NO COUNTRY FOR YOUNG MEN (OR WOMEN)

It’s always salutary to see ourselves as others see us.

Recently German-born Centre for Independent Studies researcher Oliver Hartwich wrote this piece on alcohol.

The first sentence is arresting: “Coming from a country where even petrol stations are allowed to sell alcoholic drinks as ‘essential traveller needs’, I have always found Australian alcohol practices rather bizarre”.

Imagine the outcry over any proposal to allow petrol stations to sell alcohol in New Zealand.  Anti-alcohol crusaders like Doug Sellman would have apoplexy.

I have no view on such a proposal, but shouldn’t we be willing to examine evidence from Germany?  After all, New Zealanders routinely observe that European drinking habits are better than ours.

Dr Hartwich commends competition among supermarkets in the interests of driving down prices for consumers.  The idea of imposing minimum prices on alcohol products as a means of reducing alcohol abuse makes no sense.

Recently MP Paul Quinn exposed the hypocrisy of doctors appearing before the select committee considering liquor law issues.  They wanted to ban supermarket sales yet bought their own supplies from supermarkets.

As Dr Hartwich observes, restricting the places that sell alcohol is ineffective in preventing excessive alcohol consumption.  “Licensing laws in Victoria and the ACT are more liberal than in NSW.  However, binge drinking or alcoholism appears no worse in Melbourne or Canberra than in Sydney.”

Parliament is debating a proposal to increase the purchase age to 20.  This would align New Zealand with only 11 other countries.  Eighty-one (including Australia) have a minimum age of 18, 12 (including Belgium, Germany, Norway and Spain) set the age at 16, and 17 have no drinking age at all.

As one expatriate New Zealander said to me, the proposed move would do nothing to attract young expatriates back: it would be a signal that New Zealand is ‘no country for young men’ (or women).

Alcoholism and alcohol abuse are serious problems.  But as this submission by the Business Roundtable argued, heavy-handed regulation as proposed by the Law Commission is not the way to deal with them.

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THE TRUTH ABOUT PRIVATISATION: BLOG # 8

Here is a presentation on partial privatisation given by economist Phil Barry to a well-attended meeting of the Law and Economics Association of New Zealand in Wellington on 21 March 2011.

Some interesting points include:

  • 2009 was a record year for privatisation globally
  • the international trend has been away from public floats and towards trade sales
  • the under-pricing of government floats has been much less in New Zealand than the global average
  • research indicates that the average gains from privatisation are large: 20% improvements in efficiency are reported, for example
  • most studies also find significant performance gains from partial privatisation
  • allowing foreign ownership increases the gains
  • the internal rate of return for the Crown’s investment in Air New Zealand has been just 4.1% p.a. to March 2011.

Phil Barry concludes that the government’s plans for partial privatisation are a step in the right direction.

EDUCATION VOUCHERS WORK

In 1992, Sweden introduced a major education reform whereby the government funds all schools – state and private, non-profit and for-profit – on the same basis.  You can call it an education voucher system, although that adds nothing to understanding it.

(Actually, the initial ‘voucher’ to non-government schools was somewhat less than to schools in the public sector.  Later, however, payments were equalised: as a Swedish minister said at a conference I attended in Stockholm a couple of years ago, “We believe in equality in Sweden!”)

Odd Eiken, the head of the Swedish education ministry at the time of the reforms, visited New Zealand as a guest of the Business Roundtable in the mid-1990s.

The reform has been an enormous success.  It is now supported by all political parties in Sweden except the communists.  Teachers and the teacher unions are also supportive.

The video below from Cato of Peje Emilsson, founder of the for-profit chain Kunskapsskolan, gives an excellent update on Swedish education.

Among the points he makes about the overall system are:

  • It is very easy to set up a new school
  • Schools cannot pick and choose students
  • They cannot charge additional fees but independent schools operate at lower cost than government schools
  • Enrolments in independent schools have grown from 1% in 1991 to 11% today.  At the upper secondary level 23% of students are in the independent sector and in parts of Stockholm the figure is as high as 50%
  • About 60% of the independent schools are for-profit companies
  • The independent schools are achieving better education results.  The results of the for-profit schools are better again
  • Competition has improved the performance of public schools
  • Kunskapsskolan combines technology and teacher involvement in new ways, putting students at the centre of learning
  • All the curriculum is on the computer, so that teachers have 27-30 hours a week with students compared with 20 hours (or sometimes only 10) in public schools
  • The company now has 10,000 students enrolled and employs about 800 teachers.  It is achieving about the best results in Sweden.

