Kiwi News and Views

Are we evaluating the economy on the right criteria? Perhaps we should be paying more attention to rising overseas debt.

The commentariat’s announcement last week that the New Zealand economy was in an ‘official recession’ by March 2023 – two quarters of output/GDP decline – was greeted with white faces by officials in the Reserve Bank and Treasury. There was queuing for the lavatories; some of the forecasters handed in their resignations to the Minister of Finance; one or two tested the windows to see whether they could jump out.

OF COURSE NOT. The officials would have been puzzled by the term ‘official recession’, since neither institution nor Statistics New Zealand (SNZ) use it. Later the commentariat changed the term to ‘technical recession’; I doubt any serious economist has the foggiest idea what a ‘non-technical recession’ is.

Instead, like me, the officials would have turned to their forecasts. The Treasury quarterly track in their Budget Economic and Fiscal Update (BEFU) forecast had a March 2023 increase of 0.3 percent instead of the 0.1 percent fall, so the economy appears to be tracking lower than they expected.

However, there is measurement error. One source of the error is that numbers inevitably bump around in a small economy (not to mention the complications from Easter being a moveable feast); another is that in order to publish the data early enough some, of the data input are estimates which will be updated when better figures come in. Based on the evidence of recent revisions, the March quarter could turn out to be mildly positive.

Unquestionably the economy is neither booming nor troughing; the cautious judgement – unlikely to be headlined by the media – is that the economy is flat or stagnating. If performance is measured by per capita output, the fall is somewhat larger since population has increased by about 1 percent in the two quarters.

Perhaps more important about the SNZ release was the contracting industries. Because of quarterly measurement and volatility, I looked at the year-on-year change. Negative growth is largely confined to agriculture, forestry, and fishing, mining and manufacturing – the tradeable sectors. That is not really good news because, some services such as tourism (which is not doing very well either) aside , they are the main contributors to foreign exchange earning and saving (import substitution).

I imagine there was a vigorous discussion within the Reserve Bank and Treasury between those who thought the data indicated the economy was contracting faster than expected, those who thought it was contracting earlier than expected, and the wait-and see-faction (which I probably would have belonged to). Some of the discussion would have been about the extent to which the RBNZ’s measures were working – perhaps faster than expected.

There may well have been more discussion in informed quarters on the previous day’s SNZ release on the balance of payments. It reported that in the year ended 31 December 2022 the current account deficit of $34.4 billion (9.0 percent of GDP) compared to $24.2 billion in the year ended 31 March 2022. It is the biggest deficit for the 20 years that SNZ reported.

SNZ attributed the main components of the deficit to a $6.4 billion widening of the goods deficit and a $2.2 billion widening of the primary income deficit. The primary income deficit indicates that New Zealand investors earned less overseas than overseas investors earned from New Zealand.

The above has focused on sectoral flows. Combining them, last year we borrowed more than in any year for two decades. Our net international liabilities have been rising.

Back to the BEFU forecast. There are some complications in interpreting their figures, but my reading is that the current account deficit is bigger than Treasury was forecasting – more than one could explain by data problems.

That means that in various places in the economy, sectors and households are borrowing to sustain their expenditures. We do not have the comprehensive investment and savings account to identify exactly where. We know that some of the borrowing is in the public sector, but that is only a partial explanation. Some will be for productive investment, some for residential housing purchases, and probably there are households who are borrowing or running down their savings.

Part of the worry has to be that with the economy stagnant or depressed, one might expect the savings deficit to increase as the economy begins expanding again – perhaps in early 2024.

However, as I worked through the data I was struck by the SNZ graph which showed the net international investment position – how much we owe overseas (net). We owed $90b odd, in March 2003; as we borrowed more, the debt increased to $160b just before the Global Financial Crisis. After that shock the overseas debt stabilised and was $150b in March 2018. Since then, it has begun increasing again and is about $190b today. (There was some recovery in 2021. COVID?)

