Why Does Policy Failure Dominate New Zealand Government?

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This was offered to a media outlet ‘accepted’ but not published. Excerpted from the just published In Open Seas.

The Labour Party halved its vote between the 2020 and 2023 elections (while National barely increased voter numbers). The coronial enquiries into the last election are yet to be held, but they will conclude Labour’s loss was partly because of  factors outside its control – like the unwinding of the COVID crisis, partly political factors but also because of inept policies.

In fact Labour was elected in 2017 without an overall policy framework – although a few of its ministers knew what they wanted to do in narrow areas. It established a range of unmemorable working parties to give them policies which were easily captured by slogans but it had little genuine policy content.

The consequence was that the Ardern-Hipkins Government was largely inefficient and ineffective. Perhaps the prime example is that it did not understand its flagship policy enshrined in the Child Poverty Reduction Act which, if implemented, would ultimately have reversed the Richardson-Shipley tax and benefit cuts of 1990-1. So it achieved little reduction in child poverty; the Luxon Coalition Government will achieve less.

My just published book, In Open Seas: How the New Zealand Labour Government Went Wrong: 2017-2023, is a detailed account of many of these policy failures. Its broad conclusion seems likely to apply to Luxon’s Coalition Government when its achievements are reviewed in three years. It is easy in Opposition to be critical of the Government’s policy. It is much harder to do better.

This is well illustrated by the current fracas over Health NZ. Labour’s criticisms are very damaging, although the Government has been scoring own goals too. What is not being reviewed though, is the recognition that the entire policy framework, with its emphasis on centralisation and generic management rather than on patient needs and professional involvement, may be wrong. In power Labour may well continue with its past policies based on this framework and be subject to similar criticisms.

What was instructive, which I realised while writing In Open Seas, is that repeatedly New Zealand starts off with a poorly conceived policy framework, which becomes almost impossible to break away from, even though it proves ineffective. That requires careful analysis and political courage. Instead, the policies are patched and patched again until we end up with Heath Robinson contraptions. They are easily criticised by the Opposition but after an election the roles switch, and the contraptions continue with only more and more patches.

This is nicely illustrated by our carbon emissions regime. While tackling a vital issue its implementation was poorly designed decades ago and it has proved impossible to develop effective remedies because each re-implementation, no matter how effective, generates a group of powerful political interests which veto significant change. (Remember Muldoonism?)

Not surprisingly, the electorate despairs. The party-list shares of the two main parties fell from 75 percent in 2020 to 65 percent in 2023. As 2020 suggests, coalition governments may not be inevitable, but what seems certain is that if the current government does not lift its game or Labour similarly fails when it returns to government, the public will become increasingly disillusioned with the main parties. It may turn to minor parties resulting in the fragmentation we see in France with its associated political shambles or perhaps it may even turn to authoritarian solutions as is happening elsewhere.

Economic Progress May Not Add To Wellbeing

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

How the Prospect Theory of Behavioural Economics Makes Economic Analysis Difficult

Behavioural economics has been described as the most revolutionary thing which has happened to economics for ages. The notion that people do not behave like ‘rational economic men’ (women are mainly ignored) undermines the microeconomic foundations of the subject. Not the empirical evidence on which economics is based – only its interpretation. It also impacts on normative economics, as this column explores.

I’ve written a number of pieces on behavioural economics (see here). This column explores the part known as ‘prospect theory’ for which Daniel Kahneman was awarded a Nobel laureateship in 2002 (as would have been his co-researcher Amos Tversky had he been alive). The theory unites three basic observations: people treat gains differently from losses (known as ‘loss aversion’); people place unequal weight on outcomes with certainty compared to those with uncertainty; and the structure of a problem itself may affect the choices made.

This column focuses on loss aversion, with an example of how it complicates analysis. Suppose a good quality cost-benefit analysis – they occur less frequently than they should – concludes that a project would generate an extra net $1 (add as many zeros as you feel necessary). Because the study is of high quality it also will set out winners and losers, finding perhaps that the winners receive a benefit of $3 and the losers $2 – giving the net aggregate benefit of $1.

Typically the economist is not allowed to tradeoff the winner’s gains against the loser’s losses, because that involves the political judgement of comparing people’s welfare; the profession has no particular expertise in interpersonal comparisons. In principle the tradeoff is left to politicians, although sometimes economists don a politician’s hat – without telling the public – and advocate one way or the other.

Some economists argue, using ‘Hume’s Law’ (David Hume would be embarrassed to be associated with it), that ‘a dollar is a dollar’ and favour the project since it adds a dollar to the economy. (There is also a complicated theory of ‘compensation’ which need not detain us here.)

What ‘loss aversion’ says is that different dollars have different values. Suppose you did not know you were a winner or loser but that your chances were half and half of being either. The empirical evidence is that, as a rule, most people would prefer not to lose the $2 dollars despite the equal possibility of winning $3. Typically their tradeoff is between wanting a $4 win in exchange for a $2 loss. In effect, they are valuing a dollar lost the same as two dollars gained – bang goes Hume’s law.

In which case how does progress happen when there is loss aversion? Surely there will an inertia from the loss aversion often outweighing the immediate gains from progress.

In a market, winners frequently succeed and losers suffer because there is no market mechanism to compensate losers. How often does a news story amount to the losers appealing to the government to protect them from a market decision which is against their interests?

Where politicians have some influence, the project may still go ahead despite the losses outweighing the gains. The political decider may favour the winners over the losers, the costs of opposing by the losers may outweigh the loss from the project (especially if there are a lot of small losers and a few huge winners), the losers may not realise they are being screwed and so on.

You can see one of the reasons why the evidence points to market economies progressing –with greater innovation and higher output – more than ones which are dominated by a centralised authority. You can also see how market decisions will be continually appealed to government to be overruled or moderated, not to mention the difficulties governments face when they are making changes. So while on conventional measures there may be progress of a kind, there may be considerable grumpiness from people offsetting the gains with double their losses.

And yet there is progress. The complexity is captured in a story about Ken Findlay, a feisty truckie and trade unionist. When the freezing works he worked at was closed and jobs were lost, he was a prominent and vociferous objector. Some years later he said  that the closure was the best thing which happened. I did not ask him why – alas he died last year, so I can’t ask him now. I am left with the puzzle of the apparent contradiction.

I doubt that his protests at the time were just on behalf of his devastated mates. Rather, he seems to have changed his mind or perhaps, it might be better to say, that his thinking evolved or that his subsequent experience was not as damaging as he feared.

Most of the experiments on which behavioural economic theory is based, perhaps inevitably, have very short time dimensions so they tell us little about how people’s thinking evolves through time. The one hint comes from Kahneman’s Thinking Fast, Thinking Slow. It suggests that we do not handle time in the way models of rational economic man assume.

This is all very troubling – behavioural economics is troubling to the rational thinker. Here is the best I can conclude at this stage.

First, the indicators we generally use to measure economic progress may not reflect improvements in the wellbeing of everyone (even after acknowledging their standard limitations).

Second, those who are hurt by change may be more hurt than those who benefit from it. We may ignore or discount the losers; sometimes we don’t even notice them.

Third, people may handle ‘progress’ differently in the long term from the short term. It is possible that many remember the short-term downsides and forget the long term upsides.

Not very strong conclusions, I’m afraid. Like so much of behavioural economics, the main conclusion is not to be too confident of conclusions dependent upon the traditional framework of the rational economic man.

IN OPEN SEAS: How the New Zealand Labour Government Went Wrong: 2017-2023

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

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Brian Easton 

Published in 2024 by Kea Point

ISBN 978-0-473-72573-0

380 pages

The book is rich in analyses of policy directions to progress Aotearoa New Zealand.

An account of the policy development of the Ardern-Hipkins New Zealand Labour Government (2017-2023) which focuses on its policies in the context of New Zealand’s longer term economic history, updating Not in Narrow Seas. It includes chapters on wellbeing, economic and social development, the international order, migration and diversity, Māori issues, Te Tiriti o Waitangi, governance, generic management, the healthcare system, education and science, inequality, poverty, modernisation, covid policy, climate change and the evolving direction of New Zealand.

RRP $45: Available From

Reviews:

In Open Seas; A Book (self-review)

Will Labour’s Failure Condemn the Future (Neville Gibson)

CONTENTS

  • Preface
  • Introduction
  • Prologue: The Sixth Labour Government
  • 1. Introducing the Author
  • 2. Wellbeing
  • 3. To Market, To Market
  • 4. Economic and Social Development
  • 5. The Environment
  • 6. Overpowering Markets
  • 7. The Rich World and Secular Stagnation?
  • 8. The International Order
  • 9. The Open Economy
  • 10. Migration and Diversity
  • 11. Māori
  • 12. Te Tiriti o Waitangi
  • 13. New Zealand’s Governance
  • 14. Centralised New Zealand 
  • 15. Co-governance
  • 16. Accountability
  • 17. The Public Record
  • 18. Generic Management
  • 19. The Healthcare System
  • 20. Education and Science
  • 21. Inequality
  • 22. Poverty
  • 23. Redistribution
  • 24. Modernisation
  • 25. Making Policy
  • 26. Covid Policy
  • 27. Climate Change
  • 28. The Public Discourse
  • 29. Mañana New Zealand
  • Epilogue
  • Appendix: Sailing in a New Direction
  • Bibliography                                                              

The Meaning of MAGA

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

The Dangers of Delusions of Grandeur

This is a column about MAGA – Make America Great Again. But as a prequel I scroll back sixty years to when I was teaching in England. I have fond memories of the students – bright and personable as they were. But their attitudes to England and the world left me uneasy. In the time of their great-grandparents – before the Great War – Britain and its empire had been the world hegemon. Those students persisted with the notion that their country was considerably more powerful than was warranted in the 1960s. They thought it had won the Second World War, discounting the impact of the Russian population and the American economy. They thought in terms of the British Empire (oops, Commonwealth) ignoring that the core element of India had gone AWOL, and that other elements – even New Zealand – were forging their own paths.

I concluded that there was considerable inertia in international attitudes over the generations but hoped that the Brits would steadily come to the realisation of their relative decline. I took comfort that the support of Edward Heath and Harold Wilson for the (now) European Union, and the outcome of the referendum in 1975 which favoured joining it, was evidence of Brits revising their perception. I recall, however, one of my students supporting joining the Union on the basis that it would benefit from British leadership – the EU as a kind of third British Empire.

Britain proved unable to lead the EU. Germany was bigger and had more weight; France, Italy and even Poland and Spain were only a little smaller. In 2016 the English and Welsh voted to leave and the Northern Irish and Scots voted to remain. Exactly why they voted as they did is complex but I heard in the campaigns echoes of the delusions of grandeur and that Britain could go it alone. Older voters tended to vote ‘leave’, and there was talk of reviving the British Commonwealth – yeah, right. (Of course it could go it alone at an economic cost, but its weight internationally would not increase.)

Britain’s hegemony was being displaced by the US’s. In 1950 the US produced around 27 percent of the world’s goods and services (measured in common prices – ‘purchasing power parity’). The next ones down were the Soviet Union at 7 percent and the United Kingdom at 6.5 percent. The rest of the world was desperate for US dollars because their inward-facing postwar reconstruction meant they had little to sell to the US. No other country was anywhere as near as militarily powerful, although the Soviet Union had just tested its first nuclear bomb in 1949. I do not know how to measure it, but cultural hegemony had shifted to the US too – think of Hollywood.

Seventy years later it is a very different world. China produces 19 percent of the world’s GDP, ahead of the US at 15 percent. The EU (without Britain) is fractionally behind also at 15 percent. India is at 7.5 percent and Japan at 3.7 percent. Further down, Indonesia, Brazil and Turkey join Russia and Britain in the 2 to 3 percent group. (The ten member states of ASEAN produce about 5.7 percent; Australia is about 1.0 percent, New Zealand a sixth of that.)

A caveat is that while China’s economy is bigger because of its larger population, its productivity is markedly lower and its discretionary surplus smaller. (However, its more authoritarian governance may find it easier to deploy its surplus for international purposes.)

Moreover, even today no other country is as militarily powerful as America with its global reach. But, as local wars demonstrate, other countries may challenge it in a region, while a US presence may change the balance of military forces as it does in Europe, the Middle East and Taiwan. None of the remaining military powers has a global reach. Even China’s military extends outside its immediate region only to protect its supply routes. Otherwise, it confines itself to its ‘region’ although, as boundary disputes with India and in the South China Sea (to use its most popular name) plus Taiwan indicate, others may have different views of what exactly is China’s region.

It could be argued that the US has not the commitment to exercise its global military reach. Nowadays it may be less willing to commit troops outside its borders and you may think its support to Ukraine has been less than wholehearted. But decades after 1956, Hungarians recalled what they thought was a betrayal when the West gave no significant support to their uprising.

Apparently the Pentagon is less confident that it can fight two major wars, a position underlined by Donald Trump who wants Europe to bear a greater share of the burden of confronting Russia, presumably to free up US military resources for other theatres.

(Because of the global use of English, US culture is still significant, but probably diminishing. Britain also punches above its weight culturally.)

MAGA is a reaction to this change. Observe the second A for ‘again’. It says America was once great but is no longer. However, its diagnosis is hardly convincing to the reflective observer. It explains the loss of greatness as a consequence of the failure of the leadership in Washington, typically for conspiratorial reasons rather than the structural reasons just outlined. It concludes that what is needed is a new leadership not beholden to the ‘deep state’ in Washington – enter Trump.

