Back on Track?

The state of the current economy may be similar to when National left office in 2017.

In December, a couple of days after the Treasury released its 2024 Half Year Economic and Fiscal Update (HEYFU24), Statistics New Zealand reported its estimate for volume GDP for the previous September 24 quarter. Instead of the expected trivial fall of 0.1 percent on June, the economy appears to have contracted 1.0 percent. There was much consternation because the discrepancy was too big to be explained by noise/measurement error. The outturn was also much weaker than the private sector forecasters anticipated.

The issue is not the single quarter decline. The New Zealand economy has been in contraction since late 2022. (I am using per capita GDP, to reduce the effect of immigration.) That is eight quarters, with a total fall of about 5 percent per person so we are back to about where we were six years ago.* The consensus among forecasters had been that the contraction would bottom out about now. I imagine they now think the upswing will be a bit later – the gloomy may say ‘much later’.

As a consequence, unemployment – which lags the bottom of the production cycle – will be higher. HYEFU24 forecast unemployment peaking at 5.4 percent of the labour force in June 2025. (It was 4.8 percent, September 2024.)

And, of course, the government’s current account is going to show a greater deficit, because the government’s revenue will be below what HYEFU24 anticipated. There will be a need for more borrowing – to be discussed in a later column.

What has caused this contraction? Many people will jump to the conclusion that it is the fault of one politician or another, the choice depending on their political prejudices. I do not want to discount that there has been some poor fiscal management – probably by both parties – but that disguises what may be an underlying structural problem.

I won’t bore you with the details, but the economy seems to have been performing poorly over the last twelve years. It was pedestrian under the Key-English Government. Labour tried to lift its growth by expanding the public sector, but the private sector remained near static. In particular, there was little growth relative to the population in the tradeable sector, which generates and conserves foreign exchange.

There were three main exceptions. The Information, Media and Telecommunications sector boomed. Presumably that was from the broadband rollout. But even it peaked in 2021 and is now stagnating.

There was some growth in consumer spending but that appears to have mainly sourced from products produced offshore. (Retailing contributes to economic activity by paying workers and rents and making profits.) In fact, retailing was sluggish like the rest of the economy until 2019, and then took off, interrupted by the lockdown. It is still humming away (but not everywhere).

 The third driver has ben the construction and real estate sectors. Construction grew rapidly after the turn down following the GFC. It peaked in late 2021 and has contracted by about 10 percent since, back to about where it was in 2017. The pattern for the real estate sector (which is very heterogenous including rental and hiring) is a little different. It fluctuated around a rising trend a lot; it still appears to be rising even if estate agent activity is not.

So we have had a weak economy for some time. Labour was trying to stimulate it via the government’s spending, which the Coalition Government is cutting back. There is no part of the private sector which is significantly expanding. Its expansion peaked three years ago; today the construction sector is producing absolutely less than it did then.

It is easy then, and correct, to say that at the heart of the current economic contraction is the construction sector. Its contraction was caused by the Reserve Bank hiking interest rates. OCR went from 0.5% p.a. in August 2021 to 5.5% p.a. in June 2023 – it is currently 4.25% p.a.)

The minutes of the RBNZ Monetary Policy Committee are not published, so we cannot be sure exactly what it was thinking. In November 2022 a select committee of Parliament asked the RBNZ Governor whether the central bank was engineering a recession to combat inflation. He replied, ‘I think that is correct. We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth.’

In August 2021 consumer prices (CPI) had increased 5.9% on a year earlier. The rate rose to 7.3% shortly after and has since sunk back to 2.2% today. I leave to another venue whether this inflation reduction is a consequence of RBNZ action or whether it would have largely happened anyway as world inflation eased.

So a major cause of the two-year-plus contraction has been the actions of the Reserve Bank. But it happened in a decade-long weak economy.

Because we hardly focus on the existence and causes of the weakness, the government is hardly addressing it – continuing the Key-English approach. The one exception is Shane Jones and his ‘think big’. You may not like what he is proposing – and it will take some time to be effective – but at least it grasps the nub of trying to deal with the weak tradeable sector.

In summary the state of the current economy as similar to when National left office in 2017. As it promised in its election campaign, we are back on its track.

* This column looks through the strong fluctuation associated with the Covid crisis.

A Bully of Billionaires

Can we trust the Trump cabinet to act in the public interest?

Nine of Trump’s closest advisers are billionaires. Their total net worth is in excess of $US375b (providing there is not a share-market crash). In contrast, the total net worth of Trump’s first Cabinet was about $6b. (Joe Biden’s Cabinet total was about $118 million and Barack Obama’s second-term Cabinet was about $3 billion.)

A US President’s cabinet is different from ours (or a British one) which has to come from the governing party caucus (or caucuses) and (partly) reflects its political balances – it may even contain members whom the prime minister loathes. The US system harkens back to the days when the kings chose their advisers who did not need to be in Parliament; compatibility need not be a problem unless the president picks a bunch of egoists.

In principle then, the President has a much wider choice, and ought to be able choose a Cabinet of greater competence. However, outsiders may not have a good grasp of the difference between business and politics. To take a simple local illustration, more than one party leader with a business background hasn’t understood that while the CEO appoints the workers, the workers/caucus appoint the party leader – which means that if the polls turn against a bullying or neglecting party leader, he or she will be out (if there is a viable alternative).

There is a tendency by the public to assume that because someone has succeeded in one arena they are expert in many others. In fact, where celebrities give opinions on which they have no expertise, their contributions are usually uninformed, with – at best – content as useful, as comforting and as platitudinous as a horoscope. Yet we listen with unwarranted respect.

Before the 2008 Financial Advisers Act, a celebrity would front advertisements for a financial firm to give an impression of its integrity and competence. (A number of the firms collapsed much to the chagrin of their investors; some even had staff prosecuted for fraud-like offences.) Assessing the soundness of a financial business is not easy; auditors have not always been successful, nor have the retired bankers recruited to their boards. Why should uninformed celebrities do any better? Presumably enough of the public were credulous to make it worthwhile for the firm to outlay considerable amounts on a suitable celebrity. (Derek Quigley says he turned down a $150,000 fee to front an insurance company’s TV promotional campaign, at a time when the average wage was about $18,000 a year.)

