Archive for April, 2010

The small country’s option?

Thursday, April 29th, 2010

http://www.flickr.com/photos/ myglesias// / CC BY 2.0

Like many people, I suppose, I have a bunch of writers and commentators whose work I’m impressed by and whom I follow pretty regularly. One of the things I aim to do with the blog section of Policy Progress is to share these people and some of their insights with other New Zealand progressives.

You’ve already heard me talk about Martin Wolf and (closer to home) Rod Oram, and I’ve mentioned Brad Delong in passing a couple of times. It’s only a matter of time before Will Hutton and Paul Krugman crop up. (And there have been a few others mentioned in my weekly email newsletter.)

As I foreshadowed last week, however, one of my very favourite writers at the moment is a guy named Matthew Yglesias. Yglesias is a fulltime professional blogger, employed by the Center for American Progress think-tank as part of their Think Progress project. He is one of those intimidating guys who, at the age of 28, seems to already be able to offer insightful comments on just about any policy area under the sun. He often has a way of turning an issue around and offering something incisive that you hadn’t thought of before, or else citing an author and crisply summarising the ‘take-home message’ from what they’d written.

Yglesias is prolific (ten posts a day isn’t unusual) and writes on a range of topics. Much of what he writes is pretty specific to a US audience (filibuster reform is currently a big theme), but a lot of his writing about ideas is relevant to us, and very occasionally he even mentions New Zealand.


One example of the latter that I’d like to reference and expand on came last November in a post entitled Israel’s Recession. Yglesias was responding to a claim from William Galston of the New Republic that Israel had weathered the global recession particularly well because of a unique policy approach that rejected both Keynesian stimulus and supply-side approaches. Yglesias was sceptical:

Knowing that Israel is a small country, I suspected that the real story is what Israel did is just let its currency sink in value, boosting exports.

. . . This is exactly what I would do if I were in charge of Israel. Faced with a downturn, a small developed economy needs to be much more worried than a large developed economy does about maintaining markets’ confidence in your ability to sustain your debt level. At the same time, a small developed economy has much more ability to sustain employment and growth by making its currency cheaper. So a policy of austerity and devaluation is a very reasonable course of action.

He provides an exchange rate graph to illustrate his point, and then adds that this approach doesn’t have much application to a large country with a huge internal market like the US, but is “possibly relevant to Sweden, Iceland, and New Zealand“.

That got me thinking, to what extent do we see the same pattern taking place here? So I put together the following graph, comparing New Zealand, Israel and Sweden. (I decided that Iceland’s situation was unique.)

Yglesias explains that “since the onset of the downturn in mid-2008 the Shekel has gotten cheaper relative to the Euro, the Yen, and even dollar which has itself been depreciating”. We can see from our graph that much the same thing happened in New Zealand and Sweden; in fact, both these countries exhibit the same pattern as Israel but to a more pronounced extent.

So what have been the results?

Each country’s path is different, but clearly Israel was touched by the recession to a much lesser degree than either New Zealand or Sweden, despite the much greater exchange rate falls that these two countries experienced in the second half of 2008.

This doesn’t necessarily invalidate Yglesias’s suggestion that Israel’s exchange rate decline helped it escape the recession. But clearly an exchange rate decline is not sufficient on its own.


Also from Yglesias, but more recent and on a more theoretical level, is The Very Big Picture. Check it out, this is a really interesting piece.

Yglesias responds to Australian economist John Quiggin’s lament about the lose of a sense of “possibility of a fundamental transformation of capitalism” amongst modern progressives. Yglesias counters, “It turns out that welfare state capitalism just is the alternative to capitalism” and then gets into how it’s now “more possible than ever for people’s non-commercial labors to have a meaningful impact on the world”.

Quite a bit of food for thought on both sides, and I’m sure I’ll return to this exchange again in a future post. In the meantime, I’d be interested in your thoughts.

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Posted in Progressive Path to Prosperity | 2 Comments »

Jon Johansson and the great ‘centrist project’

Tuesday, April 27th, 2010

Jon Johansson is probably the highest-profile of a new generation of New Zealand political studies academics (sorry Bryce Edwards – your time will come!) and his most recent book The Politics of Possibility (2009) doesn’t lack for ambition.

In the space of its 200 pages, Johansson attempts to: explain a theory of political leadership; classify every New Zealand government in history according to Erwin Hargrove’s preparation/achievement/consolidation cycle; provide one of the first considered assessments of Helen Clark’s prime ministership; determine whether John Key is Generation X or not; and unveil the ‘Centrist Project’ that will underpin the major change in New Zealand politics.

Inevitably, it ends up more than a little uneven. Some parts are quite strong, some seem a bit undercooked, and others . . . well, let’s just say that I don’t think the approach of summarising the problems of the pre-Key National Party by spending 1 ½ pages altering the lyrics of Bill Joel’s We Didn’t Start the Fire is likely to catch on amongst political studies academics.

By the end of Chapter Eight, he has relegated the Fifth Labour Government to being a mere ‘government of consolidation’. They shouldn’t feel too bad though — he argues that we have only ever had threefour ‘Big Change’ governments (‘governments of achievement’): Vogel in the 1870’s, Seddon in the 1890’s, the First Labour Government in the 1930’s, and the 1984-92 period of Rogernomics and Ruthanasia.

