Kiwi News and Views

Robert Solow transformed the way we think about economic growth.

When you are in the trenches, you may not always realise what the war is about. Years later you read an account and see more clearly. Thus it was with me in the 1960s when economic analysis went through a revolution.

My insight came later when reading the budgets in the 1960s of Minister of Finance Harry Lake about whom I had been asked to write. The speeches expressed an ambition to increase economic growth, but the analysis was around capital investment only, which sounds very incomplete to today’s economist. Reflecting, I realised Lake was using the explanation I had been taught in my economics courses.

However, I was also working at the NZ Institute of Economic Research, whose first director, Conrad Blyth, had brought back from his overseas studies a different account of economic growth which I had absorbed into my thinking without realising how radical it was. Later Bryan Philpott and I worked together in the area. The key founder of this approach was Bob Solow, who has just died at the age of 99.

Solow’s key finding was that output per worker rose faster than the quantity of capital in the long run. You may know the standard assumption in classical economics as the ‘falling rate of profit’ as in Das Kapital, but Marx was drawing on orthodox economics, beginning with Malthus and Ricardo in the early nineteenth century, and still held by great economists such as Keynes and Schumpeter in the 1930s.

The decreasing marginal return on capital is really a consequence of the laws of thermodynamics. So the laws must imply that there are other things affecting production as well as capital and labour. Solow was humble about what he found. (It was such a gigantic insight he could afford to be.) His seminal 1957 paper explained the paradox by ‘technical change’:

I     “I am using the phrase ‘technical change’ as a shorthand expression for any kind of shift in the production function. Thus slowdowns, speedups, improvements in the education of the labour force, and all sorts of things will appear as ‘technical change’.” (His italics)

Solow’s paper is the source of the widely quoted claim that 80 percent of economic growth (output per person) is attributed to technology. But only if the word ‘technology’ has Solow’s particular meaning of what we cannot explain. Economist Moses Abramovitz called the unexplained residual the our ‘ignorance’. Today we call it ‘multi-factorial productivity’ (MFP) or Total Factor Productivity (TFP)..

Sloppy thinking has empowered any group – educationalists, managers, scientists, those in the creative sector – to promote its interests by claiming it is making a major contribution to the coefficient of ignorance. Each seizes on their version of the meaning of technology; it makes them seem important and seems to justify spending large quantities of public money on them. (Many of those who argue for increasing our ignorance are well placed to make a contribution.)

Economists have tried to explain MFP/TFP – to reduce the coefficient of ignorance. We have never been able to explain it all. (It has been difficult because we cannot do experiments.) Over the years economists have concluded it is not just a matter of technology in the narrow sense of plans on how to use resources but also covered such things as managerial performance and the speed at which innovations are taken up and adapted to local circumstances. But we have not been able to measure by how much.

More recently, a crucial feature of economic development has hit home. (It is a central notion of my Not in Narrow Seas.) There has been a shift to economic activity in the market from economic activity outside it. Women moving from the kitchen into the factory are included in the calculations, but what about the refrigerators and washing machines which reduced their household grind, making the move easier?

Or consider when in the 1860s New Zealand had the highest productivity in the world as conventionally measured. It was not that we were working smarter or using more advanced technologies then. Rather, we were moving alluvial gold in the river beds outside the market into the market economy – bank vaults. Had the effect been drawn to Solow’s attention, he would have wished he had mentioned the effect moving from outside the market to inside among the ‘any kind[s] of shift’ in his 1957 paper. But in those days, economists were not as sensitive to the resource issue in economic growth (land excepted).

Economists have never said that capital and labour were irrelevant. They are as necessary as classical orthodoxy thought they were, but in a different way. Technology (in the narrow sense of ‘plans’) has to be embedded in capital and labour. So developments in information technology are embedded in personal computers and so on – capital goods. And the developments have to be also imbedded in the skills of the persons using them.

Nor should we ignore the social technologies of how an economy is organised. They range from having a good judicial system, so that contractual arrangements run as smoothly as possible, to how workplace relations are organised.

A curious feature of economic growth is that over a long period the rate of change of New Zealand’s MFP/TFP (the residual contribution to economic growth) does not seem to have changed much. I’ve looked and looked.

Had another go with a new data base a couple of weeks ago and failed, yet again. I was looking for a slow-down in hourly labour productivity growth early this century, as posited by some economists internationally. I thought I had found a slight one but it turned out to be not statistically significant. Bother!

And so to the uncomfortable question of whether we can accelerate the rate of long-run productivity growth. Everyone has been saying that since seven decades ago when we first had reasonable measures of the rate of economic growth. Economists do it as a mantra: ‘adopt my economic policies and the economy will grow faster’. (The commentariat echoes them.) But they provide no systematic evidence that their prescriptions will work. It is more ‘trust me, I know what I am doing’, but since the prescriptions all differ whom do you trust?

The politicians’ slogan is that faster economic growth will mean we can meet the public’s demands for tax cuts and more public spending. It is easier to say this when one is opposition. In government the cruel reality is that no matter what they do, the long-term MFP/FTP growth rate chugs along much as it has for the last century.

It is difficult to identify any New Zealand government that has really changed the growth rate (with the possible exception of the neoliberal policies of the late 1980s and early 1990s which  stagnated the economy; we still have not recovered from their damage). Short-term burst, such as the upswing of a business cycle, can be identified by judicious choices of end points which may satisfy those with an ideological bent. A scientist is less able to find a significant long-term change. (A change of 0.1 or 0.2 percentage points in the growth rate is difficult to identify because of noise in the data.)

Most of the paragraphs of this column could not have been written before the systematic measurement of economic output, led by Simon Kuznets, and the resulting analysis, led by Solow. One honours him for his pioneering insights. In the study next door, Paul Samuelson changed how we thought about economics; Bob Solow changed how we thought about the economy.

He wrote with elegance and clarity – he was drawn into the social sciences by reading great novels in his adolescence. They were spliced with wit. Here are some:

    “Economists are divided between those who look at economic aggregates and those who look at the details. I belong to both sides.”

    “Everything reminds Milton [Friedman] of the money supply. Well, everything reminds me of sex, but I keep it out of my papers.”

As an economist, Solow liked formal models and mathematics. But nothing too fancy. Over-refinement reminded him of the man who knew how to “spell banana” but did not “know when to stop”.

    “Part of the job of economics is weeding out errors. That is much harder than making them, but also more fun.”

    “Why does a public discussion of economic policy so often show the abysmal ignorance of the participants?”

When Frankiln D. Roosevelt in July 1933 coined the phrase “first 100 days”, those first few months were already done and dusted. He was looking back over a start to his presidency that had seen him call Congress into urgent session, during which time it had passed 15 major new laws. While some were more successful than others, they pushed back against the Great Depression and sparked new hope and ecomic activity.

The National-ACT-New Zealand First government made much its 100 day plan, which Prime Minister Christopher Luxon has repeatedly described as “ambitious”. Luxon likes to say things, like his government will “deliver and get things done” and “work incredibly quickly”.

