Medical Misadventures: Should Patients Be Compensated for Managerial Failure?

This entry was posted in Health, Listener, Social Policy on 26th February 2005 by Brian Easton.

Listener: 26 February, 2005.

Keywords: Health; Social Policy;

An earlier column Accidents Will Happen (April 17, 2004) commended the proposed change in the ACC compensation criteria from medical error (which involves fault) and medical mishap (with a rare and severe outcome) to the situation where unexpected treatment injury occurs. The column worried that the opportunities the new scheme promises for prevention might be overlooked. I gather the ACC is instituting a programme to improve the medical safety cultures of health professionals. Great. As the column concluded, the biggest gains from the reform may be that there will be less medical misadventure.

However, the new scheme has carried over a provision from the current scheme whereby patients are not entitled to compensation where their injury is due only to a lack of resources.

Consider two women going for a breast examination. In one case, the doctor’s diagnosis misses her malignant tumour, and her surgery is delayed for six months. If, as a result of the delay, some treatment injury occurs, she will be entitled to compensation. The doctor would probably be referred to the Health and Disability Commissioner, who may require the undertaking of further training.

The second woman’s doctor identifies the malignant tumour, but, because of resource shortages, the treatment waits six months, about three times more than what the experts recommend. But she has no compensation entitlement because of the legislation’s resource shortage exemption, although this woman has exactly the same treatment experience as the other. Despite a managerial failure to provide the resources, there is no mechanism under the new scheme to compensate the victim for the failure or to assess the competence of the managers who failed, nor is there any incentive to improve managerial performance.

The apparent justification for exempting resource failures is because the fiscal exposure could be enormous. Where might it end? Someone halfway up a mountain has a cerebral haemorrhage. There is no nearby ambulance or other medical treatment available. Should they be entitled to compensation? Yes, if the brain injury was due to an accident. Although, as far as health professionals are concerned, any failure to treat can be a source of treatment injury, the law overrules the health professionals’ ethic.

You may think this is an example of the “managerial exemption”, that curious phenomenon whereby managers hold their subordinates to higher standards of account than they hold themselves: “Do what I say, not do what I do.” In this case, the statute places greater accountability on the health professionals than it does on those who manage them.

But if treatment injury cases involving resource shortages are not covered by ACC law, they may be covered by common law. In which case, some resource managers may find themselves going through a lengthy and expensive process of litigation, with their hospital facing damages many multiples of the ACC compensation.

The sensible thing would be to revoke that statutory exemption, but include a test of reasonableness to avoid the need for standby ambulances up mountains. However, this leaves the scheme open to a high degree of fiscal exposure from the failure to provide treatment resources. A medical specialist and I recommended to the Parliamentary Select Committee on the reforming bill that the clause should be revoked in, say, three years. In the interim, the health system would gear itself up to meeting the resource standards that experts recommend as reasonable. A piece of work I have done, using radiotherapy for breast cancer as an example, shows that reducing waiting times can give spectacular returns from reduced treatment injury. It is not just one person coming off the waiting list, but everyone after gets treated earlier, and so is less likely to suffer.

My hope is that shortly after the new scheme is begun, the government will take the next step of investigating how it can remove the unfair resource exemption from the legislation. As for the current reform, the biggest gains may be from preventing the treatment injury that arises from excessive waiting.

Serendipity in Museums

This entry was posted in Growth & Innovation, Literature and Culture on 24th February 2005 by Brian Easton.

Fulbright New Zealand Quarterly Vol 11, no 1, February 2005, p. 3.

Keywords: Growth & Innovation; Literature and Culture;

A Fullbrighter cannot spend all his or her time reading, writing, attending lectures and formal occasions, and visiting people. My indulgence was to visit the museums and galleries which enrich such cities as Washington and Boston. Entirely for myself you understand, for there was no mention of them in my application to spend time in the US studying its economy in the context of globalisation. (Maybe the visiting is a compensation for childhood deprivation, when they closed the Canterbury Museum for what seemed an eternity.)

Mind you, my economist’s eye sees things which others may not. So I was delighted that George Washington’s farm at Mt Vernon is a late eighteenth century feudal estate. In the course my work I have visited Washington, DC on many occasions, but the Fulbright award gave me the time to take the metro and bus to the farm about an hour north.

I have seen a number of old farm estates in Europe, but although they keep ancient artefacts, they present a modern farm. In the case of America, piety has them trying to recreate Washington’s farm as it was 200 years ago, a task helped by his leaving detailed instructions on how it was to be run when he was (often) away.

He was a ‘scientific’ farmer, experimenting systematically and designing things (not always successfully: the threshing barn doubled the yield, but his fences could not keep all the wild animals out of his gardens). The soils of the farm had been drained by the growing of tobacco over the previous century, and he had to develop a more sustainable farming, based on wheat as an export (they also exported fish from the Potomac which the farm overlooks), and manuring (rather than fertilising for this was pre-industrial economy). There was also much self-sufficiency, making things on-farm we would expect to be made off-farm today. Yet, despite the layers of time, one could still see the social hierarchy, with indenture servants and slaves at the bottom.

I am not critical of Washington as a feudal lord. Rather I was delighted to have such a clear display of an old economy farm estate. It highlighted how the America of revolutionary times was pre-industrial. And yet within a few decades it was transforming into the greatest industrial economy in the world. That was the topic of my 2004 Fulbright lecture, From Feudal Society to Globalized Economic Power.

I also visited the Henry Ford Museum by the Ford Rouge Factory near Detroit. (It was weekend, so I didnt see the car assembly line.) Ford collected an astonishing range of old machines beginning with the Newcombe Steam engine (the first powerhouse of the industrial revolution after water wheels), together with various heritage buildings he relocated in the grounds. The economic eyeopener was Thomas Edison’s Menlo Park laboratory which Ford, a close friend, had replicated. Myth has it that at the opening Edison said it was 99.9 percent accurate. A stickler for perfection, Ford bridled. Edison explained that it was much too dust-free.

I had always assumed that Edison was a one-man inventor. But the laboratory consisted of half a dozen buildings which housed a team of glass blowers, chemists, metal workers, carpenters, technical drawers and other craftsmen (not to mention lawyers for patents and bookkeepers to deal with the cash flow). Leaving aside the inherent interest of the exhibit, and the increased respect one has for Edison as a scientist who understood both the theories and materials he was using, here is the first case of the ‘industrialisation’ the process of invention. He came close to achieving his goal to have one major invention every six months and one minor invention every ten days. That is the other end of the US economic success: Mt Vernon and scientific farming; Menlo Park and scientific invention.

There were many other museums which enriched my understanding of America, but pleased dont think it was all work-fun. The Art Galleries I visited were almost all pure recreation, and there was lots of fun-fun in the museums too.

You know how after a long day, walking between exhibits, one mind’s strays, and you have a sense of someone walking beside you. Often it was Senator William Fulbright, whose scheme aims ‘to bring a little more knowledge, a little more reason, and a little more compassion into world affairs and thereby to increase the chance that nations will learn at last to live in peace and friendship.’ I got the impression he did not mind me wasting part of his program’s time wandering around the museums of the United States.

Taxing Alcoholic Beverages in New Zealand

This entry was posted in Health on 22nd February 2005 by Brian Easton.

Revised Version of Paper for “Thinking Drinking: Achieving Cultural Change by 2020″, Melbourne, 21-23 February, 2005.

Keywords: Health; Regulation & Taxation;

I thought a useful contribution would be to describe the recent history of alcohol taxation in New Zealand, explaining the principles underlying the changes and discussing some unresolved issues.

Some Preliminaries: The Impact of Higher Prices on Unsafe Drinking [1]

Before doing so, I need to say something about the obvious, which is nevertheless frequently overlooked in discussions on the economics of alcohol, when it assumes there is a single price. When we talk of ‘the’ price of alcohol we usually mean the average price, but that is not what purchasers confront. Even if we confine ourselves to off-licence sales, there are a myriad of prices for different drinks. Different consumers respond in different ways. An alcoholic or someone who is short of money and wants to binge drink will look for the cheapest drink, measured by the cost of the absolute alcohol. Others, perhaps purchasing a bottle of wine, will take little interest in the absolute alcohol content – assuming it is the same in each bottle – but will trade off their preferences and the quality of the product against price, subject to what they can afford.

The implication is important for tax policy. If, for any reason, the price of the alcohol rises, consumers may exhibit one of two extreme responses (plus the spectrum between). They may reduce their consumption of absolute alcohol or they may purchase the same amount of absolute alcohol, but buy a lower quality drink. A rise in excise duty (or whatever indirect tax) only reduces the level of absolute alcohol consumption insofar as the first response occurs.

That means that where a rise in excise duty is intended to curb unsafe drinking, it will only succeed insofar as it reduces the absolute alcohol consumed in unsafe circumstances. Although I know of no systematic empirical evidence, it seems likely that those who purchase the lowest price of absolute alcohol drinks are most likely to practice unsafe drinking. That means they are likely to be most influenced by a rise in excise duty.

Of course some unsafe drinking occurs when the more expensive (measured by the price of absolute alcohol) drinks are consumed. For instance unsafe drivers may have purchased very expensive wine before driving home. A rise in price of the liquor may not deter them from consuming the same quantity of absolute alcohol if they will to purchase a lower quality beverage. So their unsafe drinking is relatively impervious to a higher excise duty. We need some other policy instruments to curb the possibility of harm. Drink-driving requires rigorous enforcement of effective laws.

There are a couple lessons from this. The first is that higher prices for alcohol will not curb all unsafe drinking. It is but one of a set of policies.

The second is that where higher prices are most likely to matter where the price of absolute alcohol is lowest and where, conveniently for policy purposes, a large part of unsafe drinking occurs. From which I conclude that the key price to target to reduce harm from drinking alcohol is the minimum price of absolute alcohol, rather than the average price of an alcoholic beverage.

A series of policy decisions in New Zealand, which I will now describe, have led us to a practical implementation of that targeting.

The New Regime

Until the mid 1980s, taxation on alcoholic beverages was on an ad hoc basis, with excise duties and wholesale taxes on beer and spirits, and a sales tax on wine. In October 1986, the entire indirect tax system was dramatically reformed with the imposition of a GST (goods and services tax) on all purchases, the exceptions being where it was not practical to impose the tax. This means that GST is imposed on all beer, wine and spirits just as their producers and distributors have to pay income, corporate, and any other taxes in the course of their business.

There was a purist element among the official advisers, supported by the liquor industry, who argued that there was no case for taxing alcohol differently from other products. But had only general taxes been imposed on alcoholic beverages, their relative price to other goods and services would have fallen. The loss of revenue would have required a higher GST rate, or lower reductions in income tax. Fiscal prudence, political realities, and the vigour of the alcohol control lobby resulted in the imposition of a excise duty based on the quantity of absolute alcohol, so that wine and beer face the same tax for the same quantity of absolute alcohol. (I mention the exceptions below.)

The officials’ justification is that insofar as absolute alcohol was an economic ‘bad’, there was no compelling evidence that the bad varied between different beverage forms – even if there are many anecdotes to that effect. (There may also be a case to tax differently different drinking venues, to vary the rate by the quantity of absolute alcohol in a drinking session, but there is no practical way of imposing differential taxes to reflect the different circumstances.)

GST is levied on excise duties. It makes the tax system easier to administer. But also, when GST was raised in July 1989 there was no need to make separate provision for raising the excise duties to maintain the prices of alcoholic beverages relative to other consumables.

Every six months duty levels are automatically increased by the same amount as consumer prices. This is directed by statute, so it is not an abrogation of the principle that parliament sets tax rates. The advantage of this automatic mechanism is that the government does not have to expose itself by passing legislation or – as frequently occurred before the change – not doing anything and allowing the real value of the taxes on liquor to fall.

The new tax regime occurred during other major economic reform, also including liberalisation of the supply of liquor with quality licensing, with no quantitative restrictions on outlets. There has also been increased policing of potential harmful drinking, including tougher enforcement on drink-driving and host-responsibility, backed by public health campaigns.

There has been a reduction in the quantity of absolute alcohol consumed since the reforms. On some indicators there has been a reduction in some harmful drinking, although there is no comprehensive set of measures. Moreover, unsafe drinking among teenagers has risen.

Some Consequences

An absolute alcohol based taxation regime has two consequences. First, as absolute alcohol content rises, the tax payment rises in proportion. The tax paid is the same whether one has the same number of standard drinks from cans of beers, flavoured alcohol beverages, or bottles of wine. The payment is the same whether the drinking occurs in a single session or over a number.

Second, the level of tax is independent of the price or quality of the drink. Thus the excise duty paid is the same on the cheapest bottle of wine as it is on a very expensive one. This partly reflects the principle that the indirect tax system has not the purpose of redistributing income. (In the previous system higher sales taxes tended to be imposed on luxury goods, although subsequent research showed that the redistributional effect was negligible.) New Zealand policy is to have redistribution goals pursued through the income tax and social benefit systems.

(While a lift in alcohol excise duty will raise prices for all drinkers, many will be better off insofar as the resulting tax revenue will be recycled back. Under some assumptions, over 70% of adults will be better off as a result of this recycling (and also from reductions in harm). Because heavy drinking is concentrated in a small part of the population these drinkers will be made worse off as a result. On the other hand heavy drinking is the main source of harm, and so the heavy drinkers would be paying for a greater share of the harm they generate.)

Lower cost drinks have a higher proportion of their sale price as excise duty. So the flat excise tax compresses prices relative to the cost of production. Practically, the regime favours those who are primarily concerned with drinking an alcoholic beverage relative to those who merely want to consume absolute alcohol. It is also possible that the lack of poor quality New Zealand wine – the lack of cheap local wines on the supermarket shelves – partly reflects this tax incidence on producers.

Exceptions

There are some exceptions to the principle of the same rate of excise duty being applied on all absolute alcohol.

1. The minimum threshold. Products with an absolute alcohol by volume (aabv) of less than 1.15% are not taxed. This threshold appears to be for administrative convenience. ALAC NZ takes the view that the threshold could be raised to 2.5% aabv, reducing compliance costs, and making low alcohol beers even more price attractive relative to standard beers. (As one senior staffer remarked, ‘one would drown before getting drunk on 2.5% beer’.)

