OPINION WITHOUT ANALYSIS IS PRETENTIOUS

It’s always frustrating to come across opinionated comment unsupported by evidence or reasoning.

A case in point is this February 25 New Zealand Herald editorial on last week’s Welfare Working Group report.

The editorial states:

… the group errs in spreading its net too widely. John Key’s queasiness related to women who had more children when they were already on the benefit being required to look for part-time work when their baby was just 14 weeks old. The intention is to stop mothers having additional children simply as a means of remaining a beneficiary. Every so often, an example of this gains publicity. It is probable, however, that the problem is overstated. Either way, the Prime Minister is right to rule out the proposal.

This is just fact-free ex cathedra opinion. It is “probable” that the problem is overstated?  There is no need to surmise. Did the leader writer not read the WWG report which states (p76), “In New Zealand, an estimated one is seven sole parents who enter the benefit system will have an additional child while on a benefit (and ultimately one in four of current sole parent beneficiaries)”?  That hardly looks like a small issue to me.

And what is the Herald’s alternative position? Does it condone the behaviour of the appalling, foul-mouthed Joan Nathan of MeGehan Close, a long-term beneficiary with six children, one of whom, befriended by John Key, is now in CYF’s hands because she is “better off” there and “it’s a life I can’t give her”? Does it think taxpayers should support such DPB recipients on an open-ended basis when most responsible, working families plan the number of children they have on the basis of how many they can afford to provide a good life for? What is its view on the responsibilities of the fathers in question? Does it support the other WWG recommendations on this issue, eg free contraception? Does it favour the minority recommendation that work obligations should commence after 12 months rather than 14 weeks? And why? We are not told.

The editorial goes on to say:

In the same way, the working group goes over the top in recommending that mothers should be forced to look for work once their first child turns 3. Many couples on two incomes may well be willing to return to work soon after a baby’s birth. But that does not mean other people’s priorities are wrong. In parenting terms, there is much to be said for mothers who stay at home with their pre-school children. Whatever the benefits of work, for the individual and the economy, insisting that sole mothers take paid work before their children attend school is a step too far.

It describes this recommendation as “radical” and “extreme”. By what standards?  Welfare researcher Lindsay Mitchell has pointed out that the United States and Canada have a range of ages according to the state or province, with the United States having a maximum of 1 year.

Social democratic Norway, France, Germany and Switzerland have been work testing at 3 for some years.

Why does the Herald think that New Zealand can afford a welfare system with rules that are more lenient than those of these much richer countries, with all the consequences for child poverty and social breakdown that they generate?

The WWG reports (p66) that three-quarters of recipients of paid parental leave returned to work within 12 months, and two-thirds of those returned to work after taking six months or less.

The expectation that, with exceptions, parents be required to look for part-time work of at least 20 hours per week once their child reaches three years of age, and thus relieve the burden on taxpayers and society, looks neither radical nor unreasonable to me.

The leading newspaper in New Zealand’s leading city could do better.

FRIDAY GRAPH – PORT PRODUCTIVITY

Here is a sobering graph, courtesy of Maersk New Zealand.

Click to enlarge.

  

It shows container productivity (gross moves per hour) in New Zealand ports for Maersk vessels compared with other ports mainly in the Asia Pacific region.

The statistics show productivity as low as 20 GMPH in some locations, including New Zealand, and much higher rates in others.

Port size, ship size, labour restrictions and other factors do not fully explain the differences.

Some New Zealand ports, especially Tauranga, are better than others, especially Auckland.

The picture is consistent with the findings in this 2010 report by the New Zealand Institute of Economic Research for the Local Government Forum.

Port reform in the late 1980s and early 1990s greatly improved the performance of New Zealand ports.  We were ahead of many Australian ports for some years but the position has now reversed.

A renewed effort involving ports, shipping lines and the government is needed to make up for lost time.

THE TRUTH ABOUT PRIVATISATION: BLOG # 5

In foreshadowing partial privatisation of some SOEs and Air New Zealand, the government is placing emphasis on the case for reducing debt.  There was a similar emphasis in the privatisations of the late 1980s.

This case is valid but it is a secondary argument.  The main argument is about economic efficiency: that on average and over time, privately owned enterprises out-perform publicly owned ones (and hence contribute more to national income).