So as the year comes to a close and we reflect on the first stage of this new government’s life, how’s it looking so far?

Well, 24 days into its government, parliament has closed and MPs have gone on holiday for more than a month. Most of the legislative work thus far has been to repeal laws and stop things. And, many voters may be surprised to learn, most of the actual changes promised are months – if not years – away. This National-led government’s big promise, its point of difference from the previous lot, was delivery. But if the 100 Day Plan has done nothing else, it has suggested the current lot are going to struggle just as much as the last.

To be fair, a few of its actions have been prompt: The so-called “ute tax” – a subsidy for low emission vehicles funded by taxing high emission imports – will be gone on December 31. Fair Pay agreements have been repealed, effewctive December 20. The first law the government passed was repealing the Reserve Bank’s dual mandate of inflation and employment, returning it to its pre-2018 focus on inflation alone.

Sidebar: It was an odd priority, given experts tend to agree that even with a single mandate, its approach to price stability since 2018 would have been nigh identical to what it did. What’s more, this law was passed with support from New Zealand First, whose leader Winston Peters just 11 years ago introduced a private members bills demanding the opposite. Back then he was concerned about the high New Zealand dollar and attacked the Bank’s “myopic obsession” with inflation.

But – back to the 100 Day Plan – most of the promises involve large globs of smoke, mirrors and spin. Lots of promises to do something later. It looks like National’s promise to get the country back on track will be a wee way down the track.

One of the defining aspects of National’s election camapign was its heavy reliance on slogans and Luxon’s and Willis’ refusal to go off-script to discuss policy and debate ideas. They would repeat scripted lines ad nauseum. They have started in government much the same way.

It’s noteworthy that National’s two senior leaders have corporate backgrounds where “messaging” and “comms” prevail as a way to talk to “stakeholders”. No-one seems to have explained to them yet that speaking to citizens in a democracy requires a different approach.

In truth, the 100 Day Plan might be better called ‘the great undoing’. This is a Do-over government like none before. In the past, New Zeaand has been saved the curse of great pendulum swings as governments come and go. Arguably it’s one of the blessings of short, three-year terms. Parties have tended to accept the bulk of a previous government’s manifesto and moved on. Not this time.

Luxon and co have deified the previous Key government and seem to want to return us to 2015. (Which is interesting given Winston Peters was railing against it from the Opposition benches). Regardless of what you think of the Key years and what’s happened since, pendulum-swing governments are bad for a country long-term. Let’s hope the do-over approach of the sixth National government is a blip, not a trend.

So what does it want to undo, precisely? Central to its “ambitious” list of plan to stop things are removing Auckland’s regional fuel tax, repealing three waters laws, stopping work on Auckland’s light rail, repealing RMA reforms, and stopping the Lake Onslow scheme.

For all Luxon’s words about working incredibly quickly, unpacking some of these laws will eat up millions of public servants’ hours and heaps of National’s political capital in its first term.

Much like the 100 Day Plan, Nicola Willis’ mini-budget this week hints at urgency and the ghosts of mini-budgets past. But while Ruth Richardson came in with a howitzer, Willis deployed more of a bow and arrow.

Her big moves announced in her statement?  “Confirming the Government’s commitment to fully restoring interest deductibility for rental properties, with details of the phasing of this commitment to be the subject of an announcement in the New Year”.

 Oh, and, “progressing work to deliver meaningful income tax reduction in next year’s Budget” or “continuing to uphold the commitment in the ACT-National Coalition Agreement to consider the concepts of ACT’s income tax policy”. “Progressing”? “Confirming”?

The Labour-led government was not unfairly ridiculed at times for announcing announcements and failing to act. But I struggle to remember a statement from them promising to continue a commitment to consider a concept.

While the new government’s main “delivery” thus far has been slogans and promises to get round to its promised repeals next year, it has also been buying into a fistful of fights. With the health sector over smokefree legislation; with environmentalists over mining on the conservation estate; with China over AUKUS; with Maori over te reo, treaty principles and affirmative action programmes; and with KiwiRail over the Cook Strait ferries.

All of this has – within just a few weeks – prompted questions about this government’s experience and discipline, usually National’s strong points. Each of those issues could consume huge chunks of political attention and capital with very little delivery for your average voter or impact on the cost of living.

And if, for example, the three water repeal means higher rates and the tax deductibility changes mean higher house prices, the money back into people’s pockets – the centrepiece of National’s campaign – could soon disappear back out of those pockets, leaving some very aggrieved voters.

National in Opposition liked to use accuse Labour and the Greens (and New Zealand First 2017-20) of “virtue signalling”. A lot. The Child Poverty Action bill, feminism, the gender split in boardrooms, refugee policy, Healthy Homes, the offshore drilling ban… all were examples of virtue signalling, according to National. Yet look at the headlines around this government in just one month – stopping higher pay for public servants who learn te reo, promises to make English an official language and require public service agencies to have their first name in English, gender-based funding for grassroots sports, going to “war” with the media and more. The risk of distraction and chasing rabbits down holes in 2024 looom large.

As politicians up sticks and begin their summer break, the clock is still ticking on the government’s 100 Day Plan. It runs out on March 7. With so much fuss having been made about this timeframe and this government promising to be the great deliverers, voters will be waiting with interest to see come summer’s end precisely how much has been delivered.

 

The new Minister of Finance implied that Treasury’s ‘books’ were deceptive. Can’t see it myself.

I was disturbed by media reports that the new Minister of Finance, Nicola Willis, had criticised the previous Labour Government ‘for leaving the books with “nasty financial surprises” that National will have to clean up’ and that ‘after looking at the books Willis said the outgoing Labour Government had left some “nasty surprises”.’ She went on that ‘the Labour Party had left the “cupboard bare” and spent New Zealanders’ money with “pretty wild abandon” … What I’ve now learned is it’s not just that the cupboard is bare, it’s that there are snakes and snails and all sorts of things in there, nasty financial surprises that we as an incoming government are going to have to deal with.’

I do not have an exact transcript of what she said – hence the confusion of quotation marks – and it is not uncommon for an incoming minister to make extravagant claims about an outgoing government.

What disturbed me was that the new minister seemed to be saying that the Pre-election Economic and Fiscal Update (PREFU) was misleading, with the implication that the Treasury was incompetent or dishonest. She was not probably intending to do so, but ‘the books’ are the Treasury’s, not the Minister of Finance’s.

To give a context. In 1990 the incoming National Government was surprised by the fiscal situation it took over. To ensure this would not happen again, it passed the 1994 Fiscal Responsibility Act (now incorporated in the 1989 Public Finance Act), which required two reports a year on the state of the government’s finances, one at budget time (BEFU) and one half-a-year later. (The Half-Yearly Economic and Fiscal Update (HYEFU) has just been published.) Additionally, it required a PREFU to be published a few weeks before any election. (September 12 in the case of the 2023 election.)

Willis seemed to be challenging the integrity of the 2023 PREFU. Each EFU makes it very clear that it is a Treasury document. Here is what HYEFU 2023 says:

     “On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with, this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications of government decisions and other circumstances as at 23 November 2023 that were communicated to me by the Minister of Finance as required by the Public Finance Act 1989, and of other economic and fiscal information available to the Treasury as at 24 November 2023.”