With one exception, Trump’s proposals to MAGA are unclear. He is promising to increase tariffs on imports, especially those from China. The Chinese economy appears to be in trouble. Possibly it has reached a similar stage to the Japanese economy in the 1990s, when its economy seems to have absorbed all the international technology it could and it stagnated for a number of decades.

But China aside, a 20 percent tariff on the rest of the world is likely to be extremely disruptive because there will be retaliation. A big change over the last 70 years is that in 1950 the US exported about 3 percent of its output; today the figure is more like 11 percent. The US is also vulnerable because of the international involvement of US corporations which could be subject to boycotts. (X and TELSA are already prominently mentioned.) How a global trade war will evolve can only be guessed, but it will be ugly – wars are. International output will fall, and unemployment rise.

A further complication is that the world institutional architecture was largely developed shortly after WWII, favouring the US. It has, with four others, a veto in the Security Council in effect castrating the United Nations. Its institutional power in the IMF and the World Bank reflects the international economy of 70 years ago. It has paralysed the workings of the WTO by refusing to approve judicial appointments to its appeal authority.

So international fora are not going to be much help. Yet under MAGA the US can only bully, not lead, the international community. My guess is that the consequence of any thuggery will be a further weakening of the long-term influence of the US as the rest of the world evolves institutions to deal with the bullying. It won’t be easy and it won’t be instant. It certainly won’t be easy for countries as small as New Zealand. Expect a realignment of our international connections.

Notes on Governance and Te Tiriti

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Notes for a Friend

Te Tiriti gave ‘kawanatanga’ (governance) to the Crown but ‘rangatiratanga’ to Iwi (I’ll come to a complication). ‘Sovereignty’ confuses the discussion because it could be either kawanatanga or rangatiratanga – the sovereignty of the state vs the sovereignty of the individual.

The governance vision in 1840 was a minimalist state. The 1852 constitution even allowed the possibility of separate Māori provinces. This was never pursued and in 1876, non-Māori provinces were gutted of serious power too. New Zealand became increasingly centralised, especially as geographic connectivity increased.

The centralised governance was underpinned by a majoritarianism which discounted, ignored and suppressed minorities. Māori could be largely ignored because most lived rurally.

What is happening today is that a whole range of minorities are objecting to majoritarianism. Interestingly the biggest ‘minority’, women, has been largely incorporated into the majority. (Gays and lesbians similarly.) But Māori have not been; yet following urbanisation they can no longer be ignored. That may be because they have a different agenda but also that those Māori whose demands have been met (and so have been incorporated) don’t speak up.

Some of the Māori solutions – including partnership (as some have interpreted it rather than as the Court of Appeal intended) and co-governance – involve centralisation and/or majoritarianism. Traditionally their Iwi were organised hierarchically (more below) which makes this option attractive to the elite. It was not coincidental that the chief advocate for co-governance was from the Kīngitanga.

However, neither is politically feasible (given that it is unacceptable to the existing majority) nor does it address the fundamental problem of multiple cultures trying to coexist. (More New Zealanders report allegiance to non-Māori, non-Pakeha ethnicity –e.g. Asian and Pasifika – than report Māori ethnicity.)

It seems to me that if New Zealand is to survive without intolerable civil tensions, the need is for a more decentralised political economy but not as decentralised as the Rogernomes envisaged. There are key elements of the good life—such as education, health and welfare – which cannot be delivered at the local level. But more can be delivered than currently. Working out what has to be done is not easy for at least two reasons.

First, New Zealand has political culture of majoritarianism. Even neoliberals when they get into power seize the levers rather than devolve them. For instance the ACT Treaty Principles Bill is a majoritarian solution in that the effect of the proposed referendum would be for the majority to impose a particular (ahistorical) interpretation of Te Tiriti. (Conversely, one is amused how politicians who lose power start advocating decentralisation, despite their having been centralisers when they were cabinet ministers.)

Second, a working decentralisation requires a ‘fair’ income distribution which can probably only be attained by centralist interventions. For instance, while greater local autonomy may be a key element, that local authorities depend upon rates as their main source of revenue makes effective autonomy impracticable. The same applies to individuals who without income lack autonomy.

Any shift towards greater decentralisation could be structured around treating Te Tiriti as a social contract, as it appears to have been be envisaged by at least one drafter (Busby). It leaves governance to the Crown, but the maximum self-determination/autonomy (rangatiratanga) to individuals. There is an obvious tension here but it rules out majoritarianism.

I’ll leave the details of the implementation to another venue. (Personally, I favour an incremental, organic approach. I have long supported increasing the autonomy of local authorities; this does not address Māori ‘nationalism’ concerns though.)

I need to say something about the role of Iwi. Strictly, the effect of Te Tiriti was to preserve rangatiratanga for the collective Iwi, rather than the individual Māori – that is the way they thought and were organised at the time.

The treaty settlement process has recognised this. While it strengthened Iwi financially, and hence politically, the Iwi are still not strong enough to affect the welfare of most of its members materially. I looked at the accounts of the first Iwi to settle and one of the largest and strongest (Tainui) and found that while it had enough income for its elite and governance (in this case the Kingitanga) and to support its various marae, there was little left for a dividend to its membership.

Every Iwi faces the challenge of sustaining active membership given that most of its members live outside the rohe and have multiple Iwi memberships, while their Māori ancestry is increasingly diluted. I’ll stop there except to say that my guess is that while Iwi have an important role in the evolution of Māori nationalism it may not be as central as they hope. The centre is likely to continue to have a greater influence on the wellbeing of Māori.

What Was the Hīkoi Against the Treaty Principles Bill About?

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

Some analysis by a social statistician. A note for myself.

On 20 November 2024 around 42,000 people crowded in and around Parliament Grounds nominally protesting against the Treaty Principles Bill after a Hīkoi which came from the North Cape and the Far South. What exactly was going on was more than just a protest against the TPB. This note attempts to contribute to the understanding of what was happening.

Who Were Protesting?

The police estimated the crowd as 42,000 people, presumably based on the number who marched along Lambton Quay, plus adjustments such as for those who went direct to Parliament Grounds. This was almost certainly the largest single protest in New Zealand’s history.[1]

I looked at one photo of the densely packed crowd. As best as I could judge, only about 5 percent looked non-Māori (which does not mean they lacked Māori ancestry). For caution, let us double that figure to 10 percent – say 4000 in the crowd. We also deduct another 4-8000, say, for those who came from outside Wellington. That would mean 30,000-35,000 of protesting Māori came from Wellington.

There are about 90,000 people of Māori descent in the Greater Wellington region. It looks as though at least a third of them were at the demonstration. Allowing for those who were not there because they were too young, too old, disabled, had other commitments or could not travel, and the total of the attendees and the sympathetic absentees must be around half the local Māori population.

Extrapolate that proportion to the national population (cautiously since Wellingtonians are likely to be more political) and we get about half a million Māori who were supportive of the demonstration – that is, 10 percent of the New Zealand population.

However, without a survey, we cannot estimate what proportion of the non-Māori population was supportive (nor what they think).[2]

How Does Te Pati Māori Fit in?

I have seen the Hīkoi dismissed as an instrument of Te Pati Māori. For the record, the party received about 88,000 list votes in the 2023 election.[3] Most of those participating in the protest did not vote TPM in 2023.

Obviously TPM hopes the Hīkoi will enable it to recruit more votes in 2026 (although it already holds six of the seven Māori seats). But equally obviously, ACT hopes its promotion of the TPB will help it recruit more votes from those who are uneasy with Māori aspirations. (It says it is gaining support from 2023 National supporters.)

It may be that TPM activists played a larger role in the organisation of the Hīkoi than their electoral weight suggests. But the Hīkoi was connecting with more than just TPM voters. It involved deeper issues than party politics.

What Were They Protesting About?

So what did the protestors think? There were very few placards, which suggests either that the crowd was unfamiliar with traditional modes of demonstrating or that they were from an oral culture. ‘Kill the Bill’ is only a great chant, not a manifesto.[4]

Both National and New Zealand First spokespeople said the protests were pointless since the Treaty Principles Bill would not pass a second reading. They are saying the TPB will be ‘killed’, but more slowly than the demonstrators were demanding – strangled rather than shot.

But were the demonstrators as naive as the spokespeople implied? It seems likely that the Hīkoi was treating the TPB as symbolic, reflecting a deeper concern.

The new National-led Coalition Government has rolled back a number of initiatives involving Māori that the previous Labour Government had advanced. ACT’s TPB is probably the most extreme and thus the most provocative of these rollbacks.[5]

Here, as elsewhere, the new Government’s policy objective has been to get the country ‘back on track’, the track being the policy framework at the end of the Key-English Government in 2017. It would appear to be responding to those who consider recent policy developments towards Māori have excessively favoured them.

I do not propose to evaluate this tension, but one can say, evident in its response to the Hīkoi, that the current government has no clear idea of a solution to the issue – perhaps surprisingly given that the current Cabinet has more members of Māori descent than any previous Cabinet.

Perhaps their inability illustrates that while there is a tendency to treat Māori as a homogeneous community, the fact is that it is deeply fragmented on most issues (as are non-Māori).

The irony is that the TPB may have done more to unite Māoridom than at any time in the last 150 years, or even further back given the traditional fractious relations between Iwi. It is always easier to unite against the government than to offer a coherent alternative.

Endnotes

1. There are higher estimates, up to 100,000.

2. I saw no Asians or Pasifika in the pictures of the demonstrators; presumably those who attended were at the back.

3. Because we do not know how those Māori on the general electorate rolls voted, we can do not know what proportion this was of the total Māori vote, but in 2023 the TPM won 30 percent of the list votes in Māori seats and 1 percent of the list vote in general seats.

4. ‘Honour Te Tiriti’ is also difficult to interpret.

5. ACT could have avoided the direct confrontation with Māori by proposing a bill which  focused on its third principle ‘the right to equality’. It chose not to.

Property Rights and the Treaty Principles Bill

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Property rights – which enable decisions over tangible and intangible assets – are critical to an economy as Why Nations Fail pointed out.

Not just private property rights for, as we shall see, they are more complicated than that. Neoliberals argue that private property rights lead to the maximum economic prosperity; they used that to justify privatisation. Certainly, ambiguous property rights are likely to result in poor quality outcomes. But community property rights can be effective, as economic orthodoxy acknowledged when Elinor Ostrom was awarded a Nobel laureateship in 2009 for showing that the use of exhaustible resources by groups of people can be rational and prevent their depletion without either state intervention or markets with private property.

Pre-market Māori demonstrated that too. The seas around Northland were teaming with fish, even in the 1850s. The local hapu had various measures which sustained them. Following the breakdown in hapu authority, the seas became fished out.

The neoliberal misunderstanding was evident in the original formulation of ACT’s treaty principles proposal. Its second principle stated that the government should ‘protect all New Zealanders’ authority over their land and other property’. This was intended to be an updating of Article II of Te Tiriti, which actually stated that the Māori rangatiratanga would be preserved for ‘ratou wenua o ratou kainga me o ratou taonga katoa’, which might be translated as ‘their lands, their villages and all their treasured things’.

Two things. Minor for the purposes here, ‘ratou taonga katoa’ (all their treasured things) is wider than just property. Did ACT intend to downgrade the standing of te reo, despite the highest courts in the land determining that it is a taonga under Article II?

But second, the notion of rangatiratanga is not just about individual authority. Pre-market Māori did not have a notion of individual ownership of land and other resources. Those property rights were exercised communally.

This was barely understood by the first Europeans and led to many early misunderstandings, some of which persist to this day, for we are always tempted to anachronistically interpret the past by current standards. (The misunderstandings are well explored in the scholarly literature; I tried to summarise them in Chapters 4 and 5 of Not in Narrow Seas.)

(Those of a conspiratorial frame of mind may think that ACT was not ignorant but was trying to sneak into legislation a clause which the courts could interpret as upholding the principles in ACT’s Regulatory Standards Bill.)

Clearly, ACT’s second principle will not do, and sober official advice changed its manifesto promise to

          Rights of hapu and iwi Māori — the Crown recognises the rights that hapu and iwi had when they signed the Treaty/te Tiriti. The Crown will respect and protect those rights. Those rights differ from the rights everyone has a reasonable expectation to enjoy only when they are specified in Treaty settlements.

(ACT has lost interest in this revised second principle but is proceeding with the Regulatory Standards Bill.)

This still does not capture the essence of Article II of Te Tiriti. I’d have thought that the rights existed from the time of signing and that treaty settlements only recognised the existing rights rather than created them.

There is also a deep complication about what property rights refers to. It is not peculiar to Te Tiriti, so I begin with a contemporary example.

Suppose there was a proposal to establish a KFC in a suburban shopping centre. Even a neoliberal living, say, 100m away might object to its impact on the neighbourhood and join in the objection to its establishment. (In the case in mind, they were successful and the KFC was never established.) There is nothing among a property owner’s legal rights which entitles them to block the proposal. The opportunity to object arose from town-planning provisions such as in the Resource Management Act. But presumably the neoliberal thought there was some existing moral right to block a neighbour’s peaceable, if detrimental, activities.

(You can see why proposed changes to the RMA and the proposed fast track legislation are difficult. While they are intended to reduce the transaction costs of making decisions, they will also reduce some people’s ‘property rights’ while increasing those of others.)

We frequently see Māori claiming kaitiakitanga (guardianship) in their rohe, despite its ownership having been legally alienated. They are arguing that the rangatiratanga of Article II of Te Tiriti included stewardship rights and mana whenua was not alienated when ownership was transferred (whether justly or unjustly). They are not alone in their belief of kaitiakitanga rights. Greenies frequently invoke it; we are all greenies on occasions (as with the raising of the level of Lake Manapouri, even if we had never visited it and lived miles away).

