, and not distort it.

Te Wananga o Aotearoa

Such a distortion occurred when Te Wananga o Aotearoa came under investigation. To many people treated it as if it were solely a Maori institution, and imposed their judgements about Maori on it. I do not know anything more than what has been published in the papers, but lLet me offer a different perspective, using business theory.

Te Wananga was a rapidly growing business. If it had increased at the same rate over the next six years as it did over the last six, almost every New Zealander would have been enrolled with it. That absurdity it tells us that the rapid growth phase was over, and the institution would become a mature business with slow growth, or stagnation, or even some decline, given that some of the client base have now got the qualifications they required.

Business theory tells us that the transition from rapid grower to mature operation is a difficult one, because various funding and investments mechanisms which are favoured by rapid growth, no longer work. It is also not unusual for such rapidly growing businesses to have poor internal management which has to be systematised and consolidated at the maturity phase. It is not unusual for businesses at this stage to crash, to be taken over, or to require a complete reconstruction of their management.

Does that not sound like what is happening to the wananga? One does not have to analyses the circumstances of the wananga in racial terms – be it that a Maori cant run a business, or that the anti-Maori are destroying a successful business. Maori business are subject to the same laws of business behaviour as are non-Maori businesses.

We too easily impose a racial framework over phenomenon, because we are too lazy to think about things carefully. Racism, be it unthinking pro-Maori or unthinking anti-Maori, is the easy option. The Maori deserve better from us.

It’s ironic isnt it, that the lazy will say that what I am arguing is racist? It cant be true for my analysis is with the greatest respect of the Maori in their diversity, their needs, their wrongful treatment in the past, and in the belief they have much to offer us all. I give them my best.

Of course this laziness is not exclusive to our thinking about Maori matters. Too often we are lazy about other public issues, following the herd, rather than trying to think things through. We allow others to think for us, replicating their inferior arguments as our own, rather than demanding higher standards. I am allowed to say such things at a University of the Third Age. Anywhere else I would be condemned as an intellectual.

Thinking about Nationalism

Even were there no Maori, we would still face a challenge of the meaning of being a New Zealander. Thinking about nationalism in New Zealand requires an international context. A key element I have learned from studying New Zealand is that we are shaped by the world outside, and our response to those pressures. New Zealanders cant be insular. So what meaning can we give living into this distant outpost of a bustling world?

I am working on a book about globalisation – informed by New Zealand but not exclusively about it. The book explores two key elements of political and social aspects of globalisation: policy convergence and cultural convergence. Policy convergence is the possibility that globalisation will force all nation-states to adopt the same policies: cultural convergence is that we will all end up culturally the same. My tentative conclusion is that there is an inevitable convergence in some policy areas but not others, while any cultural convergence from globalisation is very slow and probably subject to sufficient local shocks to stall the convergence forever.

Globalisation analysis has to be predicated on some notion of the nation and the nation-state. Curiously, while we talk about them as kind of eternal, they are actually very recent. Nationalism, in its popular sense, first becomes a vigorous phenomenon in the nineteenth century. Intellectually it arose with the Enlightenment and its rejection of traditional notions such as defining community by one’s religion. Popularly, the sharp reductions in the costs of distance that were occurring then (particularly from the railroad and mass media), together with the resulting increase in mobility, meant that Europeans had to shift from a village perspective to a wider regional one.

The English experience of nationalism seems unique, one might say anachronistic, for it was very early in the nationalism stakes because of its reasonably secure boundaries. Shakespeare’s Henry V, with the battle cry ‘God for Harry, England and St George’, is in part a response to the threat of the Spanish Armada, although even here the nationalistic demand includes loyalty to a person and to a religion. However most European (and American) nationalism arose a couple of hundred years later. Elsewhere it often began in the twentieth century.

Only a handful of today’s nation states were broadly in their present form a 150 years ago. That includes New Zealand, which had a self government in 1852 which has a continuously evolved to today’s governance, and whose boundaries have remained largely the same. Using this not very rigorous criteria the other of today’s nation-states in Europe which were there in 1855 are Belgium, France (probably), Luxembourg, Netherlands, Portugal Spain, and Switzerland, but not the United Kingdom which lost Ireland in 1920. On the America continent there is possibly the United States, although it was still expanding west, six central American republics including Mexico but no Carribean ones; and Argentina, and Uruguay, for all the other South American states have since had significant boundary changes. The only Asian states to meet the criteria may be Afghanistan, Iran and Japan. There are no African states and Australia did not federate until 1901. Most of the world was not covered by today’s nation-states. They are not eternal.

Now if the nation-state is such a recent phenomenon, despite the rhetoric of permanency, can we expect them to still exist in another 150 years? The answer depends on what we mean by nation-state and how it might evolve. However commerce requires legal jurisdictions and social order requires polices, so these may still have to be supplied in localities. Undoubtedly a whole range of activities which we associate with nation-states will no longer be under their control. I’m betting that includes restricting goods and services at the border except for special reasons such a phyto-sanitary, terrorist and (possibly) cultural ones. I expect capital to be largely mobile, except possibly hot money movements (although any restrictions will have to be internationally imposed). But there may not be major increases in labour mobility.

Crucially nationalism involves contrasting those within the (putative) nation-state with those outside. As students in the 1960s, we used to say ‘I am a citizen of the world’. Overseas I was irritated to be categorised as an Australian, Canadian, a Rhodesian or wherever. (The Australian confusion led to my retort that there was the same distance between Wellington and Canberra as between London and Moscow and they would appreciate that I could not tell the difference between an Englishman and a Russian.) It was this need to identify myself which meant it was overseas I learned I was a New Zealander, and that I needed to be able to articulate that status, even though I had been a New Zealander as soon as I began growing up. The parallel is with Moliere’s character who discovered he had been speaking prose all his life. .

Striving for, or defending, one’s nation-state is a characteristic of nationalism. Sometimes that has led to destructive outcomes. Need it? There is a useful distinction between ethnic nationalism and civic nationalism. Ethnic nationalism – it may be culturally, racially or religiously based – contains the notion of exclusivity, and antagonism to others. It is a nationalism which has lead to territorial expansion and ethnic cleansing.

Civic nationalism is about citizenship and political and social participation. Typically there is a sharing of common values, a sense of belonging to a community, and an allegiance to a nation which is typically but not always the nation-state where one resides. There is likely to be a common language, and usually there are common myths about the nation, using myth here as a narrative to explain certain phenomenon which may or may not be true in some sense or other. The continuity of myths is one of the key binding elements of nationalism, although of course it evolves over time. Myth enables those in a nation-state to claim a longer nationhood than the state has existed. There are few nation-states since 1855 which do not have a narrative which goes back centuries earlier.

Civic nationalism need not be aggressive, either towards those within the boundaries of the nation-state (as ethnic nationalism often sadly has been) or towards those outside them. But it can be. Indonesian President Sukarno used the Confrontation in the 1960s in an attempt to wield together the disparate elements of the newly founded Indonesian state. Less aggressively, the success of a person or group from the nation, say a win by the national sports team, brings out a national fervour. The United States, one of the most heterogenous nations in the world was unified in the sad circumstances of the terrorist attack of 9/11.

On Being a New Zealander

My New Zealand nationalism is civic nationalism. I give to other nations the respect they deserve, but I value New Zealand as a part of myself. I am not arguing we are ‘better’ – that is one of the reasons I eschew the ‘Better Britain’ notion. Being a New Zealander is best for me, but I make no much claim for the rest of humanity. I smile at the slogan that there are ‘two sorts of people in the world: New Zealanders and those who wish they were.’ But I know it is not true, and I would not want it to be.

In any case, claiming to be ‘best’ is a recipe for complacency. I observe serious inadequacies in New Zealand. Because I love the damned place as an integral part of my being, I seek to address those weaknesses, rather than ignore them — just as I try to do so with myself.

I am a Pakeha because there are other New Zealanders who would call themselves Maori. I celebrate such differences within New Zealand, observing the toleration of civic nationalism.