Note that, as Treasury also states, HYEFU 2023 was ‘completed prior to the release of the Coalition agreements, the Government’s 100 Day Action Plan commitments and the decisions made on the Mini Budget.’ So it is really the Labour Government’s last EFU, rather than the National Coalition Government’s first EFU. (It is due in May 2024, just before the Budget.) The commentariat treated it as a dead duck, and focused on the Minister of Finance’s financial statement released at the same time.

I looked carefully at HYEFU 2023 to see whether it had changed much from PREFU 2023. Yes, there are differences but no more than normal. I am not surprised. Yes, there is a deterioration in the fiscal position between August and November 2023 but by far the most important reason is that the economy has deteriorated more than expected, which reduces government revenue. In my experience Treasury is scrupulous about following the law, although it readily acknowledges that it has to make its best judgements in applying it. Treasury macro-economists loathe getting their forecasts wrong; there would be no intention to mislead in PREFU 2023. The HYEFU economic forecasts were finalised on 6 November. Since then there has been more bad news. (I’ll review the state of the economy early next year, when I’ve had time to put in the grind.)

What then is Willis going on about? I put aside that she is trying to portray a crisis – the strategy of incoming governments in 1975, 1984, 1990 and 2008. Not all those portrayals were justified but some gave the new government the excuse to make radical changes including reneging on election promises. Undoubtedly though, Willis wants to portray the previous government as a fiscal disaster – that’s politics.

One problem she faces is that she may not have a good grasp of the ministerial challenges she faces. No matter how hard Treasury tries, there is always a bit of a fiscal shambles of things popping up unexpectedly. Cabinets never resolve all that they face each Monday morning. There were issues which the Labour Cabinet had not yet addressed when it closed down for the election campaign.

One such example may have been Kiwirail’s ambitions for the Cook Strait ferries. Willis has scotched them for being too expensive. The way she did so was unfortunate. Old Wellington hands – Willis is not among them – are too familiar with government agencies making ‘gold-plated’ claims for taxpayer funding in order to get a less ambitious project approved. The Treasury paper rejecting the proposal probably suggests alternatives.

There are also the ‘risks to the fiscal forecasts’, which take many pages in an EFU (48 pages in HYEFU 2023 compared with 19 pages of fiscal outlook). You have to be a bit of a geek to pay them much attention (I plead guilty). Many carry over from EFU to EFU, there are new ones and some have come to book in the period between. They might be deemed ‘snakes and snails’, but they can be identified if one puts in the effort.

One is left with the impression that the National Opposition did not. Willis complains that there were spending programs due to terminate which she did not know about. A bit of diligence in the Opposition Research Unit would have identified them – did they tell her? Or was the Opposition badly prepared?

I do not want to suggest that there are no fiscal problems facing the incoming government, even if it were not giving major income tax cuts. Days before the release of PREFU 2023 the then Minister of Finance, Grant Robertson, announced that most government departments were told to cut back their spending, alerting old hands to the challenges. (A few days before the election, a leaked paper reported that the Ministry of Business Innovation and Employment was reducing staffing and tightening up on expenses. Newbies reported this as though MBIE had assumed that a National-Act government would be elected and were anticipating the expenditure cuts it would impose. In retrospect, Robertson may want us to think that, but the reality is that MBIE was responding to his directions.)

As far back as I can remember, there has been Wellington-based gossip about Treasury losing its grip. There is no evidence of this in HYEFU 2023, despite what their new Minister said. In parallel, as far back as I can remember there has been a view that Oppositions are badly prepared for taking over the government.

PS. Some of the commentariat report that Willis had announced ‘expenditure cuts’ worth $7.5b up to June 2028. However, that total includes a tax hike of $2.3b from commercial depreciation becoming non-depreciable for tax purposes from 1 April 2024.  (The outgoing Labour Government went into the election with the same policy.) There are more expenditure cuts to be announced.

In his Economists in the Cold War, Alan Bollard contrasts Saburo Okita of Japan with Zhou En Lai of China to highlight a critical issue.

Saburo Okita (1914-1993) was in Manchuria (northeast China), in the port city of Darien (Chinese: Dalien) which was occupied by Japan at that time. Because they were politically unsympathetic to the increasingly militaristic occupation regime, his family moved in his teenage years back to Tokyo, where he graduated in electrical engineering and joined the civil service. During the Second World War, and despite reservations about Japan’s war policy, he was involved in managing the supplies of raw material such as coal and iron necessary for the war economy and food.

Japan lacks sufficient local supplies of many of these critical resources. One of the reasons for its territorial ambitions was to secure alternate supplies by conquest. Manchuria was a key source.

Defeated Japan was grim. Okita set up a group immediately after the war to plot the economic recovery. It met in a half-destroyed building. Many of the official records they needed were missing and they lacked even paper. Okita’s home had been bombed and he and his family had to pile in with the in-laws. He had to scrounge for potatoes and other basic food.

Bollard uses Okita’s life to describe the Japanese recovery from this misery to become one of the strongest economies in the world with Okita playing a central role in the planning and advice system, although he was never Minister of Finance.

As the economy flourished, he moved into the international arena including chairing the Pacific Economic Cooperation Council in Bangkok from 1986 to 1988.

In the course of his career, he helped develop a solution to the Japanese resource deficit which did not involve conquest and colonisation. The alternative was trade. New Zealand is a beneficiary. We were on the edge of the Greater East Asia Co-Prosperity Sphere, the creation of which was a Japanese objective in WWII. Instead, Japan is our fourth largest export market, and an integral part of the East Asian economy which New Zealand depends upon.

If a Japanese empire was not realised, neither were some of the victors’s plans. They wanted to ensure that after their defeat Japan and Germany would revert to rural economies, unable to provide the advanced technological resources to pursue modern warfare. Wiser heads (and the need to resist Communism) prevailed and today both countries are advanced economies playing an important role in the liberal international order. (On the other hand, Russia and North Korea demonstrate that less developed economies can sustain militarily aggressive intentions – at enormous cost to their populations.) This is an important lesson to be recalled if the West ‘defeats’ Russia. Putin’s claim the West wants to dismantle Russia. The West should make it clear that it wants Russia to be a part of a civilised, affluent, peaceful world. (That Japan transformed successfully might provide some optimism for such a goal.)

Okita and other Japanese economists of his time explained this international economic interdependence as ‘flying geese’. As characterised by the diagram of a flock of birds flying in a V-shaped formation, there is a leader with the rest tucked in behind it, benefiting from those in front. *

 

The flying geese model is intuitively attractive to explain the evolving pattern of East Asian development despite significant differences in resource endowments. As Bollard writes:

       “As the lead goose (Japan) grew stronger, its rising wages and growing investment moved it towards more capital intensive industry, releasing its labour intensive operations for economies further down the formation. Each economy remained outward-looking and trade-driven, with the possibility of positive spill-over effects, technology transfer, and international investment speeding the growth process.”