ACT does not seem to have thought through these issues in its proposals, or perhaps neoliberals do not think they should be attended to (unless it’s about a KFC in their neighbourhood). But others do.

ACT has opened up a can of worms. The biggest worm in the property rights can is to what extent their existing distribution is just. (This is not quite the same issue as the inequality of the property rights.)

The respected libertarian philosopher Robert Nozick pointed out that if a distribution is ‘just’, the distribution of rights remains just following voluntary transactions. But what if the original position is not just, what if transactions are not voluntary? How can we treat the existing distribution as acceptable?

Was the distribution of land just even on 6 February 1840? As a reult of the Musket Wars much land involuntarily changed its rangatiratanga. Oral traditions report that there were involuntary land transfers following conquest even earlier. Was there ever a time when the distribution of land was just? Arguably the proto-Māori seized the land from the existing animal inhabitants, when they first arrived.

A practical resolution might be to say that the distribution on 6 February 1840 was acceptable in the governance of New Zealand. Even so, much of the subsequent alienation was not voluntary.

The tendency is to highlight the consequences of the New Zealand Wars – we do love heroics. Arguably, the 1865 Native Lands Act was far more destructive. It created the Māori Land Court, which converted Māori customary title into a title recognisable under law. Māori were not consulted about this legislation. British law was unable to deal effectively with collective (customary Māori ) ownership, so Māori practices were converted to individualised ownership. The creation of a commercial title with its individualisation pitted Māori against Māori, undermining the integrity of hapu. (Woody Guthrie sang ‘some rob you with a six-gun/some with a fountain pen.’) Here is a salutary reminder that property rights influence the way we organise society.

Nozick is ruled out. So how are we settle on an acceptable distribution of property rights? ACT’s Treaty Principles Bill is not an answer.

Outsourcing in a Public Health Service.

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This was a note I prepared for myself

International experience provides very little guidance to the problem of designing an effective health system; there is little structural convergence between the health systems of affluent countries on the supply-side.

One almost universal exception to this pessimistic conclusion is that the funding of a health system needs to be primarily unified and the role of private payments limited. This was a conclusion of proponents of Obamacare. But entrenched interests left the US with its fragmented healthcare funding which is generally thought to be one of the reasons that the US has exceptionally poor health outcomes despite spending more per capita than any other country and having some of the most advanced medical centres in the world.

It is on the supply-side of health delivery that there is so little agreement or convergence. The divergences partly reflect differing sizes of nations and their constitutional and fiscal arrangements. But there are also considerable differences in the balance between public and private delivery of healthcare. In the case of a unified funding system this amounts to some outsourcing, in which the central agency funds the treatment which is provided by an agency which is not in the public sector. (It may be for profit, not for profit, or charitable.)

There are various forms of outsourcing. To make this paper tractable, it focuses only on secondary care. Public-private partnerships are discussed in an appendix, which concludes that it seems unlikely that PPPs, rigorously defined, have a significant role in New Zealand’s public health system. The focus here is on the public sector contracting out treatment to agencies outside the public hospital system.

This paper is presented with large population centres using multiple possible private suppliers. Some centres may not have that option. Centres in which there is only a single feasible private supplier of a service raise the complication of bilateral monopolies, which weakens the ability of the public hospital to get a good deal.

Contracting Out

Contracting out is where the public health system purchases (i.e. fully funds) a healthcare service which is provided by a private agency. The possible services and reasons for the transaction are numerous.

Contracting out non-medical services, such as for cleaning and food services, is common. What seems to be happening is that the medical management is contracting out a non-medical part of the service to an agency with more expertise in the management of that activity. The principle does not seem controversial although there may be controversy about the particular quality of a contracted service.

Here are some examples of medical contracting out which illustrate the variety and the broad reasons for doing so.

            – in about 1990, the (Labour) Government gave the Tauranga Hospital a grant to reduce its surgical waiting-list backlog. The hospital commissioned private providers to carry out the surgery, presumably because the public hospital was already working at full capacity. (This was a poster case for the supporters of the health redisorganisation of the time and brought CEO Lester Levy to public prominence – not his fault. It actually supported the dissenters. There were no efficiency gains, just extra funding.)

            – about twenty years ago, a Wellington oncologist was hired by Waikato Hospital to assess women with potential breast cancer who would then be sent by the hospital to Sydney for treatment. Both the hiring of the oncologist (he would have been on contract rather than salary) and the Sydney treatment were contracting out caused by a shortage of local capacity.

            – an Auckland dermatologist told me that the public hospital did not have a particular piece of equipment but when it was needed (for birthmarks, as I recall) they contracted out to a private provider who had the equipment. There was not enough demand within the public service to fully utilise the equipment, but the external provider was already using theirs to meet private cosmetic demands.

            – one Monday my public hospital doctors got my biopsy and decided I needed a full-body CAT scan for the consultation on Wednesday. I got the scan on the Tuesday from a private provider. I assume the public hospital CATs were fully booked and that rather than bump someone else, my case was outsourced. The backup MRI a few days later was booked and done in the public hospital. (There was no evidence of metastatic cancer.)

The above examples appear primarily as a consequence of full utilisation of capacity in the public sector. Here are some examples which might be more problematic.

            – ACC tends to use the private sector, presumably to skip public sector waiting lists. (This illustrates the dangers of multiple funders, since accident victims need not be a higher medical priority than non-accident patients.)

            – Off-campus laboratory services are outsourced to a (monopoly) private sector provider. I assume this is because the hospital system does not want to run the myriad off-campus sites which are convenient for those who need to be tested. Presumably the processes involved are sufficiently routine not to require the tight-quality supervision that the public hospital provides. (It has internal laboratory services for those in treatment.)

            – Ambulances are another example of specialist outsourcing.

            – I am told that the Wellington Hospital has insufficient MRI scanners which means that some patients are referred to a private sector provider. It could be argued that this example belongs to the earlier ones of outsourcing because of lack of capacity but as usually explained, it seems that the hospital has made a deliberate decision not to acquire another scanner. The example needs to be teased out.

I am guessing that outsourcing MRI investigations saves the hospital the capital outlay of installing another scanner. There are parallels here with the public-private-partnership approach set out in the appendix because it involves the private sector installing the capital (e.g. equipment and accommodation). However it involves permanent private ownership (typically, PPPs eventually revert to public ownership) and there is no contractual obligation for the public hospital to use the private scanner nor has the scanner an exclusive monopoly (another business could set up in competition and the public hospital switch its custom or install its own capacity). Thus it is not a PPP in terms of the NZ government accounting conventions (neither is the outsourcing of cleaning or food services). Even so, one is left a little uneasy if the reason for the outsourcing is to avoid public sector capital investment. But that is also true for some of the earliest group of outsourcing examples.

Evaluating Outsourcing

There is such a variety of ways of outsourcing it is difficult to evaluate them generally. Here follow some pointers.

Does outsourcing reduce costs? For a variety of reasons it may increase them. Capital costs are higher and it is generally thought that salaries – at least of senior medical professionals – are higher in the private sector than the public sector.

In one way, private provision is likely to appear more expensive. A fully utilised service (as public healthcare tends to be) has no downtime; the private healthcare service covering it when the public supply is constrained must have periods in which its equipment, and possibly labour, is not fully utilised. Thus the cost of outsourcing is likely to be higher than internal provision except, of course, the costs of providing above the public sector constraint will be higher than average costs of its provision too.

There is a trope that the public sector – in this context, the public delivery of healthcare – is always inefficient. That can be true. There is (and should be) a constant effort to reduce such inefficiencies as there are. But the issue here is whether the private sector is any more efficient. We do not know but it is not obvious in healthcare why it should be – ideology aside – when we do an exact case match. It is an empirical question, which needs to be evaluated by case studies. There are few such studies. (The only one I know of — from the early 1980s, found the costs of public and private cataract surgery were within a $1 of each other. The remunerations to the private surgeons was higher, but it was offset by the private treatment discharging the patient after one overnight stay, but the public treatment keeping them for three nights. Nowadays it is day surgery.)

The point about the previous paragraph is to be cautious about the claim that outsourcing to the private sector reduces costs. That is an unproven hypothesis, not a fact.

(It should be acknowledged that private provision may innovate new or more effective treatments – as will the public sector. There is a general economic consensus that multiple independent agencies tend to generate greater innovation.)

One issue which I have wondered about is quality control. It seems to me that it is likely that public provision has more checks and balances – in a large hospital anyway. When I have discussed this with (even public sector) doctors they have discounted the issue. I suspect that may be because the outsourced services are relatively simple and quality control straight forward. (I have never heard of routine multi-disciplinary meetings in the private sector.) Perhaps all that is needed is that when outsourcing, a public hospital should require in the contract quality standards similar to what it expects internally – and that their expectations be enforced.

One concern is that outsourcing may shift medical personnel from the public sector to the private sector, both raising costs of provision and making equitable provision more difficult because private treatment prioritises by ability to pay rather than medical need. (The mechanism is that the public sector outsourcing provides a base which enables the private practice.) Essentially, private payments (including medical insurance) weaken unified funding.

A further issue is whether practising in the private sector undermines commitments to the public sector. It is sadly true that some doctors present themselves as if their chief loyalty is to their remuneration – they may still be very good doctors. Generally though, I’d have said that most doctors’ loyalty is to their profession. How much equity of treatment (base on medical need) and hence the importance of public provision may vary from doctor to doctor.

Conclusion

Disappointingly, this review does not produce strong conclusions. The weak one is that outsourcing has a role in public healthcare provision but it has to be carefully managed and not used too extensively. The biggest danger identified here is that the public hospital limits its capacity because of inadequate provision of capital, in which case the outsourcing is nothing to do with healthcare but because the government, in effect, borrows for the heathcare system without putting it on the public balance sheet.

It looks like that in our large centres, at least, are going to have an ecology of different suppliers including private suppliers providing publicly funded services. What is critical is that outsourcing does not undermine the commitment to a dominant unified funder – the danger is that private insurance may reduce public pressure to ensure there is adequate funding. Even more critical is the principle that access to treatment be based on need rather than ability to pay.

Appendix: Public Private Partnerships

Public private partnerships (PPP) is a term which is used very loosely in the public discussion. It is a form of outsourcing. Inconveniently the Government’s most recent policy statement New Zealand PPP Framework: A Blueprint for Future Transactions (to which the Labour Opposition signed up) does not offer a definition.

An associated media release describes how a PPP works as follows:

Normally, a government agency would contract designers and architects to plan an infrastructure project, builders and engineers to create the asset, and then one or more contractors to maintain it for the rest of its life. The government would take out a loan to pay for the build, and then pay this loan back over time. It would be responsible for maintaining the asset as well.

With a PPP, the government agency works out what it would cost them to build the asset and maintain it for 25 years to a certain standard under the traditional approach. Private sector bidders then work out how they can deliver these bundled services to a better outcome for this same price. A PPP will only be pursued and accepted if it delivers demonstrably better value than the agency would have got by doing the job itself.

With the bid accepted, the private sector partner then builds the asset and maintains it for the next 25 years – billing the government quarterly (including the repayment of debt incurred by the partner) from the time it’s built until the 25 years is up. If the asset doesn’t meet the agreed performance standards, the partner is paid less.

After this, the debt has been repaid and the asset will have been maintained to a pre-agreed condition. The government maintains ownership of the asset throughout the 25-year period and beyond, taking responsibility for asset management at the end of the PPP.

Thus a PPP is about the financing and operation of a physical asset. It could apply to a hospital building although there is no hint in the documents that this is a New Zealand interest.

PPPs have been used in Britain to develop hospitals. Generally the outcome has been very expensive. There are particularities in Britain which made PPPs attractive (assuming they are cost effective – they were not). The effect of British public accounting conventions was that the PPPs were off-balance-sheet borrowings which allowed the British government to claim to be below a set public borrowing limit while actually exceeding it. New Zealand public accounting conventions are more rigorous so this cannot happen here. For example, the liability to the government incurred by the Transmission Gully motorway is explicitly reported in the public accounts. One expert summarised the New Zealand convention that it includes ‘hire-purchase as a debt’.

The recent government release on PPPs states

PPP procurement should not be categorised as a financing tool. While the PPP model utilises private finance in support of achieving these enhanced outcomes, spreading infrastructure related cash flows through project finance arrangements is not the purpose of PPP procurement (if it were, this outcome could be achieved more efficiently through general Crown borrowing to finance infrastructure needs). (p.7)

It goes on:

One of the features that has distinguished the New Zealand PPP approach from other jurisdictions is the focus on greater outcomes rather than lower cost.

It is not obvious how a PPP could generate ‘greater outcomes’ in the health sector which is dominated by skilled professionals rather than capital. Hence, it seems is unlikely that PPPs, rigorously defined, have a significant role in New Zealand’s public health system. As discussed in the main text, the focus will be on contracting out.

We Are Not Listening

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

The current rise of populism challenges the way we think about people’s relationship to the economy.

We seem to be entering an era of populism, in which leadership in a democracy is based on preferences of the population which do not seem entirely rational nor serving their longer interests. The re-election of Donald Trump is just the latest example

Professionally, I found the British people’s voting for Brexit the most disturbing (52 percent voted to leave, 48 percent to remain, on a 72 percent turnout). There was a compelling case that the British economy would be damaged by Britain leaving the European Union (although not as quickly as some claimed). One might favour ‘Leave’ because it would give Britain more control over itself, for international economic intercourse compromises national sovereignty. But the tradeoff is that cutting back trade reduces economic prosperity. Much of the public chose to ignore the tradeoff when they voted. Subsequently they found that the sovereignty gains were small, while the British economy has performed badly. An increasing proportion of ‘leavers’ regret the decision to leave. The economic analysis proved correct.

