Globalisation: the Consequences in the Reductions in the Cost Of Distance

This entry was posted in Globalisation & Trade on by .

Quo Vadis (Trinity Methodist Church, Pakuranga, 2001) p.33-44. Revised version of the text of Brian Easton’s message at Trinity Church in July, 2001.

Keywords: Globalisation & Trade;

I originally undertook to talk about commercialization, but I have recently been working on another, although closely related, question – globalisation. I hope you will forgive me if that is what I talk about today, because it is very much on my mind. I will start by defining globalisation; then talk about two earlier periods of globalisation to see what lessons we can learn from those; then I will talk about some of the current issues.

Definitions

The London Economist defined globalisation as ‘international capitalism’. This is not a helpful way to think about the problem. Instead I try to reduce the notion of globalisation to a relatively neutral idea, to avoid individuals react positively or negatively, or possibly stop thinking at all, rather than trying to work through it with all its complexities.

I define globalisation as ‘the economic, political and social consequences of the reduction in the cost of distance.’ At various times in the history of mankind, distance has become cheaper, in various ways. Much travel or transport we now accept as normal were once very expensive. For example many here will have flown to London (now taking only about 26 hours) at a cost which is quite small compared to the cost of the flight when I first did it 35 years ago. Then it took over two days, and cost around $2,000 return, much the same as it does today, except the purchasing power of money has reduced over the period. If you have a child living in Britain and something goes wrong you can fly there in a hurry. One of the reasons your child may live in Britain is because it is much cheaper to get there than it once was. And maybe you can afford to visit Britain (or wherever) quite frequently to visit your friends.

This example of the reduction in the cost of distance applies to the physical movement of a person, and also to the transport of goods. It also applies to information. Today, if you want to read the London Times or the New York Times you can do so on your computer in New Zealand within hours of publication. One now has access to information in a whole range of ways, and it is far cheaper quicker to move than the physical bodies of books and newspapers took in the past.

So if once upon a time distance was very expensive, today it is considerably cheaper for many sorts of personal travel, goods, and information. The consequence is economic, social and political change: changes which are both beneficial and detrimental.

Pax Romana

About 2000 years ago the Roman Empire gave peace to a large part of the Middle East and Europe, so it became much easier to move around the various parts of the empire. Paul, for instance, could wander around the Mediterranean visiting various Jewish communities who had moved from Palestine seeking opportunities elsewhere. There was less chance of being disrupted by pirates. Civil peace meant you could move from Palestine to, say, Ephesus, and set up a in business there.

Although it is harder to document, there is also evidence of the movement of capital; one could take your savings from one place and move them to another. With some commonality of language and the ability to communicate across boundaries, ideas which may once have been confined to a particular place, including the arts and philosophy, could spread throughout the empire. Greek philosophy (from 200 or so years before) penetrated the Eastern Mediterranean.

When the costs of distance goes down it becomes easier to trade. Palestine, at the junction of the Middle East and the Eastern Mediterranean was a crucially link in the expanding trading patterns. Accounts of the time hint at economic transformation and a prosperity which financed, for instance, Herod’s temple.

The theological debates that arose were part of that economic transformation. One is struck how the vast majority number of reported saying of Jesus are related to the economy or use the economy as an image, including vineyards, sowing grain, the parable of the talents (a story about investment) and the good Samaritan. The story of the widow’s mite is about the value of money. The widow gives her dollar. The rich man his $100. The rich man’s gift may have been worth 100 times that of the widow’s in financial terms, but Jesus is suggesting that its value should be measured in terms of the sacrifice made in the making the gift. Globalisation is directly behind the story of Caesar’s coin, for the globalisation from Rome is generating an international currency.

These theological debates were taking place at the time not just with Jesus and his followers, but also among other religious groups, for instance the Sadducees, the Pharisees, the followers of John the Baptist, the Essenes, and other parties who were trying to change the ways in which people thought and behaved. So the globalisation of Pax Romana 2000 years ago, had a major impact on the world both directly and through its impact on the foundations of Christianity.

Pax Britannica

The period from about 1850 to 1940 is recognised by many scholars as the greatest era of globalisation, at least among European nations. Pax Britannica affected only part of the world, but it allowed people to move many thousands of miles. Distance was still costly, if cheaper, so most migrants had little chance to return to or even visit their home country. Trade increased, and capital flowed even more freely than people. Ideas like the Bible and western values travelled too.

As well as the peace there were major technological changes. Developments like the telegraph and later the cable, plus the railways, enabled people to connect and to trade. Imagine two towns some distance apart, each of which traded wheat. Over time, given the ability to use the telegraph to establish what each town was charging for its wheat, and with the railway to reduce the cost of moving wheat from one town to the other, arbitrage moved the prices closer together.

With the advent of refrigeration by 1882 New Zealanders discovered how to move dead meat and, later, dairy products tens of thousands of miles without any marked loss in quality. Refrigeration technology complemented with steamships and the ability to use the telegraph to find out how much product was needed in Britain enabled New Zealanders to produce here and sell successfully in Britain 12,000 miles away. British migrants could continue to do much the same things as they did in Britain, but make use of a superior climate. If that reduction in the cost of distance had not occurred New Zealand would today be a much smaller – and probably more impoverished – society.

The migration from Britain had benefits for the British at home. There were now fewer workers, and their wages rose. So they got cheaper food and a larger share of the nation’s production. Slums were less overcrowded. But this globalisation process also had its downside. Some people suffered greatly, amongst whom were the British hill farmers who found the prices for their meat, wool, and dairy products undercut by New Zealand sheep meats and had their livelihood diminished.

During the 19th century economic activity shifted from agriculture to manufacturing, for it was also a period of industrialisation. Manufacturing processes, once performed at home, moved to increasingly larger factories. So our ancestors moved from their villages into the vast slums of industrial Britain and Europe. We picture the extraordinary destruction of the environment, polluted air and water, billowing smoke stacks, ‘dark satanic mills’. Economic historians still debate whether living standards rose or fell over the period. It probably rose for some, fell for others. Deteriorating conditions caused many to leave home and travel to the other side of the world. The process of industrialisation led to much personal trauma and environmental damage. Nevertheless eventually we all have been beneficiaries, even if our ancestors suffered.

Over time we learned to harness the new technologies and take advantage of the new opportunities provided by industrialisation. Factory Acts preventing the use of child labour, regulations and public infrastructure were developed to deal with the disposal of waste and public hygiene. Means of public income protection and support developed: workers compensation started in Germany as a response to factory accidents in the late part of the nineteenth century. (It was introduced to New Zealand in 1901.) So gradually – step by step – the tiger unleashed by nineteenth century globalisation and industrialisation was tamed. Mankind learned to control the forces and make them work in our interests. Fascinatingly much of the resistance to the forces and the controlling of them was inspired by spiritual movements. Not just the traditional churches but also anarchists, syndicalists and Marxists (which initially – as conceived by Karl Marx – had a profoundly spiritual basis). Even so, in Britain it has been said that the struggle to control industrialisation ‘owed more to Methodism than Marxism.’ On the European continent, Catholicism often occupied a similar moderating influence.

So, however awful some of the effects of 19th century industrialisation were, we learned to control it and to benefit from it. Admittedly some Utopians longed for a return back to the 18th century way of doing things, but even the most nostalgic did not really want to give up their new advantages. Maybe things have not changed too much in this regard. I am reminded of a friend of mine who lived at Waitati to the north of Dunedin, who when visiting the city would complain bitterly about what a terrible town it was – totally polluted – contrasting it with the pleasures of unspoiled rural life. And then he would get into his car and drive over the Kilmog with smoke pouring from its exhaust!

But nostalgia was insufficient to resist the economic forces unleashed in the nineteenth century. A better life came from our learning to control them.

1914-1950

Conventional wisdom says that globalisation receded from the beginning of the First World War until after the second one. In some ways it did. For instance restrictions were applied to labour movements – the big migration flows into the United States were virtually cut off in the 1920s- while capital movements were also restricted and trade suffered from the imposition of import controls and tariffs. There were even attempts to restrict ideas.

However distance costs continued to reduce. I recently attended a conference on Musicology where the topic for discussion was the first performance of the New Zealand Symphony Orchestra. Where did the players learn about full symphonic performance? Some may have travelled to Britain and heard symphony orchestras there. But many players had never heard a full symphony live before. The French horn player, for instance, had never heard a live orchestral performance featuring his instrument. However they had listened to gramophone records. Music had been transformed by the reduction in the cost of distance – in this case by the transportation of it in gramophone records. Perhaps it is not as good as hearing a live symphonic concert, but recordings are a viable substitute, and a lot cheaper and more practical than travel. (Our children are experiencing the same phenomenon when the download music from the Internet, which also reduces the cost of distance.) Radio, too, was enabling the transmission of information much more quickly. Films widened access to theatre. Motor vehicles were becoming more common through this period. So there were reductions in the cost of distances globalisation in the interwar era too.

Reducing the costs of distance in a region.

Given reductions in import controls and tariffs on manufactured goods, and the extraordinary change in the cost of distance, whether internal or external, kinds of globalisation have become more pervasive. Its effects can be seen everywhere.

You can see it clearly on the landscape in Taranaki. Once a map of the region was covered in about 100 dots which represented dairy factories. Initially it was costly to ship milk any great distance so the dairy farmer took the milk to the nearby factory. As the roading network improved, together with the introduction of bigger and more powerful tankers, the costs of distance became less important. Fewer factories were needed. Today throughout the Taranaki there are towns whose location only makes sense only in that once they existed to service the now defunct local dairy factory. The factory may still be there, but it is abandoned or converted to some other use – perhaps housing an antique dealer. What happened to the town when the dairy factory closed? For most workers the new factory was still close, perhaps an extra fifteen minutes drive and so the effects of redeployment was not great. They would still tend to use their local shops, and so much of the town’s other economic activity would remain. It would grow more slowly than it did, or even contract. But the factory closure would not usually cause an abrupt disruption to workers and inhabitants. People could cope with this regionalisation – this minor globalisation.

Reducing the costs of distance in a nation.

We saw how lower costs of distance in a region caused some disruption,. Consider an example of the effects of a reduction in the costs of distance in a nation. I use the example of a brewery, because once the costs of transport was so high every town had one – a bit like dairy factories in the Taranaki. Over time, they became concentrated into a single factory in each region. But the process did not stop there.

Not far from where I live in Wellington there used to be a brewery. Today it is a supermarket which sells beer manufactured in Hastings. Modern roads, modern tankers, and economies of scale in the production process mean that it is cheaper to manufacture the product in a single factory. The product is maybe cheaper for the consumer. But what of the brewery worker? Unlike the Taranaki dairy worker who could perhaps commute to work a short distance away, the shift of the brewery means the worker has to change locations or change jobs – a much less appealing prospect. Of course some workers may prefer to transfer to Hastings, and some may do so reluctantly and be pleased in retrospect that they did. While in no way diminishing the significance of the move, it is after all within the same national community. Even so many workers will be initially worse off from the local business closure and relocation.

But the nation as a whole may not be. More workers in Hastings get jobs, Hastings has more economic activity, and the tax the brewery and its workers pay still goes to the national exchequer. Consumers may be better off too, if the beer is cheaper (although there may be less competition). These gains offset (to some extent) the disadvantages to the individual worker and family. If the worker can be redeployed to a new job reasonably easily, the nation may be well pleased with the relocation of the business.

(In the discussion the issue of boutique breweries was mentioned. ‘Boutique’ suppliers arise where the economies of scale are not overwhelming and where there may be a demand for non-standard products or ones where there is a demand outside mass production – women’s fashion is an obvious example. However a boutique supplier may also depend upon lower national transport costs. There is a case to be made that consumer preferences for variety will see an increase in boutique suppliers for some, but not all, products and services – although of course many large scale suppliers will respond by diversifying their outputs. Even so the boutique supplier may be national or international, so that is no guarantee that a region or nation can compensate for a loss of a large scale business by the increasing the number of boutique suppliers.)

Reducing the costs of distance internationally

Now it might be that one day the Hastings brewery might close and the company beer might concentrate its beer production in Australia, say Sydney. The impact on the brewery workers – and the nation – would be more severe than the shift from Wellington to Hastings. The worker is much less likely to move to Australia than to another New Zealand city, and this time the fiscal revenue moves offshore too. Thus the niggling problems we saw with the impact on a region or a nation, become more serious when a business moves offshore.

Now the shift may not be in a single direction. New Zealand increasingly supplies milk products to Australia, so the Hastings brewery worker may find a job in a Taranaki dairy factory. There will be disruptions as the economy shifts out of some industries and increases its scale in others. But the situation need not be disastrous if the new industries are creating as many jobs as the old ones are destroying. Some sort of economic change is inevitable if we want higher standards of living and to take advantage of new industries.

Now I skip over here the sort of policies a country might pursue to ensure it gets a reasonable share of the world’s new jobs. The point is that we tend to look at business closures, and not see them as related to the business openings. We tend to assume that our location – wherever we live – will suffer from globalisation and all the benefits are elsewhere. That cannot be true for the whole world. And it was not true for New Zealand in the nineteenth century, for it was one of the major beneficiaries of the reduction of the costs of distance from telegraph, steamships and refrigeration.

Even so, globalisation – the consequences of the reduced costs of distance – tends to concentrate particular activities into particular places, and so that other places stagnate, contract, and even die. There are ghost towns – ghost regions – all over the world. But there are also nodes of growth. Auckland has been one (just ask anyone from Dunedin). The concentration can be regional, national or international, and so can the depletion. It has happened in the past; it is happening now; it will happen in the future.

A new sort of globalisation?

If globalisation is not new, is today’s globalisation different? No and yes. No, because there are regularities and similarities. It is not even clear to the historians that this time the process is faster than occurred in the nineteenth century, or involves more fundamental technological changes. But yes, because this time globalisation involves more of the world – the nineteenth century globalisation was largely confined to those of European descent and their colonies, and it also involves more economic industries.

We divide economic activity into the three divisions: primary and other resource industries (including forestry and fishing); manufacturing industries; and service industries. Why the distinction?

Primary industries are characterised by being close to the key resources they use. Manufacturers can choose whether to be near the resources they use or to the consumer, and their location will be question of balancing those costs, especially where there are strong economies of scale in the production process. Service industries have been traditionally characterised by where they need to be in relation to the customer.

This definition of service industries is breaking down. In some cases – tourism education, and medicine for instance – the customer can sometimes travel to the provider. Even more important, with the reduction in transporting information costs, some services need no longer need be near to where the customer lives. Books can be bought from a retailing outlet offshore via the world wide web. My computer help desk is based in Australia. When I book an air ticket the call centre might be anywhere in New Zealand, or even overseas. (Apparently call centres in India are developing where the operators talk with the customer’s accent and have access to you local weather conditions so that they can pretend to be where the caller is.)

As confusing as these changes are, however, they may be no more so than for those in the nineteenth century when production activities – such as a brewery – that had been local since time immemorial moved away.

And like the nineteenth century industrialisation globalisation, again the tiger is rampant and unleashed. People are going to suffer. Workers in whole industries, communities in whole regions may suffer, as happened 150 years ago. The challenge today is that which are ancestors took up them. Not a nostalgic attempt to reverse the untamed forces – to pretend they do not exist – but a vigorous effort to harness them for the community interest.

Is there a spiritual response to globalisation?

If we take up that challenge we can be guided by the success of our ancestors. Significantly they tackled the task with a strong spiritual belief. This time resistors might not all be Christians – as I have said this time the process involves more than just those of European descent so it seems likely other faiths will be involved too. Moreover, it seems likely that resistance will come from more than just the conventional religions, but there will be a strong spiritual element in it, motivated by a social concern which is more humane and human, more spiritual than the unbridled tiger produces. May we have the courage to take up the challenge.

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Twenty to Ten: the Emptiness Of the Latest Economic Slogan.

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

Listener 7 July, 2001.

Keywords Growth & Innovation

Chatham House rules applied, so I can only tell you there was considerable derision in a meeting of top economists when the slogan of New Zealand aiming to be tenth in the OECD was mentioned. Many such slogans float around our public debate, driven by dogma and lobbying interests. But this one has a quantifiable meaning so it can be assessed. The point of the following is not to overwhelm you with statistics – ignore them if you like – but to try to persuade you that economics can be about analysis rather than meaningless ideological slogans.

On the latest OECD statistics, New Zealand is ranked 20th of the 30 members of the OECD according to the criterion of ‘per capita GDP measured at purchasing power parities’. This is a measure of output per member of the population valued in a common set of prices, and is not the same thing as per capita national income since some of the income from the production will be received by foreigners. Moreover it only covers material output, and does not include non-material circumstances like the environment, public safety, culture and so on. For the record, our per capita output level was 83 percent of the average in 1999.

Tenth on this list was Ireland at 113 percent of the average. To catch up to Ireland – that is what the slogan is about – we would have to increase production by about 36 percent, without any increase in population. Suppose we caught up over a decade. That would mean we would have to grow annually about 3 percentage points faster than the OECD average or more than double our current growth rate. (I have slipped some assumptions in here, but the order of magnitude is correct.)

Now economists – or perhaps I should say some economists – are competent to answer a question like what would happen if the economic growth rate were to double? Our doyen was Bryan Philpott, and while he is no longer with us, his colleagues such as Ganesh Nana, Denis Rose and Adolph Stroombergen would dearly love to have an opportunity to tackle the question.

The point is that if the economy grows at 6 percent p.a. then some sectors will have to grow even faster. Which? And what are the implications? Good questions for which nobody is providing the resources to find an answer. The lobbyists’ overblown rhetoric is pie in the sky.

Key elements in the growth path are the sectors which contribute to exporting. There is an internationally well established theory called the ‘balance-of-payments constrained growth model’. The basic idea is that in order for a country to grow it has to pay for its imports. In the long run that means generating enough export revenue, so total growth and export growth are closely related. If this is true for New Zealand then exports will have to grow at least 7 percent p.a. That means our share of world exports will have to increase, rather than fall as they have in recent decades.

