Kiwi News and Views

New Zealand’s economic development has always been a partnership between the public and private sectors.

Public-Private-Partnerships (PPPs) have become fashionable again, partly because of the government’s ambitions to accelerate infrastructural development. There is, of course, an ideological element too, while some of the opposition to them is also ideological.

PPPs come in so many different forms that it is tedious to characterise them all. Some of those forms have been used in the past. For instance, the First (Savage-Fraser) Labour Government wanted to accelerate house building to catchup from the housing deficit caused by the Great Depression. It turned to Fletcher Building. (There was even a – rejected – proposal to nationalise the company.)

More recently, the Third (Muldoon) National Government arranged for various companies to develop projects to utilise its energy surplus (including its gas from the Maui gas field). Think Big failed because when the new businesses came online, the world price of oil had fallen and was only about a third of the level that the investments had assumed. Even worse, the Government had given guarantees so that it took the downside risk of low oil prices. It cost taxpayers a fortune.

Those guarantees were secret. That cannot happen today because the law now explicitly states that to be legally valid, any government guarantees must be reported to Parliament. (They are listed in the government accounts as ‘contingent liabilities’.)

Even so, the Think Big failure remains a reminder that a PPP are often about sharing future risk (such as cost overruns, unexpected events – such as delays from Covid lockdowns – and uncertainty about future demand, prices and costs of borrowing). A nice example was the broadband roll out where, in effect, the government accepted the take-up risk, which the private sector was not prepared to bear, but was able to ensure the construction risk remained with the private sector.

The private sector is never enthusiastic at taking on these risks but neither should the public sector be. Trying to cover all these uncertainties is why a PPP agreement often ends up hundreds of pages long.

PPPs were popular in Europe about a quarter of a century ago. Members of the EU were required to constrain their government borrowing to 3 percent of GDP. However, the definition of what was government borrowing did not include the implicit borrowing that occurs under a PPP. It was like your bank asking for a list of all your debts but ignoring anything bought on hire purchase.

New Zealand’s public accounting does not allow such elementary lapses. The public accounts include an item covering the government exposure to PPPs. Here is a list from Note 17 of the Financial Statements of the Government of New Zealand as at 30 June 2024.

• Transmission Gully State Highway   $1,392m

• Puhoi to Warkworth State Highway $1,157m

• Waikeria Corrections Facility            $1,045m

• Education Assets                                  $   934m

• Auckland South Corrections Facility $  373m

• Auckland Prison                                     $   350m

• Total public private partnerships     $5,251m

Of that total, $3.6b still has to be paid by the Government to the private sector and the liability is included in total New Zealand public debt.

So PPPs are not a means of off-balance sheet borrowing. As the Government’s New Zealand PPP Framework: A Blueprint for Future Transactions states: 

     ‘PPP procurement should not be categorised as a financing tool. While the PPP model utilises private finance in support of achieving these enhanced outcomes, spreading infrastructure related cash flows through project finance arrangements is not the purpose of PPP procurement (if it were, this outcome could be achieved more efficiently through general Crown borrowing to finance infrastructure needs). 

     ‘Having private capital at risk for delivery performance offers significant benefits by creating stronger commercial incentives. … With “skin in the game,” they are motivated to prevent performance or availability failures, ultimately enhancing overall accountability and reliability …

     ‘PPP will not be appropriate for all projects. It should be considered alongside a suite of  other procurement and delivery options, all of which will have pros and cons depending on unique project characteristics. 

I guess there is a bit of leeway about what is meant by ‘enhanced outcomes’. For instance, there is much grumbling about how quickly the road surfaces of Transmission Gully have deteriorated (some are already being replaced). What seems to have happened is that in order to meet their construction deadlines and avoid lateness penalties, the contractors skimped on the sealing. However, the contract arrangements require them to maintain the road for some decades, so the resealing is at their cost, not the public’s.

The Transmission Gully contract would be a fascinating case study on how PPPs work, much more use than, say, various studies of British PPPs, which have often proved to be costly disasters through poor management (and are regularly cited by opponents as examples of the dangers of PPPs). There is a Transmission Gully Post-Construction Review from which we can learn lessons. Unfortunately, the contractors and the government are in dispute so it says is not comprehensive. That there is such litigation is a reminder that PPPs can go very wrong.

So PPPs are not a solution to New Zealand’s infrastructural woes. They may make a contribution. But that contribution does not include getting around the debt targets we have set ourselves – hire purchase is out.

There is a European view that those governments who could do PPPs successfully did not need them. In contrast, those who needed PPPs had little chance of successfully pulling them off. Which category do you think New Zealand is in?

PPPs require careful management. We may have some people in the public sector who have the necessary skills and experience but they will not be able to handle all the projects which the government is keen to progress. Using the insufficiently skilled and inexperienced will lead to the kind of disasters that occurred in Britain. Like the sign on so many roadworks, ‘proceed with caution’. But you still roll the vehicle carefully forward.

Note. It would help public discussion and understanding to provide a supplementary account to the main government accounts which set out the government’s infrastructure balance sheet (including its size and the debt which might be attributed to it), and the changes over time. Personally, I would be much more comfortable about the government increasing its borrowing if I knew that it was borrowing to upgrade infrastructure.

Further Reading. The following may be useful

NZ Government: New Zealand PPP Framework: A Blueprint for Future Transactions.

Public Sector Vol 40:2 has a number of articles on PPPs

Craig Rennie: When should you use a PPP? – A bluffer’s guide.

It is said that economists know the price of everything and the value of nothing. That may be an exaggeration but an even better response is to point out economists do know the difference.

They did not at first. Classical economics thought that the price of something reflected the objective cost of producing it – as in the ‘labour theory of value’. (Note the word ‘value’ which was for long interchangeable with ‘price’. Indeed economists still confusingly call the ‘price theory’, ‘the theory of value’.)

However, classical theory generated numerous paradoxes. Clearly water is much more valuable than diamonds. One can go without the latter all one’s life but you need water every day. Yet the price of water is trivial compared to the price of diamonds. Or consider a work of art. The price of the Mona Lisa is fabulous, but you can get good ‘counterfeit’ copies for the cost of production – which involves about as much labour as Leonardo’s original. So why is the original so pricey?

The paradox was resolved in the late nineteenth century by three economists working independently of one another: William Stanley Jevons of Britain, Carl Menger of Austria and Léon Walras of Switzerland. They saw the price reflecting what the market was willing to pay for it. On this foundation rose the formidable edifice of neoclassical economics (which is not the same as ‘neoliberal economics’ although some people confuse them).

I’m going to skip much of the edifice and focus on its central insight that the price is a subjective assessment not an objective fact, especially in regards to financial assets. To begin with a banknote.

A $100 banknote costs about 2 cents to produce – that is its ‘objective’ cost. Yet everyone ignores the 2 cents and focuses on its $100 subjective price. (If there is anyone who does not, I am happy to purchase from them any banknotes they have at the objective price with a handsome margin – say at 5cents.) The immediate reason we work with the subjective price is because we believe it, just as Jevons, Menger and Walras proposed. The belief is underpinned by governments accepting their banknotes at face value for settlements of its accounts such as tax payments.

A banknote is but one example of a financial asset which costs little to produce compared to its face value. Often its subjective price is underpinned by something more tangible. In the case of a mortgage, it may be a house which the mortgage holder acquires if the mortgagee fails to service their mortgage.