No doubt among some of Trump’s billionaires there will be some who are competent and some who are not. But that is usual in any cabinet. The bigger concern is the extent to which they will use the opportunity to pursue their personal interests at the expense of the public interest. At his confirmation when being appointed as Secretary of Defense in 1953, the President of General Motors, Charles E. Wilson, said ‘what was good for our country was good for General Motors, and vice versa’. It is widely thought he said that ‘what was good for GM was good for America’, the sentiment implicit in his ‘vice versa’. The implication is that there are no conflicts of interest between business and the government.

You may recall that in his first term as president, Donald Trump signed a ‘historical trade deal’ with his ‘very, very good friend’ Xi Jinping that committed China to purchase $200b of additional US exports before the end of 2021. China bought none of the additional exports Trump’s deal promised.

I have not been greatly impressed by Trump’s international negotiating record. (Remember the cosying up with North Korean president Kim Jong-Un?) But perhaps I was looking in the wrong place. At the time he was doing the deal with China, that country was giving very favourable treatment to the fashion businesses of his daughter, Ivanka Trump.

Will this sort of thing be repeated in Trump’s second term, but tenfold? There will be even fewer checks on him this time, given that Congress is dominated by Trump supporters – for the next two years anyway. These were the concerns of those who designed the American constitution almost quarter of a millennium ago. I doubt they quite expected things to play out as they will over the next two years.

American social psychologist Dacher Keltner has amassed a huge amount of evidence which suggests that the more powerful people become, the more likely they are to act selfishly and ignore the consequences of their actions on others. While the conclusions are based on micro and experimental studies, they may well apply to macro-situations such as being in government. As Lord Acton said in 1887:

‘Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority, still more when you superadd the tendency or the certainty of corruption by authority.’

(Was Jimmy Carter an exception?)

While many may use the opportunities in government to enhance their wealth, the Trump Cabinet may not have ten billionaires (Trump plus nine others) when it steps down in four years time. Some may have left in frustration, either with the president or with the job. (It has been pointed out to Eion Musk charged with cutting government spending, that his new job is not rocket science – it is way much harder.) Some may end up with smaller fortunes – in some cases the current valuations appear to be based on over-optimistic valuations rather than underpinned by solid cash flow.

Moreover, there are concerning assessments that the world financial system is in the ‘Ponzi finance phase’ of the Minsky financial cycle. The last one was 17 years ago in early 2008. One could argue that a bust is more than overdue. As Herman Minsky wrote:

But in truth neither the boom, nor the debt deflation, nor the stagnation, and certainly not a recovery or full-employment growth can continue indefinitely.

The consequences of a bust would impact not only on billionaires but also on ordinary folk; indeed, more so. Providing they are not over-leveraged, the rich have much more cushion to cope with a shock. It is not uncommon for the amelioration measures to be more in the interests of the rich – recall how the financial sector made a pig’s breakfast leading to the Global Financial Crisis, but many of its employees kept their bonuses which were paid as a part of taxpayer bailouts. One would not expect a Trump Cabinet to behave very differently.

Bob Dylan sang ‘money does not talk; it swears.’

Quality Ministers

While we may not always have quality political leadership, a couple of recently published autobiographies indicate sometimes we strike it lucky.

When ranking our prime ministers, retired professor of history Erik Olssen commented that ‘neither Holland nor Nash was especially effective as prime minister – even his private secretary thought Nash was ineffectual’. Even so, Olssen ranked the two as 11th and 12th out of 21 (and two other historians ranked them even higher). That means Olssen judged there were nine of our prime ministers who were even less effective. Apparently, ineffective prime ministers presided for roughly half the time since the position became formalised in the early twentieth century (previously they were ‘premiers’). It is a salutary reminder that so many of even our top politicians are mediocre, although often that does not become publicly stated until the cosmetics of office are stripped away.

Not surprisingly then, one ends up reading many biographies and autobiographies (often ghost-written) of politicians as a matter of duty or nostalgia. However, sometimes the subject is a quality politician – one way or another – and the reading becomes a pleasure while providing insights. Earlier columns have reviewed the memoirs of Michael Cullen (here and here) and Chris Finlayson (here). Here follow two more which are worth reading.

Derek Quigley (b.1932) was a National MP from 1975 to 1984 (almost four years as a cabinet minister – mainly housing) where he fell out very publicly with Rob Muldoon. Between 1996 and 1999 he was back in Parliament as an ACT MP. This and much more is set out in Challenging the Status Quo: A Political Memoir.

The book chronicles Quigley’s life as well as giving a thumbnail history of the National Party. Politically he is anchored in National on its rightish side, very committed to private enterprise but not quite a neoliberal. (He does not really have a good grasp on the challenges the New Zealand economy has been facing.) His membership of ACT was as much to redirect National. There is a fascinating account of the ideological tensions within the ACT Party, still playing out today, and a gripping account of the failed ‘Colonels Coup’ against Muldoon in 1980, as well as much political gossip. Those interested in international relations will appreciate his detailed accounts of the role he played in restructuring the military. I greatly valued his account of being a minister.

As I did when reading Steven Joyce’s autobiography. A generation younger (b.1963), Joyce was a National minister from 2008 to 2017. He did not fall out with his Prime Minister. John Key lauds him as ‘the guy who got stuff done’. Called ‘the Minister of Everything’, as the seven major portfolios he held indicates, there is much less politics in his On the Record. He is too busy telling you about what he got done.

As is usual, Joyce starts off with his early life. At university he got involved with student radio, which he built up into the successful network RadioWorks. He learned there how to interact with the public, which led, after he sold his holding, to running National’s election campaigns, and then a list MP jumping immediately to become a minister in the Key-English Government.

One cannot help noticing that he developed his radio network by seizing opportunities from changing government regulation. Quigley’s business success after politics was also dependent upon opportunities created by government actions. One can favour private enterprise, but never escape the symbiosis between it and the public sector.

The public has a shallow understanding of the way a minister works; so have, it would seem, many politicians with ministerial ambitions, who think it is about getting the baubles of office and then do what they think should be done (assuming they think). The two books show it is much harder than that. For that reason alone the books should be read by any aspiring politician, potential policy public servant, or observer of how governments actually work.