But I am not particularly supportive of biculturalism, because there is a rich diversity within the Pakeha strand: Asians, Celts, Continental Europeans, Indians Jews, and Pacific Islanders. Even that does not capture the rich kaleidoscope of our origins and ethnicity. Moreover, biculturalism is divisive. It suggests a homogeneous majority with a group of 10 to 15 percent who have separated themselves out. Nonsense, we are much more diverse than that, and New Zealand benefits from that diversity. .

However such a multiculturalism must acknowledge the special place of the Maori. That I have spent much of this lecture engaged with them is one such acknowledgement. I particularly cherish what the Maori has brought to modern New Zealand, facilitating the transformation from European settler to Pakeha.

Ultimately I know I am a descendant of my Pakeha New Zealander Mum and Dad, whose ancestors were from Europe. But Mum and Dad are different from me. And my children are different from their parents. But there is a continuity. If we want things to stay as they are, things have to change.

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Further Developments in Estimating the Social Costs Of Substance Abuse

AVOIDABLE COSTS

The views in this report on the Avoidable Costs of Substance Abuse Workshop (Ottawa June 21-22) are my own and do not reflect those of the others involved. It focusses on issues particularly pertinent to New Zealand. The paper was presented to a seminar of officials on 7 August, 2005. Comments Welcome [1]

Keywords: Health;

Introduction

This report is on The Avoidable Costs Workshop held in Ottawa, Canada June 21-22, under the sponsorship of the Office of Research and Surveillance, Health Canada (Bureu de la rechercher and de la surveillance, Sante Canada).

The purpose of the workshop was to review and develop the preliminary draft of Developing International Guidelines for Estimating the Avoidable Costs of Substance Abuse by David Collins and Helen Lapsley, with supplementary papers on epidemiological and criminological issues by Jurgen Rehm and Serge Brochu respectively. Other papers were also reviewed.

Around 19 researchers attended from 10 countries. The meeting was chaired by Louise Déry, of the sponsoring office.

The workshop is a continuation of a series which began in 1994, and which has led to the major publication International Guidelines for Estimating the Costs of Substance Abuse 2ed (WHO 2003) [2] (all of whom attended this workshop). Subsequently, International Guidelines have been used to calculate the social costs of substance abuse in a number of countries including New Zealand. [3]

The 2005 workshop was concerned with a number of new issues – particularly avoidable costs and the social costs of crime – which can be expected to be included in any 3rd edition of The International Guidelines. [4]

Theoretical Background

An early decision was made to anchor the work in the ‘theory of value’ the economists’ account of costs and prices. The most important reason for doing so is that we can draw upon the entirety of economics when confronted with a novel situation. Or a silly argument, because there is considerable rhetoric in the area of drug abuse where advocates grab invalid arguments which seem to support their case. [5]

While we do not seem to be able to prevent neophytes from misusing economics, any more than we can stop teenagers smoking and misusing alcohol, one can but hope that mature debate will reflect the coherent framework that economics offers, just as we hope teenagers will mature into sensible adults.

While the term ‘costs’ indicates that the research program has a considerable input from economists, as will soon be evident, other disciplines are also involved, especially epidemiologists and – increasingly in the future – their equivalents in criminology.

Opportunity Costs

At the core of the economist’s notion of the ‘cost’ of a resource is its opportunity costs that is the value of the next-highest-valued alternative use of that resource. It is what the community forgoes when the resource is used for its current purpose.

The notion is a subtle one, but at its simplest if someone consumes a muffin for which they paid $1.00 they have given up the opportunity to consume something else which cost $1.00: $1.00 is its opportunity cost. Note the consumer may value the muffin in excess of the $1.00 – perhaps they might have still purchased it were it $1.50, so they have the benefit of additional value over the resource cost to society. (We know, incidentally, that the consumer must normally value it at a minimum of $1.00, since had they not, they would not have purchased the muffin, but held onto the dollar to purchase something more worthwhile.)

The analysis becomes more complex for products where not all the resources used are included in the commercial cost – suppose the muffin maker was polluting the local stream. Drug abuse is riddled with these ‘externalities’. Indeed an economist might argue that there is no ‘abuse’ unless there is an externality – that is a cost to someone else that the consumer does not pay – or the probability of one. Thus a glass of wine, say, does not generate an externality, but a couple of bottles does if the imbiber goes off in a car and crashes or beats his wife. The first glass is a ‘use’, by the fifth, say, is it ‘abuse’. Where there are externalities there will be both public costs borne by others in the community, as well as private costs borne by the consumer.

The total private and public costs that the drug abuse generates are usually called ‘social costs’. Because the social costs of drug abuse are high relative to private costs that there is much public intervention. The economic ideal would be a price for the drug which reflected full social costs, say by the addition of a tax. In practice this is not always possible because some drugs are illicit, some consumption behaviour is irrational, and because it is not practical to impose the optimum tax (since for instance the external cost differs between the first drink and subsequent ones).

The Counterfactual Scenario

If costs are about alternative uses, it is necessary to define the next best alternative, especially where there is as complicated phenomenon as drug abuse. This alternative is the called ‘counterfactual scenario’.

However, it is important to appreciate there is no uniquely right counterfactual scenario. This is illustrated in the case of alcohol consumption. Some researchers’ scenarios have been based upon the assumption that there is no unsafe drinking, while others have investigated the implication of there being no drinking of alcohol at all – safe or unsafe. Perhaps the distinction here is the former refers to the social costs of alcohol abuse, the latter to the social costs of alcohol. Whatever, it is important to be clear about the scenario, since it is usually one of many.

Another complication that there may be a displacement from one drug use to another. For instance some countries’ ban on alcohol appears to have increased its consumption of cocaine. Usually (and often implicitly) the scenario posits that there is no displacement, but this may not always be a reasonable assumption. At least displacement should be discussed when describing the details of the counterfactual scenario.

In principle then the researcher need to identify precisely the counterfactual scenario, although those who use the research are often more casual.

In practice the choice of counterfactual is often determined by the data availability and other technical issues. When I did the New Zealand estimates, I used the assumption that there had never been tobacco or alcohol in New Zealand, and there was no displacement. (There was insufficient data to do illicit drugs or misuse of pharmaceuticals).

An important alternative counterfactual scenario is where everyone stops using (or abusing) the drug, but that there is a carryover from past use. We shall see that this leads to the ‘avoidable cost’ estimates which the workshop was about.

Constructing a Counterfactual Scenario

In the researcher’s mind eye, if not actually in the published document, there is a table with the actual scenario in one column and the counterfactual in the other. Line by line, the table highlights the differences between the scenarios. For instance an analysis of smoking will have deaths from lung cancer in the left hand column of the actuality (a lot of them), and deaths from lung cancer in a counterfactual scenario where, say, nobody has smoked a (few of them). The table has an infinite number of rows in principle, but in practice identical rows are omitted. Consolidation (as in the causes of death) leads to between one and two dozen rows.

Constructing a Counterfactual Scenario

Actual Counterfactual
Deaths from Lung Cancer = Deaths from Lung Cancer =
…. ….
…. ….

The table entries need to be quantitative estimates. They are not largely the work of economists, but are derived by other disciplines, most notably epidemiologists, but also social statisticians , sociologists and others. The entries should include those by criminologists, but until recently they were omitted because there was no useful data. I return to the crime dimension in a later section.

In principle the collection of many of the data entries in the table is a bit mysterious to an economist – it is in practice too. Data sources can be quite ad hoc. (In New Zealand there may be only one, and one prays that the work is reasonable quality, it being difficult to independently check).

Epidemiological Fractions

‘Epidemiological fractions’ are at the core of the health impacts of drug abuse, and increasingly important in the criminological estimated.

I am not an expert on epidemiological fractions. I doubt any economist is. I have sat through intense and focussed – even heated – discussions between epidemiologists, and not understood the details of the points at issue. (I have watched those same epidemiologists looking equally mystified as economists have rowed over some subtleties in the theory of value.) Here is my short explanation, using lung cancer to illustrate the general principle.

