Personal Debt and the Poverty Trap (31 October)
Interest Rates and House Prices (27 October)
Primary Education Outcomes (26 October)
Road User Charges on Commuting (13 October)
Immigration Policy; the Missing Story (13 October)
Mayors, Councillors and MPs (12 October)
The Australian Election (12 October)
The Forces of Deflation apply less to Food (2 October)
Economists are not Advocates of Capitalism (2 October)
Economic Policy Levers cannot be Relied Upon (2 October)
Personal Debt and the Poverty Trap
(31 October)Benefit levels are set on the assumption that beneficiaries are debt free. And social policy analysts often overlook the additional impact of personal debt on the creation of poverty traps, preferring instead to focus on effective marginal tax rates (EMTRs).
In some ways, incurring personal debt is seen as a personal vice - not unlike smoking, drinking and gambling - and that therefore discussing the issue is able to be interpreted as a form of beneficiary bashing. If we talk about beneficiaries' personal debt, it is too easily seen as another way of blaming beneficiaries for their situation.
People who live from paycheque to paycheque - or from benefit day to benefit day - cannot afford to save. They have minimal discretionary income relative to their existing commitments. They constitute a much greater proportion of New Zealand's population than they used to. And, given the high rates of abatement of benefits - including benefits paid to workers - people in this situation have virtually no ability to raise their disposable incomes. This applies in particular to people with children, and who are receiving Family Support benefits on account of their children.
What do families without discretionary income do, when unexpected or irregular expenses are incurred. They have no choice. They borrow, either from mainstream financial institutions (including credit cards and hire purchase), from the backstreet institutions (what might be called the pawn trade), or from friends and relatives.
Borrowing to meet a contingency means that almost the full amount of funds gained are able to be used to meet that contingency. This is very different to additional earnings, which, especially for low income families, go mostly into benefit reduction (or increased surcharges such as child support or student loan repayments), and very little into meeting the contingency. (There is an exception where the state's claim is delayed - eg until the end of the tax year - which means that the contingency can be met from extra earnings, but that a new contingency mast be faced.) The state has first call on additional earnings, and the state takes the lions share.
Servicing/repaying the debt serves to erode even the minimal amount of discretionary income that debt-free low income families have. Or it creates a situation of negative discretionary income, which means that additional debt must be incurred even in the absence of further unanticipated contingencies.
Gradually, the emphasis moves from repaying debt to simply paying the interest, to cutting living standards even where incomes are rising, and eventually to having to take on more debt just to pay the interest on existing debt.
The real poverty traps that real families face are usually more complex - and more personal - than those which enter the equations of social policy analysts. Add to that the cultural requirements in some communities to pay church tithes and remittances and the poverty trap becomes a truly intractable nightmare. Such families are extremely vulnerable to exploitation from unscrupulous employers, creditors and - especially with the advent of the community wage - government and quasi-government agencies.
Agencies, such as the new Work and Income Agency, need to provide facilities through which personal debt can be restructured, and repaid on a flexible basis as if they were benefit overpayments.
Poor people incurring debt is not "moral hazard", as many policy analysts and moralists will see it as being. It is survival. In a world of poverty traps, to survive we have to tighten the noose by incurring increasing amounts of personal debt.
Interest Rates and House Prices
(27 October)Brian Fallow of the Business Herald writes (27 October) that "a chronic balance of payments deficit and Kiwis' penchant for investing in houses make Reserve Bank governor Dr Don Brash's preference for higher interest rates and a lower dollar understandable."
Actually, that preference for rising interest rates and a falling exchange rate is not feasible under the current Reserve Bank regime. Rising interest rates ensure that the exchange rate will be higher (rather than lower) than it would otherwise have been.
Furthermore, raising interest rates deters business borrowers far more than it deters home buyers. And raising interest rates in a small open economy leads to more money available for the banks to expand their lending, not less money. Higher interest rates either create a capital inflow or stem an outflow.
As we have already seen in the mid-1980s and mid-1990s, raising interest rates stimulates lending on housing. Home ownership is a tax-exempt investment. With floating interest-rate mortgages, few borrowers really care about the current interest rate, because that will not be the interest rate that they will pay throughout the life of their mortgage. Furthermore, home buyers know that other prospective home buyers will have more bank credit to spend on housing at such times. Therefore they have every reason to expect house prices to rise; they come to expect that real interest rates on housing will fall when nominal interest rates are high. They will expect capital gains on their tax-exempt investments, and that expectation is self-fulfilling.