Populism is sometimes characterised as ‘the people’ rejecting the ‘Establishment’. During the Brexit campaign there was a strong undercurrent that since the Establishment supported ‘Remain’, the policy must serve them to the detriment of ‘us’. They now know that closer British involvement with the European Union was beneficial to many of them too.

It is easy at this stage to dismiss people taking a strong line against the Establishment as ignorant or worse. Recall Hillary Clinton muttering that many of the Trump supporters were ‘deplorables’ and there will be equally dismissive explanations of those who voted for Trump’s second victory – ‘racists’, ‘sexists’, ‘fascists’ …

It might be wiser to recognise that these people have concerns which they may badly express, which they may badly diagnose, and for which they may have badly thought-through policy responses. But even so, those underlying concerns are real enough. There is no point in ignoring them and then being shocked at the following election when the holders again vote against the Establishment and even against their best long-term interests.

How often does one hear preaching rather than engaging with the audience? How often does one find that the preacher’s argument is self-serving? That does not mean that the argument is always wrong, the preacher is just not connecting. The case against Brexit was not wrong as we (almost) all know with hindsight; it was badly presented.

I’ll leave others to tell us about the populist vote which has returned Trump to power, and I’ll leave you to decide whether the opinions are self-serving or based on too narrow a perspective and information. Instead, here is a New Zealand example about how a government was not listening to even its own people.

In August 2023 Talbot Mills Research surveyed voters on their views on some non-economic issues. Four responses are revealing. The scores here are the percentage favourable less the percentage unfavourable by party voting intentions. The focus is on those intending to vote Labour but the equivalents for Green and All voting intenders are included for comparison.

  • Labour Greens All
  • Bilingual Road Signs 13% 56% 11%
  • Māori Health Authority 16% 58% 1%
  • Co-governance   10% 49% -5%
  • Māori Wards in Local Govt  -13% 25% -26%

There was not a lot of enthusiasm among Labour voters for their party’s policies, especially when you compare the Green responses. The survey took place a few months before the 2023 election, where the party ad lost half of its 2020 support. Presumably the majority of the Labour leavers had views more like the last column of all voters, who were even less enthusiastic.

One must conclude that the Labour Government seemed hardly to be listening to its own supporters – let alone the nation as a whole. One is reminded of a parallel instance under the Lange-Douglas Government, when a small group of senior cabinet ministers pursued (neoliberal) policies which were an anathema to the party supporters. A Talbot-Mills survey in August 1990 which asked questions about Labour’s economic policy is likely to have shown a similar lack of enthusiasm.

It was a time in which half the population had no increase in their real incomes between 1986 and 1998, twelve years later. Around a third had to wait twenty-odd years before they got an income boost. But there was nary a mention of their struggles by the experts and acolytes of the Establishment, whose incomes continued to rise under the neoliberal policies of the time. I leave it to the elite to reflect whether they should feel guilty about their neglect; the point here is that they were not listening.

What would we hear from the non-establishment were we to listen? I am hesitant to answer that question. It is just too easy for the opinionated to pretend to listen and report their personal prejudices. However, allow me to raise the possibility that rising material GDP does not always make consumers feel better off, despite our having been indoctrinated into assuming it does. GDP measures output, whether the output be goods or bads.

For example, when Europeans first arrived in New Zealand, they wanted produce like flax, timber and food. Maori increased their production in order to acquire guns and other European goods in exchange. GDP increased but the guns led to the chaos of the Musket Wars which devastated the Maori population. This extreme example reminds us that increased material possessions need not lift wellbeing.

It may be that increased material consumption and possessions in the first half of the post-war era was associated with people feeling better off. But that may be less true in the second half. Hence the turning to populist demagogues who promise better outcomes (even if the promises do not get fulfilled as in the case of Brexit and, as seems likely, with some of Trump’s promised policies).

It is possible that once consumers have met reasonable material needs – not all have – additional consumption is more concerned with esteem needs so that there are few realised gains from just keeping up with Jones. (The implication is that traditional theory which equates consumption with wellbeing no longer applies.)

The populist phenomenon may not be only economic. The Talbot-Mills survey explored cultural responses. Another possibility is that many people are finding the rate of change is accelerating and they are finding it increasingly difficult to cope. That may explain why populism is currently dominated by conservative parties in affluent economies – Boris Johnson’s Conservatives in Britain, Trump’s Republicans in the US, New Zealand’s most populist part in NZF led by Winston Peters. (MMP may disperse the populist capture of a single dominating party; I resist going down some interesting consequential paths.)

Whatever the reasons for the rise in populism – there are more – it presents a challenge to liberal democracy. The challenge will not be resolved by ignoring the underlying concerns until the run-up to the next election and calling their holders ‘deplorables’ when they vote against the Establishment.

The End of Austerianism?

This entry was posted in Macroeconomics & Money, Political Economy & History, Pundit on by .

Does the Autumn 2024 British budget point to a change in fiscal strategies?

Many countries found their fiscal position was unsustainable, following the 2008 Global Financial Crash.  Their public spending was well in excess of their public revenue and they had to borrow more heavily than lenders thought prudent. Almost unanimously, such countries tried to fiscally rebalance by cutting back their public spending rather than raising tax revenues. The poor and those on middle incomes bore the burden of adjustment.

In some ways the strategy, called Austerianism – a portmanteau word from austerity and Austrian economics – was surprising. Certainly the rich had been hard hit by the GFC but they had been the main beneficiaries of the financial boom which had caused it. Ironically, that boom was accompanied by the demand that governments should not get involved in regulating the financial markets, but when they crashed, the same financiers expected their governments to bail them out.

The Austerian policies which followed tend to protect the rich at the expense of the rest of the community. Rarely, for instance, did governments try to reduce the fiscal gap by raising the top tax rate or reducing the tax loopholes of the rich. Neoliberals seized the crisis to pursue their ambition of reducing the size of the state.

Not surprisingly, Austerian policies resulted in political turmoil. Yet they continued. Even the Ardern-Hipkins Government pursued them with the promise of no significant tax rises and a restrictive borrowing target which meant that public spending – including supporting the poor – was severely constrained. Less surprisingly, the Luxon-Willis regime is also broadly Austerian, as had been the Key-English regime. (The measures which we associate with Ruth Richardson were also Austerian.) Admittedly, all of them fudged around the margins – we shall see more fudging from this government.

The British Starmer-Reeves Government budget represents a major break from this approach. It faced a major fiscal imbalance inherited from the Conservative Government which it has just replaced. Its response has been to raise taxes and maintain public spending. (Its borrowing is coming down more slowly than the Austerians would want).

The Blair-Brown Government had left Britain’s government spending at just over 46 percent of GDP in 2011. The Conservative Governments which followed had squeezed the ratio to under 40 percent just before the Covid crisis. After, it rose to near 45 percent but the Conservatives planned to squeeze the ratio down to 42 percent by 2029. Labour announced spending plans which would have kept the ratio at 45 percent, not quite the Blair-Brown level, but nearly. ( Comparing country ratios is tricky because of institutional differences but I am pretty sure the British public spending ratio is effectively higher than New Zealand’s, which is reported at about 28 percent.)

I think it reasonable to assume that had the Conservatives returned to power, facing the same fiscal gap they would have cut government spending even further. British Labour is adjusting primarily through increased taxation. What it will further do while it is in power is conjectural. (The next Britiah election may not occur until 2029.). But the reasonable expectation is there will be further tax increases. British fiscal policy has entered a new era.

Of course it may not work. Economic policies have a practice of being blown off course by events external to the economy. Often, the forecasts prove too optimistic or other events occur (in New Zealand’s case we seem to be building up considerable expenditure commitments to compensate for some of the dreadful things that past governments did – often by neglect, sometimes a long time ago). And there is always the possibility that lenders will raise the cost of borrowing. In the past, governments with similar intentions have often had to retrench.

There was widespread disappointment that the economy is expected to be growing slightly more slowly under the Reeves October budget projections than under the last Conservative budget in March. But there may have been new data indicating the economy has been tracking lower than the March forecast. Moreover, one expects some slowdown if a fiscal hole has to be addressed.

But third, we are naive if we think a single budget can make a major change to the long-term economic growth rate (if only it were that easy). The sorts of spending policies which Labour hopes will work, like on infrastructure and industry targeting, will take years to come onstream. That is why that sort of spending is among the first items to be cut under an Austerian budget. So there always seems to be an infrastructure deficit. As this government is telling us; it will be lucky if any of its infrastructure projects have any impact on the growth rate before the next election.

(It’s hard to identify a change in trend, given there are so many possible endpoints and cycles. I remain uncertain whether there was a slowdown after about 2008, and why.)

If I was advising the British Government, I’d suggest they would get a quicker boost to their growth rate by negotiating a better trading interface with the European Union, reducing the extraordinary transaction costs that Brexit has generated. A budget is not the only place for policies which can also substantially affect economic performance. 

Our Thousand-Year Struggle Over Technology and Prosperity

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Last week’s column mentioned the three 2024 Nobel laureates in economics. The column focused only on the 2012 book Why Nations Fail by Daron Acemoglu and James Robinson with little reference to Simon Johnson, although the three have worked closely together for about 30 years. Johnson published last year, with Acemoglu, a 599-page book: Power and Politics: Our Thousand-Year Struggle Over Technology and Prosperity.

Any book covering a millennium is going to be selective, with some of its examples contested. Nevertheless, this one’s basic thesis is uncontestable: technological innovation is not always beneficial and often favours the powerful.

Economics tends to treat technology as beneficial, probably because of Bob Solow’s finding some 70 years ago that it was not possible to explain most of (per capita) economic growth by additional capital. He labelled the gap – the coefficient of ignorance which explained 80 percent of rising labour productivity – ‘technological change’, saying it was ‘a shorthand expression for any kind of shift in the production function’ including ‘slowdowns, speedups, improvements in the education of the labour force, and all sorts of things’. When we are thinking about aggregate (market) GDP we should also include shifts into the market as when natural resources are depleted, subsistence farming becomes commercial farming and rising household productivity shifts housework and houseworkers into the market.

Lumping this miscellany into ‘technology’ is confusing. So to first principles. Joan Robinson defines technology as ‘blueprints’ – a description of how things can be done. In order to be of practical use, a blueprint has to be imbedded in an artefact (physical capital) or in how people do things (human capital). Not all discovered blueprints are adopted. Many are never used or are discarded because they do not contribute to profitability. (Their adoption by the non-market economy and society as a whole is even more mysterious.)

This focus on aggregate market output (GDP) plays down technology’s transformational role. Electricity and the internal combustion engine may have had major impacts on GDP, but their impacts on the lives we lead has been even more extraordinary. Without them we would be poorer, but we would also lead very different lives. Conversely fertility regulation technologies hardly merit measuring their impact on output, but they have transformed the lives of both women and men.

We tend to assume that if something contributes to aggregate output (GDP), it is beneficial to humankind. Of course that is not totally true – think of climate change, smoking and weapons – and economists have given much thought to explain when and why it is not. Economic ‘bads’ (and externalities) are a critical feature of economic analysis.

Acemoglu and Johnson are saying more. I skipped over how we identify the blueprints. Increasingly they are the result of major financial outlays. The evidence suggests that locating genuinely novel (commercial) technologies is becoming increasingly expensive – or as economists put it euphemistically, the ‘productivity of research is falling’. So who makes the investment in research decisions?

The book argues that the impact of new technologies on human welfare depends crucially on social choices about how those innovations are used. Those choices are usually determined by those who hold power. In recent decades the choices have been increasingly steered by tech companies and venture capitalists in terms of profitability rather than social wellbeing.

Thus the effort for new pharmaceuticals is towards those who can pay rather than maximum life enhancing, so we put less into researching ways of medication for those with high mortality and morbidity in poor economies. (A bizarre illustration was that American medicine was much slower to adopt lithium chloride for managing bipolar mood swings than European medicine because the chemical was not patentable so there was no commercial incentive to encourage American doctors to prescribe it.)

The book suggests that, in particular, currently digital technologies and artificial intelligence are increasing inequality while undermining democracy through excessive automation, mass data collection, and intrusive surveillance.

Acemoglu has done a lot of work on the impact of robots, pointing out that the new technologies aim to replace workers rather than complement them. That’s the way our system operates. The authors argue that democracies must ensure that the proceeds of technological waves are more generally shared among their populations. They say there are three things that need to be done.

First, the automatic technology-equals-progress narrative has to be challenged as a convenient myth propagated by a huge industry and its acolytes in government, the media and academia even though it is not always true.

Second, there is a need to cultivate and foster countervailing powers including civil society organisations, activists and trade unions.

Third, there is a need for technically informed policy proposals that supply a steady flow of ideas aimed at improving human wellbeing rather than exclusively targeting private profit.

The book also contains an interesting discussion on avoiding technologies which replace workers and devising ones which complement and empower them instead.

You may be surprised at how progressive (or impractical, if you are of a different political temperament) these Nobel laureates are. It is a reminder that the top of the economic profession reflects much wider political spectrum than the New Zealand one.

New Zealand economics is also imitative. Rather than adopting (or ignoring) the Acemoglu-Johnson-Robinson recommendations, New Zealand needs to apply them to local conditions. Since most – say, 99.7% – of the world’s research (blueprint generation) occurs overseas, our main task is to adapt what is available.

That does not mean we should do no research. Local research is a critical part of the process of effective importing and adapting new technologies. If, as a consequence, New Zealand researchers do some exceptional internationally innovative work, we are twice blessed.