People suffer and (usually) die from lung cancer. The scientific evidence is that the main cause of lung cancer is tobacco smoking (including passive smoking). However there is a very low incidence of lung cancer among people who have never smoked, and appear not to have been passive smokers. What is needed for two scenarios is the number of people with lung cancer (on the actual side) and the number who would have it were there no smoking (assuming that is the counterfactual). Miraculously, epidemiologists calculate these ‘epidemiological fractions’.

As I understand it they compare the incidence of the disease between those who smoke and those who do not smoke – after adjusting for the effects of passive smoking. From this they can infer the proportion (epidemiological fraction) of those who die (or suffer) from long disease as a result of smoking. Since the incidence and intensity of smoking varies from country to country (as well as by cohort, gender, social class …) the fractions vary from country to country too. So a country aspiring to do a social cost study needs its own epidemiological fractions.

If they dont exist, the social costs cant be done, except by borrowing the fractions from other countries, which is not particularly robust. To foreshadow a later section, how do we get the equivalents fractions for crime?

Valuing the Scenarios

Once we have got the tabulation comparing the two scenarios, (that is when the hard grind has been done by the data gatherers) then the economics come into play (and have the fun?).

The process might be described as follows. To the tabulation of actual and counterfactual scenarios add three more columns. In the first new one (the third) put the difference between the two columns. In the second new one (the fourth) put the price relevant to the activity shown in the row. Multiply the two, putting the product in the fifth and final column. Sum the final column and voila!, one has the social cost difference between the two scenarios – that is the social cost of the drug abuse.

Calculating the Social Cost

Actual Counterfactual Difference Price Value
…. …. …. …. ….
…. …. …. …. ….
…. …. …. …. ….

Column Sum of Final Column = Social Cost Difference between Scenarios

Choosing the correct prices is complicated. Basically the price should reflect the resource cost of the activity – what it is worth to society – or, where a resource is not directly involved, of how it is valued by society in resource costs terms. That means the sum total represents the difference in resources used in the two scenarios, valued in social prices. So if the figure is say, 3.0 percent of GDP, then we may say that material standards of living would be 3 percent higher under the counterfactual scenario.

The Value of Life

One complication is how to treat deaths and poorer quality of life as the result of drug abuse. The scenarios will have different mortality and morbidity histories. Without going into the technical details, the differences can be summarised in a measure called ‘quality adjusted life years’, or QALYs. Substance abuse results in significant loss of QALYs, both from early death and also form an inferior quality of living while alive. .

We can calculate the reductions in QALYs. That is tricky, and on the technical frontier, but it is not impossible. More contentious is the valuing of a QALY. The issue is agonisingly set out in the International Guidelines. What must be said is that the valuation of life can not be zero, for that would mean we never made sacrifices to save life; it can not be infinite because that would mean we would never risk life no matter how small that risk; and the somewhere in between is not easily decided.

However it would seem that any realistic choice for a value of life results in a social cost which is very large, say a large proportion of GDP. That is because GDP only covers the value of material goods, whereas the social cost includes the value of life which is not in GDP. My view is that while life quality must be valued, and the aggregate can be quoted, the better comparison is to state that the social costs are equivalent to a reduction in the material standard of living (the tangible costs) by X percent of GDP, and a reduction in the aggregate quality of life (intangible costs) by Y percent of the total.

Interestingly, X is often sort-of close to Y as the following tabulation illustrates, although there is a differing relative importance between material consumption and life between the two:

Social Costs of Drug Abuse [6]

  Units Tobacco
Use
Alcohol
Misuse
Tangible Costs (X) % of GDP 1.7 4.0
Intangible Costs (Y) % of Total Life Quality 3.2 2.0

The Use of Social Costs Calculations

The precise meaning of the social costs of substance abuse estimate depend upon the precise counterfactual scenario. In practice any estimates prove to be large, evidenced by the much tinier estimates for other diseases (although they do not always use the advice, methods, or rigour of the International Guidelines). The estimates are usually used as ‘Gee whiz’ figures to draw attention to the seriousness of the public policy issue.

As a general rule there is still not enough consistency to make robust international comparisons (use instead the direct epidemiological figures), and comparisons through time in a country are often invalidated by improvements in data sources and methods. The estimates have also been used by dividing the aggregate value by some physical consumption figure (say kilos of tobacco or an illicit drug, or litres of absolute alcohol) to get a unit social cost of a drug.

The International Guidelines also recommend that the aggregate cost be disaggregated to where the costs fall directly on the user, households, government and business., which can be useful for policy purposes.

A not always appreciated role of the aggregate figure is that it reveals deficiencies in the data. I found in my 1995 study that the poorer quality of lives as a result of alcohol misuse seem high (of a similar order of magnitude to the mortality costs), but that there is virtually no data on them. Alas there is still none. In the case of road accident costs outside the health system, there were none and I had to borrow the Australian data.

Sometimes the estimates indicate that some effects are very small. I spent a tedious day chasing up the costs of fires caused by smoking to discover that they are trivial compared to, say, health costs, despite the wont of the anti-tobacco lobby to emphasise them.

However the biggest New Zealand data lacuna is that there is hardly anything useful on illicit drugs (including crime and justice effects). Studies from other countries suggest that they are probably a small proportion of total costs of drug abuse, because their consumption is much less widespread than consumption of the licits. However they fall very heavily upon some groups and services in the community, and so have a very high unit cost.

In any case, size is an indicator of public importance, it is not an indicator of whether or what public initiatives should be taken. That is where avoidable costs come in.

Avoidable Costs

Consider the following counterfactual scenarios:
Scenario 1: There has never been any tobacco consumption in New Zealand;
Scenario 2: All tobacco consumption ceases from a particular point in time.

The second scenario will have a number of consequences not evident in the first. For instance there will still be a overhang from those who smoked in the past and suffer from health disabilities (and mortality) after the everybody-ceases-smoking day. The differences between the two counterfactual scenarios, valued in the standard way, is the ‘avoidance cost’.

There is an important difference between the two scenarios. Scenario 1 (there has never been any smoking) has broadly the same values for every year. However in Scenario 2 the values will vary over time, perhaps (on some items anyway) at first rising as the disease consequent on the abuse rise, and then falling off, as the diseased die off. Thus avoidance costs vary over time.

This leads to the need to consolidate the stream of costs. There is a straightforward economic procedure: ‘discounting’, a kind of weighted averaging of each year, giving greater weight to years closer to the cessation decision. We need not go into it here, except to say there is a well established economic procedure and that care needs to be taken between comparing the capitalised value of the stream of costs and an income stream such as GDP. [7]

More contentious is the discount (weighting) rate. [8]

The principle of avoidable costs was well known to the Working Party, and is mentioned in International Guidelines. However it is only recently that the epidemiological data base has become available to pursue them effectively. What is needed, in the case of tobacco, is quantitative estimates of mortality and morbidity if the subject stops smoking. This is far harder to calculate than the traditional epidemiological fractions, since it usually requires following the health course of a group of smokers, ceased smokers and non-smokers.

While there is increasingly good information on the time profile of smoking cessation, there is far poorer data on those for alcohol and illicit drugs. The workshop spent a considerable amount of time discussing alternative strategies (such as identifying some long term level and assuming a path to it). At this stage, those outside the intense discussion of the workshop (future ones will be conference calls) may wish to observe that there is considerable uncertainty, which wont be really addressed until some actual estimation is done. In this area, the new guidelines are likely to be permissive, rather than directive.

Policy Evaluation and Avoidable Costs

Thus far the discussion has been in terms of total cessation, and so may be thought of as a ‘macroeconomic’ evaluation. However, because the approach of the International Guidelines has been rigorously based on economic theory, the method and underlying theory is almost identical with that which is used for standard evaluations such as cost-benefit analysis. So the macro-statistics may in whole or part be useful for evaluating policy interventions.

