Let the foals thrive

Prime Minister John Key’s statement on an internet chat session that he has ‘ruled out the complete sale of any state-owned assets if National win a second term’ will be a major disappointment to many who had hoped a second term National led government would be bolder on this issue. That they will possibly look to move minority holdings will be a minor consolation.

Today’s Herald, a paper not exactly known as a bastion of free market reform, has an editorial titled Open the SOE stable and let the foals thrive. In a blog on that editorial David Farrar remonstrates that we may be alone in the developed world in having a bipartisan policy of no asset sales.

I suspect he is correct. In an article I wrote before the last election in 2008 titled ‘Privatisation: New Zealand Swimming Against the Tide’ I wrote:

With the National Party’s decision not to move any state-owned enterprises to the private sector in its first term if elected this year, we appear to have a new political consensus between the major parties in New Zealand: privatisation is bad.

This contrasts with the earlier consensus that privatisation is good. A few years ago the World Bank observed that “Privatisation is now so widespread that it is hard to find countries not using the approach: North Korea, Cuba and perhaps Myanmar make up the shrunken universe of the resistant.

Since then I have blogged that even Cuba is taking steps toward privatisation. We are in dubious company.

The common mantra in New Zealand that privatisation of state assets is somehow ‘right wing’ is simply not true. Indeed, in 2007 a British MP commenting on the significant privatisation achieved by Tony Blair’s Labour party wrote:

Now that Blair has been and gone, you would struggle to find a serious politician in any party who would advocate state ownership of any industry as a 21st-century model. Indeed the idea of the state running our utilities, airlines or railways now seems archaic and even faintly ridiculous.

It is an undisputed fact that over time and on average businesses do better in private rather than public ownership.  

John Key is rightly respected as a pragmatic and trusted leader with the common touch and plenty of common sense and business acumen.  He has the ability to raise public understanding of the economic gains that would ensue from privatising state assets – particularly lower prices and better services for the public. Privatisation should not be seen as ideological – it is a pragmatic course of action that the public should understand. Why not at least try?

Meanwhile privatisation continues at a steady pace in Australia, the most recent being the sale of Queensland Rail by the Queensland Labor government, the second largest Australian privatisation after Telstra.

To see the 2025 Taskforce’s recommendation on the issue click here (scroll down to government assets).

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From the Bad Economics file

Eric Crampton is a bright and energetic academic at the University of Canterbury.  One of his missions is to expose bad economics.  Last year he and Matt Burgess of Victoria University debunked a shoddy study by BERL on the social costs of alcohol use in New Zealand.  Their critique showed BERL’s cost estimates were grossly inflated (see Eric’s blog Offsetting Behaviour).  This did not stop the Law Commission, in full crusading mode, continuing to cite the discredited BERL numbers in its final report.

Eric was at work again last week, this time on a Ministry of Health study on tobacco.

He notes that:

the vast majority of estimates, both in New Zealand and internationally, conclude that smokers pay far more than their fair share in tobacco taxes.  W. Kip Viscusi’s work in the United States suggests smokers actually save the government a fair bit of money: they pay into the national pension system but die before receiving much in terms of benefits, so non-smokers benefit from their contributions.

Eric then cites a New Zealand study by Des O’Dea, an experienced New Zealand economist:

In New Zealand, Des O’Dea’s estimate, funded by Action on Smoking and Health and the SmokeFree Coalition – hardly members of any big tobacco conspiracy against the public – showed that the health costs of smoking were only a small fraction of collected excise taxes.  O’Dea concluded: “It appears certain that smokers contribute considerably more in taxes than the net ‘economic costs’ to the rest of the community caused by their smoking”.  O’Dea estimated costs to the health system on the order of $350 million per year; annual tobacco excise revenues total about a billion dollars.  His measured “social costs” were much higher, but mostly consisted of costs falling on the smoker himself.

So Eric was understandably taken aback when the Ministry of Health recently came out claiming that smoking costs Vote:Health about $1.9 billion a year.

Just how had MoH managed to provide a figure more than five times greater than the estimate previously provided by an anti-tobacco funded study, and seriously out of line with the body of international literature?  An OIA request and extensive correspondence with the officials behind the figure gave me the answer: they’ve essentially assumed that smokers would never have imposed other costs on the health system if they hadn’t died of smoking.

This is a totally bogus procedure, as Eric goes on to explain:

This isn’t a method commensurate with producing a sound figure that can form the basis for policy.  It’s a method best used for producing a politically convenient figure to rally support for measures to further stigmatize and punish smokers, like a doubling of the excise tax rate.

The full article is available here.

