Not Exactly a Depression    (28 June)

Acting, Writing and such Vocations are Valid Occupations    (24 June)

Why Deny Mwai?    (24 June)

Balance of Payments Current Account Deficit    (24 June)

To Split or to Combine?    (23 June)

GST and Domestic Savings    (23 June)

The Social Wage is not Charity    (21 June)

A Trade-Led Recovery?    (17 June)

Robert Reich and Labour on Social Investment    (16 June)

Not Exactly a Depression    (28 June)

After the release of the GDP growth figure for the three months to March 1998, some media commentators were claiming that NZ was on the verge of a recession "or worse" (the "d" word). Seasonally adjusted GDP was down by 0.9% on the previous quarter. In fact the economic growth "performance" is still nothing like as bad as at was during the "Rogernomics" period of the late 1980s (see chart).

If we choose to be generous to Mercury Energy and others who may have been negligent in contributing to the February and March power crisis in central Auckland, perhaps 21/2 percentage points of GDP were lost as a result of two completely external causes - the el niño global climatic shock, and the Asian economic crisis. That means, if we ignore such external shocks, the domestic growth performance may have been close to 11/2 percentage points for the quarter (equivalent to over 6% growth per annum).

Despite the external shocks, which affected agriculture far more than any other sector, GDP for March 1998 is 3.2% higher than it was in March 1996, and real value-added in agriculture was 7.7% up on March 1996. It would have been higher if farmers had not sent much of their stock to the freezing works early (ie in December), on account of the drought.

Above are some figures which compare the depression and recovery from 1989/90 with other nine-year periods of depression and recovery: 1929/30 to 1938/39 and 1975/76 to 1984/85. In each case the depression lasted for three-four years, and the recovery took place (or is taking place) despite at least one year of global economic crisis (eg 1937, 1980-82, 1997-98).

Despite being the deepest depression, that of 1929/30 to 1933/34 experienced the most complete recovery, with economic activity in the year to March 1938 being 36% greater than before the Great Depression.

In the 1975 to 1984 depression and recovery, the international crisis was greatest in the middle years. Nevertheless, GDP in the year to March 1985 was 15% higher than in the last year before the "oil shock" depression that Don Brash compared our present situation with in a speech on Friday (26 June).

In the year to March 1998, we are 21% up on 1989/90, and we are still on target to reach 25% at the end of the 9-year period. We are still in a normal recovery phase. The recent Asian economic crisis is certainly no worse than that of 1937/38 or that of 1982/83. We have nothing to fear except self-induced panic.

There is nothing unusual in negative growth in a single three-month period. All considered, the minus 0.9% growth number is surprisingly high, given the shocks that we faced during that period.

PS From "Loose Change" in today's Sunday Star-Times: "Company liquidations for the June quarter are likely to be way down on the same period last year, and near their lowest levels in a decade." 270 liquidations were recorded for April-June 1997, 265 for January-March 1998, and "just 143 liquidations had been reported for April and May".

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Acting, Writing and such Vocations are Valid Occupations    (24 June)

The television programme Backch@t last Sunday (21 June) ran a story about the problems that unemployed actors face when registering with the NZES (New Zealand Employment Service) as a job seeker. This registration is a prerequisite to getting an Unemployment Benefit (UB).

This represents a fundamental flaw in the old UB system, where the labour market is still perceived in "industrial" terms and in which semi-paid vocational self-employment doesn't easily fit. (Others in the past to run foul of this industrial approach have been farmers, who have had to sell their unprofitable farms before becoming eligible for income support.)

Acting (and, by implication, writing) is regarded as a non-viable occupation, despite its importance in our lives. We even have a comparative advantage in acting-related activities; hence the filming of American shows Hercules and Xena in Auckland.

The present benefit system is an inflexible straightjacket. The Community Wage concept, on the other hand, has the potential to resolve this situation. If acting and writing are not community work - are not regarded as contributions to the general well-being - then the community work proposal must be seen as a form of punishment rather than a means of facilitating productive community activity.

The Community Wage scheme can become successful if it recognises the contributions of actors and writers. If progressive political activists do not contribute to making a success of the scheme, there is a real danger that it will become a punitive scheme; a self-fulfilling prophecy of the Left. (After all we do tend to enjoy punishing outsiders, and scapegoats are classic outsiders. There will be considerable public support for a punitive workfare scheme.)

The present benefit system is hopeless, and has to be changed. It is being changed. It is up to people with unpaid, underpaid and unevenly paid vocations to make the new scheme work for them. If good people fail to make their systems work, then the philistines will mould our institutions in their image.