The model can also be applied to the development of the European economy and to the North American economy (applied to regions and not just countries). Observe too, that in long flights the lead bird will ease back and another take over. Is China doing that? (Although you cannot see it, there is a small dot at the back of the right wing of the V; that’s us – New Zealand.)

Bollard contrasts Okita with Zhou Enlai (1898-1976) who also had a turbulent life until 1949 when the Chinese Communist Party took over the governance of China, and he came second only to Mao Zedong; unlike the latter he was a stabilising force.

Okita and Zhou met on a number of occasions. Bollard’s description of a conversation in 1971 is revealing.

      “As Zhou saw it, the main purpose of economic growth was to build defence and security, and Japanese growth could drive the country back to Manchuria in search of resources. Okita had been an advocate of peace policies in Japan, and he objected to the argument, saying the purpose of Japanese growth was to give its citizens better living standards and its consumers more choice. Indeed Japan’s internationalization would likely constrain militarism. The debate continued for some hours and, while very civil, there was no agreement. Zhou’s argument, that the economy must serve strategic national interests rather than improving the material lives of citizens, had deep roots in Chinese history but also fitted Communist Party thinking in many Cold War States. What was the real role of economics? To Okita, it was consumption for individual welfare, to Zhou it was production for state security.”

The answer remains unsettled. (In contrast, the big economic question of how to organise a modern economy – getting the balance between markets and planning – is much better settled. The review of Bollard’s Economists in the Cold War which explores this is here.) You can easily identify countries which prioritise national security over their citizens’ wellbeing. Zhou’s strategy may still dominate Chinese thinking. Even though its citizens have experienced substantial rises in their material standards of living, there is a growing popular desire for their interests to be given greater weight.

It is easy to claim that Okita’s rather than Zhou’s strategy has long applied in New Zealand. Recall that during the trench warfare of the Great War – which has similarities to what is going on in today’s Ukraine – the New Zealand leadership was not nearly as ready to sacrifice its troops in the way the British military command seemed to and which appears to be the Russian approach in its Ukraine invasion. On the other hand, our commentariat often gets carried away with describing the economy as an entity which has a significance beyond that of the citizens. I am reminded of the sentiment: ‘my economic advisers tell me the economy is doing well, but I know the people are not.’

* I wish they had chosen swans rather than geese. One of the most moving moments in music is the glorious ‘swan theme’ in the final movement of the Sibelius Fifth Symphony.

Alan Bollard, formerly Treasury Secretary, Reserve Bank Governor and Chairman of APEC, has written an insightful book exploring command vs demand approaches to the economy.

The Cold War included a conflict about ideas; many were economic. Alan Bollard’s latest book Economists in the Cold War focuses on the contribution of seven economists with each one paired with another, the contrast heightening the underlying theoretical tensions, I am not going to deal with two of the chapters, important as the topics are: the struggle by the US to dominate the international economic architecture (Harry Dexter White) and the development of the strategy for nuclear conflict (John von Neumann).  The focus here on the five which are about how to organise an economy.

The Cold War started almost eighty years ago. It began in the shadow of two economic events. The first was the Great Depression, when the capitalist economies miserably failed. It occurred closer to the publication of Marx’s Das Kapital than to today. That book seemed to predict the sort of economic catastrophe which happened and promised – albeit vaguely – an alternative economy. Many economists, including Keynes, whose General Theory had yet to be fully adopted, expected another great depression after the war.

Moreover, the Soviet Union, which was based upon Marx’s vision, seemed to have ridden through the Great Depression without the same agony. (The belief was not entirely true; things had been pretty rugged there too, including the Holodomor, the great Ukrainian famine of 1932-3 in which up to 7m died in a population of about 30m. Knowledge about what was going on in other countries was not as extensive as it is today.)

The second influential event was the Second World War, in which the economic power of the West – most notably the US – was harnessed by direction from the centre rather than by market demand, as is common in a capitalist economy. The detail of the direction during the war was extraordinary; in New Zealand it extended to the length of women’s dresses.

Again admiration fo the Soviet Union loomed large. During the war, a quarter of its people were wounded or killed, including around 27m dead. It was no wonder that many in the West, uninformed about the brutal internal oppression, admired the country. As Bollard records, some economists went so far as to become Soviet spies. Others were fellow travellers. And of course others were vigorously anti-communist.

It was a reasonable question straight after the war to ask how best to organise economy. The contrast was ‘command or demand’; was it better to have an economy directed and owned by the government from the centre or would a market-driven economy of individual decisions and private ownership work better?

Bollard covers the question by describing the life histories of five economists who answered the question in various ways. In each case he contrasts his choice with another economist who took a different view.

Oskar Lange (1904-1965) was a Pole who spent a lot of time in the US following persecution in his homeland. The contrasting economist is Austrian neoliberal Friedrich Hayek (1899-1992) who was a vigorous proponent of the market economy. Lange put much thought into how to make central planning work, especially by using price signals. He had an interesting life – sad because he when he returned to Poland after the war, this subtle economics thinker found himself having to mouth Stalin’s economic nonsense.

(It had not occurred to me how many of the era’s economists whom I respect lived politically turbulent lives. Unless you were American or British, you probably had to flee on at least once. Bollard also covers their personal lives. Some of those were turbulent too.)

The German chancellor Ludwig Erhard (1897-1977) was an economist who as Minister of Economic Affairs and later as Chancellor presided over the German postwar miracle. His strategy was a social market economy which aimed to provide a liberal market environment with public/social welfare support for individuals. He is contrasted with Jean Monnet (1888-1979), was a key founder of what became the European Union. French-German tensions aside, I am not sure they were too different.

Joan Robinson (1903-1983) was based in the stability of Cambridge, England. An ‘establishment rebel’ she was the closest to a Marxist of Bollard’s seven (but recall Karl said he was not a Marxist either). I greatly admire her economics but, sadly, she often ended up endorsing some very unsavoury regimes.

She is contrasted with American Paul Samuelson (1915-2009), with whom she had a long off-and-on correspondence. (Bollard does not discuss how Samuelson is probably the twentieth-century economist, second only to Keynes, provided a theoretical answer to big question of how to organise economies. It is called the ‘neoclassical synthesis’, combining Keynesian macroeconomics with an advanced version of neoclassical microeconomics.)

I am going to leave Japanese economist Saburn Okita (1914-1993), contrasted with Chinese premier Zhou Enlai (1898-1976), for another column because they moved on to an even bigger question of the purpose of an economy. Suffice to say here, that Okita played a key role in the Japanese postwar recovery and in the wider development of the East Asian economies.

Raúl Prebisch (1901-1986) is the last in the book. Although originally Argentinian, he fled to Chile, in between a number of internationally important jobs, to experience the turmoil which followed the Pinochet coup. His challenge was whether the models for the development of rich countries were as relevant to poor countries. His thinking was influential on New Zealand’s thinking about development policy in the early 1960s. In particular he argued that primary exports faced falling prices (terms of trade) relative to manufactures, which justified measures to diversify an economy. (There is an enormous literature about this ‘unequal exchange’.)