David Farrar commented on the article here.

Taxpayers’ money is being wasted on these worthless reports.  The BERL study on alcohol cost the Ministry of Health and ACC over $130,000.

Academics play a valuable ‘critic and conscience’ role when they expose bad economics.  Another egregious target is the numbers served up by economic consultants to justify government or council support for stadiums and events.  For a critique, see this study for the Business Roundtable by Tyler Cowen, Should Governments Subsidise Stadiums and Events?

Can we catch Australia by 2025? Yes we can, but …

There have been the usual mixed bag of reactions to last week’s 2025 Taskforce report.

Some were facile to the point of being cringe-making, focusing not on the substance but on the presumed political acceptability of the report.

There were exceptions in the regular media, including an article by Rob Hosking in the National Business Review and editorials in the Dominion Post and The Listener.

Taskforce chair Don Brash has also written a good response in Muriel Newman’s electronic newsletter.  I liked the title, ‘Can we catch Australia?  Yes we can, but …’

As I understand it, David Farrar has largely given up on the MSM for serious public policy discussion and thinks the blogosphere is the place to be.

He may be right if this post by Winton Bates is any guide.

Bates is a highly respected Australian economist, formerly a First Assistant Commissioner in the Industries Assistance Commission (now the Productivity Commission), and author of several Business Roundtable research studies and a background paper for the Taskforce.

He begins with a discussion of economic geography explanations of economic under-performance, saying:

Since the Taskforce presented its first report last year, Philip McCann – an economist with expertise in economic geography – has advanced the view that New Zealand’s geographical disadvantages prevent it from becoming a high productivity economy … [T]his is true irrespective of the degree of flexibility in the domestic labour market, the degree of transparency in the local institutional environment, or the levels of cultural aspirations for success.

Bates initially asks, “How does the Taskforce respond?” and observes:

… it judges the evidence in support of the view that New Zealand’s small population limits the potential to obtain agglomeration effects to be weak. In particular, Auckland’s position within the regional hierarchy of Australasian cities is not declining – the population of Auckland has been growing faster than the populations of Sydney and Melbourne. The Taskforce also points out that there is no evidence that New Zealand suffered an adverse shock from globalization during the 1980s; that migration from New Zealand to Australia is disproportionately of highly skilled workers as agglomeration theory implies; or that the relative performance of small countries has declined in the past 20 years.

Then Bates adds his own observations:

Sitting in Australia, current concerns in public policy discussions about the emergence of a two-speed economy in this country make the agglomeration theory of relative decline in New Zealand’s economic performance seem rather odd. Rather than a concern that agglomerations centred on Sydney and Melbourne are leaving the rest of Australia behind, the main concern is that New South Wales and Victoria (along with other states) are being left behind as economic growth steams ahead in Western Australia and Queensland, as a result of rapid expansion of the minerals sector and related industries. There is also reason for concern that, over an extended period, the particularly poor performance of the New South Wales government has detracted from the substantial location advantages that Sydney should enjoy.

The Sydney point – at around 4 million, Sydney’s population is similar to New Zealand’s – is particularly telling.  I find the McCann thesis (also adopted at least in part by the New Zealand Institute) unconvincing.

Bates goes on to discuss the ‘lucky country’ explanations for Australia’s performance:

The Taskforce pours cold water – correctly in my view – on another geographical explanation, namely Australia’s good luck in having plentiful supplies of mineral resources to export to rapidly growing markets in China and India. It is only in the last few years movements in Australia’s terms of trade have been much more favourable than in New Zealand. Moreover, New Zealand also has substantial mineral and hydrocarbon resources.

It could be added that ‘Fortress Australia’ was also an under-performer prior to its mid-1980s economic reforms, despite its mineral endowments.

Finally, Bates gives his own view on why Australia has done better than New Zealand (even though post-reform New Zealand has kept pace with the average growth in per capita incomes in OECD member countries as a whole):

… I think that leaves us with having to explain New Zealand’s relatively poor economic performance in terms of policies that are less favourable to economic growth …  For example, one major problem discussed by the Taskforce is the effect of relatively high levels of government spending in discouraging investment in export industries – via impacts on the real exchange rate as well as tax rates …  It seems to me that those who believe that New Zealand has geographical disadvantages should logically be strong supporters of that view (unless they reject the objective of closing the income gap). The greater the geographical disadvantage, the greater the policy superiority New Zealand will need in order to meet the objective of closing the income gap by 2025.

University of Canterbury economists Paul Walker (Anti-Dismal) and Eric Crampton (Offsetting Behaviour) also blogged on the 2025 Taskforce report

The full report is available here.

