Another step to building a modern economy – but an upgraded FTA with China would be welcome, too

Trade and  Export  Growth Minister  David  Parker  returned   to  NZ   on  Saturday  after  what his  PR  flaks   described  as  a  “successful”  official  visit to  China.

So  Point of Order  went  looking  for  the  success.  And yes, he has had  talks with his  ministerial  counterparts  in the trade and  environment  portfolios.

This, according to the press release issued in his name, constituted  “ yet another step  in this government’s  work to  deliver a  modern, sustainable economy  for   New Zealanders”.  

Wow. And no doubt our wellbeing will be lifted, too. Continue reading “Another step to building a modern economy – but an upgraded FTA with China would be welcome, too”

Joseph Stiglitz says the US can save its broken economic system from itself (so what about NZ?)

An article headed “Progressive capitalism is not an oxymoron” based on a conversation with a respected American economist should be welcomed at the Treasury, where officials will be tidying up the government’s first wellbeing budget.

We must wait for the budget to see how wellbeing is being translated into fiscal policy and the extent to which capitalism will be constrained or nurtured.

In the meantime we can savour the ideas of Joseph Stiglitz, a Nobel laureate in economics.

He is discussing the American economy, of course – but at least some of the issues he raises are relevant to this country, which followed the US and UK with economic reforms in the 1980s to liberalise an array of markets..

His diagnosis:

Despite the lowest unemployment rates since the late 1960s, the American economy is failing its citizens. Some 90 percent have seen their incomes stagnate or decline in the past 30 years. This is not surprising, given that the United States has the highest level of inequality among the advanced countries and one of the lowest levels of opportunity — with the fortunes of young Americans more dependent on the income and education of their parents than elsewhere.

But things don’t have to be that way, Stiglitz insists.

There is an alternative: progressive capitalism. Progressive capitalism is not an oxymoron; we can indeed channel the power of the market to serve society.

Stiglitz goes back to the 1980s, when Ronald Reagan’s regulatory “reforms,” which reduced the ability of government to curb the excesses of the market, were sold as great energisers of the economy.

But just the opposite happened: Growth slowed, and weirder still, this happened in the innovation capital of the world.

The sugar rush produced by President Trump’s largess to corporations in the 2017 tax law didn’t deal with any of these long-run problems, and is already fading. Growth is expected to be a little under 2 percent next year.

This is where we’ve descended to, but not where we have to stay. A progressive capitalism based on an understanding of what gives rise to growth and societal well-being gives us a way out of this quagmire and a way up for our living standards.

Among Siglitz’s observations:

America created the first truly middle-class society; now, a middle-class life is increasingly out of reach for its citizens.

America arrived at this sorry state of affairs because we forgot that the true source of the wealth of a nation is the creativity and innovation of its people. One can get rich either by adding to the nation’s economic pie or by grabbing a larger share of the pie by exploiting others — abusing, for instance, market power or informational advantages.

We confused the hard work of wealth creation with wealth-grabbing (or, as economists call it, rent-seeking), and too many of our talented young people followed the siren call of getting rich quickly.

Beginning with the Reagan era, Stiglitz contends, economic policy played a key role in this dystopia:

Just as forces of globalization and technological change were contributing to growing inequality, we adopted policies that worsened societal inequities. Even as economic theories like information economics (dealing with the ever-present situation where information is imperfect), behavioral economics and game theory arose to explain why markets on their own are often not efficient, fair, stable or seemingly rational, we relied more on markets and scaled back social protections.

The result is an economy with more exploitation — whether it’s abusive practices in the financial sector or the technology sector using our own data to take advantage of us at the cost of our privacy. The weakening of antitrust enforcement, and the failure of regulation to keep up with changes in our economy and the innovations in creating and leveraging market power, meant that markets became more concentrated and less competitive.

Politics has played a big role in the increase in corporate rent-seeking and the accompanying inequality. Markets don’t exist in a vacuum; they have to be structured by rules and regulations, and those rules and regulations must be enforced. Deregulation of the financial sector allowed bankers to engage in both excessively risky activities and more exploitive ones. 