It is all very well saying that most of this debt is private and not a matter for public policy. We saw how in the GFC, the private debt of the commercial banks became a public concern. I have no doubt that at our next credit rating review, officials will be pressed by the credit rating agencies. The resulting rating guides the international investors who are lending to us. If the officials don’t have a satisfactory response, the interest rates at which we borrow internationally will be higher, including feeding through to those on residential mortgages.

One of the lessons from New Zealand’s economic history is that our big economic crises have usually been associated with our overseas debt. Of course, I may be wrong next time; the ostriches do not expect another major crisis here or globally. But it seems to me that the debt level issue is far more important than the commentariat wittering away about whether we are in a recession, be it ‘official’, ‘technical’ or just an old-fashioned downturn.

The ACT party election manifesto will propose to introduce a Regulatory Standards Act to set a higher bar for new regulation, and test regulations against the key principles of the Regulatory Standards Act.

To make my position clear I have had doubts, going back to Muldoon’s time in the 1970s, about the casual way we introduce regulations. Since then we have made a number of improvements to how they are introduced. But I am uneasy about the proposed legislation; at the very least, I think it requires a wide public debate before it is enacted.

We know roughly the content of what legislation ACT has in mind because in 2021 it introduced a Regulatory Standards Bill to Parliament – it did not get past the first reading. It said its purpose was to improve the quality of Acts of Parliament and other kinds of legislation by

‘(a) specifying principles of responsible regulation that apply to new legislation and, over time, to all legislation; and

‘(b) requiring those proposing new legislation to state whether the legislation is compatible with those principles and, if not, the reasons for the incompatibility; and

‘(c) granting courts the power to declare legislation to be incompatible with those principles.’

The heart of the proposal is the ‘principles of responsible regulation’. Perhaps the most troubling is principle (c) which reads that legislation (or regulation)

should not take or impair, or authorise the taking or impairment of, property without the consent of the owner unless

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

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

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

Let me explain by example. When in 2006, the Government announced it would force Telecom to unbundle its operations separating the copper network from the ‘value-added’ services it delivered over the network, the market capitalisation of Telecom fell by about $3 billion; Telecom shareholders had their property (the shares) ‘impaired’ by that amount.

It is not difficult to favour principle c(i). Telecom was a monopoly, as a consequence of the botched privatisation in 1989 which did not go through a select committee while the cabinet committee did not even have a paper reviewing the regulatory (i.e. monopoly) issues the privatisation raised. The purchasers of the business made big monopoly profits. However, Telecom was unable to work out how to do a commercial broadband roll-out, and New Zealand was internationally way behind in electronic connectivity.

A main purpose of the separation was to improve that connectivity. Chorus – which evolved from the Telecom network – together with a lot of government funding and some competition has got our network up to speed. So much so, you think of what is provided today as normal. But reflect how much more difficult the Covid lockdowns would have been had we still had the Telecom network. Working from home would be a joke. So we may take it that the separation of Telecom was in the public interest if it was necessary for the broadband roll out.

The downside for the holders of Telecom shares was that having lost its monopoly, their company would not be as profitable. That is why the share price fell so dramatically. Here is where principle c(ii) applies. Under the Regulatory Standards Bill the government would have had to compensate the shareholder for their $3b loss.

It didn’t. Should it have compensated? At which point the argument gets tortuous.

You could say that the shareholders did not deserve their monopoly profits. That may be true for the first purchasers of the privatised company, as they used its market power to extract higher prices (often with poor services) from consumers. But most sold their shares at favourable prices, so many of the 2006 shareholders paid a higher price for their holdings because the monopoly returns were built into the price of the shares they bought.

n the other hand, you could argue that they should have bought into the company knowing there was regulatory risk – that at any time the government could change the regulatory framework which might be detrimental to their share value. Certainly, the Labour Government had signalled that in 1999 it established a review of the industry.

You might argue that regulatory risk is an integral part of a market economy. Higher profit rates partly reflect this. However, there are economies in which that risk is so high, that investment and innovation are distorted and those economies function poorly, often with low formal employment and negligible economic growth.

The Regulatory Standards Bill cuts through this complex argument by setting a standard that any change in the regulatory framework should result in anyone who suffers being compensated. I am not sure how pervasive the principle is intended to be. For instance, would those who suffer from the introduction of a capital gains tax or a higher income tax rates have to be compensated?