Quigley was the Minister of Housing for just under four years but his detailed account of twice restructuring the defence services reinforces the description of the required skills. Marilyn Waring said ‘if every minister ran their portfolio like Quigley runs Housing, we would be in government forever.’ Joyce is even more detailed. I was long puzzled about some features of his creation, the Ministry of Business and Innovation and Employment. I am clearer now – I still think the creation of the mega-department was not a good decision. (Ironically, now out of power, Joyce is likely to argue for greater decentralisation.)

There is an important difference between their presentations. Quigley acknowledges the role of his advisers, even naming a particularly valued Treasury economist. Quelle horreur! The convention is that officials at this level are anonymous. Joyce hardly mentions his advisers.

Joyce certainly deserves credit for, say, the broadband rollout. But the story is more complicated. Work on the rollout was well under way by the Clark-Cullen Labour Government, including taking the first steps to separate Telecom’s value-added services (it became Spark), where the market was potentially competitive, from the monopolistic line operation (Chorus) which Telecom had been using to beat its competitors. Almost certainly, Joyce depended on at least one unmentioned official, probably a specialist network economist.

Could either have been a prime minister? Quigley describes how his prospects of leading the National Party were blocked first by Muldoon and later by Jim Bolger – neither of whom he has much time for. Joyce was a contender for National leadership after Bill English’s resignation. The winner, Simon Bridges, demoted him and he left Parliament – he was 55. (Portfolios are often allocated on the basis of rewards to allies, rather than on ability.)

Each is a reminder that the most able may not reach the top. In Labour’s history, Arnold Nordmeyer would almost certainly have made a better prime minister than Nash. But we should never overlook that ministerial success is dependent upon quality, usually, anonymous advisers – although even the best cannot overcome the limitations of a weak boss.

The Wing Parties’ Economic Policies.

It is difficult to make sense of the Luxon Coalition Government’s economic management.

This end-of-year review about the state of economic management – the state of the economy was last week – is not going to cover the National Party contribution. Frankly, like every other careful observer, I cannot make up my mind.

Certainly Christopher Luxon and Nicola Willis are doing things, but there appears little coherence in what they are doing (after implementing the expenditure and tax cuts promised during their election campaign). The Post senior editors ranked the two’s performance in the bottom half of the cabinet. (The top rankers were Chris Bishop, Simeon Brown, Todd McLay, Mark Mitchell, Winston Peters and Erica Stanford; the Lambton Quay rule is that it is rare for more than five cabinet ministers to be outstanding performers.) We may see from the 2025 Budget Policy Statement (early next year) whether the government’s economic management is struggling with a contracting economy or just plain struggling.

Instead, this column focuses on ACT and NZF, the two wing parties in the Coalition Government who have quite different economic visions.

ACT was founded by neoliberals and on the whole has followed their approach. For instance, its election manifesto tried to slip into its Treaty Principles Bill a neoliberal reinterpretation of the second article of Te Tiriti based on the its account of property rights. Their approach was so anachronistic that the bill before Parliament has replaced it with something which is closer to what was the thinking at the signing.

However sometimes ACT policies can be puzzling. David Seymour is minister for Pharmac and announces major public funding initiatives. No doubt that goes down well with the public but it is unclear how greater public funding fits in with a neoliberal vision of a health system. A conspiracy theorist might argue that the cunning plan is that while the additional spending is not very effective, it chews up public healthcare spending which could be used more effectively (such as reducing waiting times and earlier prevention) and so drives people into the private healthcare sector and private insurance.

ACT’s Ministry of Regulation is even odder. It was to be funded by closing down the Productivity Commission, which was established as an ACT initiative during the Key-English Government. Presumably ACT’s thinking has shifted from the need for an independent assessment of the impact of government interventions to one which was more ministerially driven.

The Ministry is going to be about twice as expensive as the Commission. One reason is that it will be paying the highest remuneration in the public service. Seymour’s group working on charter school is also more generously remunerated than average. So much for the neoliberal vision of small government.

Even more strangely, Minister Seymour has chosen agricultural and horticultural products, Early Childhood Education (ECE) and hairdressing for the first regulatory reviews. One doubts that improvements there are going to make a lot of difference to economic performance. (The review of building regulations by National’s Minister for Building and Construction, Chris Penk, will have a far great impact, although it is to be hoped they will not repeat its mistakes which led to the leaky building saga.)

An even stranger story is that neoliberals in general and Seymour in particular have a passion for a Regulatory Standards statute. In Opposition they twice introduced a bill into Parliament – both times it failed – and plan to again. However, in an interim regulatory impact statement the Ministry of Regulation said that while it supports the overall objectives, the legislation isn’t needed. Its preferred option is to build on, and strengthen, an existing regime based on Labour’s legislation passed in 2019.

One is left with the uneasy feeling that, as with the Treaty Principles Bill, ACT is not showing any of the political skills that were so admired in the delivery of the End of Life Choice Act.

If ACT is the successor of Rogernomics, NZF is the successor of the economic management paradigm that it replaced. Yes, Winston Peters is Robert Muldoon’s successor. The media does not like Peters. Nor did they like Muldoon, both of whom treated them with belligerence. (In any case the Establishment is always uneasy with populists.)

While it is easy to criticise Muldoon’s second period as Minister of Finance (1975-1981), his first period (1967-1972) was widely admired. In the later period Muldoon was beset with economic problems which, he could not solve because of the politics. But the interventionist economic paradigm developed in the 1930s and 1940s had proved successful for four decades. (Not in Narrow Seas explains why it became obsolete, although it probably can be adapted.)

Peters made no great mark as Minister of Finance (1996-1998) but he adamantly rejected ‘neoliberalism’: ‘[t]he truth is that after 32 years of the neoliberal experiment the character and the quality of our country has changed dramatically, and much of it for the worse’. His occasional mention of economic issues – like at this year’s party conference – would be supported more by Muldoon than by Seymour.

This stance is reinforced by NZF’s number two, Shane Jones, who is the Minister of Resources (and Minister for Oceans and Fisheries and for Regional Development). Like Peters, he is a populist and belligerent towards the media. Jones may be overqualified for a politician, with enormous Māori mana and a Harvard degree, and having worked as a university teacher, a public servant, in commerce (including chairing the Treaty of Waitangi Fisheries Commission) and in diplomacy.