Hello Asia

I was in Sydney last week at a Pacific Rim Policy Exchange conference of think tanks in the Asia Pacific region, led by the Property Rights Alliance.  A particular highlight was a dinner speech by Rowan Callick, the exceptionally well-qualified Asia Pacific editor of The Australian who has a deep knowledge of Asia and has lived for some years in China.  He started by reminding delegates of the Western-driven mentality behind the UN’s Millenium Goals:

The goals are worthy targets in themselves, emanating of course from guilt-laden but increasingly broke Europe, and largely devoid of an economic context. They have come to be identified with the affirmation of a certain take on the “development” process – that of kind rich folk developing hapless poor supplicants through noblesse oblige.

Callick noted that the same mentality pervades our ‘world’ view of the GFC:

For you are meeting in the wake of the recent North American-European financial crisis – NOT a GLOBAL financial crisis – and just as this region is taking over, in my view unshakeably, the leadership of economic growth, if not of the global economy itself.

He observed that the example so many Asian countries have set in climbing out of poverty through rapid economic growth has largely gone unnoticed by the Western-dominated world of official aid, but not by the rest of the world.

I was living in Beijing when 43 African heads of state and government almost four years ago attended a summit there, which launched China’s extraordinary burst onto that continent. China wanted resources primarily, and ultimately once Africans begin to spend, its markets too. And as in Latin America and central Asia and the Pacific islands, such economic vitality proved both attractive and contagious. China’s Premier Wen Jiabao said he wasn’t interested in exporting a China Model of development. And I believe him. His priorities are domestic, first second and third. His party’s legitimacy depends on economic health at home.

But Africans who have for generations seen Western taxpayers and NGOs donate $ billions to their kleptocratic rulers are naturally lured to the revolutionary idea coming from the East, that economic growth is good, not merely bad for the planet as they had been told by those sleek Westerners. They are attracted to the notion that shipping, selling and buying stuff provides a better prospect for their families than following anaemic World Bank prescriptions.

A fun formula has it that in 1949 only socialism could save China. In 1979, only capitalism could save China. In 1989, only China could save socialism. And in 2009, only China could save capitalism.

Imagine a Western leader of today proclaiming as Deng Xiaoping did: To get rich is glorious. She or he would be condemned for crass materialism, and for privileging elites.

That determination to get rich is the type of talking dirty that thrills people who are dirt poor – that is, those people who have not already been pre-conditioned towards petty envy and the redistributionist zeal that led so many societies down a false trail, one that ends in the desert – as we see in contemporary Europe.

Callick noted that China has succeeded economically despite hobbling itself with efforts to control its people’s lives – a tribute to Deng Xiaoping’s decision to open manufacturing to foreign investors but also to the Chinese people themselves and their core individualistic culture.

In covering the Beijing Olympics while I was living there, I followed the Chinese teams. When China wasn’t playing, the default country which Chinese sports fans tended to cheer, was the US of A. They feel very much at home in the individualistic American culture.

And they mostly hate paying taxes, and avoid doing so, just as Americans, and I must say Australians, do. When I told a Chinese friend after I had begun working in Beijing, that I thought I should start paying some personal tax, he said I was crazy. Neither he nor any of his pals paid tax, he said. Why should they, when they didn’t choose the government, and mostly disagreed with what it spent money on.

 China also has a huge grey income, and its property and financial sectors are rife with insider trading, market manipulation and much misuse of power for personal gain.

Deng Xiaoping spoke of crossing the river by feeling the stones – cautious progress. He was not referring to taking China from a communist river bank to a liberal democratic one, but taking the party and the country towards prosperity. Where did this great pilgrimage start? With formally conceding the space to do business.

Much of China’s rapid change can be attributed to the determination of its “masses” to carve out better lives for themselves come what may, with the party’s legitimacy relying on its capacity to shift its tactics, even its values, in response to demands from below. 

And with Deng’s contract of 30 years ago beginning to fade, the party is now searching for a new source of legitimacy for itself as, among other roles, the source of security, stability and safety.

And now the party is beginning to use domestic Chinese NGOs to deliver the social services for which the country is increasingly clamouring as it ages, but which the government lacks the structures to deliver. The state’s wealth, including the massive foreign exchange largely still held in $US, was in part built on denying its own citizens a fair share – in the economic as in other realms. But this is proving not to be sustainable. A higher proportion of the economy is steadily being seized by consumers and workers, as part effect and part cause of the structural change from cheap surplus labour and towards domestic services and greater productivity.