The Swedish system is not unique – the Netherlands, Denmark and Ireland have similar policies, and there are steadily expanding voucher programmes in the United States.  Australia has a more even playing field than New Zealand as far as independent schools are concerned.  Reports by an Inter-Party Working Group in 2009 recommended similar moves in New Zealand.

The experience of for-profit schools in Sweden is particularly interesting.  I have long thought that for-profit education may be the way of the future in the twenty-first century.  A thriving for-profit sector may hold out the best hope for revitalising teaching as a profession and allowing good teachers the opportunity to earn the rewards they deserve.

THE TRUTH ABOUT PRIVATISATION: BLOG # 7

You often hear the suggestion that if state-owned enterprises (SOEs) are sold, the government should limit shareholding to ‘Kiwi mums and dads’.

Putting aside arguments about the wider benefits of foreign investment, let’s look at the practicalities of this proposition.

Analysts calculate that the New Zealand share market as a whole is majority owned overseas, mainly by Australian institutions.

One estimate is that overseas shareholders account for about 60% of the market.  In the case of New Zealand’s largest listed company, Fletcher Building, the figure is around 58% (with half of that investment coming from Australia).

Why is this?  Quite simply because it would not be prudent for New Zealand investment funds and other institutions to have higher weightings. The additional risk outweighs the expected return.  Instead, funds need to be diversified across countries and asset classes.  Institutions are of course the major shareholders: in the case of Telecom, investors with shareholdings of 100,000 or more account for 92% of total shares issued.

You can see this pattern with the investment portfolio of the New Zealand Superannuation Fund, which is tasked with achieving competitive returns for a given level of risk.  As at 28 February 2011, the NZSF held just 5.1% of its assets in New Zealand equities.  By contrast it held 62.6% in global equities.

It follows that if the government were to attempt to restrict ownership in privatised (or partially privatised) SOEs to New Zealanders, the businesses would end up with a very distorted and more costly capital structure.  Moreover, restricting foreign ownership in certain asset classes (eg former SOEs) would mean higher foreign ownership of others.  Similarly, New Zealanders who increased their ownership of SOEs would have less invested in other New Zealand or foreign assets. Would there be any logic to that?

A likely implication of ownership restrictions is that the government would receive a lower price for the privatised assets.  Local institutions and investors would be forcibly exposed to idiosyncratic risk and so would require a higher expected return (discount rate) as compensation, whereas for foreigners the New Zealand asset risk would be at least partly independent of their home risks – and hence diversifiable – thus allowing a lower discount rate.

For example, the Commonwealth Bank of Australia reports funds under its management hold over 10% of Telecom’s shares, and depending on the trustee arrangements these holdings might well be reported as held by an overseas investor.  But thousands of New Zealanders have an ownership interest in these shares through superannuation and other funds managed by CBA.

One could even take the argument further and suggest that taxpayers as current owners of SOEs are exposed to undue risk.  On average they already have most of their assets in New Zealand (in the form of housing) and are dependent on New Zealand sources for wages and other incomes. If New Zealanders are not willing to own entire SOEs voluntarily, because the return does not justify the risk, why should the government force them to do so by investing in SOEs on their behalf, either directly or through the NZSF?

If we look at our external accounts, foreign equity investment in New Zealand is barely higher than New Zealand equity investment abroad.  The difference is that foreigners tend to invest directly in large stakes (which are visible) whereas New Zealanders hold mostly portfolio investments in securities markets. In both cases these transactions are welfare-enhancing for New Zealanders: outward investment because it diversifies portfolios; inward investment because foreigners have paid more than locals were prepared to.

New Zealanders would be most unhappy if they lost a large chunk of their retirement savings due to concentration in a single market.  (The foreign exchange element of investing abroad is easily hedged.)