A shareholder may believe there will be a flow of future dividends from the company’s profits. Moreover, if the company fails, the shareholder is entitled to a share of the breakup value of the company (which is often less than the total value of the shares). In practice, the shareholder can sell the share to someone else who assesses its price on a similar basis. Thus, the price reflects the subjective sentiments of many would-be purchasers.

What then, are we to make of the share price of, say, Amazon which has never paid a dividend and whose share price – just under $U5 as I write – far exceeds the tangible assets which back it? It might pay a dividend one day, but the skyhook which holds the share-price up is the market sentiment that the share-price will rise and shareholders will benefit from the capital gain.

Or consider a cryptocurrency (such as bitcoin) which has even a less objective value compared to its price than a banknote and, typically, has no tangible assets backing it. So why do people hold a cryptocurrency (currently a bitcoin is over $NZ84,000)? It is because there are others willing to pay that amount when the cryptocurrency is offered on the market. Since they can never expect to get a dividend, one assumes purchasers expect the market price to rise (that is, others will pay a higher price one day), and they can convert their purchase into ordinary currency which they can use to purchase something more tangible.

This is a kind of Ponzi scheme for which investors get their return by selling out to an incoming investor who in turn hopes to sell out at a higher price to a later incoming investor. It requires a long-run rising price for the cryptocurrency. Stein’s law says if it can’t go on forever, it won’t. At some point the appreciation will cease, the price will stagnate and crash.

(There is no theory which predicts exactly when the crash will happen. If there was, users knowing when there will be a crash, would bail out a little before, causing the crash earlier, so the forecast would be wrong.)

Does the crash matter? There have been three major crashes of bitcoin (as an example) in the past. Its price fell about eight-tenths (in $NZ) between December 2017 and December 2018; it fell almost five-tenths in May 2021; it fell about seven-tenths between November 2021 and October 2022. (Other cryptocurrencies have slightly different stories.) In none of the three cases were there widespread repercussions to the rest of the financial system (although individual holders suffered). This was partly because cryptocurrencies are marginal in the totality of the giant financial system, but critically, there is not enough interdependence with it. In simple terms. investors in crytpocurrencies do not seem to be borrowing to invest. It is the borrowing which causes a proper financial crash as the holders’ losses ripple out through the system, impacting on innocent people who had not realised that their savings were tangentially involved in cryptocurrency speculation.

In the Minsky cycle of speculation, financial markets go into a phase in which there is heavy borrowing by investors; hence the big crash which follows. I do not know whether the cryptocurrency markets have reached that stage. (Another complication is when there is fraud, embezzlement and theft.)

The purpose here has been to illustrate how a market can flourish even when what is being transacted has no ‘objective’ value in the sense which classical economics understood it. (Ironically, though, David Ricardo who set out the Labour Theory of Value, made his fortune on the share market.) It was understanding of the subjective theory of value (price) which enables us to understand better how financial markets work.

The price of financial assets reflects the sentiment of those in the market; they may be totally detached from the tangible and objective. But that sentiment can be like reef fish, quickly switching from one direction to another. Sometimes a switch crashes the financial system which impacts on the real economy.

Footnote: Cryptocurrencies can – like a banknote – be used as a medium of exchange for purchasing or paying off debt. That is not a major feature (except for paying debts in dark markets). It is suggested that the government could accept cryptocurrencies for payment of debts to it. (This is different from banks exploring whether they can efficiently use blockchains in conventional currencies.) A prudent government would immediately switch the cryptocurrency it receives into a more conventional currency. Thus its holdings would be small – till money. El Salvador proposed to make bitcoin legal tender. Its economy is a bit of a financial basket case. When it was recently bailed out by the IMF it was required it to scale back its crypto ambitions. The IMF was wary of lending while bitcoin was legal tender because its volatile price posed a risk to financial and fiscal stability. My personal view is that a government should not get into investing in financial speculation, no matter how promising the gains might appear to be in the short run. Recall how Nick Leeson brought Barings Bank to its knees.

Note The prices used here applied at 21 March, 2025

By international standards the New Zealand healthcare system appears satisfactory – certainly no worse generally than average. Yet it is undergoing another redisorganisation.

While doing some unrelated work, I came across some international data on the healthcare sector which seemed to contradict my – and the conventional wisdom’s – view of the healthcare sector. Broadly, the sector seems to be performing relatively well and does not seem underfunded compared to other OECD healthcare systems.

The details are here but, in summary, the OECD report thought that we were close to the OECD average on most of its health indicators, but we were better than average in regard to self-rated health, smoking, air pollution, and effective secondary care (dealing with heart attacks and stroke). We were doing badly only on obesity (we knew that). In the international pecking order our health expenditure is seventh as a share of GDP and sixth if we adjust for the age-structure (we have a relatively younger population than those ranked close to us) and for price differences (the cost of the same care is lower).

The US-based Commonwealth Fund confines its international comparisons to only ten countries. New Zealand ranks in the top half on all  its dimensions – fourth on overall rankings, third on health outcomes – with the exception of equity where we rank second-to-bottom above the US. (One is surprised they can even make a judgement given that unlike most affluent nations we have no unmet needs survey.)

There is so much widespread grumbling about the New Zealand healthcare system, I was surprised at this data although I am cautious because international comparisons tend to be treacherous. What we overlook in our insularity is that there is widespread grumbling everywhere else too. Even so, the grumbling deserves careful analysis.

Failures

First, occasionally failures happen in the health system, mistakes which can be tragic for the individual and their families. Usually, they involve an individual incident. To be realistic, such mistakes are bound to happen in any system as large as a healthcare one, where there are literally millions of potential incidents every year, and where clinical rather than mechanical judgement is involved. (There can also be impatience with delayed diagnosis; that’s because healthcare is more complicated than deciding who won a race.)

The aim has to be to minimise such occurrences and to give as good redress as possible when they happen. We probably have a reasonably effective arrangement with the Health and Disability Commissioner – perhaps the commission is underfunded and a bit slow as a result – and ACC. The grumbling is a part of this continuous improvement process. But it does not prove the system is failing. (There is a bias, because we do not hear reports of the successes, which happen far more often; good news is not news.)

Occasionally failures are systemic, involving the wider system. They will happen, but in the ones I have looked at, the remediation has taken too long, suggesting the upper bureaucracy is not as committed to continuous improvement in the way that medical professionals are. Typically, such systemic failures are local. Expecting even higher bureaucrats based in Wellington to do better seems implausible.

Access

There are different sorts of access issues. There are going to be locational challenges; it is not going to be possible to provide heart surgery in Hokitika. Similarly, there will be treatments which are too rare, specialised or new to provide anywhere in New Zealand so those needing them may have to go offshore. Again, continuous improvement bringing them onshore – often backed by research (as is happening with CAR T-cell therapy for cancer) – is the long-run solution.

Sometimes a treatment is just too expensive to be a realistic option. Consider a drug which costs a million dollars a pop (and if you don’t think that is expensive, I haven’t told you how many pops are necessary, nor how little quality of life the drug generates). Yet, the patient who needs the treatment may think it is their last chance; it’s an easy news story too. In a constrained budget system, providing the treatment is at the expense of other healthcare services and treatments which may generate far greater quality of life. This has been a particular concern in regard to expensive pharmaceuticals being pushed by their Big Pharma providers.