Many economists understood that trade with developing countries would drive down American wages, especially for those with limited skills, and destroy jobs. We could and should have provided more assistance to affected workers (just as we should provide assistance to workers who lose their jobs as a result of technological change), but corporate interests opposed it. A weaker labor market conveniently meant lower labor costs at home to complement the cheap labor businesses employed abroad.

We are now in a vicious cycle: Greater economic inequality is leading, in our money-driven political system, to more political inequality, with weaker rules and deregulation causing still more economic inequality.

If policy-makers don’t change course, matters will likely worsen, as machines (artificial intelligence and robots) replace workers.

Stiglitz’s remedy begins by recognising the vital role the state plays in making markets serve society.

We need regulations that ensure strong competition without abusive exploitation, realigning the relationship between corporations and the workers they employ and the customers they are supposed to serve. We must be as resolute in combating market power as the corporate sector is in increasing it.

If we had curbed exploitation in all of its forms and encouraged wealth creation, we would have had a more dynamic economy with less inequality. We might have curbed the opioid crisis and avoided the 2008 financial crisis. If we had done more to blunt the power of oligopolies and strengthen the power of workers, and if we had held our banks accountable, the sense of powerlessness might not be so pervasive and Americans might have greater trust in our institutions.

Stiglitz identifies many other areas in which government action is required.

Markets on their own won’t provide insurance against some of the most important risks we face, such as unemployment and disability. They won’t efficiently provide pensions with low administrative costs and insurance against inflation. And they won’t provide an adequate infrastructure or a decent education for everyone or engage in sufficient basic research.

Then Stiglitz explains that “progressive capitalism” is based on a new social contract between voters and elected officials, between workers and corporations, between rich and poor, and between those with jobs and those who are un- or underemployed.

Part of this new social contract is an expanded public option for many programs now provided by private entities or not at all. It was a mistake not to include the public option in Obamacare: It would have enriched choice and enhanced competition, lowering prices. But one can design public options in other arenas as well, for instance for retirement and mortgages. This new social contract will enable most Americans to once again have a middle-class life.

But can the US afford to provide this middle-class life for most, let alone all, Americans?

He responds:

Somehow, we did when we were a much poorer country in the years after World War II. In our politics, in our labor-market participation, and in our health we are already paying the price for our failures.

Above all, Stiglitz argues “the neoliberal fantasy that unfettered markets will deliver prosperity to everyone” should be put to rest.

It is as fatally flawed as the notion after the fall of the Iron Curtain that we were seeing “the end of history” and that we would all soon be liberal democracies with capitalist economies.

Most important, our exploitive capitalism has shaped who we are as individuals and as a society. The rampant dishonesty we’ve seen from Wells Fargo and Volkswagen or from members of the Sackler family as they promoted drugs they knew were addictive — this is what is to be expected in a society that lauds the pursuit of profits as leading, to quote Adam Smith, “as if by an invisible hand,” to the well-being of society, with no regard to whether those profits derive from exploitation or wealth creation.

Stiglitz shared his thoughts in conversation with Andrew Ross Sorkin.

 

World press cuttings

Online snippets from the last week or so.