At the simplest level consider a policy which results in ten percent abandoning smoking (or even one which applied to a particular group results in ten percent abandoning smoking). Ten percent of the macro-avoidable cost estimate (on a per capita level where a group was concerned) may be the return on this intervention, and so with very little extra work the cost to benefit analysis (CBA) can be completed, and the policy’s economic effectiveness evaluated (that is, whether the policy outlay can be justified, in standard CBA terms).

I have said ‘may’ here because there may be complicating factors. For instance, suppose 10 percent of the group ceased smoking and the remainder of the group reduced their consumption by 20 percent. The analysis would need to take the reduction into account (or take 10 percent of the macro figure to provide only a minimum estimate of the intervention return).

In my view the most powerful use of the avoidable costs scenario will be the basis for evaluation of policy interventions, which involves a useful extension of the social costs approach from that set out in the second edition of the International Guidelines. Far too many policy interventions seem based upon ‘it seems like a good idea’ rather than any careful analysis of their effectiveness. Rarely is there a post-implementation assessment, which reflects this casualness. However the application of CBA does depend on the availability of the micro-data for each policy intervention.

Criminology

To begin with a caveat emptor. Over the year, economists have had little to say useful about crime. The economic studies I have read are either pathetically trivial or arrogantly ignorant. This is not because the issues are unimportant, but that economists have not really been able to offer useful insights in the area (in contrast to that what they have done for health). Thus the following remarks are made by an economist working in very unfamiliar territory. [9]

The working party which produced the International Guidelines was well aware of the significance of drugs in crimes, but at the time the report was prepared it, could not see any coherent way of obtaining the required data. To illustrate the problem with an example of the costs of prisons.

The epidemiological fractions depend upon identifying those in hospital (or who have died) who smoke (or whatever) against those who dont by each disease category. However in the case of prison the exact question is much more complicated, because causation is more complicated. Consider the following statements by prisoners :

“I take drugs, but they are not the reason I am in prison.”
“I am in prison, because I committed a crime because I take drugs (say robbery) to pay for my addiction.”
“I was under the influence of drugs when I committed the crime.”
“I took drugs in order to commit the crime.”
“I am in prison because I committed the crime of possessing drugs, but for no other crimes.”
And so on.

Would one even believe the prisoners’ account of causality? A paper presented to the workshop by Serge Brochu, professor of criminology at the University of Montreal, Drug-related Crime: Definitions and Avenues For Reduction, indicated how difficult the exercise is. [10]

Brochu has designed a questionnaire which he says gives the proportions in prisons (or whatever) who are there because of drugs (analogous to those who are in hospital because off smoking). If the approach is successful. the epidemiological fractions can be calculated and the same techniques used for health can be applied to criminally associated expenditures.

I do not have the skills to evaluate the success of the procedure. My impression is this is front line research, and not yet widely adopted within the criminology profession, in contrast to the widespread acceptance of the epidemiologists’ approach. However, the method has been applied in Australia, with Collins and Lapsley including the results in their estimates of the social cost of drug abuse in Australia. What we know from their work is that the crime induced social costs from drugs are significant contributors to total costs of substance abuse.

Brochu also included in his paper reports of meta-analyses of studies of various programs aimed at reducing or abandoning the consumption of drugs. They give the impression that criminologists have done better than health professionals in evaluating their interventions. Some popular interventions may not be very effective, and may not cross the approval threshold of a cost-benefit analysis, once dollar values are included. But first we need the macro-avoidance of cost studies to provide the framework.

One theme in the workshop was the needs of poorer countries. A particularly troubling class of countries are those where drugs are a central part off society, politics and the economy. (For example Colombia.) Fortunately their problems are not directly relevant to New Zealand. [11]

Data

It cannot be over-emphasised that good quality social cost estimation involves good quality data bases. Especially for illicit drugs, and for the licits to a lesser extent, some of the data is hard to collect. An interesting contribution to the workshop was from Eric Single on the problem of under-recording of alcohol consumption.

Conclusions and Directions

The primary purpose of the workshop was to progress the development of international guidelines for estimating the avoidable costs of substance abuse. The draft paper is to be revised and circulated, after comments by the workshop. I shall continue to be involved.

However this report back enables one to reflect on what steps New Zealand might next take.

1. Do nothing.

OR?

2. Have we sufficient new data to make it worth updating my 1995 study?

3. Have we sufficient data to include illicit drugs in an updated study? Should we systematically collect some of it? (Especially in the area of crime, given that public spending is rising.)

4. It was suggested that there should be country pilot studies of avoidable costs for particular drugs. It was proposed that perhaps New Zealand should do the tobacco use study. Could we then go on and do alcohol misuse, perhaps coordinated with David Collins and Helen Lapsley, who are based in Sydney?

5. What institutional framework would best contribute to any active answers to the above questions? Who should be involved?

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Notes
[1] Attendance at the conference was made possible by Health Canada’s Office of Research and Surveillance (Bureu de la rechercher and de la surveillance, Sante Canada). Previous attendance at workshops was made possible by Alcohol Advisory Council of New Zealand (ALAC)and the Canadian Centre for Substance Abuse (CCSA). This paper has been commissioned by the Office of the Commissioner of the New Zealand Police which is not responsible for any opinions or error in it. I would also like to express gratitude to Louise Déry for chairing the workshop, and her team at the Office for administrative support, to my colleagues at the workshop for sharing in a challenging and rewarding meeting, and to the paper presenters, especially David Collins and Helen Lapsley, for interesting their contributions.
[2] E. Single, D. Collins, B. Easton, H. Harwood, H. Lapsley, P. Kopp & E. Wilson (2003) International Guidelines for Estimating the Costs of Substance Abuse 2ed (Geneva. WHO)
[3] B.H. Easton (1995) The Social Costs of Tobacco Use and Alcohol Misuse (Wellington, Department of Public Health, Wellington School of Medicine)
[4] A couple of terminological issues: the expressions ‘substance’ and ‘drug’ are used interchangeably in the literature, partly reflecting national practices. Sometimes the term ‘abuse’ is interchanged with ‘use’ or even ‘misuse’. This partly reflects the impacts of different drugs, nicely captured in the title of my report ‘The Social Costs of Tobacco Use and Alcohol Misuse’. The area is divided into licit drugs (alcohol and tobacco) and illicit drugs (narcotics). There is also others areas, hardly studied by economists, such as the misuse of pharmaceuticals, household substances such a glue, and party pills. Some countries pay less attention to tobacco.
[5] For instance ‘What about the contribution of all the tobacco farmers?’ Aside from that contributing something which may have no positive value is hardly of public worth. the standard economic model assumes that the farmers switch to an almost as lucrative crop, so there is little impact on the value of farming. Where the switch is not easy – as for tobacco growing in Mali – there is a straightforward method to deal with the situation.
[6] B.H. Easton (1995) op. cit. p.26.
[7] It is better to convert the capitalised value back to an annuity.
[8] Which is one of the advantages of the first (never any abuse) scenario, since it avoids the need, because every year is the same. The annuity approach, however, reduces the overall effect of the choice of discount rate.
[9] The workshop got into a complicated discussion of the case for penalties for possession of illicit drugs: resolving it is important because it reflects upon the treatment of some of the valuations. In its course there popped up the novel idea, to me, that making drugs illegal was a means of reducing pressure on the health system, thereby transferring a problem from heath to crime. The thought that here was an interesting tradeoff analysis, which economists could contribute to, occurred to the economists around the table, although it was outside the scope of the workshop.
[10] S. Brochu (2005) (Paper for Avoidable Costs of Substance Abuse Workshop (Ottawa June 21-22).
[11] A weakness of the workshop was that Brochu was the only criminologist there, in contrast to a number of economists and epidemiologists from various countries. This is not to demean Brochu. But I have learned much about the robustness of epidemiology from the debates between epidemiologists. I do not have the same knowledge of criminology. The under-weighting of criminological representation reflects, I think, that we are still coming to grips with the general issue.

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What Does Reform Mean?

