Category: Uncategorized

A close analysis of the Treasury assessment of the Medium Term in its PREFU 2023 suggests the economy may be entering a new phase.

Last week I explained that the forecasts in the just published Treasury Pre-election Economic and Fiscal Update (PREFU 2023) was similar to the May Budget BEFU, except that it showed weakening in the fiscal position. A summary might be that the commentary on the Treasury forecasts should have happened four months earlier.

What I did not discuss was the PREFU 2023’s medium term outlook which presents the economy returning to track after wobbling last year and this. A serious forecaster always has a medium-term view although there is always a high degree of uncertainty (fan) around it.

I should not be surprised if Treasury is currently reviewing its medium-term outlook. A group of diverse macroeconomists with which I am associated are. Some of their issues are too technical for a column but here is my response to their discussion.

I focus here on the external sector, asking whether there has been some structural change in the last few years. The possibility is there in the PREFU 2023 forecast of the Net International Investment Position (what we owe overseas less what is owed to us) rising from about 50 percent now to near 60 percent in 2027. That suggests that a substantial element of our economic growth in the next few years will be the result of overseas borrowing.

The forecast rising net debt is largely driven by the current account deficit (i.e. import payments over export receipts). Currently they amount to about 8 percent of GDP. The deficit comes down but remains higher than in the decade before 2022, which is the arithmetic cause of the rising net debt. The high current account deficit seems to come from three causes:

First, there is some reduction in our export prices, especially for dairy products. The Treasury forecast expects no significant recovery. This suggests a structural change probably arising from the slowing down of the Chinese economy and their consumption of our food exports. Lower export prices mean lower export revenue, and that increases the current account deficit. It also reduces the prosperity of the farm sector.

Second, while the volume exports of goods has continued to expand, there has been a falloff in service exports, particularly tourist receipts. I have not seen a thorough account of what is happening here so I must be cautious. There are two major possibilities. One is that the post-Covid recovery has not worked through to the tourist sector yet. Rather, after two years of restrictions, Northern Hemisphere tourists are visiting nearby destinations, and when they have exhausted them they will move on to more distant ones. The other possibility is that there has been a structural change in the international tourist industry – perhaps airfares are going to be permanently higher – so our tourist industry is on a lower growth track. Given the importance of the tourist industry’s generation of foreign exchange, the latter scenario would represent a major structural change, as would lower export prices.

The third possible structural change is the fiscal stance. To go back to last week’s PREFU column, the big change seems to be the falloff in corporate tax receipts. PREFU 2023 gives no account of why this has happened and expects the receipts to be back on track in a couple of years. Let’s hope it is right.

Even so, public debt continues to rise faster than GDP. PREFU 2023 expects net public debt (excluding the NZ Superannuation Fund) to be near 40 percent of GDP over the next few years, in contrast to 20 percent or so before COVID, with no expectation of a significant fall.

(There are a number of measures in the PREFU 2023 forecasts. I am not fastening on a single one in the way the election ‘debate’ does but looking at them all. As I said, the issue is technically complicated.)

If the government is borrowing more, then someone has to be lending to it. Generally that ‘someone’ is overseas, although the channel through which the loans flow  is complicated. As a rule, the New Zealand Government borrows in New Zealand currency, but further along, the lender to the government is, typically, converting foreign currency into New Zealand dollars. Suppose the public borrowing is used for diesel to fund capital investment. Ultimately, the diesel has to be paid for with foreign currency.

(This is a severe omission in explanations like Modern Monetary Theory when they ignore the foreign sector. The index of Steve Keen’s The New Economics: A Manifesto – which, by the way, is a much better exposition of MMT than his earlier book – does not mention the balance of payments, exports or imports. Were modern economies so simple.)

Forgive me if I don’t give here the details of the complex analysis. What seems to be happening is that we are not adjusting our economic behaviour for the expected reduction in the terms of trade. Over the next four years, consumption and investment are expected to grow more slowly than total production (GDP) – public consumption is actually forecast to decline – but the production is less valuable because imports are more expensive relative to exports, so what we can afford to spend is growing slower than consumption and investment. (PREFU 2023 does not publish sufficient tables to be sure of this.) To maintain our desire for growing national expenditure, we have to borrow more overseas so that foreign debt rises.

The good news is part of that borrowing is for business investment, which is expected to rise faster than consumption, and will, presumably, add to productivity. Even so, it is not obvious that national consumption should be rising quite as fast as expected. A neutral observer, observing that public spending is already constrained might suggest that the restraint should be on private spending, although those with political agendas might argue differently. (Remind me of the economic case for general tax cuts.)

This conclusion is not the outcome I expected when I first began analysing the medium-term PREFU 2023; facts have a bad habit of getting in the way of preconceptions. Ultimately then, PREFU 2023 seems predicated on a structural change in our terms of trade with slower economic growth prospects in the medium term. Oh dear.

 Another poll, another 27 for Labour. It was July the last time one of the reputable TV company polls had Labour’s poll percentage starting with a three, so the limbo question is now being asked: how low can you go?

It seems such an unlikely question because this doesn’t feel like the kind of election that delivers a 27 percent major party. Usually parties crumble because of internal dissent, a tanking economy or radical reform.

Labour has been cautious in its reforms; many of its supporters say too cautious. The economy’s sub-par, but take away the partisan politics and it’s pretty clear that’s the result of war in Europe, global inflation, China’s woes and paying off the costs of a pandemic either major party in government would have accrued. (Before you argue, look at how a National government responded to the global financial crisis and Christchurch earthquakes). Inflation is falling, we were never in a recession, the credit agencies are giving us AAAs, and unemployment has stayed low. What’s more, Labour has united behind Chris Hipkins and backed him to run this campaign as he wants. There’s none of the back-biting and dysfunction of the Shearer/Cunliffe/Little years.

Yet as we discuss on this week’s Caucus podcast, voters this far into the campaign are proving unwilling to take another look at Labour. They’ve done their Covid time; seen the failings of KiwiBuild, light rail and the rest; tsked at Cabinet ministers behaving badly; wept at the price of kumara and so far been unwilling to reconsider this government.

The right bloc of National and ACT is holding around 47-49 percent. It’s tight when it comes to whether they will need New Zealand First to have a majority – a nightmare scenario for any major party trying to govern with less than 40 percent support, as Guyon Espiner says – but it mirrors the results John Key and various ACT leaders delivered through three elections. Things are looking good for the right.

What’s perhaps yet under-appreciated is the disaster a 27 percent result would be for Labour and its future. If we assume Labour will hold 30 seats (the assumption being it loses it red wave wins of 2020 and maybe one or two more), then 27 percent and New Zealand First in Parliament would give Labour just four list MPs. 

