Kiwi News and Views

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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