How to preserve the social market economy in a modern Europe.

Listener: 30 July, 2005.

Keywords: Labour Studies;

Reform is a weasel word, avoiding specifics because advocates are either not sure what it means or they don’t want others to know. So, when the German Government and the Goethe-Institut offered me the opportunity to study the German economy, I just had to look at the reality of its “reforms” debate. Some of the implemented ones – pressures on the unemployed to take up work – seem not too different from ours. But some proposals have the ideology underpinning our Employment Contracts Act (ECA).

Even more than New Zealand, Germany had what Bruce Jesson called the “historic compromise” between business, government and unions (which the ECA ended). It has a “social market economy” in which businesses are given considerable market freedom in exchange for social protection of the workers and the population as a whole largely delivered through the market. (Germany is not alone. Other Western European economies operate in a similar way.)

Others can report on the complex governance of business where there is considerable union-worker involvement. I focused on wage determination, which is said by German reformers to be too inflexible. They often object to the community ethic that underpins the social market economy, preferring a more individualistic approach to society. Their proposed “reforms” include cutting public spending (including on social benefits), lowering taxation (which would increase income inequality), privatisation (including of the health system) and weakening of the unions.

Although much more productive than that of New Zealand, the German economy has two main problems: it grows too slowly and it has too much unemployment. Reform, we are told, would increase productivity (the ECA did not) and lower unemployment (it requires a very tenuous argument to say that the ECA did). Reality is so much more complicated.

Germany has an excellent export record, recently taking over from the US as being the world’s largest exporter. This statistic depends on treating the countries of the European Union as separate economies, but the states of the US as united. California is probably the world’s biggest export economy on a consistent definition. But, in any case, Germany is doing well, and improving.

German exports are largely technologically advanced, using high-skilled workers who must be being paid the going world wage rate (relative to their productivity), given the export success. But unemployment averages around 12 percent of the labour force, which suggests that the unskilled are costing German businesses too much to employ.

German unions maintain rigid wage differentials for skills in order to protect their poorest workers. With no unions, the differentials may open up. Would that generate more jobs? Economic theory says it might, but not necessarily a lot more. The skilled and unskilled labour may not readily substitute. A BMW assembled by cheaper low-skilled workers might not be the quality Beamer that its current reputation evokes.

The unskilled really need new industries. (There are some terrific, but expensive, tourist locations in Germany. Cheaper unskilled labour might generate lower prices and more tourists.) But lower wages for the unskilled would mean they are poorer, even though some of the unemployed might be better off if – a big if – they got jobs.

Another pressure on the established European welfare states is the EU’s enlargement. Workers from the poorer countries to the east and south threaten to undercut the pay of low-skilled workers in Germany and elsewhere in Western Europe. That was perhaps the visceral reason for the French and Dutch rejecting the proposed EU constitution.

If current social objectives are to be maintained, there may have to be greater flexibility in wage differentials than in the past (the unions already tend to turn a blind eye to lower wage rates in lower-productivity eastern Germany), and greater emphasis on social support of the poor via tax and benefits (as we do with our family assistance). The reality of the modern dynamic economy is that the wage system cannot generate a fair income distribution. Trying to make it do so, rather than using the tax and benefit system, is likely to generate more unemployment among the poor, greater income inequality and an inferior welfare state. Ironically, that is nearer the goal of the reformers with individualistic aspirations.

Is New Zealand the Best Place in the World to Bring Up Children?

Presentation to the Wellington WEA, 25 July 2005.

Keywords: Social Policy;

There is one outstanding fact about New Zealand poverty. Choose any reasonable poverty line, and you will find that over 80 percent of the poor are children and their parents. The figure would be even higher if one included other adults living in households with children. The economic problem of poverty is overwhelming children and the families they live in.

We should not be surprised. Given low unemployment a person can earn a modest income for her or himself. New Zealand Superannuation is indexed to these wages. These people share in the rising prosperity of the nation. But how can the children of the nation share, unless there is some public mechanism to steer a share of the nation’s income in their direction?

We like to say – we use to say – that New Zealand is the best place in the world to raise children. There is still a lot going for the New Zealand child. Many – but not all – experience a good physical and social environment, a loving family, and real opportunity. But the complacency of the ‘best place in the world to raise children’ slogan has meant we have one of the least supportive financial environments for children. International comparisons among rich countries suggest we are low on financial transfers to families with high on child poverty.

Official figures estimate that in 2001 New Zealand had about 29 percent of children in poverty, using the official poverty line. It thinks that in the 2004 year there was still 21 percent below the line, reflecting the effects of the fall in unemployment, rise in real wages and various government initiatives such as cheaper access to health care and the phasing in of the ‘working for families’ package which is redistributing income in favour of children with working parents. But as welcome as these changes are, there is no room for complacency: 180,000 children together and their parents are still be below the official poverty line.

Can we do better? Can we get reclaim the ambition that New Zealand should one of the best places in the world to raise children? We can. But to attain the goal we must think much more systematically about the poor, their needs and how to respond effectively to them.

Who Are The Poor?

So first, who are the poor? Given our failure to focus on children as central in poverty, we should not be surprised that the popular image of the poor is largely different from the reality. Of those who live in poor families:
– over half are Pakeha;
– over half live in two parent families;
– over half depend on earnings rather than benefits;
– over half own their own homes (with a mortgage) rather than rent.

The reason why the research picture of the typical poor family is rather different from the public image is that while ethnic minorities, single parent families, beneficiaries and renters have a higher proportion who are poor, they are a much smaller group in the entirely of the community, and so in total they are not the dominant group among the poor.

Focussing on these minority groups as the poor has two serious impacts.

First it divides the community. Emphasising the Polynesian single family living on a benefit in a rented house – a most untypical poor family – means that any family that does not have these characteristics but is in as great, or greater, need feels left out and resentful. We saw the effect of that alienation after Don Brash’s Orewa speech. The claims that policy favoured the Maori were extremely exaggerated. But the mainstream rhetoric suggested otherwise, and people felt angry, including, ironically, Maori who also believing the rhetoric could not understand why they were not receiving more from the misrepresented policies.

Over-emphasising the minorities also distorts policy, making policy delivery inefficient. It is not much use trying to eliminate poverty by targeting a small proportion of the poor. Conversely effectively targeting all the poor will address the problems of the Polynesia poor, and the single family poor, and beneficiary poor and the rental poor. That does not mean we should neglect them. Policy needs to be sensitive to the special circumstances of those in minority circumstances just as it has to be as to be sensitive to the majority.

Most of all, it needs to keep its eye on the ball. In the case of poverty the ball is children and their parents. Solve that one, and we decimate the number below the poverty line. A substantial proportion of the residual are in situations not particularly amenable to economic interventions. For instance there is a growing number of unemployed who suffer from psychiatric or drug abuse problems.

Resolving poverty among children and their families will affect other families who are already above the poverty line. That is because we cannot exclusively target on those below, as I shall shortly explain.

Additionally there are families who have solved their income deficiencies problems by making great sacrifices. A psychiatrist once remarked to me that all one (anonymous) patient needed was sleep therapy? ‘Sleep therapy’ I innocently asked. ‘Yes’, I was told. The mother was looking after the kids in the day, working at night: what she needed was eight hours good sleep a day. If we were to supplement her family’s income, the likelihood is she would have given up the shift work, and spent more quality time with the children. One might say they solved the household fiscal deficit, but created a social one.

Does Poverty Matter?

But, you might ask, ‘does poverty matter? I grew up poor, and look how well I did?’ The research does not argue that poor children will inevitably suffer in the long term. Some will be successful, often because of bit luck added to exceptional talents. What the research shows is that poor children are less likely to prosper.

Let me illustrate with an anecdote. Over a hundred children lived other in the street where I grew up. Only three of us got to university (two graduated) at a time when the university intake was 15 percent of the generation. That difference cannot be explained by the kids in the street being naturally stupid. Rather they were poor, and that limited their life opportunities.