Moreover, since some of our key exports are physically constrained – agriculture, forestry, fishing aluminium – to growth rates well below 7 percent p.a., others such as added value primary processing, general manufacturing and tourism, will have to rip along at a much higher rate. Can they? Will they? These are questions which economists can tackle, and indeed did in the past before the repression against dissent stopped such systematic thinking about growth. The last big exercise was in 1991, which not only had a cry of ‘Ten in 2010′ (yes the current slogan), but backed it with a careful feasibility analysis of the economic implications of attaining a higher output. It soon became evident it was not feasible.

That is the difference between serious economics and those who sloganise. Recall Prime Minister Geoffrey Palmer’s announcement in 1990 that his government was going to halve unemployment. (They lost office before they had a chance. The succeeding National government did manage the goal, by doubling unemployment and then getting it back to where they started.) However there was not a single paper that indicated how the government had done it. (In fact economic officials were as puzzled by the promise as those outside.) It turned out that some spin doctor had invented it.

Today the use of the Official Information Act helps keep the government honest, and the spin doctors stay away from those areas amenable to economic analysis. Outside the government, things are murkier because the Act does not apply to them. Try asking you favourite bete noir – party or lobby group – to justify some economic claim they make. They will be as bereft of a decent analysis as was Palmer’s government. The difference is that they dont have to admit it.

The Budget and the Production Process

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

Listener 23 June 2001.

Keywords Macroeconomics & Money

Most of the public comment on the government’s May budget was on the lack of growth of social spending. This overlooked that in a typical year the government has a little less than a billion dollars extra to spend from economic growth, after allowing for price and population increases. After some has been spent on really urgent items (like increasing bio-security) and necessary repairs to failed past policies (the cervical smear program) there is perhaps $750m left. That total is less, say, than the spending that advocates for Education or Heath or Social Welfare are each demanding for their sectors alone. Inevitably many (quite reasonable) demands are not met. Their advocates are irate, but rarely suggest cutting back on other government expenditures or raising taxes. Last year was unusual because the incoming government raised income taxes and so had more than normal to spend. This year (and in most years) it did not, so there is not the same expansion on government spending.

Unless the government makes significant spending cuts somewhere else (unlikely) or it plays with mirrors, spending will remain tight. (My view there is little room to cut spending other than by privatising its burden so it is borne by households. That is not this government’s social philosophy. The exception might be in distributional spending. I am not advocating the incomes of the poor should be cut, but a lot of spending increases in recent years have been poorly targeted.)

The interesting element in the budget is the government seems to be revealing a different account of the production side of the economy from that held by the preceding Labour and National Governments. The past view rested on the theory that all the useful information between economic actors is encapsulated in market prices, providing the government interference in the pricing system is minimal. This is a good starting point but it soon becomes evident it is not the whole story. The production process of an economy is far more complicated than what standard price theory allows. That shifts the policy problem to whether a government can improve the production process by interventions additional to the price system.

If this all seems a bit theoretical consider that when Equiticorp bought New Zealand Steel off the government in 1987, the CEO, Alan Hawkins said ‘we could see that, in accounting terms, it was a good deal. [But] there was no way we could assess the steel plant as a manufacturing operation because none of us had any experience in the industry.’ For the financiers, ignorance of the production process did not matter, because all they needed to know was captured in the financial accounts. This criticism of financiers having a poor knowledge of production is a frequent explanation for the failure of the British economy to grow as fast as the rest of the OECD. It is said they neglect long run investment opportunities in favour of short run gains. Certainly the record of Britain and New Zealand is financier dominated economies dont grow very fast (but arguably the US is a contradiction).

The conclusion might be that the government becomes an investor in the economy where the financiers tend to fail. The venture capital fund, incubator support, and the spending on research and excellence are examples. The government is aggressively attracting business to set up in New Zealand, for investors dont know the advantages unless they are told. (The potential size of physical infrastructure budget seems too horrendous to contemplate.)

There also seems to be interdependencies between the production processes of firms which the market prices do not signal. (Economists call them ‘externalities’.) They occur in technology and information, the labour market and physical infrastructure. Again we see the government trying to enhance these activities.

Now of course the government can overdo its interventions (as Muldoon did), although today’s desperate shortage of government spending limits that. Moreover – and let us be clear about this – many of the government initiatives will fail. For instance, most of the research budget will not, in the end, enhance economic growth. But some will, and their returns should more than pay for the failures. (We would of course prefer to avoid zero return research, but noone can tell which is which until the research is done.)

The government enhancing the production process is not new. Not in New Zealand, for that has happened throughout our history (with the 1985 to 1998 period the longest exception), and it happens everywhere else in the world too. It is not only a broadly correct strategy but a courageous one. The inept policies of the previous fifteen years mean it will take some time for New Zealand industry to get back onto a strong sustainable growth path. In the interim the government is expending precious political effort and scarce public dollars on investing in industry with, probably, little immediate return. The easy strategy would be to blow it all on what the public lobbyists are demanding, and which the public desperately wants. The government is judging the public wants the prospect of long run prosperity even more.

Writing the Nationbuilders

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

Presentation to the National Library Society: 13 June, 2001.

Keywords Political Economy & History

I thought it might be interesting to describe how The Nationbuilders came to be written. It is a useful exercise because books are linear and readers – beginning at the beginning and reading through to the end – may think that is the way each is written. Some books are, but many are not – including this one. Let me tell you how it was.

There is no single event which caused this book. The precipitating event may have been the Dictionary of New Zealand Biography’s invitation to do the entry on Bernard Ashwin. When I accepted, I knew little about him: he had been a Secretary of the Treasury (from 1939), and he appears in the mythology as the man who blocked the social security plans of the Labour Caucus in 1938. There is not a lot published about him. Fortunately his son, Barry, lent me some personal papers, including interviews by historians working on others’ biographies. That material, the minor parts in others’ writings, and some official papers tell us that Keith Sinclair was absolutely right when he said that Peter ‘Fraser ruled in very close consultation with [Fintan Patrick Walsh]. The other powers in the land were Walter Nash and Bernard Ashwin.’ Yes, Ashwin was one of the four most powerful men in the 1940s, and that power continued through until he retired in 1955. Arguably, he is the most important public servant of the mid-twentieth century, for not only was he involved in virtually every major government decision from 1932 to 1955, but he created the modern Treasury.

Having completed the DNZB entry, I turned to whether I could write a full biography on such a powerful, and personable New Zealander. I reluctantly concluded that I did not have enough material – a bit less that 20,000 words in all, and it may be the devil’s own job getting much more. Moreover, as Douglas Kennedy (The Times, 20 November 2000) recently said of biographies of writers: ‘of course it is always fascinating to read about [his] work habits and his familial influences, not to mention the social and political texture of the times in which he lived. But if his life was one of relative emotional stability, the biographer is going to have to struggle to maintain our general interest.’ In other words it’s the extracurricular activities largely irrelevant to the professional life which make a good biography, and if there are few, then there is not much of a book.

One way around this is to use the biography to tell a story of the times. That is the largely the approach of a number of biographies of New Zealand politicians. If we are going to get a fuller biography of Ashwin, it may be in Malcolm McKinnon’s history of the Treasury, where Ashwin will be embodied – almost anonymously – in the Treasury he created. That is probably what the public servant in him would want. Yet I had all this fascinating material on Ashwin. What to do with it? The answer came from another quarter.

In the 1960s it was taken as normal – at least among my generation – that New Zealanders sought nationhood, that we wanted our country to be a nation not a colony, to use Bill Sutch’s felicitous phrase. In truth we were not sure what nationhood meant, but like most (mild or radical) revolutionaries, we knew there had to be changes to accomplish the objective. Probably we had some notion of a country with its own economic, social, foreign policy and cultural independence and standing, which was not beholden to other nations, particularly Britain and the United States.

Yet extraordinarily, when the generation came to political power in 1984, the policies they pursued were colonial. They may be illustrated by a cultural cringe in economic thinking, whether it was importing mediocre overseas experts as advisers, selling off New Zealand government businesses to foreign companies, or removing assistance to New Zealand industries and leaving them to face the world by themselves. I had written much about post-1984 policymaking in earlier books, but they do not directly address the policymakers’ subservience to foreigners and foreign thinking.

Ashwin’s life pointed to a resolution to the paradox. While he was a conservative, he was also as much a nationalist of his times as was my generation of the 1960s. That led me to two fundamental insights. First, a commitment to nationhood was not a peculiarity of the political left but has been held by New Zealanders elsewhere in the political spectrum. Second, nationbuilding had been a program before the 1960s.

The Nationbuilders is an account of that program, written around a series of interlocking essays based on the biographies of people who met the DNZB criteria of significant and dead. The material I had on Ashwin ties together the mid-century nationbuilders, and in the second half of the book there are the postwar ones up to 1984. Originally I planned a dozen essays averaging 5000 words each – 60,000 words in all. The manuscript went to the publisher’s reader at 18 chapters totalling 80,000 words, and has gone to Simon at a fraction less than 100,000 words, with the publisher admonishing me not to exceed that number. So how did the book develop?

The core of the first half of the book is chapter two on Ashwin and it is surrounded by chapters on the men he worked with: Coates, Fraser, Fletcher, and Walsh. Three of the five already have major biographies, but in each case I have ‘added value’ by using new material from Ashwin and other sources, interrelating them, focusing more on their contributions to economic policy and thinking – which is often not well done in their political biographies – and often extending the interpretation of the men. In the case of Walsh and Ashwin, and indeed of nine of subjects in all, the book contains their longest available biographical studies (although in two cases there are autobiographies).

Thus, the chapter on Gordon Coates focuses on his time as Minister of Finance in the 1930s. The young Ashwin was one of his key advisers. Steering us through the Great Depression and providing the foundation for the economic boom which followed was probably Coates’s finest achievement. I know this is not the conventional wisdom – the book is not strong on conventional wisdom – and I suggest that Coates is our greatest Minister of Finance.

There has just been a major biography on Peter Fraser, but I add to it by paying attention to his economics, for Ashwin as Treasury Secretary was the key adviser. I make a couple of judgements of Fraser I have not seen elsewhere. First his success – indeed the success of every great politician in New Zealand – is he led from the progressive centre. That is, wherever they start politically – Fraser on the left, Coates on the right – the great politician leads the country by commanding the political centre, and moving it in a progressive direction – in the way the political economy is moving. My second conclusion comes from Fraser being surrounded by a galaxy of extraordinarily able people. Some are in the book. Others including Clarence Beeby, Bernard Freyberg, Alistair McIntosh and Nash – even Janet Fraser – could have been. The numbers may have been luck, but Fraser managed them superbly, even those who had one time been his enemies, such as Freyberg, Jack Lee, Arnold Nordmeyer, and Sutch. Of all his multitude of talents, human management perhaps contributed most to Fraser’s greatness.

James Fletcher was another Fraser incorporated into the governance both as a businessman and a public servant. The book goes past the times of Fletcher, right up to the present day, describing the life and death of the Fletcher’s companies he founded through to Fletcher Challenge. That includes Tasman Pulp and Paper, the original postwar ‘Think Big’, in which both Ashwin and the Fletchers played major parts. That story straddles their two chapters.

The fifth is Fintan Patrick Walsh, a man so mysterious that one is not even sure of the name to call him. Through him I tell the story of economic stabilisation during the war – his office was next to Ashwin’s, and not far from Fletcher’s – and also the story of the union movement. I was going to update the history of the union movement after his death in 1963, but there was not the space.

When I finished the initial draft on these men, the director of Auckland University Press, Elizabeth Caffin – who has seen the book in all its various stages – pointed out that I was so interested in the economics story, I had overlooked the social security one. So I went back and added housing into the Fletcher chapter – it is a sort of prewar Think Big. The social security story is in the Ashwin chapter. He was involved at each stage in its development between the Labour Caucus and the legislation. I completely changed my view of his role. When the proposal left the caucus it would have cost almost 15 percent of GDP, which would have busted the bank. Because of Ashwin’s persistence, the levels and entitlements were steadily trimmed back to a cost of 4 percent. He never liked social security, but his fiscal caution ensured the scheme was sustainable. Ashwin deserves to be remembered as one of founders of a viable scheme, rather than its obstructor.

I did not do much on education. It is very difficult to add value after Bill Renwick’s fine essay on Beeby and Fraser. To cover health policy I turned to Douglas Robb. He is best known as the doctor who established the world famous heart unit at Green Lane. But in the 1940s he was a thinker and advocate of the health reforms – the minister of health at the time, Nordmeyer, says he was – so I tell the health story in the Robb chapter. The chapter also introduces there the role of the outsider intellectual in New Zealand life, a theme which appears in later chapters.

That completes the six mid-century nationbuilders and their story. Before them I have a prologue which originally featured just Julius Vogel, perhaps the first ‘Think Bigger’. Writing that chapter taught me that Vogel was a nationbuilder in his own way for his times, reinforcing what I learned from Ashwin: each generation has had their own nationbuilding project. The publisher’s reader pointed out I had omitted Richard Seddon and Bill Massey as nationbuilders. Adding them I also included Harry Atkinson who, like Coates, battled through a depression and is thus much underrated, and John Ballance who is the foundation intellectual of the New Zealand left, more so than Pember Reeves.

At the centre of the book, linearly and structurally is Bill Sutch, for whom I had also been asked to contribute the entry in The Dictionary of New Zealand Biography. His attraction is he is both an activist and one of the most extensive writers about New Zealand, laying down ideas which will influence many generations to come. I had so much material I gave him two chapters, and he appears in just about every other. Sutch’s greatest achievement is not widely known, for it happened overseas. But for his initiative UNICEF would not exist today – the story is told in the book. One story I do not devote much space to is the security issue – only three paragraphs. I wrote a 1000 word appendix on the events surrounding the Sutch trial under the Official Secrets Act. I did not have much new material to add – it is a subject dominated by speculation rather than evidence. However both the publishing director and the publisher’s reader suggested dropping it, for it diverts from the main story. We get so obsessed with the security issue we ignore Sutch’s significant ideas.

I am very pleased with the text I added instead, because it enabled me to better trace Sutch’s later intellectual development. I show his ideas were not fixed, and in particular in the period when he was Secretary of Industries and Commerce his approach on New Zealand’s industrialisation developed. Sutch was thinking and writing about some very general – almost eternal – issues about New Zealand, but he was doing it in a current context. I often find myself wondering about what he would have thought about this or that subject, were he still living and were he my generation. Succeeding generations of New Zealanders may well do the same. I like to think Nationbuilders will assist them.

The book’s next nationbuilder is Norman Kirk. I have always been doubtful about his economics but he was an inspirational visionary for nationhood, tapping deep into the aquifers of our national psyche. And I was fascinated by how he resolved the tension of a small New Zealand economy trading in a large world, by promoting nationhood. You can trace Kirk’s economic vision back directly – and indirectly through Nordmeyer – to Sutch, and forward to the open economy wing of today’s Labour Party. But nobody has got the rhetoric – the public vision – as well as did big Norm.

The next chapter was Rob Muldoon. Some have objected because they said he was not a nationbuilder. It is simpleminded to say nationbuilding is good, Muldoon is bad, therefore he could not be one. In fact Muldoon was the last Vogelist – the last Think Bigger. Leaving aside his personal defects – and that is a big ask – Muldoon had the misfortune to be in charge of the economy during an exceptionally difficult period – like Atkinson and Coates. But unlike them and Fraser he was a conservative centrist rather than a progressive centrist, looking back rather than forward. That was his ultimate political failure.

There was no way I was going to finish the nationbuilders with Muldoon. The last is Henry Lang, who completes the pantheon in all sorts of ways. Ashwin was his mentor, and I talk about the Ashwin -Lang Treasury. Lang is an example of a civilised economist. The epitome of decency, he is the only Secretary of the Treasury I know of who advocated systematically increasing public spending relative to private spending, and he actively promoted the arts after his retirement. I was also glad to have one of the nationbuilders who was not of Anglo-Celtic origin, thus paying tribute to migrants from elsewhere, especially the middle-European Jews whose contributions far exceed their numbers.

Originally I wanted the Lang chapter to tell part of the economic story, but it couldnt. About the same time I concluded this, I learned my good friend and colleague Bryan Philpott had been diagnosed with a fatal brain tumour. I had talked a lot to him about the economics in the book and I so wanted to show him the various sections on the economic development. His death stopped that, and it is only a little consolation that he is the topic of a chapter between Kirk and Muldoon, which details the course of postwar economic development and the debate that went on.

After the Lang chapter there is the Epilogue describing how nationbuilding ended after 1984, focusing on why the new leadership regime adopted such a colonial mentality, lacking the confidence in New Zealand their predecessors had, and adopting foreign solutions even when they were manifestly inappropriate because they preferred to imitate rather than create. It is the least biographical chapter because it covers the views of hundreds of people rather than focusing on any single person.

The Epilogue explains that there was no Maori or woman among the selected nationbuilders, because the nationbuilding program the book describes did not incorporate them – or, for that matter, the environmentalists – into a program which was essentially a ‘white boys’ engineering thing’. When the rogernomes began their assault on nationbuilding key elements of those who could resist where not committed to the nationbuilding program they were asked to defend. I comment in the introduction, that if they are not included in the next round of nationbuilding, then it wont happen.

Now if I was not going to end the core of the Nationbuilders with Muldoon I was certainly not going to finish the book with the defeatism of the rogernomes. What to include in the envoy was problematic, because the new millennium nationbuilders are alive, and doing their thing. I did not want to comment on what they were doing, partly because a book is published in real time, so they would have moved on by the time it was read, and of course in the middle of a struggle everything looks confused, and half the strugglers seem to be facing the wrong way.

Sadly, one of them is no longer with us. I talked a lot about the politics and history of the book to Bruce Jesson: he always said how much he was looking forward to reading it. Alas he died before it was finished. His writings covering history and political analysis already appeared in about a third of the chapters, so it made sense to consolidate his views on nationhood in an Envoy, as he offers us the promise of the next round of nationbuilding – providing we can get most of the strugglers facing the right direction.

This then, was largely the book that went to the publisher’s reader. He liked it, although commenting it belonged to ‘no known academic genre’. Essentially the book is a history of the idea of ‘nationbuilding’, told in the context of the economic, political and public policy history from the early 1930s to the early 1980s, but told through biographical essays of some of the major participants. I do not know what genre that is either.