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Why Deny Mwai?    (24 June)

Kenyan born musician, Peter Mwai, will be released from prison today and is scheduled to be deported. He was convicted for having sexual relations with five women, knowing but not disclosing that he carried the HIV virus. There was some doubt at the time of his trial whether Mwai fully understood the significance of his condition; ie it may be more correct to label him as having acted with negligence rather than with malice.

Mwai is now suffering from aids and tuberculosis. He has a partner and young daughter in New Zealand. He is expected to live for six months at the most. Yet official opinion and public opinion favours his deportation. "Cynical man" - 1990s' version of Hobbesian man - seems to be short on mercy.

Perhaps more significantly, we are quite obviously an "anti-utilitarian" species, and probably always have been. This is a significant finding, because almost all economic theory is based on the utilitarian view that economic efficiency represents "the greatest good for the greatest number", given that some resource constraint always applies. Utilitarian philosophy asserts that human beings are, individually and collectively, pleasure maximisers and pain minimisers.

In fact, we often seem to like inflicting pain for pain's sake. (The great New Zealand neoliberal experiment from 1984 represents one collective example of pain maximisation "for our own good". And we often reject opportunities to confer free pleasure.

Take the Mwai case. The three major stakeholders are Mwai himself, his family (daughter and partner), and the people of Kenya. By deporting Mwai, we inflict pain on all three. We deny Mwai mercy and the right to be with his family in his final days. We deny Mwai's totally innocent daughter her right to be with her dying father. And we impose the burden of Mwai's care on the Kenyan health system, which is far more cash-strapped than our own. Innocent Kenyan's are being placed at risk.

Mwai's deportation is a case of "lose-lose-lose", with no gain to the public of New Zealand. If Mwai were to stay, it would be a case of "win-win-win", with no cost to the public of New Zealand. To an economist we are being irrational. However, the reality is that many if not most humans do get a kind of perverse pleasure from the suffering of others. (You only have to look at the number of lawsuits in the USA to appreciate this.) An economic science that took this human trait into account would look very different to the prevailing orthodoxy that we have come to both love and hate.

We may be pleasure maximisers as individuals, but we, in the 1990s, are far from being seekers of the maximum societal well-being. We are socialised to support ourselves and our social in-group. (Class consciousness is an example of in-group socialisation.) Beyond that, we tend to demand the suffering of outsiders, including in-group rejects such as estranged partners.

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Balance of Payments Current Account Deficit    (24 June)

I sent the following to a friend with whom I network, on 23 June, the day before today's release of the Balance of Payments data for the year to March 1998.

While I made no specific prediction on what today's current account figure would be, at 7.2% of GDP, it represents a significant reduction on the 7.7% for the year to December 1997, and significantly below market expectations. This is a simple result of the marked reduction in foreign capital inflows in 1997; a reduction that has been closely linked to the gradual decline in the market value of the NZ dollar throughout the year to March 1998.

The biggest danger that we face with respect to our external accounts in 1998 is a sudden reversal to balance of payments surplus. That is another name for capital flight. Last year I advocated capital flight sufficient to bring our currency to a level just low enough to give New Zealand a small trading advantage; ie enough to ensure an ongoing surplus on trade in goods and services. The $NZ has now fallen to that level. Further falls, precipitated by the export of capital from New Zealand, will lead to a significant decline in the living standards of low and middle income New Zealanders.

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To Split or to Combine?    (23 June)

The two lead items in today's midday news (National Radio) were about two major areas of microeconomic reform. In one case, the four Regional Health authorities are merging into one, and 80% of the staff are having to reapply for their positions. The reason for the recombination is the high cost of the split model, in which most administrative functions were duplicated.

The other item was the electricity generation and transmission reforms, in which a single national organisation, Electricorp, is being split into three regional electricity wholesalers, for reasons of "economic efficiency".

Two very similar cases are being subject to diametrically opposite restructuring for the same ostensible purpose, increased economic efficiency !!

Interestingly, the one that is nowhere to be seen in the coalition document - the Electricorp split - is being presented to Parliament as a confidence issue. This worries me very much, because it is leading me to question my conclusion that the Prime Minister is, at heart, a democrat and not a bulldozer.

I recently commented on the Electricorp split, and it is worth repeating and augmenting my main conclusion. The Electricorp split takes significant income away from the present owners of Electricorp, and may create some additional income to the consumers of electricity. The consumers which stand to gain the most are in fact producers, many of them transnational companies producing goods for sale on the global market. Cuts in the price of electricity in New Zealand are not going to reduce the world market price of any consumer goods.