This changes our research strategy. Instead of bewailing that New Zealand does not produce enough commercial blueprints, we need to evaluate it by how successful it is at importing and transferring the internationally generated blueprints here. (Medicine is an excellent example of our success at importing new technologies.) We need to move our approach from its (not very successful) narrow commercial focus to a whole-of-society approach.

While adapting we need to keep in mind the Acemoglu-Johnson reservation that the new inventions are biased towards some groups over others, and we may want to direct them differently.

Our public funding is far too centralised. Why Nations Fail argued that it was the decentralisation in an inclusive society which enabled effective innovation. We have not reached the stage where Stalin’s directive to pursue Lysenkoism and ignore Darwinism set back Soviet biology for generations. We came close to it when the Rogernomes closed down empirical economics research because its results disagreed with them. It has crippled New Zealand economics to this day. Outsiders would be surprised how little of our economic policy public discussion is evidenced based.

Each year the Taxpayers’ Union highlights bizarre ‘research’ grants from the Royal Society’s Marsden Fund. They would be amusing if they were not diverting funds from more valuable activities. They are not at the Lysenkoism level, but suggest that some of members of the grant panels are chosen for their ideology rather than competence. My guess is that there are objectively worthier projects among those that the ideological and non-competent rejected.

Power and Politics: Our Thousand-Year Struggle Over Technology and Prosperity challenges us to think more carefully and creatively about technology policy. It is very unlikely there is any grant funding to do this.

Why Nations Fail

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This year’s Nobel awards in economics raise critical issues about the future of the world.

I was not alone with high hopes when the Soviet Union collapsed. It has been good to see various nations leave the yoke of the Soviet Empire and move towards liberal democracies with thriving economies although sometimes it has been two steps forward and one back. But that has not happened to Russia itself, despite it having a comparatively well-educated population and a large economy. It remains nowhere near a liberal democracy and any economic success has been correlated with high oil and gas prices.

Among others who were disappointed was a British economist and political scientist, James Robinson, currently at the University of Chicago. He has just been awarded a Nobel laureateship in economics jointly with Turkish economist Daron Acemoglu and British economist Simon Johnson of MIT. With Ronald Coase, Douglass North, Elinor Ostrom, and Oliver Williamson – also Nobel Laureates – they have been key contributors to the ‘new institutionalism’, which focuses on the contribution of institutions (the social and legal norms and rules) that underlie economic activity.

The approach is well illustrated by the 2018 Why Nations Fail by Acemoglu and Robinson. Like all their books, it is rich in ideas. I focus here on the light it sheds on the Russian experience.

What I underestimated at the time of the Soviet collapse was the importance of institutions such as the rule of law, restraint on arbitrary government, lack of corruption, secure human rights, sound property rights and sustainable fiscal practices (including a robust tax system). They are so integral to many of the economies I have studied closely that I overlooked their importance.

The Soviet empire generally lacked them. Even today, the ‘liberated’ nations to its west struggle, some lapsing into authoritarianism (currently Hungary) and finding it difficult to eliminate corruption (Ukraine is not alone in this respect).

Perhaps it is not so surprising. It took the prosperous Western economies centuries to evolve their current institutional arrangements and they are still not always perfect. What is sad though, is that Russia has made so little progress compared to the years when it dominated the Soviet Union.

The Russian economy is distinguished from the ex-Soviet economies to its west by being based upon enormous mineral reserves – especially oil and gas. The success of these quarry industries crowds out more conventional exportable industries, such as farming and manufacturing (as explained by the ‘Gregory effect/Dutch disease’). Resource-based industries produce substantial rents and there is more private profit to be made from wrestling over the allocation of those rents than by producing things, especially when the members of an authoritarian government are syphoning off some for their private enrichment. The book describes the resulting political economy as ‘extractive’.

Contrast with New Zealand. Admittedly we inherited our institutions from the long-evolving British ones. (Acemoglu and Robinson see their foundation in the 1688 Bill of Rights.) But we are a resource-based economy too. Our resources – sun and water (New Zealand soils are not particularly fertile) – are not as easily monopolised as those found down a well with their associated pipelines. Instead, the rise of the mixed family farm, following the introduction of refrigeration in 1882, dispersed the resource rents across much of the population, shaping the political economy of New Zealand into a popular liberal state with a market economy, which the book describes as ‘inclusive’.

There was almost an important exception. Initially, prosperous sheep farms were not viable north of Taupo because of bush sickness and footrot. Instead, late nineteenth-century Auckland developed around the extractive industries of gold, kauri gum and kauri timber. Fortunately for Auckland, as they became depleted, the railway network facilitated dairy farming in the Waikato region while, as its port became increasingly dominant, local manufacturing prospered. Even so, today a residual of those ‘wild west’ times is still evident in the more commercially vigorous Auckland. (This story is elaborated in Chapters 13, 16 and 18 of Not in Narrow Seas.)

Acemoglu and Robinson argue that inclusive political and economic institutions lead to a prosperous economy, while where the institutions are ‘extractive’ there is poverty and economic failure. A key difference is that the former allows initiative and innovation, whereas the latter stifles it.

But is an inclusive political economy necessary for economic prosperity? Acemoglu admits that China appears to be an exception suggesting its economic success may be but transitory. In my view China’s success has been the result of technology transfer from the West and the economy may not be sufficiently innovative to sustain its growth.

We must be careful though with this explanation. Concentrated effort enabled the Soviet Union to develop nuclear weapons and the sputnik. But it was not generally pervasive. Clearly China’s development of electrical vehicles is impressive, but widespread innovation has been less evident. I await to learn more of the new institutionalists’ explanation for the China anomaly. A major component of its current economic struggle has been a bursting of a Ponzi-type property boom (although one might argue that the finance boom in the West is similarly artificially stimulative). Certainly, China’s government has not shown the degree of arbitrariness and corruption evident in Russia – not as yet.

Both China and Russia show considerable outmigration. The success of those migrants rules out that their countries face some cultural or racial handicap. The outflow of so many able, energetic well-educated Russians to the West adds to my pessimism about its future. Instead of the prosperous inclusive society which one hoped for after the collapse of the Soviet Union, it is likely to remain exclusive and extractive, even after Putin, with its elite fighting over the resource rents. That is disturbing because of the destabilising impact on the world order. That is sad because I so much admire Russian contributions in art, literature, mathematics, music, science and – yes – even economics. Too often though, recently these have been by its refugees in the West.

Why Nations Fail and the other works the three have published are worthy of Nobel recognition. The New Institutionalism reminds us that economics is not just about narrow technical markets but about the wider social context in which an economy operates. Adam Smith, David Ricardo, Karl Marx, Maynard Keynes and Joseph Schumpeter – among so many of our great economists – would applaud.

Experiences on the Treasury Forecasting Panel

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A note written for some younger economics colleagues.

I was lucky when I was on the Treasury Forecasting Panel (from about 1998 to 2008) that Jas McKenzie was on it too and we could discuss our experiences. Generally, our approach was that they were the Treasury forecasts and that our task was to help them understand their implications, something which sometimes gets lost in the sheer pressure of getting the forecast together. Neither Jas nor I tried to impose a different forecast on Treasury. Our role was much more Socratic.

The benefit to Treasury was that they could draw upon our analytic and technical skills honed by experiences going back over six decades, while our memories of past difficulties could help them see their way through the current ones. We both enjoyed the comradeship of working with professional, competent economists including with the newer members of the Treasury forecasting team as they learned a new trade.

We were valued. After my first panel session – Jas had yet to join – two senior Treasury economists came up to me – independently – and said it was good to have someone there who knew something about macro-forecasting. The other independent panel members were academics who had little experience of the exercise – some could be astonishingly ignorant.

There were many memorable episodes. They included sorting out what was happening to the terms of trade, the bloody inventory cycle (which may not be as serious as it was when we first began forecasting, because of better inventory management – offset by a heightened unemployment cycle which is better monitored today by the data), struggling with noise in the data or where the data definition did not correspond to the economic notion, dealing with new statistics, and making suggestions which improved the forecasting process.

The most difficult issue was that practically a macro-forecast is cycles and noise around a trend. Sometimes the pressures of dealing with the first two means insufficient attention is given to the underlying trend.

I continue to worry over this. Has the long-term trend flattened out? I have put a lot of effort into exploring NZ’s trend (back to the 1860s). The long-term productivity growth rate has been surprisingly constant. (Of course there has been deviations which are mainly explainable.) However, there seems to have been a puzzling slowdown since 2008. (It may be a phenomenon for most affluent economies.)

Alas, Jas and I did not stay long enough on the panel to help them with this. We were laid-off in late 2008 just before the GFC. This was not the Treasury choice. They told us they were most disappointed. At that time, the panel was run from VUW by a person who was bereft of macroeconomic forecasting (or any economic) knowledge and skill. He seems to have wanted to downsize and naively sacked the two most experienced members of the panel, probably because they were not attached to the university and because he knew so little about what he was doing. Treasury was unable to do anything because they gave the university independence in the composition of the panel.

The sackings had an interesting consequence. The next forecasting round occurred after the initial impact of the GFC. The Treasury forecast, in line with other NZ forecasts, badly missed the size of the downturn. When that became clear, a Treasury economist told me that with hindsight the Treasury advice on the fiscal stance to the new minister (Bill English) was of poorer quality than they expected of themselves.

We can but speculate on the counterfactual of what would have happened had Jas and I still been on the panel. But we discussed what our advice would have been at the time, so what I am about to write is not based on the hindsight of many years later.

The widespread comment at the time compared the likely outcome of the GFC shock with the Asian crisis just a decade earlier. That was obviously nonsensical, but it was all that most younger economists could remember. Jas had been on a key Treasury desk during the 1966 wool-price shock and had been pulled back into Treasury to build a forecasting unit after the 1975 forecast debacle. (Shortly after he had to deal with the data ballsup of the time.) I was not here in 1966-67 but my forecasting experience started earlier than his and I have studied the wool-price shock. We were both there in the 1985-1995 period, and so on.

Perhaps the first rule of forecasting is that the initial forecasts underestimate the size of the impact of an external shock, as exactly happened in regard to the GFC one. Had Jas and I been on the panel we would have drawn attention to the rule/past experience and asked the Treasury forecasting team whether they were confident of their relatively modest downturn. I cannot say whether the team would have lowered their track, but I am sure they would written up the EFU with greater attention to the downside risk and that would have strengthened the pessimists in the Treasury during the fiscal policy discussions.

Healthcare is Not in Crisis; Financing it Is.

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Healthcare sector management needs to break away from its obsession with financial information and focus on funding for access.

Health New Zealand recently ‘proactively released’ 454 pages about its financial performance to July 2024. Here is a letter it did not release.

Hon Dr Shane Reti, Minister of Health.

Dear Minister.

We have been deluging you with information about our financial performance. Probably no one understands it all. Certainly you won’t. That is probably, conspiracy theories aside, why you appointed Lester Levy as Commissioner for Health NZ, so you had someone you could consult, although it may be doubted whether even he can understand it all in a three-day working-week.

This letter says that it is all dishonest. To be clear, it is not saying that you, Minister, or anyone else is dishonest. Nor is it saying that the accounts sent to you are dishonest – they conform to the Generally Accepted Accounting Principles (GAAP). It is the system which is dishonest.

You announced that the ‘Government’s goal is for all New Zealanders to have timely access to quality healthcare, to improve life expectancy and quality of life’. We can assure you that from the very beginning Health NZ has had a similar goal.

The June 2024 Government Policy Statement set out five priority areas for the health system.

  •  ‘Access – ensuring all New Zealanders have equitable access to the health care services they need, no matter where they live.
  •  ‘Timeliness – making sure all New Zealanders can access these services in a prompt and efficient way.
  •  ‘Quality – ensuring New Zealand’s health care and services are safe, easy to navigate, understandable and welcoming to users, and are continuously improving.
  • ‘‘Workforce – having a skilled and culturally capable workforce who are accessible, responsive, and supported to deliver safe and effective health care.
  •  ‘Infrastructure – ensuring that the health system is resilient and has the digital and physical infrastructure it needs to meet people’s needs now and the future.’

You then identified five access targets (none of which we are currently being attained or likely to be attained with current financing), adding that ‘focusing on the health targets did not mean other areas would be neglected’.

Meanwhile a month earlier, the May 2024 budget, from a totally different part of government, voted Health NZ insufficient funds to deliver those ambitions. It is as if two parts of the government brain are disconnected from one other.

Were they connected, the government would offer a certain amount to Health NZ; we would then come back with an estimate of how much we could deliver with that funding. There would follow a bit of bargaining but ultimately we would all end up with adequate funding for realistic goals, if not your June ones.

That is not how it happens. It is more like an architect being asked to design a five-bedroom home but being offered funding for a two-bedroom one. That is what is meant by the system being dishonest.

The dishonesty distorts the running of the public healthcare sector. Its  administration has become obsessed with its finances, while ignoring its healthcare performance. It is evident in the document dump where there are papers describing themselves as reporting ‘performance’, when they are merely dealing with ‘financial performance’. The actual performance of the healthcare system – that is, how well those needing healthcare are being treated – hardly appears.

A June document reported an expected $604m financial deficit for the 2023/4 year. The deficit is made up of $529m of a pay-equity revenue stream which had not been received (presumably an accounting failure), $183m which was about COVID decisions which occurred in earlier years, and $40m of ‘actuarial and writeoffs’. Without these accounting adjustments (and probably some others), Health NZ would have been running a surplus (of over) $148m.