Jones left the Labour Party, where he had been a minister, in 2014 because it was not sufficiently committed to the private sector, but his promotion of the Fast Track legislation and other development initiatives shows that he is also highly interventionist. It is a mix which politicians from the pre-Rogernomics era would recognise. Fast Track is an example of the ‘think big’ approach which goes back to Julius Vogel over 150 years ago. (Muldoon gave the approach a bad name but previous programs had often been successful.) Think Big is anathema to the neoliberals.

Jones is an Associate Minister of Finance, as is Seymour (and National’s Chris Bishop), Willis being the minister. Economic policy discussions within the Luxon Coalition Government must be rather tense because while with Luxon, National has a majority, the politics of coalition enables both Jones and Seymour to wield a veto. Perhaps that it is why it is so hard to fathom what Luxon and Willis actually stand for.

Foreshadowing HYEFU 2024

By way of prologue, the closest parallel to the current economic situation may be when Ruth Richardson became Minister of Finance in late 1990. The economy had been contracting, although there were signs of a fragile recovery. She was an Austerian and cut public spending savagely.

The economy plunged a further 5% in GDP per capita terms. Unemployment rose to above 10% of the labour force. Richardson could claim she achieved her Austerian goal of lowering relative government spending.

But National only narrowly won the 1993 election (because the left was severely divided – this was before MMP). Richardson was sacked. While she could point out that the rate of inflation came down under her watch, it was not really her win. World inflation was falling and in any case, as the legislation she supported clearly states, inflation was the responsibility of the Governor of the Reserve Bank (then Don Brash) not the Minister of Finance. (Perhaps one should add that the National Government also suffered electorally from its attempt to commercialise the health sector.)

This is not to say that this will be the political fate of Nicola Willis, nor of the Luxon Coalition Government. But the memory of the effect of heavy cuts to government spending on a weak economy hangs heavily over today’s policy stance.

Treasury’s 2024 Half Yearly Economic and Fiscal Update (HYEFU) is due for release on Tuesday 17 December – an awkward time of the year, which precludes serious analysis published before Christmas. Helpfully on 21 November, Treasury’s Chief Economic Advisor, Dominic Stephens, gave an indication of what is likely to be in the macroeconomic forecasts – not the numbers, but the way they are shaping up.

He observed that the economy has been doing worse than the central forecast of May’s Budget Economic and Fiscal Update (BEFU), pointing out that since the September quarter of 2022, per capita GDP has fallen by 4.6%, making this already a larger per-capita recession than the Global Financial Crisis of 2008-10. Recent economic data suggests the downturn has been deeper, and the recovery will begin later, than the May BEFU forecast (which was already pessimistic compared to the December 2023 HYEFU):

– in the June quarter GDP fell 0.2%, compared to the Budget forecast of a 0.2% increase.

 – as of October, spending on electronic cards at retail stores remained 1% lower than a year ago.

– indicators of manufacturing and service activity remain at contractionary levels, suggesting little or no growth in the economy over recent months.

– Despite improvements in firms’ expectations of future trading activity, the Quarterly Survey of Business Opinion reported that firms are more pessimistic about their current trading conditions than they have been since 2009 (apart from the pandemic).

In fact the economy seems to have been tracking nearer the downside economic forecast which was also set out in BEFU2024. I look at two aspects of what this may mean: unemployment and the fiscal position.

Unemployment tells us something about the shape of the output (GDP) track although it tends to be a lag indicator. BEFU2024 had its rate at 4.0% of the labour force in December 2023, rising a third to 5.3% at the end of 2024 (about now). Then it was to fall sluggishly so that in December 2026 it would still be at 4.6%. There is no downside forecast for unemployment, but a reasonable guess is that it would have peaked near 7% sometime in second half 2025 and would be correspondingly higher about the time of the next election (even 6% in December 2026). Recall that after the GFC it took the economy almost five years to return to its previous GDP peak.

The fiscal forecasts are gloomy too. Treasury’s Chief Economist reported that ‘Treasury has been revising its revenue forecasts lower. Tax revenue has proven lower than expected given the state of the economy in recent economic and fiscal updates. … If this trend continues, there could be further downside risks to the Treasury’s revenue forecasts.’ One of his Associate Ministers, Chris Bishop, was less discreet, announcing that it is unlikely that the fiscal position will return to surplus by 2027/8 as forecast in BEFU2024.

The Treasury did not foreshadow anything about the public spending track. That is a ministerial prerogative; ministers are indicating they expect more public spending cuts. A group of 16 economists led by Ganesh Nana have argued there should be no more spending cuts or delays to infrastructural spending because they will ‘needlessly exacerbat[e] the current recession’. In effect the economists are arguing for a bigger government deficit – that it is not necessary to pursue as rigorously the debt-to-GDP target. Bishop may agree; he said the government was ‘not going to be a slave to a surplus’ (not mentioning one can get enslaved by debt). Prime Minister Christopher Luxon said ‘I’m not going to chase a surplus at all costs.’ We await HEFU2024 to learn the new date.

One should not quibble with public spending cuts whose purpose is to reduce over-staffing, while arguments about cuts of programs which the government does not like are political, although there will be technical consequences. The offset to this position is that the government should increase expenditure where there is under-staffing or on programs which it favours. The technical issue is whether the government should be cutting overall expenditure (or restraining it below population and related demands) to return to surplus. (There is a parallel discussion around raising taxes.)

What Nana et al. are arguing is that not only are such cuts unnecessarily harsh but they are compromising long-term economic growth. On the other hand, there are Austerians who think that the state sector is still too big and are using the crisis to cut it back. (The exception is that they prove to be big spenders in their own portfolios.)

This is likely to be a major debate from now to the next election. In the interim the economy is contracting and is likely to stagnate a bit before it recovers. I withhold an explanation until we have the detailed Treasury HYEFU2024.

Economic Progress May Not Add To Wellbeing

How the Prospect Theory of Behavioural Economics Makes Economic Analysis Difficult

Behavioural economics has been described as the most revolutionary thing which has happened to economics for ages. The notion that people do not behave like ‘rational economic men’ (women are mainly ignored) undermines the microeconomic foundations of the subject. Not the empirical evidence on which economics is based – only its interpretation. It also impacts on normative economics, as this column explores.