So the message for those who want to restrict shareholding in privatised SOEs to ‘Kiwi mums and dads’ is: be careful what you wish for (if you really have their interests at heart).

FRIDAY GRAPH: IRELAND’S BEST HOPE FOR RECOVERY

This graph illustrates Ireland’s best hope for recovering from its current crisis.

The Celtic Tiger boomed in the 1990s with economic liberalisation.  It rose in the economic freedom index of the Heritage Foundation and the Wall Street Journal to rank as the freest economy after Hong Kong and Singapore.  Notions that its economic success was due to EU subsidies and interventionist industry policies were misplaced.

Policy errors combined with the unsuitability of EU monetary policy for an overheating economy contributed to the property bubble, bank failures and the debt crisis of recent years.  However, Ireland stands a better chance of recovery than some other highly indebted European economies.

Internal devaluation is already working, export growth is strong, and the government has taken tough decisions, including cuts of 10 percent to public sector payrolls.

The biggest risk remains the possible need for further recapitalisation of Ireland’s banks and associated sovereign debt burdens.

The challenge for Ireland is to return to the principles of the Celtic Tiger and achieve growth rates in the next few years that will see its debt levels peak and reverse.

Ireland’s tigerish dynamics – liberalised, young, productive and hi-tech!

Click on the graph to enlarge.

Source: OECD, Eurostat, CBI, Datastream

PPPs: DO THEY WORK?

Here is an excellent, balanced article on public-private partnerships by economic consultant, Phil Barry of Taylor Duignan Barry Ltd.

He is the author of the report The Changing Balance Between The Public And Private Sectors commissioned by the Business Roundtable.

The article notes that:

More than 90 countries are now using PPPs in areas as diverse as designing and building roads and schools, constructing and running prisons, and designing, building and operating water and wastewater treatment facilities.  Amongst the most active countries using PPPs have been the United Kingdom, Australia and Canada, countries we have much in common with.

But do PPPs work?  Here is Phil Barry’s assessment:

The formal studies that have been undertaken generally provide a qualified “yes” to that question. I say qualified because the PPPs don’t always work. And even when they do work, the PPPs are by no means perfect.

A study by the UK National Audit Office (refer the table below) provided one of the most comprehensive independent evaluations of PPPs. That study found PPPs had their flaws: of the 37 PPP projects evaluated, 9 of the projects (24%) were late and the projects incurred cost-overruns, on average, of 22%. But the experience in the public sector was a lot worse: 70% of the projects were delivered late and the cost overruns averaged 73%.

A comparison of PPPs and conventional public sector performance
 

PPP performance

Public sector performance
Cost overruns

22%

73%

Delay in project delivery

24%

70%

Source: UK National Audit Office

Some people think PPPs have failed because private investors have gone belly up.  But this is just a normal business risk that they should bear.  As the article notes:

There have been some high-profile collapses of companies involved in PPPs in Australia in recent years. For example, the consortium behind the Cross-City Tunnel underneath central Sydney went bankrupt, largely because of its over-optimistic projections of traffic volumes. Much the same happened with the Brisbane and Sydney airport rail links.  Does that mean the PPPs failed? There was no loss of service – the tunnel and rail links remained open – and the taxpayer didn’t lose out. Those who lost their money were the private investors who took the risk. Another road PPP, Melbourne’s Citylink freeway, has been highly successful, and when there were problems with one of the tunnels the entire rectification cost was borne by private parties with no call on taxpayers.

Phil Barry debunks the old canard that PPPs are not appropriate because the government can finance the project more cheaply:

Certainly the government can almost always borrow more cheaply than the private sector. But that doesn’t mean the government should necessarily finance a project. If that logic was correct, the government would end up funding all the riskiest activities in the economy. Why not have the government fund property development or own football teams if all that mattered was access to cheap finance?  Higher private sector rates allow for risk, but the true cost of government borrowing is higher than it appears – the risk element is often only recognised when taxpayers end up bailing out unsuccessful projects.

The article notes the relevance of PPPs to the social sector.  A case in point is the recommendation of the recent Welfare Working Group that much of the job placement role of Work and Income New Zealand should be outsourced to the private (voluntary and for-profit) sector.