For some years the most commonly cited meta-study in support of this view was a 2001 Journal of Economic Literature (JEL) article by Megginson and Netter.  The JEL is the leading economic journal for survey articles of this kind.  As summarised by Phil Barry in his report for the Business Roundtable, the paper found that:

1. of the ten studies examining the relative efficiency of private and public enterprises operating in the same industry, eight studies found the private sector firms performed better, while two found no significant difference between the privately and publicly owned firms. None of the studies found the public sector was more efficient;
2. of the 22 studies that examined the effects of privatisation in developed countries, all but one found privatisation was associated with improvements in the operating and financial performance of the divested firms; and
3. of the 16 different studies of the effects of privatisation in transition economies, the studies documented “consistent and significant” evidence that private ownership was associated with better firm-level performance than was the case with continued state ownership. Further, foreign ownership was associated with greater performance improvement than for firms where ownership was limited to domestic investors.

Phil Barry also cited OECD and World Bank surveys that reached similar conclusions.

One would not expect all studies of privatisation to find that private ownership is superior:  SOEs can perform well for periods of time.  Some individual case studies have found public sector superiority.  The key point is the “on average and over time” finding.  Governments should not gamble against known odds with taxpayers’ money.

Since the three studies mentioned above, the only comprehensive survey article I’m aware of is this paper by Saul Estrin et al, published by the World Bank and also in the JEL in September 2009.

The Estrin et al survey examines the effects of privatisation in post-communist economies and in China. Their findings parallel those of the three earlier surveys noted above. In particular Estrin et al find:

• ownership matters but it is not the only thing that matters;
• on average and over time privatisation leads to improved firm performance and improved economic performance (the CIS seems to be an exception to the latter); and
• allowing foreign ownership significantly increases the positive effects of privatisation.

Thus the government would appear to be on firm ground in citing the empirical evidence in support of full privatisation.  The evidence on partial privatisation may well be more mixed.

THE TRUTH ABOUT PRIVATISATION: BLOG # 4

I blogged about Air New Zealand on 1 February.  My main point was that although Air New Zealand has been innovative operationally, it is not meeting its cost of capital (and it did not do so in at least some earlier years) and is hence a drag on the economy (GDP and GDP/head).

The Treasury has recently posted an interesting short paper on Air New Zealand on its website.

It is dated but nevertheless still relevant.  The author, experienced former Treasury official John Wilson, suggests the following lessons from the Air New Zealand experience:

It was private investors, rather than the government, who lost money as a result of Air New Zealand’s financial failure.

The Ansett purchase was a major strategic failure. It does not disprove the general principle that private ownership is more commercially adept than government ownership. But it reminds us it is a general principle rather than an iron law.

A New Zealand government is likely to find itself the only potential source of new capital in the event of financial failure of a New Zealand-based international airline.

One comment on my earlier post was that (some) other airlines are not making money either.  This is true.  John Wilson comments that “the record of airlines as investments is poor”.  Noted investor Warren Buffett once said that if someone had shot down The Flyer when the Wright brothers put it into the air at Kitty Hawk they would have done investors a favour.  The moral of the story is that governments should be wary of committing taxpayers’ money to such investments.

FRIDAY GRAPH: EUROPEAN FINANCIAL CRISIS

 

This is a great graphical summary of the European financial crisis and the country cot cases.

Click to enlarge

 

 

We are living in dangerous times.  New Zealand’s situation is not too flash either.  As one of my favourite journalists Jane Clifton wrote recently, if we don’t watch ourselves, PIGS R US.

 

FRIDAY GRAPH: MANUFACTURING

China has devastated manufacturing industry in America, right?  No, wrong. 

From Jeff Jacoby’s column in today’s Boston Globe “Made in the USA“:

Mark Perry writes:

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent (see chart above). China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent.

Perceptions also feed the gloom and doom. In its story on Americans’ economic anxiety, National Journal quotes a Florida teacher who says, “It seems like everything I pick up says ‘Made in China’ on it.’’ To someone shopping for toys, shoes, or sporting equipment, it often can seem that way. But that’s because Chinese factories tend to specialize in low-tech, labor-intensive goods — items that typically don’t require the more advanced and sophisticated manufacturing capabilities of modern American plants.

A vast amount of “stuff’’ is still made in the USA, albeit not the inexpensive consumer goods that fill the shelves in Target or Walgreens. American factories make fighter jets and air conditioners, automobiles and pharmaceuticals, industrial lathes and semiconductors. Not the sort of things on your weekly shopping list? Maybe not. But that doesn’t change economic reality. They may have “closed down the textile mill across the railroad tracks.’’ But America’s manufacturing glory is far from a thing of the past.”