Those list seats would be taken by Grant Robertson, Jan Tinetti (assuming she loses Tauranga), Ayesha Verrall and Willie Jackson. It would see the exit of senior MPs Andrew Little, Adrian Rurawhe and David Parker. But perhaps more importantly – if some marginal seats also fall in a swing back to National – Labour could lose its next generation leaders, such as Peeni Henare, Kieran McAnulty, Ginny Andersen, Priyanca Radhakrishnan and Camilla Belich.

Given most people still two-tick, the swing back to National in the party vote is likely to be reflected in seats as well. The Newshub Nation poll in Wellington Central this week illustrated this, with National’s party vote in the seat doubling from 14 percent in 2020 to 28 percent and its candidate vote rising from 18 percent in 2020 to 28 percent.

Hence the concern for McAnulty and co. The margin between the late-20s and early-30s matters immensely to Labour’s future. One Labour MP I spoke to this week said the party was still confident of rebounding and, as Julian Wilcox has heard as well, the focus is now on turnout. That MP said that crucially, MPs were still focused on the party vote and hadn’t turned inward, attempting to save their own seats. The party was holding together.

What should happen the next day but Greg O’Connor in Ōhāriu – in a hotly contested race with National’s deputy leader Nicola Willis – is reported saying at a local debate, “let’s face it, unless something changes in the debate tonight [referencing the 1News leaders’ debate this week], Nicola’s likely to be the next Finance Minister”. O’Connor is trying to appeal to an electorate that famously values access to its local MP, but that line will cut like a knife for his leader and colleagues.

The Caucus team also discussed the first leaders’ debate, aka the middle managers’ debate. Lisa Owen acknowledged the detail was there, but asked where was the hope, the rainbows and sunshine? She says the leaders did “a two-step” around the big issues and the hosts agreed the big winners may have been the parties who weren’t there. The minors already have a third of the vote, according to the polls. Only the 1996 and 2002 elections saw less vote captured by Labour and National combined. And if Luxon and Hipkins can’t lift their game, the minor party proportions could yet grow.

Luxon did get his ‘deckchair’ moment, when he told the humanising story of he and his wife sitting in their first home with only a single deckchair and a TV on a box as furniture. It was the moment he needed to help ward of voter’s concerns that he’s a rich Auckland businessman who doesn’t get them.

Hipkins, though likeable and considered, couldn’t find his moment. There were chances, such as when he warned voters against a National-ACT-New Zealand First coalition. But he never rammed them home. As an example of what Hipkins was looking for – and will still be looking for in the next debate – we played a clip of the final 1993 leaders’ debate. Jim Bolger is onto what he thinks is a winning moment, saying he is working across the aisle with Jim Anderton and Winston Peters on employment issues, and in a clearly rehearsed line asks Mike Moore why he won’t join them. Moderator Paul Holmes says it’s a reasonable question and asks Moore to answer. Moore replies, “And it demands a reasonable answer. [pause]. Because I don’t trust you Bolger.”

Boom. Delivered to a Prime Minister who had gone back on several high-profile commitments, in particular his famous “no ifs, no buts, no maybes” promise to abolish the superannuation surcharge, it was a mic drop moment. A sword to the heart. Hipkins – a scrappy working-class boy like Moore, a politician he admires – needs to find the sort of cut and thrust Moore had in his prime.

But he’s running out of chances to get Labour back into the 30s and back into this campaign. Hipkins needs to find some song-and-dance routine that resonates. Whether it’s a swing or a two-step, Hipkins needs some new dance steps if he doesn’t want to be doing a limbo. He’s got to find a way to make “grumpy” voters take another look at what he’s offering, or he could follow Moore as one of New Zealand’s shortest-lived Prime Ministers.

Follow Caucus on Apple Podcasts, Spotify, iHeart or wherever you get your podcasts

David Seymour is usually more a talker than a fighter, an ideas man; but he’s been flexing his political muscles during this election campaign. Running as high 13 percent in major media polls this year (and even 18 percent in one Roy Morgan), ACT has been threatening to become the most successful minor party ever under MMP. (New Zealand First got 13.3 percent in 1996, in the first MMP election). But with two polls showing ACT slipping to 10 percent, has the mouse roared too much and is Seymour misreading the mood for change?

In this week’s Caucus podcast, we look at what the polls are suggesting a change of government may look like. Labour and the Greens are painting the picture of a National-ACT coalition as the most free-market, right-wing government New Zealand has ever seen. If New Zealand First is needed, they predict chaos. And as Guyon Espiner says in the podcast, Luxon’s inexperience alongside Peters’ and Seymour’s belligerence could mean we are back at the polls in no time if the votes require that three-way coalition arrangement. 

At this stage, voters don’t seem to be concerned. National leader Christopher Luxon has caught up with Labour’s Chris Hipkins in the preferred prime minister stakes as National has reached 39 or 40 percent in this week’s polls. that suggests that, while New Zealanders may not be taking Luxon to their collective breast, he’s passed a certain sniff test. He’s not the liability Labour was hoping he’d be. Sure, he repeats lines like a parrot and his tax plan doesn’t add up, but he’s good enough. And he’s working hard not to appear mean and scary. Just this week Luxon said, “I consider myself very much a centrist and I’m very much a pragmatist.” So voters don’t seem to be afraid of a hard swing to the right as in 1984 or 1990. And most of all, he’s not the incumbent government. 

Just as the British public voted out Winston Churchill within weeks of VE Day at the end of the Second World War and chose a new government to ‘win the peace’, so the New Zealand public seem to want to wash their hands of the pandemic government. So long and thanks for all the vax.

That puts the pressure on National to, as Lisa Own puts it, deliver the sunlight. Voters are wanting better times and any new government will be on the clock to deliver, which could be hard in this global economic (and literal) climate.

But to form a government, Luxon will almost certainly need ACT. Enter Seymour stage right. And he’s very much not interested in propping up a centrist government. In a revealing interview on TVNZ’s Q+A last year he said National tends to campaign from the right and govern from the left, never overturning Labour’s reforms. “The ACT Party says that’s just not good enough,” Seymour told Jack Tame in July 2022. In the first 100 days, that’s the litmus test. Are you prepared to take some of this stuff on?”

ACT knows minor parties only get so much time in government, and even less at 10 percent or more. He doesn’t want to be what the Greens have been to Labour the past six years. Expect a full court press from a party motivated more by liberal principles than shiny BMWs. To quote Eminem, Seymour knows he’s going to “only get one shot, do not miss your chance to blow”.