I’ve written a number of pieces on behavioural economics (see here). This column explores the part known as ‘prospect theory’ for which Daniel Kahneman was awarded a Nobel laureateship in 2002 (as would have been his co-researcher Amos Tversky had he been alive). The theory unites three basic observations: people treat gains differently from losses (known as ‘loss aversion’); people place unequal weight on outcomes with certainty compared to those with uncertainty; and the structure of a problem itself may affect the choices made.

This column focuses on loss aversion, with an example of how it complicates analysis. Suppose a good quality cost-benefit analysis – they occur less frequently than they should – concludes that a project would generate an extra net $1 (add as many zeros as you feel necessary). Because the study is of high quality it also will set out winners and losers, finding perhaps that the winners receive a benefit of $3 and the losers $2 – giving the net aggregate benefit of $1.

Typically the economist is not allowed to tradeoff the winner’s gains against the loser’s losses, because that involves the political judgement of comparing people’s welfare; the profession has no particular expertise in interpersonal comparisons. In principle the tradeoff is left to politicians, although sometimes economists don a politician’s hat – without telling the public – and advocate one way or the other.

Some economists argue, using ‘Hume’s Law’ (David Hume would be embarrassed to be associated with it), that ‘a dollar is a dollar’ and favour the project since it adds a dollar to the economy. (There is also a complicated theory of ‘compensation’ which need not detain us here.)

What ‘loss aversion’ says is that different dollars have different values. Suppose you did not know you were a winner or loser but that your chances were half and half of being either. The empirical evidence is that, as a rule, most people would prefer not to lose the $2 dollars despite the equal possibility of winning $3. Typically their tradeoff is between wanting a $4 win in exchange for a $2 loss. In effect, they are valuing a dollar lost the same as two dollars gained – bang goes Hume’s law.

In which case how does progress happen when there is loss aversion? Surely there will an inertia from the loss aversion often outweighing the immediate gains from progress.

In a market, winners frequently succeed and losers suffer because there is no market mechanism to compensate losers. How often does a news story amount to the losers appealing to the government to protect them from a market decision which is against their interests?

Where politicians have some influence, the project may still go ahead despite the losses outweighing the gains. The political decider may favour the winners over the losers, the costs of opposing by the losers may outweigh the loss from the project (especially if there are a lot of small losers and a few huge winners), the losers may not realise they are being screwed and so on.

You can see one of the reasons why the evidence points to market economies progressing –with greater innovation and higher output – more than ones which are dominated by a centralised authority. You can also see how market decisions will be continually appealed to government to be overruled or moderated, not to mention the difficulties governments face when they are making changes. So while on conventional measures there may be progress of a kind, there may be considerable grumpiness from people offsetting the gains with double their losses.

And yet there is progress. The complexity is captured in a story about Ken Findlay, a feisty truckie and trade unionist. When the freezing works he worked at was closed and jobs were lost, he was a prominent and vociferous objector. Some years later he said  that the closure was the best thing which happened. I did not ask him why – alas he died last year, so I can’t ask him now. I am left with the puzzle of the apparent contradiction.

I doubt that his protests at the time were just on behalf of his devastated mates. Rather, he seems to have changed his mind or perhaps, it might be better to say, that his thinking evolved or that his subsequent experience was not as damaging as he feared.

Most of the experiments on which behavioural economic theory is based, perhaps inevitably, have very short time dimensions so they tell us little about how people’s thinking evolves through time. The one hint comes from Kahneman’s Thinking Fast, Thinking Slow. It suggests that we do not handle time in the way models of rational economic man assume.

This is all very troubling – behavioural economics is troubling to the rational thinker. Here is the best I can conclude at this stage.

First, the indicators we generally use to measure economic progress may not reflect improvements in the wellbeing of everyone (even after acknowledging their standard limitations).

Second, those who are hurt by change may be more hurt than those who benefit from it. We may ignore or discount the losers; sometimes we don’t even notice them.

Third, people may handle ‘progress’ differently in the long term from the short term. It is possible that many remember the short-term downsides and forget the long term upsides.

Not very strong conclusions, I’m afraid. Like so much of behavioural economics, the main conclusion is not to be too confident of conclusions dependent upon the traditional framework of the rational economic man.

The Meaning of MAGA

The Dangers of Delusions of Grandeur

This is a column about MAGA – Make America Great Again. But as a prequel I scroll back sixty years to when I was teaching in England. I have fond memories of the students – bright and personable as they were. But their attitudes to England and the world left me uneasy. In the time of their great-grandparents – before the Great War – Britain and its empire had been the world hegemon. Those students persisted with the notion that their country was considerably more powerful than was warranted in the 1960s. They thought it had won the Second World War, discounting the impact of the Russian population and the American economy. They thought in terms of the British Empire (oops, Commonwealth) ignoring that the core element of India had gone AWOL, and that other elements – even New Zealand – were forging their own paths.

I concluded that there was considerable inertia in international attitudes over the generations but hoped that the Brits would steadily come to the realisation of their relative decline. I took comfort that the support of Edward Heath and Harold Wilson for the (now) European Union, and the outcome of the referendum in 1975 which favoured joining it, was evidence of Brits revising their perception. I recall, however, one of my students supporting joining the Union on the basis that it would benefit from British leadership – the EU as a kind of third British Empire.

Britain proved unable to lead the EU. Germany was bigger and had more weight; France, Italy and even Poland and Spain were only a little smaller. In 2016 the English and Welsh voted to leave and the Northern Irish and Scots voted to remain. Exactly why they voted as they did is complex but I heard in the campaigns echoes of the delusions of grandeur and that Britain could go it alone. Older voters tended to vote ‘leave’, and there was talk of reviving the British Commonwealth – yeah, right. (Of course it could go it alone at an economic cost, but its weight internationally would not increase.)

Britain’s hegemony was being displaced by the US’s. In 1950 the US produced around 27 percent of the world’s goods and services (measured in common prices – ‘purchasing power parity’). The next ones down were the Soviet Union at 7 percent and the United Kingdom at 6.5 percent. The rest of the world was desperate for US dollars because their inward-facing postwar reconstruction meant they had little to sell to the US. No other country was anywhere as near as militarily powerful, although the Soviet Union had just tested its first nuclear bomb in 1949. I do not know how to measure it, but cultural hegemony had shifted to the US too – think of Hollywood.