As I understand it, the bill does not require the compensation in regard to parliamentary statutes. Rather, the courts could declare that principle c(ii) was infringed but the government could still go ahead with the policy. The Bill of Rights Act works like this. The effect of the principle is to give property rights a similar status to human rights.

Much of the literature goes back to a provision in the US Bill of Rights which is an integral part of their constitution. The Fifth Amendment includes that no person ‘shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.’

At first, the last part was concerned about the government taking land without paying for it, but over the years economists and lawyers realised that the notion of ‘property’ could apply to many other things. There has been an ongoing discussion about the application of the notion. Some US states have passed related legislation. A particular pressure has been from neoliberals for it would reduce the range of interventions available to a government.

You can get a sense of this by imagining the principle applying in the past. I leave others to describe what might have happened when the government was interfering with Maori land rights. But suppose it had applied in 1984 when Muldoon left office. Virtually every regulatory change made since then infringed principle c(ii) in regard to someone or some institution. For instance, unions would have a grievance from the Employment Contracts Act, as would have had many workers. Perhaps it would not matter so much if Parliament set out the change in statute but most such statutes require supplementary regulations. Social security benefits are set under regulation.

An irony is that some of the advocates of a regulatory standards act were closely involved in those regulatory changes. They were acting in good faith then, if breaching the principles they now want to enact.

My view of the post-1984 regulatory changes is mixed. Some I supported, some I opposed, some I was uncomfortable with. (I think a degree of regulatory risk is inevitable in a thriving modern economy, but that it should not be excessive.)

I was, and am, particularly concerned with the massive change to the income distribution. (We don’t have data to tell us what happened to the wealth distribution.) In particular child poverty about doubled, while the rich had marked increases in their income (those on middle incomes were worse off too).

The effect of implementing a regulatory standards act would be to consolidate the existing income distribution, stalling the government from changing it. Do we want to do that? What is special about the current income distribution? Why not the 1984 distribution, or any other year you might choose?

There may be two caveats to the proposal. First, the courts would only be able to declare a legislated change was against the principles of the act; they could only strike down changes under regulation. Do I trust lawyers and judges to have a sophisticated understanding of how such economic regulation works? Do I trust economists?

But second, the 2021 Regulatory Standards Bill had a provision that it would not come into force unless it was endorsed by a majority in a referendum. I don’t know whether ACT still has that provision in mind. It might argue that ACT’s election to government (when that occurs) is such a referendum, but it is likely to have only 10 percent or so of the vote, which hardly constitutes a majority.

I regret that Parliament did not send the 2021 Regulatory Standards Bill to a select committee where these issues could have been properly debated. Many of the brief contributions during its first reading were hardly coherent. We really need a proper discussion on ACT’s proposal before it gets into office and tries to implement it.

PS. I have not covered principle c(iii) here because of space. It seems to imply that the beneficiaries from the detriment may have to be taxed to compensate those who suffer detriment.

A canter through some of the issues facing tax policies.

The Treasury experienced vigorous internal debates before Rogernomics. One was over the purpose of taxes. Eventually, a senior economist, notorious for his common sense, settled it. There it is in the 1984 Economic Management: ‘The purpose of of any tax system is to raise revenue.’ (Of course there are other purposes of taxation such as redistribution and changing behaviour – the Treasury debate had substance.)

Fair enough; the level of taxation is the main determinant of the balance between community and private spending. There is a strong right-wing lobby arguing taxes should be lower, which means lower government spending – more private, less community. That is its political judgement, although I wish its advocates would not contradict themselves by pointing out failures of the public sector arising from inadequate funding.

Of course there are inefficiencies in government spending (as there are in private spending). Most are like the fat in prime steak: difficult to get at without destroying the texture of the meat. Even so, there is a view that this government has been sloppy over monitoring the effectiveness of its spending, but whether it is that Treasury is not doing its job or whether cabinet is ignoring it is unclear.