John Key, however, has the potential to be more than a mere ‘consolidator’ — Johansson says he has it in him to lead a ‘government of preparation’ and be the harbinger for the next ‘Big Change’ administration.

All he lacks, it seems, is a plan and vision. Fortunately, Johansson has one he prepared earlier. In Chapter Nine he sketches out “some long-term goals that will span multiple terms to maximise [Key's] potential as a preparatory leader, to serve as a bridge between generations, and to lead a new cycle in our politics” (p. 169). This is what he calls the ‘Centrist Project’.

And since this ‘Centrist Project’ sets out a specific policy agenda, that is what I want to focus the rest of this post on. As its name implies, what Johansson sets out is not uniquely suited to conservative political parties. Could the ‘Centrist Project’ be something that the progressive movement can learn from, or even adopt?

There are four components to Johansson’s project:

  • Strengthening our democracy
  • Water – New Zealand’s pre-eminent strategic asset?
  • Tertiary Education – the path to freedom
  • How to Govern – means as ends-in-the-making

Below, I’ve set out what Johansson means by each of these, along with a few comments of my own.

Strengthening our democracy
This involves four ‘interlocking’ issues: the electoral system; electoral finance; the Maori seats; and the republican debate, which he advocates that we broach by way of an eminent persons group. Together, these issues translate into “the larger idea of leading a vital democratic renewal by articulating an overarching vision about the direction of our democracy” (p. 169).

This does indeed amount to a worthy area for reform. It’s frustrating however how unbalanced the ‘Centrist Project’ chapter is. Out of twenty-five pages, sixteen are on this component, and ten of those are on the electoral system and the forthcoming MMP referendum, including an extended and out-of-place discussion of how National has mishandled the MMP issue in the past.

I also have reservations about how focussed on familiar issues this section is, rather than looking at new ways to enrich our democracy. What about the potential that information technologies offer for deepening citizens’ involvement in decision-making? Or how about some of the ideas being discussed abroad like a “Citizens Branch of the constitution” or even just thinking anew about how best to use referenda?

Water – New Zealand’s pre-eminent strategic asset?
This may be the most surprising inclusion, yet Johansson argues that, “Given ever-increasing global pressures on water as the world’s population growth continues apace and the global economy continues to expand . . . it is not difficult to predict water becoming a natural resource every bit as valuable as . . . oil” (p. 189). New Zealand’s relative abundance of water therefore makes it a vital strategic asset to be preserved, yet there are important challenges around threats to water quality, increased droughts, how much water we waste and whether and how to charge for it.

Johansson does a reasonable job of introducing what may be a new issue to many readers, but he doesn’t really justify why this is the environmental issue included in his ‘project’. At one point he calls it “a longer-term strategic issue” compared with climate change (p. 170), yet surely the process of decarbonising our economy is going to take decades? One can’t help suspecting that this issue appeals because, unlike climate change where National is at best a late-comer, it might be possible for Key (and perhaps Johansson) to get some credit for putting this on the public agenda.

Tertiary Education – the path to freedom
Johansson argues that tertiary education transforms people’s lives and opportunities, and knowledge and innovation are becoming increasing important to an economy’s success. He proposes setting up a Royal Commission to get past the “old ideological debates” and onto “first-principle questions” (p. 194). This might include transforming our universities into more specialised or elite institutions” (p. 193).

I’ve got a background in tertiary education policy, although, as I’ve noted, I do my work in that area through Education Directions rather than Policy Progress. I will note that my impression is that there isn’t any magic recipe to transforming the contribution of tertiary education — it’s about hard work leading to incremental improvement — and that a Royal Commission is unlikely to do much more than rehearse a pretty familiar series of issues and arguments. But, hey, maybe I’ve become mired in sector group-think and some fresh eyes would provide a much-needed circuit-breaker . . .

How to Govern – means as ends-in-the-making
Johansson argues that “the means employed by a government to give effect to its ends are intimately connected with the likely success or failure of its desired end goals” (p. 194) and that the other three components of his agenda “all rely upon political leadership that forges a new consensus or builds upon the cultural strengths that have withstood the test of time and events” (p. 195). This connects back to his advocacy of a flexible and open form of leadership, and his preference for a less partisan politics.

These sentiments appeal, but their effectiveness compared with (or pitted against) more confrontational, centralising or subversive approaches is not really demonstrated. Johansson cites Obama a few times, yet some would argue that his bipartisan approach, involving unilateral concessions, has been ill-equipped to deal with the well-disciplined rejectionist approach the Republicans have adopted since his election.





This post has been a bit critical of Jon Johansson in places, but actually I think setting out a ‘big-picture’ agenda the way he has was a brave and worthwhile thing to do. What he has come up is a useful conversation-starter for progressives to engage with, as much as for conservatives or centrists.

So what do you think? Has Johansson hit upon some or all of the issues that governments need to face up to over the next few decades? And what would be your four components for a ‘Progressive Agenda”?

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Posted in KiwiWatch | 7 Comments »

Pascal’s Bookie to the rescue!

Thursday, April 22nd, 2010


I don’t know much about Pascal’s Bookie, other than that this is the pseudonym of a pretty prolific commenter on a range of New Zealand political blogs. But I’d like to give credit to this person for steering me towards a useful insight in my quest to better understand how New Zealand’s level of prosperity compares internationally.