Prebisch was right for the first three-quarters of the twentieth century but the trend reversed towards its end as manufacturing-successful East Asia became hungry for food and raw materials.

Bollard contrasts Prebisch with American Walt Rostow (1916-2003), famous for his The Stages of Economic Growth: A Non-Communist Manifesto with its notion of an economy ‘taking off’ into sustained growth. (He was also national security advisor to Lyndon Johnson.) He too was also influential in New Zealand’s thinking in the 1960s.

So who won? Unquestionably, economic organisation via the demand side of the economy is dominant in today’s affluent economies. I am not sure that we should attribute its success to economists, even if they gave us a better understanding of how market economies work. Rather, the complexities arising from the increasing diversity of choice in affluent economies can only be met by a high degree of decentralisation. I watched how east-central European economies under the Soviet yoke became increasingly – but slowly – more wealthy. Eventually, central controls became over-burdened and failed. That was a major factor in the rise and fall of the Berlin Wall and hence the end of the Cold War.

The prize to one of Bollard’s seven – if any is particularly worthy of the prize – is surely to Erhard, whose vision of the social market economy (Samuelson’s neoclassical synthesis with an integrated welfare state) dominates much of our thinking, even in those economies seduced by neoliberalism.

 

A. E. Bollard (2023) Economists in the Cold War, Oxford University Press. 384pp. ISBN: 9780192887399 (Also available as an ebook)

The coalition party agreements are mainly about returning to 2017 when National lost power. They show commonalities but also some serious divergencies.

The two coalition agreements – one National and ACT, the other National and New Zealand First – are more than policy documents. They also describe the processes of the new government. This column focuses on policy. The agreements give the impression they were negotiated separately, with National running between the two rooms. There are some common policies, some policies which with just a little cooperation could have been written jointly, and each also contains policies or sentiments that the other party – ACT or NZF – would have liked to have had in their agreement too had they known about them. But there are also differences which may lead to severe political tensions – even to a breakdown of the coalition government.

Summarising their combined 4500-odd words on policy is not easy. I set aside a number of individual policy proposals of the sort which come up on the floor of party conferences. Some are aspirational or pious, ranging from good and bad ideas which may or may not be adopted to special interest group demands. (NZF’s include detailed demands for improving the Northland region but nowhere else.) Some could have appeared on the floor of the Labour Party conference and even been adopted by its government.

(This column does not cover the fiscal – tax and spending – aspects of the agreement. An economist waits until HYEFU. However implementing the proposed tax cuts within the borrowing limits will require major expenditure cuts. The NZF agreement includes increased spending proposals, while ACT also wants to spend a bob or two.)

The dominant policies in the agreements can be summarised as a return to 2017 when National lost power. (Each agreement states that items not covered by the National manifesto are the default.)

The most prominent change is the winding back of Treaty and Cultural issues. All three parties reject co-governance and agree ‘public services should be prioritised on the basis of need, not race’. NZF directs that ‘all public service departments have their primary name in English, except for those specifically related to Māori’ (adding that it requires ‘public service departments and Crown Entities to communicate primarily in English – except those entities specifically related to Māori’; something I would support if the word ‘plain’ had been inserted before ‘English’). Both agreements abolish the Māori Health Authority. NZF also wants to replace all references in legislation to the principles of the Treaty of Waitangi with ‘specific words relating to the relevance and application of the Treaty, or repeal the references’.

ACT is more ambitious. Its manifesto proposal for a referendum is replaced by introducing ‘a Treaty Principles Bill based on existing ACT policy [sent] to a Select Committee as soon as practicable’. NZF says nothing about this. Perhaps it will support the introduction of a more moderate bill than ACT had in mind. Neither National nor NZF is committed to supporting the amended bill when it is reported back to Parliament.

All three parties want to repeal the Natural and Built Environment Act 2023 and the Spatial Planning Act 2023, returning to the Resource Management Act 1991 which, however, they want to amend.

Both agreements stop some of the big projects that Labour had under way. ACT’s is most explicit:

‘Immediately issue stop-work notices on several workstreams, including:

            – Three Waters (with assets returned to council ownership).

            – Auckland Light Rail.

            – Let’s Get Wellington Moving.

            – Income Insurance.

            – Industry Transformation Plans.

            – Lake Onslow Pumped Hydro.’

ACT also wants to revert monetary management by the Reserve Bank to the pre-2017 approach without the ‘dual mandate’ which took unemployment into account. (Most economists think that will make little difference to the actual way the RBNZ manages monetary policy.)

Both agreements continue to support the zero carbon target, the NZF one more explicitly. However they presage a change in the way it will be done. My impression is that there is a realisation in the deep bureaucracy that the current system is not working, and some changes would be desirable. A change of government enables them to obscure the source of their proposals. Greenies will be wild any way.

Another unwinding is that parties want to revert to the more judgmental 2017 approach to law and order. (The Act document has changes it wants in regard to gun laws which were tightened after the Mosque Massacres.)

There are also reversions in education and healthcare policies. Perhaps the most contentious is the proposed repealing of the Smokefree Environments and Regulated Products (Smoked Tobacco) Amendment Act 2022. Renters will find it harder.

And so such things go back. There are a number of proposals which amount to commercialisation, outsourcing and privatisation. Both agreements have proposals to reorganise immigration although it unclear whether they want more immigrants or whether they just think the current system is a shambles.

Labour laws are to be returned to their earlier status which were more pro-employer. Even so, while National has agreed with ACT to repeal the Fair Pay Agreement regime, NZF has committed National to ‘moderate increases to the minimum wage every year’.

I leave nitpickers to reconcile these and other policies. However, the contrast between the two agreements on regulation is stark ACT’s proposals for economic liberalisation are the centrepiece of its agreement. Its leader, David Seymour is to be Minister of Regulation, there is to be a new ministry and numerous proposals aim to roll back government intervention to improve ‘efficiency’ (there will be other effects). There is a commitment to pass the Regulatory Standards Act as soon as practicable. I have cautioned that an Act in its form of the 2021 Regulatory Standards Bill is unworkable. Even so, it is the one really innovative proposal in the two agreements, which are otherwise unremittingly back to 2017.

If the RSA is passed, it is likely to be watered down. Even so, to pass it requires the support of NZF. Their agreement with National proposes a number of policies which would increase regulatory interventions in a way that is anathema to ACT. Will there be a standoff?

The agreements are clear that standoffs can happen. ‘As provided for in the Cabinet Manual, the Parties can “agree to disagree” in relation to matters on which the Parties wish to maintain, in public, different positions’ and ‘no Party is obliged to support another Party’s Members’ Bills’.

It has happened before. Labour’s ambitions for its Seabed and Foreshore Act were thwarted by – yes, it was coalition partner – NZF. (The NZF agreement mentions the need to revisit the legislation – now replaced by the Marine and Coastal Area (Takutai Moana) Act 2011 – following a decision by the Court of Appeal; since Te Parti Māori is not in power the parliamentary situation may not be as fraught.)