There are programs which might be abandoned, but usually the advocates of the cutting ignore the consequences on people. I was heartened by ACT, who when opposing free prescriptions – I don’t – went on to say the funds could be better spent in reducing GP charges – I hope they remember the tradeoff when they get into power.

What strikes me is how feeble left-wing advocacy has been in contrast to the right-wing message. The dominant rhetoric is for tax cuts; there is never the same clamour that it means public expenditure cuts too. Perhaps the left’s failure explains Labour’s unwillingness to contemplate new taxes.

The case for the taxes is not well made. Here follow some notes.

Like the Treasury, the Reserve Bank, the IMF and the OECD, I support a (real) capital gains tax (while acknowledging it is administratively difficult). The concern is that the tax system is currently distorting investment decisions. I’d favour using the revenue from a capital gains tax to reduce tax rates on interest income; we should not be taxing interest’s inflation component.

I would apply the capital gains tax to second houses and very expensive first houses – say, those worth more than twice the price of an average New Zealand house. They are distorting investment too.

When I looked at wealth taxes back in the 1970s, I concluded that they were really a requirement that the rich should get a higher nominal return on their investments than others to get the same after-tax return. I am not uncomfortable with that proposition (except I concluded that income from assets on which wealth tax was levied should not also be taxed). Historically, it was common to tax investment income differently from labour income; presumably the economic logic was that the supply conditions are sufficiently different. An important effect of a wealth tax is that it would cover assets which do not earn taxable income such as houses and yachts. (Administering a wealth tax is not simple.)

When we had inheritance taxes, I supported a lifetime capital accumulation tax which is a progressive tax (with a substantial exemption) based on transfers – estates and gifts – over an individual’s lifetime instead of estate duty. Its effect encourages a wider spread of wealth since the rich can reduce their tax burden by sharing their wealth around, making wealth ownership less unequal. Estate duty was abandoned by Ruth Richardson in 1992, partly for ideological reasons but also because Queensland had already abandoned it, so one could escape death duties by migrating across the Tasman. The revenue loss was made up by reducing the state support for those in residential care.

I agree with the proposed change on taxing trusts, aligning their tax rates with the top income rate to reduce tax avoidance. However, I would treat trusts similar to corporations, where the taxation is essentially a withholding tax, so that New Zealanders who receive disbursements from a trust are not taxed, while those who pay below the tax rate would get some tax remission.

There is a fashion – even in right-wing circles – to argue for a land tax on the basis that land is immobile while labour and investment can avoid taxation by going overseas. However, most of the discussion I have seen does not cover the impact on the farm sector, which remains a key element in New Zealand’s prosperity. The proposal is usually dismissed because we already have a kind of land tax in local authority rates.

A minor issue in terms of revenue, but important politically, is that non-residents pay income tax only on their New Zealand income. (A non-resident is someone whose permanent place of abode is here or who spends not more than 183 days a year in New Zealand.) That seems sensible, except I would restrict the notion of ‘non-doms’ (not domiciled here) also to those who do not participate in political life in New Zealand by voting or funding political lobbying. Taxation is the price of citizenship.

(While chasing up the nuances, I discovered that the IRD made special provision for the non-doms who were forced to overstay their 183 days because of the COVID lockdowns. On the other hand, the MSD made no similar provision for New Zealand Superannuitants trapped overseas during the lockdown. I leave others to explain the different treatment.)

I like the proposal to have an income exemption from income tax. The exemption was removed in the 1970s because there was no GST. When GST was introduced in the 1980s, the income exemption should have reintroduced but the priority was reducing taxes on the rich so the poor were forgotten. Introducing an income exemption is very expensive and almost certainly requires higher taxes elsewhere. Even so, when consideration is given to the next round of income tax cuts, consideration could be given to reducing the bottom rate (currently 10.5%). The effect of a 1 percentage reduction would be to give almost everyone a $2.70 a week reduction, peanuts to the rich but much appreciated by the poorest. (It would cost about $500m p.a.)