Early this year as I was preparing to launch Policy Progress and doing some initial thinking around the Progressive Path to Prosperity topic, I came across a post on The Standard picking up on something Pascal’s Bookie had flagged in their Open Mike slot, namely a link to a trio of graphs.

It’s probably appropriate that, while the graphs originated from the OECD, Pascal’s Bookie had picked up on them from a post by Matthew Yglesias who, as I’ve mentioned a couple of times in the e-newsletter, is my very favourite US blogger. You can count on hearing more from him in these pages.

Anyway, you can see this trio of graphs yourself below. They show a comparison of incomes in OECD countries at different stages of the income distribution. Both Yglesias and Pascal’s Bookie were using this to make a point about inequality in their respective countries (which is fair enough). But what particularly struck me was the placement of New Zealand in the first graph . . . [continued below]

Yes, that’s us! Right next to the OECD average when it comes to median income. In other words, the purchasing power of a New Zealander at the midpoint of the income distribution is very similar to the OECD average.

But haven’t we just learnt that New Zealand is 22nd out of 30 countries in terms of GDP per capita, and that this equates to just 84% of the OECD average?

Now, admittedly New Zealand’s ranking on median income isn’t hugely different at 19th, but we have already heard Brian Easton’s warning that rankings can be misleading (reiterated by James Caygill in comments).

The key difference seems to be that the median income statistics tend to flatten out the size of the differences between countries. Hence we see in the graph below that the difference between New Zealand and the OECD average becomes negligible, while the difference with Australia is halved. (Interestingly, the gap with the UK is largely unchanged, while the relativity between Australia and the UK is reversed.)

So why is there is such a large discrepancy between the two measures? Two possibilities suggest themselves.

The first possibility is to do with the difference between the median and the mean. Maybe because we have fewer really wealthy people to drag up the average, our relativity at the mean is weaker than at the median, which is based on a person at the midpoint of the income distribution. Against this, however, the relativity for our top decile (the third of the trio of graphs above) turns out to be stronger than for our median.

The second to do with the difference between GDP and national income. Maybe we are bolstering our standard of living above and beyond what we actually produce. (Or as Nicholas put in comments on Tuesday, “In other words we are Esau selling his birth rights for stew; we are trading our future for immediate pleasure.”)

We’ll be investigating these possibilities, along with other considerations, as work on this issue continues over the next few weeks. Meanwhile, let us know your thoughts and ideas in the comments below.

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Posted in Progressive Path to Prosperity | 7 Comments »

Naïve questions about our OECD ranking

Tuesday, April 20th, 2010

Source: Ministry of Economic Development, Economic Development Indicators 2007, Figure 2.1, http://www.med.govt.nz/upload/53549/Indicators-Report-2007.pdf


I think I’m relatively well-versed in economic theory, but a lot of it is self-taught, or at least learnt outside of formal economic programmes.

I studied economics at high school and took 1st year Macro. But then I came back to it via politics: Jack Vowles taught me an appreciation of Keynes, David Neilson the insights that can be taken from Marxian economics, and Alan Simpson supervised my dissertation (and conference paper) on the international dissemination of economic ideas (Where do they get their ideas? Treasury, the Reserve Bank and the International Economics Community). I kept on reading from there, starting with Keynes’ General Theory and then Marx’s Capital (I only made it through Volume 1); economic books and papers have been part of my professional reading ever since.

But, even so, I’ve never really had economics textbooks drilled into me. So when I encounter a particular economic finding or phenomenon, my initial reactions tend to be those of a layperson. The standard economic explanation doesn’t necessarily spring straight to the forefront of my mind.

I’d want to argue that that can be an advantage. It doesn’t immediately ‘lock in’ an answer, and allows scope for different interpretations.

Which brings us back to the dreaded OECD ranking. As we saw last week, New Zealand’s per capita GDP has been declining compared to other OECD countries for at least the past sixty years, and is now 84% of the OECD average. We were once one of the richest, yet now rank 22nd out of 30 countries (between Greece and Korea).

Like many New Zealanders of my generation, I grew up hearing this sort of stuff. And yet when I thought about it, and particularly once I started travelling overseas, a couple of what I call “naïve questions” came to mind:

  • Are we really that unproductive?
  • And are we really that poor?

I’ll unpack each of these in turn. (Warning: the reasoning below has been deliberately simplified.)


Are we really that unproductive?
If our GDP per capita is lower than other countries, then in most cases that means that our workers are less productive. There are other possible reasons – we might have lower rates of labour force participation, or work shorter hours – but, as the Ministry of Economic Development graph at the top of this post shows, that’s not the case; quite the reverse, in fact.

So why are we unproductive? We have by all accounts a pretty good education system and our rate of participation in it is quite high. And anecdotally we know that Kiwi workers are well-regarded when they go to work in other countries like Australia and the UK. So I doubt our workforce is deficient.

Maybe it’s something to do with commodity prices. I realise I we are ‘price-takers’ when it comes to prices on commodities such as dairy, meat and wool, and that the cost of production is fundamentally set by Third World wages. But if we were able to earn First World prices through other goods and services but only Third World ones through commodities, wouldn’t the latter become pretty unprofitable and unattractive compared to the former?