2. Categories: Because it is difficult to precisely control and cheaply measure the aabv for some alcohol products, some duties are set by beverage volume instead of by absolute alcohol content. Thus all wine (below 14% aabv) is taxed as if it is 10% aabv. Since most wine contain a higher proportion of absolute alcohol, it is undertaxed relative to beer.

3. When the rates were being realigned in the 1980s, it was clear that the duty on spirits far exceeded the duties on wine and beer, perhaps arising from the belief that spirits drinkers were more affluent. So a differential was maintained, in order not to disturb relativities too greatly, with the rate for beverages with on absolute alcohol above 23% aabv (spirits) set higher – about double – than for beverages with on absolute alcohol below 23% aabv (wines, beers and FABs). (The consumer price adjustment provision was not applied to the top rate until March 1992.)

The May 2003 Reform

The regime was incrementally reformed in May 2003. What happens also suggests a minor change in fiscal policy towards greater concern about unsafe drinking.

In late 2002 the Alcohol Advisory Council of New Zealand commissioned me to review alcohol tax. My report Taxing Harm: Modernising Alcohol Excise Duties broaches a whole range of issues, many of which are touched upon in this paper. Unusually for such non-official reports, some of its recommendations were implemented quickly – within six months of publication. As its author, I would like to say this promptness reflects the sheer intellectual force of the report. However the truth is that it identified a fiscal anomaly in the system was dealt with quickly, because it involved revenue leakage, as well as the unsafe drinking of cheap alcoholic beverages.

The anomaly arose because the regime constructed in the 1980s was based on various assumptions about the forms of available alcohol. As is typical, the policy aim was for a robust regime which would not need to keep being amended as new products were created. Thus Flavoured Alcoholic Beverages (FABs, a.k.a Ready-to-drinks, RTDs, and alcopops) , introduced a little later, were covered. However the two step excise duty created a possibility for commercial gain.

As explained above, the key economic variable to target to reduce harm from drinking alcohol is the minimum price of absolute alcohol, rather than the average price of an alcoholic beverage. So I collected information on the cheapest source of alcohol from off licences.

The ‘winner’ – if one may use that term – was ‘light spirits’, 23% aabv, which sold in late 2002 for as little as $7.95 in 1125ml bottles, at a time when the minimum hourly wage was almost exactly the same amount ($8.00). A bottle contained over 25 standard (10ml of absolute alcohol) drinks at an average cost to the consumer of 31 cents. So for just on an hour’s work, a determined drinker could purchase enough alcohol to kill her or himself. On two occasions a coroner said someone did.

Providing absolute alcohol at the same price (these are late 2002 rates):
– a dozen 330ml cans of beer would cost $6.33, whereas the cheapest I could identify was $11.95,
– a 1.125 litre bottle of full spirits (at 37.2% aabv) would cost around $12.85, instead of $25.95 at the cheapest, and
– a 750ml bottle of wine would cost $2.76. The cheapest was $7.95 (although recently, imports as low as $5.95 a bottle have been available on supermarket shelves).

Why were light spirits so cheap? They are basically flavoured industrial spirit, diluted to 23% aabv, with a couple of tax breaks. The first tax break was that the spirits was taxed at the lower excise duty step, not the higher step which had been set for spirits. And second, because the lower step was intended for fortified wines and liqueurs and the like, it was based on volume of beverage rather than volume of absolute alcohol. The calculated rate assumed that the aabv was 18% rather than in the case of light spirits the actual 23%. In effect every fifth drink was excise duty free. (Compared to the excise rate fro spirits, six out of ten drinks were free). Additionally, the lower tax reduces some of the holding costs and retailer’s margin, although production, transport and packaging costs would not be affected.

The government removed these anomalies in May 2003. Today all drinks above an aabv of 14% (the maximum for wine) are taxed at the high step rate and on the basis of actual aabv. The retail price of light spirits may have doubled – ‘may’ for the product has disappeared from the shelves, indicative it was a source of absolute alcohol rather than a beverage with alcohol. .

I argued that the high step rate should be on all spirits, but that the low step rate should be continued on fortified wine and liqueurs above 14% aabv. This second proposal was not adopted and all liquor above 14% aabv is taxed at the higher step. Journalists focussed on little old ladies in retirement homes who would have to give up their nightly glass of sherry because of the price hike, while sherry producers who would have to abandon production. I did not see a single story about drinking oneself to death with light spirits. In fact, the addition to one’s nightly glass of sherry was in the order of 5 cents. I understand there has been little impact on sherry sales, and there has not been a single case of a little old lady being bankrupted as a result of the price hike.

We do not have systematic data yet on the overall impact. I am, however, confident that alcoholics are paying more for their liquor and that teenagers are drinking less absolute alcohol, than had the change not been made.

Current Rates

The current excise duty rates above 1.15% aabv can be summarised as follows:

EXCISE DUTY RATES* ON ALCOHOL (January 2005)

	1.15-2.5% aabv	2.5-14.0% aabv	Above 14.0% aabv
Beer	32.967c/l**	$21.982/l of aa	$40.035/l of aa
Wine	32.967c/l**	$2.1982/l	$40.035/l of aa
Spirits & Bitters	32.967c/l**	$40.035/l of aa	$40.035/l of aa
Other***	32.967c/l**	complicated****	$40.035/l of aa

* GST not included
**In effect this treats all beverages in the range as having aabv of 1.5% (as .015 x $21.982 = 32.967);
*** Liqueurs and cordials; Other fermented beverages (such as cider, perry, mead); Ice cream and other edible ice.
** ** 2.5-6.0% aabv: like beer;
6.0-9.0% aabv: $1.7585/l (in effect treating it all at 8.0% aabv)
9.0-14.0% aabv: like wine (in effect treating it all at 10.0% aabv)

Why Two Steps?

There has been considerable unease as to why the excise duty rate on alcohol is not uniform, the differential appearing to reflect past historic practices. My report argues that when the policy concern is potential harm from drinking, the target variable should be the minimum price of absolute alcohol. This will be determined, before tax, by the cheapest beverage to produce and distribute. In practice in New Zealand that is spirits.

Suppose we decide that in order to target the minimum price of spirits it is necessary to set an excise duty on spirits of $40.035 per litre of absolute alcohol. Were there but one rate it would also be levied on beer, wines and other alcoholic beverages, raising their current prices substantially because these beverages are much more expensive to produce and distribute.

Instead, the other alcohol forms are excised at a lower rate, ideally to keep their minimum price comparable to that for spirits. A strategy to reduce alcohol induced harm need not be punitive on the drinking of alcoholic beverages.

The spirits producers can reasonably grumble that the two step excise reduces their market relative to that for beer and wine. They may also grumble over the exact parameters. But the logic of a minimum price strategy which is not punitive, is that two steps reflect differences in costs of production. (Note that for the same total revenue, a uniform excise rate would reduce the minimum price of absolute alcohol, which is likely to increase harm, especially among alcoholics, heavy drinkers and teenagers.)

The government has not publically stated it has adopted a minimum price of absolute alcohol strategy. Governments only adopt such policies cautiously. A practical issue is that we do not have the data base – beverage prices statistics are collected as averages not minima.

The Wine Anomaly

My sense of elegance and fairness finds the excise rate on wine uncomfortable. It is levied as if wine has an aabv of 10%, but most wine has a higher alcohol content (up to 14% aabv), and wine drinkers can have a discount of up to almost 30 percent relative to other drinkers of alcoholic beverages.

Now the anti-harm lobby need not be concerned with elegance and fairness, but once light spirits are properly taxed, some of the cheapest alcoholic beverages are cask wines (often the cheapest come from overseas). My report recommended that cheap wines be taxed precisely according to their absolute alcohol content, but that more expensive wines – say over $15 a litre – be taxed as at present. The suggestion has not been adopted, possibly because of the higher compliance cost. But it is a nice illustration of the principle that the lobby should focus upon cheap alcohol, where the economic policy instrument is its most effective.

The Right Excise Duty Level?

There is little agreement as to the appropriate level of excise duty. Treasury papers sometimes have comparisons with the cost of alcohol harm to the exchequer, with the apparent intention that revenue from excise duties should offset this fiscal cost. There are two reasons why this underestimates the optimal excise duty.

First, there are costs to society other than those which accrue to the exchequer. Second, the socially optimal tax rate is the marginal cost, not the average cost. Unlike tobacco, the cost of alcohol harm rises with the quantity drunk in a session: the sixth beer is somewhat more socially expensive than the first one. Taxing at the social cost of that last drink, that is above the average cost of all the drinks, would be socially beneficial – especially if it deters the consumption of that last high social-cost drink.

We are a long way from calculating what is the correct social marginal cost. It remains an area for continuing debate. The ideal would be a tax rate that depended on the quantity drunk and drinking circumstance, perhaps also with the drinker’s personal characteristics. Practically the options are more limited.

Conclusion

Because alcohol consumption and alcohol harm are such complex phenomenon, we are a long way from the ideal excise duty regime. However as a practical system, the evolving New Zealand approach with its focus on the consumption of absolute alcohol has much to commend it.

But tax is only one of a number of policy instruments available for reducing harm. By itself it would be a very blunt one. It is important that we ensure that other effective instruments are implemented as well.

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Note
[1] This paper refers more to reducing ‘unsafe drinking’ rather than minimising harm which is the New Zealand policy goal. Unsafe drinking is where there is a potential to generate harm but on many occasions unsafe drinking does not cause harm. Safe and unsafe drinking is sometimes distinguished by a measure of ‘risky’ drinking, the number of standard drinks in a drinking session (with different levels for men and women). While a useful statistical distinction, and a helpful rule of thumb, the limits of safe drinking are dependent upon many more factors than can be captured by such a risk measure.

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Some Things We Know About Economic Globalisation

This entry was posted in Globalisation & Trade, Growth & Innovation on 15th February 2005 by Brian Easton.

Notes prepared for a meeting (February 2005).

Keywords: Globalisation & Trade; Growth & Innovation;

My research is concerned with understanding the underlying process of globalisation., providing a foundation for policy and evaluation. But it is not policy focussed, nor does it aim to come to some simple conclusion about whether globalisation is ‘good’ or ‘bad’. To worry at this stage about such issues would be to damage the development of the understanding of the foundations.
The research project is only one year in (funding is for three years, but obviously globalisation is potentially a much bigger project than that). No doubt in a year’s time there will be new insights. At this stage, the study is not paying a lot of attention to labour effectiveness or technological innovation and technology transfer. Thus the study is an incomplete account of the growth process (although I continue to work on those issues in other theatres, albeit without funding).

1. Economists define “economic globalisation is the increasing integration of national and regional economies”
Comments
1.1. Globalisation is the geographical dimension of economic development.
1.2 Attitudes towards globalisation tend to align with attitudes to economic development, especially altitudes to markets and capitalism.
1.3 The WTO, IMF, international capital flows, reductions in protection, outsourcing, brands … are symptoms of globalisation, not the underlying process.

2. Globalisation has been important economic phenomenon since the beginning of the nineteenth century.
Comments
2.1 It is not a new phenomenon.
2.2. It is not even clear that late twentieth century globalisation was stronger of more disruptive than nineteenth century globalisation.
2.3 Globalisation was not as vigorous in the first half of the twentieth century.

3. Globalisation is driven by the falling cost of distance.
Comments
3.1 As well transport costs, the costs of distance include communication and information costs, storage costs, safety and security costs, the costs of lack of intimacy, and tariffs and other artificial impositions.
3.2 One study found the ‘trade costs’ for US goods exports to foreign market represented an average markup of 170 percent on factory gates costs. In comparison the markup for to domestic markets is 55 percent. These figures vary greatly by product and are indicative rather than accurate. If reliable they indicate exporting faces an average of 74 percent additional costs (270/155=174) relative to domestic supply. About a tenth of this margin is due to policy-induced barriers such as tariffs.
3.3 As long as the costs of distance continue to fall, the forces which drive globalisation will continue. (Even if the fundamentals stagnate, it seems likely that the pressures will continue for decades, as businesses continue to find novel applications of the fundamentals.)

4 While costs of distance have fallen over the last two centuries, they have not fallen evenly.
Comments
4.1 The costs for moving information have fallen far more than for moving people and light high-valued goods, which in turn have fallen more than for moving low value heavy goods. (I have yet to study the technology transfer story. The analysis below assumes that technology is as mobile as capital – the standard assumption.)
4.2 The changing relativities change the mix of exports and imports, which will be biassed towards information based services, people (tourists) and relatively light high-valued goods.
4.3 Even this categorisation does not capture all the possibilities and all the relative changes. (For instance, the introduction of refrigeration in the 1880s favoured exporting meat and dairy relative to timber.)

5. Traditionally only manufacturing was relocatable. Today some services are joining them.
Comments
5.1 Among those services are outsourcing in all its variety, some retail sales (most famously books), and consultancy services of various kinds. Other kinds of relocatables are the provisions of services to people who come to the supplier (tiurism, education, health).
5.2 The outsourcing debate – particularly vigorous in America – is a rerun of the manufacturing protection debate, but this time it involves the servicing sector.
5.3 Policy comment For policy purposes it is vital not to over focus on past patterns of exporting while ignoring new ones. Recent New Zealand concerns about broadband connections and airports are examples of this forward thinking.

6. There is a powerful interaction between falling costs of distance and production and industry economies of scale.
Comments
6.1 Lower costs of distance enable producers experiencing these economies of scales to consolidate firms and industries into specialised locations.
6.2 Standard economic theory assumes no economies of scale in which case comparative advantage explains location. Where there are economies of scale the theory does not explain why the consolidation occurs in some places rather than others.
6.3 Thus there exists internationally competitive firms in a locations which cannot be explained, except by anecdote. Nokia in Finland is an example. Fisher and Paykle is a New Zealand one.
6.4 Policy comment The theory tells us nothing about how to initiate such firms and industries. Its best advice, thus far, is to run an industrial policy which is supportive when one of these surprising industries appear.

7. As the costs of distance fall to near zero, industry may locate to where the population is.
Comments
7.1 This would suggest that we would see industry relocate over time to the East and South Asian area (notably China and India). However this is a very long term process – a century rather than a decade, but we may be seeing it underway.
7.2 Almost certainly there will be a narrowing of the income gap between rich and these poor countries. It seems – the theory is murky – that the shift could be possibly be associated with a reduction of absolute income among existing rich countries (via a terms of trade effect).
7.3 Note that the models which give this conclusion assume all labour is of equivalent efficiency. Obviously it is not, and obviously the rich countries can stay ahead of this proposition by ensuring their labour is better quality. But this is a medium run strategy. In the long run the average Asian is likely to be as good a quality worker as the average European or American.
7.4 Policy comment New Zealand may be better placed to benefit from these long run changes in the location of economic activity than some of the other rich countries.