The simple rule of sum for a small open economy is that when interest rates are high enough to deter business borrowing, then home buyers will be flush with the funds that would otherwise have been advanced to businesses. I think Dr. Brash will have wizened up that by now, even if Brian Fallow hasn't.
(26 October)
Last week, the government announced its new targets for primary education. Essentially it is a "back to basics" programme, emphasising standards of literacy and numeracy that all New Zealand children should meet by age 9. Much of the philosophy behind the programme is said to have originated in Great Britain.
On 10 October (at 1:30 am) a BBC Panorama documentary on this topic screened on TVNZ. In England, children start school at 4, and are pushed straight into programmes of reading, writing and arithmetic, with considerable emphasis on assessment. I got the impression that the underlying philosophy was that this education programme was an attempt to create cogs for the economic machinery of the 21st century, and had little to do with what was best for the children, as human beings. My impression was that human life is increasingly being seen in Britain as a means to some collective economic goal, and not as an end in itself.
By way of contrast, Norwegian children, attend pre-school at ages 4 and 5, where the emphasis is on play. It is now widely accepted that children's brain development is far from complete at age 4, and that it is spontaneous playful activities that are required for the development of the brain at such young ages.
In Norway, there is no formal teaching of literacy and numeracy until the children are 6, and even then the transition to more formal learning is gradual. The irony is, however, that by the age of 9, Norwegian children are much better at reading, writing and mathematics than are the "fast-tracked" English children.
The Panorama programme also presented results from a study in Detroit (USA) that commenced in the 1960s. It showed that people educated along the lines now emphasised in Britain were less likely to be holding down a job than those educated in a programme more that that Norwegian children experience, and were more likely to have a criminal record. As well as being better people, those with the more playful approach to their early education were also better workers for the economic machine.
Life is like that, full of unintended outcomes. If you take a linear (left brain?) approach to the attainment of a certain outcome, you are likely to fail, through "trying too hard". On the other hand, lateral (right brain?) approaches tend to achieve as unintended outcomes, the results intended by the linear approach.
Road User Charges on Commuting
(13 October)If suburban dwellers who drive to work are going to face road use charges in the future, we need to recognise that the real users are their employers (or their clients in the case of contract workers). So the employers should pay the road use charges.
One solution would be to forget about charging car owners, and to place a commuter tax on businesses. All peak hour employee trips would incur the commuter tax. The funds raised in each city would all form a public transport fare subsidy in addition to existing subsidies.
The result is that firms would have a reduced incentive to locate in the centre of the main cities, and they would have an incentive to make better use of flexitime and teleworking. And, by cutting public transport fares rather than charging them road user charges, employees would have an incentive to use public transport.
The maintenance cost of roads would fall, thanks to decreased use of the roads. However, it should be noted that commercial vehicles rather than commuters play an important part in the clogging up of urban roads. Charges on commercial road usage could form a separate kitty, earmarked for road maintenance.
Immigration Policy; the Missing Story
(13 October)The new immigration policy, announced yesterday, is a mixture of good and bad. The racist language test will be abolished. People from southern South America will qualify for visa-free entry to New Zealand. Less good is the general tone of venality - we want people with money because we want their money. And we plan to set up shop in places like Pretoria and Moscow, to entice here people who are desperately needed in their own countries. We are still reluctant to provide a congenial environment for immigrants, once here. It is true, however, that the government (or at least Associate Minister, Tuariki Delamere) has at least acknowledged that there is a huge problem by which professional associations seek to make it very difficult for foreign trained professional to practice their careers here.
There is much more, however, to the management of net migration than an immigration policy. (See "Net Migration and Immigration Policy", 4 August 1998.) The main goal of the new policy is to achieve a net migration inflow of 38,000.
My main point here though, is that the government, in seeking 38,000 immigrants per year, is planning for a net annual loss of 28,000 New Zealanders. 28,000 is 1% of the adult population. That we are permanently losing nearly 1% of our adult population - which probably means more than 10% of our young professionals - is an unacknowledged crisis of monumental proportions.
The problem in part is the student loan scheme. Inflexible Child Support laws also create an incentive to emigration.
The biggest problem, however, is our expectation that market forces alone will provide employment opportunities for all our tertiary educated population. That is just not so. While the major lever to economic growth in the emerging post-industrial economy is "human-capital-intensive" activity, human capital is New Zealand's most successful export industry.