The reader was troubled by two chapters I have yet to mention. Initially the Denis Glover chapter was to be on literary nationalism, but it evolved into a discussion on New Zealanders’ relationship with Britain, particularly around his poem ‘Home Thoughts From Abroad’ – the bit about ‘what may yet be seen/ In Johnsonville and Geraldine.’ The reader thought this issue so important the chapter should be at the front. Now the structure of the book is roughly chronological, and on that basis Glover did not belong there. In fact the book is quite consciously structured, with the mid century nationbuilders balancing the postwar ones, in size number, and topic. So while I did not put Glover upfront, relocating his chapter meant I needed two further postwar chapters to maintain the book’s symmetries.

The first was easy enough. I had long wanted to include a business history in the book, because it was important to say that nationbuilding was not just about people and poetry, but also about production. So I added a chapter about New Zealand Steel. It’s a beaut story illustrating many of the themes of the book and, not surprisingly, Sutch, Kirk, Philpott, Muldoon, and the rogernomes are all involved. It also nicely balances Fletchers and Tasman from the mid-century nationbuilding front half.

The other chapter I needed for symmetry proved much more problematic. In the end it was resolved by a woman saying to me that ‘of course there was no women nationbuilders, they were too busy looking after their husbands and children.’ Wrong, wrong, wrong. Of course there were women nationbuilders, albeit with a different program. The trouble was the best examples were still very much alive at the time. Sadly Elsie Locke has since died. She would have been a great addition to the book, but it had been closed off a month earlier. I will write her a tribute for another venue.

Earlier, after much reflection, because it involved reversing a key principle when I set out to write the book, I added a chapter on Sonja Davies who is still alive. I am looking forward to her attending the book launch. Her chapter enables me to tell the story of how women were often marginalised by the nationbuilding program, and in addition there is a bit of the story of the peace movement, some of the story of the opposition to the rogernomes, and I update the story of the union movement after Walsh, such is the extraordinary life Sonja has thus far led. Elizabeth Caffin commented that this is the most personal of all the chapters. That is how it should be, because for a woman of Sonja’s or Elsie’s times the personal and the public are much more intricately linked than for men.

The other chapter the publisher’s reader was uneasy about was that on Colin McCahon, which was thought to not fit into the rest of the story. But Allen Curnow had written in 1945 that ‘strictly speaking New Zealand doesn’t exist yet, though some possible New Zealand glimmer in some poems and on some canvases. It remains to be created – should I say invented – by writers, musicians, architects, publishers; even a politician might help.’ McCahon invented, shaping New Zealanders’ view of their country. Moreover he was New Zealander who had faith in himself and not only influenced all of us but made it internationally. However when I began to rework the chapter, following the reader’s comments, something strange and beautiful happened.

Now while The Nationbuilders has a beginning to end linear structure, as all books must, together with a careful balanced internal structure, it also has the elements of an epic poem. I do not claim to be able write with the sensitivity to language of a good poet – I am just a working prose writer – riddled through the book are repeated images and motifs. If the chapters are the warps of the woven cloth of the book, these themes – the images and motifs – are the wefts. Not only do the nationbuilders keep reappearing in each other’s chapters, there are wefts from cameos appearances from others: James K. Baxter, Curnow, Bill Manhire, McIntosh, Nordmeyer, Bill Rowling. I could not keep Rex Fairburn out. But there are also ideas: the central role of the industrial assistance, the hollow society, the historic consensus, foreign policy development, cultural policy, the intellectual and so on. And there are the similarities of experience. Simon Cauchi asked me why I had included a minor part of Coates’ life. It is a weft which appears in other nationbuilders’ lives. An unexpected weft was religion. Almost all the nationbuilders were deeply influenced by a religious education, and while many left the church they kept to its practical precepts. I say of Sutch – but it is true for almost all serious New Zealand left wing political thought – that he owes more to Methodism than Marxism.

One of the most persistent images in the book – an exceptionally vigorous weft which I did not put there but kept pushing in – was Blake’s poem about ‘the building of Jerusalem in this our green and pleasant land.’ There is reference to the poem in the Prologue, and the chapters on Fraser, Philpott, and Jesson, and in McCahon, who did not just talk about the building. He did it, painting biblical scenes in New Zealand. I could write an entire lecture on the way that ‘Jerusalem’ is in The Nationbuilders.* Instead let me finish by reading a section from the chapter on McCahon. It is not representative of the book, which is about economic and public policy over the last seventy years, but I do argue that such development has to be seen in the context of the efforts of intellectuals such as McCahon – and Glover, Jesson, Philpott, Robb, and Sutch.

“From 1946, McCahon had begun to place biblical events in his New Zealand landscapes. Did he get the idea from William Blake? Possibly not, although he probably sang ‘Jerusalem’ at school. Sonja Davies and James K. Baxter did, albeit a little younger and going to other Dunedin schools. (Baxter refused to stand up in the cinema for ‘God Save the Queen.’ But in a room when the radio played ‘Jerusalem’, he would spring to attention, sometimes so choked with emotion that he could not sing the words.) McCahon was certainly aware of the painter/poet from his lifelong friendship with Blake devotee John Caselberg, which began in 1948, while about the same time Baxter was urging McCahon to look at Blake’s pictures.”

“Undoubtedly a major external prompting came from the classical tradition McCahon revered. Renaissance painters had no trouble placing Jesus in Italy. Why not New Zealand? If there was a New Zealand prompt, it may have been Charles Brasch who visited Palestine in the mid-1930s.”

“‘From Hebron to Damascus one might almost be in Central Otago, and the hills beyond, all the way to Antioch, have some quality of Central Otago hills, especially those between Cromwell and Wanaka. The strong light, clear air, the hot rich rocky bareness, were such as I knew and loved at home.’”

“Why not Central Otago as a background to the bible?”

The book’s cover is McCahon’s 1948 painting, The Promised Land. McCahon described the work in 1974 as ‘a dream painting of my life in Nelson – places I loved, me my hut and water and light and below Farewell Spit, the end and the beginning of it all.’

However the inset in the foreground of the work is sufficiently generic so while it may be looking along the curved sands of Golden Bay and Tasman Bay to the mountains and Spit, it could be, say, looking from Canterbury’s Port Hills, from the top of the Bridle Track across Pegasus Bay to the mountains beyond. It is a mythical view in Canterbury, for it is there were the settlers from the first four ships (the so-called ‘the Canterbury Pilgrims’) are said to have first seen the Canterbury Plains in 1851. Recall a verse from the original version of Denis Glover’s ‘Home Thoughts’ written over a decade earlier.

I think, too, of the bridle-track
Where first they saw the plains curve back
To alps, of how that little band
Of pilgrims viewed their Promised Land.

The nationbuilders tried to turn that promise into a reality. The book tells their story, and I hope in a small way encourages us, their successors, to do the same.

* See Singing ‘Jerusalem’ in New Zealand

A Surplus Of Imitation

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

Listener 9 June 2001

Keywords History of Ideas, Methodology & Philosophy; Macroeconomics & Money

Every country has its own deeply held and specific cultures, arising from the particularities of its history and geography. Economics is prone to overlook this proposition because it aims to provide a ‘scientific’ theory of economic behaviour which is culture independent. A nice example of the resulting difficulties will be found in US economist Todd Buchholz’s New Ideas from Dead Economists. One chapter is devoted to ‘The Public Choice School: Politics as Business’, centred on the work of Nobel economic prize-winner James Buchanan, who like Buchholz lives in the Washington conurbation near the centre of the US government. The theory was very influential in New Zealand’s public sector reforms from the late 1980s.

Buchholz considers its relationship with Keynes’ policy prescriptions, puzzling why such a great mind overlooked the ‘obvious’ insights on which public choice theory is based. The reader soon becomes aware that Keynes is assuming a quite different system of public administration with a different underlying culture. Washington is not London. The theory presented by Buchanan and his followers is culture specific not universal. Yet our public sector reforms were based on US assumptions, ignoring our British public service cultural inheritance. If we persist with the US approach, we will drive out the notion of ‘public service’ out of our public service, with a continuing loss of efficiency and effectiveness.

But before then, we may have wrecked the economy by slavish imitation of a different economy. Again it is the US one, whose particularity is well illustrated by a famous, albeit joking, motion proposed at an US economic conference in the 1950s: ‘since monetary policy is slow to react on the economy while fiscal policy is quick to react, and since the Fed (the US Reserve Bank) can act quickly but Congress (parliament) acts slowly, then the Fed should be put in charge of fiscal policy and Congress in charge of monetary policy.

It is, of course, the other way around. Every month or so the Fed, led by Alan Greenspan, changes interest rates if it is judged necessary. Meanwhile President Bush struggles with Congress to change tax levels. The Governor of our Reserve Bank can act as quickly as Greenspan (although he has less room to manouevre because we are such a small economy). But our parliament can change tax rates quickly if it wants. (For instance, the incoming Labour-Alliance Government raised income taxes within months of taking office.)

As the US slides into recession (one hopes it wont be something worse) their policy debate is how to use interest rates to slow the decline. That is because they cannot quickly change their tax and spending levels, so their use is irrelevant to the current crisis. This biases the economics debate away from fiscal policy. If we listen only to the US debate, without the realisation of its culture specificity, we will not use our fiscal options effectively – options which the US does not have. (If while driving, the brake cable on your foot-pedal snaps, use the handbrake and gears. But dont tell everyone with an effective foot-brake to ignore it.)

To put this in a context with may be only months away. This column has regularly advocated fiscal conservatism. Too expansionary government expenditure puts pressure on the balance of payments which kills long run economic growth, and it adds to the inflationary pressures. Moreover the column readily acknowledges that if real interest rates are high, then a persistent government deficit is unsustainable (because debt servicing will explode). Even so, there is no law of economics which says the government should always run a budget surplus. Sometimes it may be necessary to run a deficit for a few years, especially if the world recession is prolonged. (Glory be, that our low government debt ratio makes this strategy much easier than, say, Japan.) We need to discuss this possibility now so as to have answers to such questions as: when to run a deficit? What is a prudently sustainable level? How much through lower taxes? How much through higher spending? What should any higher spending be on? (For instance what priority should be given to physical and social infrastructure?) We are not going to get answers from US economists (although some of their work provides insights). We are going to have to think for ourselves.

Suppose New Zealand had a gun problem. We could invite US experts to tell us what to do. They would come from an environment where their Congress – and Constitution – has ruled out effective gun control laws. The expert advice would be biased towards better architecture which would make it more difficult to shoot people, training people what to do in the presence of gun toters, teaching peaceful folk how to use a gun in emergencies …

But we dont have the US Constitution and we have an effective parliamentary system, so we can implement effective statutes, run a proper registration system, enforced by an efficient police force, without having to introduce a myriad of ineffective second and third best policies. Why not do the same for economic management?

Pain and Health Economics

This entry was posted in Health on by .

Paper to the 2001 Conference of the New Zealand Pain Society, June 8, 2001, published in New Zealand Pain Society Journal, Issue 3, September 2001, p.13-16.

Keywords: Health;

The initial concern when health economics first began as a part of the economics discipline – about 40 years ago – was ‘productive efficiency’, the extent to which the costs of any particular treatment could be reduced, thus focussing on the relative merits of different treatments of the same medical condition. However economists soon faced the necessity to compare the resource consequences of different medical conditions – ‘allocative efficiency’. The problem arises because ‘health’ is not a simply defined concept with a single index of performance – unlike material production which is measured by GDP – so comparisons between health outcomes are deeply problematic. (There is no policy problem here if health care is delivered entirely by the market mechanism of private payment, for the market implicitly resolves the difficulty by the sick’s payments on the basis of their perception and their ability to pay. But there is no country in the world where this applies.) Any comparison of the health status of two persons also involves deep philosophical issues, which practical economists may avoid, but which still lurk under their pragmatic solutions.

Initially, economists used as a measure of medical performance the avoidance of death and in some areas – road design for instance – that remains the measure today. But even here there is the problem of the resulting length of life – a treatment which extends life for a couple of decades has to be considered of greater merit than one which extends it for a couple of years. So economist’s attention shifted to the notion of ‘life years’ saved rather than ‘lives saved’, although they have been handicapped because often the average number of life years saved by a treatment has not been scientifically measured. (Moreover we cannot avoid comparing people. For instance surveys suggest that adding five years to the life of a eight year old is valued by the public more highly than adding five years to an eighty year old’s life.)

The logic takes us to considering the quality of life, since two treatments may lead to different sorts of lives – say whether one is in a wheelchair, or whether one remains fully ambulant. So in principle we need to compare the quality of life years – that is the number of years a person lives, adjusted by the quality of the life they live. This notion of QALYs may be simple enough but their measurement is complicated. Moreover there is a sense there is no objective people-independent scientific measurement of a quality life year. We have to ask people how to value them – it is a social valuation which is relevant, given society is going to provide the public funding.

As a final stage in this quick history of some key underlying concepts of health economics, note that much medical treatment today is not intended to save lives, but to improve the quality of life of the living. In such cases mortality measures are totally irrelevant and morbidity becomes paramount. For instance, multiple sclerosis does not, so I am told, shorten life expectation but – especially in its later stages – individuals are seriously handicapped, and the medical profession quite rightly tries to minimise their discomfort and to delay the onset of the later stages.

I have reflected on how economists were pushed from productive efficiency to allocative efficiency and thence from deaths prevented to quality life years improved, as a background to the issue of pain. In a very obvious sense pain reduces the quality of life, so the health economist is interested in the value of preventing or ameliorating that diminution. The practical implication is that if the absence of reduction of pain is valued highly, then there may be a case for public funding of effective treatments. That does not automatically follow, because the cost of treatment has to be taken into consideration. Nevertheless that society significantly values pain reduction is a necessary first step towards such a policy conclusion.

Recently economists have been trying to measure the incidence of pain in society, and the degree it is socially valued. A just published New Zealand study gives some indication of the incidence.[1]

Percentages with Moderate Or Extreme Problems: (Self Assessed)

Age
Group		 Usual
Activity		 Mobility Self
Care		 Anxiety/
Depression		 Pain/
Discomfort
18-29 9.1 4.9 1.2 15.9 21.3
20-39 10.7 9.9 1.3 19.4 26.3
40-49 13.7 9.5 1.5 20.5 31.8
50-59 19.9 18.7 5.6 19.3 45.3
60-69 30.4 27.4 6.3 25.9 54.6
70+ 48.2 50.0 11.3 26.6 62.6
All
Adults		 18.2 15.9 3.5 20.2 35.4

That these problems tend to rise with age will not surprise anyone. Perhaps more astonishing is the relative incidence. About a third of adults report they have moderate or severe pain and discomfort, although only about a twentieth of the group say they are in extreme pain.[2] The survey suggests pain and discomfort is the most widely reported of all the problems. This is consistent with an overseas study which found that 30.2 percent of British and 30.7 percent of Dutch respondents to a survey said they suffered pain and discomfort, and these sufferers were the largest group compared to the other problem dimensions.[3] Of course, ‘moderate’ and ‘extreme’ are self categorisations, but the survey suggests that perhaps 25,000 to 50,000 New Zealanders consider themselves in extreme pain.[4]

This finding matters most if we value the absence of pain and discomfort significantly. New Zealand health economists have not yet done any scientific studies which enable us to judge that. However Alan Williams, the British economist who has pioneered the approach which this paper has been presenting, has recently sent me some estimates for the British population. I am anxious that we do not jump to conclusions, for the data requires some delicacy in its interpretation, not to mention there may be national differences – but the William’s data suggests that British public values the absence of pain more than absences in the other four problem areas, adjusting for comparability of levels. Interestingly there is a very substantial loading for extreme pain, an estimate not too different from (96 percent of) that for unconsciousness.

So what we know is that pain is a widespread problem in New Zealand – especially among the elderly, and that probably as a society we value its absence highly. It does not directly follow from that we should put a massive effort into treating, because that also depends upon the costs and effectiveness of the treatments. To quote a study I was involved in, multiple sclerosis is a distressing disease, the cost of some treatments relative to the effectiveness meant that the public health system has been very cautious at providing subsidised treatments. That says nothing about the compassion that the decision-makers have for the sufferers. Rather it reflects the nation’s willingness to fund adequately the health system. Insofar as the funding is insufficient then there will be effective treatments which will not be available from the public system, although those with sufficient funds will have access to them by private payment.[5] Until we can say something about the cost of treatment relative to the reduction in pain, an economists is unable to make any recommendation about the degree to which treatment should be publicly funded. In any case the immediate issue may be improving the treatment rather than funding it.

But to finish on a personal note. Except in the area of hospice care, I knew little of the issue of pain ands its management and treatment when I was invited to speak to you. I still know little, but the little I have learned in preparing this paper tells me that we have real problem in our society, and we are probably giving it insufficient attention. The collective ‘we’ applies both to me as a citizen and to me as a health economist.

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References
1. N. Devlin, P. Hansen & P. Herbison, ‘Variations in Self Reported Health Status: Results from a New Zealand Survey.’ New Zealand Medical Journal 8 December 2000.
2. The totals are not those of the original paper, which based on the sample. These figures are reweighted by the true population proportions.
3. P. Kind ‘The EuroQol Instrument: An Index of Health-related Quality of Life’ in B. Spiker Quality of life and PharmoEconomics in Clinical Trials, 2ed, Lippincott-Raven Publishers, Philadelphia 1996. The New Zealand proportions are higher – and in the case of ‘mobility’ substantially higher – than those reported in this studied.
4. Because of sampling coverage, the results may be biased towards over representation of those with health problems.
5. See B. H. Easton Desperate for Funds, Listener, November 6, 1999, for further details. The government has since adopted the policy conclusion of public provision of the treatment for a well group targeted of patients.

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The Public Use Of ‘ethnicity’ Statistics

This entry was posted in Maori, Social Policy, Statistics on by .

This squib was published in Letters to the Editor, The Dominion, on the 26 May, 2001.  I discovered it recalled in a report, A Question of Ethnicity – One Word, Different People, Many Perceptions: the Perspectives of Groups Other Than Mäori, Pacific Peoples and New Zealand Europeans, a prepared for the Statistics New Zealand Review of the Measurement of Ethnicity in Official Statistics by Ute Walker of the New Zealand Federation of Ethnic Councils Inc (November 2001) It is placed here, for the record, and because I care about these issues very greatly.
 