Manufacturing is still a large industry in New Zealand.  Moreover, the statistical categories these days can be misleading.  Whether service activities are performed within an industrial company or outsourced can lead to different classifications.  When does a processed agricultural or forestry product get classified as a manufactured product?  The statistical classifications have little meaning from an economic point of view.  Our manufacturing sector is far more efficient and competitive than when it operated behind high protective walls.  It will be alive and well for a long time yet.

PSA/IPANZ Debate

I had fun last evening.

The Public Service Association and the Institute of Public Administration ran a debate on the topic ‘Are cuts to public services and asset sales in recessionary times the way forward for New Zealand?’ 

The main speaker was David Hall, Director of the Public Services International Research Unit, University of Greenwich, London.  On the panel were Bernard Hickey, MP Grant Robertson and me.  Not a very balanced line-up you might think.  Apparently the PSA had asked several ministers to front but they declined.  And most of the large audience seemed to be rusted-on PSA supporters.  They loved Grant Robertson for slapping down John Key for his remarks about our bloated and inefficient bureaucracy and Bill English for talking about ‘waffly’ social policy advice.  Anyway, none of that was a problem for me.

David Hall seems a decent fellow but his views are littered with economic fallacies and they fly in the face of economic research.  For a summary of them, see here.  Essentially, he argues that big government is good but bigger government is even better.  I felt dissecting his positions was like shooting fish in a barrel.  I even managed to feel sorry for the PSA – bringing him to New Zealand would have done their credibility with ministers and the heavyweight policy community no good at all.

Two bits of the evening were particularly enjoyable

I had been itching to ask a front-bench Labour spokesperson why is it that, of all the parties of the Left around the world, New Zealand Labour was in the shrunken universe of the resistant  – which might now be down to just North Korea – in opposing privatisation?  Communist China has long been into it, and now even Cuba.  Helen Clark’s Social Democrat friends have been into it everywhere – Germany with its Post Office, Sweden even with a hospital and a university.  You only have to look across the Tasman to see all Labor federal and state governments getting out of running commercial enterprises in the past 20 years – most recently the Queensland Labor government with the sale of Queensland Rail and the New South Wales Labor government with the sale of electricity assets.  Why was New Zealand Labour in such a weirdly different place?, I asked.  Can you believe what I got in reply?  “That’s not a question.”

The second bit of fun was to offer a bet to the PSA.  Earlier this week they had reacted to the government’s announcement about state sector cuts by saying they would drive the economy back to recession.  That’s a very testable proposition, I thought.  Any organisation that wants to be taken seriously should be willing to put its money where its mouth is.  So the personal bet I made is that there will be no recession (defined as two negative quarters of GDP) in the next two years if the government proceeds with its spending cuts ($200-300 million off new spending etc).  I said I wanted a serious bet – four figures, but they could name the first one.  (I could do with the money to help with my mortgage.)  Brenda Pillott and Richard Wagner Wagstaff looked sheepish but said they would come back to me later.  And indeed they did, but for only $100.  You can decide what to make of that, but I’m happy.

Anyway congratulations to the PSA for organising the debate – I loved it.

Closing The Trans-Tasman Gap

It was good to see the New Zealand Herald editorialising today on the need for new policy to close the income gap with Australia.

The editorial made some good points:

Two years on, after a fall resulting from the global financial crisis, the move westward is growing again, up 16 per cent from 2009 to last year according to the statistics department. And National, too, is reduced to waving at the departees, our economy marooned in low growth and higher unemployment than across the Ditch. The number of New Zealanders returning from Australia is relatively static.

And again:

In government its answers have been limited: reducing company tax, shifting some direct income tax to indirect GST, tinkering with labour and planning laws, trying to hold the annual increase in state spending rather than cutting it, but ruling out big ticket changes such as to Working for Families, interest-free student loans and raising the entitlement age for superannuation.

But then it rather lost the plot:

The economic growth and prospects of a small, primary-produce-exporting nation are not directly comparable to those of a big, diverse, less indebted neighbour.

Hang on a bit!  New Zealand was once a wealthier country (in terms of income per capita) than Australia.  Its geographical position hasn’t changed.  Australia has always had those minerals in the ground.  Australia and New Zealand are both relatively small countries but small countries can do just as well as large ones (think Luxembourg, Switzerland, Hong Kong and Singapore) provided their markets are open and competitive.