It's not good enough for the government to argue that graduate employment is not a major issue, simply because graduates have lower unemployment rates than secondary school drop-outs. Unemployment among New Zealand educated graduates is low precisely because of emigration, but also because many of them are employed in tasks for which they are overqualified, thereby displacing those with fewer qualifications from employment.
We should participate in the international human capital market, as a partner, not as a predator. But, most of all, we need to invest in industries that make intensive use of educated minds, creating development linkages throughout the New Zealand economy, and giving young New Zealanders a reason to stay.
Dialogue on Immigration with Paul Williams
PS. On 27 October, The NZ Herald reported ("Exodus plunging NZ into crisis: paper", p.A16) a feature article from the British Sunday Telegraph headlined "Crisis as young quit New Zealand". The NZPA writer of the article is not critical of the British article. Rather, s/he says that "the article is one of the most significant pieces printed in the British media [about New Zealand] since Auckland's power blackout eight months ago."
(12 October)
Auckland has a new mayor: Christine Fletcher MP, former Minister of Women's Affairs and Local Government.
The media keeps harping on about whether she should resign from Parliament, rather than retire within 6 months of the next election. They should let it pass. If a Prime Minister can be a Prime Minister as well as an electorate MP, then so can a mayor. Furthermore, we now have plenty of list MPs who can and do cover for the pastoral duties of electorate MPs. In practice, Doug Graham is as much MP for Epsom (which includes his old seat Remuera) as is Mrs Fletcher. He, and others, will have to cover for her after she resigns in May, so why not before.
Ironically, Epsom will have a new MP anyway, next month. List MP Jill White, the new mayor of Palmerston North, who is retiring, will be replaced by Chris Fletcher's 1996 Labour opponent in Epsom, Helen Duncan. Ms Duncan will set up shop in Epsom.
Of more general interest to me is the continuing trend for people to be elected as mayors and as councillors because they are already widely known. As our bigger cities get bigger, more candidates are more unknown to more voters. Parties, or "tickets", are necessary in the larger cities where the candidates are not generally known. It is better if the tickets are distinct from those of national politics, so as to avoid the problem (as in Britain) of Local Body elections being used as a referendum on the National Government.
It is unfortunate that the bill to get STV (single transferable voting) for Local Body elections was defeated in Parliament. As a result, the Maungakiekie Community Board is totally filled by the Citizens and Ratepayers ticket, while the Eden-Albert Board has a clean slate of City Vision members. These incestuous results completely defeat the purpose of the Community Boards. STV has the effect of electing tickets roughly in proportion to their support. Thus, under STV, the Maungakiekie Community Board would probably have had two C&R members, two from City Vision and one from Auckland Now.
In 1995 we had the bizarre situation of the Alliance members being defeated from the Auckland Regional Council and the Auckland Regional Services Trust, despite their support actually rising. The problem is that first-past-the-post (FPP) voting tends to elect whole tickets, whereas we really want our Local Bodies to be representative of voters. In 1995, there were fewer tickets standing for office than in 1992.
The situation is a bit different for mayoral elections, where only one candidate can win. Here, preferential voting (the version of STV where only one candidate is elected; the system used to elect the Australian Parliament) is required. In Christchurch there were about 15 candidates for mayor. Under FPP, the winner probably only had to get 20% of the vote. In theory, someone could have won with 7% of the votes.
Given that we now like to vote for mayors who are already well known, it seems very likely that many more MPs and former MPs will seek mayoralty positions. I expect that the same trend will appear with respect to City Councils. As an example, former Labour MP Richard Northey was the top polling candidate in the Penrose ward of the Auckland City Council.
This trend to name candidates may not be a good thing, as it restricts the opportunities for politicians to gain experience in local politics before stepping up to National politics. That is an important argument for cementing a party system in place at the local level, with STV required to ensure that party tickets do not get elected en masse.
(12 October)
The recent Australian election, using preferential voting which is nearly as effective at shutting out third parties and independents as is first-past-the-post (FPP), produced an odd result, in that the Labor Party received 51% of the two-party preference vote, yet the Liberal and National parties which together got less than 50% were able to form a government with a margin of at least 6 seats.
It is quite clear from the result that Australia needs to adopt proportional representation in its House of Representatives as well as its Senate. (Tasmania has STV - single transferable voting - in both.) However, as correspondence in the letters section of the NZ Herald shows, some people are using the Australian result as an argument against MMP - multi-member proportional - in New Zealand.