Admittedly there was some ‘operational overspend’ (at least $385m more compared to that planned in March). That means that in those last three months, Health NZ spent another $385m more on healthcare than it planned. Most people would think that was a good thing. But we are so obsessed with the financials that the benefits of any extra care were overlooked.

To be clear, we are not objecting to the application of the GAAP rules (which are probably necessary for government borrowing). The issue is that they should not dominate our thinking about healthcare provision. The law articulated by Don Gilling, a retired professor of accounting, is that the way the system is scored shapes the way the game is played. We should not be scoring healthcare according to the GAAP rules.

I’m afraid, Minister, we have all been trapped by this scoring system. You have said there is a ‘healthcare crisis’. There is not one. Most parts of the healthcare system are working brilliantly once one is inside it. As your ambitions set out, the failure is because people in healthcare need  are not getting inside it. That is because Health NZ does not have enough resources. Give us the funds and we’ll meet your ambitions. 

What we have is a financing crisis; insufficient funding means that there are too many people who are not getting access to the quality care you say you want. (We don’t know how many; unlike many other affluent nations we do not have a comprehensive survey of healthcare needs.)

That means, Minister, your ambitions, your expectations and your targets are pointless. They will remain so until the government provides the funding to meet them.

In June 2024, Health NZ told you, Minister, that ‘our intention is to take on a savings target of $2 billion in 2024/25 Budget on the premise that … this is a comparable target to other agencies across government (7% of revenue). … No frontline clinical employees’ roles will be impacted through the savings target.’

The entire personnel costs of the non-medical employees of Health NZ were about $1.6b last year and the spending on ‘infrastructure and non-clinical supplies’ came to another $1.5b.The statement seems to be proposing to cut those items by two-thirds. It is joking.

The greater part of the $2b reduction is likely to come from financial juggling (consistent with GAAP, of course). It won’t be sustainable, and the following year there will be another financial deficit. In any case, there is going to be the ongoing access deficit, unless the Government fronts up with the required funds. We’ve set out the failures of the current situation bluntly, Minister. You have got to stop talking about a ‘health crisis’ and focus on the funding crisis. Unless you do, the limitations on access to care will continue and your ambitions will remain unrealised.

Yours etc (signature deleted under obscure provision of the OIA).

PS. This letter may not have been sent.

PPS. A balloon fell out of a fog and settled down in the middle of a large green field. The traveller in it asked a bystander where he was.

  • ‘You are in a balloon which is in the middle of a large green field.’
  • ‘You’re an accountant, aren’t you?’
  • ‘How did you know?’
  • ‘Your advice was precise, accurate – and of no bloody use.’
  • ‘That will be $2000 plus GST.’

Law and Order; An Economics Perspective

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What might the public’s increasing demands for safety and security tell the economist?

Criminology and economics are quite different disciplines. Someone from one discipline trespasses on the other with the greatest of caution, something which, I’m afraid, not all economists have. There is a foolish economics literature about the ‘optimal level of crime’. Before it raises your hackles, it is better framed as the optimal level of criminal enforcement, something which must trouble greatly the Treasury desk officer struggling with the law and order vote. This year it amounts to $6.7b (police $2.6b; corrections $2.1b). It is up $2b (or almost half) in the last six years. It amounts to the average adult paying almost $5 a day in tax.

The size and growth of the sector are puzzling, since overall the level of crime has not been increasing. The Ministry of Justice has run a New Zealand Victim and Crime Survey since 2018. It is far more reliable than offences reported to the police because not all crimes are reported and not all of those reported are to the police – common reasons are because the incident was too trivial or it was reported elsewhere (fraud is more likely to be reported to a bank).

The survey results are all over the place but with the exception of fraud offences, which are rising, generally the crime trends have been stable or very gently falling since 2018.

(I made a small research contribution to explaining these trends when I pointed out that Māori were poorly prepared for their postwar migration into the big cities, which resulted in social disruption including higher incarceration rates. As Māori have adjusted to urban life the imprisonment rates among the young have fallen dramatically; the proportion of Māori who are victims of crime has been falling and is now close to the national average.)

However, the public perceptions show increased concern about crime. While 30 percent of the public said they felt ‘completely safe’ in 2018, only 24 percent had similar feelings in 2023. Meanwhile, the proportion who felt ‘unsafe’ rose from 10 percent in 2018 to 15 percent in 2023. Hence the public demand for increased law and order spending. It is high across most parts of the political spectrum, including among those otherwise antagonistic to government spending.

The research literature describes a phenomenon called a ‘policy entrepreneur’, who promotes an agenda by exaggerating the problem the community faces. But the community has to be receptive to the exaggeration. To understand its willingness, we might turn to another discipline – psychology.

Abraham Maslow proposed a hierarchy of (human) needs. It is frequently presented as layers in a triangle, with a point which draws attention to the upward direction. However, the casual observer may think that the needs at the top are smaller than those at the bottom. So here the hierarchy is presented as a stack.

Maslow’s Hierarchy of Needs

  • Self-actualisation needs
  • Esteem needs
  • Love and belonging needs
  • Safety needs
  • Physiological needs

Stack or triangle, the physiological needs – essential for human survival and include things such as food, shelter, and clothing – at the bottom are the foundation of wellbeing. They are the needs with which economics is most concerned (and which are measured by GDP). But observe that the economy has much less to contribute to the remaining higher levels (although the importance of conspicuous consumption – the display of ‘positional’ goods – to esteem needs should not be underestimated).

Immediately above the physiological needs are the ‘safety’ needs with the implication that as physiological needs are met, people turn to their safety needs. That seems to be what is happening.

There is no question that the physiological needs of the vast majority are being better met than at any time in human history. That is true almost everywhere, although for many people in the world there remain serious physiological deficits. But in some parts of the world – including New Zealand – there is widespread affluence.

Certainly, people demand more income – hence the demand for tax cuts – but the same people may be retiring earlier and working shorter hours or taking lower paid jobs because that better reflects their life demands.  (Two hundred years ago, a 70 hour working week was not unusual and people did not retire but worked until they died.)

But we should not be complacent. Perhaps a fifth of the population are struggling rather than affluent. Typically, they are families with children.

So the economic logic is that the economy may becoming less important in public life. It is still there of course, but not as prominent as I recall it being in the 1970s. Economics remains foundational in political and social development. Moreover, economic goods and services remain important in dealing with safety needs to the extent of at least $6.6b a year of public money and all the private money spent on safety. (Additionally, as already mentioned, positional goods are important for esteem needs.)

Whether we are deploying the law and order resources most effectively is an economic concern. Often policy entrepreneurs have solutions to complex problems which are clear, simple … and wrong or wastefully ineffective. It is also a feature of New Zealand’s approach to public issues to ignore prevention, instead focussing on ambulances at the bottom of the cliff and neglecting fences at the top. (We are so unprepared, the ambulances usually arrive late.)

I began by saying that economists do not have a lot to say about law and order so perhaps I should stop at this point. I finish with the slogan of a former British Prime Minister, Tony Blair, who said that his government was ‘tough on crime; tough on the causes of crime’. I cannot think of a New Zealand politician who has expressed a similar sentiment.

Is the New Zealand’s Retirement Strategy Sustainable?

This entry was posted in Pundit, Retirement & Savings on by .

Today’s mañana strategy will lead to a crisis for the oldest elderly.

It is said that the only certainties are death and taxes, but a lack of each causes uncertainties. As longevity increases, the pressures on state spending increase. A reluctance to increase taxation means the pressures on the elderly increase.

The dilemma is usually presented by the rising ratio of those over 65 years of age, who are net consumers, compared to those in the 15-to-65 age bracket, who are net producers. Sometimes called the dependency ratio, it is currently about one to four but is expected to rise to about one in two by 2074. (It was one to seven in 1974, although there was also a higher proportion of children, and women’s participation in the paid workforce was not as great.)

In some respects the ratio is misleading. Many people over the age 65 are still in the paid labour force. Others retire before they are 65. Many in the working age groups do not work full-time. Patterns change over time. Moreover many of the (especially younger) retired participate in the unpaid voluntary labour force making a positive contribution to their communities, if not to GDP.

A further complication is that the over 65s are far from homogeneous. At the very least, it is useful to distinguish the young-elderlies from the old-elderlies. The over-80s get almost treble the healthcare and social support that the 65-to-69-year-olds get from the public purse. For a 90-year-old it amounts to about as much as they get from New Zealand Superannuation (NZS). Increasing longevity means the number of (more expensive) old-elderlies are growing faster than the young-elderlies.

While selecting an age such as 65 is a mechanical attempt to portray a complicated situation, the actual age is a key one in fiscal management. At 65 almost everyone is entitled to NZS, which gives them a minimum after-tax income of around 40% of that average wage for a single person (currently about $27,000 a year), irrespective of their other income. It is taxed, but because our income tax system is not very progressive, it remains valuable to those on high private incomes.

The Treasury has recently, and once more, pointed out that with the expected increasing numbers of the elderly the current regime is going to put increasing pressure on the fiscal regime. It is hard not to conclude that current arrangements are fiscally unsustainable unless tax rates are substantially raised in the long run. (There are other great pressures for more government spending which also demand higher tax rates. Borrowing is a short-term measure which defers raising taxes to a later date.)

If you think there is a fiscal sustainability problem which cannot be resolved by higher tax rates – I do – then there are two major ways to the resolution, aside from mañana, which I also discuss.

The first is to raise the age of eligibility for NZS. The National Party campaigned on raising it from 65 years to 67 years. (The coalition agreement with NZF abandoned this proposal.) I leave you to judge whether the proposal to raise the age from 65 to 67 was courageous or timid; I think it is the wrong strategy.

What we should be doing is setting a formula for the age of eligibility based upon life expectation, not a numerical age. When in 1993 the age was last raised to 65 (by agreement between the unlikely pair of Ruth Richardson and Michael Cullen), a person of that age had a life expectancy of another 25 years. Today a 67-year-old has a life expectancy of about the same 25 years. In the twenty-odd years since 1993, people’s life expectation has gone up about two years. (These figures are based upon the Statistics New Zealand life table, and yes, the data really shows that one has about a quarter of century more life at 67 on average.)

I suggest that we should set the age of eligibility for NZS at where there is an average life expectation of, say, 25 years. As life expectancy rises (or falls), then the age of eligibility should automatically rise (or fall).

Two important caveats. The eligibility age should not be jumped up but rise incrementally, as it did under the Richardson-Cullen scheme. And second, there has to be an incomes-tested benefit for those who are unable to provide for themselves below the age of eligibility either by working or having insufficient savings. Again that was a feature of the Richardson-Cullen scheme. (Cullen’s personal contribution was the introduction of Kiwisaver, which boosts private retirement incomes.)

A second strategy is to abate more strongly the NZS of those on higher incomes. An easy way would to be to put all superannuants on a separate tax code with higher income tax rates which reduce the state contribution as private incomes rise. The bleed-out rate should be high enough so that the very well-off would opt back to the standard tax rate and forgo NZS completely. (This regime is not very different from what I suggested for a universal family benefit.)

The alternative strategy to these two might be called ‘mañana’, where we put off decisions until later, perhaps in the hope that we shant have to make them in our lifetime. But something will happen in most people’s lifetimes. It may be an ‘overnight’ crisis, as has happened in a number of countries when a fiscal collapse forced a sharp rise in the state retirement provision – none of this planned incremental increase stuff with a good warning it was going to happen.

Or it may be a creeping crisis, in which the government struggles with its fiscal position which it resolves in regard to the elderly by cutting back their provision for healthcare and state support. So they – the old-elderly especially – find themselves either paying for more of it themselves or going without. (Yes, it may be already happening; we practise mañana a lot in this country.)

That would mean that many of the young elderly would remain reasonably well-off, but as they age and their frailties increase, they will find themselves living in increasingly difficult circumstances.

Actually, that is not quite right. Under mañana, an increasing number of the young elderly are going to find themselves coping financially with their parents in their nineties. Those parents will be lucky to have their children’s support; others will not.

In making the case for the strategies of raising the age of eligibility for NZS and bleeding-out the payment at a higher rate (yes, I’d probably go for both), I am not so much arguing for cutting back funding on the elderly but allocating the funding to deploy it more effectively. I remain of the view that tax rates are going to have to rise in the future.

As for the individual reader, I don’t give financial advice but commonsense may well conclude that if you are young, you are unlikely to get your NZS at 65; if you are older, you are likely to have a difficult old age if we continue with mañana. In both cases, prudence suggests that private provision for retirement remains a personal priority.

(A recent Treasury view on these issues is Longevity and the Public Purse Fiscal and Economic Impacts of Increasing Longevity by Dominick Stephens who is Treasury’s Chief Economic Advisor.)

Will Labour’s failure condemn the future, book questions

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

Neville Gibson Reviews In Open Seas NBR Sun, 29 Sep 2024

Surprisingly, little has been forthcoming from the academic world about where and why the Sixth Labour Government went wrong, except for an analysis of the 2023 election. But whenever there’s an intellectual gap, someone must fill it.

Brian Easton, a doyen among economists and social analysts, has done it by updating his seminal economic history of New Zealand, Not in Narrow Seas (2020). Initially, while considering events since 2020, he was expecting a “transformative” government that had been promised by Labour under Dame Jacinda Ardern.

Easton thought he could provide a bit of “intellectual weight” using his knowledge of economic history and the prospect of a change in direction after the complacent nine years of the Key-English Government. He also wanted to be forward-looking, extending the maritime metaphor of Stormy Seas (1996), Not in Narrow Seas, to In Open Seas.

But Easton was sadly disappointed. “[I]t became increasingly obvious to the informed that many of the Ardern-Hipkins Government’s policies were suicidal …” He had finished the first draft in July 2022 and did not expect Labour to lose the 2023 election.