8. The above assumes a high degree of population immobility.
Comments
8.1 Significant high population mobility is unlikely, except in the very long run.
8.2 I have yet to work my way through the complexities of where there is moderate population mobility.
8.3 Policy comment Low population mobility seems to be the foundation of the nation state, and – at least in the past – culture.

9. While there will be some policy and cultural convergence, it is unlikely to be total in the medium run.
Comments
9.1 Policy convergence is the phenomenon whereby a nation state loses independence of its policy instruments and adopts a genric international policy stance. The evidence, thus far, is that while there may be increasing loss of the freedom to control cross-border goods, services and capital flows, there may be more freedom for distinctive policies reflecting national values in other areas – such as the welfare state.
9.2 Cultural convergence is the phenomenon whereby all cultures converge on a broadly common one. This has not happened within the United States, nor between the US and Canada.
9.3 There are quasi-globalised states – the United States of America and the European Union – where there is less sovereignty and more population mobility, and where these conclusions may need to be modified.

10. Small countries have economic advantages over large countries
Comments
10.1 The social cohesion of small countries means they are simpler and less costly to govern, which raises the potential growth rate.
10.2 The exception is the United States, which has resolved the problem of the high costs of large government by great decentralisation.
10.3 A consequence of smallness is a small country cannot have a ‘balanced’ economic structure but must specialise (in order to get the benefits of economies of scale) and trade with the rest of the world to offset the imbalance.
10.4 Policy comment The previous comment may lead to the single most important immediate policy conclusion. It explains why the tradeable sector is central to the growth process in a small country and why focus on the aggregate or domestic economy misses the point.

11. Conclusions
11.1 Insofar as the costs of distance continue to fall, while new ways are found to exploit them, globalisation – the integration of economies will continue. (Two possible reasons for distance costs to rise, is rising costs of transport fuel and increase security requirement.)
11.2 Globalisation presents opportunities and threats, benefits and costs.
11.3 The issue that confronts New Zealand, or any country, is how to deal with ongoing globalisation.
11.4 New Zealand need not be inherently worse off in a more globalised world (although there will be the inevitable downsides).
11.5 This view that New Zealand economy is too small and too distant to be able to function in a globalised world is anti-historical since it was smaller and more distant in the past and still performed very well.
11.6 Moreover distance is becoming less of a handicap as the costs of distance fall. The research says small size may be offset by effective government and by specialisation. New Zealand’s growth prospects need not be pessimistic, nor need we try to resolve them by changing size and location or bewailing we cannot.

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te Ara: the Economy

This entry was posted in Political Economy & History on 15th February 2005 by Brian Easton.

Released February 2005.

Keywords: Political Economy & History;

Te Ara is New Zealand’s On-line Encyclopaedia. The primary author of its section on The Economy ( http://www.teara.govt.nz/en/economy ) was Brian Easton.

For other of his contributions

New Zealand’s economic history: www.teara.govt.nz/en/economic-history

Income and Wealth Distributions: www.teara.govt.nz/en/income-and-wealth-distribution

Notes on the Growth Challenge

This entry was posted in Growth & Innovation, Political Economy & History on 15th February 2005 by Brian Easton.

Keywords: Growth & Innovation; Political Economy & History;

Those who debate the economy are challenged by theGrowth Culturereport of the Growth and Innovation Board .* The economic debate of the last four decades has largely been among the elite. This study asked what do New Zealanders think of economic growth?’

The short answer is: not very much. In fact you think of negatives associated with economic growth more than the positives. On the top of your list was traffic congestion, followed by a growing gap between rich and poor. Next came positives of more opportunities and a more prosperous New Zealand for future generations, and then there were a bunch of negatives (more stress and pressure on the average person pressure on resources) and positives (better education and health systems).

Such survey responses depend on the precise questions being asked but, even so, the public is a lot more cautious about economic growth than the public debate. It was not so long ago that it was talking about getting us into the top half of the OECD, measured by per capita Gross Domestic Product, as if there were no downsides at all. (Some troglodytes continue to talk like this.)

When the report came out, at least two major figures said the public did not know what it was talking about. It was arrogance rather than listening. However, many of the elite greeted the report with a stunned into silence, followed with – often shrewd – questions, and then they made a real attempt to engage with what you were trying to say.

It may have been this. The usual indicator of economic output, GDP, does not capture all your aspirations. Sometimes an increase in output, as we measure it, may even be inimical to them. So when somebody says, ‘raising taxes to fund transport investment is bad for economic growth’ your reaction, sitting there fuming in the traffic fumes, is to say ‘I’m against economic growth’.

Actually, when we look carefully at your responses, we find you are not. Rather the things you want – such as jobs education and healthcare, and opportunities for yourself and for others – are closely associated with rises in output. Richer countries even treat their environment better than poorer countries (although they may have done considerable damage getting there). Of course you bridle if some developer comes along with a project which compromises the environment, just as you bridle at the higher taxation when the Minister for the Environment pleads for more resources to address environmental degradation. These are tradeoffs inherent in economic policy.

Ironically, almost all the policies to promote GDP also promote the growth you desire. To give an example, the (not entirely reliable) statistical evidence suggests that New Zealanders work longer hours than workers in other OECD countries. Suppose New Zealanders wanted to work shorter hours. The point is not to say that you dont know what you are talking about and we will never reach the top half of the OECD if you insist of not working. My job as an economist is to ensure you understand that by working shorter hours you will have less material consumption, if more leisure. You are in charge of that tradeoff, not some economic elite.

But I cannot think of a single growth promoting policy I would change, were you to demand shorter hours. In particular we still need a vigorous, globally connected, innovative and profitable business sector. The one thing which might change this would be if you said you wanted security and stability, rather than novelty and opportunity. On the whole, the survey says you want the latter.

The big difference is not how we would produce things (although at the margin the treatment of the environment is important) but how we would spend the proceeds. Earlier I mentioned those who say that we need to reduce taxation to promote economic growth. But while an inefficient tax system is a burden on an economy, there is surprisingly little evidence that moderate efficient taxation reduces output. The overall tax rate controls the balance between public and private expenditure. The evidence suggests that your relative desire for some public goods may be a little higher than the quantity suppled. That is a tradeoff we will be voting on at the end of the year.

* I am a member of GIAB, but these notes reflects my views only.

Testing Economics:

This entry was posted in Education, History of Ideas, Methodology, Philosophy, Listener on 12th February 2005 by Brian Easton.

A Professional Economist Tackles the Controversial Seventh Form Economics Examination

Listener: 12 February, 2005.

Keywords: Education; History of Ideas, Methodology & Philosophy;

Intrigued by a row over some questions in the 2004 Level 3 (Seventh Form) NCEA economics exam, I obtained the paper. It is in four sections. The first two, “Understanding marginal analysis and the behaviour of firms” and “Understanding the market and allocative efficiency”, required the student’s mastery of some standard economic concepts.

The fourth part, “Describe and illustrate aggregate economic activity”, would be more controversial, with considerable disagreement among practising economists as to the right answers. The problem arises because of the desire for “relevance”, so that students are given exercises that purport to be about the actual economy, but are really about a highly idealised one. I suppose that is okay, providing that students do not end up with the impression they know a lot about reality, and could run the macroeconomics division of the Reserve Bank or the Treasury. That takes at least another five years of study.

The two questions that generated the public row were in the third part, “Describe and illustrate resource allocation via the public sector to compensate market failure”. I was surprised how little of the basics the student was required to demonstrate. Neither this part, nor part two, required an explanation of the meaning of “allocative efficiency”, a concept that I spend some time over when teaching adults.

Moreover, there is absolutely no hint that the students (or teachers) had to understand the fundamental distinction between “positive” and “normative” economics. Positive economics is how the economy works; normative economics is how we judge the outcome. It is the distinction made by philosophers David Hume and Immanuel Kant between “is” and “ought”, without which ideology takes over from reality.

You can see the problem in the first question, “What do economists mean when they say ‘a market has failed’?” How the student was expected to answer in three lines is beyond comprehension, but to do so requires a clear understanding that although markets solve the positive economic questions of what, how, for whom, where and when, the market’s answers to those questions can be unsatisfactory, judged by some normative or moral criteria.

In the first controversial question, students were told that “the New Zealand government provides ‘free’ (ie, heavily subsidised) education at state secondary schools. Explain why this results in a better resource allocation than the free market shown in Graph 1.” (Note the normative “better”.) As in the fourth part, this is not a statement about reality, but an exercise that says, “Assume the world is like we have posited in Graph 1. Derive a conclusion.” But how close does Graph 1 reflect the real world? Hence the public dispute.

The other disquieting question was “Explain why using ‘free market’ policies causes income inequality.” Even the examiner is embarrassed by the term “free market”, putting it in quotation marks, for it is an ideological rather than analytic notion. I would have thought the provided five lines were excessive, answering, “Of course. All social arrangements other than death lead to inequality, and markets – free or whatever – are social arrangements.”

However, preceding the question – and unmentioned in the public debate – was the comment that “New Zealand government policies in the last 20 years have been more ‘free market’. In the same period, inequality has increased and the gap between rich and poor has grown wider.” Both statements are true, but are they connected?

I think I can claim to have made the most careful evaluation of that question. To my surprise, I could not demonstrate any connection. Rather than attributing the widening gap to market liberalisation, I showed that it was mainly due to cuts in income taxes on the rich, and benefit and public expenditure cuts on the poor. There may be a caveat – there are always caveats – but I would hardly expect a seventh former to deal with it. Anyway, I want a bit more data before I am sure. Suppose that the seventh former was widely read. How would they answer the question along the lines the preceding comment seemed to require, yet knowing that it was probably wrong?

Were a group of professional economists to have sat the seventh form exam, we would have zipped through parts one and two, largely failed part three, and never finished part four as we put in all the caveats.

Payback Time

This entry was posted in Globalisation & Trade, Listener on 5th February 2005 by Brian Easton.

The suggestion that rich nations should freeze debt repayments for hard-pressed countries has focussed attention on the ethics of international money lending.

Listener 5 February, 2004

Keywords: Globalisation & Trade;

As the world seeks to give a hand-up to the countries devastated by the Asian tsunami, and the finance ministers of the world’s seven most powerful economies (the G7) come together in London this week, debt is firmly back on the political agenda.

Among the proposals to deal with the tsunami destruction was the offer by the Paris Club – the informal group of 19 major lenders to the World’s poor countries (see below) – to freeze debt repayments of the most afflicted, rolling over their $US5 billion or so of debt repayments for this year. The biggest beneficiary would have been Indonesia with around $US3 billion of debts due. But Thailand, a moderately indebted country, according to the World Bank, was cautious. It did not want to be seen unable to repay its debts. After all, the offer will not reduce any country’s debt, just delay its repayment.

The club had already made a more generous offer by pledging $US3.64 billion for aid. In hindsight the temporary debt-freeze offer looks more like a knee-jerk reaction to the agony wrought by the tsunami.

Sceptics point out there would be no guarantee any savings would be go to relief and reconstruction. They could be diverted, doubters hinted, to the armed forces. Heavily indebted governments tend to be bad governments. If they have not borrowed prudently in the past, why should they be trusted to use any debt relief well this time?

In its more sober moments the Paris Club has agreed. Its strategy since 1996 has been to offer debt relief to ‘highly indebted poor countries’ that establish a track record of sound policies and a viable strategy for fighting poverty. In the six months before the tsunami, the Congo, Ethiopia, Georgia, Ghana, Iraq, and Madagascar all experienced reductions, rescheduling and/or restructuring of their debt.

The debt relief reflects the recognition that some of the poorest countries in the world are trapped under a burden of foreign-owned debt as destructive as a tsunami. Every month, more people die from poverty in Africa alone than the tsunami drowned. It also recognises that some countries are so deeply buried they are not ever going to be able to repay it. Liberia’s debt exceeds 5.3 times its Gross National Income (GNI); for the little islands of São Tomé and Principe off the coast of Western Africa the excess is 7.5 times. In the same year, the tsunami-hit countries of Indonesia, Sri Lanka, Thailand and India paid $US550b between themto creditors. For Indonesia that meant almost half its governments’ revenues.

But the relief offered and the calls for more are also an implicit admission that much of the lending of the past was of little benefit. Some of the money got recycled by the political leaders to their offshore personal bank accounts, some went in excessive charges by the Western contractors who built the projects the debts were meant to finance, and in many cases the projects themselves were of little value. The World Bank-funded Chixoy Dam in Guatemala, for example, was hugely expensive, displaced whole villages and failed to increase the electricity access to most Guatemalans. However, those who received no benefit from the lending, many born after its proceeds were syphoned off, must pay taxes to service the debt. That means less schooling, less health care, and an ongoing cycle of deprivation.

So it is not just generosity which drives the Paris Club, but embarrassment and political calculation. Consider the moral pressures from groups ranging from pop singers like Bono to the Jubilee Campaign, a Christian Coalition citing the Mosaic prescriptions of debt forgiveness, and how the US benefits from cutting Iraqi debt.

The reason New Zealand is not a member of the Paris Club is that all our bilateral aid is in grants not loans, so no poor country owes us anything. Our .22 percent of National Income on aid in 2002 put us 18th out of 22 rich countries. Still, it is good quality aid: no loans, no armaments, and a minimum of corruption. The $68m the government has added for tsunami relief this year will bump us up a few steps if the amount is maintained in the future. And already New Zealand household donations put us in the top half of the OECD in our private aid efforts.

We have advanced some debt to the poorest countries via multilateral institutions like the World Bank. Gordon Brown, the UK Chancellor of the Exchequer, has said says Britain will cancel its share of that debt as it comes up for repayment, and challenged other countries to do the same. It seems very likely that New Zealand will.

The article then goes on to a map to show a map of the world, in which 47 countries are marked as severely indebted, some of them among the poorest in the world. Another 47 are moderately indebted. It is not shown here.