A big access issue is waiting times, including for emergency, seeing a specialist (and increasingly for some, alas, even a GP) or for treatment. This seems to be a mix of inadequate funding and inadequate staffing (which requires a far greater commitment to labour-force planning than has been evident for three decades). An especially uncomfortable issue is the ‘ghost’ waiting lists, those in need who do not even get to a doctor. A particular case involves Māori and Pasifika with cancer who are getting into the healthcare system when the disease is far advanced. (It is this situation which led the Commonwealth Fund study to down-rate us for equity.)

Is the healthcare system failing?

So the New Zealand healthcare system has a number of challenges, as do all the other systems we compare ourselves with. We are more ambitious than just pacing ourselves with the rest of the affluent. We want to do better – so do they. To do better we need to intensify continuous improvement. I am not sure that the generic management which dominates the system copes with this very well, because continuous improvement relies on the integrity of the professionals which the managers do not trust.

There may well be accounting problems. (See here.) But it would seem that is not impacting as badly upon the delivery of healthcare as much as one feared. Long may that be so.

And yet we keep redisorganising the top of the healthcare system. National’s second was announced last week, somewhat reversing its earlier one. I despair. Let’s agree they can’t get it right. Which is not surprising since there is rarely any careful review of why the system which is about to be replaced has failed. The next one is likely to fail too. The problem is that each redisorganisation fails to put the medical professionals at the heart of system. Look after them and they will look after their patients. If they are not trusted to perform as well as the international comparisons suggest, we end up with heavily over-managed and not well-performing layers above them.

The underlying message of this column is that rushing around claiming the system is in crisis without a careful analysis is dangerous. I first saw the danger when in the 1980s people of goodwill said the New Zealand healthcare system was terrible. (There were no international comparisons in those days.) The neoliberals said they had a solution. Their proposed redisorganisation of the early 1990s was quack medicine and, not unexpectedly, made many people worse off – some died because of it.

Yes, we can do better if we aspire to do better and we trust our professionals. It requires more funding to increase and retain the healthcare labour force (the drain to Australia is a threat), it requires a commitment to professional-led continuous improvement, it requires better analysis at the top which begins with careful diagnosis and does not end with a nostrum unrelated to the actual disease.

Peter Frankopan’s The Earth Transformed: An Untold History is a compelling account of the interaction between humans and the environment. We would be unwise to ignore it.

The Silk Roads: A New History of the World by Oxford professor of history Peter Frankopan was initially widely admired. But critics point out that the book exaggerated the significance of the land connection between Europe and East Asia. In his The Golden Road: How Ancient India Transformed the World William Dalrymple makes a convincing case that the main trading routes were by sea and they played a part in the critical role in the contribution that the Indian subcontinent made to the world in the 1500 years from the beginning of the common era (when Europe was backward).

But the dispute on the transport routes understates Frankopan’s achievement. He centres his history of the Eurasian world near Persia, rejecting the Eurocentric world histories that most of us grew up with. Dalrymple’s book reinforces that re-centering. My guess is that in a few generations’ time, students will be taught history from a less European-centred perspective.

As if the heroic task of getting us to think differently about the geography of world history was insufficient, Frankopan’s latest book The Earth Transformed aims to change our perceptions about the interaction between human history and the environment.

Obviously, this writer of Not in Narrow Seas: The Economic History of Aotearoa New Zealand is sympathetic. When I began the book, I knew it would finish with climate change because it illustrates how New Zealand is so dependent on the outside world over which it has little control.

As I wrote the book, I learned that there had been climate change in the past (although more moderate than we expect to happen in the future). Both the proto-Māori migration to the country of 700 years ago and the European visits which began 250 years ago occurred in times of a favourable climate for long-distance sailing. (Abel Tasman was not so fortunate.) The deterioration shortly after the proto-Māori arrival probably explains why there were so few return voyages. As anthropologist Atholl Anderson has shown, the climate change which happened after had Māori settlement shifting from the drying east side of the country to the wetter west.

Frankopan has a stronger story to tell. Climate change did not just impact on humans, sometimes human settlements impacted upon the climate. That is not so astonishing today given what is happening via carbon emissions and global warming. But it happened in the past, albeit on a smaller scale.

Coming to think of it, there may have been a local instance although my book did not pay much attention to it. Shortly after the proto-Māori arrived, much of the South Island forest cover was reduced. Some think this was a consequence of climate change but others think the proto-Māori started the fires. I am willing to compromise by saying both (while acknowledging that Māori society learnt from the experience and evolved to a more sustainable culture). Given the sort of settlements at the time, the economic impact did not seem to be great so I did not emphasise it. Frankopan, concerned with the whole world and his much longer time-frame gives many more examples which usually had a bigger impact on – some civilisations were extinguished. (He is so assiduous with his examples that they over-power the reader.)

Frankopan is able to do this because in recent years scientists have developed ingenious means of measuring climate change in the long distant past. (Another impressive ‘archaeological’ breakthrough is Svante Pääbo’s development of methods to evaluate the genomes of extinct hominins for which he was awarded the 2022 Nobel Prize in Physiology and Medicine.)

To give but one example of the environmental story in history, if you have visited Mycenae, the legendary city of Agamemnon who led the Achaean (Greek) forces at Troy, you will be struck by its poor location, 19kms from the sea on a tiddly river and hardly in a hospitable area. Part of the explanation is that Greece is a tectonically active area and the land has lifted with the sea retreating. But assuredly, three and more millennia ago the land around Mycenae was heavily wooded area. Deforestation changed the local climate and the soil eroded into the valley below. Eventually Mycenae was abandoned.

It is instructive that standard histories of Mycenae ignore the environment. We tend to interpret its history – and much elsewhere – as if there is no environmental change. Frankopan would say that is a nonsense. His 700-page book has example on example going back three millennia of human-environment interaction.

It does not confine itself just to the climate. Civilisations have come to grief by their careless treatment of water when they exhausted an aquifer or when rising salinity undermined their agriculture. He also traces the impact of pandemics, which had a climate dimension.

Almost every example is small in terms of the total globe and the human time on it, although empires have risen and fallen because of climate change. But the process is slow in terms of most of our preoccupations. What is unusual today is that because there are so many of us and because our resource usage is so intensive, the change is much faster.

It took a bit of trouble when I was writing In Narrow Seas to get a measure of just how much climate change has occurred since coal-burning industrialisation began. It turns out that New Zealand temperatures have risen about 1°C since the start of last century, while global sea levels rose about 20 cm in that time. Sometimes I look at a sandy beach trying to envisage what it was like a century ago. A common estimate of the maximum gradient is about 1 in 8. That would mean the sea would be at least a metre and a half or so further out. We think the levels are rising faster nowadays. We cannot be sure how much faster, but it seems to be reasonable to imagine a grandchild will one day look at that beach and the sea may be three metres closer.

I’ve already stated the primary lesson from the book: do not assume the environment is static, that any changes are irrelevant to human destiny and that civilisation has no impact on the environment (including on the climate).

This lesson was there millennia ago, but we show little evidence of having learned it. It’s like the story of the frog in the slowly warming pot of water who boils to death. Experiments show it is not true for frogs – they jump out. It seems truer for humans.