Seymour does not want Luxon the centrist, he wants Luxon the Air New Zealand CEO going line by line through the budget to cut costs. By Christmas he wants many of the Ardern and Hipkins era reforms consigned to history, from Three Waters and gun laws to co-governance and fair pay agreements. Most of those National will happily concede or have promised to axe themselves. Seymour will want to go further. As the presumptive minister over-seeing his new Ministry of Regulation, he will look to shrink the size of government. And as Owen says in this week’s episode, he’s identified on Checkpoint that tax reform is top of his list; ideally a move to ACT’s two-tier tax system (17.5 percent and 28 percent).

This week he floated the idea that if National and ACT are a majority of MPs after the election but National won’t go far enough, he might offer a new minority government confidence, but not supply. That is, Luxon could go to the Governor-General after the election and say he has the confidence of a majority of MPs, but that he doesn’t have the majority needed to pass the Budget next year. That negotiations were ongoing. 

It’s never been done before and it would likely never fly. While the Governor-General would likely have to accept such an unprecedented offer and let National form a minority government, in truth confidence and supply go together like a horse and carriage. I tell ya brother, you can’t have one without the other (hat tip: Frank Sinatra). New Zealand’s constitutional conventions say pretty strongly that if you can’t pay the bills, you can’t run the government. And it would be anything but the “strong and stable” government Luxon is currently promising on high-rotate. 

Labour and the Greens want to use this prospect of instability and a swing right to fret voters into a rethink. So far Luxon and Nicola Willis are assuring voters – if they are in fact worried – that they can and will restrain ACT. But the questions will only grow in the next month.

That could spell risk for ACT. While the polls suggest a mood for change, it’s hard to see a mood for a big liberal change. Not for the “real change” that Seymour wants. As is almost always the case in New Zealand elections, voters are signalling they want rid of the incumbent, not inviting massive policy shifts. As Espiner says, sometimes voters treat governments like a game of beach cricket – it’s just someone else’s turn.

Seymour risks overplaying his hand and pushing ‘beach cricket’ voters back to National (as we’ve seen in this week’s polls) or even to New Zealand First. Because there stands Winston Peters, once again reassuring voters this isn’t his first rodeo and he can be the centrist handbrake to ACT’s promise to ‘take this stuff on’. Peters hopes that – and a little race-baiting – is enough for NZF to reach 5 percent.

So does Seymour moderate his language or double-down? Do voters on the right swing back to National now they are looking stronger, consider NZF or do they go to ACT to encourage more substantial change?

Luxon for now parrots the line that he only wants to talk about National and anything else is hypothetical. But every political future is hypothetical. National’s tax plan is hypothetical, but he still talks about it. Under MMP, voters deserve to know not just what single parties want to do, but what coalition governments might do. Luxon has ruled out some ACT policies and will be under pressure to take a position on more.

So the key campaign questions have become what National and ACT can agree on and whether New Zealand First reaches 5 percent on election day and is needed as part of any coalition deals.

Follow Caucus on Apple Podcasts, Spotify, iHeart 

 

Despite the headlines, things are not much worse than at the time of the 2023 budget, but fiscal management is always difficult.

The Treasury is required by law to publish a Pre-election Economic and Fiscal Update (PREFU) a few weeks before a general election, just as it is required to publish one before the (May) budget (BEFU) and a half (fiscal) year one in December (HEFU). The purpose of a PREFU is to minimise any surprises to the new government.

PREFU is an independent assessment by the Treasury. There is no input by politicians other than to advise the decisions that Cabinet has made which might affect it. That means that some of Labour’s election policy promises are excluded; in any case, the announced ones involved only small increases in government spending phased in over the next three years.

The reality is an EFU is usually a very boring document, as no doubt the Treasury officials who work on it think too. It is packed with detailed information of great interest to economic wonks, but there are rarely any headlines of public interest. So the politicians make them up, predictably exuding confidence if they are in government or claiming the EFU reflects a disastrous state of the nation if they are not. The media trawl through the detail to identify as spectacular a story as they can find, while the commentariat mixes in their political views. What is a straight-down-the-centre columnist to do, other than bore readers with a factual summary?

A PREFU is particularly difficult from this perspective, since it is published only four months after the BEFU, so there are only four months more data (often just one more data point if a series is compiled quarterly). Not surprisingly then, there is no great revision to the Treasury’s macroeconomic outlook.

The Treasury, bless them, provided a comparison with their previous BEFU forecast. Often it is very hard to see any difference, indicating that the new data was consistent with their May forecast. The biggest difference is that migration is surging more than was expected. Smaller differences, well within forecasting error, are that interest rates are fractionally higher and yet house prices will stop falling sooner (the effect of the migration?); the external terms of trade are fractionally lower and so the current account deficit is slightly higher but still coming down. Consumer prices are now thought to be falling a little more slowly than PREFU projected. But the GDP and unemployment tracks are much the same.

Yes, I am assessing the changes in terms of the margins of forecasting error. As I explained here, it would be better to provide ‘fans’ rather ‘point’ estimates. PREFU almost does, because it looks at alternative macroeconomic scenarios, reflecting the uncertainty of economic forecasting and various minority views within the forecasting teams. (A healthy forecasting team should have dissent and hard-fought arguments over the different scenarios.) The bands of uncertainty can be wide. For instance, the 90-day interest rate is forecast to be 3.9 percent per annum in June 2025. but the upper band is 5.4% p.a. and the lower one 2.4% p.a..

The PREFU also devotes more than a page to what is going on in the Chinese economy which it judges as weakening with some impact on our external terms of trade. I think what it is saying is that Treasury is concerned, they are monitoring China closely, but they don’t know enough to work how events will evolve there.

To summarise, there has been a tendency for the commentariat to highlight bad economic news, but things haven’t changed much since May (which is good news for all the political parties which have been using BEFU as the base of their election policies). Share prices dipped on the day before the PREFU was released. The reason given is that the share market expected a bad update. It wasn’t. (Mind you share prices often fluctuate for no rational reason; although the commentariat always has an explanation after the event.)

Treasury needs to forecast the macroeconomy to underpin its fiscal forecasts. To nobody’s surprise, these show some weakening. In particular, the Treasury has lowered its corporate tax forecast since the BEFU. As far as I can assess, if that had not happened the fiscal position would be much the same between the two EFUs. (There are, of course, numerous minor positive and negative changes.) Forecasting business profits is one of the most difficult parts of the macroeconomic forecaster’s job; I have never had to forecast corporate tax, but I know there is a long history of Treasury struggling with the exercise.

As widely reported, the forecast date for the planned budget surplus has been pushed out from the June 2026 year to the June 2027 year. Year measures are a bit coarse. The actual delay is probably about seven months rather than twelve. So with four months more data the surplus date has been delayed seven months, a sobering reminder of the volatility of a number which is a small difference between two very large numbers. (A one percent error in the forecast of revenue for the June 2024 year and an accurate expenditure forecast, could generate a 15 percent mistake in OBEGAl, the standard measure of the deficit.)