Keywords: Maori; Social Policy; Statistics;
 

Sir,
 

Your tabulation of child victims of homicide (May 16) has columns recording the ‘ethnicity’ of the victim and the offender. Some are classified ‘Caucasian’. That is a race, not an ethnicity. I take it that ‘Mäori’ is a race or descent classification, too. Are those for whom, say seven of their eight grand-grandparents are Caucasian classified as Mäori?
 

How does the classification treat those with Mäori and Samoan great-grandparents? If the notion of ethnicity is the standard one (say, as used in the census) of self-classification, why is no one Reported of mixed ethnicity?
 

These classification issues are troubling enough to social statisticians. They are potentially inflammatory in public. It would be helpful if the police, who supplied the table, were to state what their policies are on the subject of ethnicity classification.
 

Brian Easton

Locked Out: Of Free Press and Free Economics

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

Listener 26 May 2001

Keywords Political Economy & History

In front of me as I write this, is a 1990 circular to journalists by a media chief, who reports being approached by a public relations consultant complaining that too much space was being given to opponents of rogernomics (the euphemism is ‘continue to use the same small group of commentators’), and suggesting that other economists should be used. Attached was the consultant’s suggestions. The circular does not mention which interests the lobbyist represented, nor that a goodly number of those proposed were employees or advisors to the consultant’s clients.

I also have a letter from another media chief explaining why, about the same time, certain opponents of rogernomics were banned from their media outlet. (The concern was they were too vocal and represented only one side of the argument.) Shortly after, a number of journalists told me they were subject to various pressures not to use critics of the government’s policies. (Some, bless them – including this magazine’s – ignored the pressures, or found ways to get round any ban.)

One consequence of this limiting of public debate was the public was misled. Journalist Karl du Fresne wrote in a 1998 Evening Post column that the New Zealand economy was ‘stuffed’, and that ‘too many ordinary New Zealanders are still waiting for the dividend promised by Rogernomics. Those, like me, who gave the economic reform process the benefit of the doubt are taken to the reluctant and unhappy conclusion we have been taken for a ride.’ But who took them for a ride? Those who argued the case for the rogernomes? Those who lobbied on their behalf to silence the alternative view? The media chiefs and journalists who caved in?

There was an even more insidious consequence for the economy. The development of quality economic policy requires open public debate. By closing off a part, the professional debate became distorted, particularly by the suppression of analyses which subsequently proved correct. (Of course, journalists could not know who would be right. Which is one of the reasons they should report the professional debate in its entirety, rather than censoring it in response to political pressures.) Even today, with – to quote du Fresne in a later article – ‘the New Right revolution hav[ing] become thoroughly discredited’, Rogernomic analysis continues to influence public policy out of proportion to its intellectual or empirical strength, while the government continues to appoint Rogernomes because there are no alternatives available. Alternative views were suppressed in the public service, while the dissenters missed contracts, and younger economists had reduced opportunities to hear them or their alternative analyses. In the universities, academics were misled as to the policy relevance of the new ideas and promoted the pro-Rogernomes to the more senior positions where they are still influential.

The result is the level of economic analysis in New Zealand is stunted, and ideas which are a part of the normal overseas discourse are hardly ever discussed here, so policy is often misdirected. The claim of the Rogernomes that they won the policy debates because of the strength of their analysis is simply absurd, given they were at the same time actively encouraging the media to suppress those who pointed out the weakness in the Rogernomic arguments.

Today some journalists continue to rely on economic commentators who regularly got things wrong in the past (presumably on the basis that some time in the future they must get things right). More worryingly they present as ‘independent’, commentators who have a financial relationship with those who will benefit from their advocacy (employees, funding recipients, consultant advisers), although such linkages are often not mentioned. I would regret greatly were those contributions to be suppressed, but the not-so-informed reader is entitled to be told of any connections.

I do not know whether the various directions by the media chiefs remain in force. Maybe some journalists who participated in the past are too embarrassed today to approach the independent commentators who were banned. And younger journalists may not know who are the alternative commentators. Readers, viewers, and listeners deserve better. So does economic policy.

Estimating the Economic Costs Of Alcohol Misuse:

This entry was posted in Health on by .

Why We Should Do it Even Though We Shouldn’t Pay Too Much Attention to the Bottom-line Results

Paper presented at the annual meeting of the Kettil Bruun Society for Social and Epidemiological Research on Alcohol, Toronto, May 2001 by ERIC SINGLE and BRIAN EASTON.[1]

Keywords: Health Economics

Abstract

A coalition of provincial, national and international addictions agencies has sponsored a series of international symposia leading to the developing of international guidelines for estimating the costs of substance abuse. These guidelines have now been utilized in national studies in four continents, with more consistent and comparable results than in previous studies. Although the bottom-line results have been utilized to argue for alcohol issues having a higher place on the public policy agenda, the real value in such studies lies in the detailed results regarding mortality and morbidity attributable to alcohol, the relative contribution of acute vs. chronic conditions to overall problem levels, and the role of alcohol in adverse social consequences such as crime and economic productivity. Recent updated estimates are presented regarding the attributable proportion of various causes of disease and death due to alcohol misuse in Canada. There are a variety of factors which undermine the robustness of the findings, including lack of data, laying of assumptions and changes in the epidemiological knowledge base. It is argued that economic cost estimates should nonetheless be conducted and continually refined, as the detailed findings are of great utility to the design and targeting of prevention programming and policy.

Introduction

The costs of alcohol misuse represent an issue of key interest to stakeholders, policy makers and the media. Knowledge of the costs associated with the problems caused by alcohol informs decisions related to funding and to interventions to prevent or reduce adverse consequences. The purpose of this paper is to briefly describe current efforts to improve the methodology of cost estimation and discuss the many problems to be overcome to achieve more robust and comparable results.

Our major thesis is that while there are indeed many difficulties regarding the “bottom-line” estimates of total economic costs attributable to alcohol use, economic cost studies are nonetheless worthwhile research exercises that should be undertaken. As detailed below, there are indeed problems regarding cost estimates. But these are the problems of all most any aggregate statistical index including such widely used ones as a mortality rate or Gross Domestic Product. That we have called them an ‘index’ marks the issue. They combine literally millions of unique and idiosyncratic activities into a single measure, which has the property that in some sense the numbers rank the size of the phenomenon. Higher mortality rates imply relatively more deaths, higher GDP imply relatively more production. The implication is not simply because of the index construction, but because underlying the construction is a theory, which describes how the index can be constructed. The construction may not be perfect, and the theory itself often warns of the limits of interpretation. But if we understand these limitations, we not only understand the weaknesses of the indices. For all their failings, what serious demographer would abandon mortality rates, what serious economist would throw out GDP?

The same applies to the estimates of the social costs of alcohol and drug abuse. It is a single index that combines myriads of individual actions. Without it we are forced back to anecdotes, which may be misleading. As harsh as may be the experience of alcohol dependent persons and the communities in which they live, the implication of the measures of social costs of alcohol abuse is that, in the aggregate, alcohol abuse is an even more serious problem than suggested by these experiences. The cost estimates sum up all the individual anecdotes and provide a framework for comparing the aggregate societal impact of alcohol versus other psychoactive substances. While the problems experienced by narcotic users may be more severe in comparison to those experienced by the average person who experiences a problem due to his or her drinking, in total there are many more of the latter.

Alternatively we may use a less complex index, which again may be somewhat misleading. For example, examination of estimates of mortality attributable to substance abuse indicate that there are many more deaths from tobacco use than alcohol misuse, suggesting that tobacco is a far more serious problem than alcohol. But gross death rates ignore that alcohol-induced deaths typically occur at a much younger age than tobacco-induced deaths, and in terms of total years of life lost as a result of the abuse the two sources are much more similar. It also turns out the material losses from alcohol due to accidents and policy costs for the enforcement of alcohol laws are markedly higher than tobacco in most of the countries for which there have been analyses. Thus mortality rates are a useful indicator of the severity of particular forms of substance abuse, but economic cost estimates provide a more complete index.

The theory underpinning the social costs methodology is a well proven one, arising out of the neoclassical revolution of the end of the nineteenth century, and based on developments which began in the middle of the twentieth century in the measurement of GDP and the application of cost benefit analysis. Thus, the theory is the one that is probably used by the government economic advisers in most Western type democracies in virtually every practical public spending decision, as well as many other policy decisions. Cost estimates are in principle useful for public policy purposes, although there are practical limitations at its present state of development – limitations from data inadequacies and limitations because of theoretical problems arising from the applications of the theory. These limitations must be identified if we are to remedy them. It is these limitations that this paper addresses.

1. Estimating the costs of substance misuse: background

Studies that estimate the costs of substance abuse are still uncommon and relatively few countries have attempted to estimate these costs. In the past, estimates of the costs of substance abuse have often been fraught with methodological difficulties resulting in widely varying estimates.

In May 1994 the Canadian Centre on Substance Abuse (CCSA) organized an international symposium in Banff, Canada, to discuss the issues involved in estimating the social and economic costs of substance abuse, and to seek a consensus on the most appropriate model. The purpose of the meeting was to explore the feasibility of establishing an internationally acceptable common methodology for estimating the costs of drugs. The symposium in Banff brought together persons with experience and expertise in dealing with the issues of costs estimation. A working group was formed to explore the potential for developing guidelines on estimating the economic costs of substance abuse, consisting of myself, David Collins, Brian Easton, Rick Harwood, Helen Lapsley and Alan Maynard. These guidelines were drafted and finalized at a second International Symposium held in Montebello, Quebec, in 1996 (Single, Collins et al., 1996). In June 2000, the Third International Symposium on Estimating the Social and Economic Costs of Substance Abuse was held in Banff. This meeting focused on ongoing methodological issues and the expansion of cost estimation methods to developing economies. The guidelines are currently being revised and expanded to reflect the outcome of this meeting.

Studies have been carried out in Australia (Collins and Lapsley, 1995), Canada (Single et al., 1998) and the US (Harwood et al., 1999) utilizing these guidelines. Although the Canadian and American studies use a human capital approach to measure indirect productivity costs while the Australian studies uses a demographic approach, all of these studies use the Cost-of-Illness (COI) approach advocated in the guidelines.

Time does not permit a detailed comparison, but it is noteworthy that the results of all three studies show substantial material impacts resulting from alcohol misuse. In each case the largest cost is indirect productivity losses followed by health care costs and law enforcement costs. There appears to be some convergence in the results over time, with more comparable per capita costs between societies, possibly reflecting to some extent the agreement to use comparable methodology. The major divergency in results regarding alcohol costs is the higher per capita costs of alcohol in the US study compared with that of the Canadian study. However, it appears that most of the higher per capita estimates in the US study are not due to the costing methods but rather due to differences in the methods used to estimate alcohol-attributed morbidity and mortality

2. Sources of error in the bottom-line economic cost estimates

There are many reasons why one might choose not to give much attention to the bottom-line estimates of the overall economic costs attributable to alcohol in these studies. First, although the cost study symposia and the development of international guidelines have done much to increase comparability of results, there remains a lack of consensus regarding the appropriate methodology to employ in conducting cost estimation studies. The more commonly used Cost-of-Illness approach has been criticized for including indirect costs such as productivity costs, and some prefer the more conservative “externality” approach championed by US economist Willard Manning. Even among those who employ a COI approach, there are differences regarding the valuation of premature mortality caused by alcohol misuse. While most studies continue to use the human capital approach (which uses foregone income to estimate foregone productivity), Collins and Lapsely have developed an alternative “demographic” approach and several studies use new “willingness-to-pay” techniques (e.g., tobacco costs have been estimated in this fashion by Brian Easton in New Zealand and Claude Jeanrenaud in Switzerland). Exactly how to include the ‘human’ dimension is still a matter of discussion. Most studies recognize that there is a loss of actual or potential output as a result of morbidity and mortality. This can be measured by either the human capital approach (used in the US and Canadian cost studies) or the demographic approach (used in the Australian studies), which reflect different ways of dealing with the time element. However there is survey evidence from the willingness to pay studies, which supports the philosophical stance that we value life above that of the lost of production (so that the retired are considered of social value even though they are not producing). How to incorporate this into the social cost study is not fully agreed. However it is totally agreed that if there is an allowance for the value of life above that of the loss of output, then it is quite wrong to compare the full social cost estimate with that of GDP since the latter only applies output.

Second, data are invariably lacking on cost items in almost all cost studies. This is particularly true for developing economies which often lack reliable reporting systems. Even in developed economies, there is sparse information on many cost elements. The proportion of crime attributable to alcohol is highly contentious. There is a lack of data on the costs of specific alcohol-related productivity problems such as absenteeism, job turnover, lower on-the-job productivity due to alcohol use, alcohol-attributable disability and so forth. In some countries, estimates of alcohol consumption do not exist for the year under investigation, and must be estimated by interpolating the prevalence from other years. It is frequently difficult to determine from government budgets what proportion of policy costs (prevention, research and law enforcement costs) that can be attributed to alcohol. In the absence of complete data, decisions have to be made because to ignore a cost is in effect to count the cost as zero, which is generally more erroneous than making a decision on the basis of incomplete information.

Third, even when relatively complete data are available, the prevailing methods for estimating economic costs attributable to alcohol use involve a layering of multiple assumptions. For example, estimates of alcohol-attributable morbidity and mortality are required to underpin estimates of productivity costs and costs to the health care system. The morbidity and mortality estimates are made by combining information on (a) the relative risk of consuming alcohol at different levels to various causes of disease and death from meta-analyses of the epidemiological literature with (b) prevalence data on the number of persons consuming alcohol at levels associated with a higher relative risk in order to generate (c) etiologic fractions of the proportion of all such causes of disease and death that can be causally ascribed to alcohol use. These etiologic fractions are then applied to the reported number of hospitalizations and deaths by cause to estimate morbidity and mortality attributable to alcohol use. This procedure must necessarily make the following assumptions:

It is assumed that all alcohol-related causes are included. This may not always be the case, depending on many factors. Even the best meta-analysis of alcohol-related health consequences (English et al., 1995) failed to consider excessive cold, probably because it is virtually unknown in Australia. In the Canadian territories, however, freezing to death accounts for 20% of overall morality and it is frequently attributable to alcohol misuse.

Some causes involve both alcohol and other causes (e.g., drug interactions, injuries stemming from fires involving both smoking and alcohol intoxication) and arbitrary decisions must be made concerning the division of attribution.

It may be assumed that relative risk estimates from studies in one country can be used to estimate relative risk in another, when there are no local data for that country.

It is assumed that confounders are adequately controlled for in the studies used to estimate relative risk.

It is assumed that age and gender are adequately controlled for in estimating relative risk.

In most cases (but not in the Canadian study), the estimates of relative risk are derived from both morbidity and mortality studies, thus assuming that the risk of morbidity is equivalent to the risk of mortality.

It is assumed that the reported number of hospitalizations and deaths is accurately counted and complete, and that the cause is accurately recorded. We know, for example, that some disorders only recently described in the medical literature (such as fetal alcohol syndrome) are not being reliably recorded yet.

Even when one has reasonably accurate estimates of alcohol-attributable deaths and hospitalizations, there are yet other assumptions involved in arriving at estimates of health care costs. In most studies, a per diem cost is used to estimate hospitalization costs on the assumption that costs for alcohol-related conditions are similar to other conditions. Depending on the cost study, there is also often a need to use cost estimates from a particular region to make national estimates. Thus, for example, in the Canadian study we had very good estimates for some health care costs such as prescription drugs for some provinces that were then applied on a per case basis to other provinces.

The estimation of productivity costs also entails considerable assumptions. There is remarkably little information regarding specific negative consequences of alcohol use in the workplace such as the extent of tardiness, absenteeism, employee turnover and lower on-site productivity due to impairment. Sometimes the cost estimation studies must assume that these productivity costs can be estimated by considering the lower wages of alcohol dependent persons. This is at best a crude approximation of productivity costs and rests on the assumption that wages are a true reflection of productivity. Furthermore, the choice of discount rate–the rate at which future earnings are “discounted” or converted into current dollars–can have a very large impact on the total cost estimates (Single et al., 1998).[2]

Even law enforcement and criminal justice costs, which derive mainly from government budgetary data, are subject to certain assumptions. For example, police costs due to alcohol misuse are typically estimated by examining the proportion of offences (violations that are officially drawn to the attention of the police) that are due to alcohol and multiplying this percentage by total police costs. Court and corrections are similarly estimated in terms of percentage of total charges or jail sentences. This assumes that the amount of police, court and corrections time and resources spent on alcohol offences is the same as for other offences.[3] Thus, as with other types of costs, the estimation of criminal justice costs involves considerable assumptions.[4]

The fourth major reason for caution in interpreting the bottom-line cost estimates concerns changes in the epidemiological database and what we know about the effects of alcohol use. There are constant improvements in diagnostic practices. As noted above, the best method currently available for estimating alcohol-attributable morbidity and mortality relies on reliable diagnoses of alcohol-related causes of death and hospitalization. Conditions such as fetal alcohol syndrome have only recently been described and accepted in the medical literature, and such conditions will likely be underreported for some time. More importantly, new research is continually emerging concerning the link between alcohol use and various causes of disease and death. Ten years ago, there was insufficient data to conclude that there is a causal connection between alcohol use and breast cancer. Now the evidence is compelling. Although alcohol accounts for less than 3% of breast cancer fatalities in Canada, it is such a big killer that it represents the third leading cause of alcohol-attributable death among women (Single et al., 2000). A study conducted just one decade earlier would likely have not even included breast cancer in the cost calculations.

3. Why do cost studies if the results are so uncertain?

Thus, even with improvements in methods for estimating alcohol-related mortality, morbidity and economic costs, there are still significant sources of error in the bottom-line estimates of total economic costs caused by alcohol misuse–errors arising from incomplete data, layering of assumptions and changes in the epidemiological data base. Given these uncertainties, why do cost estimation studies at all?