The net effect is that an income stream payable at present to the shareholders of Electricorp is to be replaced by a smaller income stream, most of which will be payable to the shareholders of transnational companies (including NZ-owned companies that sell on the world market) that use New Zealand generated electricity.

PS (June 24): Apparently, when Electricorp was split into two a few years ago (ECNZ and Contact Energy) the total dividend paid to the owners halved, from around $600 million to around $300 million. While the combined dividend still remains much lower that it would have been without the split, electricity prices have been rising at a faster rate than the CPI (consumers price index).

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GST and Domestic Savings    (23 June)

On National Radio this morning, the Director of the NZ Institute of Economic Research, Alex Sundakov, said (among other things) that an increase in GST ("Goods and Services Tax"; ie a value added tax [VAT]) would lead to an increase in savings. He personally favours income tax cuts and an increase in GST, although he noted that an increase in GST would be unpopular.

The definition of "saving more" is actually "spending less". The idea about raising GST is that households will be forced to spend less on account of the fall in their disposable incomes; thus an increase in GST is a form of "forced savings". The assumption is that the extra revenue will add to the government's budget surplus rather than to government spending.

From a public accounting point of view, this is an increase in Government savings, not an increase in household savings. So households would remain vulnerable to the charge that they are saving too little.

In fact, low income NZ households have been subject to a very aggressive forced savings policy, especially since 1991.

Sundakov's preferred formula, more GST and less income tax, will raise the disposable income of NZ's big spenders, whose propensity to save any additional income is no greater than is the propensity of low income households to save additional income. (Here we should note that debt repayment is as much a form of savings as is putting money into a savings account at the bank, and that low income households have a very high propensity to use additional income to repay debt.)

Of course, the bigger problem remains that a general worldwide increase of savings, especially during a recession, is the classic formula for a depression.

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The Social Wage is not Charity    (21 June)

A letter in today's Sunday Star-Times refers to benefits as "the charity that the rest of New Zealand provides". This, sadly, may be the majority view; that social welfare is charity. To ensure that social welfare survives as anything more than a grudging payment to "losers", the issue needs to be resolved at a conceptual level before it can be won at the political level.

The alternative view, the "conceptually correct" view in my opinion, is that both social welfare benefits and tax concessions are a part of the social wage. The social wage is the income of the sovereign (which means the people, collectively and equally, in a democracy).

The income of the sovereign is the sum of all tax revenue, plus the sum of the sovereign's investments in the marketplace. Thus, in an imaginary democratic society without any government spending, the entire social wage can be though of as a cash dividend distributed equally to all citizens subject to that sovereignty. This situation should be thought of as the reference point, to be contrasted with the actual situation in any country.

In the more realistic situation where the government purchases goods and services, such purchases are funded by withholding some or all of the social wage that would otherwise be entirely distributed as a monetary dividend.

The social wage in New Zealand is approximately $15,000 per annum per man, woman and child "tax resident" in New Zealand. Thus all benefits - including subsidies, tax concessions, tax credits, tax exemptions - that total less than $15,000 per annum for any person are no more than a part of those persons' incomes.

What happens is that persons receiving high benefits can be said to have less of their social wage income withheld for government funded goods and services.

Public spending is social-wage funded, which mean that we all fund it from our social wage incomes; we fund public spending from that $15,000 per annum of our incomes that we do not always think of as a part of our earned incomes. The people who have the most of their social wage income withheld are those who receive little in the way of either social welfare benefits or tax concessions. In general, these are recipients of low wages, unpaid partners (often caregivers of children), and children (who should - but may not - benefit through high levels of government education and health expenditure on their behalf).

People on salaries above $38,000 at present receive ordinary tax concessions of $3,933 per annum. They will get an annual benefit increase of $1,197 next month, higher than anyone else, increasing their total cash benefits to $5,130 (meaning that just under $10,000 of their social wage incomes are withheld). $5,130, or $99 per week, is certainly higher than the average benefit paid to New Zealanders. That is, average New Zealanders have significantly more than $10,000 of their social wage incomes withheld.

The reality is that government spending in New Zealand is disproportionately funded by low income New Zealanders. Some New Zealanders do get more benefit income (ie social wage income not withheld) than do those on high salaries; ie the ones we call "beneficiaries". Nevertheless, most of the Crown's [*] New Zealand revenue that is not withheld by government is distributed, as cash social dividends, to people earning more than $30,000 per annum.

* NOTE: New Zealand is a constitutional democracy. The formal head of state - ie the notional sovereign - is Queen Elizabeth II. The term "Crown", in New Zealand, refers to the collective property of all New Zealanders for whom the Queen acts as sovereign.