It concludes with a comment on the relevance of PPPs to the Christchurch earthquake recovery effort.  They are an obvious source of capital for replacement infrastructure.

LESSONS FROM SINGAPORE

This week’s issue of The Economist contains an important special report by one of the paper’s most talented journalists, John Micklethwaite, on the role and size of the state.

He concludes that the prospects for reforming the state have improved with the fiscal crises buffeting Western nations:

… the incremental benefits of ever bigger government, even assuming it was somehow affordable, become ever smaller.  Decent-sized government can reduce inequality and poverty, but most of the evidence is that gargantuan government merely gets in the way of social progress.  A state that takes up more than half the economy begins to deliver an ever worse deal to ever more people in the middle: the extra benefits become harder to detect, the extra costs harder to hide.

The report argues that with good management the share of government spending in Britain could be reduced to 40% of GDP – a very modest goal and an outcome that would still be far too high for fast growth.

It rightly notes that the British welfare state, with high levels of social transfers and middle class churning, would remain twice the size of Singapore’s.  Unusually, for what is still a Eurocentric paper, the report devotes this section (scroll down) to observations about Asia and Singapore in particular.

Singapore is certainly a standout country.  Only two generations ago Orchard Road looked like a third world thoroughfare.  In the 1970s I was involved with the administration of New Zealand aid to Singapore.

Today, Singapore’s per capita income (PPP basis) according to World Bank figures is US$47,940, roughly on a par with Hong Kong ($43,960), well ahead of Australia ($34,040) and nearly twice that of New Zealand ($25,090).

Some New Zealanders think of Singapore as a country that reflects the state paternalism of Lee Kuan Yew who ran the island from 1959 to 1990.  It is true that there are dirigiste elements in the Singapore model, such as mandatory contributions to the Central Provident Fund which finances  much of Singaporeans’ housing, pensions and health care.  Also some outsiders dislike Singapore’s limited political democracy, proselytising of ‘Asian values’ and attitudes that they find somewhat stifling, including of entrepreneurial vigour.

But to regard Singapore as an essentially statist country is to miss the wood for the trees.  It consistently rates behind Hong Kong as having the freest economy in the world.  As Micklethwaite notes, Singapore’s success owes far more to laissez-faire than to industrial policy:

Rather than seeing foreign investment as a way to steal technology or to build up strategic industries, as China often does, Singapore has followed an open-door policy, building an environment where businesses want to be. The central message has remained much the same for decades: come to us and you will get excellent infrastructure, a well-educated workforce, open trade routes, the rule of law and low taxes.

Government spending is around 19% of GDP, the top income tax rate is 20%, the top corporate rate is 17%, Singapore has been at free trade for years, and its labour market is highly flexible with no burdensome rules on dismissals and work hours.

Many other interesting features are noted by Micklethwaite:

  • Singapore’s competitive advantage has been good, cheap government
  • It provides better schools and hospitals and safer streets than most Western countries
  • It is near to the top of educational league tables, yet education consumes only 3.3% of GDP (less than half New Zealand’s level of education spending)
  • Teachers need to have finished in the top third of their class; headmasters are often appointed in their 30s and rewarded with merit pay if they do well but moved on quickly if their schools underperform
  • The quality of Singapore’s civil service is exceptional, with those at the top being paid US$2 million or more
  • There is a welfare safety net to cover the very poor and sick, but much greater reliance on personal and family resources.  Lee Kuan Yew once said that the only thing that would hold Singapore back would be the development of a Western welfare state.

Micklethwaite concludes:

… arguably the place that should be learning most from Singapore is the West. For all the talk about Asian values, Singapore is a pretty Western place. Its model, such as it is, combines elements of Victorian self-reliance and American management theory. The West could take in a lot of both without sacrificing any liberty. Why not sack poor teachers or pay good civil servants more? And do Western welfare states have to be quite so buffet-like?

By the same token, Singapore’s government could surely relax its grip somewhat without sacrificing efficiency. That might help it find a little more of the entrepreneurial vim it craves.