Of all the headline-making, world-reshaping actions of the second Trump administration thus far, perhaps the most defining is the United States’ vote against the resolution condemning Moscow’s invasion and supporting Ukraine’s territorial authority. The US has used its security council veto and superpower heft in questionable ways before, but this vote alongside Russia and other strongman states such as North Korea, Belarus, and Hungary was Trump switching sides; the clearest of statements that Donald Trump’s America is a very different place from the America of Dwight Eisenhower, Ronald Reagan, and George H.W. Bush. America could have abstained from the vote against an unquestionable invasion of a sovereign nation by a dictator-led nuclear power; it did not. At a time when GOP politicians are lining up to applaud even Trump’s most controversial moves, one senator, John Curtis of Utah, even dared to say he was “deeply troubled” by the vote. “This posture is a dramatic shift from American ideals of freedom and democracy”, he wrote.

Well, it’s reassuring at least one member of the once proud party of Lincoln and Eisenhower can see it. Because it should be troubling to any democrat (small ‘d’), that the Trump administration did not take what every US president in 100 years would have seen as the most basic and unquestionable stance in defence of freedom and national sovereignty. Instead, Trump sided with a different group of ideals.

If you look at the leaders who instructed their ambassadors at the UN to vote in sympathy with Russia, you see Trump applying for membership of a new club. The strongman club. A club that eschews the traditions of American power – a power largely based on liberal democratic ideals – in favour of a power based on taking. A power of short-term self interest. A power that says, above all, might is right.

Yes, the rhetoric has long been there but to side with dictators at the UN is still shocking. Yet these are the countries and leaders that Trump is clearly impressed by and instinctively drawn to. Men who will make a deal about the lives of millions – for as long as it suits them; who will renege in a heartbeat; who claim the right of the powerful to take what they want, when they want it, simply because they are powerful.

This is where the gap is growing between Trump and America’s traditional allies in the West. The West, however you describe that entity and whatever its flaws in practice, was built on ideals of democracy, the rule of law, free trade, individual rights, and sovereign nationhood. America has many times succumbed to the magnetism of economic power, of national self-interest, of political paranoia, but, as Winston Churchill famously said, America can always be relied on to do what is right once it has exhausted every other possible option.

At least, it could. At the core of American foreign policy since World War II has been a belief in its responsibility to support liberal democracies and freedom-loving peoples everywhere, to back a rules-based order (while often trying to skew the rules in its favour). It – usually – acted as if there were greater goods – free trade, national sovereignty, democracy etc. On the flip side, totalitarian regimes and things that diminished the democracies and choices of a free world were to be opposed.

Trump views the world differently, and the UN vote (and the subsequent abandonment of Ukraine re arms and intelligence) shows he’s willing to act on those views. Trump as a leader is out for what he can get. He’s not interested in an 80-year alliance with European democracies that has helped build continental unity; that have allowed nations in Europe to spend less money on their military to fight each other and more on economic growth. Previous presidents have seen the value in a peaceful Europe that doesn’t draw America into wars. It creates trading partners. It creates democratic political partners. It helps the money go round so people on both sides of the Atlantic prosper. The Trump administration, as Fareed Zakaria has said, reckons that’s a policy for suckers. Only suckers think of the greater good. Strongmen? Well, they’re interested in what is good for them, right here, right now.

Trump’s America First strategy makes little room for win-wins. Every choice is a zero-sum game. By this calculation the United States’ support of Europe and NATO means America has not taken as much as it could have. It’s time to line up America’s erstwhile friends and make sure they start paying for what America has given over the years. Ukraine’s mineral deal to pay back support for the war is the first ‘renegotiation’ (read betrayal). The tariffs against Canada and Mexico, the second. Who knows what comes next?

The idea that American foreign policy has, in giving aid, protection, and support to democracies has both made the world safer for more people while also allowing the US to become the world’s only superpower and dominate 21st century economics, makes no sense to Trump. He sees only wins and losses. There’s no clear target of what he means by American greatness, but it seems to focus on squeezing every drop of blood, oil, and treasure from every relationship it has. To the Trumps of the world, as with the Putin, Xi’s, Netanyahu’s, and Orbans, this is what strength looks like.

It seems Europe is not entirely unprepared for this turn of events. And, whatever you think of Trump’s strongman urges, it may not be an entirely bad thing for the continent. At least, so long as you don’t live on its far eastern fringes.

On the plus side, this American shift forces Europe to define itself and its liberal values more strongly, as distinct from the values of Trump. It forces Europe to look at its own military strength and realize that without American patronage, there’s a risk other bullies could take advantage. It perhaps forces them to look at their own slightly worn economies. It forces them to work more closely together.

It is, at the end of the day however, still an increase in military spending. It means more guns, more bombs, more soldiers looking for a target; it creates the scope for tensions between countries down the track, where previously across Europe’s lower defence spending meant less likelihood of another war on that continent; a continent where wars twice in the 20th century caused the deaths of millions.

Maybe Ukraine and the UN vote is an aberration; to talk about a ‘Trump doctrine’ at this stage perhaps gives too much credit to a man whose principles seem flexible, even erratic, and attention span limited. But in short order we’ve had enough words now from Trump, Vance and Hegseth to indicate the path they’re on. Trump may like to declare, “America is back”, but for the rest of the world this is a new, scary America.

For those on the right, the US is siding with the countries on the right side of the culture wars; but they should not mistake this as a move in favour of conservatism. With Musk at his side, Trump is actively looking to disrupt. For those on the left, an isolationist America that withdraws from the world stage is something they have wished for for decades. They have often asked America to butt out, pointing to governments overthrown in south America and Asia, wars in the Middle East, and nuclear tests in the Pacific as examples of US bullying. But they now are confronted by the flipside of American involvement and what it has brought in terms of security and democracy.

As we see the outline of the Trump doctrine start to get coloured in by actions like the UN vote, it raises several concerns for New Zealand.

First, we might wonder what Trump’s abandonment of Europe and liberal democratic values more broadly might mean in the Pacific. We see tariffs imposed on three Pacific nations and might wonder who is next. We wonder if China and stopping its rise might mean more of a focus for this administration and create more tensions in our neighbourhood.

Second, we might reconsider how we handle our relationship with both the US and China. As China under Xi has turned into more of a dictatorship in the past decade, New Zealand has inched closer to America on many non-trade issues. We are closer to the US now than we have been since the nuclear-free debate of the 1980s. That tilt towards the US under the past three governments now comes with a new level of risk and must give us pause for thought. It’s not hard to imagine us needing to stand up against the Trump doctrine on issues of tariffs, trade, and territory (more on that last one in a sec).

Third, and perhaps most importantly, Trump’s abandonment of Ukraine and articulation of a ‘might is right’ approach to foreign policy is terrible news for small nations everywhere. Trump has made it clear he does not understand why a powerful country like the US should give a damn about a small country like Ukraine, unless it can gain wealth or power. There is no sense that countries are obliged to stand up for rules in service of a greater good. As I noted earlier, Trump doesn’t believe in a greater good.

And if Ukraine is a small country of no value, easily sacrificed, then how much smaller and more dispensable is New Zealand? We have built our foreign policy and economy on a belief that rules matter, the world operates best when there is trade and connection, and everybody plays fair. Trump is joining a club of world leaders who don’t care about rules.

Which leads me to one final thought. While many of Trump’s supporters voted for his promise to get out of the world’s business, thus allowing more money to be spent domestically on Americans, the president’s ‘might is right’ worldview cuts against their expectations. Politically risky. But more than else, he seems weirdly wedded to a desire to expand. Real estate, it seems, still matters immensely to him. One of the most consistent refrains from Trump this term is a belief that America should take more land. Canada has resources, it should be the 51st state. America wants shipping lanes, so seize the Panama Canal. Interests in the Artic? “Get” Greenland. Mars is even a priority. What happens when someone mentions Antarctica to him? His expansionist words aren’t taken terribly seriously, but surely by now we realise these riffs aren’t just riffs. We should take him at this word; Trump wants more real estate.