In Asia more broadly, the right to do things for yourself, to be an autonomous actor, is coveted more highly than the right to receive support from the state – in part because success in the former will move you up to a higher realm of wellbeing and control over your life.

… I usually tell people who ask my advice on books to read about China today, to start with Charles Dickens. He was also writing of a society that was rapidly urbanising and industrialising, in which ancient extended families were shrinking into nuclear families, a world of casual injustices and astounding coincidences, and of resourceful heroes and, especially, heroines. 

As Callick concludes:

Asia is hardly perfect, it’s a long way from liberal, but for the most part it loves globalization, its people prefer governments to keep out of sight, and… well, welcome to our region.

At the same conference I was invited to speak in a session on free trade and emphasised the case for organisations like the Australian Productivity Commission to shed light on the costs of protectionist policies to consumers and other industries.  I’m a member of the Tasman Transparency Group, a collection of Australian and New Zealand economists and business people who’ve been urging governments to set up transparent agencies of this kind.  A bill to set up a New Zealand Productivity Commission is currently before parliament. 

Also at the conference was Kiwiblogger David Farrar who spoke on the role of social media in debating public policy in an era where there seems to be less and less focus on policy analysis in the regular media.  What was particularly interesting was the representation of the free market institutes from the Asia region, most notably China, Korea and India.  I particularly liked the Mongolian Institute for Fair Taxes and Wise Spending.

It was interesting that none of their preoccupations related to the economic debates raging in the West around things like Keynesian stimulus policies, fiscal deficits and the burden of welfare states.

Obsessive Compulsive Disorder

Yesterday I read a commentary in the NZ Herald loaded with erroneous claims about the Education (Freedom of Association) Amendment Bill. It was signed by a group of student association leaders (with a strong vested interest in retention of the status quo) arguing that student association membership should be compulsory.

In fact the case for voluntary student membership (VSM) is overwhelming. The New Zealand Business Roundtable made a submission on the Bill strongly in favour of it. Without delving too deep into the issue here I thought I’d comment on a few of the glaring misconceptions in the piece (placed prominently opposite the editorial page in the Herald).  

The subheading:

Student leaders outline what is wrong with Act’s bid to make association membership voluntary

The signatories are not student leaders, they are students’ association leaders elected by a tiny minority of students (typically 5-10%). The vast majority of students would not be able to name their association leader. A 5-10% voter turn-out does not give anyone a mandate as a leader.

The decision of National members of a parliamentary select committee to ignore tertiary institutions, students and the public by supporting an Act bill to impose voluntary student membership on students’ associations is disgraceful.

‘Impose voluntary’ is an oxymoron. Impose means being forced to do something. Voluntary is the ability to choose. This Bill would give students the opportunity to choose whether or not they want to belong to an association.

Students don’t want this. Tertiary institutions don’t want this. The committee received 4837 submissions on the bill, with an overwhelming 98 per cent opposed.

The number of submissions, for or against, is not an accurate representation of how students think. If only 5-10% of students bother to vote in the students’ association elections, you would hardly expect a tidal wave of written submissions (which aren’t compulsory like essays or association membership). You would, however, expect organised association representatives and employees with a vested interest to submit en masse.  The idea that trade union membership should be made compulsory if most submissions to a select committee favoured it doesn’t pass the laugh test.

If it is a decision made on the principle of freedom of association, it is flawed. Students have less choice; they will no longer be able to come together as a universal collective.

How absurd. Under VSM, students can still join an association to come together as a collective if they choose. And when have students ever come together universally? On any issue there will be differences of opinion among students. Accordingly, under freedom of association, students can form groups, unions and associations on issues of concern of their choice.

Students’ associations nationwide work hard for students. They provide vital services such as welfare, representation and advocacy for students who cannot make ends meet, have problems with a landlord or need help resolving a grievance.

If that is the case then there is no reason why students presented with the information would not choose to join an association. Unfortunately though, student unions are often notoriously badly run – see Victoria University law student Jenna Raeburn’s excellent submission for examples.

As a direct result of the passage of this legislation, students will see an increase in costs as tertiary institutions scramble to introduce services that all stakeholders consider essential.

All stakeholders? Union leaders do not represent the views of all students who are the most important stakeholders. New Zealand taxpayers are also stakeholders because they subsidise tertiary education, and it is likely that taxpayers, and students, would consider many of the ‘services’ provided by associations as non-essential if not wasteful. For example, I understand that 70% of the 2009 VUWSA budget comprised administration costs. Furthermore, some services could be sold or contracted out and it is likely that in general costs would go down.