  • The lead actor in a popular Ukrainian satirical comedy (about a teacher being elected president after his online ranting against state corruption goes viral) has been elected president of Ukraine on a mandate to clean up corrption. Ukraine is the first country (after Israel) to have a Jewish Prime Minister and President.
  • London newspapers report that the number of violent crimes reported to the English and Welsh police rose – by nearly 20% last year, and doubling since 2008 – while the charging rate for all reported crimes fell to 8.2% – a new low.  The government prefers estimates derived from its annual crime survey of 50,000 households which suggest little change in recent years.
  • But the Wimbledon prowler has been brought to justice: he is thought to have committed up to 200 burglaries in the London suburb of Wimbledon over the last 10 years.  He lived in Manchester, which suggests he clocked up about 1200 hours of commuting time.
  • The New York Review of Books has a cracking review of Fatal Discord: Erasmus, Luther, and the Fight for the Western Mind  by Michael Massing. Both men identified the need for reform in the great institutions.  But Erasmus, the elegant intellectual gradualist, held firm on the need for a consensus of believers, while Luther, the dogmatic absolutist, was (well – perhaps unintentionally) a harbinger of religious and political pluralism.
  • On the subject of religious and political pluralism, two leading sportsmen  and a prominent politician reaffirmed their belief in hell with the BBC reporting differing reactions in each case.
  • In Bloomberg Opinion, Dan Wang makes the case that China will eventually rival the US in high tech.  He thinks market forces (ie, competition) in its huge internal market will outweigh non-market forces (eg, state intervention and political control).   The argument that China does markets better is not intuitive but it is definitely more sophisticated than those which said that the Soviet Union would overtake the the West.
  • Meanwhile, the Financial Times reports that China is revising lending criteria for its international Belt and Road infrastructure programme over worries that some projects or countries may have difficulty in paying the money back.
  • The Financial Times also says that Britain’s National Heath Service is facing a staffing crisis.  Senior doctors risk earning nothing from extra work because of inflexible pension rules and high marginal tax rates.
  • The self control couldn’t last for ever. Brexiteers are compared to Nazis.

Ian Stewart – NZ diplomat and trade policy expert who dined with de Gaulle

With the passing of Ian Stewart in  Wellington at the age of 96, New Zealand has lost one of the last of a generation of diplomats which launched the country’s foreign service after World  War 11.

Stewart joined the Dept of External Affairs after wartime service in the Army. He rapidly became a European specialist and developed an exhaustive knowledge of the continent and its cultures, languages and, of course, post war Britain.

He had several postings but one in particular appealed to him.  He was No 2 at the New Zealand Embassy in Paris when General ee Gaulle was president of France.

One event he recalled was a dinner to which he had been invited by de Gaulle because the NZ ambassador was out of the country. Continue reading “Ian Stewart – NZ diplomat and trade policy expert who dined with de Gaulle”

No, we don’t expect perfection from the Govt – but a considerable advance would be welcome

Prime Minister Jacinda Ardern, back  in   January, told the Labour caucus 2019 would be a year of “delivery” for the government.

Ardern then said 2018 had been a year where the government had set up the “infrastructure” for serious change and pumped money into health and education. 2019, by contrast, would be more focused on delivery.

And, yes,   she has  delivered:  a  huge backdown  on  a capital  gains tax.

And yes, a  stunning  failure  on its  Kiwibuild  programme.

Yet  commentators  see the CGT outcome  as  something of  a  political coup. Continue reading “No, we don’t expect perfection from the Govt – but a considerable advance would be welcome”

Heartwork and the game that is helping to inject compassion into Budget preparation

Oh dear, what a shame … the Point of Order team missed it.

So did Eric Crampton, chief economist at the New Zealand Initiative.

But Crampton did preview the occasion – he drew attention on April 9 to the invitation to pay a $35 registration fee which would help to promote a small business involving a former Treasury staffer by hosting a Heartwork event and encouraging folks to buy its products.

The promoters were  Fiona Ross, The Treasury Chief Operating Officer, David Dougherty, The Treasury Manager Strategy and Performance, and “24 curious and creative people at The Treasury” who have been “experimenting in the social lab” by “playing and rapidly prototyping with the Heartwork Wellbeing Card Game…” 

After Crampton blogged about Heartwork, a Newshub story prompted National leader Simon Bridges to criticise the card game as “bizarre and actually wrong”, while Jacinda Ardern hastened to explain that she and her ministers had nothing to do with it.

Regardless of this lack of prime ministerial approval, blogger Danyl McLaughlin did attend the session at Treasury and reported on it at The Spinoff. Continue reading “Heartwork and the game that is helping to inject compassion into Budget preparation”

The decline of (economic) thinking in the UK

News from Europe is not all Brexit.  Embattled British Prime Minister Theresa May has discovered a deficit in economic fairness.  Her latest wheeze:  to stop landlords taking their properties back (without a good reason).