Or consider health status (albeit with the caveat that the majority of the poor are healthy on the measure I am going to use). Suzie Carson and I looked at the health of children by their household income (adjusted for family size). We found that a child in a bottom quintile household were three times as likely to be in fair or poor health as a child in a top quintile household.

Why are poor children more likely to be sick? Their parents arnt nearly as prone to sickness, so we cant attribute it to family background. Rather childhood is period when individuals are more vulnerable to sickness – especially because of their living situation. The circumstances of the poor include less access to health care (including transport cost as a hindrance), poorer nutrition, and inferior housing, all of which are likely to be detrimental to a child’s health.

You may think that such outcomes are unfortunate or unfair. But they can also be socially damaging. How many adult New Zealanders with poor health are precipitated there by childhood conditions? How many miss out on life path opportunities indirectly because of poor childhood health, or directly because of financial limitations. We dont know the exact number, but it is likely to be large. From a child’s perceptive, the earliest years are the happiest days of one’s life – or they may not be. But from society’s perspective children are a social investment. Each generation’s quality of life is dependent upon the success of that social investment in younger generations. This becomes especially true when the generation retires because their welfare depends almost entirely on the younger generations. .

That so many children are in poverty suggests we are under-investing in them, even though we know that human capital is one of the keys to economic and social progress. The comparison with most other OECD countries supports the conclusion.

Investing in Children

If we decide to increase the investment, what should we do. The big investment areas are education, health services, housing, and income assistance.

The record is that the parental contribution to schooling has been increasing. There is a system of public funding which favours lower decile schools – the ones which tend to have more children in poverty. Even so, higher decile (and family income) schools are better funded overall, and the children benefit as a result.

The government has been increasing the subsidies for children visiting a general practitioner, and has also put a lot of effort into better public health for children. Those concerned with poverty should give the government credit for that poverty relief.

The government has also increased housing assistance, although I dont know how much of the funds go into the pockets of landlords and in higher house prices, rather than relieve the long term financial stress of poor families. There is still not a coherent approach to housing, although that was even more true in the 1990s.

Income Assistance

However, today I want to spend most of the time available exploring the issue of income assistance. Basically people are poor because they have not enough money. We can alleviate their poverty by giving them more. Of course, that wont solve it all, for there are other contributors to poverty. But without more income the other contributors will compound an already unsatisfactory situation. Income assistance is effective.

The catch about this strategy – of addressing the problem directly rather than through some partial and misunderstood interpretation of the real problem – is that it is expensive. The ideal situation would be a universal family benefit – one for every child related to age and the other children in the house – of sufficient value to take the poor out of poverty. But because the rich would get the same supplement it would be very expensive. Given that we only have a certain about of government support to give away, unless we raise taxes substantially, that which is available has to be targeted on the poor.

But it cant all be targeted only on the poor. Those who are just above the poverty line also have to have some income supplementation, for otherwise they would have no incentive to better themselves. Those just above them also need some assistance, for the same reason. So the support has to taper out.

Typically what happens is that as the income of the assisted rises, as well as paying income tax they also experience a reduction in the amount of assistance. For instance, if they earn a dollar, the government might take 20 cents in tax, but also reduce their family assistance by 50 cents. So at the end of the day they have only 30 cents in the hand despite having earned a dollar. We call the 70 cents in the dollar the ‘effective marginal tax rate’ or EMTR.

The Treasury estimates of the EMTRs on the second earner of two groups of households, are published as Figure 4.5 in the OECD Review of New Zealand. There are various other assumptions but for our purposes we dont need to detail them because the conclusion we are after is quite general and apply to other households.

What is instructive is that the effective marginal tax rates are very high on the left hand side of the graph, when the second earner is earning a low income, but much lower on the left, when the earner is a high income. The rising on the right from 21 to 39 percent is the progression in the income tax system. On the right, among the poor, the levels are higher: over 50 percent and even over 70 percent.

So the poor face higher marginal tax rates than the rich. Politicians bemoan their rich clients facing marginal tax rates of 39 percent. But the poor, who have very few politicians to speak on their behalf, face rates which are almost double the so-called ‘iniquitous’ rate on the rich.

The Treasury also provides estimates of EMTR for some beneficiary households. (Figure 4.4) They face even higher marginal tax rates, even tax rates of 100 percent, which means that if they earn anything extra they experience no rise in their income. That is what we mean by the ‘poverty trap’. Extra effort gives no extra reward. There being no incentive to make an extra effort, the family is trapped into a low income level. That is no only detrimental to them, but it is detrimental to us because if they are not working they are not contributing to national income, while they remain a burden on the tax system.

It is important to understand why this happens. The mathematical model is simple, but I’ll try to explain it in words.

Suppose we decided there was a minimum standard of living to which everyone is entitled. I’ll ignore here that we may say some people should earn it – a difficult direction when there is unemployment. Now I want you to decide what proportion of the average income that minimum should be. My experience is that people usually propose a minimum in the range of 50 to 60 percent of the average. So let’s say 55 percent. The theorem says that in order to guarantee a minimum income for everyone of 55 percent, there has to be somewhere along the income distribution an effective marginal tax rats a rate of 55 percent or more.

If you prefer a 60 percent minimum, then somewhere the EMTR will have to be 60 percent to more. And so on.

The theorem does not say where this high rate has to be exactly. It could be put on those with highest incomes in which case the system would be progressive. Or it could be put on those with lowest incomes and the system would be regressive in places. In practice we make the latter choice.

There is a nice little illustration of the theorem in the Treasury graphs. They show the rates before and after the working for families package. The effect of the package was to raise the minimum income for working families. The theorem predicts that somewhere there will be a hike in the EMTRs and, sure enough, the graphs show one.

At the time of the working for families package was introduced, there were some politicians who waxed indignant about the high EMTRs, observing that a family could substantially increase its earnings and yet have little increase in take home pay. Some, I’m regret, were hypocritical, for they did not draw the conclusion that the EMTRs on families with children could be reduced by raising the general level of income taxes. Or perhaps they are going to reduce EMTRs by reducing the minimum income that families are entitled to.

That was a major factor in the justification for the benefit cuts of 1991, and it was likely to be a factor as to why the working for families package did not raise the income of beneficiaries. A major concern was that there is not enough difference between the income of non-working beneficiaries and the income they would receive if they worked, it being argued that when the gap was small there was no incentive for beneficiaries to go out and find a job.

It is a complicated area. We face the uncomfortable tradeoff of being only to choose two out of the following three objectives:
– high minimum incomes;
– low tax rates on those in receipt of government assistance;
– low general tax rates.
Even so, the designers of the current system have not covered themselves with glory.

To give the government a little credit, it did its best with the ‘working for families’ package last year. The package is the tax cut we are demanding. What the government did was calculate the largest possible tax cut that could be phased in over the next three years, and instead of cutting general tax rates, they gave all the money available to low income families with a working parent. That may not have been many people’s priority, but child poverty reduction was the government’s, even though those without children did not get a tax cut. .

The package was too ad hoc, and it was hamstrung by having to ensure no one was worse off. A better strategy would have been to have started from zero and ask how the available funds going to families could be best spent. I look forward to the day such an exercise occurs. In the interim we have the working for families package.

Can Our Children Afford Tax Cuts?

Given the quantity of child poverty, you may think the package is too meagre. The government spent every penny it had left on the package, after its other commitments. That is why it had to phase it in over a number of years: there was not the revenue stream to introduce it in one hit. In a typical year the government has only an extra billion dollars or so to allocate on spending and tax cuts. About half has been going on education and health. So it is out of this smaller pot that the tax cuts in the working for family package has been funded.

‘But’, you may ask, ‘isnt the government running an enormous fiscal surplus’? The answer is no, it is not. Total Crown liabilities are projected to rise by $1.7b in the year to next June. ‘What about’, you may ask. ‘the enormous OBERAC surplus?’ But OBERAC, the operating balance after revaluation and accounting changes’, is an accounting measure and not the true fiscal surplus, because it does not include the various capital outlays of the government. OBERAC is not large enough to cover all the capital outlays. That is why the government has to borrow.