Neither Hong Kong nor Singapore have significant natural resources.  Their geographical position has not altered: Hong Kong grew rich while China was still poor.  They do not have great natural environments but there’s not much they can do about that.  Their prosperity underlines the lesson that the institutions and policies a country adopts basically determine its success in the modern world.  Singapore has an admirable focus on its own interests; one hears little about ‘leading the world’ on climate change, for example.

Many New Zealanders are sceptical about the idea that New Zealand could catch up with Australian living standards.  I have put the question the other way round: would any competent economist not think that New Zealand could overtake Australia if it moved towards the kind of economic framework of Hong Kong and Singapore?  So far none has come forward to take this position.

THE FAIRNESS TEST

Just out from the Reform thinktank in the United Kingdom is a report The Fairness Test.  The author is Dr Patrick Nolan, formerly of the New Zealand Institute of Economic Research.

The current UK government has defined fairness as one of its three core values (together with freedom and responsibility).  The report argues that the current debate on fairness is flawed and in danger of leading policy astray:

  • It is dominated by measures that emphasise existing spending through the tax and benefit system.
  • It assumes that more government spending is synonymous with fairness.
  • Many arguments around progressivity and inequality are based on little more than assertion.
  • The role of economic growth in providing resources for redistribution is often ignored.
  • The actual nature of tax avoidance and evasion (the tax gap) is poorly understood.

It concludes that:

To avoid these problems clearer thinking on fairness is needed. While there is no one single agreed view on fairness most people would accept that the extent to which government actions combat disadvantage should be central to any definition. This supports a focus on education and welfare reform. This does not support encouraging high-earners’ migration, maintaining the middle class money-go-round, increasing personal tax allowances or postponing difficult decisions.

Some specific points in the report resonate with debates on fairness and social policy in New Zealand.

On the book The Spirit Level, the report states:

There is no proven connection between the claims in The Spirit Level and the implied policy responses. The theory on equality could, for example, be used to justify a flat tax (which would equalise proportionate sacrifice).

It notes Okun’s “leaky bucket” trade-off:

Spending on welfare not only comes at a financial cost to the taxpayer but also creates other economic and social costs. This can be illustrated by the famous trade-off between equality and efficiency, which Arthur Okun described as the “leaky bucket.” Money transferred to the poor to alleviate poverty must be, as he wrote, “carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich.” The losses are due to administration costs and incentive effects. These incentive effects are due to people who are receiving welfare having less incentive to work as they are able to reach a desired standard of living with a lower level of work effort and they may face clawback of assistance as their incomes increase.

The report rightly stresses “the dynamics of income distribution (that people will move up and down in the income distribution over their lifetime” rather than static analysis, and the importance of facilitating social mobility, eg through education.

It criticises the use of personal tax allowances, noting that they benefit primarily higher income earners and damage work incentives because they require higher marginal tax rates to replace lost revenue.  A tax-free threshold, as proposed for New Zealand by the Labour Party, would have similar effects.

Interesting points are made about welfare reform in the United Kingdom, echoing material in the recent Welfare Working Group report in New Zealand:

  • The flipside to having a welfare system which provides an important social safety net is that most people can reasonably be expected to take up work if it is available and adequate.
  • The welfare system is too complex. The Department of Work and Pensions’ Decision Makers’ Guide is no less than 8,370 pages long.
  • One of the first initiatives the Government announced was the Work Programme, which will outsource all welfare to work services. The new commissioning framework will give providers longer and larger contracts, greater freedom and will fund welfare to work services through the savings made in reductions in benefit expenditure. Following reforms begun under the previous Labour administration, a number of benefits for people out of work (such as the incapacity benefits) have been reformed to be more active. These are the right changes.

On education, the report endorses the moves by the UK government to adopt a Swedish-type education voucher programme, saying:

The greater use of choice and competition in the education system can support fairness. Competition is not a zero-sum game where the profits made by private sector companies deprive public services of funds. This zero-sum view ignores productivity. Profits (especially when they attract new entrants into markets) can encourage competition and drive up standards and productivity. These productivity improvements can mean, for example, that the supply of services can expand even when costs are falling. Indeed, as Tony Blair has argued:

“Choice mechanisms enhance equity by exerting pressure on low quality or incompetent providers. Competitive pressures and incentives drive up quality, efficiency and responsiveness in the public sector. Choice leads to higher standards. The over-riding principle is clear. We should give poorer patients or parents the same range of choices the rich have always enjoyed. In a heterogeneous society where there is enormous variation in needs and preferences, public services must be equipped to respond.”