****************
MEMBERS OF THE PARIS CLUB (The major lenders to the world’s poor)
* Member of G7.
Austria
Australia
Belgium
*Canada
Denmark
Finland
*France
*Germany
Ireland
*Italy
*Japan
Netherlands
Norway
Russian Federation
Spain
Sweden
Switzerland
* United Kingdom
* United States of America

(The Paris club does not publish statistics on the debt owned by its members).

A Taxing Year: the Election Rhetoric Is Likely to Be About Taxation.

This entry was posted in Listener, Regulation & Taxation on 30th January 2005 by Brian Easton.

Listener: 30 January, 2006.

Keywords: Regulation & Taxation;

Some decades ago, the political Left retreated from its historic role of engaging with economics to provide a critique of the modern capitalist economy. Nowadays, insofar as it discusses the economy at all, other than in terms of nostalgia – things were better in the past – the focus is on redistribution: how the output of the economy should be shared. It is not an unimportant question, but it is not the whole of economics.

Oddly, the political Right has become as focused on redistribution, too, albeit with opposite distributional objectives. Thus, this election year’s economic discourse is likely to be about taxation. Were these columns to deal only with its misrepresentations, there would be no space for anything else. But an outline of some issues might be useful.

How big can the tax cuts be? The apparently large public surplus allows those who do not understand the underlying concepts to argue for huge reductions in tax. But most of this so-called “surplus” is already spent, so using it to cut taxes would be spending the same money twice.

However, there is likely to be some room for a cut in income tax rates later this year. What you may be sure of is that the politically astute Minister of Finance, Michael Cullen, is no Scrooge, and he will “spend the lot”, giving the biggest cuts he prudently can. Political pressures could even push him above the highest levels of sustainable cuts. If they are too high, don’t be surprised to see the Reserve Bank raising interest rates to prevent the inflation that the additional expenditure surge could generate.

It is also a safe prediction that whatever Cullen’s reduction in income taxes, his critics will say that they are not enough. But can they do more without raising interest rates (and possibly causing loss of confidence by overseas investors and a balance of payments crisis)? They can promise that “under our policies the economy will grow faster and there will be more room for tax cuts”, an undertaking that is worthless, as they can’t be sure they can make the economy grow faster. The more honest will say that they will give further tax cuts as we can grow the economy, but the government can say that, too.

The evidence that lower taxes will increase the sustainable economic growth rate (measured by long-run GDP increases) is conflicting and not very convincing. There are theoretical reasons for a trade-off between lower taxation and higher sustainable output. But the empirical evidence just does not support the theory. All we can scientifically say is that any output inhibiting effect of taxation is very small – if it exists at all. Those with political agendas will be more extravagant.

Of course, a government can give greater income tax cuts if it can cut public spending and welfare benefits. (Or hike GST, either deliberately or when it becomes clear that its promises were fiscally irresponsible.) The question of the balance between public and private spending is largely a political one. I tend to the view that the public sector should be spending relatively more on such things as culture and heritage, education, the environment, foreign aid, health and infrastructure, and on increasing opportunity and reducing inequality. You may differ. We can have a sensible discussion on our differences, but at the end of the day we may still disagree, reflecting our different political perspectives as well as empirical judgments.

These disagreements are the stuff of politics, and lead to different views on the level of taxation, a major function of which is to determine the balance between public and private spending. Those who want bigger tax cuts than Cullen will offer also want less government spending than his government does. If they get into power and implement their tax plans, they will assuredly cut back on government spending. That is a perfectly proper matter for political judgment, to be settled by party choice in an election. However, it is not always in the interests of those clamouring for our vote to be so honest about what they are promising.

Free Beer Tomorrow

This entry was posted in Growth & Innovation, Listener, Political Economy & History on 15th January 2005 by Brian Easton.

Yeah right. No wonder there is reform exhaustion.

Listener: 15 January, 2005.

Keywords: Growth & Innovation; Political Economy & History;

For 40-odd years, economic pundits have been telling us that our economic output is growing too slowly, and that we should adopt their policies to accelerate it. Sometimes we have, but before long more pundits come along to say that there has been no increase in the growth rate (for much of the late 1980s and early 1990s the economy stagnated) and we should introduce more reforms.

No wonder there is widespread reform exhaustion. Not only are we battered with prognostications and policies, but also promises of higher growth never actually occur. Even when the economy seems to be growing slightly faster than it did in the past – as appears to have happened in recent years – there are still grumbles that it is too slow and we should be doing even more reforms. Will they ever stop?

Behind all this is a confusion, which is not confined to non-economists. The underlying ideas of distinguishing stocks and flows (or distance and velocity) were sorted out over 50 years ago by New Zealand economist Bill Phillips (best known for his “Phillips curve”). But sometimes we forget the lessons of the past. It is easy to explain the confusion to mathematicians, but here I’ll try to do it with a minimum of maths.

Imagine that the economy is a travelling car. At any point in time it has gone a certain distance and it is going at a certain speed. What the pundits seem to be saying is that we should push harder the accelerator pedal of reform to make the car go faster. Their promise is that we have only to push it once to increase the speed. But, as you will have noticed, no matter what we do, the pundits keep demanding more reforms.

So, on the one hand, they imply that there is not a lot of work to keep the car at cruising speed. If only we were to put the pundit in the driver’s seat, we would go even faster. (“Okay,” I hear you asking, “just where are we going?” A good question that the pundits rarely consider.) On the other, they are always demanding more reforms, under the excuse that although the car may not have accelerated yet, it could go faster.

A better analogy is a bike. You have to pedal. If you do, the bike proceeds forward: if you don’t, it stops, you fall off, and you may hurt yourself. Pedalling takes effort, even to progress at the current speed. From this perspective, the reform process is not to get the bike to go faster. It’s about keeping the bike moving forward at the current speed.

Economic growth is always posing new policy challenges. For instance, in a 1991 column I asked “who owned the foreshore?” at a time when the issue was of no great economic significance. But the bike moved on, the commercial potential of aquaculture became important, so foreshore and seabed legislation became necessary. Probably, there will be the need for more legislation in the future. Don’t ask me about what. All I know is the bike will go forward, meet new problems, and we have to pedal to get past them.

“Is there no end to it all?” sigh the reform-exhausted. As long as new technologies, new resources, new markets and new opportunities crop up, the answer is “Keep pedalling.” However, over the past 40 years, there has been more material output and – what seems more important to me – more opportunity. The pundits may grumble, but the pedallers progress.

The reform exhaustion arises because the pundits are always promising what they never deliver – it’s a “free beer tomorrow” message. The pedallers are rewarded by economic gains, although sometimes related issues are not addressed (such as traffic congestion). Even so, despite numerous successful policy developments, more problems arise and more has to be done.

It’s important that we celebrate these advances, but also ensure that the benefits from economic growth are shared among us. This is something every political party has a view on, even if they confuse themselves and the electorate with undeliverable promises to increase the economic growth rate.

in Defence Of Globalization: (review)

This entry was posted in Globalisation & Trade on 7th January 2005 by Brian Easton.

by Jagdish Bhagwati (Oxford University Press, 308 pp. $72.95) ISBN 0-19-517024-3, reviewed in New Zealand International Review, January/February 2005, Vol XXX, No 1, p.31-32.

Keywords: Globalisation & Trade;

The economics student struggling though the mind-numbing theory of international trade will eventually hit upon learned papers by Columbia University economist Jagdish Bhagwati, whose contributions make him a candidate for an economics prize in honour of Alfred Nobel. They will soon learn that beyond his painstaking rigour he has a total commitment to free trade. So there was much glee among anti-globalisers when he rejected some aspects of globalisation. There may be less as a result of his latest book In Defence of Globalization.

Bhagwati’s popular fame follows his rejection of the case for unfettered short term capital flows. But he favours increasing economic integration based on free trade and movements of labour, capital and technology, albeit with numerous caveats. His support comes in part out of his trade theory, although there is little reference to it in the text. Rather he argues, with numerous illustrations, that the best chance that the developing world has for raising its material standard of living is an open economy. This is a book about North-South relations, so he does not quite engage with those anti-globalisers in developed countries, who are preoccupied with the impact of globalisation on them, although they often use the impact on developing economies to buttress their argument.

Bhagwati divides the anti-globalisers into two camps. One is the ‘hard core’ who have a deep-seated antipathy to globalisation. The implacably hostile get a short treatment. In a few pages he damns their trilogy of discontents ‘anti-capitalist, anti-globalisation (he means anti-imperialist), and anti-corporatist (against big business), adding an attack on the right, on communitarians, and on anti-Americans. It’s good knock-about stuff – he has a crack at post-modernism on the way too – but the purpose is to dismiss them in order to engage with the second group.

They are those within the mainstream discourse, who argue that economic globalisation is the cause of several social ills of today, such as poverty and environmental deterioration. Bhagwati says they invite a reasoned engagement. So chapter on chapter addresses their concerns: the impact of globalisation on poverty, child labour, women, democracy, culture, labour standards, the environment. One chapter provides a powerful critique against unrestricted financial flows, (but not foreign direct investment), a second defends corporations, another on migration ends with his recommendation of a World Migration Organisation. Each chapter is rich in practical examples.

Engagement is not ideological rhetoric. One has to listen to one’s audience, and deal with its understandings and perceptions. In doing that one may change one’s own mind, or a at least recognise that there are deficiencies in the current system and suggest improvements, as does Bhagwati in his last four chapters. One is entitled ‘coping with downsides’ so he admits they exist. That’s engagement.

But he does not budge from his belief that open trading strategies are good for developing countries. Given that there is no post-war example of an economy which has successfully developed as a closed economy (the oil producers aside), he is on strong grounds. When a country is steaming along at an annual 10 percent GDP growth, a lot of good things are happening. Sometimes not everyone benefits – hence the peasants’ revolt in the ‘Shining India’ election – but with luck and care there are few people actually worse off. However when the economy reaches rich OECD status, and growth slows down to 3 percent, trade makes some people worse off. That gives an opposition to globalisation which Bhagwati hardly addresses..

Like most economists, Bhagwati is so comfortable with the way the market operates he does not recognise the widespread discomfort of non-economists (which is not the same as antagonism to capitalism). It is touched upon, when he impatiently asks whether the alternative in a particular case would be better. Perhaps, too, he should have found more space to disentangle people’s concerns with social change which they attribute to globalisation but would happen anyway. The book also needs a chapter on international institutions such as the IMF and WTO, because anti-globalisers – of both types – worry about them. (There is an excellent glossary of acronyms.)

Ultimately Bhagwati wants globalisation, because he believes in the economic integration and the trade and specialisation which comes from an open economy, and which he believes will benefit those in poor countries. But he wants a more humane version than we have today. And he wants NGOs to support the evolution of globalisation, rather than resisting it.

This is an engaging book. But for the price, I would recommend that groups buy a set and talk through chapter by chapter, taking up the implicit challenge on every page, pondering whether Bhagwati has got it right – have they got it right? Those of us who have struggled through international trade theory will be surprised to find a charming cultivated man widely read in Eastern and Western literature, one who cannot resist an opinion on matters of moment, and even of total irrelevance. How on earth do sexual revelations at the OJ Simpson trial relate to globalisation? But it contributes to a lively text which will engage the open-minded.

Brian Easton wrote this in Washington while on a Fulbright New Zealand grant.

Dull, Philistine and Conforming: How Have We Changed over the Years?

This entry was posted in Listener, Literature and Culture, Political Economy & History on 1st January 2005 by Brian Easton.

Listener: 1 January, 2005.

Keywords: Political Economy & History; Lietrature and culture

Returning after graduate studies at Oxford and war service in Europe, M K (Michael Kennedy) Joseph thought the New Zealand of the late 1940s and 1950s was dull, philistine and conforming. He famously expressed his reservations in “Secular Litany”, which begins:

That we may never lack two Sundays in a week
One to rest and one to play
That we may worship in the liturgical drone
Of race-commentator and the radio raconteur
That we may avoid distinction and exception
Worship the mean, cultivate the mediocre
Live in a state house, raise forcibly educated children
Receive family benefits, and standard wages and a pension
A rest in peace in a state crematorium
Saint All Black
Saint Monday Raceday
Saint Stabilisation
Pray for us

The poem describes a very different New Zealand from today, for it is littered with antiquated images, now only worshipped by small, and often dying, minorities. Later, the poem asks various Saint Holidays to defend us “from all foreigners with their unintelligible cooking” and even from “barbecues”. No doubt, Joseph would rail against today’s takeaway foods, but he would revel in our restaurants, while the plainest New Zealand cook uses foreign ingredients. The only remaining national icon in the poem is the All Blacks. So, what is the connection between today’s New Zealander and that of a 50 years ago, when three-quarters of us weren’t born?

The issue of cultural commonalty over time is outside the economics discipline, but it becomes important when we talk about the “New Zealand values” that underpin economic behaviour and policy. The reforms of the 1980s and 1990s failed in part because they required us to change our values. It was no accident that the reformers relied on foreign advisers who were out of sympathy with, and ignorant of, New Zealand values.

Rob Muldoon saw himself as defending them. But even his differed from the poem’s. Although as a politician he would have been anxious “when the bottles are empty/and the keg runs sour” (and as Minister of Finance even more anxious about the lost excise duty), he drank wine. And surely a sometime star of The Rocky Horror Show would not have wished to be defended from “kermesse [fairs and bazaars] and carnival, high day and festival”.

Joseph’s parody was not so extreme that the real situation was unrecognisable, for the poem was popular in the decade after it was written. There remains an undertone that resonates today. Joseph was irritated by a dominant culture that was intolerant of alternatives and dissent.

We may be more tolerant today, and accept “distinction and exception” (although, in intellectual affairs, we largely continue to “worship the mean, cultivate the mediocre”). Some of that tolerance comes from the market. I may like cabernet sauvignon; you sauvignon blanc, or Speights, or Southern Comfort – or orange juice. The market supplies our individual needs and although we may josh one another about their respective merits, we accept the different tastes. Public sector delivery offers less choice, which is why some – but not all – economic liberalisation of the 1980s was beneficial.

But not everything can be delivered effectively by the market. How do we establish laws that recognise the differences between the Maori and Pakeha melting pot of other ethnic groups; Christians and Muslims; religionists and secularists; men and women; straights and gays; town and country; moral traditionalists and moral liberals, social conservatives and social progressives? “One law for all” is both an absolute requirement of a well-functioning society, and a temptation for majoritarian repression. So, how do we recognise and celebrate our diversity in public policy?