Remember too, that much of any borrowing is for capital spending. In 2027 the net worth – its assets minus debt – of the Crown will be higher than today. It is a proper economic discussion to debate how much of the government’s capital investment should be funded from current revenue and how much from borrowing. (I can hear a Treasury official grumbling ‘don’t forget we still have to borrow the bloody money’.)

What the PREFU is saying to the Minister of Finance after the election, is that the books are not in too bad a position (providing you have not promised anything stupid), but always – always – you will be under fiscal pressure. And you may have to deal with unexpected shocks.

The Treasury gives little guidance as to the particularities of the current pressures (other than the implications that politicians always want to reduce taxes and increase spending). Clearly the war resulting from the Russian invasion of Ukraine is among the big impacts on the world economy. China’s difficulties may be yet to come.

However, what I don’t think we have appreciated sufficiently is the impact of the Covid pandemic and the measures taken to reduce deaths. They had a substantial immediate economic impact – you can see it in the PREFU. But that is still unwinding three years later. It would be naive to think that those economic measures were a free lunch and almost as naive not to think about having to pay for the lunch. Trade-offs are central to economic management as the next government – whoever it may be – will find, even if in the heady days of election campaigning trade-offs are largely ignored.

Public policy frequently suffers because we don’t look at alternatives.

Thus far the Labour Party’s only ‘new’ election (economic) policy is to remove GST from fruit and vegetables.

Even the accompanying promise of adjusting Working for Families is much in line with what it has being doing in the last six years. It is also an acknowledgement that the government has not been able to improve the scheme despite an almost universal agreement by the knowledgeable that the sixteen-year-old scheme is neither efficient nor equitable. The Key-English Government could not solve the conundrum either. The promise to offer free dental care for under 30-year-olds is also an extension of past policies.

That suggests that Labour’s positive campaign is that it has done a good job and promising to progress its policies, but that there is nothing new it needs to offer – except cheaper fruit and vegetables. Whether the electorate considers this a good offer will be revealed on election night.

Why GST off fruit and vegetables? Why not bread and milk? I am guessing it comes from the public health sector, which has been concerned that people do not eat enough fresh fruit and vegetables. It found that higher taxes on alcohol and tobacco contribute to restraining their misuse and use. The sector, assuming this success will as easily apply to other products, has called for increased taxation on what is damaging to health – like sugar – and reduced taxation (or subsidisation) on what should be promoted – like fresh fruit and vegetables. In its enthusiasm it has paid little attention to the practicalities of implementation or the effectiveness of the price alteration in changing behaviour.

There has been considerable criticism of the proposed policy, ranging from the practicalities of implementation – what would be in and out, how food businesses would cope since they would almost have to keep two sets of accounts – to the possibility that most of the reduced tax would be absorbed by food outlets and little would be passed on in lower prices to purchasers. It is also argued that any reduction is greater benefit to high-income households than to low-income ones. Little attention has been given to any health benefits; there is not a lot of evidence one way or the other.

One of the main attractions of GST is its uniformity, which makes its implementation simple. (I applaud the Labour Government’s various measures to broaden coverage.) Varying the rates on one product group tempts a free-for-all on everything else. Casual advocacy can think of reasons for more or less consumption tax on almost every known product.

I support targeted excise duties on specific products which can be shown to be administratively practical and beneficial for the purpose. Currently that includes alcohol and tobacco for health, fuel duties for funding the transport system and carbon taxes for aligning individual decisions to the real cost of the emissions they generate (but I do think our current emissions trading scheme is very muddled). However, most popular proposals do not bother with such careful analysis. That leads to a higgledy-piggledy mess like we had in the Muldoon era.

Labour’s response seems to be that whatever the experts say, GST off fruit and vegetables is a popular policy. Apparently, the party’s focus groups favoured it about two to one.

I do not know exactly how the proposition was posed to the groups. Did they ask ‘do you support the removal of GST from fruit and vegetables?’ or did they ask ‘do you support the removal of GST from fruit and vegetables even if it is difficult to implement and much of the benefit of the lower taxes may go to retailers rather than purchasers?’

You may think the second question is loaded but so is the first, offering a policy change as though it is free. Next time you see the response to a focus group or survey question, ask yourself whether putting the same sentiment another way would have resulted in the same answer.

I would have preferred that the focus group had been asked ‘do you support the removal of GST from fruit and vegetables or would you rather have the cost of the reduction used to give you an extra $140 a year?’ I am guessing that the two-to-one support for the GST reduction would near reverse.

The cost of the lower GST is about $500m a year. The same $500m could be used to cut the bottom income tax rate from 10.5 percent to 9.5 percent so that every taxpayer who earns at least $14,000p.a. would be $140p.a. in the hand better off. It would be proportionally more beneficial to the poor than to those on higher incomes. You might be able think of options to spread the tax reduction more fairly, but this is my guess about the option voters would best respond to.

Putting the policy choice this way, many in the focus groups might be derisive of the size of the giveaway – less than $3 a week for most adults and nothing for children.  (National’s lowest offer is even smaller.) But that is true for the GST reduction. Do we really want that sort of transparency of policy in an election year?

My concern is wider. We usually discuss tax issues by looking at only one side of the story. I can understand people being opposed to a hike in income tax but it would be more popular if it was presented being used to increase spending on, say, health care, thereby reducing waiting lists and the need to go private. (In fairness, the Greens say they want to use the proceeds from their wealth tax to make dentistry free. I support both policies although there are some technical difficulties with free dentistry – did they consult anyone with expertise in dental economics before formulating their policy? But universal free dentistry is not at the top of my priority list for using any additional revenue.)

Regrettably, public discussion focuses on tax changes but not what their effect on public spending would be. That’s fine if one is opposed to all public spending, but it is hard to find anyone who is quite so rigorous. Even ACT MPs are happy to accept their salaries and expenses – once upon a time parliamentarians did not get much of either.

Economics is about tradeoffs. Sadly, these tradeoffs often get ignored in public discussion despite them being integral to public and private life. Even going without fresh fruit and vegetables trades off against your health.

PS. National’s tax package has been well covered by others, and hardly needs comment here. However, a broader point is that proposing new taxes to partially fund the reductions, breaks the consensus of ‘thou shall not introduce new taxes’, paving the way for a less hysterical discussion on capital gains and wealth taxes.

Evergrande and Country Garden – two giant Chinese property development companies – are a portent of the turbulence before us.

The recent financial failures of two ginormous Chinese property companies, Evergrande and Country Garden, at various times ranked the second largest and sixth largest in China have implications for the New Zealand economy.