The third party in Australia, One Nation, is seen by mainstream opinion as mildly fascist; certainly as racist. One Nation was shut out by voters in the mainstream parties giving their preferences to each other rather than to One Nation. That should be interpreted as a vote for a "grand coalition" government in the event of One Nation holding the "balance of power". (See comments relating to that option in New Zealand.)
There should be nothing to fear from an extremist party having a small minority of the seats. And if an extremist party wins more than a small minority, it's no use blaming the electoral system. The mainstream parties have to blame themselves if they are so unattractive.
The principles of representative democracy demand that all significant groups of voters should be represented. The Parliament is the fundamental institution of democracy, with the party system ensuring that capable but little known candidates can get elected and then become known.
Government is the prerogative of Parliament, at least within the British "Westminster" tradition. There is never a need for a minority extremist party to become a part of government, so long as the mainstream parties cooperate to deny that party access to the levers of power. MMP would have been good for Australia, because it would have forced the creation of a Grand Coalition government, which is, I expect, what most Australians really wanted; a solid broad-based government of the centre that is unable to be hijacked by an extremist clique within one of the mainstream parties.
Not only Australians. New Zealanders voted for MMP in 1993 because they wanted government by Parliament rather than by cliques. Indeed New Zealanders desperately want the grand coalition style of government, in which the parties work constructively together instead of hurling abuse at each other. Unfortunately our politicians are slow to learn. They are too used to having either total power or no power. That is the big difference between the political cultures of Australia and New Zealand. Australians have always had to negotiate and compromise. New Zealand has neither state governments nor a senate. Hence our politicians in government are having to learn to negotiate, and our politicians out of government are having to take some responsibility for political outcomes. It has been a big ask. Too many of them want to go back to the old days.
We should not be afraid of having parties like One Nation in our Parliament. People who like such parties have the same democratic rights as the rest of us. We should be able to feel confident, that at any time, there are enough responsible politicians to form a responsible government. We cannot get an extremist government unless the majority of our representatives are irresponsible. The Australians showed that they were capable of closing ranks against One Nation, whether or not that party got a number of its candidates elected. The Australian result is not an argument to ditch MMP in New Zealand.
The Forces of Deflation apply less to Food
(2 October)Food prices in New Zealand increased 2.7% from the June quarter 1997 to the same quarter in 1998. This compares with 1.7 for the CPI in general. Meat, Fish & Poultry increased 3.7%.
This is just the beginning. A report in the Sunday Star-Times ("Pundits pick price rises on the way", by Greg Ninness, 27 September, p.E3) shows that prices of many imported food items (eg bananas and rice) have recently increased significantly, due to delayed impact of the fall in the NZ dollar. The same applies to New Zealand produced exportables, such as steak and milk products.
Even bigger food price increases are expected in the December quarter, which we are now in.
There is a myth going around that the NZ dollar plummeted in June but then stabilised. In fact, the dollar has been falling steadily for over a year, and continues to do so. In June the fall was overstated, because it coincided with a dramatic rise in the US dollar. In more recent months the New Zealand dollar has fallen against most of our trading partners (as measured by the "trade-weighted index" [TWI]), but hardly against the US dollar which is moving off its June highs. It is the TWI rate that matters, not the US dollar rate.
The currency depreciation is not a bad thing for us, but it does have implications, because there is now much more imported content in the food and non-food products that low income New Zealanders buy. New Zealand's manufacturing sector has changed completely; it now produces for high income consumers across the world; it no longer produces wage goods for Kiwis.
I have constructed a Beneficiaries Price Index (BPI) which seeks to measure the inflation rate for basic needs only (see chart). It is likely that this BPI will diverge further from the CPI in the next 12 months.
We need to note two further points.
First, that the world is in a deflationary environment. Thus, while New Zealand may still experience inflation on account of a falling currency, in global terms prices are either falling or are under great pressure to fall. From a global point of view, food prices are falling less slowly than are non-food prices.
Second, the kinds of comments by Gareth Morgan that suggest that food production is a loser or sunset activity could not be more wrong. Colin James, in his Herald column (30 September) repeats Morgan's claims (Herald 29 September); James says that New Zealand is "still too much a commodity producer".
In the last 15 years, there has been a marked divergence between the prices of food and non-food commodities. We are now entering a period in the world economy in which the trend will be for food prices to rise relatively and absolutely. Just the changes in weather patterns are enough to indicate such a scenario. In a world downturn, with deflationary pressures, food prices may not increase much in absolute terms, but they will increase very much relative to other prices.