We have faced this tension time and again over the past 50 years. Somehow we have to find a balance between judicial comprehensiveness and judicial tolerance, avoiding casting people into moulds to which they don’t belong. If we can’t, we lose the social cohesiveness and creativity on which our economic – and, more important, our nation’s – future depends.

And yet at the personal level we can be remarkably tolerant. A homosexual I know says, “Some of my best friends are happily married Christian couples.”

The Right Stuff

This entry was posted in Listener, Political Economy & History on 18th December 2004 by Brian Easton.

Two books analysed the US presidential election outcome before it happened

Listener: 18 December, 2004

Keywords: Political Economy & History;

Politically, Americans are not like the rest of us. Personally, they have been as courteous and hospitable to me visiting them as a Fulbright New Zealand scholar, as I expect New Zealanders to be to American visitors. But their re-election of George W Bush illustrates the underlying political differences, for, in some ways, challenger John Kerry was to the right of, say, our National Party, while the US Congress became dominated by the Right in 1994.

A couple of books published before the US election, but presaging its outcome, explain some of the reasons. The Right Nation, by Brits John Micklewhite and Adrian Wooldridge, who write for the (London) Economist in the US, identify four key differences between the US and Europe (and implicitly New Zealand). First, the US has a vigorous network of right-wing, privately funded think-tanks providing intellectual leadership.

Second, Americans are more individualistic. Two-thirds of Americans reject the notion that “success in life is pretty much determined by forces out of our control”, whereas the European rate is less than half. Practically, Americans look for individual solutions to public problems, where most other rich nations contemplate collectivist ones. Yet, although their rhetoric is anti-government, US practice is often the opposite. The states that voted for Bush in 2000 received government transfers of around $US90b a year from the states that voted for Al Gore; Bush increased government spending far more than his Democrat predecessor, Bill Clinton.

Third, Americans are more patriotic. Eight out of 10 say they are proud of their country, and six out of 10 Americans say their culture is superior to other cultures, about double the European rate.

Perhaps most fundamental is America’s religiosity. Two out of five go to church at least once a week; six in ten say that religion plays a “very important” role in their lives, more than double the European figures; 39 percent describe themselves as “born-again Christians”. Micklewhite and Wooldridge argue that America’s heritage as the first secular state meant its churches had to entrepreneurially recruit members rather than rely on the inertia of an established church. (That cannot be totally true, for it has not happened to the same extent in New Zealand.)

What’s the Matter with Kansas?, by Thomas Franks, puzzles over why working people in the US heartland vote against their class (ie, economic) interest, since the Republicans’ tax cuts benefit the very rich. Franks, best known for his One Market Under God, sees the poorer voting on a “values” basis, without understanding that eventually tax cuts will have to be paid for by everyone, not least the poor – presumably in inferior government services.

Both books describe how Bush’s Republican Party has been captured by the Christian right at the expense of its traditional moderates. To this unholy tension add neo-conservatives, who promote patriotism and individualism, and business, which promotes business interests. The coalition is kept together by a first-past-the-post/winner-takes-all electoral system, and a glossing over of the hard issues that face the US: the Middle East, fast-rising government debt, looming resource depletion, a failing health system, a deeply divided nation …

There are some fascinating American right-wing thinkers (including economists), but, more often, the Right’s public rhetoric consists of clichés inconsistent with known facts, Even so, American politics is so important to the future of the world, that this column will be returning to these themes. In the interim, I was struck, while visiting the John F Kennedy Library in Boston, by how different American politics was 40 years ago when it espoused values of a collective underpinning of individual effort, expanded the role of the state where the market had manifestly failed, and committed itself to significant international involvement with humility.

The library’s walk-through exhibit of Kennedy’s life begins with his saying, “For the great enemy of the truth is very often not the lie – deliberate, contrived and dishonest – but the myth – persistent, persuasive and unrealistic. Too often we hold fast to the clichés of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinions without the discomfort of thought. Mythology distracts us everywhere – in government as in business, in politics as in economics, in foreign affairs as in domestic affairs.”

globalization in Historical Perspective, Review

This entry was posted in Globalisation & Trade on 18th December 2004 by Brian Easton.

Globalization in Historical Perspective, a National Bureau of Economic Research Conference Report, edited by M.D. Bordo, A.M. Taylor and J.G. Williamson. (The University of Chicago Press, 2003)

New Zealand Economic Papers, Vol 38(2) December 2004, p.299-306.

Keywords: Globalisation & Trade;

The public, which has firm, uninformed, and confused views on globalisation, would be astonished as to what the scholars think about the topic, although perhaps less surprised as to what they do not (yet) know.

First, there is the question of definition. A short one is “(economic) globalisation is the closer integration of nations” (to which I would add “and regions” because internal integration is so similar to, but preceded, international integration).

There is an ambiguity in this scholars’ definition. ‘Globalisation’ may refer to the process of globalisation, or it may refer to the degree of globalisation. The distinction can be important, especially when different periods are compared, as we shall see.

The economic focus tends to be on trade, migration, capital flows and technology transfer, together with changes in the international order, and tends to exclude such related phenomenon as transmission of diseases, the consequences on the environment, culture and languages, and political arrangements. To add them may involve moving outside economists’ expertise. An even more serious omission may be the role of military force in the shaping of the world economy.

Second, economic scholarship does not see globalisation as a recent phenomenon. There is some disagreement as to whether it begins as early as the first European explorations in the fifteenth century, but the consensus sees globalisation beginning in the early nineteenth century (say 1820) when international trade begins to shift from absolute advantage (gold for spices) to comparative advantage, where countries import products they could make themselves. There is a widely held view that the nineteenth century globalisation was more vigorous than the late twentieth century globalisation, because migration was much stronger. The process of globalisation was stagnant – even reversed – in the first half of the twentieth century, even though the level was in some respects higher than in the nineteenth century. (Note that there is debate as to whether the stagnation began in 1914 or up to thirty years earlier.)

This pattern of globalisation is illustrated by that all international trade was 1.0 percent of World GDP rising to 9.0 percent in 1929, but falling to 5.5 percent in 1950. In 1998 it was 17.2 percent, and is – no doubt – higher today. However, while other indicators – say of capital and labour flows – have the same general pattern, the timing of the turnarounds differ.

Third, and this is less explicit in the literature, globalisation is treated as a consequence of the falling costs of distance. This need not surprise us: regionalisation occurs when the connections between regions improve; trade based on comparative advantage is going to be negligible when the costs of transporting the goods are high. Behind this is the economic scholars’ approach in which the effects of an exogenous change are modelled. Exogeneity in modelling can be an artifice – arguably some transport cost falls have been responses to globalisation. Even so, it is useful to be able to separate various influences, rather than have one great muddle of everything, as is common in many popular books.

These three themes are admirably elaborated in Globalization in Historical Perspective, which is based on eleven papers presented at an NBER conference in 2001. Most of the papers are gems, in which two distinguished economists survey the literature, followed by an equally distinguished discussant. Thus they offer every economist the opportunity to catch up with the economic scholarship of an important and rapidly developing area of interest..

To be provocative, I start with the seventh chapter “Globalisation in History: A Geographical Perceptive” by Nicholas Craft and Anthony Venables (both London School of Economics). That the book puts it so late reflects the tendency of economists to ignore the spatial. Economies are treated as columns in a tabulation rather than places on a map. Yet globalisation is essentially about the changes to the spatial allocation of economic activity (and its related growth).

The chapter tells a spectacular story. In 1750, over half of the world’s industrial output was located in China and India. By 1850, over half was produced in North America and Western Europe, a situation which broadly pertains to this day. A similar, although not quite as spectacular, story applies for GDP, although the Maddison database only goes back to 1820. In contrast, the population story shows much more stable patterns.

The chapter then sets out a model based on falling transport costs and location theory to describe the phenomenon. (See Fujita, Krugman and Venables (2000) for greater elaboration of the underlying models.) It argues increasing returns are a major source in the divergent patterns of trade, concluding that as the costs of distance fall, agglomeration effects are crucial. ‘[I]n the twenty-first century these are likely to revolve much more around complexities of information and pools of skilled labour than the costs of transporting manufactured goods’. Discussant Richard Baldwin (Graduate Institute of International Studies, Geneva) ) remarks that the biggest missed opportunity in this paper concerns a ‘grand unifying theory of globalization and geography’. But we are well on the way.

The opening chapter of the book is “Commodity Market Integration: 1500-2000” by Ronald Findlay (Columbia University) and Kevin O’Rourke (Trinity College, Dublin), which sets out in detail the changing patterns of world trade, often using price information when quantity information is not available. Trade grew only slowly during the 300 years to 1800 and the price gaps between markets were large and poorly correlated, indicating that not only was the cost of transport high, but there were high margins for uncertainty. Discussant Douglas Irwin (Dartmouth College) describes the review as ‘near-exhaustive’ but chides it for confining attention to intercontinental trade. He is quite right of course, but the extension to more localised trade would easily have trebled the paper length. Similarly it would have been useful – albeit requiring a further doubling of the paper – to have had more on non-commodity merchandise (and also services).

The following chapter, “International Migration and the Integration of Labour Markets” by Barry Chiswick (University of Illinois at Chicago) and Tim Hatton, (now Australian National University), deals with one of the most troubling areas in globalisation. Today migration is proportionally small compared to the mass flows in the 300 years before 1914, so we do not have to worry so much about a factor of production changes national social welfare functions when it changes jurisdictions. Moreover, while some choose to migrate, others are forced: slavery, convicts and refugees from political repression and war. Moreover in contrast to those on goods and capital, there have been, and are, significant policy-induced barriers to migration.

The survey’s main message is that, even so, migration is quite responsive to economic incentives. Intriguingly today’s main migration flows are from poor countries to rich ones rather than those from Europe to America and other frontier societies which dominated the nineteenth century. Unlike for goods and capital, the nineteenth century globalisation of labour markets, albeit then confined largely to Europeans, has not been repeated in the late part of the twentieth century, when flows were regulated by national policies, discriminating heavily against the unskilled, so the (poor) origin nations losing skilled labour suffer. Discussant Riccardo Faini (University of Brescia, Italy) concludes ‘there is still a long way to go to the globalization of labour markets.’

Chapter 3 “Globalisation and Capital Markets” by Maurice Obstfeld (University of California-Berkeley) and Alan Taylor (University of California-Davis) makes up the third leg of the standard goods-labour-capital analysis. It does not work as well as the earlier chapters because added to the survey element is some new research. Moreover it mixes together financial flows with direct foreign investment, and while they can be closely related, it is useful to separate them. (The final four chapters focus on financial flows.)

There was a high level of international capital mobility in the nineteenth century, much less in the first half of the twentieth and then a return to high capital mobility thereafter, the so-called ‘U-shaped pattern’, although the chapter suggests that capital may have flowed more easily to poor countries in the first boom than the more recent one. The authors propose that this was a consequence of the ‘macroeconomic policy trilemma for open economies’ where it is not possible to maintain the three policy goals of full freedom of cross-border capital movements, a fixed exchange rate, and an independent monetary policy oriented towards domestic objectives. At different times there were different national policy responses, although there is no discussion on how these responses were related to trade policy and migration policy, even though they experienced a similar U (albeit in the case of migration with a weak post-1950 upside). Moreover, discussant Richard Portes (London Business School) argues there is a wide variety of alternatives to the authors’ fundamental hypothesis’, so the chapter needs to be treated more as work-in-progress rather than a survey.

Part II, the next four chapters (including the already mentioned one on geography), is meant to be about outcomes, but Chapter 6 is about technology, and belongs better to Part I which uses the standard model of trade. Gregory Clark and Rob Feenstra (both University of California-Davis) ponder on the ‘Technology and the Great Divergence’. As in the case of the chapter on capital, this contains both reviews and existing work. It uncomfortably reflects the state of economist’s understanding of technology (and the production function). Robert Solow’s measurement of what is called today ‘Total Factor Productivity’ was a forward step, but his TFP – the coefficient of ignorance (Balogh and Streeten 1963) – is an unexplained residual which fifty of years of research has hardly progressed to an empirically causal process. It is a way of summarising data rather than providing causal stories. Economists are torn between the quantitatively measurable but tautological TFP, and more qualitative accounts such as the Schumpeterian one of William Baumol (2002).

Clarke and Feenstra meet the challenge with the following story. What explains the differences between the incomes of nations is neither capital scarcity, for they assume capital is largely mobile, nor technology, which they argue is easier to copy than create. Rather than differences in the access to technology, they argue there are substantial differences in the use of technology between rich and poor countries, providing some micro-evidence from railways and international trade patterns to support their assessment. But, as those who have done technology or productivity comparisons between two rich countries know well, it is a difficult hypothesis to verify. Moreover, what causes these differences? Discussant Joel Mokyr (Northwestern University) calls the answer the ‘mysterious’ ‘Factor C’ (after Clark) but is it managerial ability, human capital, or the institutional arrangements which Mokyr puts some emphasis on?

In the fourth chapter in the book, Steve Dowrick (Australian National University) and Bradford DeLong (University of California-Berkeley) bring together the five chapters on geography, trade, labour and capital flows, and technology in “Globalization and Convergence”. They propose a convergence club, ‘the set of economies where the forces of technology transfer, increased international trade and investment, and the spread of education were powerful enough to drive productivity levels and industrial structures to (or at least towards) the industrial core.’ (Note this definition does not mention managerial ability nor institutional arrangements.)

One of the club’s features is that membership is not eternal: the authors identify over a dozen members that in it there in the interwar period but are no longer. They conclude that ‘globalization of the economy does not necessarily imply global convergence’, and that ‘at the end of the twentieth century the growth benefits of opening up appear substantially lower than in the twentieth century’s third quarter … there is little reason to be confident that opening doors to the world economy will guarantee a place at the high table’. Discussant Charles Jones (University of California-Berkeley) extends the argument by observing in the late twentieth century there was much less income divergence between the open economies than between the closed economies: perhaps all open economies resemble one another, but each closed economy is closed in its own way.