The Evergrande Group has been struggling since 2021 (here). It has just filed in a New York for Chapter 15, a bankruptcy protection in the US enabling it to restructure its debts. The debts – most are not American –  are estimated to amount to an eye-watering US$300b (say NZ$500b). One assessment concluded that in February 2022  its liquidation would return only between 0% and 10% of principal to creditors.

Also in August 2023, Country Garden defaulted on the US$45 million with regard to interest disbursements linked to two offshore US dollar bonds. I won’t go through all the turmoil which has since happened, but summarise by saying that today Country Garden appears to be where Evergrande was two years ago. It may go down faster because Evergrande has undermined financial market confidence.

Moreover, while not so prominently in the news, there are many Chinese property companies – some comparably large – which are also in increasingly difficult financial troubles. China has many ‘shadow’ banks, that is banks whicch are not legally regulated in the usual way and which have the potential to collapse the entire financial system.

The immediate precipitant was that in August 2020, the Chinese government enacted a ‘three red lines’ rule which regulated the leverage taken on by property developers by limiting their borrowing based on the following metrics: debt-to-cash, debt-to-equity, and debt-to-assets. The rule’s purpose was to rein in the highly indebted property development sector. It has, but at the cost of undermining many of them. By October 2021, 14 of China’s 30 biggest developers had violated the regulations at least once.

More fundamentally, there had been a speculative property boom starting over a decade earlier in which the companies relied on inflating property prices to ‘balance’ their books. It was a kind of Ponzi financing, compounded by local authorities financing themselves by selling land to the companies, who financed the sale from the cash flow coming from new investors and banks.

Because of the local authority involvement the companies have been building accommodation in third and fourth level cities, where there is no significant demand. There are pictures of rows of apartment blocks which are said to be entirely empty. They will be in the company books at cost plus inflation, but there is little prospect that they can be sold at those prices, if they can be sold at all.

Observe too that a rapidly growing company – anywhere in the world – is unlikely to develop rigorous internal systems to administer and monitor itself. It is not until the receivers move in that we learn just how slack the failing company has been (and how much corruption).

I take it that the central authorities judged that the boom was unsustainable, and that the later the crash the bigger it would be. So they thought it better to act soon, even if that put China’s property and financial markets into turmoil.

There is much more that can be pieced together or guessed. But the issue for this column is the impact on New Zealand and the world.

There is a general agreement that the financial instability may politically weaken Chinese premier Xi Jiang. At the very least, it requires him to pay more attention to domestic issues. Among the issues which would surely worry Xi and the central committee is demonstrations outside Evergrande’s offices by investors who had partly prepaid for housing which has not been built or finished and by subcontractors who had not been paid. The demonstrators may turn on the government.

This does not mean that China will cease to be significant politically in the international system. It is too big and important for that. There is even the uncomfortable possibility that it will be more aggressive externally in order to take its population’s concern off failing domestic issues. (Putin’s Russia is a current example, but history records many others.)

Moreover, the property sector is said to contribute 24-30 percent of China’s GDP. The turmoil in its property market seems to be contributing to the slowdown in the growth of the Chinese economy, which gives Xi less room for economic manouevre; it may slow down its commitment to the Belt and Road Initiative.

(The other great Chinese growth driver has been exporting and that too is hiccupping, partly because the world economy is slowing down and partly because many countries are trying to de-risk their dependence on China. It is also possible that the gains from its thriving export sector are not increasing as fast as they have done over the last few decades.)

One assumes that eventually the government in Beijing will bail out the Chinese property sector (and the local authorities and the banks that have been financing it). There are various ways of comparing the size of the Chinese and New Zealand economies; one says it is about 70 times as big. So Evergrande’s NZ$500b debt is equivalent to about $7b here. (Double it for the other property companies also going under?) Our Treasury and Reserve Bank would blanch at a bailout of this magnitude. (I have more confidence in their expertise to do a bailout; they have had more practice. And they wouldn’t have to deal with a shadow banking system.)

Will the financial turmoil in China impact greatly on the world financial system? The conventional wisdom is that the exposure is not great. There may be some non-Chinese financial institutions which are overexposed and will suffer – even crash – but presumably they are a small proportion of the total.

Of greater concern to New Zealand is whether the slow growth of the Chinese economy will impact on our exports there. Our trade dependence on China is extraordinary. It is the biggest market for milk products, sheepmeats (for beef it is only second), fish, apples, wine and honey (for kiwifruit it is third). Thirty years ago, China did not make New Zealand’s top ten export destinations in any of these products. We may already be seeing an impact from the growth slowdown in international dairy product prices.

We have long been aware of our export overdependence on China, compounded by selling to other markets in East and Southeast Asia (including Australia) which are themselves very dependent on the Chinese economy. (Exports to these markets are about two-thirds of our total; China alone is a third.)

There have been considerable efforts to diversify; we have just settled free trade agreements with Britain and the EU. The big diversification could be with India, but the Indians have not been nearly as enthusiastic as we are. After all, compared to the others they are negotiating with we are a tiddler. A deal was a ‘priority’ for the Key-English Government, it has been for the Ardern-Hipkins one, and National has announced that it would be for them. There is a bit of a pattern here, isn’t there? When we finally get an FTA,  it is likely there will be little improvement for dairy access.

We are negotiating trade deals which will add to the diversification: with the ‘Pacific Alliance’ – the Latin American regional group made up of Chile, Colombia, Mexico and Peru – and with the Gulf states – Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain. Negotiations with the Russia-Belarus-Kazakhstan Customs Union are currently suspended, while a long-term ambition for an FTA with the US is hardly on the table.  Open plurilateral deals enable new members to join, as when Britian joined the CPTPP, adding to the diversification; existing bilateral trade deals are also being upgraded.

This probably means that China and its associated economies will continue to dominate the prospects for the New Zealand economy for some time to come. What is going on in China’s property and finance markets may be more important to us than the October 2023 election.

Banning mobile phones in schools points to wider issues.

I don’t have enough information to evaluate National’s election proposal to ban mobile phones in schools, but something has to be said about how they plan to implement it. Compulsion from the top is characteristic of much New Zealand policy reflecting our centralist approach to government.

Many school principals are critical of the diktat. Presumably, they know a lot more about the issue than I do (or, for that matter, Chris Luxon does). Luxon claimed that ‘the ban was one of the ways National would lift “abysmal” achievement levels’, although there does not appear to be any evidence of a causal relationship between phone use and learning – correlation is not causation. (Evidenced-based policy will not be at the forefront during the election campaign.) As I understand it, the usual concern is misuse, especially for bullying, not academic achievement.

Some schools have already instituted bans without a Wellington-based direction. Apparently many principals think there is a problem with mobile phones in schools but that it should be addressed at individual school level, allowing for differences of opinions, circumstances and management styles.