Now consider this statement:

New Zealand’s options for revival are relatively limited by lower productivity, high private foreign debt and an almost cultural aversion by the state and individuals to cutting spending in favour of saving and productive investment.

Options limited?  But it is institutions (like electoral systems) and policies (spending, tax, regulatory, social) that mainly determine whether countries prosper or not in today’s world.  New Zealand’s productivity growth performance was slightly better than Australia’s in the 1990s but fell sharply in the last decade as economic reform stalled and reversed.  Decisions on institutions and policies are for us to make.  The question to ask is: If New Zealand moved in the direction of the policy settings of countries like Hong Kong or Singapore, why wouldn’t the income gap with Australia close quite rapidly?  (Think Ireland when it had its act together.)

Another argument:

Little is being achieved in catching up with Australia and it is possible that no policy setting, short of changes that would spark far more serious social upheaval than a brain drain will deliver parity in the foreseeable future.

 [The government’s] … 2025 productivity task force, headed by former leader Don Brash, twice predicted that major change was needed, and was given an almost unseemly short shrift. Dr Brash’s prescription suffered from a political tin ear, unaware or unpersuaded by the risks of a voter backlash to wholesale cuts to welfare programmes and taxes and sales of state assets.

This is hyperbole.  There is no need for wrenching economic change (unless we dither and it is forced upon us again).  The Brash prescription was orthodox, not radical.  It was entirely consistent with OECD prescriptions. It wasn’t the Taskforce’s job to play at being politicians; it was to deliver economic advice on how to close the gap.  And the government has on its agenda a number of possible initiatives which, if adopted, could make a difference, as I noted in this article.

Finally, somewhat contradictorily, the editorial concludes:

For its own sake, New Zealand needs bold economic initiatives that will position the country for sustained growth.

Sadly, the Herald put forward no suggestions at all for “bold economic initiatives”.  If it disagrees with the 2025 Taskforce, what is its alternative programme?  How can citizens and voters buy into the idea of “bold economic initiatives” if our leading newspaper does nothing to point the way?  And it doesn’t help if its op-ed pages are littered with articles like those of Bryan Gould (13 last year, two already this year) and Peter ­­­Lyons whose economic prescriptions would see us falling further and faster behind Australia.

What grade for the editorial?  Could do much better.

FRIDAY GRAPH: WHERE IS FACEBOOK NOT USED?

Today’s blog comes direct from LibertyScott.

Scott writes:

 Look at this map [click to enlarge], showing Facebook connections.

  

Well there are three reasons for big dark areas:

1.  Nobody lives there (vast tracts of the Amazon, Sahara, Arctic Circle, Siberia, majority of Australia but notice how Greenland is still connected despite a population of well under 1 million);

2.  Few can afford it (mountains of South America, central and west Africa, and the lower density in some areas);

But there is a third reason…

Look at China, no lack of people, no lack of people who can afford it, but it’s a blank.  In fact look at the Middle East, except the shining lights from Egypt through Israel, Jordan and Lebanon.  Beacons in the oil rich Qatar, Bahrain and UAE.  Not Syria, Saudi, Yemen, Libya and little Iran.  Yet Vietnam has some, and we can see free China in the form of Taiwan, Hong Kong and Macau against the near devoid lack of mainland connections.  South Korea vs North Korea is too obvious to point out.  Indonesia and Malaysia are wonderfully well connected.

Speaks far more of freedom than many indicators

THE TRUTH ABOUT PRIVATISATION: BLOG # 3

Last Sunday’s Sunday Star-Times editorialised against the government’s privatisation plans (‘Asset sales road littered with disasters and fiascos,’ 30 January).

Among other things, it said that government-owned companies “can be efficient as well as profitable. Kiwibank has been a brilliant success …”

The first part of this statement is certainly correct. Not all SOEs are poor performers and not all privately owned businesses perform well. But the unequivocal findings of economic research are that on average and over time, privately owned businesses outperform publicly owned ones (see here for relevant references). What matters for policy is this general result. Government should not bet against the odds with taxpayers’ money.

What about the claim that Kiwibank has been a “brilliant” financial success. I have never seen evidence to support this claim. Two points are relevant:

As I understand it, the original Cameron Partners advice to the government was that Kiwibank would ultimately earn profits but that these would not be sufficient on an NPV basis to warrant the investment, and

Many argue that Kiwibank has been cross-subsidised by the postal business of New Zealand Post.

Does the Sunday Star-Times have evidence on these points to justify the “brilliant success” claim?  I think we ought to be told.