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A Trade-Led Recovery?    (17 June)

In a piece of commentary under the title "Global Meltdown Worsens - Decisive Action Required" the following comments were included:

The second paragraph does not follow from the first. I agree with the first but not the second. Perhaps the best insight here comes from the Great Depression of the early 1930s. This was also a crisis of the international economy where everyone wanted to export and no-one wanted to import. The principal means of stemming imports was deflationary macroeconomic policy, especially tight fiscal policies which ensured low household demand.

The solution turned out to be the recovery of each domestic economy, separately. Thus we can say that "increased domestic activity was a necessary condition for a recovery from the Great Depression". That of course meant a diminution in the ratio of international trade to global product. Nevertheless, it was the recovery of domestic economies that created the conditions that enabled the eventual recovery of the international economy.

While we are not quite in a global depression, the same lessons still apply. Policy in each country should focus on getting local factors back into production. Increased protection may be necessary for some countries - especially those which take the initiative - because some countries will always be slower than others to push for full employment in their domestic economies. Without increased protection, unilateral macroeconomic stimulus tends to create jobs in other countries.

Free trade remains an ideal, appropriate for a world in which each country has a properly managed domestic economy.

J.M. Keynes understood these things very well in the 1930s. Always a committed internationalist, he favoured protection in the 1930s for the very reasons I've cited. But his great dream was an internationally coordinated macroeconomic policy - a radical British submission to Bretton Woods which was rejected by the politically dominant Americans - which would create the conditions in which free trade would flourish and protection would be an anachronism.

We are nowhere near those ideal conditions today. Rather, we are managing the international economy much as we did in the 1920s, with the existence of floating currencies being the major exception.

It is better to use domestic policies to avert a great depression than to fix it after the event.

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Robert Reich and Labour on Social Investment    (16 June)

Robert Reich, Secretary of Labour in President Clinton's 1993-96 administration and author of The Work of Nations, was in New Zealand last week as a guest of the New Zealand Labour Party. It seems that his presence is the second-best clue yet as to what sort of policies we might get from Labour. The best clue was Michael Cullen's announcement a few months ago that Labour would not raise income taxes above the present 33% corporate rate. Government would have to find ways of implementing progressive social policies without raising any more revenue than the present Government.

I am not a great fan of the direction our Labour Party thinking is moving into; they are colluding with conservative parties into creating a low tax consensus. For me, that's a dead-end. Indeed PM Jenny Shipley " welcomes comments by Robert Reich" in a press statement released today.

The most widely reported comments from Reich favour a "new direction" based on "social investment". In particular this seems to mean a commitment to higher level education. That's fine, but there seems to be no commitment to providing opportunities in New Zealand for our well-educated, for those talented and highly educated non-profit-maximisers whose presence can generate economic activity. New Zealand's academic All Blacks (unlike America's) will be, increasingly, expatriates creating economic opportunities elsewhere.

The biggest problem, is that if the portion of the social wage being reinvested is going to be bigger under Labour than National, then (given Cullen's announcement) that means that the combined portions spent on "non-investment" social wage goods such as health and housing, benefits and growth dividends, must be smaller under Labour than under National.

In fact, it is very difficult to separate "public consumption" and "public investment" expenditure. The only kinds of pure consumption being funded from the public purse are the tax cuts being paid, in the main, to the rich, plus a number of subsidies paid to higher income New Zealanders as tax avoidance and tax exemptions (eg the subsidies to home-owners noted in the last paragraph of "The Savings Question"). Social welfare spending is in fact a form of social investment. The costs of not having a welfare state are vastly higher than the costs of having one.

Nevertheless, the term "social investment" appears to be being used in a narrow easily quantifiable sense; public sector investment is seen as parallel to company investment.

If this is so, then we must acknowledge that private sector investment is conducted on behalf of the capitalists who own the capital being invested. Public investment must be seen in the same way; retaining socially-owned capital to create a social profit (ie to create a social wage fund from which benefits and social wage goods can be paid). Private capitalists expect dividends; they expect to be able to consume more as a result of the investments that they made. The owners of public capital also expect a return on the investments that they fund.

Investing public capital to increase private incomes, be it in the form of higher private profits, lower prices, or tax cuts, is a form of theft. For the last 10 years we have been subject to privatisation of public assets. For the next ten years, while we are being offered an increase in public assets, we are facing a privatisation of the income deriving from those assets.

It's no good saying that public income paid to capitalists will trickle back to the public. Public investments require a direct public return.

© 1998 Keith Rankin

Rankin File