Is it something to do with the exchange rate, then? Does it somehow set our wages and price levels in general based the prices of our commodities, since they are our main export earners? I can see how that might happen with the non-tradeable sector, i.e. those goods and services that aren’t (and often can’t be) traded internationally. So a New Zealand hairdresser might earn much less (in buying power terms) than one with the same skills, experience and talent in the UK, because the customer base they were trying to sell to has less money to spend.

But if this were the case, wouldn’t it make our other export industries very competitive, because they were producing their products more cheaply than other First World countries? And aren’t our manufacturers complaining about precisely the opposite?

Another possible explanation is underinvestment in productive capital. After all, labour productivity is often more a reflection of how well-equipped a worker is than anything about her personal skills or aptitudes (a fact that is often overlooked when this issue comes up in political discussion). Maybe with our small firms and low domestic savings rates, we just haven’t invested in our capital stock the way other countries have, and our workers are less productive (and therefore poorer) as a result?


Are we really that poor?
My second naïve question is about how our low per capita GDP manifests itself in our material standard of living.

In comments on my previous post, Achela, Nicholas and James have made the point that there’s a lot more to standard of living than just GDP per capita, such as life expectancy for instance. And, in another context, Rob has drawn our attention to the insights of happiness economics.

But even just in terms of our ability to afford market goods and services, how meaningful is what these GDP per capita figures are telling us?

Take two countries that most New Zealand are pretty familiar with: the United Kingdom and Australia. According to these figures, the British are 30% better off than we are and the Australians are 37% better off.

Does that feel right to you? I spent a couple of months in the UK last year, and I know people who live in Australia who I visit pretty often. The standard of living over there doesn’t seem particularly different to here. Can you think of things that people in those countries regularly afford that we can’t, for instance?

At the same time, the figures suggest that the difference between the Australians and us is the same as the difference between us and the Slovak Republic. Now, I don’t know much about the Slovak Republic but I imagine that if I went there I’d pretty quickly see signs of a rather more restricted lifestyle – somewhat more different from us than we are to the Australians. How can we explain that?


I’ve raised these questions with economists on occasion and been kindly assured that there is absolutely nothing interesting or insightful in them, and that these seeming paradoxes are easily explained.

And I’m not so rash as to hijack the entire Progressive Path to Prosperity topic — or even just the Identifying the Problem workstream — and make it about that.

Nevertheless I do hope to present my work in this area in a way that does offering a satisfying account of New Zealand’s situation to people who puzzle about the same sort of naïve questions as I do.

If you have had similar questions to me, or can offer some compelling answers, or even if you think this whole line of enquiry is misguided, I’m keen to hear from you – leave a comment below!

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Posted in Progressive Path to Prosperity | 5 Comments »

New Zealand’s economic performance – sixty years of decline?

Thursday, April 15th, 2010

Stream 1 of Policy Progress’s work programme topic A Progressive Path to Prosperity is Identifying the Problem.

In today’s post I’d like to start a discussion about that by setting out the standard case about New Zealand’s long-term relative economic decline. This will no doubt be familar to many of you, but it’s useful to set it out as a starting point. Then on Tuesday I want to talk a bit about what it really tells us.

It’s pretty well known that New Zealand’s economic growth has been quite weak compared to other OECD countries for a long time now. The result of that is that our per capita gross domestic product — how much we produce per person in the population — has fallen below other countries. The graph above shows how since 1976 we have dropped below the OECD average and fallen behind countries like the UK and Australia.

The following 2002 graph from prominent New Zealand economist (and Listener columnist) Brian Easton shows our decline against the average OECD per capita GDP over an even longer period.

Back in 1951, our GDP per capita was 60% higher than the OECD average, but by 2002 it had fallen to 14 points below the OECD average (86%). That’s a pretty massive decline, and it has continued since: the most recent OECD figures are for 2007 and have us at 84%.

This, of course, brings us to the dreaded “OECD ranking”.

Easton warns that rankings can be misleading but nonetheless provides useful information on them. Back in 1951 we were fifth in the world with only the US, Switzerland, Luxembourg and Canada ahead of us; and we stayed that way until the early 1960s.

By 1970 we had fallen to 11th place, just behind France and Iceland. By 1980 we had fallen to 19th, behind Italy and Finland.

There we stayed until 1997 when Ireland overtook us, leaving us in 20th place. Since then, we have also been overtaken by Spain (2000) and Greece (2005).

That puts us at number 22 out of 30 OECD countries. We are a little ahead of Korea, the Czech Republic and Portugal, and well ahead of the Slovak Republic, Hungary, Poland, Mexico and Turkey.

Cue the political rhetoric:

We are among the foothill nations at the base of the OECD wealth mountain. Number 22 for income per person, and falling.

But what does a wealth ranking matter, you might ask? Why does it matter if we’re number 22 or number four?

It matters because at number 22 your income is lower, you have to work harder, and you can save less. You face more uncertainty when things go wrong, when you or your family get sick or lose a job. No New Zealand sports team would be happy to be number 22. Why is the Government?

That was from Opposition leader John Key in 2008. In truth though, politicians of all stripes have sought to alternately raise alarm about or justify our OECD ranking for many years.