In Chapter 5, Peter Lindert (University of California-Davis) and Jeffrey Williamson (Harvard University) ask “Does Globalization Make the More World Unequal”. Since at least the times of Karl Marx there has been a tendency to assume that capitalist growth makes the economy more unequal, and the poor poorer. Perhaps one hundred years ago, it became evident that this was not necessarily happening in the industrialised countries, so the increasing inequality hypothesis was reinterpreted as applying to between countries. Unfortunately the notion of inequality is not a simple one: formally there are situations where economists are unable to say unequivocally that one of two income distributions is more unequal than the other. Given that data is almost always incomplete and inaccurate, the opportunities for vigorous debate without reaching conclusion seem unlimited.

Yet the authors provide some relatively convincing answers. World income inequality has risen since 1820 (and probably since the sixteenth century), although there is some dispute as whether the trend has continued in recent years, probably arising from the ambiguities in the measures of inequality. But most of the increased world inequality took the form of a rise in income gaps between nations, not a rise of within-country inequality. They observe that large integrated economies – the US and Japan, and perhaps soon the European Union – have less internal inequality than the world as a whole, suggesting that integration per se (and by extension perhaps the integration which comes from globalisation) may not be a source of inequality. Note however these examples of integration involve no restrictions on labour mobility. Discussant Lant Prichett (Harvard University) admires the ‘masterful review’ and poses five puzzles which arise from the paper. One is whether we should worry about inequality. On a slightly narrower focus I would ask that suppose globalisation were to increase inequality but at the same time to increase the incomes of all people. Is such globalisation a good or bad thing? (A Rawlesian criteria would say ‘good’.) After reading this book, one concludes that notion that globalisation is a zero sum game is a deeply flawed assumption, although of course some people suffer.

Space precludes individually reviewing the last four chapters on financial institutions, regimes and crises except to say that the emphasis on this topic – while omitting others mentioned below – seems imbalanced, perhaps reflecting the economics profession rather than the inherent importance of each issue. Even so those interested will again find a set of useful specialist surveys. The contributions from the panel which ended the conference is thin in contrast to the rich diet before.

There are a number of important questions which economic historians can address, but which the book hardly touches on. First, is the tendency to take the nation-state for granted, whereas they appear to be creatures of globalisation and regionalisation. As Alberto Alesina and Enrico Spoloare (2003) have pointed out, the boundaries between nations are not fixed in the long run, while the activities of the nation-state have evolved (e.g. Lindert 2004). Nor should economists turn their back so firmly, as this book seems to, on the scholarly discourse about empires and colonies.

Second, given the break in globalisation in the first half of the twentieth century, there is a need to synthesise the separate discussions in the chapters into a comprehensive account. It probably revolves around the creation of integrated nation states in the late nineteenth century leading to particular policy responses. The bigger question becomes why they changed their mind in the 1950s?

And, third, there is surprisingly little in the book about supra-national institutions such as the IMF and the WTO (or Pax Britannica in the nineteenth century). There are parallels here with the creation of domestic economic regulatory institutions a hundred years ago, as nation-states bedded in.

The issues are inter-related. Even so, here are topics for the next conference, which will be a cracker if it is a good as the one this book reports.

What is the popular response to all this? Many of its concerns are not addressed, in part because they are not central concerns of economists, although perhaps some should be: environmental degradation, loss of nation-state sovereignty, policy convergence, resource depletion. Some concerns economists think so normal they tend not to mention. But they are acute to those involved. The exemplar is the loss of jobs as industries locate elsewhere.

Moreover, perhaps we are in a new phase of globalisation. We may have moved from the comparative advantage of inter-industry trade to the competitive advantage of intra-industry trade, although of course the old ways continue – there is still considerable absolute advantage trade. The ICT revolution has also reduced the cost of transporting information so that chunks of the service industry are even more relocatable as manufacturing. Curiously, much of the antagonism to today’s globalisation is about the multilateral regulation of international economic intercourse. Treating Pax America as if it is parallel to nineteenth century Pax Britannica ignores the growing multilateral institutions, not wholly subservient to the US. Finally, perhaps, as a 2004 paper by Paul Samuelson shows is theoretically possible, some of the winners of the last 200 years may be losers in the near future. One is struck for instance, how Jagdish Bhagwati In Defense of Globalization focuses on North-South relations, and ignores some of the particularly North concerns.

There is a need for economists to engage in the popular debate. Bhagwati’s book is a fine example. But economist’s contributions must be underpinned by the painstaking analytical and statistical work that Globalization in Historical Perspective brings so excellently together and makes so accessible to its profession.

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Bibliography
Alesina, A. & E. Spoloare (2003) The Size of Nations (MIT Press).
Baumol, W.J (2002) The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism (Princeton University Press)
Bhagwati, J. (2004) In Defense of Globalization, Cambridge University Press.
Balogh, T. & P.P. Streeten (1963) “The Coefficient of Ignorance”, Bulletin of the Oxford University Institute of Economic and Statistics, May 1963, p.99-107.
Fujita, M., P. Krugman & A.J. Venables (2000) The Spatial Economy: Cities, Regions and International Trade (MIT Press)
Lindert, P. (2004) Growing Public: Social Spending and Economic Growth since the Eighteenth Century (Cambridge University Press)
Samuleson, P. (2004) “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization”Journal of Economic Perspectives Vol. 18, No. 3, Summer 2004

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After Neoliberalism: the Growth and Innovation Framework.

This entry was posted in Growth & Innovation, Political Economy & History on 13th December 2004 by Brian Easton.

Paper for the “After Neoliberalism? New Forms of Governance in Aotearoa New Zealand” Symposium, Auckland University, December 13, 2004. While the author is a member of the Growth and Innovation Advisory Board the views presented in this paper are his own, and are not the official views of the Board and may not reflect the views of the other Board members.

Keywords: Growth & Innovation; Political Economy & History;

The policy clash in the 1980s and the 1990s was more complex than a Left-Right divide. At the very least it was tripartite. One group we might call the ‘conservatives’, many of who were on the Left, who wanted to defend the existing economic and social policies whose beginnings go back to the 1930s – making minor modifications from those which we associate with Muldoon. The concerns of the nostalgic Left has been more about human rights, foreign affairs and redistribution, than about economic policy, the main concern of this paper.

At the other extreme were the who wanted a massive redirection of New Zealand, in terms of where it was going as well as how it should get there. The radicals of the Right are the ‘neoliberals’ of this conference title.

The third group were the modernisers, who respected New Zealand values, but wanted to respond to new circumstances and new technologies to preserve and progress them. They saw the Muldoon era as one of policy stagnation failing to address the modernising pressures. While modernisers have values similar to many of the conservatives of the Left there was little dialogue between the two groups. One is reminded of the nineteenth century tensions between the nostalgic followers of Proudhon who saw the resolution to the effects of industrialisation was a return to the past, and the progressive socialists, including Marx, who were as concerned with the impact of industrialisation but who wanted to harness it for the social good.

The modernisers and the radicals of the Right came to power in 1984, but for various reasons it was the extremists who dominated the policy process. In particular, the lack of dialogue between the conservatives and the modernisers meant they could never get a coalition to resist the radicals. The policies of the radicals were superceded for two reasons. First, they were incompatible with New Zealand values. Second whatever their ideological strength the neoliberals were technically incompetent, and their policies failed to deliver their promises. Instead there was the longest period of stagnation in the postwar era.

Economic policy is now dominated by the modernisers, who lost the battle in the 1980s, but who regrouped to be re-elected in 1999, when the neoliberals failed also to deliver under National in the 1990s. Modernisation tends to be incrementalist, so it is hard to describe intellectual underpinnings without hindsight. We do have a major policy document, Growing an Innovative New Zealand released in February 2002, which describes the Growth and Innovation Framework (or ‘GIF’). Reflecting the lessons learned in the three years, GIF is currently being updated to what is known as ‘GIF II’. Its status is further complicated by the Sustainable Development for New Zealand report which is yet to be integrated with it. Hovering behind is the Growth Culture report, to which I shall return. Before describing the Growth and Innovation and Strategy, which replaced the neoliberalism of the 1980s and 1990s, I need to say some things it is not.

First, it is not the ‘Knowledge Economy’. That was the slogan adopted in 1998 by the Shipley government when it became evident that their previous policies had failed and they needed an excuse for intervention. Keynes’ cautioned that practical men and women are but the slaves on defunct economists and other intellectuals. This was true for the neoliberals of the last two decades, but it also applies to the knowledge economy, and to the academics who use the slogan, without any understanding just how shallow is its underpinning. It is easy to say that economic growth depends upon knowledge, and therefore we should fund academics, but the rhetoric has no analytic content. Growing an Innovative New Zealand uses the ‘knowledge economy’ phrase, but in ways which deepens its meaning, particularly with reference to innovation, which is its key notion.

Nor, second, can the current economic strategy be summarised by the ‘Knowledge Wave’. That was an attempt by a group of Auckland centred business people to redirect economic policy. Its politics has yet to be written up, and its economics may not have been much deeper than the ‘Knowledge Economy’. The strength of the Knowledge Wave was that it facilitated a rapprochement between the Labour Government and business, but it came to grief in February 2004, with its flirtation with neoliberals.

At some stage the Auckland business community seems to have struck on a target of per capita GDP (output) at international prices being in ‘the top half of the OECD’ in 2010. The target seems to have been plucked out of the air, without any systematic assessment, not even observing that last time New Zealand was in the top half was in 1984 just before the neoliberal policies were introduced. For a short period the government was seduced by the slogan, but dropped it because it is practically infeasible. The GIF talks about attaining the goal at some unspecified time in the future, which reduces the target to New Zealand growing faster than the OECD average (something which has actually occurred over the last few years).

Outsiders had trouble evaluating the Knowledge Wave because The Business Herald, Brian Fallows excepted, mixed up its favourable opinion with its reporting, so that the casual observer would have gained the impression that the Knowledge Wave was government policy when it was not. It is pleasing to report that in recent months The Business Herald has returned to orthodox standards of journalism. This lapse indicates how dangerous it is to depend on journalistic sources. The sensible analyst relies upon primary documents. Undoubtedly the key one remains Growing an Innovative New Zealand .

It characterises the Growth and Innovation Framework by the following eight principles:
* A stable macroeconomic framework.
* An open and competitive microeconomy.
* A modern cohesive society.
* A healthy population.
* Sound environmental management.
* A highly skilled population.
* A globally connected economy.
* A solid research and development and innovation framework.

I shall use some to illustrate the opening theme of differences between modernisers, conservatives of the Left and radicals of the Right.

A stable macroeconomic framework: The current policy stance is fiscally conservative, although the widely reported OBERAC – operating balance (excluding re-evaluations and accounting changes) – makes the small effective fiscal surplus appear larger than it is. This may seem to align the modernisers with the neoliberals of the past, although the records of the Reagan and second Bush presidencies suggest that fiscal conservatism may no longer be a neoliberal virtue.

However the government has made it quite clear that when the economy goes into downswing it will manage the fiscal position to ease the contraction. In fact, Keynes did not support unlimited government deficits. He favoured managing the government fiscal position. Today’s policy retains the Keynesian stance, but adapted for the new circumstances of inadequate private domestic savings even during an economic boom.

A fiscally conservative government faces severe restraints on increasing spending or reducing taxation. Typically today’s government has less than an additional billion dollars to spend each year, about half of which goes to education and health services. Conservatives of the Left would like to spend much more – but so would the government, had it the wherewithal. In current policy circumstances this requires higher taxation, but whereas unlike the neoliberals, the modernisers are not adverse to raising taxes, their record is they are cautious about doing so.

An open and competitive microeconomy: Modernisers use the market mechanism to make economic decisions, and so there is much less legal regulation, and fewer barriers to entry and controls than in the pre-1984 era. However they are not ideologically committed to the market and where it is judged appropriate, they will over rule it. Among the many instances, the government:
– has been willing to spend to promote culture and protect the environment;
– has reduced competition in some public provided sectors (such as education and health services);
– has been willing to use public ownership where it judges failure by private corporations, (the creation of PostBank and the renationalisation of Air New Zealand and the Railtrack);
– has tackled the infrastructural network deficit, funded by higher taxes (rather than continuing the neoliberal stasis because they could not work out how to impose private charges).

The difference is that unlike neo-liberals, modernisers see the market as an instrument of economic policy, not an end in itself. Where they judge it fails they use another instrument. Underpinning this approach is the perception that the market is a powerful social technology, and – as William Booth said – ‘Why should the devil have all the best tunes?’

I am not sure that modernisers have thought through the distributional impact of market adjustments, which sometimes damage the interests of the poor. Because of this, conservatives of the Left tend to over-rule all market transactions. Radicals of the Right dont care in principle, although the evidence is their policies aim to manipulate the income and wealth distributions in favour of the rich. While they are not explicit, modernisers seem to accept that individual market decisions will make some people worse off, but that they should be protected by a safety net of the welfare state.

A highly skilled population: While a new principle is evident in the replacement of the Employment Contracts Act by the Employment Relations Act and the report of the Workplace Productivity Group, I like to illustrate it with respect to core education. Today the focus is on improving educational performance by working with teachers, rather than hoping it will happen by putting competitive pressure on schools. The underlying principle is a cooperative relationship between workers and management will lead to greater gains – as the Workplace Productivity Group report demonstrates.

A globally connected economy: This is one of the biggest differences between modernisers and conservatives of the Left. The pre-1984 regime was far more cautious over global connectedness than the current policy stance, even though the Left were once the great internationalists, and remain so in the non-economic area.

Global connectedness is a large topic, and many of the issues have to be worked out. But the Left need not be anti-globalisation, Rather than parallel Proudhonian nostalgia or uncritically promote globalisation as did nineteenth century capitalism, they may, like the progressive socialists of that era, aim to harness globalisation for the common welfare. The Left in the nineteenth century was engaged with economics in a way that those of the late twentieth century have not been.

A solid research and development and innovation framework: ‘Innovation’(and creativity) is key to the government’s thinking about economic growth. Again this is an enormous topic, but it reflects microeconomic analysis illustrated by William Baumol’s The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism in which technological innovation in the firm is at the heart of the growth process. (In contrast the Treasury research program is based on a more macroeconomic paradigm, which hardly seems to contribute to the Growth and Innovation Framework).

Despite the traditional ambivalence of the Left towards capitalist business, modernisers have consciously decided to make an accommodation with capital. This has not been an easy for this government, and the initial approach of some of the peak business organisations did not help. Under the neoliberals, business had the impression that its interests preceded all others. Perhaps this has to be true in a market economy, which is why we have democracy as a second pillar of the macro-regulation of society. Inevitably there is a tension between them. At issue ensuring that business can do what it can do best, but do so in some social interest.