I assume schools would recognise – even welcome – a recommendation from the centre, especially if it was accompanied by guidance about options prepared by an expert panel of school leaders. But it would be up to each school to implement a ban or not, including the practical details of how it would work. I should not be surprised if different schools chose different details in their approach, for circumstances differ from school to school.

This is an example of the application of nudging where the government has a view but rather than order it, it sets up a framework which encourages others towards the government view but leaves the final choice to them.

Perhaps a result of decentralisation would be messy decision-making in which each school – principal, teachers, council, parents and students – has to wrestle with what to do. (Have those schools which have a cell phone have a lot of trouble deciding?) But that is true whenever we have choice. There would be enormous ‘efficiency’ gains (and probably health ones too) if instead of giving superannuitants cash the government delivered its choice of groceries to everyone’s door. The elderly would not even have to decide on breakfast – nanny state would do that for them. Think of all the time and transport savings from not having to shop for food.

The nanny state trope is not mere rhetoric. One of the challenges parents face is how initially they make all the choices for their children and then have to slowly withdraw as the child evolves into an adult and increasingly makes their own decisions; sometimes parents are irritated or anxious by the decisions adolescents make – but you live with it.

What interests me about National’s policy is that it is top down. One usually thinks of National being the more decentralising party and that those to its political left are more prone to running the country by government direction. Recall John Key’s slogan in opposition that Labour was running a ‘nanny state’.

(National’s educational spokesperson is Erica Stafford – electorate East Coast Bays. Her adult background has no practical experience in the education system except that she has a couple of children.)

It would seem the culture of centralisation is so deeply embedded in the country that even National succumbs when it is expedient. Perhaps they are influenced by focus groups – apparently about three-quarters of those surveyed support a ban. I am astonished that so many New Zealanders thought they were informed enough to have a view – count me out. I wonder if the groups discussed how the ban would be implemented.

I agreed with the Rogernomes that, at the time, economic decision-making was too centralised and more decisions should be taken at lower levels.  I favour ‘subsidiarity’, a principle which is not prominent in New Zealand political thinking. (A leading Labour Party thinker, who honourably resisted neoliberalism, said he had never heard of it.) Subsidiarity is that social and political issues should be dealt with at the most immediate or local level that is consistent with their resolution.

The notion goes back to at least Thomas Aquinas in the thirteenth century and is prominent in Christian Democrat political philosophy, the European Union where it is a general principle in its law, and in the United States. The principle is not increasing efficiency – sometimes its application may – but reducing the power of those at the top of the hierarchy.

The economy the Rogernomes took over had suffered detailed intervention under Robert Muldoon, the dominant tradition of economic management since the Second World War, compounded by his personality and the wretched fight against inflation. The Rogernomes, rightly in my opinion, wanted to leave more decisions to lower levels where personal choices are co-ordinated by markets.

They did the decentralisation badly for at least three reasons. First, they did not pay enough attention to the need to regulate the market. The list of their failures is long; it includes building leaky buildings and allowing Telecom to be a monopoly.

Second, the market requires a fair income distribution to work properly. The Rogernomes increased inequality by cutting the incomes of those at the bottom. Most people think the resulting distribution is not fair.

Third – this is what this column is about – they saw the only valid agents in the economy as being the central government and private voluntary arrangements – which include businesses and households. Social institutions between them which required some regulatory support were downgraded – hence the Employment Contracts Act, which undercut unionism.

It is true that in places the Fourth Labour Government made some changes supportive of those institutions. It consolidated local government which could have given locals greater autonomy, but they did not address the funding issue and they continually bullied localities – for instance, directing them how they were to run their trading enterprises; we continue to do so today.

Labour also consolidated the health sector into what was then Regional Health Boards and later District Health Boards (interrupted by National’s neoliberal-driven attempt to commercialise the public sector in the early 1990s). Again there has been more bullying – the worst example was the treatment of the successful Canterbury DHB (described here and here). The system is not now subject to central government bullying of locals, because of its centralisation into Health New Zealand (Te Whatu Ora), with local input stripped out. (However, at least one local authority is seeking ways to monitor their local health system; good on them, may others join their effort.)

In David Lange’s post-Picot restructuring of the schooling system was decentralising with the intention of increasing the power of teachers and parents and reducing the power of Wellington bureaucrats and Rogernomes. Although presented as cost-saving, it was not. The Secretary of Education in charge of the transformation, while explaining to me how it was designed to hold off the Rogernomes, said that to make it work properly it needed another $60m p.a. (say $120m in today’s prices). But we still see the kind of bullying that National is practising.

Not that this Labour Government is exempt, despite the record of its 1984 predecessor. In a number of areas its approach has been centralist. (I have also mentioned in previous columns the media merger – now abandoned – the polytech merger and the three waters merger.)

The temptation of politicians to bully is inevitable; Muldoon was just the most prominent in my lifetime, but even the Rogernomes were dreadful bullies, especially if you did not agree with them. It is said that voters are more affected by moods than by specific policies. I shan’t be surprised if an important defining mood in 2023 is about the balance between centralisation and decentralisation.

The recent reduction in the US credit rating signals that market lenders are not happy with the US fiscal arrangements. New Zealand’s lower rating is a warning that we could do better too.

Fitch recently lowered its long-term credit ratings rating of US government debt from the top grade of AAA to AA+. Financial markets hardly moved – they had already incorporated Fitch’s reservations in their thinking.

Borrowers, including the New Zealand government, pay credit raters (the other main ones are Moody’s and Standard and Poor) to assess their credit worthiness. The raters also give an indication of how they may change their rating next time. New Zealand’s Fitch long-term credit rating is AA and ‘stable’, just below the US one which is also stable. Countries above the US at AAA include Australia, Denmark, European Union, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland – all are stable too. (For a list of country ratings see here.)

Lenders require a rating to assess the risk of investing in sovereign bonds; some may not even be allowed to hold the bonds unless the rating is above a particular level. The higher the grade, the more willing they are to invest; usually the higher grade bonds pay lower interest rates. Credit ratings also reduce the costs of monitoring for lenders. I guess a country acquiring a credit rating is a kind of penance for borrowing; not having one reduces a country’s ability to borrow.

Ratings below AAA do not mean that the credit rating company or the lenders expect the country to go into meltdown soon. But there could be a hitch. I take it that Fitch’s US downgrade arises from an inconsistency in US laws. Congress approves the US government’s additional borrowing (spending more that its revenue) but it also sets a debt ceiling which total debt may not exceed. The two figures may not reconcile – inevitably so, if the government keeps borrowing in the long run.

As total US government debt nears the ceiling, the political parties in Congress play a kind of ‘chicken’ of who yields first. On the last occasion this year, the Republicans, who are not in the executive, refused to raise the ceiling, while the Democrats, led by President Biden, refused to restrain spending. After much political argy-bargy, which included the president cancelling an important overseas trip, the Republicans agreed to suspend the ceiling in exchange for the Democrats making some spending concessions. The next round of chicken is expected in 2025, when there will be a new Congress and possibly a new president. (The last round was in 2021.)