But how serious is this situation really? What does it actually mean for our material standard of living? That’s what I want to begin to address on Tuesday, starting with a few naïve questions that I hope will illuminate the issue.

But before that I’m interested in your perspective on New Zealand’s OECD ranking and related issues. What do you think of this ’standard case’ about our economic performance? Do you find it concerning? Convincing? What alternative or additional measures or considerations would you bring to bear?

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Posted in Progressive Path to Prosperity | 10 Comments »

The lesson the left needs to learn from the right

Tuesday, April 13th, 2010

Many progressives, used to hearing the names Milton Friedman and Friedrich Hayek paired together as advocates of free markets and arch-critics of Keynesian economics, are likely to assume that the two were very similar in their economic theories. But actually there were very important differences between them.

Friedman’s Chicago School was the driving force behind what has been variously described as neoclassical economics, monetarism or freshwater economics. It has been the dominant paradigm in economics for the last thirty years, though is perhaps now being challenged by a Keynesian resurgence. It is generally known for elegant and detailed theoretical models using quite complex mathematics.

Hayek’s Austrian School on the other hand emphasised the unpredictability of the market economy and was generally distrustful of the claims of theoretical models and complex maths. While Hayek’s moral and political writings are sometimes fondly quoted on the Right, the Austrian School’s economic thinking has largely been relegated to an historical footnote.

Hang on, though – didn’t I say this post was going to be about John Kay, following on from his critique of the market theory to look at what his alternative? And so it is.

Kay, as we saw, is critical of the market failure doctrine. But its greatest failure, in his eyes, “is that its model provides not just an inadequate account of how markets fail, but an inadequate account of how they succeed“.

For Key, the most profound strength of market economies lies, not in the the way they efficiently allocate production and resources, but “in their ability to innovate and adapt in an environment of uncertainty and change.”

The sustained achievement of market economies comes from their pace of innovation — in products, technology and organisation – derived from the ability of market systems to undertake small-scale experiment, to watch the results, to mimic what works, and discard what doesn’t.

. . . That insight — the economics of Friedrich Hayek (concerned with the dynamic capacity of market economy to experiment and innovate) rather than of Milton Friedman (concerned to promote the allocative efficiency of competitive markets and to attack all kinds of state intervention) — is the lesson the left needs to learn from the right.

So far as I know, Kay is not affiliated with the Austrian school; he certainly doesn’t share their hatred of collective action. His own analysis centres on the concept of “disciplined pluralism”, which he describes as “decentralised choices with accountability”. This “allows a multiplicity of small-scale experiments and in which the successful experiment is quickly imitated while the unsuccessful quickly folds”.

He criticises old-style progressives who “conflate the need for collective choices and collective action with central direction and political control”, but also the tendency of UK New Labour to combine quasi-market mechanisms in areas like health and education with a system of detailed centrally-prescribed targets. He notes that “rationalist bureaucracies detest” the “inherently inefficient process” of disciplined pluralism, which “relies on constant displays of irrational optimism, and most of its experiments fail”.

Kay envisages a world where:

educational goals are not determined either by central state direction or by the simple aggregration of individual choices. Both are relevant but neither is sufficient. Multiple goals emerge, are different across different parts of the educational system and evolve over time, through an interactive process between those who provide the services and those who pay for it. In a similar way, medical treatment must be managed through trust relationships between politicians, professionals and patients.

I’ve found John Kay’s account of the limitations of market failure pretty persuasive. As he says, “the list of market failures is a guide to some common problems in economic policy” but is not a good theoretical basis for progressives to rely upon to justify and guide their interventions.

I’m a little more inclined to reserve judgment about his proposal of “disciplined pluralism” as an alternative. Partly, it’s just that I’m interested in looking around to see what other approaches are out there.

But I also have a few reservations. Firstly, I’d want to know a bit more about how “disciplined pluralism” would work and what it would mean. Kay’s earlier book The Truth about Markets covers some of that, apparently. Also, as Policy Progress newsletter readers already know, he has a new book out called Obliquity: Why our goals are best achieved indirectly, which may shed further light.

Secondly, some of the implications that he does set out may be a little troubling to progressives. For instance, he argues that we might not know the secret of successful provision but we recognise a good school or hospital when we see it. That means that ‘exit’ is more effective than ‘voice’ and policymakers should give people a choice of health and education providers – “the most effective means of getting a good school is to be able to reject a bad one . . . recognising success and failure is indispensible to innovation and imitation.” In other words, perhaps, provided that Professor Hattie can devise a valid methodology for them, school league tables might be a good thing! Is that a notion we’d be comfortable with? If not, what would be our theoretical basis for arguing against this?

I’d be interested in hearing what Policy Progress readers think of these ideas, including any impressions from anyone who’s read some of Kay’s other works.

Postscript: another book that might be worth following up on that seems to reflect a similar perspective is James Scott’s Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed. Anyone read it? What did you think – anything valuable for the Theoretical Foundations topic in it? Berkeley economist Brad Delong has an interesting though rather involved discussion on it (and its connections to Austrian economics) here.

Postscript 2: The classics of Austrian economics are probably worth engaging with further, but the modern Austrian school(s) are probably best steering clear of, a lesson Brad Delong draws from Time’s Justin Fox’s experience.