It’s no coincidence that in that United Nations vote, he stood alongside countries that have no qualms about taking territory that doesn’t belong to them; Russia in Ukraine, of course, but also Israel in the occupied territories, and China with its claims to Taiwan and areas in the South China Sea. Perhaps one of the reasons Trump finds it so hard to condemn Russia’s land grab in Ukraine is that he imagines he might want to do some land-grabbing of his own in the next four years.

It seems clear Trump’s foreign policy is based on a view that laws and borders are negotiable depending on who has the cards, strong countries have the right to take from weaker countries, and that America’s commitment to liberal democracies has been a policy for suckers. That UN vote signals trouble ahead for small countries like ours that rely on rules, trade and peace to prosper. It’s hard to imagine that some time in the next four years the relationship between America and New Zealand won’t be strained at some point. Then, some hard reckoning will be required.

As Lady Bracknell almost said, ‘to lose one may be regarded as a misfortune; to lose two looks like carelessness.’ And so a second Government Statistician has made a hasty exit, The official reason in each case was the management of the population census but the cult of generic management is the underlying failure

Generic management is the notion that managers need know little about what they are managing so they can run any organisation despite without appreciating the particularities of the agency.

That was true for the last two early-retiring Government Statisticians, but the notion is pervasive. I first came across it in the health sector over thirty years ago during the neoliberal health-sector redisorganisation, when chief executives who knew ‘bugger all’ about healthcare were imposed upon District Health Boards.

Typically, generic managers are appointed from outside the sector with little knowledge of it. They begin by redisorganising the previous generic manager’s management structure, including replacing the senior management team. Which amounts to having no confidence in their predecessor, with the likelihood that their successor will have no confidence in them either. (While some generic managers are competent, many are not. On more than one occasion I have known about a manager who had a dreadful reputation but went on to greater disasters; it was as if the Peter Principle of being promoted only to one’s level of incompetence does not apply in New Zealand.)

Public relations is something else they are into, although they will avoid the cross-examining from a select committee and the like – they don’t have the command of the issues. Another fetish is changing the agency accommodation – an upheaval which damages the culture of the institution (which they know little about).

Critically, they will commonly put a management tier in between the top and the professionals in the agency. In a number of cases the chief executive has seemed uneasy in the presence of the professionals they are meant to be managing.

This downgrading of professional skills means that the agency practises outsourcing. It is a gift to a consultant to have a contract manager who does not understand the issue. I occasionally read reports which have harvested that gift by providing expensive useless twaddle.

Another outsourcing mode is to contract tasks traditionally done in the agency because it is ‘cheaper’ (and appears to require less management). But the cost is a loss of control. The census incidents which caused the early retirement of two Government Statisticians involved poorly managed outsourcing.

Generic management, including the outsourcing, undermines the professional culture within the agency. Because it involves one of my professions, I found what has happened in Statistics New Zealand especially unsettling.

At the core of SNZ’s culture is the integrity of the statistical system it manages. This involves producing high quality statistics – I have never found any major fault with their data when I have worked with it and SNZ data has a good reputation internationally (especially for its size). International connections are a vital element for the functioning of some agencies, such as SNZ. A chief executive is judged overseas by their professionalism – generic managers rarely measure up. Our best professional managers get international work after their retirement.

But the integrity also involves the public trusting that any data which SNZ collects will be used only for the purpose for which it is collected. While we do not know exactly what went on at the Manurewa Marae, the public can reasonably conclude that SNZ did not ensure that the management of the census data fulfilled that promise. That failure was why the Government Statistician is exiting early. He was not directly responsible but the trust dimension of collecting data seems to have escaped some of the junior staff, suggesting that the internal culture of SNZ is weakening.

The outgoing Government Statistician is unlikely to be replaced by someone from within SNZ. Generic managers have little interest in internal career development. After all, they are only running the agency temporarily, know little about it, and hope to soon move on to a better-paid agency. The practice of appointing for a five-year term is absurd given that the census cycle is five years so that there is only one census per Government Statistician; he or she can never learn from past experience if they come from outside the department. (Probably most agencies have similar longer term rhythms. The Auditor General is saying that central government agencies should have ten-year plans.)

The contrast is with the traditional SNZ, where there was career development under an experienced leadership team. When one of our Government Statisticians, Len Cook, was made UK National Statistician for five years; his terms of reference included that he should prepare the way for his successor –from the agency’s internal staff.

Yet we persist with the cult of the generic manager. It is attractive to those in power who have no profession, it is encouraged by the demand for diversity, equity and inclusion, which often involves appointing those who have as much background as a generic manager. (Without internal career development, a DEI strategy based on professionalism is unlikely to happen.)

Apparently there is another attempt to reduce the number of government agencies, a persistent ambition of State Services Commissioners who has to manage all the chief executives. (Not all Commissioners have been top quality.) Once the management style was more collective, with four commissioners to share the load; agency management structures were also collective, which reduced the damage of incompetent chief executives.

I would have thought that the repeated failures of mega-departments of miscellaneous activities, such as the sprawling Department of Internal Affairs and the Ministry of Business, Innovation and Employment, would caution against further consolidation. They require generic management because nobody can be expert on all their activities; the management span is too wide and diverse. The likelihood is that these mega-departments will not be well managed even in generic management terms, especially given the SSC record of failure among its appointments.

Instead, we need single-focused smaller organisations such as a Ministry of Labour, Archives New Zealand and the National Library. (The latter two are in the DIA, which does not even understand the difference between a file and a book.) Their leadership teams need to be dominated by those who know something about the agencies’ activities and who have a commitment to their professional culture and career development. Organisations larger than, say, 480 people – the size of a cohort in a Roman legion – need to be carefully justified and designed. (The number is about what a well-embedded senior manager can know.)

And we need to move away from the view that agencies must be frequently redisorganised. Consolidation may be its latest fashion. Centralising the healthcare system is not going to resolve its challenges. One is baffled how moving decisions to Wellington was going to solve the post-code lottery in Dargaville – it didn’t. Sure, there is a financial problem, but efficiency improvements are not going to come from a three day-a-week Health Commissioner. They will come from the continuous improvement that professionals practise and which is beyond the scope of generic management.

Generic management is more widespread than the examples in this column. It is not confined to the public sector. When Fletcher Building faced failures in its project management which almost brought the company down, its board had no one with construction expertise.

A Bully in a China Shop?

It is a mystery what Donald Trump learned when he did his BA in economics at the University of Pennsylvania in the mid-1960s. The Ivy League college has a good economics reputation, but even had Trump been a top student – unlikely or he would trumpet it – his training in international economics would have been primitive by today’s standards (and it was only at bachelor level).

It is likely he would have been taught the Ricardian story of comparative advantage in which Portugal and England produced wine and cloth, and in which despite Portugal being more productive in both activities (i.e. it had an absolute advantage in both), it made sense for it to specialise in making wine and importing cloth (it had a ‘comparative advantage’ in wine). This notion of doing what you do relatively best as valued by exchange is integral common sense in economics.