There are several responses to this question. The first answer is that doing the exercises exposes data deficiencies, and forces us to improve the statistical base and our understanding of the processes involved. Economic cost studies help to identify information gaps, research needs and desirable refinements to national statistical reporting systems. There is no better way to lay out a national research agenda that to conduct a cost estimation study. Cost studies are an excellent device for the identification of data development and research needs. For example, the Canadian cost study identified a strong need for improved estimation of the proportion of crime that can be attributed to alcohol and drug misuse and spawned a study on this topic currently being undertaken by Kai Pernanen and Serge Brochu.

The second concerns quality control. Policy makers need and use cost estimates, explicitly or implicitly, in set priorities among competing concerns. Despite all of the uncertainties involved, economic cost estimates are frequently used to argue that policies on alcohol and other psychoactive substances should be given a high priority on the public policy agenda. The public is entitled to a quality standard against which individual cost estimation studies can be assessed. Without such a standard there will be a tendency by the advocates for each social problem to overbid, adding in additional items to make their concern a suitably high (even exaggerated) number.

Third, cost estimates help to appropriately target specific problems and policies. It is important to know which aspects of alcohol misuse involve the greatest economic costs, what specific problems are most likely to occur and in what demographic or geographic groups. The nature and magnitude of costs draw our attention to specific areas which need public attention, or where specific measures may be effective. For example, Table 1 presents the relative risks and etiological fractions for alcohol-attributable causes of disease and death in Canada in 1992, while Table 2 presents updated estimates of alcohol-attributed hospitalizations and deaths for 1995 in Canada. The information on relative risk and the proportion of cases for each cause that is attributable to alcohol is of considerable interest in and of itself. It is important for clinicians and for prevention programming to know the proportion different types of cancer or the proportion of accidents that are caused by alcohol use. It is noteworthy that acute causes account for nearly one half of the total estimated alcohol-attributed mortality and approximately two third of years of life lost. The relative importance of acute consequences has significant implications to alcohol policy and prevention programming.

Table 1: Relative Risks and Etiologic Fractions For Conditions Partially Attributable to Alcohol, Tobacco and Illicit Drug Use, by Cause & Gender, Canada, 1992 Table Available from either author

Table 2: Deaths, potential years of life lost and hospitalizations due to alcohol, tobacco and illicit drugs by cause and gender, Canada, 1995 Table Available from either author

Last but not least, the development of improved estimates of the costs of substance abuse offers the potential, although generally not yet realised, to provide baselines measures for more sophisticated economic analyses to determine which policies and programmes are the most effective in reducing the harm associated with alcohol and other drug use. For instance, the costs studies in some countries are raising the significance of the interaction between alcohol and crime and leading to greater policy attention to this nexus. Ultimately, cost estimates could be used to construct social cost functions for optimal tax policy and national target setting.

The concept of Gross Domestic Product (GDP) was subject to much the same sources of error and criticisms that economic cost estimates currently face. Despite similar issues of lack of complete data and layering of assumptions, the estimation of GDP has been continually refined and improved, and it has become one of the most useful tools for economic analysis and policy development. Through international cooperation and the development of an on-going process to continually update and refine the methodology, economic cost studies will similarly become more reliable over time, and perhaps even become an important cornerstone for comparative analyses of alcohol policy and interventions much as GDP is today.

Conclusion

In conclusion, bottom-line economic cost estimates are not the sole consideration in the determination of political priorities, nor should they be. There are a host of other considerations that policy makers and others involved in policy development must necessarily consider. But economic cost studies provide an extremely useful framework for identifying key leverage points in policy development and for the development of priorities in research as well as for treatment, prevention and other interventions. The cost estimation symposia and international guidelines have done much to reduce differences in economic modeling and enhance the comparability of results of cost estimation studies in different countries. Most of the remaining sources of error in cost studies reflect data deficiencies that research must necessarily address if we are to achieve more effective interventions and outcomes. Despite the many sources of error in current cost estimates, we believe that it is indeed a valuable research exercise to estimate the costs of alcohol misuse and continually improve upon the methodology for conducting such studies. And ultimately, if we do not do these cost studies well, others will do them badly, compounding the sorts of problems we have described here, while failing to provide the sort of benefits that good studies can do, and so simply adding to the confusion in a field which is already very difficult.

References:
Collins D. & H. Lapsley (1995) Estimating the Economic Costs of Drug Abuse in Australia. Canberra: Australian Publishing Services.
Harwood, H et al (1999) The Economic Costs of Alcohol and Drug Abuse in the United States-1992, Washington: National Institute on Drug Abuse (available on their website: www.nida.nih.gov/EconomicCosts)
English D, D. Holman, E. Milne E, M. Winter, G. Hulse, G. Codde, G. Bower, B. Corti, C. De Klerk, G. Lewin, M. Knuiman, J. Kurinczuk & G. Ryan (1995) The Quantification of Drug Caused Morbidity and Mortality in Australia, 1992. Canberra: Commonwealth Department of Human Services and Health.
Single E, D. Collins, B. Easton, H. Harwood, H. Lapsley & A. Maynard (1996) International Guidelines on Estimating the Costs of Substance Abuse Ottawa: Canadian Centre on Substance Abuse. (Second Edition 2001)
E. Single, L. Robson, X. Xie, J. Rehm (1998) “The economic costs of alcohol, tobacco and illicit drugs in Canada, 1992”, Addiction 93:7 (1998): 983-998.

Endnotes
[1] Eric Single is Professor of Public Health Sciences, University of Toronto; Senior Associate, Canadian Centre on Substance Abuse; Honorary Professor, Curtin University, Perth, Australia; Associate, Centre for Addiction and Mental Health; President, Single and Associates, Research Consulting Ltd. (6 Mervyn Avenue, Etobicoke, Ontario M9B 1M6, Canada; email: e.single@utoronto.ca).
The contributions of our colleagues David Collins, Helen Lapsley and Rick Harwood to the ideas expressed in this paper are gratefully acknowledged.
[2] Under some counterfactual scenarios, a discount rate is unnecessary, but usually the interpretation of the results are more limited.
[3] A paradoxical implication of this procedure is that if more effort were put into the successful prevention of alcohol abuse, with a resulting reduction in the charges as a consequence, police costs allocated to the social costs of alcohol misuse would fall.
[4] Arguably the social costs arising from the justice system are the least developed in almost all studies, reflecting a dearth of data. Given the proportion of those, say, in prisons that are involved with some from of drug abuse, this may be the single greatest lacuna in the studies.

A Little More Than Kin: Petty Politics and External Threats

This entry was posted in Listener, Literature and Culture on by .

Listener 12 May, 2001.

Keywords: Macroeconomics & Money

Richard’s Brattigan’s four hour film of Hamlet included bits of the plot which are often omitted in the cut version of the play. I was particularly struck how the invasion of Denmark by Prince Fortibras of Norway, suggests that the events at Court at Elsinor were but petty politicking. I had similar feelings while reading the New Zealand media pages on the internet while I was overseas. The nation’s main concerns seemed to be the activities of various members of parliament and their spouses. Now, just as there is a problem if one suspects one’s stepfather has bumped off one’s father and taken over his job, it is important we have honest and competent politicians. But perhaps the economic storms outside the country deserved a little more attention.

I am not so concerned about the lurching down of world share prices. More significantly, the US economy seems to be in a recession, which may last longer than the conventional wisdom hopes. The situation was nicely captured by an article concluded that the recession was incipient because US unemployment had not turned up. The following day a higher unemployment statistic was announced.

The worry is not just the weakness of the US economy, although the Europeans I spoke to had some confidence that their economy would expand, albeit more slowly, and with some sectors especially suffering. (They were assuming the US recession will not be too long or too deep.) The Japanese economy looks much more structurally unsound, with many firms with appalling balance sheets.

Consider the general contractor Kugami Gumi, crippled by around one trillion yen (say $NZ20 billion) of debts. The Japanese banks have written off almost half their loans, and the company is reducing its workforce by 30 percent, closing most of its foreign offices, and selling ¥220b of assets (although it may not realise that amount because of falling asset prices). Yet the projected outcome is still ¥242b ($NZ5b) of debt, twelve years out. That is a long time (think about the period from 1989 to today). The Japanese government is talking about a ten-year period of grace for all corporate debts, but one analyst concluded that there was not a single sector of those struggling with rotten balance books (construction, retail, real estate, and financial and services) which could repay its debts in twenty years, let alone ten.

Western commentaries on the Japanese economy tend to end up with homilies about the need for liberalisation. The unpalatable truth, which they rarely draw attention to because their nostrums do not address it, is that there are ginormous amounts of debts on the business balance books (nobody knows how much, but probably about a trillion New Zealand dollars) which have no asset backing and are fundamentally valueless. Holders of those loans (directly the Japanese banks, indirectly their shareholders and depositors) are functioning on the basis that the loans are still valuable. Eventually, the valueless debt has to be written off, and its holders are going to have to accept the consequences of less wealth. The write-off can be done by the government taking the debt over itself – in which case the taxpayers suffer, or the shareholders and (perhaps) depositors of the banks taking a bath, while many shareholders in firms will lose their equity. Because it is not preordained as in what proportion wealth holders will suffer, they are all sitting there – dithering like a Hamlet – waiting for someone else to do something.

While the Japanese economy is the more worrying, the US economic debate is as interesting. I shall return to it, but monetarist ideology seems to be in retreat. Not long ago, the US reserve bank and its chairman, Alan Greenspan, seemed omniscient and omnipotent. Today there is a growing acceptance that monetary policy can do little about a recession, and that there is a need for a fiscal stimulus – advocated, among others, by US president Bush. It is a creeping return to Keynesianism in the policy rhetoric, although the theory never died academically, nor among senior policy makers such as Joe Stiglitz (ex-chief economist of the World Bank) and Larry Summers (ex-secretary of the US Treasury). Management of the internal (government) deficit is back on the policy agenda.

While the headline local news while I was away was the petty politics of a court page, I found a number of serious newspaper articles when I got back, albeit on page 93 or thereabouts (marginalised like Fortinbras in most productions). The Governor of the Reserve Bank is cautioning not to expect too much from monetary policy (Greenspan would not disagree). And the Treasury has given a gloomy warning of the prospects. In fact the New Zealand government’s balance sheet must be one of the best looking in the world, giving room to manouevre if there is depression, while the external sector is much more diversified than in the 1930s. Not that I expect a Great Depression – not yet. It is just that the politicians on all sides need to divert from their mud-slinging petty concerns, address the economic issues, and show some leadership. Otherwise, Fortinbras takes over.

Economy Of Substance: What We Can and Can’t Measure.

This entry was posted in Health, Listener on by .

Listener 28 April, 2001.

Keywords: Health.

Some social sciences – demography, economics, geography and psychology – started off well because they had could measure the concepts they were dealing with. Others – anthropology, politics, sociology – have never been as successful. But that something cannot be measured does not mean it is unimportant. We cannot quantify culture and related behaviour and institutions. Yet they seem to be a key elements in economic performance. Contrariwise, well-constructed measures of economic performance, such as per capita GDP, may not be good indicators of our social objectives.

The previous paragraph is a reflection as I travel to an international working party on the social costs of substance abuse. What are we quantifying those costs for? Suppose you knew the exact cost of substance abuse in New Zealand. You might say ‘gee-whiz’ but is there a practical use? How does one encapsulate in any number the heartache that the abuse causes?

There are prosaic reasons The costing exercise becomes a collecting together of what is known. It identifies the gaps in the data (and the accuracy of what is there). Consider the morbidity costs of alcohol misuse – that is the damage to people’s health and welfare which does not appear as death or reduction in material possessions. It includes the side effects of excessive drinking on the drinker, the physical damage done by drunks to their partners, children and others, and the anguish that the drinking causes to the drinker’s close ones. How big a problem is it? Most individuals are distressed by at least one serious alcohol-precipitated incident in their life, over which they had no influence – usually an ongoing one involving a friend or relative. It is also a public policy issue insofar as public policy can reduce these morbidity incidents and the pain they cause.

When I tried to measure the morbidity costs from drinking, I found lots of anecdotes but not much solid information. To my astonishment, the material I scrambled together suggested that morbidity costs are not too different from (actually it was slightly bigger than) the mortality costs of alcohol misuse. I would not go to the gallows defending the calculated figure, but practically it indicates that here is a social problem which could be easily overlooked because of the lack of data. The policy consequence could be that we put effort into, say, preventing road accidents caused by drunk drivers, for which there is some reasonable data, while we insufficiently respond women and kids being terrified and beaten up by drunks. We desperately need to improve the data here.

One of our biggest lacunas is the costs of substance abuse induced crime. There are severe technical problems. What is causation? Just because the criminal was drunk – or smoking, or on a high, or wearing red socks – when the crime was committed, does not prove that drinking – or smoking or illicit drugs or red socks – caused the crime. (Moreover they may be stone cold sober when they burgle or rob to fund an addiction.) Not long ago the technical problems seemed intractable, but some recent innovative overseas research hints that the social costs from crime and substance abuse are very significant. That seems consistent with the anecdotal evidence here in New Zealand. I worry that the omitting the costs of crime from my figures, has contribute to our ignoring the interaction between drugs and criminality.

Data also makes comparisons possible. For instance, about five times as many people die from smoking than drinking. However, it turns out that smokers die in older age groups, but many of the deaths from alcohol are of young adults. Counted in years of life lost, the relativity between smoking and drinking mortality is only about double. Policy-wise, the result draws attention to young drinkers, asking whether we should be putting as much effort into them as we do for their smoking.

Another important (overseas) finding is that the licit drugs of alcohol and tobacco do far more damage than the illicit drugs such as cannabis and heroin. The data to test it does not exist in New Zealand, but the difference is so big in Australia it must apply in New Zealand. (That their social costs are smaller need not make the policy problem less urgent, nor the anguish that the families with addicts face less stark.)

Notice how in the social sciences the scientific curiosity about what the world is like is continually interacting with a policy interest of how to make it better. Careful measurement helps pursue both objectives. But that measurement can only take us so far. For a scientist the limitations may not be important. There are so many things to investigate, he or she can confine research to that what can be measured. (There is a compelling argument that only that which can be measured – in some sense – can be investigated by a scientist.) But there are things we cannot really measure – anguish, love, hope, misery, joy – which are an integral part of our humanity, more so than anything an economist scientist works on.

Two Economic Lieutenants

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

Revised paper for The Stout Centre Research Centre conference on ‘Holyoake’s Lieutenants: 1960-1972′, 27-28 April, 2001. Parliament Buildings, published in Holyoake’s Lieutenants ed M. Clarke (Dunmore Press 2003)

Keywords: Macroeconomics & Money; Political Economy & History;

The term of the second National Government, from 1960 to 1972, can be split into almost exactly equal economic phases, changing at the end of 1966, when almost coincidentally the Minister of Finance also changed. The second from March 1967, was Rob Muldoon, well enough known and important enough to have a conference of his own in due course. From December 1960 to February 1967 the finance and economics lieutenant had been Harry Lake, an almost shadowy figure in the politically histories of New Zealand.

Harry Lake

Harry Robson Lake was born in 1911 in Christchurch, going to Christchurch West High School and Canterbury University College from which he graduated with a B.Com. In 1943 he established his own accountancy practice, and in 1950 became Treasurer of the Canterbury -Westland division of the National Party. He unsuccessfully stood for the Labour-safe Riccarton electorate in 1949, and in 1951 he won the Lyttleton seat from Terry McCombs, a seat which had been a Labour-McCombs family fiefdom for 38 years. He held it in 1954, but lost it to a younger Norman Kirk in 1957. Lake returned to parliament in 1960 for the National-safe Fendalton seat, which he held in 1963 and 1966.

Holyoake made him Minister of Finance in his 1960 ministry. Lake, then 49, was ranked seventh in cabinet, a relatively low status for a Minister of Finance. However the six above him had all been ministers in the 1950s, as had three below. He was marked as an upcoming young man.

Following the retirement for health reasons in 1960 of Jack Watts, who had been National’s Minister of Finance between 1954 and 1957, Holyoake had to choose between the more seasoned Tom Shand and Lake for the finance portfolio. Barry Gustafson reports that Lake was ‘one of Holyoake’s most trusted friends.’

Lake was Minister of Finance for 74 months, which also ranks him seventh (out of 37) in tenure behind Joseph Ward (172 months), Walter Nash (168 months), Rob Muldoon (160 months), Richard Seddon (120 months), Harry Atkinson (116 months), and Julius Vogel (79 months) and ahead of Bill Massey (60 months), Sydney Holland (59 months), Bill Birch (56 months) Roger Douglas (52 months), and Downie Stewart (47 months). He would be the least known off that pantheon.[1]

Harry Lake died of a heart attack in February 1967 aged just 55. This may explain part of his anonymity. If they had died at the same age Ward would have been Prime Minster for but five years, Muldoon for but one, Seddon for nine, Nash would have been Minister of Finance for two years, Holland will still have been in opposition, and Birch would have been back there. Only Seddon, Atkinson, Vogel, Douglas and Stewart had largely achieved their reputations by their fifty-sixth year, even fewer by their 53rd year when Lake had his first heart attack. He was the youngest Minister of Finance between Stewart and Muldoon. Lake may be anomalous because of his early death..

A second reason for Lake’s eclipse may be that he was not a flamboyant man. Of the above list of eleven, seven held the portfolio and premiership jointly, Nash was later prime minister, and Birch and Douglas might have been premiers in a less television-dominated age, Stewart if his health had let him.

The Lake Years[2]

Additionally, Holyoake is widely seen as the ‘real’ Minister of Finance. Of course it is not inappropriate for a prime minister to be closely involved in the finance portfolio. Lake presided with him over the last third of the early postwar boom which began in 1949 and ended in 1966. The boom was a period of average GDP growth of 4.3 percent p.a., consumer prices rose at 4.0 percent p.a. (the GDP prices deflation rate was lower than the OECD average), and registered unemployment was negligible (while the measure using the internationally accepted convention rate was probably usually below 2 percent, and rarely above 3 percent). Economic management remained problematic. It always does, because no matter how well an economy is doing, there is a demand for it to do better. Trying to drive a small open economy faster means compromising the balance of payments, as imports are sucked in, and that means overseas borrowing to fund them in excess what exports will finance.( In those days, under a fixed exchange rate, foreign borrowing was largely the job of the government. Given that export revenue was volatile, there was a constant need to adjust the economy through fiscal and monetary management.)