Seventy years later it is a very different world. China produces 19 percent of the world’s GDP, ahead of the US at 15 percent. The EU (without Britain) is fractionally behind also at 15 percent. India is at 7.5 percent and Japan at 3.7 percent. Further down, Indonesia, Brazil and Turkey join Russia and Britain in the 2 to 3 percent group. (The ten member states of ASEAN produce about 5.7 percent; Australia is about 1.0 percent, New Zealand a sixth of that.)

A caveat is that while China’s economy is bigger because of its larger population, its productivity is markedly lower and its discretionary surplus smaller. (However, its more authoritarian governance may find it easier to deploy its surplus for international purposes.)

Moreover, even today no other country is as militarily powerful as America with its global reach. But, as local wars demonstrate, other countries may challenge it in a region, while a US presence may change the balance of military forces as it does in Europe, the Middle East and Taiwan. None of the remaining military powers has a global reach. Even China’s military extends outside its immediate region only to protect its supply routes. Otherwise, it confines itself to its ‘region’ although, as boundary disputes with India and in the South China Sea (to use its most popular name) plus Taiwan indicate, others may have different views of what exactly is China’s region.

It could be argued that the US has not the commitment to exercise its global military reach. Nowadays it may be less willing to commit troops outside its borders and you may think its support to Ukraine has been less than wholehearted. But decades after 1956, Hungarians recalled what they thought was a betrayal when the West gave no significant support to their uprising.

Apparently the Pentagon is less confident that it can fight two major wars, a position underlined by Donald Trump who wants Europe to bear a greater share of the burden of confronting Russia, presumably to free up US military resources for other theatres.

(Because of the global use of English, US culture is still significant, but probably diminishing. Britain also punches above its weight culturally.)

MAGA is a reaction to this change. Observe the second A for ‘again’. It says America was once great but is no longer. However, its diagnosis is hardly convincing to the reflective observer. It explains the loss of greatness as a consequence of the failure of the leadership in Washington, typically for conspiratorial reasons rather than the structural reasons just outlined. It concludes that what is needed is a new leadership not beholden to the ‘deep state’ in Washington – enter Trump.

With one exception, Trump’s proposals to MAGA are unclear. He is promising to increase tariffs on imports, especially those from China. The Chinese economy appears to be in trouble. Possibly it has reached a similar stage to the Japanese economy in the 1990s, when its economy seems to have absorbed all the international technology it could and it stagnated for a number of decades.

But China aside, a 20 percent tariff on the rest of the world is likely to be extremely disruptive because there will be retaliation. A big change over the last 70 years is that in 1950 the US exported about 3 percent of its output; today the figure is more like 11 percent. The US is also vulnerable because of the international involvement of US corporations which could be subject to boycotts. (X and TELSA are already prominently mentioned.) How a global trade war will evolve can only be guessed, but it will be ugly – wars are. International output will fall, and unemployment rise.

A further complication is that the world institutional architecture was largely developed shortly after WWII, favouring the US. It has, with four others, a veto in the Security Council in effect castrating the United Nations. Its institutional power in the IMF and the World Bank reflects the international economy of 70 years ago. It has paralysed the workings of the WTO by refusing to approve judicial appointments to its appeal authority.

So international fora are not going to be much help. Yet under MAGA the US can only bully, not lead, the international community. My guess is that the consequence of any thuggery will be a further weakening of the long-term influence of the US as the rest of the world evolves institutions to deal with the bullying. It won’t be easy and it won’t be instant. It certainly won’t be easy for countries as small as New Zealand. Expect a realignment of our international connections.

Property Rights and the Treaty Principles Bill

Property rights – which enable decisions over tangible and intangible assets – are critical to an economy as Why Nations Fail pointed out.

Not just private property rights for, as we shall see, they are more complicated than that. Neoliberals argue that private property rights lead to the maximum economic prosperity; they used that to justify privatisation. Certainly, ambiguous property rights are likely to result in poor quality outcomes. But community property rights can be effective, as economic orthodoxy acknowledged when Elinor Ostrom was awarded a Nobel laureateship in 2009 for showing that the use of exhaustible resources by groups of people can be rational and prevent their depletion without either state intervention or markets with private property.

Pre-market Māori demonstrated that too. The seas around Northland were teaming with fish, even in the 1850s. The local hapu had various measures which sustained them. Following the breakdown in hapu authority, the seas became fished out.

The neoliberal misunderstanding was evident in the original formulation of ACT’s treaty principles proposal. Its second principle stated that the government should ‘protect all New Zealanders’ authority over their land and other property’. This was intended to be an updating of Article II of Te Tiriti, which actually stated that the Māori rangatiratanga would be preserved for ‘ratou wenua o ratou kainga me o ratou taonga katoa’, which might be translated as ‘their lands, their villages and all their treasured things’.

Two things. Minor for the purposes here, ‘ratou taonga katoa’ (all their treasured things) is wider than just property. Did ACT intend to downgrade the standing of te reo, despite the highest courts in the land determining that it is a taonga under Article II?

But second, the notion of rangatiratanga is not just about individual authority. Pre-market Māori did not have a notion of individual ownership of land and other resources. Those property rights were exercised communally.

This was barely understood by the first Europeans and led to many early misunderstandings, some of which persist to this day, for we are always tempted to anachronistically interpret the past by current standards. (The misunderstandings are well explored in the scholarly literature; I tried to summarise them in Chapters 4 and 5 of Not in Narrow Seas.)

(Those of a conspiratorial frame of mind may think that ACT was not ignorant but was trying to sneak into legislation a clause which the courts could interpret as upholding the principles in ACT’s Regulatory Standards Bill.)

Clearly, ACT’s second principle will not do, and sober official advice changed its manifesto promise to

          Rights of hapu and iwi Māori — the Crown recognises the rights that hapu and iwi had when they signed the Treaty/te Tiriti. The Crown will respect and protect those rights. Those rights differ from the rights everyone has a reasonable expectation to enjoy only when they are specified in Treaty settlements.

(ACT has lost interest in this revised second principle but is proceeding with the Regulatory Standards Bill.)

This still does not capture the essence of Article II of Te Tiriti. I’d have thought that the rights existed from the time of signing and that treaty settlements only recognised the existing rights rather than created them.

There is also a deep complication about what property rights refers to. It is not peculiar to Te Tiriti, so I begin with a contemporary example.