However today’s international trade is very different from the inter-industry exchange which Ricardo was portraying. Much of it is intra-industry – that is, exchanging very similar products like cars for cars. Much of the trade is in components which get produced in various countries and assembled in a third, often after having crossed many borders. Much of today’s international trade is in services rather than the physical goods which dominated two hundred years ago (and which are hard to tariff).

It may not be simply ‘comparative advantage’. Many industries may have been located in a particular place by chance, but they are still there decades later because their experience and technological innovation gives them a ‘competitive advantage’. A further complication is the ‘economies of agglomeration’ which arise when production is cheaper because of this clustering of economic activity (typically in a larger city – it may be cheaper to do things in Auckland than in Akaroa).

The notion of comparative advantage still holds – do what you do well – but it now exists in a much more complicated environment. Adding to those complications, the standard undergraduate model would not have allowed for internationally footloose capital and technology – labour less so, but migration is still important – which means that industries can now relocate to cheaper sites. They produce paradoxes, like giant – trillion dollar – firms (like Apple) that do not produce anything but outsource the making of the product they design, manage and market to other businesses usually located in other countries.

You may be aware of these complexities and the nuances of behaviour they generate but is Trump? It is very difficult to understand the ‘trade war’ he is prosecuting in terms of the realities and intricacies of today’s international trade.

Perhaps ‘war’ is key to his thinking. Rather than using troops, he thinks he can get his way – America can get its way – by trade threats. War involves economic sacrifices; Trump seems to be aware he is expecting the US to make them when he accepts that there will be inflation as a result of his actions. Perhaps he hopes the threat of his tariff-troops will get him what he wants. (Although sometimes it is unclear what it is; remember the joke about Hitler who wanted ‘peace’ (it works better if you say it) – a piece of Canada, a piece of Greenland, a piece of Panama, a piece of Ukraine …)

My guess is that whatever happens, the Trump initiatives will dramatically change the global economy. Before explaining how, recall an earlier trade war.

The Smoot-Hawley Tariff Act of 1930 raised US tariffs on more than 20,000 imported goods. prompting retaliatory tariffs by many other countries. They were a major factor in the reduction of American exports and imports by two-thirds during the Great Depression, although they did not cause it. The event was so traumatic it would almost certainly have been mentioned in Trump’s international trade class, although he may not have been listening.

In the 1930s and 1960s US goods exports and imports made up about 3-5 percent of total production. Today the figure is more like 10-12 percent, so the impact of a Smoot-Hawley tariff war would be even greater.

Will we see a return to the 1930s trade wars. Hopefully not, although it may require considerable finesse to avoid one. I suppose it depends on how much Trump can get what he wants via bluster, how much he is willing to concede and how much the rest of the world stands up to him. Individually most countries are no match to the US, but there are blocks – like ASEAN and the EU – with collective clout. There are almost certainly already backroom conversations in train about collective responses.

That suggests that the effect of Trump will be to strengthen those blocks whether there is an actual war or just threats. Those outside the blocks will also be trying to work together. New Zealand on the periphery will find it particularly difficult. We will depend upon working with Australia but that country is trying to get a special deal with the US.

Were I a Chinese strategist I could not believe my luck. Sure, it is going to be difficult because of China’s production chains, including those with the US. But Trump has created a medium term opportunity for China to offer an alternative to a US-led global economy, strengthening its sphere of economic influence.

Businesses may take a different lesson, especially as they dislike the uncertainty which will be Trump’s heritage long after he has moved on. Can they rely on cross-country production chains as they used to? I shall not be surprised if there are changes to investment strategies, including postponements of investment decisions which will intensify any economic downturn.

Consumers may also respond, including those outside the US boycotting American products. In some cases – social media, fast food chains – it may not be so easy because there is no significant alternative. For others, we shall see.

Tesla cars face a further challenge. Trump’s tariffs may increase their US market, but Tesla may find it harder to sell elsewhere, as Chinese EVs push into third markets. In addition, it has a factory in China and sources some of its US components from elsewhere. (This is not Ricardo’s world.)

The world economy is not a china shop, although in the short term it could be greatly damaged by trade warfare or threat of war. In the medium-to-long term Trump’s bullying may be inadvertently hand over its leadership to China.

Severe geological and financial earthquakes are inevitable. We just don’t know how soon and how they will play out. Are we putting the right effort into preparing for them?

Every decade or so the international economy has a major financial crisis. We cannot predict exactly when or exactly how it will happen. (For what its worth, one is about due; the obvious risk point is the cryptocurrency market – but that is another column – and Trump is clumsy enough to precipitate anything.) The resulting economic distress affects many ‘innocent’ people who are not directly involved in the financial processes which led to the crash. They – with some justification – and those in the financial sector – with less justification but more political influence – turn to their government to help them through the crisis. Given the impact of the crash on the wider economy, we can expect the government to respond.

The prudent may take measures, but it is difficult to take comprehensive ones, especially if their resources are limited. (In contrast a billionaire may suffer a severe financial loss but still live much as they did before the crash – although with less public adulation.) A sensible government will prepare for the collapse.

It strikes this resident of the ‘Shaky Isles’ that there is a parallel ith our planning for earthquakes. Minor ones happen all the time – as do business collapses. But one day there will be ‘the big one’. We don’t know where. We don’t know exactly how – both the Canterbury and Kaikoura earthquakes exhibited unexpected phenomena. And we certainly don’t know when. Seismologists think the big one is less likely to happen than economists expect the next global financial crisis, but they are sure it will. Despite the probabilities, it could happen tomorrow night, before the next financial crash.

Engineers have put a lot of effort into preparing for a major earthquake disaster. You are probably aware of the New Building Standard (NBS – often referred to ‘the code’) which is used to assess how well a building can withstand an earthquake. It may affect directly affect you. You may live in an ‘earthquake prone building’, which means it is vulnerable to much smaller earthquakes than the NBS is set for. Or you may have spent a fortune upgrading your building to the NBS. You may have had difficulty selling your building because of its NBS rating or buying one because your bank is unwilling to advance a large enough mortgage on your chosen building given its code rating. You may have difficulties with your insurer.

A 100% NBS means that the building is thought to be able stand an earthquake which is expected to occur once in 500 years. This is longer than most buildings are expected to last but of course the ‘big one’ could happen tomorrow. In practice it is common to use a 67% rating which should cope with a one in 200-or-so years earthquake. (A 34% rating is about one in 34-or-so years and is sometimes seen as a minimum ambition.)

There is much debate about the realism of these estimates and what is an appropriate policy response. The point is that it is prudent to think about earthquake risk and to take public measures to minimise the damage a major earthquake will cause.

The same applies for financial earthquakes, even though – alas – we have not the same information that engineers have. Public policy has made a number of adjustments. Following the Global Financial Crisis, the Reserve Bank directed the commercial banks to borrow less often for a longer term, which meant they would not have to refinance if international monetary markets seize up, as quickly as they almost did in the GFC. Commercial banks can go to the RBNZ when they are in trouble, in effect pushing their troubles on to the central bank. So it makes sense for the public central bank to reduce the likelihood of the private banks getting into trouble.

The effect of the change has been to raise the cost of domestic borrowing. You can think of the (slight) premium as a form of insurance. You and New Zealand are a bit better protected during the next financial crash.

The same applies for the Depositor Compensation Scheme to be launched later in the year, which safeguards deposits (up to $100,000) in the case of bank (or other deposit taker) failure. The return will be slightly lower because the depositer is paying an insurance to protect their capital.