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Posted in Theoretical Foundations | 10 Comments »

The Failure of Market Failure

Thursday, April 8th, 2010

The idea for the Theoretical Foundations work programme topic came from reading John Kay.

John Kay is a British economist and writer. He has been director of the Institute for Fiscal Studies and a columnist for the Financial Times. His most famous book is probably The Truth about Markets (2003), which I haven’t yet read.

But I have read “Market Failure”, a chapter in a book called Beyond New Labour: The future of social democracy in Britain edited by our old friends Patrick Diamond and Roger Liddle, that covers some of the same ground.

In this chapter, Kay discusses how modern progressives – he is focussing on New Labour in the UK but the lessons go wider – have embraced the doctrine of ‘market failure’ as a way of squaring an acceptance of a market economy with a continued desire to address inequality. This, he says, has been a mistake.

Under the market failure doctrine, effective market outcomes rely upon the following four conditions, and there is an ‘efficiency justification’ for state intervention if any of them are breached:

  1. A competitive environment
  2. Consumers have good information about their needs and the services available
  3. No ‘externalities’ (the good or service affects only the producer and the consumer, not any third parties)
  4. No ‘public goods’ (producers can identify the consumers of the service, and can quantify the consumption and charge for it).

We can probably all think of instances where such breaches occur. A number of environmental issues for instance, including the climate challenge, are situations where condition 3 does not hold.

The market failure doctrine therefore seems to offer plenty of scope for progressive action, while also feeling quite prudent and economically literate. It is understandable that it would have seemed an attractive approach for modernising progressive parties.

But, according to Kay, market failure is a bad argument for progressives to buy into. “By conceding too much to market fundamentalists it loses both intellectual coherence and political resonance.” (p. 74)

Kay mounts a comprehensive critique of the market failure doctrine thoughout his chapter, but the theoretical core of his argument can be found in the following paragraph (p. 76):

The basic philosophical differences that divide left and right concern the priority that should be given to claims of individual rights and private property relative to those of solidarity and social justice. The left insists, and the right denies, that the public interest is more than an aggregation of private interests. The model that underpins the market failure doctrine answers these questions, and others, in the right’s favour. A particular philosophy is inherent in the mathematics. The model takes individual preferences as given, along with personal resources and property rights, and sees social welfare as an aggregation of individual preferences. The primacy of material incentives as determinants of economic behaviour is not a prediction of the model, but an assumption.

Moreover, because the modern left has invested so much in market failure as its rationale for action, there is a temptation to frame everything they want to do as a response to market failure, however tenuous the basis for this may be. Kay cites the example of health, where Gordon Brown insisted on explaining his commitment to a tax-financed National Health Service by reference to market failures that, while real, did not actually justify the particular model he supports.

“More importantly, they have nothing to do with the real reasons why most people – including Brown – support a publicly funded NHS. These reasons begin from ethical concepts such as compassion and fairness rather than economic concepts such as information asymmetry.” (p. 76)

And this is the crux of the problem. “The notion that some economic choices are essentially collective, and cannot be described as a summation of personal of personal preferences, strikes at the heart of the market failure doctrine.” (p. 77)

I can relate to this. Back when I worked for NZUSA in the late 1990s there was a lot of debate about the extent to which tertiary education was a private good and should be privately funded through student fees. The students wanted to maintain that tertiary education was a public good and should be fully publicly funded. I was keen to dissuade them from this – while they had good arguments against particular claims about the private benefits from tertiary study, by buying into the public/private benefit argument, they undermined their own position. There is clearly some private benefit from study so you couldn’t argue for free education on public/private benefit terms.

Instead, I argued, they should seek to frame tertiary education as a collective good, i.e. one which society should agree to fund collectively as it does for school education.

John Kay makes a similar point: “The majority of contested economic policy issues reflect disputes about the nature of entitlements, or they occur when parties look to the government to fill in the implicit terms of imperfectly specified contracts.” (p. 81)

And, indeed, first amongst his list of illustrative recent policy issues is tertiary fees, framed not as public/private benefit or as (market failure) barriers to participation, but as “What rights of access do individuals have to higher education, and on what terms?”

Progressives in New Zealand have not made as extensive or explicit use of market failure as a theoretical framework as appears to have been the case in the UK. Nevertheless, these and other market-oriented economic concepts have permeated policy discussion pretty thoroughly in this country for the last twenty-five years, and to a large extent progressive policy thinking has accommodated itself within that discourse.

In the Theoretical Foundations work programme topic, I want to take a step back from that and have a look at the theoretical arguments we progressives rely upon to justify our actions and initiatives. Are they fit for purpose, or, like the market failure doctrine, do we end up either making tenuous linkages and/or conceding significant intellectual terrain to our opponents?

In Tuesday’s post, I’ll survey Kay’s proposed alternative to the market failure doctrine.

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Social change through libertarian paternalism

Wednesday, April 7th, 2010

Behavioural economics has been popularised by Richard Thaler and Cass Sunstein in their book Nudge and their nudge blog.

They describe their approach to public policy as libertarian paternalism, by which they mean:

It is both possible and legitimate for private and public institutions to affect behaviour while also respecting freedom of choice. Often people’s preferences are ill-formed, and their choices will inevitably be influenced by default rules, framing effects, and starting points. In these circumstances, a form of paternalism cannot be avoided.