The Business Roundtable has discussed issues of fairness in social policy in a number of reports.  They include the books Equity as a Social Goal by Cathy Buchanan and Peter Hartley, and Middle Class Welfare by James Cox.  Both are cited in the Reform report.

FRIDAY GRAPH: THE DEADWEIGHT COST OF TAXATION

The graph below, taken from this Cato Institute Policy Analysis, ‘Congress Should Account for the Excess Burden of Taxation’ (October 13, 2010) illustrates an important economic concept.

Figure 1

The Excess Burden of a Hypothetical Excise Tax on Apples

(click to enlarge)

 

As the paper explains:

 A well established principle of public finance holds that taxes impose costs on society beyond the amount of revenue government collects. When the government taxes Peter to pay Paul, Peter views his tax payment as a loss.  Those tax payments do not represent a net welfare loss from a societal perspective because Paul experiences an offsetting gain. Taxes do impose costs on society at large, however, in that they encourage Peter not to engage in economic activities that would have benefited him and others. The loss of that economic output is what economists call the “excess burden” or “deadweight loss” of taxation. Virtually all taxes impose deadweight losses…

Economists have confirmed empirically what most laymen understand intuitively: “whatever you tax, you get less of.” Taxes on labor, such as income and payroll taxes, tend to reduce the amount people will work. Consumption taxes, like sales, excise, and value-added taxes, reduce the consumption of the taxed items. Capital taxes, such as those on property, dividends, or capital gains, decrease the desirability of investing and reduce the amount of savings available for capital investment. All of these predictable changes in human behavior reduce output (present or future) in some form, thereby reducing the economic welfare of consumers, producers, or both.

Economists measure this loss in terms of reductions in consumer and producer surpluses. In a competitive market, the equilibrium price at which supply matches demand permits many consumers to purchase goods at a cheaper price than they are willing to pay. Imagine you can purchase an apple in the market for 50 cents. If you were willing to pay 50 cents, there would be no net value to you from the transaction: you would give up 50 cents, and receive the equivalent value in the form of an apple. You would be indifferent about keeping your money or buying the apple. But if you were willing to pay 90 cents for the apple, buying an apple for 50 cents increases your net welfare by 40 cents. The amount by which a consumer’s willingness to pay exceeds the price is what economists call the “consumer surplus.” A parallel calculation applies to producers. In a competitive market, some producers may have been willing to supply apples for only 25 cents, but because the price they get in the market is 50 cents, they enjoy a “producer surplus” of 25 cents.

A sales tax of 50 cents on apples will shift the supply curve up by that amount since producers will still have the same cost per apple as under the old supply curve, but will have to remit 50 cents to the government for each apple sold. This shift in supply will result in consumers demanding a smaller quantity of apples, since the new equilibrium price will be higher (say, 80 cents). Consumers who previously had been willing to pay between 51 and 79 cents for an apple will no longer purchase them. Their loss in welfare—the reduction in their consumer surplus—will be the difference between their willingness to pay and the pretax market price. For each apple no longer purchased, there would be a parallel, though not necessarily equal, reduction in producer surplus that arises due to lower sales of apples.

Figure 1 illustrates these ideas. The pre-tax supply curve intersects the demand curve at point A, where apples sell for 50 cents. An excise tax of 50 cents shifts the supply curve upward to a new equilibrium point B that is 50 cents higher than point C on the pre-tax supply curve. The shaded rectangle shows the amount of tax revenue collected by the government, while triangles D and E respectively show the lost consumer and producer surplus resulting from the tax.

The conventional way of measuring excess burdens is to compare them to the amount of taxes raised. In Figure 1, these losses are approximately one third of total taxes collected. Note that the amount of these welfare losses is smaller than the full market value of whatever production is lost to taxation. This amount is the average excess burden for the hypothetical excise tax.