Regrettably, those unfamiliar with the fiscal matters focus on the OBERAC measure, including alas far too many journalists and politicians. It is unfortunate their misunderstandings – one might say ‘ignorance’ – misleads the public. However rather than go through the intricacies of the fiscal theory, which I did at a St Andrews presentation In Praise of Fiscal Sustainability a couple of weeks ago, let me give that paper’s summary of why we cannot afford a tax cut unless we cut government expenditure:

1. The government is already borrowing – $1.7b this year.

2.Consumer spending has grown faster than incomes – 17.7 percent against 13.3 percent. We have already spent the proceeds from the growing economy

3. Cullen has spent it all – just like every other Minister of Finance in election year. Of course he has. He would be stupid not to.

In the 1980s the Labour government borrowed to fund its tax cuts for the rich. The government account did not get back to fiscal balance until the early 1990s, when the incoming National Government made savage reductions on government spending, eliminating the fiscal deficit by increasing the social deficit. Poverty levels rose. Among those most heavily hit were the nation’s children.

Tax cuts funded by borrowing will raise interest rates and the exchange rate, and stagnate the economy, just as they did in the 1980s when there were six years of economic stagnation. Children born after those events never benefited from the tax cuts of the time and now suffer from them: from the long term effects of cutbacks in social expenditure and because they have to fund the debt servicing from the higher borrowing. Tax cuts in current circumstances are about getting today’s children and those yet to be born, to pay for our consumption splurge. We keep them in poverty to fund our greed.

Conclusion

Poor economic performance of the last twenty years is one of the limitations on our ability to give bigger tax cuts – to children, or anyone. In turn we will suffer from the inferior deal we gave to the nations children: we may already be suffering in high crime, more expensive social policy, and lower national income from less productive workers.

It is easy to say ‘child poverty does not affect me, and so it does not matter’. It affects all of us. At issue is whether we are willing to make the sacrifices to invest in the nation’s children now, to give the nation and each of us a long term benefit.

Is New Zealand the best place in the world to bring up children? For many children, the answer is still ‘yes’. For too many others the answer is a sad but firm ‘NO’. We are not going to make that slogan true by endlessly repeating it, We make it true by committing ourselves to the goal. The first commitment has to be address child poverty.

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Educational Aspects Of My Time at Christchurch Boys’ High School: 1956-1960.

This note was prepared on request of a educationalist who is writing a history of some aspects of the school for its 125th anniversary in 2006

Keywords: Education;

The mid 1950s must have been a pivotal time for Christchurch Boys’ High School. A number of new high schools opened up in Christchurch – Aranui, Cashmere, Linwood, Riccarton, Shirley Boys’. The challenge was not the drawing off of students, for this was a time of the ‘bulge’, and the reputation of the school was such that it still attracted a high proportion of the best students. But new schools need teachers. CBHS lost a number of its better younger ones to senior positions in the new schools. Their promotion at CBHS had been blocked by the older generation, many of whom had been there for decades, perhaps after returning from the Second (or even First) World War. Those teachers, near retirement, were too often tired and bored, at best teaching solidly rather than inspiringly.

I tended to be in top forms. In my first year in 3A1 I had, like all other new entrants, done the common course of English, Mathematics, General Science, French, Social Studies and core subjects, reasonably successfully, although I came second to bottom in the class in French. To my regret, languages have always proved beyond my competence, although perhaps like Winston Churchill it meant I have mastered English better. So it was inevitable then I went into 4N1 (N = non-language, or science), probably being deemed too bright for the S (Social?) streams. (Yes, the school had a marked academic hierarchy.)

English was a compulsory requirement for School Certificate. I suspect the class was treated as doing it grudgingly. Certainly I was never inspired by any of my four English teachers. Despite them, I learned to love some poets – Keats and Tennyson. But there were no twentieth century poets, not my beloved Donne (I would wait for university to meet him – and to engage properly with Shakespeare), and certainly no New Zealand literature. The best part of English at school was the readings from the Bible in Assembly. They were meant to be for religious purposes and perhaps I imbibed a little, but I gloried in the language of the King James Version. It is with me to this day, and I have asked for some of it to be read at my funeral.

In my lower sixth year, I was entranced by a production of Shaw’s Arms and the Man by, as I recall, students from Christ College and Christchurch Girl’s High. I got all of Shaw’s books out of the library, and then a whole range of other playwrights and related writings of the period. I read them in class, moving down to its back so the teacher could not see. (On reflection, he must have known, but had not the energy to find out what was going on, nor to encourage me in what was a seminal moment in my life.)

I read a lot. Probably more than the rest of my science class, raiding both a perfunctory school library (the science section aside) and the Canterbury Public Library. I read mainly non-fiction. But this was Mum’s influence, not the school’s.

It is possible that I made greater use of the opportunity to write school essays than others. I’ve written about the impact of Charles Lamb’s “Dissertation on Roast Pig” at primary school, and how it seduced me into admiring the essay as a literary form.

Part of the problem may have been the curriculum. My geography teacher was lively enough, but the subject was about regurgitating a series of facts. It was the closest we ever got to a social science at school. It may be surprising that geography had so little influence on me, but I was never good at remembering lists. My forte is about the relationships of facts and theories – of analysis.

The narrowness of the School Cert vision cost me dearly in chemistry. I had not realised that by the end of the first term of our fifth year, we hade moved past the prescribed curriculum onto the more analytic University Entrance one. I prepared the latter, and was hopeless in the School Cert exam. This accelerated learning also occurred for mathematics and physics, but because they were more a continuation of the School Cert foundations, rather than a new direction, I was not as punished.

Not that they were completely bereft of memorising. In the School Cert physics exam we were asked which way the current ran in an electrolysis of water. I couldnt recall having been taught that – probably forgot – so I answered from first principles, working out which way the electrons ran. (I am skipping steps here, but it requires an understanding of the different configurations of an ion in a solution and an element in a molecule – UE chemistry knowledge.) However the current direction convention was introduced before the underlying physics was understood, and current went in the opposite direction to the electrons. So I got zilch, even though I knew a lot more physics than those who guessed or memorised.

I was to do better in chemistry in my final year, in part because it was more analytic, but also because of an enthusiastic teacher Alan Woof, who also looked after the science section of the library. He was most disappointed that I did not take up chemistry, unaware that given my clumsiness, in a laboratory I was an accident waiting to happen,.

The other enthusiast was my School Cert physics teacher Trevor (‘Mouldy Mac’, I dont know why) McKeown, who went off to Riccarton High in my sixth form years (and retuned later to be deputy principle of CBHS). I still recall his first fourth form lesson: a tiny little man hammering one fist into the other to emphasise that ‘the absolute unit of force was that force which gives unit mass unit acceleration’.For many it would be a mantra to be remembered, but it is an analytical relationship – one of Newton’s laws, summarised by F = m.a.

Mathematics was, as far as the school was concerned, where my talents were (today we might say my ‘comparative advantage’). They had been identified and fostered by Walter Sawyer (W.W. – of those wonderful Penguin introductions to mathematics) when I was in primary school, but that is another story. My mathematics teachers were solid and experienced rather than inspiring, so we plodded through the curriculum.

I had only one week off from school through illness. It was when the class did permutations and combinations. I caught up, but I have never been as fluent in that topic as the others. Perhaps the teaching was more than just going through the routines.

But it certainly was not inspiring. It gave me no sense of mathematics as a part of our cultural heritage. (I picked that up from J.R. Newman’s wonderful World of Mathematics borrowed from the Canterbury Public Library. I now possess a copy of my own.) Nor can I recall the sheer joy of marvelling when a particularly elegant piece of mathematics comes together. I still get that. Yes, I read mathematics – and science – to this day.