In a housing shortage, what could be more reasonable?  But perhaps this is to forget the history of post-war rent controls in the UK, which succeeded in transferring landlords’ wealth to sitting tenants, and in the process destroying the private rental sector for new tenants.  Private landlords built no new houses and ditched their existing stock.  The state built subsidised housing, sold it cheap to the lucky tenants and then ran out of money to build more.  Distortion piled on inefficiency.  In the 1980s, Margaret Thatcher’s government removed the controls to legalise free exchange between consenting landlords and tenants.  Over several decades a large and tolerably efficient market grew up to serve the people’s needs.

You hope Mrs May does not have a secret plan to repeat the 30 year slow march to destruction but it looks like a solid first step on the path. With this new potential for bureaucratic intervention, private landlords are likely to be more wary about letting properties for short terms or to people they don’t know (bad luck for foreigners).  And one rule often leads to another.  If you can’t get your house back, you might be tempted to charge a higher rent.  Which might result in more discussion of how to prevent ‘unreasonable’ rent increases.

The old lesson – that prices and quality in the market are signals to be understood, not challenges to be eliminated by fiat – remains valid.  If you want cheap housing, don’t impose cost-escalating controls, but find out why its expensive and then do something to increase supply (like reducing building or land costs) or grit your teeth and subsidise it.

Nor is this depressing failure in Economics 101 an isolated piece of craziness.  Britain’s Conservative party government has form in interfering in markets, ostensibly to benefit consumers but often imposing long term costs. The justification is usually on the lines of broken markets and unfairness (eg, failing to provide universal service coverage, to serve vulnerable customers or to rectify poor consumer decision making). The tool of behavioural economics is used to create a model of consumer irrationality which, with appropriate assumptions, can justify just about any intervention the regulator wants. At the heart of these is the conceit that the bureaucratic expert consistently knows better than the changing collective choices of millions of buyers.

Let’s look at a few more examples.

Having taken over direction of Britain’s electricity supply and dictation of how power must be generated, Britain’s politicians were surprised that this increased prices.  So a price cap was brought in to deal with the problem that only some customers take the time to actively search out the lowest prices.  It’s early days but there are signs that the deals are disappearing and prices are moving up to bunch around the cap.  Pressure to set the cap at below-market levels may not be far behind.

Meanwhile, at the other end of the power market, there were problems with those very consumers who chased the best deals.  Rules made the industry take over bust energy suppliers and carry the costs.  Cue entry of new firms offering too-good-to-be-true prices and asking for big customer deposits upfront; managers then awarded themselves handsome bonuses before the firms collapsed and it became someone else’s problem.

Even Britain’s hapless rail industry offers an example.  Privatised in the last gasp of 1990s liberalism (albeit with heavy price and service regulation), it has undergone a twenty year journey of steady state encroachment: state ownership of the track, increasing control of procurement, and more detailed specification of services.  Private involvement has dwindled to a rump of private companies managing services on a short-term franchise.  Now this fractional remnant of the private sector could be extinguished by a new liability for the railways’ historic pension liabilities.  Ironically, the only private companies which seem interested in bidding on this basis are subsidiaries of foreign state-owned railways. This might be a historic first – to nationalise your railway through foreign governments.

It is hard to avoid the conclusion that, armed with these tools and great confidence, so-called market-based regulation (whether from governments or from increasingly-politicised independent regulators) is over-reaching.  While a plausible case can be made for many individual initiatives, in the longer-term the picture is one of collective cost.  It would be nice if one could say this was a peculiarly British disease.  But it seems to be a longer-term trend across much of the developed world (not excluding New Zealand), eroding the market gains from the deregulatory surge of the last two decades of the twentieth century.

It may also pose a particular problem for political parties and voters of the centre-right.  Left of centre parties have a closer affinity between populist measures and the (short-term) needs of their base.  Right of centre parties using regulation to show they are just as good at ‘practical’ and ‘fair’ politics run two risks: in the short term, of confusing their supporters and, in the long term, of generating problems for the next Margaret Thatcher to fix.