… a far useful concept for assessing the welfare losses associated with increased taxes is the marginal excess burden (MEB). In Figure 1, suppose we increased the 50-cent excise tax to 60 cents. As one moves higher up the demand curve, the ratio of the additional deadweight loss to the additional tax revenue collected will be higher than the previous ratio, which represents the average deadweight loss. Using the average ratio of deadweight losses to tax revenue will therefore understate the actual welfare loss associated with that tax increase. The MEB is thus the more accurate and appropriate measure.

The marginal excess burden of many taxes is large.  A 1994 Business Roundtable study found that it was around 18 cents for the marginal dollar of labour taxation and around 14 percent for the marginal dollar of consumption tax.  More recently, the Treasury has recommended an MEB of 20 percent for cost benefit analysis of government projects.

In the context of financing the reconstruction of Christchurch, a recent New Zealand Herald editorial advocated higher taxes on the grounds that they would not harm the economy unless they reduced the budget deficit (a Keynesian idea).  This is incorrect: any feasible tax is harmful to growth.  Some taxes are more harmful than others, and the higher the taxes the greater the economic harm.  For income taxes, deadweight costs rise more than proportionately as the rate of tax increases.  For example, if the rate of tax doubles, deadweight costs quadruple.  Taxation should be viewed as a scarce resource, and there needs to be a high pay-off (taking deadweight costs into account) from tax-financed government spending.

ENEMIES OF CAPITALISM

Journalist Colin James, had this thoughtful article in the December issue of New Zealand Management magazine.

His theme is summarised in the introductory paragraph:

Rip-offs and amateurism in business damage capitalism just as surely as child abuse accusations damaged the Catholic Church.

He calls upon “capitalism’s leaders” to expose and denounce not just unlawful business misconduct but also “venality” and “incompetence” as well.

He does not appear to accept any limitations on speaking out:

… the “difficulty of getting proof” defence, which one business lobby luminary uses, is unconvincing.

The term ‘luminary’ doesn’t fit, but I worry that he could be thinking of me!

I totally agree about the need for lawful and ethical business conduct and have written and spoken about it a number of times, for example here and here.  But speaking out about specific cases raises a number of tricky issues.

For a start, what’s special about business?  The same argument could surely be applied to many walks of life.  For example, one could say that amateurism or incompetence in journalism damages the news media.

A fair reply might be that people can and do criticise amateurish or incompetent journalism.  But by the same token, people in business, business journalists and others comment on the strategies and performance of businesses all the time.

Then you have to wonder where to draw the line.  There is no end of folly in the world, including in business.  Firms routinely go broke through incompetence, as well as for other reasons.  Is there any point in a running commentary on human folly?

Colin James is right to say that “morality and ethics aren’t court matters” and that trust is essential to the efficient conduct of business.  Business people certainly steer clear of others whom they regard as untrustworthy.  But again, what’s special about business, and is speaking out about suspected unethical behaviour feasible?  The law of defamation – which journalists are very conscious of – exists for good reason.

If a journalist asks me for my opinion about some fully disclosed skulduggery I’d be glad to comment.  But for anyone in my position to issue gratuitous statements about conduct which they cannot know enough about would be reckless and irresponsible.

Because I am sympathetic to Colin James’ general theme I put my money where my mouth is and took part in an action against a former chairman of Fletcher Challenge for insider trading.  The motivation was to demonstrate that people in business did not condone such behaviour by their peers.  But the basis of the case was a finding of insider trading by the Securities Commission.  Frustratingly, it was necessary to spend $70,000 to get a court order to get the necessary information out of the Securities Commission.

The proceeds of that action were placed in a trust called the Business Integrity Trust, the purpose of which is to help parties to take cases against business misconduct if the cases seem meritorious and they lack the resources to do so.

Absent a finding by an authority such as the Securities Commission or its successor, or by a court, it is hard to see a lot more scope for condemning business misconduct.  The issue of verification cannot be lightly dismissed.

We have always relied on the Fourth Estate to expose wrongdoing and reflect our morality back to us.  If Colin James is willing to rush in where the more cautious among us have feared to tread, perhaps he can set us an example to follow.