Thaler and Sunstein’s idea is that if people have poor information the onus is on the state to create default positions that most people would choose given good information, and choice architecture to guide them to better choices.  They also like to leave people the option to reject the default if they want – accepting that right decision has subjectivity, and that adults should be free to be wrong.

Public policy choices are constructed both when governments act and when they don’t act.  It’s just that non-decision making can more easily be framed as not interfering.  In other words all governments are in some sense nanny-states.

Progressives need to distinguish between legitimate governance and nanny-statism (in the narrower sense), to accurately gauge the level of interference in their lives the public will see as legitimate.  This is where behavioural economics can help.

The first trap to avoid is the default of most politicians to doing what they can do, which is changing laws, regulations, and restructuring, rather than what will work. The second trap is a large gap between official pronouncements on desirable behaviour and the real world experience of people.

The Crimes (Substituted Section 59) Amendment Act 2007 (Anti-smacking legislation) is an example of both traps.  The purpose of the Act:

is to amend the principal Act to make better provision for children to live in a safe and secure environment free from violence by abolishing the use of parental force for the purpose of correction.

The public context of the law change was some horrific cases of child abuse.

In March 2010 Sue Bradford was reported as believing new figures from police on the impact of the so-called anti-smacking laws prove the legislation is working as intended.  Apparently police investigation has led to two people being prosecuted under the Crimes Act – presumably because the previous defence that existed no longer does.  Here, then, is the celebration of a law that caused no change, evidence of the first trap.

Trap two is that there is a chasm between the political consensus reached in the law change and sentient parents’ observed reality. Sue Bradford apparently believes that smacking is violence, no shades of gray – but to most people smacking by the vast majority of parents is not seen as a problem and they see it as unrelated to child abuse.

The expenditure of limited political capital on something to achieve no obvious change is unfortunate.

I can’t figure out how nudges would easily work for child abusers but I can work out a couple of ideas about just being anti-smacking.  I wouldn’t have attached the idea to the legislation.  I would have created a programme to increase parental control over children (what parent doesn’t want that!), launching off the existing SKIP programme and popular ideas such as the Super-Nanny’s naughty step and other positive parenting ideas.

Another example is the fanatical support for breastfeeding by health professionals such that bottle feeding almost can not be contemplated in open.  Perhaps I am stuck in a fallacy of a very limited universe, but why is it every mother I know has enough nous to gloss over whatever the nurses say and do what is best for them and their family anyway.

Having just been through antenatal classes I’m fairly sure a more balanced approach that focuses on the outcome of a healthy child rather than the input of breastfeeding is more likely to be accepted by parents.  I would spend the limited time on tactics to encourage latching and mixed breast and bottle approaches rather than the hard sell of breastfeeding as the be all and end all of baby health.

Both anti-smacking and pro-breastfeeding are attempts to create norms without respecting freedom of choice and without respecting the fact that when people do have good information they choose differently from the norm the state prefers through its agents.

Politicians have to understand that citizens have the right to be left alone.  Thaler and Sunstein’s book is called Nudge because they think nudges in the “right” direction are legitimate, pushes are not.

One change project that has worked well is drink-driving reduction.  A key element in the change was the host responsibility choice architecture.  The Sale of Liquor Act required elements like the provision of substantive food, non- and low-alcohol drinks and safe transport options.  It didn’t require that anyone have to use them just that they were there in licensed premises.  People were still free to choose.  But, for example, the designated driver could take that first non- or low-alcohol beverage and be more likely to remain sober.

There was also a long campaign directed at describing behaviour that accorded with values and behaviours the public valued, for example “Friends don’t let friends drive drunk” and various other treatments of the mate-ship theme.

In the manifesto for the next progressive government we should consider the utility of libertarian paternalism techniques to achieve sustainable, i.e. publicly legitimate, social change.

Darel Hall lives in Christchurch where he is involved in local government politics as part of the Christchurch 2021 grouping. He has a background in health promotion and tertiary education policy, having previously been president of the University of Canterbury Students’ Association (UCSA) and executive director of the Industry Training Federation, amongst other roles.  Between the first and last drafts of this post he welcomed Alexandra and Samantha to the World.

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Core Crown Expenses 1999-2009: an overview

Tuesday, April 6th, 2010

This is the first post on the Policy Progress work programme topic ‘Progressive Fiscal Policy – Lessons from the Fifth Labour Government’.

It may come as a bit of a surprise that there really isn’t any readily available database that shows the fiscal record of any particular administration. We will have to construct this for this topic, and there will be some complications involved in doing so.

For today, however, I just want to use some currently available information to present a bit of the ‘big picture’. I’m going to use Core Crown Expenses, which is the standard measure, and look at the period from 1998/99 to 2008/09. I think that timeframe is the best one for a simple analysis, but no year-to-year analysis is perfect. The budget for 1999/2000 was actually set by Bill Birch in the Shipley government, but the incoming Clark-Anderton government committed significant additional spending during 1999/2000 ahead of their own first Budget in June 2000. Similarly, the current government made significant changes to the 2008/09 appropriations but the budget for this was originally set by Michael Cullen.

Plus, of course, the Core Crown Expenses are a mix of deliberate initiatives, responses to cost and salary pressures, and automatic adjustments (benefit CPI increases, additional superannuitants etc). With these caveats in mind, then, let’s look at the figures.