It will require the wisdom of Solomon to find a way through some of the potential conflicts. There are commentators on the right who think there is not such wisdom in the current National leadership. Any doubts are reinforced by the mess of the forty-day negotiation which generated these two coalition agreements.

A previous column looked at Winston Peters biographically. This one takes a closer look at his record as a minister, especially his policy record.

1990-1991: Minister of Māori Affairs.

Few remember Ka Awatea as a major document on the future of Māori policy; there is not even an entry in Wikipedia. The impression is that Peters left the writing to officials as was not greatly interested in it. We shall see a repeated pattern of his not being a policy wonk.

I am not sure about Peters’ vision for Māori in New Zealand. He is proud of his Māori heritage as well as his Scottish one. (He is not fluent in te reo; English was the language in his childhood home and he was not allowed to speak Māori at his primary school.) The right wing account of Māoridom is not well articulated; attempts to explain it are drowned by cries of ‘racism’, not all of which are justified. I am confident that Peters does not support the views of the majority on the left. He has specifically rejected the He Puapua report and co-governance.

1996-1998: Treasurer (And Deputy Prime Minister)

Peters is not remembered as a great minister in charge of the Treasury; his deputy, Bill Birch, did the grunt work. I am told his approach was ‘legalistic’ rather than policy-focused. My impression is that he does not have a grasp of the technical side of economics – just the political side. His limitations are illustrated by his failed retirement scheme.

During the coalition negotiations in late 1996, Winston Peters asked me to prepare a proposal for a contributory retirement superannuation scheme as a part of NZF entering government. His one requirement was that it had to be implemented within the three years of the electoral cycle. My advice was based on the 1974 New Zealand Superannuation Scheme which had been implemented within three years with much of the work already done. Peters’ scheme – the one I advised on – was adopted as a part of the coalition agreement with National under Jim Bolger.

When Peters became Treasurer he asked Treasury to design an earnings-related contributory scheme. The available papers suggest that the officials did not look at the scheme in the coalition agreement. Instead, they latched onto Douglas’s neoliberal scheme set out in Unfinished Business.

It was dreadful scheme. Some people – more of them women – would have made contributions throughout their working life and received not an extra cent in retirement support (they would have actually got less because the Treasury proposal cut back the level of the non-contributory scheme by indexing it to prices rather than wage changes). The Treasury proposal went to a referendum in 1998; it lost heavily.

It was Peters rather than Treasury who suffered. The trashing of his pet scheme weakened his political position. Peters’ original scheme would have been popular. Michael Cullen introduced it as Kiwisaver in 2005. Woe betide any politician who tries to abandon it. (When Treasurer Peters introduce the Treasury proposal to Parliament in 1998, Cullen pointed out it was far from the scheme agreed in the coalition document.)

Shortly after his death, Cullen’s name came up in discussion with a nurse of Asian ethnicity. She became effusive because her family had used their Kiwisaver funds to purchase their home. I said I had a small role in its development – I meant ‘small’; I kept the remembrance of the 1974 Labour scheme. She thanked me three times.

Perhaps the course of politics would have been different had a ‘Kiwisaver’ type scheme been offered to the voters in 1998 instead of a neoliberal one. Perhaps the strengthened Peters would have survived as Treasurer and NZF would have returned in the 1999 election – possibly it would have joined the Labour Government.

(Almost as an aside, I recall thinking when neoliberal Jenny Shipley toppled Bolger, that ‘they are out to get Peters’, who got on very well with Jim. Peters made a tactical error which led to his downfall – he interpreted the coalition agreement legally rather than politically. But my guess is that they would have got him anyway, especially after he lost the referendum.)

2005-2008: Minister of Foreign Affairs

By all accounts Peters was a successful Minister of Foreign Affairs. He liked the job of putting New Zealand first, listened carefully to briefings, while ministry officials were comfortable with his redirection towards the Pacific and delighted about his ability to extract additional funding.

There is a revealing story on the wider policy front. In 2003 the Court of Appeal ruled that iwi might (sic) have a limited claim to interests in the foreshore and seabed. The Clark-Cullen Labour Government decided that legislation was needed rather than leaving the matter to the tortuous processes of the courts. Its preferred solution was blocked by a lack of parliamentary support. (National opted out; according to Chris Finlayson, the Key-English Attorney General, who was not in Parliament at that time, their thinking was muddled.) Labour depended on New Zealand First, whose support came, according to Michael Cullen, at a ‘heavy price’, including the loss of ‘a lot of high moral ground’.

Peters’ objection seems to have been that the original Labour proposal created a new legal principle to which, as a legal conservative, he objected. Ironically the New Zealand First shaped legislation led to the formation of the Māori Party (Te Pati Māori) – a nice example of very unintended consequences.

(Cullen thought that National’s replacement 2011 Takutai Moana Act (supervised by Finlayson) was closer to what Labour wanted in 2004 than what could be negotiated with New Zealand First. Even so, when that bill was passed, Labour voted against it. The Court of Appeal has just raised serious objections to the Takutai Moana Act which will have to be sorted out by the Luxon Government. Peters will be involved again.)

2017-2020: Minister of Foreign Affairs (and Deputy Prime Minister)

Ministry officials were so pleased to get back Peters after the harrowing experience of his predecessor, National’s Murray McCully (after a brief interregnum by Gerry Brownlee). Labour’s Nania Mahuta, who took over after him, was not liked as much either.

An authoritative history of the first term of the Ardern-led Government is yet to be published. I shan’t be surprised if it shows Peters’ experience was a key element in stabilising the new government which consisted largely of ministerial neophytes. However, on his account, there seems to have been a breakdown in consultation and trust by 2020, presumably as the parties headed towards the election. Will this pattern be repeated in the Luxon-led government from 2023?

In summary, generally Peters has been a reasonable but not outstanding minister showing very good political skills but mediocre policy ones.

The picture the commentariat presents of Winston Peters is a misleading caricature. If we don’t try to understand the complexity of the man, we cannot understand what is going on in New Zealand politics.

Winston Peters has been active in New Zealand politics longer than any other current politician. He stood for Northern Māori in 1975 and was first elected to Parliament in 1979, 44 years ago before two-thirds of the 2023 electors had ever voted. Sure, he has been out of parliament for nine of those years, but he is the longest sitting MP and one of the most experienced cabinet ministers. Unfortunately, the commentariat description of him is shallow and incomplete. There is more substance to the politician than it allows.

Wynston (sic) Raymond Peters was born in Whangarei in 1945, the middle child of a family of eleven (six of whom got to university) and grew up on a Northland farm. His father was Māori (primarily Ngāti Wai but also of Ngāti Hine and Te Waiariki). His mother was of Scottish ancestry. The dairy farm must have been pretty marginal as his father also had to work long hours as a truck driver and construction worker. In Not in Narrow Seas I described such farming as ‘subsistence’ and pointed out it was common among Māori in the first part of the twentieth century.

Peters once remarked that the welfare state – presumably referring the high quality publically provided education, health care and social support – had not reached Northland when he was growing up, which may explain why, despite his abilities, rather than going to university, he first studied at the Auckland Teachers’ Training College, going out to teach. He then went on to work on blast-furnaces and tunnels in Australia.