Probably the biggest single provision New Zealand has against a global financial earthquake is the government keeping its debt low. That means that when the chaos occurs the government has more room for manoeuvre – including borrowing to tide over the crisis. The Minister of Finance has announced a government net debt target as a percentage of GDP (as have at least six of her predecessors). The actual debt level is currently sitting a little above the target, and the date which the target is expected to be attained is being rolled out as the economy performs more poorly than expected. (The next global financial crunch could occur before the target date.)

I am not opposed to some sort of debt target as a part of a suit of measures to judge the fiscal position. (I think it should be somewhat below the average of comparable small open economies because of our heavy overseas private sector borrowing.) However, we may be over-obsessed with it when we evaluate fiscal performance.

Suppose you asked an architect to design you a house and every time you complain about some feature of the proposal – poor access, the kitchen badly designed, the bedrooms too small … – the architect explains it was the consequence of making the building earthquake robust. Isn’t that a bit like how we have designed the fiscal building? It may be small, cramped and uncomfortable but we daren’t do anything about it because of the financial earthquake risk.

I am not arguing that we should completely redesign the fiscal strategy overnight. I can think of changes I might make, but I’d prefer a evolutionary approach. In the interim I agree with the current government’s approach of not being over-obsessed with the debt target (despite what its political enemies and the commentariat say).

And I am certainly not arguing that we should just change the debt definition as both the current and the previous Minister of Finance have done. Fiddling the accounts addresses political perceptions not economic realities; they will not make one iota of difference when the big one hits.

I wonder whether the New Zealand Government has been through a simulation about how they might handle an external shock, just as the RBNZ has stress tests done on the commercial banks to see how financially robust they are. (It went through the real thing during the GFC. I thought the Reserve Bank and Treasury handled it brilliantly, although the Governor of the Bank of Canada said not to discount luck.) Stress testing would suggest that certain assets and liabilities are near irrelevant during a financial crisis, while others are critical and that we should be paying more attention to them.

And yet we must be mindful that whenever we borrow, we require a lender. As we observed earlier, a major determinant of the impact of the NBS is the way that financial institutions use them as a guide of the willingness to advance mortgages (and provide insurance). and insurers use the NBS to set their premiums. The credit rating agencies such as Standard and Poors award a grade to the government, which underpins the cost of borrowing for virtually all New Zealand borrowers. The agencies have a similar role to engineers who give an NBS rating which is then used by insurers and lenders when they make their decisions.

New Zealand economic policy is haunted by occasions when the country was (almost) unable to borrow. During the Great Depression Keynes advised our Minister of Finance, William Downie Stewart (Jnr), to borrow as much as New Zealand could, to offset the downturn, but added that if he were a lender he would probably not be prepared to advance us any more.

This transcript of a recent conversation between the Prime Minister and his chief economic adviser has not been verified.

We’ve announced we are the ‘Yes Government’. Do you like it?

Yes, Prime Minister.

Dreamed up by the PR team. It’s about being committed to growth. Not that the PR team know anything about the economy. So how do we go about it?

You mean growth of GDP, sir?

The Minister of Finance – what’s her name? – said in her 2025 Budget Policy that there would be three overarching goals – let me see, where did I put it? ah, yes – ‘building a stronger more productive economy, delivering more efficient, effective and responsive public services, and getting the government’s books back in order’. She added that the goals are ‘the Government’s wellbeing objectives, as achieving them is the most important contribution the Government can make to the long-term social, economic, environmental and cultural wellbeing of New Zealanders’. We are required by law to have wellbeing objectives, you know.

But, sir, wellbeing is not the same thing as GDP.

No ‘buts’, no ‘nos’. This is a yes government.

Yes, sir. I was just pointing out the difference.

My first-year economics dealt with the two in different parts of the course. Never really got my head around the difference. Might as well treat them as the same for my government.

Yes, sir.

So when are we going to get some growth of GDP? The Half Yearly thing-a-me-bob wasn’t too optimistic.

The macro-economic indicators which have come in since we did the forecast have been worse than expected. The business closure rate remains high. We expect the contraction to continue a bit longer, but we havn’t done the next round of forecasts yet. There is a view among the troops that the upturn may be weak – but we have yet to decide. The downside risks will be greater than for December’s ‘Economic and Fiscal Update’. There is increasing concern that Trump’s tariff policies will precipitate a world economy downturn, and we cannot rule out there may soon be another global financial crash. We are due for one. Many of the indicators suggest financial instability, and the upset over Deepseek [the Chinese AI firm whose recent announcement clipped a trillion dollars off share values] warns just how fragile financial markets are. Meanwhile the Chinese economy is still spluttering.

That’s not good enough. We need some growth.

Yes, sir. I should add that the current GDP track is not the same as the growth of production capacity. We are currently a bit below full capacity so there could be a bit of catchup. You may be concerned with the sustainable long-term economic growth.

Actually, what I am concerned with is what will make the Government look good, particularly as we run up to next year’s election.

Understood sir. We can temporarily accelerate the current GDP growth rate by increasing the fiscal deficit. That will mean you will miss your stated budget target. The increase may be inflationary; the Reserve Bank might have to increase interest rates.

We wouldn’t want that. But we could expand the economy just before the election when the inflationary pressure is not obvious. So we’ll focus on increasing long-run capacity.

Yes, sir. Some of those measures may also lift the economy in the short term.

Good. Now I have a list of policies here. What about digital nomads?

They  won’t have a big impact and they may not lift New Zealanders’ incomes much. Most of the GDP increase may go to the nomads. That’s an example of why an increase in GDP does not always lead to an increase in support for the government.

Except among the commentariat.

Exactly. Nobody believes them either, except other members of the commentariat.

How about we increase foreign investment?

If they are just buying New Zealand assets, there is not much benefit. New investment creates jobs, which boosts the economy in the short run the way you are wanting. In the long run there are typically fewer jobs than the construction phase and more of the profits go offshore. The exact balance depends on the particular case.

Does that include the fast track projects?

Yes, sir. Most won’t get underway before the election and you’ll have to manage the political backlash. Some of its arguments are valid. But during the investment phase the projects will produce jobs, usually fewer than in the production phase.

Privatisation?

It may not do much for economic growth. The 1980s sales program didn’t make much difference. Many were botches. We had to buy back NZ Rail and Air New Zealand. (I know.) We had to set up Kiwibank because selling off the POSB left a gap in the market which the trading banks ignored. It took us decades to unwind the private monopoly that the privatisation of Telecom created. We’ll prepare a list of possible asset sales. It won’t be long.

Including the government equity in the electricity generation companies?

Yes, they’ll be high on it. There is an argument though, that the sector should be nationalised and the companies merged into a single government-owned and operated entity. Actually, what we would like to do first is design a better regulatory regime for electricity production and supply. Currently, it seems to be price gouging consumers and businesses – some big ones say they are closing down because of it. There’ll be a consumer outcry when there are major price increases later in the year.

Oh dear. You seem to be suggesting there is not much we can really do. We could reduce regulation.

Everyone agrees, sir, that some of the regulation is clumsy and ill-suited for purpose, some bits are badly administered and that we should be trying to remedy these failures. That supervising task is now delegated to the Ministry of Regulation although we shall be monitoring them. But there is not a lot of evidence that our regulatory regime is holding back economic growth more than it is in other countries. A lot of regulations are trying to align GDP growth with improving wellbeing and a sustainable environment.