The graph above shows the growth in Core Crown Expenses from the 1999 fiscal year (1998/99) to the 2009 fiscal year (2008/09). The yellow line is the CPI index for this period, so the area above that line represents a real increase in government spending. Anything below that can be argued to be simply reflecting general price inflation.

We can see that expenses increased from $34 billion to $62 billion during the period. That’s an increase of $28 billion, or almost a doubling of Core Crown Expenses. Probably about a quarter of that, or $7 billion, can be accounted for by general CPI inflation, so the real increase would be about $21 billion.

Where did all that additional money go to? We have data breaking the money down into Core Crown Expense Classes, a slightly odd grouping of spending areas that don’t seem to be used anywhere except the Crown accounts.


The graph above presents the composition of the $28 billion increase by Core Crown Expense Class. It shows that the two largest areas of additional spending were ‘Social Security and Welfare’ and ‘Health’, followed by ‘Education’. Between them, these three classes accounted for almost two-thirds of the total $28 billion increase.

Such broad categories, however, raise as many questions as they answer. For instance, what drove that extra ‘Social Security and Welfare’ spending? It might be thought that it went on additional benefit expenditure, but actually it was more likely to have been a combination of an ageing population increasing the cost of Superannuation, and Working for Families tax credits.

Also, since some Expense Classes are much bigger than others, those large slices of pie above may simply reflect the fact that those areas made up a large proportion of spending to begin with.

To test that, let’s use an index approach to show the growth pattern in each Expense Class over time irrespective of the overall size of spending in each.

This shows that, when viewed in relative rather than absolute terms, growth in ‘Health’ and ‘Education’ was actually only mid-range amongst the Expense Classes, and ‘Social Security and Welfare’ was one of the lowest-growth areas.

By far the fastest growing Expense Class was ‘Economic and Industrial Services’ followed by ‘Transport and Communications’. ‘Defence’ by contrast has grown quite slowly — however Core Crown Expenses do not include capital expenditure such as military equipment.

All this is just the first layer of the onion. Over the course of this topic I intend to peel further and look at the particular initiatives and expenditure lines that have driven costs in each of these Expense Classes, and also look at other areas like capital expenditure that are left out of this initial analysis. Let me know of any insights you have about how to proceed, or requests about particular areas of expenditure that you feel are important.

Update: I should also reference my data sources. Most of the data comes from the very useful Treasury file Fiscal Time Series – Historical Fiscal Indicators 1972-2008. The data for 2008/09 is from Core Crown Expense Tables in BEFU 2009.

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Finalised!

Thursday, April 1st, 2010

I’m pleased to be able to say that Policy Progress’s work programme for 2010 has now been finalised.

Undoubtedly, there’ll be some changes as we proceed over the coming year, but the key decisions have now been made.

It’s a good feeling, and I’d like to send out a huge thanks to everyone who commented or wrote in with thoughts and suggestions!

You can see the full work programme here so I’m not going to summarise it in this post.

Instead, I’d like firstly to say a few words about how it has evolved from the draft I published on 2nd March; and secondly to talk about the role that this blog will play as the work programme proceeds.



From Draft to Final

  • The topics that we started with have broadly been retained in the final programme – there seemed to be reasonable support for each of them, and the other suggestions that were put forward seemed to be able to be accommodated within the proposed topics.
  • Child Poverty & Cycles of Disadvantage is now presented more formally as a topic, even though most of the work will take place in 2011 – this responds to calls for a firmer commitment to work on family issues in general and child poverty in particular.
  • In response to strong and persuasive arguments, and despite some initial reservations on my part, Stream 3 of the Progressive Path to Prosperity topic will now look into the issue of a national economic vision and how that might be arrived at.
  • There are now three streams to the Theoretical Foundations topic to emphasise that it will address the rationale for social as well as economic interventions, including what has been described as “How does a progressive government want to interact with society / community – is there a good case for better ’social engineering’?”
  • The Fiscal Record topic has been renamed as suggested in order to emphasise that its purpose is informing the future rather than simply understanding the past.

Finally, I’d like to acknowledge those readers who have made thoughtful comments about the specific economic obstacles I set out last Tuesday. I haven’t responded to those points yet, as my initial focus was on ‘the vision question’ debate, but I’ll reflect on them carefully as work on Stream 2 of the Progressive Path to Prosperity gets underway.

The Role of the Blog
I also wanted to add a few words about how I see this blog operating as the work programme gets underway. Over the next few months, I intend to make a strong start on the work programme topics, and as I do so, I will often post little pieces of work-in-progress here, sometimes to test out some thinking and sometimes just as a point of interest.

I don’t intend to serialise every Policy Progress report in toto on the blog, but you are likely to get a fair idea of many of the key ideas and analysis that will be covered.

In addition, I will also put up little programme-related nuggets like Tuesday’s Martin Wolf graph that I come across and think are worth sharing.

And there will sometimes be posts about other issues entirely. For instance, I see one of the purposes of this blog as celebrating the importance of quality analysis and research in policymaking, and will be looking at ways of doing that – more on that as it develops.

As ever, though, I’m interested in your feedback. What do you think the blog should cover, and how should it best keep everyone informed about progress with the work programme?

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