It would be easy for Lake (or others involved in economic management) to claim – with hindsight – an unusually high degree of competence, but the early postwar boom was underpinned by exceptional terms of trade. Today they are comparable to the prewar period. Imagine if today’s export prices were a third higher (as they were relatively during the 1950s and 1960s boom) but import prices were the same. Of course there would be economic management difficulties, but life would be somewhat easier and more affluent. Holyoake implied as much when he implicitly compared Gordon with his own lot when he said ‘… some men are lucky in the times in which they have the opportunity to govern or help in the government of any country. I would think Gordon Coates was the most unfortunate of men in this respect. It was his task to carry the heat and the burden of the day [of] the worse economic slump … that the world experienced this century.’[3]

Holyoake was initially known for a ‘steady as she goes’ approach to the economy, presumably distinguishing his government from the sharp measures which Nordmeyer undertook in his 1958 budget.[4] Certainly Lake’s six budgets reflect a blandness. The 1961 one, the first and hence placing blame on an outgoing government, said that export prices were falling and ‘New Zealand was living well beyond its income’, although the current account deficit of 1960/1 was a mere 3.7 percent of GDP.[5] Monetary measures had reduced liquidity, and import licences had been extended from a 12 to 18 month period (with some supplements). The budget’s economic growth philosophy is summarised by ‘increases in production and productivity will be brought about not be redistributing the national income, but by investing more in productive equipment. It is no coincidence that throughout the world, the highest output – and income – is achieved by those workers who have the best equipment and largest amount of capital behind them. … The Budget marks the beginning of the Government’s programme to encourage a faster rate of investment, …’[6] This may sound unexceptional, but it is a classical view of economic growth, for there is no mention of allocative efficiency or of technological change, which are key elements of the neoclassical view and become important in the 1980s and after. That only developed in the academy in the 1950s, so it is not surprising that it had not reached policy by the early 1960s.

Again, and typical of all his budgets, Lake’s 1962 budget begins with the external account. The budget’s basic design was ‘to provide incentives for increased exports and to encourage a greater volume of investment in industry’, mentioning the ‘removing of unnecessary restrictions which foster inefficiency and hamper development, and … introducing savings and investment’ and claiming to have ‘provided the greatest possible reductions of taxes on income.’[7]

His third, 1963, budget has the sense of a valedictory, because the government could not sure it would be returned in the election later in the year, or the minister would retain his portfolio if it was. In addition it will be a part of the foundation of the election campaign. In any case there were set down eight elements which are a mixture of political platitude and rhetoric on the one hand, and economic principle and policy on the other. A slightly edited summary is:
1. … the government will continue to fulfill its obligations in a responsible manner, and not seek temporary political advantage at the expense of the long-term good of the country.
2. By reducing rates of taxation, this Budget implements the Governments policy of increasing the proportion of income left in the hands of people to spend as they see fit.
3. This budget provides incentives to increase production and productivity, and especially provides for the expansion of our exports.
4. It provides for an extension of those services, such as education, which are basic to the social, cultural and economic progress of the country.
5. Provision has been made for the less privileged members of the community to share in New Zealand’s increasing production and prosperity.
6. It recognises the need to increase expenditure on defence to share fairly with our allies the burden of mutual security.
7. This budget again expresses the Government’s determination to seek solutions to our various problems in cooperation with all the interested groups, and not to impose decisions on the basis of outmoded dogmas.
8. The budget represents the continuation of a coherent and consistent policy aimed at increasing the rate of economic growth.[8]
Consensus politics and consensus economics. Steady as she goes.

Both National and Lake returned to office (with Muldoon as his undersecretary with responsibilities for decimal coinage). However in 1964 Lake had his first heart attack, and while subsequently he remained diligent he was perhaps not so vigorous. His 1964 budget once more started off with the external situation, and gave even more emphasis to economic growth policy than the earlier ones. It offered more incentives to increase investment and production and increased government spending in some key areas: education, electricity and defence. It regrets, as does the 1965 budget, there is not more room for cuts in taxation. The 1966 budget repeats the sentiment, but is less valedictory than its 1963 equivalent. Nonetheless it offers one insight into the government’s economic framework.
… from the longer-term viewpoint our most valuable achievement has been the unprecedented growth in productive capacity in our farming and manufacturing industries. … We could have restrained investment spending to the point where our external transactions balanced without overseas borrowing. Some have advocated such policies. If we had accepted this advice the productive potential of the country would have been much less than it is today.[9]

Focussing on the broad framework of the budget ignores some major economic debates which were raging. The joining of the IMF and World Bank is discussed in the 1961 budget, and the industrialisation debate with its promontories of the Agricultural Development Conference of 1962 and the Export Development Conference of 1963 pervades the economic strategy, as in the references to production incentives and capacity.

The economic consensus was not yet breaking up, even though as a result of Vietnam in particular, the political consensus was. But the economic debate was shifting. It was sharpened by a major external shock which was change the course of the New Zealand economy.

The December 1966 Shock[10]
On 14 December 1966, in the rooms of the Wool Exchange in Auckland, the Wool Commission found itself buying in bales of wool offered for auction. This arrangement had been devised in the early 1950s to provide a floor price for wool, evening out the troughs in the fluctuations for the commodity whose price was set mainly on the auction floor. Each year a floor price was set. When offers were below this level the Commission would bid – on occasions even make small purchases – to push up the price to above the set floor level. In the previous (1965/66) season the floor price for standard wool was set at 35 pence a pound, the Commission had bid on 5000 bales, ending up purchasing 256 of them, many of which were resold at auctions a little later. The involvement was minuscule, given the two million odd bales which were dealt within a season.

In the 1966/67 season (it began in July) the floor price had been set at 36 pence a pound, a little higher than the last season but still 5½ pence below the average for the previous season. The 36 pence level must have seemed safe, since it had been exceeded in nominal terms in every year since 1948/49. The last time it was at that level relative to import prices was back in the early 1930s. Prices proved weaker in the early part of the 1966/67 than in the previous season. In the first five months the Commission bought in 9,764 bales, more than it had in any full season since 1958/59 when it had bought in total 46,401 bales. But prices continued to deteriorate in December, and at the Auckland auction the average price was 35.3 pence, with the Commission buying in furiously. In December 1966 it bought in 34,567 bales, and as prices remained weak it bought in the full season a total of 645,786 bales, 35.7 per cent of the clip.

Within a week there was an emergency cabinet meeting. The vulnerability of a small open economy dependent upon a few commodity exports to a few markets became painfully evident, for in 1966 pastoral products – mainly commodity exports – were 91 per cent of export revenue in 1966. Although few realised it at the time, the 14th of December, 1966 was the end of the golden wether. Indeed, to judge from their reports, the New Zealand Planning Council in the 1970s still had not grasped the change. In fact the New Zealand economy was to begin to undergo the most extraordinary and rapid economic transformation. That story, largely ignored then and even today, belongs to the Muldoon conference. This paper concentrates on the initial adjustment.

Immediate Consequences of a Major Structural Change in the Terms of Trade

The immediate main economic problems of a major structural change in the terms of trade are the distribution problem, the production problem, and the transition problem. I begin with the distribution problem because it is the least understood and the politically most acute.

The Distribution Problem

Even if there is no change in the level and composition of production – we look at that issue shortly – a fall in the terms of trade results in the fall in effective spending power. Production remains the same, but the income it generates is less, because foreign purchasers are paying lower prices, in effect requiring greater outlays for their imports for any given volume of exports. In the case of the 1966 fall, which has been permanent except for the brief 1971-1972 commodity boom, the nation’s effective spending power – that is its real income – was cut by about 7 to 10 percent, which was about five to seven years growth in per capita incomes. In effect the growth that had occurred in Lake’s ministership was eliminated in a single permanent collapse in the price of wool.

That meant about $1.2b of wealth has to be written off – say $30b in today’s terms. That is the reduction in the values of real assets – land, farm equipment and buildings, livestock, the infrastructure that goes with it – and not just the fall in the value of financial paper such as shares. Since farmers borrow to fund their investments there are other wealth holders – bank shareholders and even their depositors – who have to take a hit too. A similar reduction would have to happen to some human capital – to the returns to labour, especially in the farm and farm processing industries.

Who is to take this cut in their real incomes and wealth? One answer is to let the burden fall as the market allocates. In practice that would have meant reductions of farmer incomes and the wealth of farmers and those who lend to farmers. However the farmers could quite properly point out that during the early postwar boom there had been a number of mechanisms which had shared the prosperity their products had generated across the entire economy – mechanisms like industry protection, the wage-fixing system, and the fiscal system. It was reasonable to argue that when the farm production was no longer as prosperous, then the reduction in prosperity should be shared too.

That was not the rhetoric of the day, but it was the analysis which underpinned it. Thus the distributional question of who shares the burden of reduced incomes because a political question, because the actions – or failure to act – by the government have a major influence on the incidence of reductions in real income. Not surprisingly, the institutional structures of industry protection, wage fixing, and government taxation and spending all became markedly modified after 1966.

The Production Problem

To illustrate the distributional problem from a fall in the terms of trade, I assumed that the level and pattern of production remained the same. It does not, and that compounds the distributional problem. A fall in the terms of trade changes the relative profitability of the various economic activities. In the post-1966 era, pastoral farming became less profitable, and so the relative size of the pastoral farming sector diminished as farmers switched their resources into other farm activities – notably horticulture – and into activities outside the farm such as tourism, forestry, fishing, manufacturing in depth. That is also a political problem, since it changes the political balance and a party such as National with its strong connections with the pastoral farming has to rebalance itself too. Moreover, the political interests of the strong but diminishing sector will try to delay the relative diminution by using their political influence to generate policies favourable to themselves. Because those redistributive institutional mechanisms also affect the size of sectors, the production and distribution problems are intricately interwoven into the political fabric.

The Transition Problem

Thus far the analysis has assumed that the productive resources have moved smoothly and instantaneously from the old activities profitable under the pre-1967 terms of trade to the new activities profitable under the post-1966 relative prices. Of course they do not, so there is a transition problem. The economy goes into a temporary recession as resources – including labour – become unemployed in order to be redeployed. Production falls, and so does government revenue while there is upward pressure on spending. The government has to borrow more foreign exchange. So the transition problem is also a political economic problem as well as a technical economic one.

Briefly then, a substantial fall in the structural terms of trade involves strains on the market mechanisms as it adjusts the pattern of production, and some of this adjustment is pushed across to the political system, which also becomes greatly stressed. The easy compromise is to assume the relative price collapse is only temporary – a view still held by some in the late 1970s – and subsidise the struggling industries.

The production transition lasted until around 1978. The distribution transition probably lasted until the late 1980s, if we treat the double-digit inflation as a mechanism by which the real income and wealth reductions were made, although that assessment is complicated by some other economic changes such as the introduction of New Zealand Superannuation in 1976. However, the rest of this paper looks at the immediate transition period through to the 1969 election.

The Political Response

Lake did not have the opportunity to deal with the terms of trade collapse. He died just two months after in February 1967. Holyoake replaced him with Muldoon. Apparently he first offered the job to John Marshall who declined. He did not offer it to Tom Shand, repeating his 1960 decision, even though Shand appeared then to have better qualifications than Lake, and in 1967 to have more seniority. Whatever the reservations Holyoake had in 1960, by 1967 they may have been compounded by Shand’s view, expressed in a letter to Holyoake in June 1966 – and no doubt verbally to others – that the 1966 budget had been too expansionary, a view with which Treasury and Lake apparently agreed. Muldoon may have done too, but did not express himself so forcefully and was rewarded with the portfolio.

Barry Gustafson’s biography, His Way, presents a different image of Robert David Muldoon in his first ministerial years, from that which he is remembered today.[11] He is much more tentative, much consultative, than we recall him later – not surprisingly for he was the youngest (at 45) and the most junior member of cabinet, despite his very senior portfolio. One perhaps could draw parallels between Lake and Muldoon for they were both accountants in private practice. However, they present a very different demeanour. In fact Muldoon’s abrasiveness probably reflected his times. He had become the bete noir of the left for his public advocacy of involvement in Vietnam, when the foreign policy consensus was ending in the early to mid 1960s, and he became Minister of Finance when the divisions over economic policy were widening.

There was an attempt to maintain a consensus by the National Development Conference of 1968 . The approach was powerful during the war, but then the economy was expanding rapidly at about 7 percent p.a. while there had been national agreement to the priority of the war objectives. The policy tradition goes back at least to 1928, when Coates, instigated the National Industrial Conference. But the political tensions inherent in the distributional problems were glossed over, and while the facade of consensus was preserved, the tensions were apparent at other venues.

Muldoon thus became Minister of Finance right at the beginning of an exceptionally turbulent period of the New Zealand economy, when it was far from clear how permanent it would be or what structural actions should be taken. He said in his first, 1967, budget ‘I have complete confidence these difficulties will be temporary … [a] confidence [which] stem[med] from the underlying strength of the New Zealand economy, based on its productive capacity built up over the years and the skill and vigour of our people.’ One suspects the next sentences were a caution for Treasury. ‘No one can yet say how long the present situation will last. That will depend on many factors.’[12]

A little self reflection – not one of Muldoon’s stronger attributes – would have suggested that already he had taken stronger measures than at any time under Lake, with his first mini-budget in May, and stiff measures to control government spending in June. By November 1967 Muldoon had devalued the exchange rate, not simply the 14.3 per cent to parallel the sterling devaluation, but by an extra 5.15 percent, aligning the New Zealand dollar with the Australian one. The production consequences of the fiscal changes were to shift resources from the public to the private sector (which was not very popular among those dependent upon the public sector), while the devaluation shifted resources from the internal economy to the external economy. The consequence, including that of some of the fiscal measures, was to raise domestic prices, which would lead to the higher rates of inflation of the next few years.

This was, of course, also redistributional outcomes, which became even more intense in the Arbitration Court in 1968. General Wage Orders had been established after the war as a means, broadly, of compensating wages for prices increases. The previous GWO had been in December 1966. Consumer prices had risen about 6.7 percent in the next year and, with the prospect of further rises, the FOL had put in a claim for 7.6 percent in December 1967. Unbeknown to the FOL in March 1967 there had been discussions between Shand as Minister of Labour with his Secretary of Labour, Noel Woods, and the new Judge of the Arbitration Court, Archibald Blair, to ensure that the effect of the Economic Stabilisation Regulations, under which the GWO was awarded, did not negate the effect of the government’s policy measures. Pat Walsh comments ‘[t]he amendment was not made. Blair had indicated that he was not ill-disposed towards taking the government’s measures into account in making a GWO and it seems that the government decided it would rely on Blair to act appropriately.’[13]

Walsh adds dryly ‘the government’s faith in Blair, if faith it was, was fully vindicated a year later.’ [14] In June 1968 the Court (Blair and the employers’ advocate agreeing, the union advocate dissenting) found that ‘in present economic conditions a general wage order should not be made.’[15] There was widespread outrage in the union movement. Some employers broke ranks and voluntarily gave their workers a 5 percent cost of living bonus. A second application was made jointly by the FOL with the Employers Federation, and just over a month later the majority of the Court, with Blair dissenting, awarded a 5 percent increase (by which time prices had risen just under 10 percent).

I have not detailed the public and political turmoil over the period between the two judgements – Walsh does that well enough – but mention should be made that Shand negotiated with the employers and unions that the regulations should be amended to make changes in retail prices the primary criterion for the Court to consider in a GWO application. To his dismay, the Cabinet rejected the proposal. The resistance was lead by Muldoon supported by Deputy Prime Minister John Marshall who chaired the meeting in the absence of Holyoake. Muldoon and the Treasury were of course concerned with the impact of the Court on the Budget, announced in mid-July, but additionally ‘the probability is that we would build up trouble for the future by giving special emphasis to one or other set of criteria which will have to continue to apply in future years in situations which we will not have to now foresee.’[16] The economists’ point is that by binding two prices together – minimum wages and the consumer price index – the economy would lose a degree of flexibility it might need in a future crisis.

What Muldoon did not foresee was that the nil wage order ended the domination of the Arbitration Court in wage-setting. It would be many years – decades – before a satisfactory alternative was found. At the heart of the Court’s approach was that in the prosperity and moderate growth of the early postwar period the fruits of prosperity could be shared reasonably evenly, but once that phase ended, the distribution problem became sharing the burden of a structural downturn. The Court had no authority to do this, and the institutional mechanism had to be replaced by a new one.

The Arbitration Court strategy – especially insofar as the wage path was implicitly indexed to consumer prices – required that most wage earners be not exposed to competition from overseas suppliers, since otherwise they might price themselves out of the market. That protection was in the first instance via import licencing, but also involved tariffs, subsidies, and a host of other interventions (which were not finally removed until the end of the 1980s). Although the rhetoric of the protection debate was the production problem – which sectors should expand faster than others – the reality is that the gains in aggregate production are small following a change in the protection regime – in the short run anyway. On the other hand there can be very substantial impact on the income distribution, as a result of quite small changes in the protection regime. Thus the passion from the interest groups, while nominally about increasing the average level of welfare, is in fact about increasing their share when welfare is, on the whole, fixed.

There is no full account of the protection debate, whose passion was not always combined with analytic rigour, and often using economic models which were notable for their simple mindedness, except insofar as they suppress assumptions which are not in the presenters favour.