Suppose there was a proposal to establish a KFC in a suburban shopping centre. Even a neoliberal living, say, 100m away might object to its impact on the neighbourhood and join in the objection to its establishment. (In the case in mind, they were successful and the KFC was never established.) There is nothing among a property owner’s legal rights which entitles them to block the proposal. The opportunity to object arose from town-planning provisions such as in the Resource Management Act. But presumably the neoliberal thought there was some existing moral right to block a neighbour’s peaceable, if detrimental, activities.

(You can see why proposed changes to the RMA and the proposed fast track legislation are difficult. While they are intended to reduce the transaction costs of making decisions, they will also reduce some people’s ‘property rights’ while increasing those of others.)

We frequently see Māori claiming kaitiakitanga (guardianship) in their rohe, despite its ownership having been legally alienated. They are arguing that the rangatiratanga of Article II of Te Tiriti included stewardship rights and mana whenua was not alienated when ownership was transferred (whether justly or unjustly). They are not alone in their belief of kaitiakitanga rights. Greenies frequently invoke it; we are all greenies on occasions (as with the raising of the level of Lake Manapouri, even if we had never visited it and lived miles away).

ACT does not seem to have thought through these issues in its proposals, or perhaps neoliberals do not think they should be attended to (unless it’s about a KFC in their neighbourhood). But others do.

ACT has opened up a can of worms. The biggest worm in the property rights can is to what extent their existing distribution is just. (This is not quite the same issue as the inequality of the property rights.)

The respected libertarian philosopher Robert Nozick pointed out that if a distribution is ‘just’, the distribution of rights remains just following voluntary transactions. But what if the original position is not just, what if transactions are not voluntary? How can we treat the existing distribution as acceptable?

Was the distribution of land just even on 6 February 1840? As a reult of the Musket Wars much land involuntarily changed its rangatiratanga. Oral traditions report that there were involuntary land transfers following conquest even earlier. Was there ever a time when the distribution of land was just? Arguably the proto-Māori seized the land from the existing animal inhabitants, when they first arrived.

A practical resolution might be to say that the distribution on 6 February 1840 was acceptable in the governance of New Zealand. Even so, much of the subsequent alienation was not voluntary.

The tendency is to highlight the consequences of the New Zealand Wars – we do love heroics. Arguably, the 1865 Native Lands Act was far more destructive. It created the Māori Land Court, which converted Māori customary title into a title recognisable under law. Māori were not consulted about this legislation. British law was unable to deal effectively with collective (customary Māori ) ownership, so Māori practices were converted to individualised ownership. The creation of a commercial title with its individualisation pitted Māori against Māori, undermining the integrity of hapu. (Woody Guthrie sang ‘some rob you with a six-gun/some with a fountain pen.’) Here is a salutary reminder that property rights influence the way we organise society.

Nozick is ruled out. So how are we settle on an acceptable distribution of property rights? ACT’s Treaty Principles Bill is not an answer.

We Are Not Listening

The current rise of populism challenges the way we think about people’s relationship to the economy.

We seem to be entering an era of populism, in which leadership in a democracy is based on preferences of the population which do not seem entirely rational nor serving their longer interests. The re-election of Donald Trump is just the latest example

Professionally, I found the British people’s voting for Brexit the most disturbing (52 percent voted to leave, 48 percent to remain, on a 72 percent turnout). There was a compelling case that the British economy would be damaged by Britain leaving the European Union (although not as quickly as some claimed). One might favour ‘Leave’ because it would give Britain more control over itself, for international economic intercourse compromises national sovereignty. But the tradeoff is that cutting back trade reduces economic prosperity. Much of the public chose to ignore the tradeoff when they voted. Subsequently they found that the sovereignty gains were small, while the British economy has performed badly. An increasing proportion of ‘leavers’ regret the decision to leave. The economic analysis proved correct.

Populism is sometimes characterised as ‘the people’ rejecting the ‘Establishment’. During the Brexit campaign there was a strong undercurrent that since the Establishment supported ‘Remain’, the policy must serve them to the detriment of ‘us’. They now know that closer British involvement with the European Union was beneficial to many of them too.

It is easy at this stage to dismiss people taking a strong line against the Establishment as ignorant or worse. Recall Hillary Clinton muttering that many of the Trump supporters were ‘deplorables’ and there will be equally dismissive explanations of those who voted for Trump’s second victory – ‘racists’, ‘sexists’, ‘fascists’ …

It might be wiser to recognise that these people have concerns which they may badly express, which they may badly diagnose, and for which they may have badly thought-through policy responses. But even so, those underlying concerns are real enough. There is no point in ignoring them and then being shocked at the following election when the holders again vote against the Establishment and even against their best long-term interests.

How often does one hear preaching rather than engaging with the audience? How often does one find that the preacher’s argument is self-serving? That does not mean that the argument is always wrong, the preacher is just not connecting. The case against Brexit was not wrong as we (almost) all know with hindsight; it was badly presented.

I’ll leave others to tell us about the populist vote which has returned Trump to power, and I’ll leave you to decide whether the opinions are self-serving or based on too narrow a perspective and information. Instead, here is a New Zealand example about how a government was not listening to even its own people.

In August 2023 Talbot Mills Research surveyed voters on their views on some non-economic issues. Four responses are revealing. The scores here are the percentage favourable less the percentage unfavourable by party voting intentions. The focus is on those intending to vote Labour but the equivalents for Green and All voting intenders are included for comparison.

Labour Greens All

Bilingual Road Signs 13% 56% 11%

Māori Health Authority 16% 58% 1%

Co-governance   10% 49% -5%

Māori Wards in Local Govt  -13% 25% -26%

There was not a lot of enthusiasm among Labour voters for their party’s policies, especially when you compare the Green responses. The survey took place a few months before the 2023 election, where the party ad lost half of its 2020 support. Presumably the majority of the Labour leavers had views more like the last column of all voters, who were even less enthusiastic.

One must conclude that the Labour Government seemed hardly to be listening to its own supporters – let alone the nation as a whole. One is reminded of a parallel instance under the Lange-Douglas Government, when a small group of senior cabinet ministers pursued (neoliberal) policies which were an anathema to the party supporters. A Talbot-Mills survey in August 1990 which asked questions about Labour’s economic policy is likely to have shown a similar lack of enthusiasm.