This was disastrous timing for this book, to which Easton added the subtitle, How the New Zealand Labour Government Went Wrong 2017-2023. Rather than rewrite it to account for the switch to the Luxon-led coalition Government and wait for the next book publishing cycle in 2025, Easton decided to release the completed text as an e-book for instant consumption.

More personal

It is, as he also intended, more personal and more reflective than his earlier books. Easton’s reputation rests on his solid analysis of problems, always asking whether a policy or decision is correct – or has unforeseen consequences, usually of the wrong kind.

His distaste for everything neoliberal since the 1980s remains, despite most of his analysis reaching the same conclusions. The difference is that Easton admires the champion of moderation, John Rawls, the American philosopher whose brand of liberalism is infuriating and confusing in its complexity.

Rawls sounds like a libertarian but ties himself in knots by trying to define the “nearly perfect society” that should work best for the least advantaged. This description has been applied to the Scandinavian social democracies but in practice is impractical and unsustainable in the way communism failed. (A good critique of Rawls is in David Runciman’s The History of Ideas, reviewed here.)

Another Easton favourite is Karl Polanyi, a Viennese who also tried to find a compromise between a market-based society and social protection. In a splenetic attack on the philistines at the National Library and Archives New Zealand during their “cleansing” of foreign books, Easton records that Polanyi’sclassic, The Great Transformation (1944), was among the titles for disposal. This was despite it being heavily influenced by another Viennese economist, Felix Schäfer, who arrived in Wellington in 1939 with his wife Adele, a specialist in Māori myth and language.

Scientific method

Thankfully, the works of Karl Popper, another Austrian exiled in New Zealand at Canterbury University College during World War II, survived the cull. Popper moulded Easton’s scientific outlook that ideas and concepts must be abandoned if they are proved wrong.

Easton notes this is harder in the realm of social ideas, where they hang around long after they should be discarded. It’s Popper that led Easton to reject the notion that indigenous knowledge can be equivalent to science, as such ideas cannot be subjected to truthful analysis, nor indeed

replace it.

The Indian economist and philosopher Amartya Sen is admired for his The Idea of Justice (2009) and the need for society to provide opportunity for all. Easton summarises himself as a “progressive, conservative liberal” – a combination of three identifiable political strands. This gives him appeal to a broad spectrum of views. For example, his judgments on the woke cancel culture, the mediocrity that prevails in the universities, and the low level of public discourse will be welcomed by many on the right. They are the icing on a substantial cake.

No pain, no gain

During the Rogernomics era, when the economy went through its no-gain-without-pain period, Easton remained the prophet Jeremiah who warned against supping free-market snake oil. Occasionally, he was applauded by libertarians when he opposed all forms of centralisation and supported subsidiarity.

But he curried little favour with the establishment or anyone else. In a moving piece of introspection, he describes the emotional costs of being a solitary voice, spurned by all who came under his withering criticism.

The scope of his scrutiny is unparalleled among commentators, most of whom lack his pursuit of evidence that might challenge a policy. Yet he doesn’t claim to be expert in every field and avoids topics that he hasn’t fully researched. (Typically, his latest blog at Pundit, on road user charges, comes late in the debate but is more informed than most contributions.)

In 400 pages, In Open Seas has some 29 chapters that describe a litany of public policy failures over the past two decades. An aid to online readers is a summary of them as an appendix. Easton is eager that these are a starting point for anyone wanting to advance quality policymaking.

The ‘policy bonfire’ after Ardern’s departure is a case in point. This arose from Labour’s leadership failings; it was not policy driven and had no framework to implement the policies it had.

“Labour lacked vision – not just the aspirations without any plans to deliver them, but a coherent account of what was happening in the world, together with a direction the party intended to respond to and shape.”

This contrasted with the role of the left from the 19th century, a period marked by colonisation, industrialisation, and urbanisation.

Major issues

Today’s major issues, such as migration and diversity, the Treaty of Waitangi, the healthcare system, education and science, inequality, poverty, and climate change, are all now being put through policy prisms that differ from Easton’s, but the likely results will not be much different from past results.

Take child poverty, which came up again in the past week. It has been the subject of numerous commissions and expert panels over the past three decades. According to Easton, all reinforced the “New Zealand practice of neither reviewing its history nor learning from its mistakes…

I suspect the Coalition Government will not be known for its failure to deliver. This leaves Easton in a dilemma for his next book. He dismisses the legacy of neoliberalism for being too optimistic about its achievements. Because Labour failed, his predictions for the future are as deeply pessimistic as Jeremiah’s. It will be interesting to see whether a new generation of optimists can revive the ‘animal spirits’ unleashed in the 1980s.

How has the New Zealand economy been doing?

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

Stagnation and Contraction

In this column I use the less familiar measure of GDP per capita instead of the GDP measure favoured by the commentariat. I became familiar with it when I began doing international comparisons because of the population differences between countries, while I depended upon the measure while working on New Zealand’s economic history because of significant population change. The measure is also better for thinking about distributional issues.

The most recent (seasonally adjusted) GDP figure published by Statistics New Zealand showed a 0.6 percent fall in GDP per capita in the June quarter 2024 over the March quarter. Except for a minor blip in the June quarter 2023, per capita GDP has been falling for almost two years. That’s about the same time as the stagnation associated with the GCF when it took five years for per capita GDP to return to the level it had been when that GFC stagnation started.

It is hard to work out what was happening just before this decline began, because of the disruption from COVID, but the current level of GDP per capita is much the same as it was five years ago in late 2019 just before the disruption.

What is disturbing is that the current account deficit in the balance of payments (the external account) has deteriorated from about $10b a quarter before 2020 to around $30b today. That means that exporting is weak and not driving the economy. The volume of exporting has been near-stagnating since 2019.

Another factor in the decline has been that the Reserve Bank has consciously engineered a contraction to restrain inflationary pressures, using higher interest rates which cut back investment, thereby weakening the economy and making it harder to raise prices and wages. Higher interest rates tend to add to the current account deficit too.

It is not possible to tell yet whether the economy is entering a long-term stagnation phase, but had it continued to grow at the rate in did between 2005 when the GFC stagnation ended and 2019 just before the COVID stagnation began, the economy would be 8 percent larger than it is today. That might mean your income would be 8 percent higher, and with tax revenue up 8 percent the government would have more room to move on the fiscal front. Perhaps some of its more brutal cuts could have been avoided.

The 0.6 percent fall is an average (as is the 8 percent loss). Some people will be experiencing greater reductions in their incomes, while there will be others who experience a real income increase. We don’t have good measures to monitor such change (and there is a lot of dynamic change as people enter the labour force and retire). It seems likely that recent immigrants have taken up a higher share of incomes, so that the fall for those who have been here longer has been bigger than the average. That would certainly include those with significant mortgages who are paying higher interest rates – very often families with children.

So the story is a contracting economy partly induced by the RBNZ, partly by a weak external performance. The indications are that Labour lost power in 2023 because it was out of touch with its electorate on many dimensions, but the struggling economy added to the grumbling and gave the government no room for buying off the grumblers.

The Coalition Government may be more in touch with its support – except the diversity of the three parties means there are sharp differences within the support base – but it too faces a struggling economy. The austerity measures it has been taking may seem sensible in the immediate term, but I shant be surprised if by the time of the next election the resulting failure in government delivery as a consequence of the cutbacks will become apparent.

I am not going to say much about what needs to be done to get the New Zealand economy out of this stagnation. Obviously, both the investment sector and mortgage-holders expect some relief as the RBNZ reduces the OCR. You will routinely hear claims that we need to improve productivity performance but the trope is weaker when it comes to explaining the mediocre performance and how that weakness connects with the policies being advocated. The infrastructure build makes sense but I am not sure that much of it will boost productivity, even though it will improve the quality of life and the sustainability of the environment.

The historical record emphasises the importance of the export sector to economic growth, especially when it could sell to booming economies. For the last few decades that has been those centred on China and a group of economies around it which have taken our export volumes and given us good prices. It is probably not accidental that New Zealand has recently been struggling as long as China has. I am not optimistic that China will return to its previous vigorous growth.

We need to give thought to the possibility that New Zealand is entering another period of long stagnation, although that may be also happening in most affluent economies. We need to move away from the uncritical optimism that things are going to get better if only we adopt a set of policies which are ideologically, rather than empirically, driven (and that means doing a lot more thoughtful empirical research).

You know the story of the woman who sued for divorce from her economist husband on the basis of non-consummation? ‘He stands at the end of the bed, beating his chest and saying things are going to get better under his policies, but they never do.’

Pricing Road Usage

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

Congestion pricing is easier said than done.

The first seminar I attended in Britain – around sixty years ago – explained a scheme for road usage pricing which would eliminate traffic congestion and direct roading investment. It was impressive and elegant (as many such seminar propositions are) but proved impractical and costly to implement (ditto). Twenty-five years ago, a geekish Minster of Transport, Maurice Williamson, made a similar proposal which would use GPS sensors in vehicles to monitor where they went and charge them. It, too, proved impractical, costly and would have invaded privacy. The current Minister of Transport, Simeon Brown, has announced the introduction of congestion pricing for roads, but with insufficient detail to assess whether it will be workable.

We already toll a few roads. The minister has promised a wider use of tolling, with the revenue to fund further roading investment. Fuel taxes and road-user charges levy vehicles for their road use, but they are crude, hardly reflecting the quality of the road or the degree of congestion.

Broadly, congestion charging involves vehicles paying a levy when the road is overcrowded, so the use-charge varies by time of day. The economic case belongs to a class of market failures called the ‘tragedy of the commons’, where individuals use a free resource at the expense of others. This can result in overconsumption, underinvestment, and depletion of resources. Each extra vehicle reduces the ability of other vehicles to use the roads. At worst it produces gridlock with drivers fuming that if only other drivers were not occupying the road, they could move.

Standard economic responses to the tragedy of the commons are regulation (only buses may use this lane) and private ownership of the resource (which is not practical in the case of roads). Congestion pricing is a commercialisation, where the vehicle pays the road ‘owner’ (typically a public authority) a fee for its use. The price might be set to maximise the revenue or to maximise the efficiency of use, which is not the same thing (the road owner is likely to be a monopolist).

There are exaggerated claims about the cost to the economy of congestion, with promises that its elimination will markedly boost GDP. That is not true as far as private cars are concerned. The time savings – like  the fifteen extra minutes that one might be able to spend in bed in morning – won’t appear in GDP, but they are gains nonetheless. (Another timely reminder of the difference between output and welbeing.) It is even conceivable that GDP will be depressed as commuters waste less on petrol – carbon emissions will be too. (There is a caveat; what if the charges encourage the spread of cities as when the commuter choses to use the fifteen minutes to live further out of town? Economic analysis is riddled with such caveats.)

There are likely to be gains to business which are ignored if we focus upon commuters. Businesses trucking goods around do not have the option of using public transport. (A concrete mixer hardly fits on a bus.) An example of the costs to Auckland businesses is that in order to catch the evening flight, shipments have to leave the factories an hour earlier because of end-of- the-day congestion. The quicker trips would be productivity gains. So business has an interest in getting people onto buses and trains in order to free up the roads for their use (as do commuters in cars), providing a justification for cross-subsidising from private to public transport.

The economics is less helpful on practicalities. The exact form of the charging will matter. will be easier to introduce congestion charging in some cities than others because of their geographical configuration. Keeping the capital and administration costs low is the ideal. (Not incidentally, it is this implementation phase where many politicians parties fail; it is easy to dream up policies whose implementation is a nightmare when you are in office.)

Getting the politics through may not be easy either. Providing implementation is not too clumsy there will be support from, say, Auckland business for congestion charging. But there may be resistance from commuters even though it may be in their ultimate interests. A particular group of grumblers will be those whose jobs require them to turn up or leave during the congestion period even if they cannot afford the extra payments; the scheme will amount to a wage cut.

Given the likely political resistance, I was surprised that the minister announced that the revenue would be shared between the local authority and the centralised Waka Kotahi/ New Zealand Transport Agency. It will be so easy for the resisters to present this is as yet another Wellington tax grab.

I would have thought that once the facilitating legislation had been passed, it would be politically astute to handover the implementation and operation entirely to each local authority. The minister would benignly say to grumblers that is a local responsibility: ‘don’t come at the minister if you think there is a cockup, go to them’.

That means leaving all the revenue to the local authority too. They may want to spend it on improving their transport network, reducing rates, spending it on ‘nice-to-haves’ or whatever. That is their local decision – nothing to do with the central government. (Cough, cough. Don’t be surprised if Waka Kotahi surreptitiously rebalances some of its spending away from those centres which have the good fortune to be able to charge for congestion.)

There is a broader issue here. Centralisation often means that ministers get into dog fights that political commonsense says they should stay out of. For instance, the centralisation of the public healthcare system resulted in the Minister of Health getting involved in fracas over failing small hospitals rather than leaving the matter to the local health board.  Well, really! Is that the best way to spend ministerial time? (Sometimes that may be all a minister is capable of; every Cabinet has lightweights.)

The Minster of Transport has made a major strategic decision that congestion prices for roads can be introduced by local authorities. There are strong economic reasons in theory for them, although the theory warns there may be distributional consequences. A big challenge may be implementation. (I repeat that the minister should stay out, leaving the challenge to each local authority.) A bigger challenge may be the politics (where again the minister should keep her or his head down). I am not expecting a fully effective congestion pricing regime to be up and running anywhere soon.