If New Zealand's reforms are designed to create a transfer of resources from food production to non-food production (as Morgan and James think they should be), then the mistake could be fatal, literally.
Economists are not Advocates of Capitalism
(2 October)In an article in the Sunday Star-Times, reprinted from the Sunday Times of London, ("Economists failed, not capitalism", 27 September, p.E9) Irwin Stelzer laments that the "American model" of "global capitalism" is seen to be in "full retreat". Even Business Week says so.
For Stelzer, the problem is "confusing advice by the economists who are its advocates". The sin of economists, apparently, is to disagree amongst themselves. In saying this, Stelzer fundamentally misunderstands both the disinterested tradition of western science and the role of economics as a social science.
Scientists are not advocates of anything. And the offering of advice is only a very small part of what scientists do.
Economists build theoretical models of economic systems and they measure economic variables. Their aim is to explain economic phenomena. In western societies, economic activity is organised according to principles which can be called, together, capitalism. Economists do not (or should not) advocate capitalism; they should describe it. Likewise, physicists do not advocate gravity (or whatever); they describe it.
All scientific disciplines are characterised by disagreement. Theories differ, and interpretations of empirical data differ. That is a necessary feature of scientific enquiry. A science without disagreement could not be a science. It would be a cult. Disagreement is more rife in economics because of the lesser precision of social sciences vis-à-vis natural sciences.
As in natural science, much of that disagreement reflects the differing philosophical values of the scientists. Interpretations of data almost always contain some subjective component. More importantly, scientists build theories which are attractive to them. The truth arises from the theories being contested in what might be called the 'scientific marketplace'.
Stelzer does not believe in the scientific marketplace. He wants economists to hold and promote an uncontested monopoly view; ie to be advocates of an ideology rather than investigators of truth. The real irony is that Stelzer wants economists, with respect to their own professional code of practice, to suppress the marketplace ideology that they are seen to be advocates of. That's not the American model; that's Stalinism.
Finally, while writing about the global economy, Stelzer says that "a government that sees its economic role as umpire, not player, [is a] guarantor of prosperity". He's wrong on two counts.
With respect to the international economy, national sovereign governments are mandated as players. They are responsible to their national constituents only. Only international government can be an international umpire.
With respect to the domestic economy of a nation, governments play two roles. One, the judicial role, is to act as umpire. The other role is to be an agent of the sovereign, representing the interest of the sovereign. In a democracy, that role is to represent the public interest. As a representative of the public interest, government is a player, just as trade unions are players representing the private labour interests of their members, and as the Business Roundtable and the Employers Federation represent the private capitalist interest.
Economic Levers cannot be Relied Upon
(2 October)Bob Edlin ("Don't blame Asians for deficit", Sunday Star-Times 27 September 1998, p.E4) notes: "As the Kiwi dollar depreciates, the omens are for a slow improvement - but only if the authorities don't again react to an upturn by clamping down with higher interest rates and exchange rates."
He is noting that, in anticipating clamping down in accordance with a familiar formula, traditional economic levers such as low interest rates and exchange rates may no longer work as they have done in the past.
It appears that the Reserve Bank's approach to monetary policy, virtually mandated by the 1989 Reserve Bank Act (RBA), only acts in one direction. It is effective in shutting down economic activity by raising interest rates which in turn lead to (or have led to so far) an overvalued exchange rate. But it is becoming ineffective at stimulating economic activity when reversing that policy.
If that's the case, the RBA is like an economic black hole. It creates a kind of permanent gravity field, that makes it almost impossible to rise out from. When the domestic economy is (or threatens to be) overactive we are hit on the head by monetary policy. And when the economy is underactive, we remain underactive for fear of being hit on the head when our sunk investments should be bearing fruit.
In such a hostile economic environment we survive as best as we can. Poor people, undercapitalised, survive by living off accumulated social and environmental capital. Poverty and unsustainable activity go together.
Sustainable economic development requires an environment which contains a significant upside to ordinary risktakers, and a limited downside. The Reserve Bank Act has removed that upside in the risk-assessment calculus. The simultaneous undermining of the welfare system creates a massively heightened downside risk. The reforms, more than anything else, have made New Zealander's into a risk-averse people.
There is one exception. More than ever, young New Zealanders are undertaking one risky venture. They are emigrating.
© 1998 Keith Rankin