It was a time in which half the population had no increase in their real incomes between 1986 and 1998, twelve years later. Around a third had to wait twenty-odd years before they got an income boost. But there was nary a mention of their struggles by the experts and acolytes of the Establishment, whose incomes continued to rise under the neoliberal policies of the time. I leave it to the elite to reflect whether they should feel guilty about their neglect; the point here is that they were not listening.

What would we hear from the non-establishment were we to listen? I am hesitant to answer that question. It is just too easy for the opinionated to pretend to listen and report their personal prejudices. However, allow me to raise the possibility that rising material GDP does not always make consumers feel better off, despite our having been indoctrinated into assuming it does. GDP measures output, whether the output be goods or bads.

For example, when Europeans first arrived in New Zealand, they wanted produce like flax, timber and food. Maori increased their production in order to acquire guns and other European goods in exchange. GDP increased but the guns led to the chaos of the Musket Wars which devastated the Maori population. This extreme example reminds us that increased material possessions need not lift wellbeing.

It may be that increased material consumption and possessions in the first half of the post-war era was associated with people feeling better off. But that may be less true in the second half. Hence the turning to populist demagogues who promise better outcomes (even if the promises do not get fulfilled as in the case of Brexit and, as seems likely, with some of Trump’s promised policies).

It is possible that once consumers have met reasonable material needs – not all have – additional consumption is more concerned with esteem needs so that there are few realised gains from just keeping up with Jones. (The implication is that traditional theory which equates consumption with wellbeing no longer applies.)

The populist phenomenon may not be only economic. The Talbot-Mills survey explored cultural responses. Another possibility is that many people are finding the rate of change is accelerating and they are finding it increasingly difficult to cope. That may explain why populism is currently dominated by conservative parties in affluent economies – Boris Johnson’s Conservatives in Britain, Trump’s Republicans in the US, New Zealand’s most populist part in NZF led by Winston Peters. (MMP may disperse the populist capture of a single dominating party; I resist going down some interesting consequential paths.)

Whatever the reasons for the rise in populism – there are more – it presents a challenge to liberal democracy. The challenge will not be resolved by ignoring the underlying concerns until the run-up to the next election and calling their holders ‘deplorables’ when they vote against the Establishment.

The End of Austerianism?

Does the Autumn 2024 British budget point to a change in fiscal strategies?

Many countries found their fiscal position was unsustainable, following the 2008 Global Financial Crash.  Their public spending was well in excess of their public revenue and they had to borrow more heavily than lenders thought prudent. Almost unanimously, such countries tried to fiscally rebalance by cutting back their public spending rather than raising tax revenues. The poor and those on middle incomes bore the burden of adjustment.

In some ways the strategy, called Austerianism – a portmanteau word from austerity and Austrian economics – was surprising. Certainly the rich had been hard hit by the GFC but they had been the main beneficiaries of the financial boom which had caused it. Ironically, that boom was accompanied by the demand that governments should not get involved in regulating the financial markets, but when they crashed, the same financiers expected their governments to bail them out.

The Austerian policies which followed tend to protect the rich at the expense of the rest of the community. Rarely, for instance, did governments try to reduce the fiscal gap by raising the top tax rate or reducing the tax loopholes of the rich. Neoliberals seized the crisis to pursue their ambition of reducing the size of the state.

Not surprisingly, Austerian policies resulted in political turmoil. Yet they continued. Even the Ardern-Hipkins Government pursued them with the promise of no significant tax rises and a restrictive borrowing target which meant that public spending – including supporting the poor – was severely constrained. Less surprisingly, the Luxon-Willis regime is also broadly Austerian, as had been the Key-English regime. (The measures which we associate with Ruth Richardson were also Austerian.) Admittedly, all of them fudged around the margins – we shall see more fudging from this government.

The British Starmer-Reeves Government budget represents a major break from this approach. It faced a major fiscal imbalance inherited from the Conservative Government which it has just replaced. Its response has been to raise taxes and maintain public spending. (Its borrowing is coming down more slowly than the Austerians would want).

The Blair-Brown Government had left Britain’s government spending at just over 46 percent of GDP in 2011. The Conservative Governments which followed had squeezed the ratio to under 40 percent just before the Covid crisis. After, it rose to near 45 percent but the Conservatives planned to squeeze the ratio down to 42 percent by 2029. Labour announced spending plans which would have kept the ratio at 45 percent, not quite the Blair-Brown level, but nearly. ( Comparing country ratios is tricky because of institutional differences but I am pretty sure the British public spending ratio is effectively higher than New Zealand’s, which is reported at about 28 percent.)

I think it reasonable to assume that had the Conservatives returned to power, facing the same fiscal gap they would have cut government spending even further. British Labour is adjusting primarily through increased taxation. What it will further do while it is in power is conjectural. (The next Britiah election may not occur until 2029.). But the reasonable expectation is there will be further tax increases. British fiscal policy has entered a new era.

Of course it may not work. Economic policies have a practice of being blown off course by events external to the economy. Often, the forecasts prove too optimistic or other events occur (in New Zealand’s case we seem to be building up considerable expenditure commitments to compensate for some of the dreadful things that past governments did – often by neglect, sometimes a long time ago). And there is always the possibility that lenders will raise the cost of borrowing. In the past, governments with similar intentions have often had to retrench.

There was widespread disappointment that the economy is expected to be growing slightly more slowly under the Reeves October budget projections than under the last Conservative budget in March. But there may have been new data indicating the economy has been tracking lower than the March forecast. Moreover, one expects some slowdown if a fiscal hole has to be addressed.

But third, we are naive if we think a single budget can make a major change to the long-term economic growth rate (if only it were that easy). The sorts of spending policies which Labour hopes will work, like on infrastructure and industry targeting, will take years to come onstream. That is why that sort of spending is among the first items to be cut under an Austerian budget. So there always seems to be an infrastructure deficit. As this government is telling us; it will be lucky if any of its infrastructure projects have any impact on the growth rate before the next election.

(It’s hard to identify a change in trend, given there are so many possible endpoints and cycles. I remain uncertain whether there was a slowdown after about 2008, and why.)

If I was advising the British Government, I’d suggest they would get a quicker boost to their growth rate by negotiating a better trading interface with the European Union, reducing the extraordinary transaction costs that Brexit has generated. A budget is not the only place for policies which can also substantially affect economic performance.