As I have said, those are not a priority for this government.

They are for some of your voters, sir.

But not all of them. We have to win only a half. The last item on my list is the research sector. We are pumping public money into it. That should make a difference.

The evidence is that technological innovation is crucial to economic growth. But there is not a lot of evidence that subsidising it will have a lot of effect. Some of our most successful innovators like Xero and Fisher and Paykel didn’t get a lot of government funding.

Most technology is developed overseas. The big challenge is to adapt it to New Zealand. We talk as though our public research system is going to develop an international breakthrough technology. We’ve been talking like this for almost three decades and it still hasn’t. It might. But we might have got a better return spending it on Lotto.

Of course, there are areas where we have to be local. It would be a fat lot of use if our geologists depended on Australian research. But generally, the issue is the direction of research. A key channel for importing world-class technology is world class local research. It is ever so important that our medical research keeps up with the frontier. True for other areas like AI and 3D printing.

We also need to upgrade workforce skills so it can adapt smoothly to the new technologies. The indications are that the quality of the management of our large firms is not world class. Whenever this is discussed – always in hushed tones – no one is sure how to upgrade it.

You seem very pessimistic about our being able to do anything about the growth rate.

New Zealand economists were grumbling about our poor growth record before you and I were born, sir. The grumbling only goes back sixty-odd years when the data first became available, and economists began to better understand the growth process. There is not a skerrick of evidence that the six decades of grumbling has accelerated our economic growth rate. Where is the evidence that the Productivity Commission made a difference? You closed it down because it didn’t. You will find the grumblers can point to our lowish productivity growth rate, as they could back then. But their nostrums are not connected to any causal process backed by evidence.

What we can do is remove impediments to maintaining the growth rate. Like removing the Telecom monopoly which was blocking the broadband rollout. It’s a more humble objective than accelerating the GDP growth rate, but we’ve been pretty successful at that over the years.

I hear all your economics, but I am running a political airline. We need a story that will resonate with the public and the commentariat even if it does not make sense to experts. So we will keep to our ‘yes to growth’ strategy. Got that?

Yes, Prime Minister.

Do its Property Right Provisions Make Sense?

Last week I pointed out that it is uninformed to argue that the New Zealand’s apparently poor economic performance can be traced only to poor regulations. Even were there evidence they had some impact, there are other factors. Of course, we should seek to administer effectively a system of high quality regulations. However, the proposed Regulatory Standards Bill will not contribute much to this end. It has another purpose.

As a background, consider the Treaty Principles Bill (TPB). The one before Parliament has a fundamental difference from the one which ACT had in its manifesto. There its proposed second principle was that the government should ‘protect all New Zealanders’ authority over their land and other property’.

In the bill before Parliament that principle has been replaced with 

‘     .’Rights of hapu and iwi Maori — 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.’

It is a very different sentiment altogether. The minister gave no explanation for the change when he introduced the bill to Parliament. Obviously there must have been a concern within the legal fraternity about how the bill could upset existing arrangements.

But the change is more than a legal twist. The effect of the manifesto version would have been to strengthen private property rights markedly. The effect of the second sentence in the actual bill before Parliament probably strengthens them but not to the same extent.

We see a similar sentiment in the Regulatory Standards Bill (RSB). (Actually, there is no bill currently before Parliament. It has yet to be drafted. I am quoting from the bill which ACT introduced in 2021, but which was not proceeded with.) 

The principles of responsible regulation are that … legislation should

 ‘ … not take or impair, or authorise the taking or impairment of, property without the consent of the owner unless —

(i) the taking or impairment is necessary in the public interest; and

(ii) full compensation for the taking or impairment is provided to the owner; and

(iii) that compensation is provided, to the extent practicable, by or on behalf of the persons who obtain the benefit of the taking or impairment.’

Those principles substantially strengthen private property rights.

The notion of regulatory ‘takings’ comes from the US. The American libertarian lawyer, Richard Epstein, who developed the idea, said that ‘[i]t will be said that my position invalidates much of the 20th century legislation, and so it does’ and that ‘[m]ost of economic regulation is stupid…. What possible reason is there for regulating wages and hours? If my takings doctrine prevails, you have no minimum-wage laws. That’s fine. You’d have an [Occupational Safety and Health Administration] a tenth of the size. That’s fine too. You’d have no anti-discrimination laws for privileged employees, which would be a godsend.’ (Epstein was involved with the development of New Zealand’s now repealed Employment Contracts Act.)

While his approach has been described in the US as ‘rolling back the New Deal’, if it was introduced into law today the requirement would merely prevent almost all future change. For instance, had the ACT legislation been in force in 1984 there could have been no Rogernomics, because it expropriated without compensation a lot of private property rights (while creating others).

I don’t think those who developed the 2021 bill have thought through the meaning of property rights. They seem to think of plain old-fashioned property rights similar to those with which Epstein was concerned, colonially adopting his American framework. But, as the TPB implies, property rights in New Zealand are far more complicated.

Iwi and hapu might (or might not) concede that their land was legitimately transferred to others. But they will never concede that their mana whenua rights were transferred. That includes kaitiaki (guardianship) rights over the environment of their rohe. How those rights are exercised is a complicated mix of statute and common law.

Guardianship claims are not unique to Māori. Greenies will campaign on a similar basis for their environmental goals even where they have no direct connection with the land involved. Similarly you may campaign against a proposed building which will block your view.

The Government intends to replace the Resource Management Act with new legislation which will make some changes to property rights. If ACT’s 2021 RSB was law, it couldn’t. It would be hypocritical to pass a revised RMA with the RSB as currently intended pending (although that may not prevent it happening). Even so, ACT could be repeatedly embarrassed by it being insisted that it should vote against any Government legislation  (including the TPB) which infringes its 2021 bill.

Given the backdown over the TPB between its manifesto and parliamentary versions, I am expecting some major revisions to the tabled  RSB. It is possible that the Government version will be a set of sensible rules about how it should approach regulation. In its interim regulatory impact statement the Ministry of Regulation said that while it supports the overall objectives, that legislation was not needed. Its preferred option was to build on, and strengthen, the existing regime based on Labour’s legislation passed in 2019.

What is the real purpose of the proposed statute? Epstein may be the clue. Its aim is to stop government economic intervention altogether, which makes ACT the party of the status quo. Its supporters, having got into wealth and power, want to consolidate it.

There is an argument, set out by the libertarian Robert Nozick, that if you start with a just distribution of property rights, then it remains just following voluntary exchange. I leave the reader to decide whether the current distribution has derived from a just distribution at some ground zero with only voluntary exchanges since. (There are other issues involving complete knowledge and technical change which complicate Nozick’s argument, but let’s settle the initial position issue first.)

The main economic issue is that stable property rights are necessary for good economic development. It is a view held by most (Western) economists, including Daron Acemoglu and Simon Johnson, two of the most radical economists to have been made Nobel Laureates. But most would add caveats.

History has numerous examples where private property rights were over-ruled with development benefits. Most economic historians would accept that Henry VIII’s dissolution of the monasteries wrecked the rights of their inhabitants but laid the foundation for Tudor economic prosperity. Even ACT supporters would add the neoliberal Rogernomics changes to the list of more recent historical examples.

One is left with the conclusion that ACT’s RSB in its 2021 form is muddled. I look forward to someone providing a better explanation.