No one is sure what exactly would have happened if no agreement had been reached. The US government would not have melted down, but certainly there would have been turmoil in the US market for treasury bills, which underpins the entire international financial system. The Fitch downgrade was intended to signal that it was time that the US got its financial arrangements into order. Others in financial markets would say ‘hear, hear.’

More fundamentally, the crisis arises out of the structure of the US constitution – the oldest functioning one in the world. It was greatly influenced by the British arrangements of the time in which the king still had a lot of power. Instead of a king the US constitution provides for an elected president who still has a lot of the eighteenth-century royal powers. Meanwhile the British system, which we follow, evolved until most of those royal powers became held by a prime minister appointed by parliament and commanding its confidence.

The US has no such prime minister. It is quite possible for its president to not have the confidence of either its House of Representatives or its Senate. (The British parallel of the House of Lords has been largely neutered; New Zealand’s – the Legislative Council – was abolished in 1950.) This can happen – and has happened – when both arms of the US Congress are dominated by a party different from the President’s. In any case, US political parties are not as well-disciplined as the British and New Zealand ones – and you may think even those are a bit shambolic.

Why does New Zealand get an AA rating? Are not our public debt-to-GDP ratio low and our public accounts transparent by international standards? Yes, but Fitch does not look only at our public debt. It looks at private foreign debt and the indirect public exposure to it. After all, during the GFC bailout, the New Zealand government ended up, in effect, owning a large proportion of private housing mortgages, when they were used to underwrite the support commercial banks, heavily exposed to offshore debt, needed. The crisis was handled so smoothly that the public was largely unaware of the achievement. Had there been a hiccough, the economy’s financial markets would have been in deep trouble and so would have been the economy.

Our overseas debt, denominated in foreign currencies – most often subject to exchange rate risk – is almost all private, while New Zealand public debt is denominated in New Zealand dollars – it has overseas investors but they take the exchange rate risk. (Will they always?) But the private overseas debt is interlinked with the public debt as the GFC crisis demonstrated. The credit rating agencies (and our Reserve Bank and Treasury) understand that, even if not everyone does.

Very often the commentators’ monetary theories ignore the foreign sector of the economy. I read the books and other accounts which explain their theories, look up the index and too often there is not a single reference to the exchange rate, foreign capital flows, exports and imports. It is not sufficient to say that under a floating exchange rate attention to the external sector is unnecessary, because financial capital flows are very influential on exchange transactions, the exchange rate and the domestic monetary situation.

I can understand how the theories apply better to the US economy, because it issues the international currency. (Even so, most American economists are wary of the theories for technical reasons.) But, for heaven’s sake, the New Zealand dollar is not the US dollar. Haven’t those commentators noticed?

So the credit rating agencies look at New Zealand’s substantial private foreign debt and downgrade our standing accordingly. It’s a warning to us, and to anyone lending to us, just as Fitch was warning the US about its financial arrangements.

It is the professionalism – competence and integrity – of the doctors, nurses and technicians who provide the care which obscures the managerial failure.

The column-blog, Otaihanga Second Opinion is compulsory reading for anyone interested in the health sector. It is written by Ian Powell, who was Executive Director of the Association of Salaried Medical Specialists, the professional union representing senior doctors and dentists in New Zealand, for over 30 years (until December 2019) and he has an intimate knowledge of the sector and excellent judgments.

One column, Trust Relationships and Health Systems, had much wider implications than just the health sector. It draws lessons from the extremely successful leadership team at the Canterbury District Health Board (CDHB). In an earlier column I reported its demise from excessive and insensitive interference by centralised Wellington. Powell’s column provides more background as to why it was successful.

He summarises the ‘standout’ performance of the former Canterbury District Health Board (CDHB) from the mid-2000s to 2020, when integrated health pathways between community and hospital were successful in constraining acute patient demand. They occurred because they were

… clinically developed and led by health professionals working in both community and hospital care. It would not have happened without a strong focus on relationships leading to trust in order to enable an engagement culture to develop that was previously missing. Decisions were based on what made best clinical sense in many different branches of medical care. The engagement culture that led to this outcome, and was strengthened by it, provided the basis for CDHB’s outstanding response to the post-2011 earthquake health crisis.

Powell’s column was agreeing with an article by Ian McCrae, who was founder and former CEO of Orion Health: Bugger, I’m the New Minister of Health, which also drew lessons from the CDHB experience.

It then reports an insightful comment to McCrae’s article by a prominent Canterbury surgeon, Saxon Connor:

This is spot on. But what it doesn’t allude to is that the approach didn’t happen by chance. There was almost a decade of ‘trust building’ that allowed a system network to develop which embraced change based on underlying values of respect, empathy and psychological safety.

However my observation is since the change we have seen loss of those networks, trust and respect. People are now disengaging on [a] daily basis. The old way of working cannot simply be turned back on. It will require starting from scratch to rebuild trust. Paraphrasing David Meates [former Canterbury chief executive] “Change can only happen at the speed of trust”. I don’t think people quite yet understand what they have lost from the Canterbury health system over the last two years.

The trust did not occur overnight. Powell says it took longer than a decade. The turning point was the 2006 arrival of a new, very experienced, chief executive, Gordon Davies, who knew the health system well and understood the importance of both relationships and good engagement with health professionals. His work was built upon by his successor, Meates, whose leadership finished in 2020, when the Wellington approach made it impossible for him and his senior leadership term to continue.

Powell places trust at the centre of his diagnosis, but lurking underneath is the professionalism of those involved; you trust your healthcare because of the competence and integrity of the doctors and nurses treating you.

Critical to this analysis is the notion of the ‘principle of subsidiarity’, that is central government should only perform those tasks that cannot be performed at a more local level. That does not only apply to central government. Anywhere in a hierarchy, subsidiarity says activities should be delegated to the lowest possible level. Sure, they are going to make mistakes down there, but so do those higher up – bigger bogups.

It is a cultural issue. You cannot impose trust and good working practices. They develop from the bottom. Centralisers have tried; Stalin and his goons did not succeed at all. Our central institutions have done little better.

The above discussion is about the health system. It leaves one very gloomy about the success of Health New Zealand (Te Whatu Ora). If it does succeed, it is going to take a long time, longer than the tenure of any Minister of Health or Chief Executive. It will involve subsidiarity, having faith at the local level. That is almost exactly the opposite to the ambition which led to the creation of HNZ, and the destruction of the DHB system.