One thing we have learned in the post-war era is that publically owned businesses may be not be better than privately owned ones. This does not mean that – as neoliberals would have it – private business is always best. (The records of privatised Air New Zealand and Transrail give little support to that notion.) The modernisation approach is to treat each case on its pragmatic merits, with a bias towards against disturbing ths status quo, and a tendency to favour private business only in order to make the public regulation of it more transparent. The moderniser priority is the social control of industry not its social ownership. Often that social control is best by leaving the business in a competitive market environment.

The findings of The Growth Culture Report are an enormous challenge to business, indeed to the whole economic debate. It appears the public is not particularly interested in the economic growth as it is normally formulated in the public debate terms of higher GDP. They are not opposed to economic growth per se, but they want a different pattern of growth: ‘quality growth’ rather than ‘quantity growth’. However most of the policies which promote quantity growth apply also to quality growth, although not all of them. In particular their quality growth involves greater public spending (and therefore higher taxation), and more environmental sensitivity.

The traditional Left would have no trouble with such a vision – nor would Baumol. The problem is how to integrate these social objectives with the free market innovative machine, without undermining the latter’s contribution to national welfare. Neoliberals with a narrower vision of social objectives – in effect, quantity growth with the rhetoric of freedom – see no such difficulty.

The government has articulated a vision in which the GIF is embedded. The short version is:
“• A land where diversity is valued and reflected in our national identity
• A great place to live, learn, work and do business
• A birthplace of world-changing people and ideas
• A place where people invest in the future”

with a longer version:
“look[ing] forward to a future in which New Zealanders:
• Celebrate those who succeed in all walks of life and encourage those who fail to try again.
• Are full of optimism and confidence about ourselves, our country, our culture, and our place in the world, and our ability to succeed.
• Are a nation that gains strength from its foundation in the Treaty of Waitangi and in which we work in harmony to achieve our separate and collective goals.
• Are excellent at responding to global opportunities and creating competitive advantage.
• Are rich in well-founded and well-run companies and enterprises characterised by a common sense of purpose and achievement. They are global in outlook, competitive and growing in value.
• Derive considerable value from our natural advantages in terms of resources, climate, human capital, infrastructure and sense of community.
• Cherish our natural environment, are committed to protecting it for future generations and eager to share our achievements in that respect with others.
• Know our individual success contributes to stronger families and communities and that all of us have fair access to education, housing, health care, and fulfilling employment.”

In this selective overview of the elements of GIF I omitted three. The modernisers’ approach to health and a sustainable environment repeats principles already discussed, but the third requires further comment.

A modern cohesive society was also a concern of the previous National government which saw some of their policies tearing the nation apart. The traditional Left has argued that capitalist growth tends to generate rising economic (and social) inequality. On the basis of the evidence, I am not persuaded that increasing inequality is inevitable, although I acknowledge that under the neoliberal policies of the 1980s and 1990s, inequality rose. But that was because they consciously pursued pro-inequality policies.

While this government is concerned with the degree of social inequality and has taken some measures to reduce it (alas not always efficiently), I doubt that it gives the same prioritisation of redistribution as many of its Left wing critics. I’ve not read any ministers directly addressing redistributionism, but my guess is they would be concerned if more redistribution in the short run were to compromise the rest of the GIF. They also seem to give greater priority to the effects of policies which are not direct cash flows – say education, training and upskilling, and job creation. I, for one, look to greater clarification in GIF 2.

This quick overview of the current policy stances shows it is both an alternative to the neoliberal one in terms of objectives and mechanisms, but also to the conservative Left one in terms of mechanisms but not fundamental objectives. As such the GIF is currently the best framework we have in terms of melding New Zealand aspirations with feasible and effective economic policies. The challenge is to improve it – or to offer a coherent and comprehensive alternative.

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Mum: Dorothy Thelma Easton (4-4-1919 to 6-11-2004)

This entry was posted in Miscellaneous on 11th December 2004 by Brian Easton.

My oration for Mum at her memorial gathering at the Thelma Easton Library, Hillmorten School, 11 December 2004.

Keywords: Miscellaneous;

Tena kotou katoa. Friends of my mother, and so friends of mine and of her family, welcome to this gathering to remember and honour Dorothy Thelma Easton. I’ll call her Mum, because that is what she was to me.

I want to begin by reading a passage from Ecclesiastics, from the Bible which Mum passed on to me:

“For everything there is a season, and a time for every purpose under heaven: a time to be born, and a time to die; a time to plant, and a time to pluck up what is planted; a time to kill, and a time to heal; a time to break down, and a time to build up; a time to weep, and a time to laugh; a time to mourn, and a time to dance; a time to cast away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing; a time to seek, and a time to lose; a time to keep, and a time to cast away; a time to rend, and a time to sew; a time to keep silence, and a time to speak; a time to love, and a time to hate; a time for war, and a time for peace.”

Today is a time to mourn and, in that mourning, a time to renew.

Mum was born in Sheffield, Yorkshire in 1919, some 85 years ago, coming to New Zealand a year later with her father, William Cook, and mother, Maud. They were from the 19th century English working class: her Mother began working in a cotton mill at 12, and had to stand on a box to reach the machines. But both Mum’s parents loved reading. She once described how when her father could not accompany her to the Canterbury Public Library, he would lend her his large bicycle, complete with bar, and she would wobble her way there by herself. Her name, ‘Thelma’, comes from a title of a book her mother was reading. Mum would joke she was ‘glad she wasn’t reading Shakespeare’s ‘Tempest’ or Scott’s ‘Ivanhoe’.

She grew up in Christchurch, attending Normal Primary and Christchurch West High Schools. When she was about twelve her much loved Father died in a rail-road accident at the Styx crossing. I think of that bridge as his monument. The death almost meant she did not go to secondary school, but her somewhat older brother made sure she got the chance. I know Mum would want me to pay tribute to Uncle Colin and Aunty Jean, some of whose decedents are here today. She called him the ‘best brother in the world’ – only a slight exaggeration, because Keith is.

Her opportunities were even more diminished, when she left school for there was still the Depression. She should have been a teacher, but they had closed the Training Colleges. Instead she did secretarial and menial jobs. I wrote up a little of Mum’s public life in a recent Listener article, and was touched by a number of people who contacted me, seeing a similar story in their mother, of a woman of great ability whose life opportunities were severely limited by their times, and yet who overcame the limitations to achieve much in family and public life.

In 1940, Mum married Dad, Harold (Harry), who died 2000. They had three children, me (Brian), Keith and Jean. When State Houses were sold, she was quick to buy one. That involved a second mortgage, so still with young children – Jean was only three – she went out to work as a part-time secretary at Waltham School. Although common today, this was unusual for married women with children at the time. I dont ever recall her using the word ‘feminist’. But she did what had to be done, and set an example for other women. Mum was a pioneer in so many ways, a feminist.

The family and working didnt prevent here from contributing to public life. In the 1950s she was active promoting school children’s softball. Before my time she was a leader in the scouting and guiding movement.

Then in 1962 Mum became the library assistant at Hillmorten High School, in the library where we are gathered today. Others have talked of her achievements here – how the library has been a pioneer among secondary schools, and was considered one of the best among New Zealand secondary schools when she left. What she would want me to add is that it was a team effort led by headmasters Owen Lewis, Peter Murdoch and Ward Clarke, with their commitment to the library as the heart of the school, and the teachers, especially the teacher-librarians Helen Hogan, Kay Robertson, Murray Moffat, Liz Wright and Trevor Agnew. While in no way diminishing their contribution, their real skill was to give this woman her head, and a strong headed women Mum was. Thankyou too, for encouraging and supporting Mum to take the Certificate in Librarianship, the closest she ever go to that tertiary education she deserved, and which she helped pupils of the school to undertake.

For Mum should have been a teacher. Indeed her librarianship had a teaching component. She said ‘I was thrilled to have a pupil tell me that they had just read and enjoyed a book I had recommended’. As proud as she was of her books and building, she was even prouder of her pupil-readers and the school-librarians she worked with.

It was not untypical of her pioneering that she worked until after her 66 birthday, retiring after 23 years of service, although for the next few years she continued to help the school by developing its archives. She said that in retirement she was going to read more, recalling the 18th century writer, Richard Steel’s, view that ‘reading is to the mind what exercise is to the body’. Alas the body wore out: I recall her frustration in her last few years when her Parkinson’s reduced her ability to read. And then her body wore completely out, and she passed away a month ago leaving a legacy of a hard-working, strong-willed, independent, organized, loving Mother and friend.

Before finishing, I would like to, on behalf of the family, thankyou all for coming, and for the support and love you gave her. I would also like to mention Jean and Danni, who have twice lost close loved ones this year. My brother Keith must be praised for the ongoing support he has given Mum over the years, together with the enormous commitment over her last weeks – Jean helped too – and his ongoing commitment dealing with matters since. It cant have been easy being so close to Mum. And thankyou too Rose for your love and support. Mum would be absolutely thrilled to learn of your and Keith’s engagement. She’ll be at the wedding next year, in spirit. Her spirit is always with family things.

Some of you will know I was in Boston when Mum died, a bit like a cast sheep, unable to get back. We knew Mum would die soon, but we expected it would be in December or January after I returned. She didnt to make it, the only time in my life she let me down.

My daughter, Anita, sat by her bed with the others of you over that last week, and my son, Tama, attended the cremation service, both keeping me informed in detail as what was happening. Thankyou. Her remaining grandchildren: Danni, Andrew, and Anna could not be there at their Gran’s end, except in spirit, and they all saw Mum shortly before she died.

Mum finished one of her few public speeches quoting Richard Steel. I’ll finish with another 18th century writer, Dr Samuel Johnson, best known as our first significant dictionary maker, but also a distinguished writer. In one essay he writes how we know that everyone will die, but we all hope that the inevitable will be put off for a year – or in my case – even a month. And then, echoing John Donne, he reminds us how any one’s death diminishes those who are left, just as they enhanced us when they lived. His reflection followed the death of his mother: it captures what Mum’s death – and life – meant for me.

“Nothing is more evident than that the decays of age must terminate in death; yet there is no man who does not believe that he may yet live another year; and there is none who does not, upon the same principle, hope for another year for his parent or his friend: but the fallacy will be in time detected; the last year, the last day must come. It has come, and is passed. The life which made my own life pleasant is at an end, and the gates of death are shut upon my prospects.”*

* Johnson: Idler #41 (January 27, 1759)

Gender Sites:the Different Lives Men and Women Lead.

This entry was posted in Listener, Political Economy & History on 4th December 2004 by Brian Easton.

Listener: 4 December, 2004.

Keywords: Political Economy & History;

Almost 50 years ago, the guest speaker at my school prize-giving was telling the boys how we would experience a number of different careers in our lifetime, unlike our fathers, who seemed to have only one.

I remember realising that my mother had already had a variety of careers, even though she was not yet 40: temporary menial and clerical work after she left school during the Depression, mother and house manager after I came along, and from the early 1950s she was a secretary at a primary school, to pay off the second mortgage on the state house. She was a mother who went back to work before that was standard.

Reading Sites of Gender: Women, Men and Modernity in Modern Dunedin, 1890-1939, edited by Annabel Cooper, Barbara Brookes and Robin Law of the University of Otago, reminded me of how we overlook the experiences of women. The book comes out of the history department’s decision some 30 years ago to study intensively a South Dunedin suburb of Caversham. (An earlier book was the prize-winning Building the New World: Work, Politics and Society in Caversham, 1880s-1920s, by Erik Olssen.)

Since then, staff and students have pored over official records, public sources, newspapers, private papers and oral recollections to build a picture of the lives of those who lived in the area over the past century. Their research has been distilled into individually authored chapters on work, clothing, poverty, transport, spatial mobility, education, health, religion and marriage.

Don’t be put off by the word “gender” in the title. Many books about gender prove to be rants about the lives of women, with shadowy stereotypes of men. But in this case, the authors, who include men, have scrupulously looked at the different experiences of men and women, the contrast not only throwing light on each, but also giving the sense of the individual as well as collective experiences. The contributors would all give insightful addresses to school children. It is too easy to portray an abstract world built around a simplified picture of men’s lives – as economists have done. This book treats both genders as normal – and complex.

Also don’t be put off by the numerous authors of the book. Unlike most, the editors have eliminated repetition and added cross-references between chapters. Not that the authors have lost their character: the book is very well-written. I’m betting that there will be at least one novel using the material as a background, as well as future children’s books.

They needn’t be about Caversham, for despite the intense sense of locality that pervades the book, it is also about many other places and the New Zealanders who live there. Where the local record is inadequate, the writers refer to other New Zealand historians and their studies. In contrast, New Zealand economists tend to ignore all other New Zealand research, continually reinventing the wheel.

Mum grew up in a Christchurch suburb not unlike Caversham, with experiences similar to those the book relates. Time and again I saw flashes of stories parallel to those she had told me of her life. For instance, I could see Mum’s schooling in the chapter on education, which describes the evolution of curriculum for children, with the struggle to treat boys and girls differently and yet the same, to recognise that gender means something, but it does not mean everything and should not limit opportunity. (Caroline Daley tells a similar story in her Girls and Women, Men and Boys: Gender in Taradale 1886-1930). Before Mum was born, Director General of Education George Hogden made momentous decisions that influenced Mum’s and everyone else’s prospects.

Alas, the Depression limited them. Mum should have been a teacher, except they had closed the Teachers Colleges. After I left school, she became a librarian at Hilmorton High School in Christ-church. When she retired, they named the school library after her. But the building and volumes were not her greatest contribution. She encouraged hundreds of children to read, to love good books, a gift she also gave to her three children and six grandchildren.

Dorothy Thelma Easton (April 4, 1919 – November 6, 2004)

Top Shop

This entry was posted in History of Ideas, Methodology, Philosophy, Listener on 20th November 2004 by Brian Easton.

Listener: 20 November, 2004.

Keywords: History of Ideas, Methodology & Philosophy;

About this time each year I am asked about the merits of the various university economics departments. Typically, someone’s daughter or nephew is thinking about studying economics. This year, the questioner frequently adds, “Isn’t there some official ranking of economics departments?”