Given this intellectual austerity, and the narrowness of the curriculum, how did I end up an economist? In one sense I have never ceased to be an applied mathematician, but that story belongs to my time at university, under Derek Lawden. The other influence was my reading, which cultivated my interest in society. Shaw et al were particularly important. I still enjoy some of his plays, and can when necessary quote his bon mots. I was rereading some Fabian essays recently, and was struck by how they were anchored in nineteenth century economics. So I was studying economics at school, albeit outside the range of my teachers, even before I realised there was such a subject.

There were the core activities — art, cadets, craft, history, music, sport – all of which were pedestrian, nicely illustrated by my third form art classes. The teacher was simply not interested. Perhaps there were a couple of talented students in the class with whom he gave time, but the rest of us were left to our own devices. We discovered that architecture was a an art form, and I spent the year designing houses, always with the study at the centre. Elementary technical drawing really.

I dont recall ever being shown an art work or having its properties discussed. That I learned as an adult – and still not very well. Similarly the beginnings of my interest in classical music come from Dad’s collection of LP records. But I did enjoy singing – although again I was bereft of talent. I loved Assembly, the singing, the bible readings, the feeling of a school as a community. My favourite song was ‘Jerusalem’, something I have also asked for my funeral service, albeit with an altered last line.

Looking back, I am struck how knowledge was siloed, so that the interconnections across areas I revel in were never drawn. For instance it is only recently that I discovered that one of my favourite school songs – by the local composer Vernon Griffiths, as I recall – was the twelve lines of extract from Milton’s “Il Penseroso” beginning ‘But let my due feet never fail’. I suspect the music and English teachers never got together.

There were also school clubs, but I never joined in them, except for sport and the debating society. (The latter may not surprise those who know me later in life, although I was not a good debater, for already I was too intense about ideas.) Nor was I a laboratory or library boy. I dont know why. Perhaps I was too shy, perhaps it would have interfered with my reading. I dont think I was ever asked.

This may seem to be a very grumbling account of my secondary schooling. But I dont think of it that way. When I think about Christchurch Boys’ High School in the late 1950s, I can identify two major merits. Crucial was the influence of the boys in the class.

I am often struck when reading about education how we focus on the institution and teachers, but how important the composition of a class was for me – for all of us. I recall one student, his uncle was the radio doctor, writing his fourth form future career essay on how he wanted to be a doctor. It was not accidental that a dozen or so of the class later went into the medical profession too, given his enthusiasm and charisma.

We were an exceptionally able class, with a kind of academic camaraderie which largely ended when we went to university and to our different courses and, later, locations outside Christchurch. We worked conscientiously, dragged along by the class academic leaders and by the pressure of regular exams. Every year, from the fifth form (if not the end of the third form year), we sat two sets of exams, internal or external. It certainly battle hardened me for the six years of university exams I would next undertake. It must have been the source – Mum aside – for my workaholic habits.

In my final year I was still only a private in the cadets, relegated to the ‘Intelligence’ platoon of the general headquarters company. The platoon had no function, unlike the first two platoons which were training NCOs, or Signals (who romped around the campus playing with their wirelesses). It was a ghetto for senior pupils uninterested in the military. As the school battalion’s major who never taught any of us said, when he found us lounging on the bank of the river which ran through the school, ’the biggest bunch of slackers in the army’. He did not know that we would retire to an empty classroom and study for exams. The following year, after we left, he announced at the grand parade that the previous year’s Intelligence platoon had won an exceptionally high number of scholarships and bursaries. The military slackers were not academic ones.

The other thing about the school was its ambience. Bruce Jesson and Tony Simpson, a couple of years behind me but from a similar backgrounds, have criticised the school for its elitish middle-class values. While I was not particularly aware of them when I was there, on reflection they are probably right. If one was not an outstanding academic, sportsman, or in some other area of public achievement, or if one’s father was not well known, one was largely ignored.

That all of us were not well known is understandable, given that the annual intake was over 200 boys. As I recall our third form English textbook, I think it was, had Kipling saying he was a’ second eleven sort of person’. A recent search suggests either the original quotation was doctored for schooling purposes, or my memory got it wrong. Whatever, I have been much comforted by the thought all my life. My mathematical sense tells me that you cant have a first eleven unless there is a second eleven; without privates there would be no platoon for the NCOs to run. We second eleven people are the foundation of a good school.

CBHS recognised this. Institutions which tolerate eccentricity are gifts to mankind. The school gave me what it could, and otherwise left me alone. In return I observed its strange rituals torn between the fascination of the outsider and the commitment to a community.

Perhaps it would have been better had the school been able to give me more in art, literature and music, but one cant have everything. (I have no expectations of secondary schools in social sciences – it is hard enough to do them well at university.) But generally, it would be foolish for me to say I wish the school had been different. For I would be different. Not better, not worse – but a different person.

**************

I could leave this memoir there, except there is a curious coda. I have mentioned that I was in the top third form and the top science fourth and fifth forms – probably located between the middle and the bottom. (Observe how accurately we knew the hierarchy of the school.) My School Certificate results were not outstanding, although thousands of students would have been delighted with them. As already mentioned, I failed the chemistry exam badly. The geography exam was a modest pass, in part because I misread the instructions: when told to do two questions, one from each section, I did two from each section. (My sub-editors over the years will not be surprised at such a mistake.) The mark for mathematics was high, and English and physics were comfortably above average without being excellent.

The school never discussed these outcomes with me. For the lower sixth they put me in the top two mathematics class (I having exchanged geography for mechanics/applied mathematics), in a lower class for chemistry and physics and in the second class for English (that being my home form). In my upper sixth year my English/home form was upgraded to the top class in the school.

Like the rest of that class, I sat the Scholarship/Bursary exams – ten of them, so demanding that for the following month all I could do was play patience. A bursary would have been nice, but my purpose was to do well enough to go straight into second year university mathematics, there being considerable overlap between Scholarship and Stage I mathematics.

The results first arrived by newspaper. I anxiously scanned the bursary results, but while observing many of my classmates, I could not find myself in the list. I was hugely disappointed. I then turned to the Junior and National Scholarship lists which preceded the Bursary list to find other people from the class. Among the 10 or 11 Juniors there were three of my classmates at first, second, and tenth. (They went on into chemistry, physics and later the church, and engineering and later property development.) As I have said, they dragged the class through in a year of outstanding academic performance.

Then I turned to the forty odd National Scholars, again to find who in the class had succeeded. There, 21 places from the top including the Juniors, was my name, fourth in the school. So I got directly into Stage II mathematics.

I left school with the same ambition that I entered it. To be a teacher. I still have that ambition. But not teaching the same course, to the same boys, for forty odd years.

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Keep to Policy, John

Keywords: Regulation & Taxation;

Other articles on the 2005 Election Tax Debate

This is for the record, rather than of any great moment. The July 18 edition of “The New Zealand Farmers’ Weekly” included an extract from my In Praise of Fiscal Sustainablity, and a reply by National’s spokesperson on Finance, John Key. I reluctantly replied as follows. The title comes from the headline the editor put over the letter when it was published in the issue of July 25.  

This election should be about policy not personalities. So I regret John Key wasted a quarter of his reply to my extract. (July 18, p.11) with a personal attack. Readers may judge whether he is justified by reading the full speech, “In Praise of Fiscal Sustainability”.

Every politician out of office promises to eliminate waste. They seem to fail in office, because along comes the next opposition politicians making exactly the same claim. Key would do well to reflect on the remarks by Act list candidate Graham Scott, who was Treasury Secretary from 1986 to 1993.

He said National is “talking as though it will be easy to cut enough fat from the state to pay for tax cuts – it won’t be. Believe me I’ve been there and I have done that. The combination of the State Enterprises Act, the Public Finance Act and the State Sector Act, which I helped to design and implement, brought remarkable improvements in the effectiveness of public organisations and lower costs. … We can get better value for money but it has to be done with a scalpel not an axe”.

He also said “I know more about controlling government expenditure than the National front bench.”. When I first saw that, I thought he was exaggerating.

Brian Easton, Wellington.

The caption to the letter published in the July 25 edition was chosen by the editor.