Certainly there are things which need to be done nationally, like developing a national IT system (which the DHBs had already been trying to create, but at a snail’s pace). Ultimately the task is about creating a culture of professionalism and trust at the grass roots. The centre cannot deliver it by itself.

The lesson should not be lost in other sectors of government, especially given that the approach based on generic management is almost exactly the reverse, with its appointments of chief executives from outside who have virtually no competence in the activities of the institution they are to run. As well as in the health system, this column has detailed examples of Archives New Zealand, the Ministry of Local Government and Statistics New Zealand; there are many other instances. (Yes, there have been some successes but they are few and hardly offset by the failures.) We explicitly appoint them for a shorter period than the time it needs to evolve a culture, even if they had understood the job they were taking over. By the time a conscientious generic manager masters the underlying culture of the institution they had taken on, they are moved to another one.

This is not a cheerful conclusion. I was struck that when Meates left his job at the CDHB he was not immediately recruited by the Ministry of Health for his expertise; neither has he been involved in Health New Zealand. We have a system which rewards conformity rather than achievement.

Given the number of low talent generic managers that tells you a lot about how the centre works. Generic management is too entrenched to admit its failures and seek a better way focused on culture, professionalism and trust.

It is too easy to react to a problem rather than to tackle it thoughtfully.

It’s Friday night. You plan to have a couple of drinks with friends. Saturday morning you can’t remember how many you had – was it seven? – but you wish you hadn’t. What you are showing in economic terms is ‘time inconsistency’ in your decision making. Each step seems rational and yet, with hindsight, you made decisions which don’t seem rational in total. (And yes, you will do it again the next Friday.)

What appears to be happening is that there seems to be two parts of the brain making your decisions – remember Daniel Kahneman’s Thinking Fast, Thinking Slow? – and they make decisions through time quite differently. The ‘thinking-fast’ bit reacts in the very short term as when you chose to have that extra drink; the ‘thinking-slow’ bit is more concerned with the long-term consequences – like the possibility of a hangover the following morning. Too often short-term thinking dominates. It appears rampant among adolescents; some adults seem never to grow out of it.

I am not an expert on a psychological research so I offer this explanation of the source of time-inconsistent decision-making very tentatively. The point for this column is that sometimes we seem to operate with a short horizon when a modicum of reflection or hindsight suggests a longer-term perspective might be more sensible. We grab the cookie now rather than wait to get two cookies in the near future.

The same seems to apply for society as a whole. Time and time again we see the focus on the short term without reflecting on the long-term context.

Oh, you say, ‘what about greenhouse emissions? We are thinking long term there, aren’t we?’ Are you sure? It took decades to take action after we were alerted to global warming and climate change. Even today, that action is short term; we focus on trees as carbon sinks ignoring that they cannot be a long-term solution because eventually that has them covering the entire land. Meanwhile, we are doing little about the emissions from transport, which build up in the warming cloud for a hundred and more years.

Some of you will say ‘well, I am a greenie; I always think and vote long term’. Are you sure? The Green Party advocates rent controls. They receive much criticism from economists. The issue is that rent controls work in the short term; in the long term they cause havoc to the rental housing market (economists more politely say they ‘distort’ the market). In this case the Green Party are thinking fast; economists are thinking slow.

(In my view, rent controls may make sense to deal with a short-term shock but they make no sense for long-term management. A big issue is when and how to unwind them. Short-term thinkers – and adolescents – rarely pay attention to exit strategies.)

It is not only on economic issues that we think fast. The national reaction to a spate of crimes is to punish the criminals with little attention as to why the crimes are happening. If there is any account of the reason it amounts to ‘it’s the government’s fault’; a strange argument given that similar outbreaks are happening overseas under different sorts of governments.

I was moved by Tony Blair’s ‘tough on crime; tough on the causes of crime’. I have no background in criminology, so I must be cautious. But I don’t see any serious national discussion on the causes of crime. I was impressed by a paper by retired Government Statistician Len Cook, which showed dramatic reductions in incarceration rates by more recent Māori cohorts. Because older generations who have been to prison, tend to be repeat offenders – are our prisons training grounds for criminality? – the fall-off is not yet so evident in the aggregate prison population. (Cook’s paper Insights from Statistical Trends and Patterns Relating to Youth Justice:1911-2021 is here. Notice that he explores over a century of data.)

Before you jump to the conclusion, dear fast thinker, that the Māori decline is the result of changes in sentencing practice, observe that the teenage Māori incarceration rate has fallen from eight times the non-Māori rate for those born between 1946 to 1970 to thrice for those born between 2001-2005, which suggests that there is a social structural change going on among Māori.

I have very tentatively suggested that the first generation of Māori who migrated to the cities were unprepared for urban life and experienced severe social disruption but that as they settled in, later generations have become better adapted to living in cities – including by evolving specific Māori institutions. (Here.)

What is sad is that we don’t seem to have sufficient anthropologists, criminologists and sociologists to lay the foundations for a think-slow, analytic, public debate about being tough on the causes of crime. So we think fast and react.

Without those foundations, matters of major public concern get reduced to trivia. There is a proposal for a $13.7b pumped hydro-scheme at Lake Onslow. It is essentially a way of storing electricity in good times for use when the standard production is low – a kind of national battery. I have worked in the economics of energy for many decades and would love to understand what is going on – even write a column about it. But there are so many related issues – such as the rise of intermittent wind and solar provision, local battery storage, the role (or not) of the aluminium smelter, better coordination of the existing system to use existing hydro-storage (which may involve renationalisation of some kind), reducing the use of coal, climate change … – that we cannot have a serious discussion without a system model. We are flying blind, yet again.

You may say, aren’t you proposing a covert ‘plan’, Brian? Depends what you mean by ‘planning’. I am reminded of the chairman of the Beattie Commission on science policy in the 1980s asking a Treasury official about a science plan. He stuttered, and stumbled and mumbled and I realised that p*** was a four-letter word that you did not use in polite Treasury circles at that time. The role of p***ing in public policy had collapsed, and we were left with short-term thinking and the faith that the market will provide.

You see the same problem elsewhere. For instance, we gave up thinking systematically – what I mean by ‘planning’ – about the future labour force at about the same time. Now we are in labour force muddles all over the place – especially in the health sector. I am comfortable with the government’s announcement of increasing the number of places in medical schools but, for heaven’s sake, it takes up to 13 years to get a fully trained doctor. We should have been thinking about the issue in 2010.

I am not arguing that we should have another Planning Council or Commission for the Future which Muldoon’s government established in the 1970s. Neither was particularly successful, in part because governments have a propensity to stack boards with the politically correct and politicians’ pets rather than the competent and thoughtful. Instead, we need a change in the nation’s culture to move away from thinking fast to thinking slow. I doubt you will see any such move in the run up to the election. It will be more like Friday night’s drinkies.