The current law is flexible and inclusive. It does not breach freedom of association, as students have a choice whether to join their associations, both on a collective level through a referendum and an individual level through opt-out provisions.

A collective referendum does not provide freedom of association. That would be akin to forcing all New Zealanders to join the National Party – if a majority of people voted to in a nationwide referendum. The ‘opt-out provisions’ consist of exemptions on religious or ethical grounds, but the membership fee must still be paid and goes to a charity of the students’ association’s choice – so the association still controls the membership fee.  Hardly freedom of association. 

All workers in New Zealand (except under exceptional circumstances eg consumer protection in the case of professions such as medicine) are rightly entitled to freedom of association, yet currently students are subjected to compulsory union membership. VSM is a no-brainer.

David Farrar blogs on this here

The universe of the resistant is getting smaller

On reading the announcement that Cuba, long mired in the gloom of communism, is finally taking steps to free up its economy, I was struck by several aspects of the news pertaining to New Zealand.

 1. Even Cuba is moving toward privatisation

 The Herald Tribune reported:

To soften the blow, it said the government would increase private-sector job opportunities, including allowing more Cubans to become self-employed, forming cooperatives run by employees rather than government administrators and increasing private control of state land, businesses and infrastructure through long-term leases.

A few years ago the World Bank observed: “Privatisation is now so widespread that it is hard to find countries not using the approach: North Korea, Cuba and perhaps Myanmar make up the shrunken universe of the resistant.”

Clearly the World Bank hadn’t noticed New Zealand. Indeed in recent years we’ve gone in the opposite direction with the buy-back of Air New Zealand and the railways and ferries, the establishment of Kiwibank, the renationalisation of ACC, and the Auckland Regional Council’s reversal of the part-privatisation of Ports of Auckland.

As even Cuba moves towards privatisation, why are we waiting? North Korea and Myanmar are dubious company.

2. Even Cuba’s state employees will be paid according to their performance

Instead, Cubans will soon be “paid according to results,” it said, though few details were provided. Castro has said repeatedly he sought to reform the pay system to hold workers accountable for their production, but the changes have been slow in coming.

Teacher unions in New Zealand are loudly demanding a 4% pay rise across the board, and strongly opposed to performance-based pay. Why should bad teachers be paid the same as great teachers?

Unions claim New Zealand teachers are poorly paid in comparison to their counterparts in other OECD countries but David Farrar has correctly made the point that all New Zealanders are poorly paid in comparison to other OECD countries. The solution is increasing productivity, and our overall economic performance, so that all New Zealanders will be better off. 

Yesterday’s HoS editorial had some enlightening figures about teacher salaries:

The plain fact is that the average secondary teacher salary is now more than $71,000 or $1365 a week. It has risen since 2000 by more than 45 per cent – almost twice as fast as wages in the public sector as a whole (24 per cent) and the private sector (25.3 per cent).

As the rest of New Zealand belt-tightens, to use the phrase du jour, what gives teachers the right to demand a pay increase when they refuse to be held accountable for their performance? Of course good teachers should be paid well, but rewarding poor performance is ridiculous – even in Cuba.

A toast to moderately common sense

Just back from the Alcohol Law Reform Stakeholders’ lockup where I found myself coincidentally sitting next to fellow stakeholder Doug Sellman.  Doug would have found a lot less to be pleased about in the government’s response to Geoffrey Palmer’s Liquor Review than I did.   Staying well away from the sledge-hammer, wowserish measures advocated by Doug and his colleagues that would penalise responsible drinkers and do nothing to curb abuse, the government’s decisions instead largely reflect a sensible, pragmatic response to the issues.  It’s pleasing to see many of the arguments set out in our submission were listened to.  For a good rundown on the package see David Farrar’s summary here.

There are a few strange quirks – for example the drinking hours proposed would put paid to a champagne breakfast – and some anti-consumer proposals for further study, such as introducing a minimum price system for alcohol.  And some, like the latter idea, are unlikely to pass the sniff test in any proper regulatory impact analysis.

But the serious omission, in my view, is anything much in the way of strategies to deal with abuse (see page 16 of our submission), emphasising individual and parental responsibility, disincentives and penalties for abusive behaviour, making abusers face the consequences of their actions (eg denying ACC benefits for self-inflicted harm), better enforcement of existing laws, and social sanctions. 

There are, of course, deeper causes that lie behind many of the problems of alcohol abuse, such as dysfunctional families, poor parenting and welfare dependency, and these urgently require attention.  But in the meantime, measures of the sort outlined above, that sheet home the costs and shame of alcohol abuse to those who abuse it, would go a long way to curbing our problem drinkers