The answer is yes and no. Yes, because earlier in the year the Tertiary Education Commission’s allocation of the “Performance Based Research Fund” involved measuring the research performance of each teacher, which was aggregated up to an overall measure that they used to rank the departments.

But no, because the PBRF measure is but one dimension of departmental performance, and it may not be particularly relevant to the needs of an undergraduate. What the student wants is a well-taught foundation in the discipline. Researchers are not necessarily the best teachers ? some are superb, some are incompetent, most are average. In any case, the student may not meet a department’s top researchers in their early years. Indeed, of the eight economists given the top grade A, three have since gone overseas and a fourth changed universities. The remaining four may do little undergraduate teaching.

The description of As, in whatever discipline, as “world class” is misleading. Best think of their research as “internationally engaged”, although their research topics may be very narrow. A member of one panel ? not the economics one ? remarked to me that he thought the top Bs were doing the really interesting New Zealand work in his discipline. That may also be true in economics.

Are the PBRF measures any use to a student? They may provide some guidance in later years if a student wants to change departments to do graduate studies. In the interim, the most relevant PBRF measure may be the proportion of staff deemed “research active”, for the university teacher who is doing research is trying to keep up with the moving frontier of the discipline, and likely to be more stimulating than the teacher who is recycling what was learnt years ago.

I am sometimes asked, anxiously, about the amount of mathematics economics requires. Alfred Marshall famously set out the following rules:
“(1) Use mathematics as a shorthand language, rather than as an engine of inquiry.
(2) Keep to them till you have done.
(3) Translate into English.
(4) Then illustrate by examples that are important in real life.
(5) Burn the mathematics.
(6) If you can’t succeed in (4), burn (3).
This last I did often.”

You could not get better advice from a superb mathematician, a superb writer, a superb empiricist and a superb thinker. Sadly, it was recently fashionable to cloak one’s economic inadequacies in obscure mathematics. Things are changing, and most economics departments provide options for the non-mathematical as well as the mathematical. Do as much mathe-matics as you can, and then stop. That will be enough to be a good economist, no matter how little, providing you are a good thinker and clear writer.

Make sure you get a good empirical training, including in statistical methods. The fashion for theory (and policy) without evidence ? popular in the Rogernomics era ? is, I am glad to say, dying. Look for history and behavioural studies, which are currently frontier economic research areas, although you don’t need to do them within an economic department. I greatly valued doing philosophy (and often wish more of my colleagues had done epistemology – the theory of knowledge). Economics is the business end of liberal studies and the liberal end of business studies. Today, economics departments tend to be in business faculties, so look for liberal studies offsets.

A good test is to see how you like the department’s first-year textbook. Most are good, but look where they introduce the international sector. Page 800 of the 1000-page text is no use to New Zealanders, for our economy is dominated by the external sector in a way the US economy ? the main source of textbooks ? is not. (Some departments offset such weaknesses with locally focused additional notes.)

If you don’t enjoy the economics you do, you’ve struck poor teaching. As economics reminds us, customers are the best judge of quality, not some bureaucratically constructed index.

Compensating for Waiting Time Failures

This entry was posted in Health on 10th November 2004 by Brian Easton.

Submission to the Select Committee on Health In Regard to the Injury Prevention, Rehabilitation, and Compensation Amendment Bill (2004, No 3) by Brian Easton and Alan Gray.

Keywords: Health; Social Policy;

Summary of Submission

We support the general approach of the Bill to remove the notion of fault in medical misadventure and to extend rehabilitation and compensation to all those who suffer treatment injury. However, we do not believe there should be any exemption for treatment injury as a result of resource shortages. This is inconsistent with the Bill’s general principles.We recommend that the Bill be amended by deleting the proposed new Section 32,(2c), thus making it absolutely clear that in principle all treatment injury is covered by the ACC medical misadventure scheme, whatever the cause.We recommend that the Government immediately institute a Waiting Times Strategy to eliminate, over a period of not more than three years, excess waiting times.

We recommend that a procedure be devised that where treatment injury is caused by resource shortage, that a review process be established parallel to that which applies to health professionals.

1. General Issues: Support for the Legislation

1.1. We wish to support the general approach of the “Injury Prevention, Rehabilitation, and Compensation Amendment Bill (No 3)” which proposes to eliminate the fault element in regard to Medical Misadventure, and replace it with an entitlement based on Treatment Injury.

1. 2. The fault principle has no place in the rest of the ACC legislation, for the reason that it has no place in medical misadventure. It impedes rehabilitation, it delays fair compensation, and it discourages the development of the safety culture which should be aiming to prevent further misadventures. The submission of one of us to the earlier committee of enquiry whose recommendations led to the Bill under consideration is attached as Appendix A. (Also attached as Appendix B is a Listener column which one of us wrote.)

1.3. We are satisfied that the alternative proposals for dealing with medical professionals who display incompetence via the Health and Disability Commissioner and their professional bodies will be effective, and will not have the deleterious impact on prevention, rehabilitation and compensation that the current system generates.

1.4. We are delighted that ACC is establish a unit to use the information that will be generated by the new scheme to develop a safety culture and increase prevention. Whether such a responsibility should be included specifically in the legislation is a matter of public policy. Whether there should be unit with such a remit somewhere in the government system is a matter of principle.

1.5 We support the general approach of the Bill to remove the notion of fault in medical misadventure and to extend rehabilitation and compensation to all those who suffer treatment injury. However. we do not believe there should be any exemption for treatment injury as a result of resource shortages. This is inconsistent with the Bill’s general principles. Our objection is detailed in the next section.

2. The Resource Shortage Exemption

2.1 Section 13 of the Bill proposes to amend the principal Act by repealing sections 32 to 34, and substituting revised sections consistent with the new principles.

2.2 However the new section 32, “Personal injury caused by treatment (treatment injury)”, has a provision as follows:

(2) Personal injury caused by treatment or treatment injury does not include the following kinds of personal injury: …
(c) personal injury that is solely attributable to a resource allocation decision:

2.3 We take the view, which we believe is widely held within the professional medical community, that a personal injury arising from failure to treat for whatever reason is a treatment injury. That includes failure to treat because of resource shortages.

2.4 Therefore, we reject the Bill’s notion that the failure to treat because of resource allocation decisions is not treatment injury, even though a failure to treat by a medical professional is treatment injury,

2.5 Indeed, we see the possibility of an appalling anomaly arising, insofar as two patients could have the same condition, and be treated at the same time. One, however, may receive compensation and rehabilitation because he or she had delayed treatment as the result of a diagnostic error by a medical professional, while in the other receives none because she or he was properly diagnosed but treatment was delayed because of resource shortages.

2.6 We believe that the public will also find it unacceptable that while there is an onus on health professionals to provide high quality care, the effect of the clause is to exempt organisations providing health care from a similar standard. We doubt the public would understand the justification for omitting treatment injury because of a lack of resources from the ACC scheme.

2.7 The proposed clause is a successor to one in the current Act. The amending Bill represents a new vision for the ACC scheme as far as medical misadventure is concerned. It would be totally inappropriate to leave in the Bill a fossil from a past age – in effect an exemption for a particular sort of fault.

2.8 We recommend that the Bill be amended by deleting the proposed new Section 32,(2c), thus making it absolutely clear that in principle all treatment injury is covered by the ACC medical misadventure scheme, whatever the cause.

3. Resource Consequences of The Proposed Change

3.1 The proposed change recommended in our paragraph 2.8 primarily affects where there are waiting lists, with the consequence that patients’ waiting times exceed that recommended by good medical practice. In our view waiting lists are not necessarily inappropriate insofar as their function is medical management. What is unacceptable is excessively long waiting times as a result of mismanagement and resource shortages.

3.2 Currently many patients face excessive waiting times and, as a result, suffer discomfort, the need for further treatment, and/or death, which would have been avoided by treatment within the accepted waiting times. As far was we know ,there is no comprehensive census of the degree of backlog, but there is sufficient fragmentary evidence to indicate many patients suffer from excessive waiting times.

3.3 There are two possible broad strategies for dealing with the abandoning of the exemption for resource shortages.

3.4 The first is that the revised clause come into operation immediately with the enactment of the Bill, and that patients who experience treatment injury from excessive waiting times be dealt with by ACC in exactly the same way as those who experience treatment injury from delayed diagnosis. That option would be our preference.

3.5 However, we are aware that size of the resulting fiscal exposure is unclear. An alternative would be to include in the Bill a specific provision which maintains the principle that treatment injury arises from resource shortage, but which delays the implementation of the principle for a fixed time specified by Parliament. This follows the common practice of different parts of a Bill coming into law at different times. In our view any delay should not be more than three years although, as we have said in our section 3.4, we would prefer immediate implementation.

3.6 Irrespective of whether the strategy of our paragraph 3.4 or of our paragraph 3.5 is adopted, it will be necessary to institute a Waiting Times Strategy, the purpose of which will be to eliminate the waiting time backlogs. A letter written to various people outlining a possible Waiting Times Strategy is attached as Appendix C. We believe that such a strategy is feasible within existing fiscal parameters.

3.7 The Waiting Times Strategy is essentially that each year the Government sets aside an amount from the additional fiscal surplus, and that District Health Boards and other public agencies be invited to tender for a share of it, using the funds to reduce waiting times for particular treatments. Once the backlog had been cleared the Board would promise to maintain their waiting times within the standard set by the Ministry of Health in consultation with relevant medical professionals. We think that a modest amount – we suggested $60m a year – would eliminate excessive waiting times in a short period.

3.8 One of us examined the dynamics of waiting times, and came to the spectacular, albeit it with hindsight obvious, conclusion that elimination of excessive waiting times benefits more than those in the backlog. While the elimination is a one-off outlay, all the subsequent recipients of the treatment within the recognised waiting times also benefit. The paper attached as Appendix D gives two examples based on the effect of delaying radiotherapy treatment for breast cancer using available best estimates of the higher morbidity as a result of delay.
– one shows that eliminating a backlog of 100 would save 22 lives in the first year and 110 in the first five years;
– the second uses a benefit cost analysis framework to conclude that total impact on all the women who would benefit as a result of eliminating a backlog makes the treatment 40 plus more times beneficial than the benefit to the cohort of the backlog.
The implication in either case is that the elimination of excess waiting times must be one of the treatment practices with the highest returns available in the health system.

3.9 We recommend that the Government immediately institute a Waiting Times Strategy to eliminate, over a period of not more than three years, excess waiting times.

4. Organisational Consequences of the Proposed Change

4.1 Currently organisations which fail to provide sufficient resources and so cause treatment injury, are exempt from any review by the proposed provision 32 (2c) and the existing equivalent. Even under the new system there will be no review, even though health professional who make equivalent mistakes are subject to review via the Health and Disability Commissioner and their professional bodies.

The following were attached:
Submission by Brian Easton to the Review of Medical Misadventure
Listener column (17 April 2004) “Accidents Will Happen”
Letter: Waiting Times Strategy
“The Gains From A Reducing Waiting Times” by Brian Easton.

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Fiscal Foolishness

This entry was posted in Listener, Macroeconomics & Money on 6th November 2004 by Brian Easton.

Imbalanced tax cutting is like pouring petrol on a blazing barbecue

Listener 6 November, 2004.

Keywords: Macroeconomics & Money;

With the general election just a year ahead, I have, as usual, reviewed my approach. My strategy is always to help readers try to understand economic issues, rather than tell them which way to vote. Next year I may have to modify it.

The danger is that some political parties may try to buy votes by promising to reduce the government surplus with more tax cuts and/or higher public spending. That is always a risk, but it has been compounded by the American Right’s support for George Bush’s tax cuts. Because the US dollar is the international reserve currency, the Americans can get away with a big deficit in the short run. But every respected economist believes that the US has embarked on a dangerous course. It will probably weaken the US dollar – and the US economy.

Not only have the American Right, once the keepers of fiscal probity, turned around, but also there is some muddled local thinking. When last year’s government surplus proved higher than expected, Wellington’s Dominion Post demanded further income tax cuts (September 24). It may be too much for its journalists to understand that the measure of the reported surplus, called OBERAC, tells us little about what the government actually has available. (See Stressful Fiscal Sums: Should the Government Spend More and Tax Less?)

But even the office boy knows that, given the current strength of the economy, with strong growth and labour and other shortages, stimulating further spending by tax cuts is foolish – like pouring petrol on a blazing barbecue.

It may seem odd that a Keynesian like myself should be a fiscal conservative. In fact, John Maynard Keynes did not support unlimited government deficits. Keynesianism favoured managing the government fiscal position, favouring a deficit during a depression. But we ain’t in one at the moment.

Although OBERAC is useful for accountants’ concerns, economists use other indicators for evaluating the impact of the government on the economy. A series of deductions is made from it that tends to turn the surplus into a deficit. That is because the government’s savings from its current income (which the OBERAC approximately measures) are used for capital investment (just as your household uses some of its income to buy a car, add to the house, or pay off debt).

Economists have learnt two major lessons since Keynes’s day. First, it is much easier to generate a government deficit than it is to pull it back, easier to cut taxes or increase government spending than the reverse. That is like trying to put toothpaste back in a tube.

Second, the traditional Keynesian analysis implicitly assumed low interest rates, so government interest payments do not compound faster than the economy grows, shifting the burden of taxation to future generations (as Bush has been doing). All very technical, but difficult problems don’t go away because you can’t understand them.

Perhaps I am overreacting. Does anyone take notice of our newspapers? Labour leaders Helen Clark and Michael Cullen are fiscal conservatives. New Zealand First’s Winston Peters and National’s Bill English proved they were when they ran the government finances. National Party Leader Don Brash has not yet had a chance, but as Governor of the Reserve Bank he publicly cautioned against too loose a fiscal stance, warning that interest rates would have to rise if the government did not show restraint. That’s right. Pour petrol on the fiscal barbecue and the Reserve Bank fire brigade will dowse a lot of party guests.

The danger remains that, inflamed by uninformed journalists and desperate to win votes, some parties will promise policies that wreck the fiscal stance. This column will not criticise any party that maintains the current fiscal track but proposes tax cuts offset by public expenditure cuts (or the opposite). And there is room in the future for modest tax cuts or extra public spending as the economy grows. But I promise to criticise vigorously if any significant political party is so irresponsible that its policies compromise the government budget and the sustainable economy. I hope I shan’t have to.