Returning to Auckland, he studied history, politics and law, graduating LLB and BA, then going to work as a lawyer at Russell McVeagh where he represented his iwi in a land claim. (Earlier, he captained the Auckland Māori Rugby team.)

Had one been told at this stage in his life that Peters would have a political career, you might have predicted that it would have been in the Labour Party. However, during his university years, Peters joined the National Party. In his 1979 maiden speech in Parliament he explained:

     ‘I believe the most effective government the country can have is one that believes in free enterprise, encourages hard work, keeps control and regulation to a minimum, carefully controls State spending, and sets taxation rates that are an incentive, not a disincentive, to work.’

The typical ideology of a new National MP. More revealingly he went on:

     ‘By sheer hard work, beginning in the Depression, my father, with the help of his family, developed a dairy farm. Many such families exist in New Zealand – families who have worked together, who help one another, who serve the community voluntarily, who stand up for their children when they get into difficulties, and who help their members to achieve their goals.’

It was his small farming background which frames his thinking. As for ‘working-class Tories’, Peters thinks that success derives principally from hard work and personal discipline. Such Tories can be suspicious of welfare because it tends to sap initiative. While they are often sympathetic to those in difficulty, they have an antipathy to collective action.

Peters stood as National candidate in Northen Māori in 1975. He first came to national prominence when in the 1978 election campaign the National Party TV advertisements had him interviewing party-leader, Rob Muldoon. After a recount, he won the Hunua electorate in 1979 (from Malcolm Douglas, the brother of Roger). He lost the seat in 1981, and won Tauranga in 1984. He was a real scrapper in opposition and was made Minister of Māori Affairs in Jim Bolger’s 1990 cabinet when he was 45.

At this point life in his life there was a reasonable prospect of him becoming the next National Prime Minister, when the ten-years-older Bolger moved on. Within two years that possibility had turned to custard. He had been sacked from Cabinet and left National to establish New Zealand First.

The conventional wisdom is that he wasn’t a team player. Perhaps. In the ten MMP elections New Zealand First has collected an average of 159,000 votes, compared to 33,000 won by Peter Dunne’s parties and the 90,000 Jim Anderton’s parties won when they stood. (ACT’s score was 106,000; NZF beat them in seven of the ten elections.) You don’t get that support based only on charisma. (A longer account would explore the various ways NZF was handicapped compared to these other parties.)

The real story of the falling out is more complex. Peters loathes neoliberalism which was rampant in the early 1990s National Government. In his 2017 speech anointing Labour as the main party of next government, Peters said ‘[f]ar too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe. And they are not all wrong. That is why we believe that capitalism must regain its responsible – its human face. That perception has influenced our negotiations.’ Earlier he had commented, ‘[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.’

In turn, the neoliberals loathe Peters, even commissioning a biography Winston First, which was only the first of a number of character assassinations. Peters comes from the Muldoon wing of the National Party (as did Bolger). Again the public venom towards Muldoon – of what he was doing (in extremely difficult circumstances I should add) and his personality – has prevented a cool analysis of the underlying politics.

Peters has never been forgiven by the conventional wisdom for publicly walking out on his party. (Act members did so more sneakily.) I am not sure how widely his class origins or his Māori ones are held against him. It is too easy to dismiss him as a populis and ignore the deeper politician.

The sneering at Peters by conventional observers is the reason they so frequently fail to predict  his behaviour – not that failed predictions challenge their confidence in their predictions.

Peters is not without his flaws – remind me of a politician who is perfect. I am a New Zealand nationalist but I, with many others, found his occasional outbreaks of xenophobia unacceptable. He has not been the only politician to flirt with the anti-vaxxers, dog whistling support to them while arguing that the vaccination campaign could have been more sensitively managed. One of his challenges has been that without a secure electoral seat he is forced to seek support from all sorts of weirdos when attempting to get across the threshold for party list seats. I wish too his relations with the media were not so belligerent, although their responses are partly to blame.

I wrote this column as I thought through the implications for the post-2023 government. The tensions between the neoliberals and the supporters of ‘responsible capitalism’ within the National Party are great. I am told there are senior members in the National caucus on speed-dial to Ruth Richardson; presumably some are on speed-dial to Bill English. The tensions will be intensified by the associate parties. While they may agree on opposing the left’s wokeness, they are deeply opposed on economic policy. Governments are always tense coalitions of conflicting and confusing ideologies and personal ambition. This one may be unusually so.

A later column will evaluate Peters as a minister.

Did you think the incoming government promised to extend bowel screening to 50-59 year olds? The promise was more limited – and more feasible.

National’s Manifesto promised:

Bowel cancer is the second highest cause of cancer death in New Zealand, while we have one of the highest rates of bowel cancer in the world. More than 3,000 people are diagnosed with bowel cancer each year and over 1,200 will die from the disease. Screening is one of the most effective ways to find bowel cancer early before it spreads. The National Bowel Screening Programme is available for eligible men and women aged 60 to 74. National will immediately commission work on a business case for progressively lowering the bowel cancer screening age to 50.

A ‘business case’ is an investigation of whether and how a particular project should be undertaken. The commercialist jargon arrived with neoliberalism and often has the implication that the project will go ahead anyway although sometimes business cases conclude that proceeding may not make sense – which does not always inhibit enthusiasts.

The bowel screening program is separate from what happens to a patient with symptoms (which I’ve listed at the end), who is referred by a general practitioner to a hospital gastroenterologist. This is not confined to any particular age group; there is evidence of increasing rates of bowel cancer among those under the age of 50.

Whatever the GP’s conclusion, the specialist makes a separate assessment and may decline to proceed. It’s a clinical judgement so they may make the wrong decision – which may be lethal for the patient. But I have heard GPs suggesting that a particular specialist is rejecting too many. Perhaps they are overwhelmed with referrals but I have heard the claim that they may be holding back in order to meet screening targets (referrals are not included in the targets). There are some well-documented cases where the patient and their families were badly let down by the system.

A referred patient judged vulnerable gets a physical investigation (hopefully without too long a wait). The most common investigation involves a colonoscopy in which an endoscope inserted up the rectum. (There are other means but this account simplifies to get the essence of the issue.) They don’t look just for signs of cancer but also for bowel ‘polyps’ which can potentially turn cancerous, which are then excised – so the investigation is not just about identifying cancer but preventing it. (There is an analogy here with cervical screening, which is also concerned with precancerous conditions.)

Aside from the resources, the inconvenience and the time involvement of the procedure it is also necessary for the patient to first purge the bowel of any faeces which is not a pleasant experience – but neither is bowel cancer.

I’ve just described what happens if you go to your doctor. A bowel screening program is the other way around. The medical system reaches out to you to find out whether you should go on to a colonoscopy.

Designing an effective screening program is not easy. It took almost a decade to get the cervical screening program fully running. Today its success is evident in the falling rates of the incidence of and mortality from cervical cancer.