It entered public policy as a result of the NDC. In the 1969 budget Muldoon reported as follows:
“One of the significant achievements of the National Development Conference was the agreement reached on the difficult problem of protection fro the manufacturing sector. The Conference unanimously made the following recommendation on this subject which because of its importance I will quote in full:
“The manufacturing sector should be accorded a level of protection sufficient to promote steady industrial development, increasing manufacturing exports and full employment. This level of protection however, should be such as to encourage competition, efficiency, and reasonable prices to other sectors and to consumers and should also have regard to the need to give the consumer choice and variety. It is accordingly recommended that the system of protection should be flexible, that import licensing should be replaced by tariffs as the main measure of protection and that this transition should be carried out in accordance with a clearly defied programme and within a reasonable time. It is recognised however that there are cases where other protective measures including import licensing may be more appropriate than a tariff.
“The Government accepts this recommendation as the basis of its policy.”[16]

The next paragraph discusses the possibility of a standard level of protection, and promises further study. But in case one thought this was an enthusiastic adoption of the recommendation, the final paragraph of the section concluded ‘[i]n the following sections, I shall announce a number of substantial incentives and concessions which are designed to assist the development of particular industries’.[17] No, there was no real commitment, not even to end import licensing in a reasonable time. In fact it took around twenty years, by a government which was an anathema to Muldoon.

By now the Minister’s budget speeches were almost twice the length of Lake’s day, listing in detail the various concessions and interventions to be introduced or rolled over. The central principles of the 1963 budget of ‘the continuation of a coherent and consistent policy aimed at increasing the rate of economic growth’[18] would no doubt be claimed but would be less evident partly because the receding classical growth paradigm, but also because the stability of the early postwar boom had ended. As for the claim that the Government was ‘determin[ed] to seek solutions to our various problems in cooperation with all the interested groups, and not to impose decisions on the basis of outmoded dogmas.’[19] It continued to try, as evidenced by the commitment to the National Development Conference. But the conditions for consensus had collapsed too.

Muldoon went into the 1969 election as one of Holyoake’s most respected lieutenants. Others – Gooseman, Hanan, Lake, McAlpine, and Shand – had fallen by the way. Muldoon campaigned so successfully, that his cabinet ranking was upgraded from twentieth to fifth (behind Marshall, Shelton and Talboys). He was now, in effect, a general, reporting directly to and working closely with the Field Marshal Holyoake. He had been fortunate to be given the finance portfolio at such a young age, but it was his misfortune that the economic times were far more difficult than those his predecessor faced.

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Endnotes
1. The statistics in this paragraph and the next are derived from J. O. Wilson New Zealand Parliamentary Record: 1840-1984 (Government Printer, 1985), and where necessary updated.
2. The economic analysis in this article largely follows B.H. Easton In Stormy Seas (University of Otago Press, 1997).
3. Interview with J. C. Barr (Alexander Turnbull Oral History Archive, 1973).
4. The Treasury was then in the interregnum between the reigns of Bernard Ashwin, who retired in 1955 and Henry Lang who took over in 1968, although he was influential before then. The three Treasury Secretaries between are usually thought to be competent rather than outstanding.
5. H. Lake, The Financial Statement (In Committee of Supply, 20 June 1961), Parliamentary Paper B6. p.1. a.k.a. “the 1961 Budget”.
6. Op. cit. p.25.
7. H. Lake, The Financial Statement(In Committee of Supply, 28 June 1962), Parliamentary Paper B6. pp.24-25. a.k.a. “the 1962 Budget”.
8. H. Lake, The Financial Statement (In Committee of Supply, 11 July, 1963), Parliamentary Paper B6. p.26. a.k.a. “the 1966 Budget”.
9. H. Lake, The Financial Statement(In Committee of Supply, 16 June, 1966), Parliamentary Paper B6. p.25. a.k.a. “the 1966 Budget”.
10. For further details see Easton (1997) Chapter 5.
12. B. Gustafson His Way: A Biography of Robert Muldoon (Auckland University Press, 2000) Chapter 8 passim.
13. R .D. Muldoon, The Financial Statement (In Committee of Supply, 22 June, 1967) Parliamentary Paper B6. p.1. a.k.a “the 1967 Budget”.
14. P. Walsh, “An ‘Unholy Alliance’: The !968 Nil Wage Order,” New Zealand Journal of History, Vol 28, No 2, October 1994, p.181.
15. Op. cit. p.181.
16. Awards, 68 (1968) p.1281.
17. R .D. Muldoon, The Financial Statement (House of Representatives, 18 July 1968) Parliamentary Paper B6. p.33 a.k.a “the 1968 Budget”.
18. R .D. Muldoon, The Financial Statement (House of Representatives, 26 June 1969) Parliamentary Paper B6. p.25 a.k.a “the 1968 Budget”.
19. Op. cit. p.26.
20. See endnote 8.
21. See endnote 8.

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Official Channels

This entry was posted in Governance, Listener, Regulation & Taxation on by .

Broadcasting will never be just another business, whoever’s in charge.

Listener 14 April, 2001.

Keywords Governance; Taxation & Regulation.

I leave readers to recall nostalgically events from the pictures and anecdotes of Pat Day’s Voice and Vision: A History of Broadcasting (and to add the story of Aunt Daisy and the chimp). This column is about the policy process which underpins it all. There was a minister of broadcasting, and he (they were all hes) and the cabinet made decisions which affected the broadcasting system, what we heard and saw, and our nation’s culture. But there was no ministry of broadcasting, which meant that each minister was faced by a series of conflicting interest groups, which had to be sorted out without any independent advice.

The book begins about 1960 when New Zealand was facing the overt issue of the introduction of television and the covert one of private broadcasting. (Recall Radio Hauraki?) (The earlier period is covered in Day’s first volume The Radio Years, and in Ian Carter’s Gadfly, the biography of James Shelly, New Zealand’s Reith of public broadcasting. The Public Broadcasting Trust, which funded the three books, is commissioning a biography of Colin Scrimgeour, Shelly’s commercial broadcasting equivalent.) Official policy advice was dominated by state broadcasters who wanted to maintain the monopoly. While they did not, the book leaves the impression that the NZBS/NZBC/BCNZ advice favoured its own interests, and they were not always the same as the public’s.

At various times there were (quasi-)judicial tribunals, including a Royal Commission on Broadcasting in 1986, but it is rare for a court to be able to make good public policy. And there was the Treasury. Now I know many Treasury officials who are as committed to our culture as the ordinary New Zealander. But one hopes that their personal preferences do not influence their policy advice. Because the Treasury is the keeper of the public purse – of the crown treasure – they ‘guard the fisc’, ensuring the government has a prudent fiscal position, raising its revenue as efficiently as possible, spending it as wisely as possible, and not borrowing too much.

I am not sure Treasury’s broadcasting advice from a fiscal perspective is entirely to blame for making the public broadcasting sector’s revenue increasingly dependent on advertising – politicians like Rob Muldoon saw it to their political advantage too. Maybe the burden of advertising on our ears and eyes reduces the burden of taxation on our purses and wallets, but the result was to push broadcasting in a commercialist direction. (An implication of Day’s book is that the pressure for commercialisation of broadcasting began in the 1970s, well before Roger Douglas. Was broadcasting policy the precursor of rogernomics?)

A commercially driven broadcasting system is socially inefficient. It turns the medium from a consumption item to an advertising seeking audience one. Advertiser-pays is not user-pays, so broadcasting does not even function properly in terms of a standard economic market.

After the 1988 reforms, ‘independent’ broadcasting policy became located in the Ministry of Commerce, but its function was to regulate the radio frequency spectrum. Like guarding the fisc, resource management is a proper activity for government. But it has nothing to do with the cultural aspects of broadcasting policy, and can be as unfriendly to it as fiscal policy has been.

More recently and rightly – I argued this in 1988 – the cultural aspects of broadcasting have been shifted to the Ministry of Culture and Heritage. But it has only the equivalent of three people working on broadcasting policy, and the Minister had no policy adviser in her office. (‘Her’? Until recently we had our first woman minister of broadcasting in her office: Marian Hobbs.) The policy problems are no less today than those Day’s histories cover: How to run broadcasting for cultural purposes; How to deal with Maori broadcasting (which in my view is a prototype of the general issue of the degree of devolution of broadcasting facilities to all ethnic and other social groups); How to deal with new technologies.

The new technological issue is how to combine television with the internet: whether your TV set is going to be at the front end of your internet access or whether your internet is the back end of your set. The outcome is likely to have a major impact on our life, our culture, or nationhood.

The practical question is who is going to be in charge. Obviously TVNZ wants to be, and quite properly they are making a vigorous case to the minister. Other commercial ventures are lobbying just as forcefully. Because of economies of scale there is no purely competitive outcome, and the consumer will have to accept (suffer from or benefit from) whatever business settle on. The government, by involvement or neglect, will influence that outcome. Hopefully it will steer it in our interests. But how a barely supported minister will make wise decisions is not obvious. We will have to await the third volume of the history of broadcasting to get an overall perspective, but in the interim our viewing and listening will tell us much. Broadcasting may be a small industry, but it has an enormous impact on our lives.

Bursting Out: Don’t Panic – the US Slump Might Be a Good Thing in the Long

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

Listener 31 March, 2001.

Keywords Business & Finance; Macroeconomics & Money

As I write, there is vigorous debate about the current US economy downturn. In the jargon the question is whether it will be a V, U or L – the second half of each letter indicating a quick rebound a slow rebound, or a drawn out depression. It is noticeable that informed opinion is moving towards the more pessimistic end of the possibilities, although most commentators currently reckon on the U rather than the L.

Cyclical downturns are not the end of the world. Market economies have always experienced various cycles around a rising trend of economic growth. If one thinks of the economy as a giant servo-mechanism with feedback loops, then cycles are inherent. Every so often someone announces the death of the business cycles and that the economy will trend continuously upward forever and ever. Shortly after, the feedback mechanism cuts in, and down we go again. (Recall the panic in early 2000 when that happened to the New Zealand economy. Now we are in an upswing, and it is all forgotten – until the next time.)

The business cycle and economic growth are intricately linked. Certainly, as I show in my ‘In Stormy Seas’, that is the evidence for the ‘three year’ New Zealand cycles. (It generates quite different policy prescriptions from ‘the knowledge economy’ – but that is another topic). However the US long growth boom of the 1990s, and its following downturn, belong to another integrated mechanism described 60 years ago by one of my heroes, Joseph Schumpeter.

What Schumpeter would say, were he alive, would be something like this. Revolutionary electronic technologies have generated a remarkable growth boom as entreprenuers seized opportunities to invest and provide new products to businesses and consumers. But such technological innovation does not go on forever, even though many investors behave as if it does. Some firms make enormous profits – Microsoft, Intel, Cisco (which that makes the internet routers) – but many are not fundamentally profitable and depend upon shareholders and credit for funds, most of which will be eaten up in costs that fail to generate profits. ( Schumpeter would have delighted in junk bonds as a new mechanism for credit creation.)

The innovation stage of the upswing passes on to the credit creation stage. But credit created booms are not sustainable. Eventually the cash flow to some businesses are insufficient to service the debt and some begin to fall over. That adds to doubts about the viability of others – which are probably having cash flow problems to. The distrust begins to swell and investors move out of the market (as they have been doing with the NASDAQ (high technology) stocks in the US), while worried banks start to call in their loans.

By now the boom is looking soggy, and the downswing begins. A major factor in the severity of its contraction is the balance sheets of the core commercial institutions. If they carry too much worthless advances and useless other assets, they may write off all their shareholders equity and still owe some. Technically they become bankrupt, although as we have seen in Japan, it is possible to hide the negative net worth behind smokescreens for long periods. If too many become technically bankrupt and the government does not bail them out, then the downswing will be prolonged (the New Zealand experience of the late 1980s).

In the credit dominated phase there are a lot of incompetent business managers and worthless activities. Schumpeter sees the downswing as an integral part of the growth cycle, for inefficient and inept firms are cleaned out in a process he called ‘creative destruction’. Crucially, the bottom of each downswing is markedly higher than the previous one, because of the technological innovation, while the cleaning out provides a foundation for the next boom when a new technology comes along.

That does not tell us directly whether this downswing will be a V, U or L. But there is a clue in the financial position of the core firms. If too many have balance sheets which are not robust, then the more pessimistic outcome is likely. Of course there are many firms on the periphery in a dreadful state – at worst a pile of liabilities and no assets worth mentioning – but that happens in an entrepreneurial society all the time.

I do not know how robust are the core business balance sheets. If I had to guess I would begin by looking at a number of international telecommunications corporations, which have just spent a fortune leasing the third generation radio spectrum, often financed by junk bonds (whose high interests rates undermine the cash flow), and who must be having increasing doubts about the usefulness of their purchases in the immediate future.

Schumpeter thought this boom and bust inevitable, integral, and ultimately healthy. Even so, if his model proves right and there is a longish recession, or worse (the really gloomy talk about replicating the Japanese stagnation in the US), we will move from the extravagant glorification of the market system we have today, to a more realistic appraisal of its strengths and weaknesses. In the Schumpeterian view, the strengths are not inconsiderable.

There Is a Jungle out There

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

The Stock Exchange is where small fry get eaten by lions

Listener 17 March, 2001.

Keywords Business & Finance

There is no necessity for a stock exchange. In the early days, people traded shares by personal contact. But shares could not be readily bought or sold, and investors could not readily liquidate their investments. The stock exchange created a common knowledge of prices and availability. It became easier for corporations to raise risk capital, because investors were more willing to put their money in, knowing it was easier to get it out. Businesses could raise equity for a new venture or major extension. Banks provide the additional funds at a lower cost, because the shareholders took the risk.

There is only room for one efficient stock exchange in New Zealand. When the country was highly regionalised there were separate ones in the main centres. They became linked by telephone, and later amalgamated. Thus the stock exchange is a natural monopoly but, unusually, it has always been privately owned, The practice in New Zealand was to have natural monopolies publicly owned. More recently some were privatised (Telecom and ports for instance) but our legislation regulating natural monopolies remains primitive (so consumers can get easily exploited).

Because natural monopolies have economies of scale they seek mergers when it becomes technically feasible. That is why the Australian and New Zealand exchanges were trying to merge. Computer terminals mean a broker can run the business from Golden Bay. Because in practice personal connections are important, any merger must mean that some brokers will move to Sydney, with a loss of jobs in New Zealand.

While the merger is off (temporarily?), the demutualisation of the New Zealand Stock Exchange (which means that the shares in it can be bought and sold) means it is vulnerable to a takeover from, say, the Sydney exchange. Should any merger be allowed? The merits are those of establishing a stock exchange in the first place – it is easier to raise capital for risky ventures The short answer is it will happen anyway. Given the international networks, New Zealand firms will register offshore to get better trading of their stocks. The loss of sovereignty comes not from a merger, but the technological changes which make it possible. Should we worry? This may be the first time that an important natural monopoly will move offshore, so of course we should worry – even more than we should worry about our inadequate treatment of onshore natural monopolies.

Because of the laws which govern shareholding, company control uses a first-past-the-post principle, where ownership of 50 percent plus 1 share gives absolute authority over the business, including the ability to exploit the remaining shareholders. When Douglas Myers, the richest man in New Zealand, remarked ‘a lot of these old farts were encouraged to put their money into things and lost their dough,’ he did not mention is the dough went to others (often equally old farts).

It is clearly not in the interests of the minority shareholders to be ripped off by the majority. If they think the share market is a jungle, in which the small fry get eaten by lions, they are likely to stay out, investing their savings elsewhere, or in overseas share markets which give them greater protection. If your stockbroker can operate electronically in world markets so can you. This may be to the detriment of New Zealand economy, because New Zealand companies will have less access to capital insofar as they are on a backwater stock exchange. Paradoxically there is more potential for medium sized businesses to suffer from a mismanaged stock exchange than small investors.

Stock exchange rules attempt to balance the divergent interests of the big and small investors. The rules differ from exchange to exchange. New Zealand is one of the least regulated, although in July the government will impose a new code giving the small shareholders protections more like they get in other reputable markets.

In the interim, as we saw in the recent Montana takeover, the rules can be clumsy and applied idiosyncratically. Small shareholders may get trapped into the lion’s den, unable to escape. It is a bit like FPP parliaments. Once the control had passed to a small elite, they did what they liked explaining it was in everyone’s best interests. It did not always seem so (as a number of Montana shareholders will mutter). But it was always in the interests of those in control. (Perhaps the difference is that FPP parliaments does not change as the result of dawn raids. That is the prerogative of military dictatorships and share markets.)

But even if small investors are considered fair game for the biggies, it is not obvious that the law of the jungle is in the interest of New Zealand, although that may be the way the beasts want to run it. It comes back to the inadequacy of public regulation of those natural monopolies. Until that is addressed the New Zealand economy will suffer from monopoly inefficiency.

And while the lions ponce around, roaring and shaking their manes, it is the lionesses who hunt and provide the kill. The lions then muscle in. Real production comes from more than share ownership.

Every Vote Counts: a Census for Posterity

This entry was posted in Listener, Statistics on by .

Listener 3 March, 2001

Keywords Statistics

Brian Pink, the Government Statistician, says the population census to be taken next Tuesday (March 6) ‘is a celebration of the democratic process’. It is a sort of a vote, with everyone in the country – not just adults – required to be included on a census form. Unlike an election which involves just a ‘yes’ or ‘no’ vote for some political party, a census involves a wide range of questions, each chosen for some practical social purpose. (They have to be, because there are always more questions than can be fitted on the form.) So you will be contributing a list of important social attributes, putting in a vote for your gender group, your age group where you were born, your ethnicity ….

Everyone’s ‘vote’ counts, for they are used for a whole range of activities from deciding the electoral districts to the planning of social facilities. It is easy to say ‘I dont matter’ but while statisticians are only interested in your social characteristics, which is why your name or address is not recorded in the computerised census records, the cluster of them is significant Since the planning involves the location of schools and hospitals it is important that everyone is there, even the newborn. It seems likely that about once a month there is a public policy decision which uses the census and materially influences the average reader’s life. One of the stupidest threats in 1996 was from a social group who told its members to boycott the census. Had they done so, the group would have not been counted and been ignored for a whole range of public policy purposes.

While this is the 31st New Zealand Census (the first was in 1851), there have been censuses stretching back almost 6000 years. In the past there has sometimes been a reluctance to participate because the results were used for levying taxation or for military conscription. Our tax system is not dependent on the census, even if the spending of the taxes is. And today’s census cannot used for conscription. When the government approached the Statistics New Zealand in the early 1960s for assistance to identify young men for a military call-up, they were told it was prevented by the law. Instead, the government went to employers and teaching institutions.