In Open Seas; A Book

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

The background to In Open Seas: How the New Zealand Labour Government Went Wrong:2017-2023

Not in Narrow Seas: The Economic History of Aotearoa New Zealand, published in 2020, proved more successful than either I or the publisher (VUP, now Te Herenga Waka University Press) expected. I had expected that it would be a sleeper, a steady seller which would eventually reshape the way we thought about our history and our country.

However, it sold well. The obvious next step was to update it. It was to be a more future-oriented book. I titled it In Open Seas to indicate that there were options as to where we might progress. Early on, I made the decision that its voice would be more personal, more reflective because it would include my judgements about those future options. I also decided to link it to Not in Narrow Seas by describing some of the challenges I had when I was writing the earlier book.

The initial theme was transformation, following Labour Prime Minister Jacinda Ardern’s statement that hers would be a ‘transformative’ government. I thought I could add a bit of intellectual weight to the underlying transformation using the background of the nation’s economic history. But it became evident that whatever its aspirations, the Ardern-Hipkins Government was not going to deliver on them. As it became increasingly obvious to the informed that many of Adern-Hipkins Government’s policies were suicidal, the book increasingly transformed into a critique. (This is not a book about its politics; others will write about that.) I added the subtitle: How the New Zealand Labour Government Went Wrong: 2017-2023. The critique is not always sympathetic: the Government’s behaviour sometimes forced me away from the more temperate tone of Not in Narrow Seas.

I completed the first draft of the book in July 2022, and then commenced the revision and updating. More material was added as the Ardern-Hipkins Government did not change its course. But I did not expect the Government, with its huge majority, would lose the October 2023 election. By the time I sent it to the publisher, their publishing program was already full for the rest of 2024. By 2025 events and policies will have moved on under the Luxon-led Coalition Government.

That meant the book, as conceived, was no longer contemporary enough. I looked at the possibility of revising the manuscript. It contains much useful material including setting out new direction and reporting on some policy failures. Some of it is so prospective that it will be beyond the comprehension of the conventional wisdom for some time. No matter. It took 40 years to recognise the significance of child poverty, damaging two generations of New Zealanders in the interim. Hopefully, the country will respond a little faster to some of the issues raised in In Open Seas.

However, the Coalition Government has embarked upon such a different direction that a total reconstruction was required. Better to start a new book.

What to do with the manuscript of In Open Seas? I could have stuffed it in a bottom drawer. But because there is so much valuable material I decided to publish it, as is, as an e-book. This is where it is available.

In doing so I have resisted the temptation to do yet another revision and updating. I hope that readers will forgive the book’s limitations. To have done more would have meant that In Open Seas would never have been published.

The book may provoke a less than mild reaction from some Labour loyalists. In a few years’ time they will realise that their government lost its direction. Rather than plodding on, they should take the standard advice for those lost in the bush.

  • Stop. Sit down and think.
  • Think carefully about how the situation arose.
  • Can you retrace your steps?
  • Gain some height to get a better perspective.

The aim of publishing this book is to help them do so. Even if its map is not perfect, I am confident it has some clues for a better path.

Those who are not Labour loyalists will also find the book useful, as they reflect that the Coalition Government’s ‘back on track’ is not taking them anywhere near where they want to go. We really do need a fundamental rethink about the future path of Aotearoa New Zealand. I hope this book – and my future writings – contribute to the rethink.

*********

The final section of In Open Seas, called ‘sailing in a new direction’, provides a chapter-by-chapter synopsis.

1. About the Author: Hello! The study argues for a Rawlsian framework for public policy, which evaluates it on the basis of the benefit to those at the bottom of society.

2. Wellbeing: We need to refocus from our obsession with measures of material output, such as GDP, towards wellbeing, despite this being a more complex notion.

3. To Market, To Market: Markets are a very powerful means of coordination in a complex affluent economy. But they need to be regulated in order to work most effectively for enhancing wellbeing.

4. Economic and Social Development: Economic growth, say as measured by GDP, is not the same as economic and social development, the way that a society evolves. A major contribution to either is technological change, which is neither inherently good nor bad, but usually has to be regulated to promote wellbeing. The origin of most technological change is overseas and it has to be adapted for New Zealand. We overrate our ability to accelerate economic growth. We have more influence over the patterns of development.

5. The Environment: The environment is an integral part of economic growth and wellbeing. We should be aiming for it to be as sustainable as possible.

6. Overpowering Markets: Are markets overpowering our lives? Will we end up valuing everything in dollar terms rather than human ones?

7. Is the Rich World Going Into Secular Stagnation? Whether or not the world (and New Zealand economy) is entering a period of long-term stagnation or slower growth, the following need to be addressed:

  •  avoiding stressful unemployment;
  •  lifting the relative incomes of those at the bottom;
  •  improving the quality of life;
  •  improving safety;
  •  increasing opportunity enabling the achievement of capabilities;
  •  promoting sustainability.

8. The International Order: While throughout New Zealand’s past history the international order has been dominated by one of two hegemons – Britain and the US – or the transition between them, the future is likely to be a multipolar world. Even if it is a bipolar international order, New Zealand will have to tread a narrow path on economic, security and cultural issues between the great powers rather than relying on just one of them.

9. The Open Economy: Because it is small, the New Zealand economy will be a specialist one, concentrating on resource-based exports despite trying to diversify. It will have to maintain an open economic stance to the world, challenged by the reluctance of significant potential trading partners to open up their markets to pastoral imports or to even notice our existence.

10. Migration and Diversity: While there may not be more social diversity these days than in the past, it is certainly more publicly evident. That places a challenge on how to evolve a coherent nation. Tolerance is critical. An important source of diversity is immigration. It needs to be better organised and more strategic. Immigration will not solve the aging of the population. The age of entitlement for New Zealand Superannuation needs to rise in a planned, slow, transparent manner. The fiscal savings could be used to improve the healthcare of the frailist elderly.

11. Māori: The notion of being Māori has evolved. Today being Māori is primarily an ethnic or cultural matter rather than a descent (or racial) one (although whakapapa remains important). We should focus on the achievement story rather than the grievance story. Even so, most socioeconomic indicators of those who identify as Māori are lower than the national average. The gap is slowly closing. Because being Māori is evolving, it is difficult to forecast where they are going. It is critical though, that our thinking about Māori is not limited to keeping them in the past ignoring the changes, ignoring the achievements, ignoring their diversity.

12. Te Tiriti o Waitangi: There are many misunderstandings as how the treaty signed at Waitangi in 1840 came about and what the text contains. ‘Originalist’ interpretations can be rejected for any close historical/textual analysis. There was no common view of its intentions at the time of signing. Its meaning today arises from the dialogue which has subsequently occurred; it will evolve further.

13. Governing New Zealand: A modern social democracy depends upon an elected dictatorship. One way of understanding the paradox is to see it as founded on a social contract. Te Tiriti is such a social contract; that was the intention of at least one person involved in the drafting (it was not everyone’s intention).  New Zealand should continue to progress towards a republic, which is not so much about having a (distant) monarch or president as head of state, nor about the diminishing ties with Britain. It is about everyone having equal social status and value; a civil society in which supreme power is held by the people and which recognises the rights of minorities.

14. Centralised New Zealand: Those who signed Te Tiriti o Waitangi were thinking in terms of a minimalist state. Over the years New Zealand has become increasingly centralised. The pressures for increasing the powers of the centre continued. New Zealand should be less centralised, not only because the centralised state suffers from rigidity and is slow to innovate-, but because decentralisation and tolerance may be the only way for a liberal democracy to maintain coherence in the face of increasing expressions of diversity. Decentralisation is not only about giving individuals greater discretion in their decision making. It is also about encouraging the organic growth of social institutions to fill the hollow society. An important institution for decentralisation is local government.

15. Co-governance: Co-governance must be distinguished from partnership, self-government and co-management. Its origin and meaning is unclear. It does not come out of Te Tiriti o Waitangi.

16. Accountability: The government – the executive of Cabinet and the public service – of a liberal democracy is held accountable to the public by a number of mechanisms, only one of which is regular ‘free’ (i.e. independently run) elections. Many of the mechanisms exist in principle, but do not function well. Parliament holds the government to account very poorly. Among the changes to strengthen this function are:

  •  a greater recognition of importance of Parliament’s accountability responsibilities;
  • reducing political parties’ power over MPs chosen by the party list;
  • reducing the influence of political funding;
  • making Officers of Parliament those commissioners whose function is to hold the government account and who are currently within the executive they are meant to be monitoring
  • strengthening the Official Information Act (especially by better funding the parliamentary officer monitoring the OIA – the ombudsman).
  •  Until there is a considerable strengthening of the accountability mechanisms, the parliamentary term of three years should not be extended.

17. The Public Record: The maintenance of the public record is a key element of holding the government to account. The recent stewardship of the Department of Internal Affairs which is responsible for Archives New Zealand has ignored that central role in democracy. The Department’s record in regard to the National Library, for which it is also responsible, has also been disappointing. Both agencies need to be housed elsewhere. The Chief Archivist should be an Officer of Parliament.

18. Generic Management: New Zealand management is dominated by the cult of generic management, of managers who profess to be able to manage, but know little about the institutions they manage. In fact they do not manage very well, often reducing the professional capacity of their institutions. There is a need to shift to a new style of management which respects professional skills and the integrity of each organisation.

19. The Healthcare System: Often healthcare is poorly delivered by the market. That is why we need a publicly provided large and complex healthcare system with unified funding. The issue is not that its structure is wrong and we need another redisorganisation. Rather, it is managed badly with insufficient attention to patients and the people who treat them. It is typical that the last centralisation (redisorganisation) paid little attention to quality control and local accountability. Changing the balance between generic and professional management of the system is both the priority and, given the entrenchment of the incumbent managership, a great challenge.

20. Education and Science: The research and tertiary education sectors became dominated by a commercialisation philosophy when they meekly accepted the neoliberal restructuring of three decades ago. Consequently they have become top-heavy with generic managerialism and the resulting transaction costs. They have lost their purpose of contributing to New Zealand by maintaining the country near the international intellectual frontier.

21. Inequality: Distributional inequality is tricky; commentators often confuse different notions. Moreover, their focus tends to be on the existence of inequality, rather than why it occurs and how it has changed. The chapter explains some of these issues in preparation for the following chapter.

22. Poverty: The definition of poverty involves a social judgement. Mine follows from the 1972 Royal Commission on Social Security, which wanted a society in which people are able to feel a sense of participation in and belonging to the community – a very Rawlsian approach. In 1990 the approach was abandoned for the less generous standard of sufficiency to sustain life and health which has dominated social policy since. The vast majority of the poor are children and those who live with them. Poverty is not confined to any ethnicity. The effect of the 1990 ‘redesign of the welfare state’ was to double the number of children in relative poverty. The evidence is that in this new regime many people are below an adequate standard of living and are struggling, compromising their health and their future prospects. The implication of the 2018 Child Poverty Reduction Act with its objective to halve child poverty, thereby reversing the redistributional cuts of three decades earlier, was surely the most revolutionary ambition since the Rogernomics revolution. However, the Ardern-Hipkins Government failed to really pursue child poverty reduction, probably because it did not understand what it was doing.

23. Redistribution: Paying taxes is a part of citizenship. The wherewithal to pay the taxes arises from individuals being part of a community. They would have little income without the economy which the community creates. Rawlsians are left with the challenge of attaining adequate wellbeing for those at the bottom without compromising the economy and overall wellbeing. Fortunately wellbeing for most of the population is not particularly related to their material income. The current New Zealand system is neither efficient nor especially equitable.

24. Modernisation: Societies continually face shocks and change. Modernisation is the task of adapting and evolving its institutions to these new circumstances. The chapter illustrates this by reference to the changes which have happened since 1972 which require rethinking how the principles set out by the Royal Commission on Social Security need to be applied. These include the rise of married women in the paid workforce and the higher level of evident unemployment together with the inconsistency recognised by the Royal Commission between the Social Security System and the Accident Compensation System. New Zealand suffers from intellectual and policy inertia supported by sclerotic pressure groups with the consequence that it modernises slowly and badly.

25. Making Policy: Policy design is a discipline which should start off with a detailed specification of the problem followed by a careful analysis. However, it is common in New Zealand to decide on a policy solution and construct the justification for it based on selective anecdotes. That is why so much policy is badly designed and why the repeatedly amended botch jobs look so Heath-Robinson.

26. The Covid Crisis: This chapter describes the Covid crisis and the evolving policy response. It contributes to the lessons reported in the next chapter.

27. Climate Change Policy: The chapter uses the experiences of climate change policy (and the Covid crisis) to illustrate the critical conclusion that it is extremely hard to replace bad policies with good policies. We frequently imitate foreign practices failing to adapt to New Zealand-specific conditions. New Zealand’s contribution to global warming is insignificant and has been even further limited by imitating rather than adapting overseas thinking on climate change. New Zealand’s economic and social sustainability may have been compromised. The way we have measured emissions – on a production rather on a consumption basis – has shaped the way we think about the problem (Gilling’s Law), often to the detriment of New Zealand’s interests. We should be focussing more on the cloud than the emissions joining it. That suggests we should treat long-life and short-life emissions differently and reinforces the conclusion that we cannot rely upon forestry sequestration of carbon.

28. The Public Discourse: The public discourse depends upon truthiness rather than expertise, celebrities rather than experts, personal abuse rather than rationality, self-interest rather than independence. The low standards exist from the bottom of society right to the top.

29. Mañana New Zealand: Public policy is very much mañana, putting off making decisions until it is too late, without any anticipation of the future. Dornbusch’s law is that ‘a crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought’.

Epilogue: There is a sad tendency by the mediocre to try to isolate New Zealand from the world, instead of engaging with it.