Indicative of the challenges, the national bowel screening program was rolled out between July 2017 and May 2022 preceded by a pilot program in the Waitemata DHB area which began in November 2011. Pilots are necessary to design an effective system, particularly as success depends on public co-operation on matters which are intimate, and where cultural differences may be significant.

Initially the intention was to follow the international recommended standard of screening all those in the 50 to 74 age group. The Waitemata pilot did that but the national program was restricted to 60 to 74 age group and the sensitivity of the test was decreased.

The reason for the beginning age of 60 being higher than recommended one of 50 years, for most of the population, is because it was judged that we simply did not have the resources – the skilled workers and facilities – to cover everyone. (However, for Maori and Pasifika the age of eligibility is 50 because bowel cancer occurs earlier among those ethnic groups.) Resource limitations are the reason why the 2023 manifesto promise is only for a ‘business case’ for lowering the age and not for immediate implementation.

Faced with the shortage the business case could politely say ‘I am sorry Minister, but no’ or ‘not for now’. More likely they will look at whether we can obtain more gastroenterologists, the main bottleneck. It takes years to train one. Could we obtain more overseas? Other possibilities would be to use simpler but not as effective investigating alternatives instead of a colonoscopy, which may be better than doing nothing but are more likely to miss some cases. Apparently some of the alternatives can be applied by less well-trained paramedics and GPs (but we are short of the latter too).

I would hope, too, that the business case looks at the question of GP referrals of symptomatic patients. I would like to think the grumblings I hear refer only to very limited instances. Perhaps not.

These sort of evaluations of medical treatments are of intrinsic interest to an economist. Over the years I have contributed to a number, always working with members of the medical profession who know far more than I ever shall about the medical issues. But they usually require assistance in thinking through the resource implications – which is not just having a plausible case to get Treasury to cough up the cash.

I thought it also useful to draw attention to the complexities of implementing a politician’s promises or popular demands. You are going to be disappointed because once again many manifesto promises got fudged in the heat of the campaign.

Don’t be too tough on them. In this case the Labour Party made a similar promise; perhaps it was softer because they understood the challenges better. From the longer term perspective, this is another step towards markedly reducing bowel cancer.

Appendix: Bowel Cancer Symptoms

Bowel Cancer New Zealand advises

‘Being aware of the symptoms is the first step you can take to prevent bowel cancer. Symptoms may come and go so don’t wait if you have any of these concerns, no matter what age you are. Symptoms may include:

     Bleeding from the bottom (rectal bleeding)

     Change of bowel motions/habits that come and go over several weeks

     Anaemia

     Severe persistent or periodic abdominal pain

     A lump or mass in the abdomen

     Tiredness and loss of weight for no obvious reason

If you have any of these symptoms, or you are concerned about your bowel health, see your GP right away.’

There is also a genetic component to bowel cancer so family history of it is another factor taken into consideration.

(This column has been checked out by medical specialists.)

There is a view that the world economy is entering a period of higher inflation and higher nominal interest rates, but who knows? Presumably New Zealand has to follow.

If you know everything about the inflation process, and are totally committed to central banks targeting inflation at 2 percent p.a., then there is no need to read this column. I am afraid its writer is not nearly as committed as you. Indeed, all this column offers is some guidance about an evolving discussion among overseas economists which is challenging past certainties.

Those certainties were that, some exceptional circumstances aside, inflation was a monetary phenomenon only, and that central banks should be able to reduce it to any desired level – usually set as consumer prices rising about 2 percent p.a. – although their actions would cause some short-term pain. The details of the analysis – some of which are often quite subtle – are rarely mentioned.

This view is summarised by Friedman’s alleged statement that ‘inflation is always and everywhere a monetary phenomenon’, which has become a mantra. What he (and his wife Rose) actually said was ‘substantial inflation is always and everywhere a monetary phenomenon.’ The Friedman analysis tells us little about what is happening when the inflation level is low – like at 2 percent p.a..

There is a concern that high inflation feeds on itself and will spiral out of control. However this seems to apply when the inflation is above 7 percent p.a. or so. The 2 to 4 range we talk about is chosen in the light of this conclusion. Zero inflation is not commonly the target because there is resistance to lowering prices in many markets. Zero inflation reduces the price flexibility necessary for a vibrant market economy. (Another concern is that the measured indexes of price changes do not align well, and that, especially in a service-dominated economy, they may not measure quality changes perfectly.)

Today, there are murmurings among some reputable economists against this conventional wisdom on the causes of and policy responses to inflation. For instance, the just published annual report of the United Nations Conference on Trade and Development said ‘central bankers should relax their 2 per cent inflation target and assume a wider stabilising role’. Of course, any single instance can be discounted as eccentric and I have yet to see a comprehensive account of the numerous, and not always well focussed, murmurings. Hence this very cautious column.

In practice what is likely to happen is that many central banks will not pursue the 2 percent p.a. target as vigorously as they have in the past. Perhaps they will tacitly think of a 3 or even 4 percent p.a. as an acceptable level, while continuing to talk up the conventional wisdom of 2 percent p.a.. One overseas commentator, the respected Gillian Tett, said ‘this strategy also smacks of burgeoning hypocrisy – and, most importantly, a whiff of impotence’.

I guess most of us can live with some hypocrisy; we have for years in many fields of public endeavour. But the ‘impotence’ signals what I have described as the ‘murmurings’. One danger of ignoring them is a lot of chest beating by central bankers and their acolyte commentariat with much pain added in the economy but without any gain.

What does this mean for New Zealand? I leave you to decide whether the Reserve Bank will line up with the burgeoning hypocrites or the impotent chest-beaters. The reality is whichever, and whatever the rhetoric, our interest rates are going to rise in the medium term if those in our major sources of overseas finance do. (There are various plausible assumptions in here, including about the exchange rate track.)

The expectation is that nominal annual interest rates will be rising by another couple of percentage points in the near future, although whether the effective inflation rate is also expected to increase by the same amount is not clear. My tendency is to assume that real interest rates are determined by factors outside a central bank’s control – even when the bank is not impotent.

I see real interest rates as reflecting growth prospects. If the world – or at least the rich economies which offer some security to investors – is entering a period of secular stagnation (another murmuring), then there are not good investment opportunities and interest rates remain low. (There is, of course, speculation on financial assets but that involves large wins offset by large losses; which side are you on?)

So, as best as I can understand, there is an expectation that nominal interest rates are going to remain high and may even increase, while prices are also going to be tracking above the 2 percent p.a. target. My guess is that real interest rates are not going to rise in the medium term.

That does not seem to be too bad a scenario, once one is not over-committed to price stability, does it? Except high nominal interest rates are tough on those who hold mortgages and cannot easily turn the offsetting rising housing capital gains into income for spending. (On the other hand, those depending on income from interest investments may seem better off, although the income tax regime claws a lot of that back.) As a consequence, the current grumpiness of mortgage holders is likely to continue.

Meanwhile the public commentary will lambast the government or the RBNZ (and usually both) for the bedding in of a higher interest-rate regime, thereby combining hypocrisy with impotence.