The law on official statistics is written very tightly because it is essential that the quality of the national data base is not compromised, and forms are filled with accuracy and confidence. As I said, your name and address is not fundamental but the quality and comprehensiveness of your answers are. Thus there are legal restrictions and practical procedures designed to ensure that each response is used only for the statistical purposes for which it is asked.

That is a good principle in any collection of statistics, but it led to a complication. What if privacy concerns led to some people not filling in their forms properly? On the other hand the individual records could be very useful for genealogical or historical research. Would you not like to be able to look up how your relatives responded to the 1901 census? (You cant, because the forms have been destroyed.) If you look through the questions, there was nothing in them that they would have minded their great-great-grandchildren knowing 100 years later.

I was on a consultative committee which thrashed the problem around. Even more compelling than the genealogists’ case was the experience of one of the committee’s historians Erik Olssen, professor of history at the University of Otago. He, his colleagues, and students have painstakingly studied the Dunedin suburb of Caversham in the period from 1880 to 1930, including using street directories to find out where people lived and moved to. It is a magnificent study of an early urban community, some of which is written up as ‘Building the New World’, one of the best history books of the last decade. If only they had access to the censuses of those times.

But the researchers’ ethical rule is that data may not be used for a purpose for which it is not collected. Eventually we found a way out. The very last question on your 2001 census form says ‘If you agree, the information you gave on this form, including your name and address, will be stored securely for 100 years and then anyone who wants to see it will be allowed to. Do you agree?’.

So you may opt for preserving your census record (and those of your children when you fill them in on their behalf). I hope you will think of your great-great-grand children, and of the historian successors to Erik Olssen, and tick a big YES – a vote for posterity.

The G Word: the Benefit Of International Economic Intercourse

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

Listener 17 February, 2001.

Keywords Globalisation & Trade;

The US-led world economic boom of the 1990s may be ending. The economy in 2001 is likely to be rocky in the US, stagnant in Japan, and the rest of the world could suffer with them. That will generate a loss of confidence, not only in the state of the economy, but in some of the euphoric theories that have been dredged up to justify the over-optimism. Dont panic: monetary-based economies fluctuate – always have, always will. But the long term trends – such as globalisation – will grind remorselessly on, and we still need to think about them rigorously.

Globalisation is caused by technological change altering the geography of production and finance. Usually the innovations reduce the tyranny of distance, but they can be particularly disruptive when combined with economies of scale, and businesses consolidate their global production into just a handful of locations, distributing throughout the world. As a general rule consumers (if they maintain their incomes) are beneficiaries, but initially only some producers gain. The introduction of refrigeration (and steamships and telegraphy) in the late nineteenth century benefited British consumers and New Zealand pastoral farmers, but English farmers suffered.

Technological change almost always makes some workers worse off, since it usually involves closing some plants and making some skills redundant. Understandably those who suffer try to prevent their losses by raising protection or securing a government subsidy. If they are successful, then consumers get less (or no) benefit from the new technology. But those who protest against the forces of globalisation are not just workers threatened with redundancy.

The most common concern is that nations lose their sovereignty. Unfortunately ‘sovereignty’ is a very complicated notion: economic sovereignty is different from legal sovereignty. We give up pure economic sovereignty because it benefits us. We could be an autarchy independent of everyone else in the world, but New Zealand would not be a green and pleasant land. It would not just be a matter of giving up a whole range of products we cannot make ourselves or make to an adequate quality level (would you fly in a locally made plane powered by grass?). We would have to cut ourselves off from social intercourse with the rest of the world (who would there be for the All Blacks to beat, the Black Caps to lose to?). And we would be unable to extend our consumption with the rest of the world by borrowing from them. (Whether we should is one matter. The fact is we do.)

It is a bit like marriage. An individual is (broadly) sovereign, but gives up some of that sovereignty for a marital partnership which they judged, rightly or wrongly, to make them better off. The metaphor breaks down when we note that economic marriage is rarely a partnership of equals. Tiddly little New Zealand is, more often than not, a junior player in a harem, with very little leverage over the sultan.

Sometimes the sultans come together, defining unilaterally what the marriage contract involves. That was the trouble with the Multilateral Agreement on Investment (MAI), developed by the investing countries solely in their interests. But the dissenters ignored that some sort of MAI makes sense, giving a framework by which investors in foreign countries know their rights, and have a means of enforcing them. No country has to sign. Each can retain its unrestricted economic sovereignty, but it does so international investors would be reluctant to invest in it. The objection should not to an MAI per se, but the particular one, which contained unnecessary and unfair provisions. There is so much international investment that inevitably there will be another MAI (if called by something else). At issue will be what is in it.

Although New Zealand sometimes punches above its weight in international fora, we are still in a very light weight class,. So unless we join with others (as we did in the Cairns Group on agricultural trade) we have little to contribute to international agreements and they may totally ignore our interests. Avoiding irrelevance requires a finesse which has appeared lacking in recent years. The crudity of the economics underpinning last year’s Singapore trade agreement was just embarrassing. Almost – one might say – as crude as that of those who opposed it.

I remain unclear what those who oppose globalisation really want. Objecting to ‘international capitalism’ (as the London ‘Economist’ equates with globalisation) is one thing, but what is the realistic international economic alternative? Certainly we dont have to pursue ‘trading naked’, in which we seem to be willing to give our trading partners just about anything they want in exchange for a ‘free trade agreement’ which may be of the most marginal benefit to us.

What I would hope is a sober public debate which is premised on New Zealand being a small economy in a globalised world over which we have little influence, which recognises that the exporting sector is usually our major engine of growth and that we can benefit from international economic intercourse. But that it not just a matter of saying ‘OK’ if anyone asks us to a one night stand.

Poor Children: the Government Has Not Attended to the Child Poverty Problem

This entry was posted in Distributional Economics, Social Policy on by .

Listener 3 February, 2001

KeywordsDistributional Economics; Social Policy

Possibly the best established finding of twenty-five years of research on poverty is that children are disproportionately among the poorest of the nation. Not just brown children or yellow children or white children. Not just one parented children or two parent children. Just children. Over 30 percent of all children under the age of 15 are in the bottom fifth of the population by income. That means that over half the poor are children and their parents, and their rate of poverty is almost double the rate for the childless.

It is not a new phenomenon. In the nineteenth century there was little the state could do. Following a 1908 Arbitration Court decision the practice was to set basic male wages according to the needs of a two parent-two child family. But this meant that male workers without children or just one (or a wife working) were treated generously, while those with more than two children were insufficiently supported. In 1926 the Reform Government under prime minister Gordon Coates introduced ‘family allowances’ available to those with more than two children. By the international standards of the time the approach was revolutionary, because the benefits were funded out of general taxation. (Today New Zealand would no longer be considered an innovator.)

The first Labour Government initially alleviated the burden on families by free health and education, and improved housing, and then in 1945 introduced the universal family benefit at a rate of 10 percent of the average wage. These policies were broadly pursued for the next forty years – albeit sometimes grudgingly – because of their fiscal cost, and the relative value of the benefit declined. (There was also separate support for single parent families beginning with the 1911 Widows Benefit, with incremental extensions through to the statutory Domestic Purposes Benefit in 1973.)

In the 1970s Rob Muldoon and the Royal Commission on Social Security began refining the tax system to give greater financial relief to poorer families, culminating in the fourth Labour Government’s introduction of ‘family support’ which targeted low incomes. They also muddled around with the free services, as did their National Government successor. But a crushing burden was imposed on older children with major hikes in tertiary education fees (and creeping increases in ‘voluntary’ schooling fees). National eliminated the universal family benefit in 1991, although almost in contrition it hiked family support in the late 1990s. Yet the nation’s children are still disproportionately among the poorest.

Intriguingly, the current government has not yet paid much attention to the child poverty problem. Its spending from raising top tax rate hardly touched the children of the poor, and the fiscal tightness for the rest of its first term suggests it will be struggling to do much over the next two years.

The lacuna has not gone unnoticed by the Child Poverty Action Group (Box 56-150, Auckland: http://thor.he.net/~cpanz) which last week launched a report Our children: the priority for policy, with an aim ‘to reinforce political commitment to progress on the priorities of children.’ It reflects the values expressed by long time child rights campaigner, Hillary Clinton: ‘the whole village brings up a child.’

In addition to surveying the evidence of child poverty, the report makes over fifty recommendations. Many aim to get the policy ball rolling, but some are expensive. Inevitably, because there is a lot of child poverty.

The report says ‘New Zealand is a signatory to the United Nations Convention on the Rights of the Child. This convention is receiving increased attention, but New Zealand has made very little progress on its implementation. We encourage a plan of action to develop and implement the principles of the convention immediately with provisions for regular monitoring and reporting.’ (If we are not taking the convention seriously, perhaps we should just withdraw our signature.) It goes on: ‘New Zealand’s monetary and fiscal policies need to be evaluated in terms of the impact on families and young people, not just their impact on inflation, debt and Gross Domestic Product, The macroeconomic framework must explicitly include social responsibility.’

Its most revolutionary recommendation is we need to focus on all children, not just a subset. They do not mean we should ignore, say, those children suffering physical abuse. But too often we look only at pathological issues, and ignore the context, failing to recognize that tackling the general problem would also reduce the worst things that happen to our children too.

Writing in 1927 on family allowances, the precursor of our current regime of comprehensive – if inadequate – family support, Dick Campbell, who became a key economics adviser to Coates and eventually chaired the Public Service Commission, concluded ‘even in this reputedly wealthy and specially-favoured country, industry in the broadest sense has grievously failed to do elementary justice to children, and the interference from politics to redress the balance is justified. These allowances … are to be approved, and their direct provision by means of taxation provides an eminently satisfactory form of State Activity – promising, without diminishing production, to improve the distribution of wealth by the transfer of purchasing power to a most deserving quarter.’ Amen.

Measuring Inflation

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

Listener 20 January, 2001.

Keywords: Statistics;

Statistics New Zealand (SNZ) releases its December quarter 2000 estimate of the Consumers Price Index (CPI) this week. The increase is expected to be a high and, if it is a dull news day, there will be much angst. In fact we have known for some time that consumer prices are increasing more quickly than usual, mainly because the fall in the New Zealand exchange rate will push up the domestic prices of imports which flow on into consumer prices. There is the puzzle of how quickly they will flow through, and the degree to which the New Zealand sellers can and will absorb the import price hikes. There is also an argument about whether the exchange rate will stay down. Everyone expects some recovery – providing the world financial markets remain stable – but some of the predicted New Zealand exchange rate levels, seem fantastical. They would take the pressure of domestic inflation, but the export sector would suffer grievously again.

Behind all this is the nation’s assumption that we have a good measure of inflation in the CPI. It is a measure of the respect for the competence and integrity of SNZ that the premise is so broadly accepted. As a result, however, we tend to use the index uncritically – especially as if it is THE only measure of inflation. It covers only two-thirds of the nation’s expenditure, and since the prices of the other third – investment and government spending – sometimes track quite differently, how can the CPI really be said to reflect the overall level of prices of the economy? This says nothing about SNZ, but it does say we often use a measure for purposes quite different from that for which it is constructed.

There are complaints about the CPI’s allowances for changes in the quality of items. For instance, how to compare the price of the computer on which this column compared to the first one I used, which was much slower and less flexible. Complaints about quality change are often from people who have not read the technical papers but have a political agenda (usually to undermine the integrity of the CPI). There was a bad case in a recent US senate committee report, which did not mention that their CPI is already adjusted down by 2 percent p.a. for assessed quality changes.

Another complaint is that the CPI does not represent the precise spending of a particular group of people. Absolutely true, but does it matter? As a rule – not, because there are so many items in the CPI regimen whose prices move roughly together, that differences in between-group spending do not have a great effect. The one exception is housing, because householders face quite different outlays and price changes, depending on whether they own their house with or without a mortgage or rent it (and who is the landlord). Some years ago the retired demanded their own consumer price index. When they got one, they were astonished that prices for the over-65s were rising more slowly than for others. Statisticians were not surprised, because they knew the retired tended to live in housing (owner occupied without mortgage and subsidised rental) whose prices rise less than average.

A particular issue is the treatment of household debt servicing in the CPI. In its 1997 revision SNZ decided to exclude interest from the index. This means if interest rates rise (or fall) then the CPI will still remain the same, rather than rise (or fall) too. This is quite a different issue from the Reserve Bank inflation target which also excludes interest rates (and should, because the RBNZ is using the interest rate as an operational instrument). It happens that the RBNZ targets on the CPI without interest rates (and sometimes without some other things). In my view it would be better if it were to target on the price level for the entire economy, and not just two thirds of it.

It is unclear why SNZ excluded interest rates, although the cases for and against are finely balanced. An important, perhaps decisive, consideration was that the exclusion followed overseas practice. Even so, debt servicing is an important component of many household’s spending, so that the CPI probably no longer reflects household spending patterns exactly. SNZ are preparing another index which corresponds more closely to actual household outlays including interest payments, and that may be more use for assessing whether incomes are keeping up with prices.

However, whatever its strengths and weaknesses, this week all eyes will be on the official CPI which excludes interest. Fortunately interest rates are not changing very much at the moment, so the two indexes will track along together for a while, both showing a big change because of last year’s exchange rate fall.

While the CPI is a well crafted, like all measurement tools, it is best used for the purposes for which it is designed. If it used for another purpose then it is not the craftsmen’s fault if things go wrong. If you want to use it for another purpose, it is better to understand its construction.

Footnote for Listener 25 September 1999

THE NEW CPI

The new construction of the Consumer Price Index represents a new purpose for the index. Historically (the official CPI goes back to 1914) its main purpose was to assess the changes in prices that income recipients (workers and beneficiaries) experienced. Because most consumers paid interest, the CPI included the cost of interest, as well as the cost of the goods and services they bought. From this month, interest costs are dropped out of the regimen, because the CPI is used for monetary policy targeting and because overseas financiers need an index which is similar to the ones in international use (which usually exclude interest costs).

The new CPI may not be the best measure for considering wages or benefit changes. It remains possible to calculate one with interest costs in it. My expectation is that we will end up with two: one for the financial community, one for income assessment. They will not usually differ that much.

Polish Shipyards: Why the Poles Have Done Better Than Us over the Last Decade.

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

Listener 6 January 2001

Keywords: Globalisation & Trade;

I like Warsaw. The young people swing along the street with all the insouciance of Parisians. But the old folk bear their past. One could easily have been ruled by the Russians, the Germans, the interwar Republic of Poland, the Soviet Union, and the communist regime of Poland, without hardly moving residence. And now as age (and some brutal winds from the Steppes) close on them, they are once more in a democratic regime.

When I visited the Poles a decade ago, shortly after the Berlin Wall had fallen, I thought they were going to adopt the then so fashionable commercialist policies which got New Zealand into trouble in the 1980s. I was told not to worry. There would be no rush to destruction. The Polish economy had been edging towards the market economy since 1982, and the Polish economists were not that incompetent. Returning in 2000, you see how right they were.

For the Poles have done well with the growth of production (GDP), dreadfully on the inflation front (consumer prices rises have averaged around 10 percent a year), while the unemployment level and balance of payments do not look too good either. Even so, except for inflation, the Poles have done better over the last decade than New Zealand. That is no surprise – except to our business commentators. But Poland remains a poor country – their GDP per capita is about a third of ours.

The Polish performance is all the more extraordinary given their main market collapsed – twice. The Soviet Union economy contracted in the early 1990s, and the Russian economy crashed in the late 1990s. On the second occasion, the Poles lost their outlet for their low technology manufacturing exports. Their western neighbours, the Germans, also lost a market (for high technology manufacturing) and switched to selling to Poland. So the Polish manufacturers were caught in the double whammy of the loss of the major external market and an invasion of their internal one.

The Polish experience provides a test of one of the propositions that has been used to justify the poor performance of the New Zealand economy since 1984. It was argued that we did badly because we started off with a dreadful base with the economy riddled with distortions. But nobody would argue the Polish economy was less distorted in 1990 then New Zealand in 1984. Yet they performed better. Why?

Back in 1990, the dissenting New Zealand economists and the Polish economists I talked to, agreed that the external sector was the key. It was crucial to keep a viable exchange rate, which encouraged exporting and the dynamic industrial growth the tradeable sector induces. Poland did: New Zealand did not. The Poles increased their share of OECD exports, the New Zealand share fell. However both guzzled imports, so Poland too faces a deteriorating balance of payments – although not quite as seriously as New Zealand.

Not everything is perfect in the Polish economy. They still have some massive industrial restructuring to do – often where there are strong unions which are politically influential (although the famous Solidarity shipyard has been privatised). Moderate social reform has done better than New Zealand’s rushed extremism. But to give a simple example of how difficult things can be there, I thought in 1990 there were to be gains from privatising the stock of public housing: individuals look after their house better than the state, it would encourage domestic savings, small entrepreneurs use a house mortgage to start up, and it would lead to a more sophisticated retail banking sector. But Poland’s public houses are owned by local authorities, who are far more inclined to corruption than the central state. Selling the houses would provide too many opportunities for graft, and they remain in public hands.

We often describe Poland as being in ‘Eastern Europe’, but Warsaw is closer to Brussels than Moscow, to the Atlantic than the Urals. I prefer the term ‘East-Central Europe.’ The Poles look West – they use a roman alphabet, their art is influenced by France and Italy, their religion is Roman Catholic not Eastern Orthodox. Their view of things east must be contaminated by the enormous Palace of Culture which dominates the centre of Warsaw. Gifted by the Soviet Union, but paid for – so goes the myth – by Polish zlotys. The best views of the city can be seen from it – so they say – because you are looking from, rather than at, the ugly monstrosity.

Inevitably then, they Poles are keen to join the European Union, not just for its economic and security benefits, but because its values are closer to their’s. The EU is less enthusiastic, because of the horrendous costs to their agricultural budget, among other reasons. Hopefully, the political logic will override the economic costs. (New Zealand hopes this will occur with a wind back of EU agricultural subsidies.)

It will be symbolic when they join. The West went to war in 1939 over the invasion of Poland, while the Solidarity upheaval and a Polish Pope are often seen as the beginning of the end of the Cold War.