There are other taxes we might consider. I am comfortable with indirect taxes which reconcile private behaviour with the public good, as we do in the case of alcohol and tobacco. I am not quite so convinced of the effectiveness of a sugar tax. Our greenhouse emissions strategy needs a total overhaul; it needs to fund the retreat from the coast because of sea-level rising and making infrastructure more robust to storms. There is also a role for user-group pays taxes where it is not easy to charge for individual behaviour. An example is the road taxes to pay for road maintenance and extensions. (Proposals for charging motorists individually go back at least 60 years but, except in special cases, implementation has proved impractical.) I am not unsympathetic to a financial transactions tax (a.k.a. Tobin tax) as a substitute for the sector not paying GST. But we should wait for others to implement it first, in order to reduce avoidance. It will, however, not generate the enormous revenue its proponents claim, since the financial sector will be smart enough to find (legal) ways to avoid paying, demonstrating that perhaps they are smarter than the FTT’s proponents.

This column has been about getting the tax structure right rather than the levels which shape the fairness of the system. It is no secret that I am concerned with child poverty. That involves a better system of child support than the current Working for Families.

This canter though some of the taxation possibilities indicates some of the complexities which the general public discussion tends to overlook. I have been explicit about my own values. Yours may be quite different. But I hope this column contributes to a public discussion which is sober and rational – rather than uninformed and hysterical – despite our differences.

The Chatham Islands flag waves above the New Zealand one. Perhaps the Chathams offer insights on to how to govern New Zealand better.

It is said that our first minister of regional development – in the early 1970s – claimed that he wanted all our regions to have above average incomes. Duh! You would expect that there would be some variation in regional incomes. They are probably not large (partly because ours is a small country). They are not measured but we do have estimates of per capita regional domestic production (similar to GDP) which in March Year Ending 2022 ranged from 17 percent above average for the Wellington Region to 34 percent below for Northland. Because of income tax and social security benefits, the income range will be narrower. (Another factor which narrows the income range is that some of the profits of a region will go elsewhere; for instance Taranaki does well on the GDP measure but much of its profits from its hydrocarbon resources do not stay in the province.)

Should we worry about these disparities? There is a simple answer if the disparities arise out of central government prioritising the richer regions over others, as it often does with its infrastructural spending. But what if, for any of a number of reasons, the region is less productive on average?

One could argue that this is a question of fairness to be resolved by the tax and benefit system. However, that ignores the effects on social structure. People tend to migrate out of low productivity regions because there are fewer opportunities and poorer pay. That means that those left have to struggle with the costs of infrastructure, civic amenities, education and health services spread across fewer people, which makes them more expensive on a per capita basis and more limited, with lower quality. The effect is compounded by those more likely to migrate being at the younger end of working age, which undermines the local tax base as well as the social structure and balance.

(A friend recently wondered whether it was ‘racist’ to observe that our two lowest productivity regions – Northland and Gisborne – are more Māori. It is nothing to do with race. Māori are more likely to live in their rohe, while non-Māori are less likely to be attracted to low productivity regions.)

These meditations form a background to Hugh Rennie’s recently published Chathams Resurgent: How the Islanders Overcame 150 Years of Misrule. Rennie, a greatly respected lawyer, has connections to the Chathams going back almost 60 years to when he began to give legal advice to the Chatham Island Council. His book focuses on constitutional issues and gives little room to environmental and conservation history, fraught Moriori-Māori relations, or economic development. Constitutional issues tend to be a bit dry and, so, initially is the book. Don’t let that put you off; once it gets to the postwar era it is a fascinating read.

At the heart of the problem is that the Chatham Islands are an anomaly – some 0.3 percent of New Zealand’s land area and 0.02 percent of its population sitting 800kms plus to its east. (For the record, we are 0.2 percent of the world’s land area, 0.06 percent of its population and pretty isolated too.)

Whether the Chathams is inherently a low productivity economy, its great handicap is its occasional and expensive transport links (almost New Zealand and the world again), which lowers its ability to generate effective income. The islands’ governance hardly existed in the nineteenth century which left the Wellington government greatly troubled about its legal status; the easy solution was neglect. It was not until 1926 that the Chatham Islands County Council was established, some 50 years after the introduction of councils for the rest of New Zealand. Even then, there was much travail getting it to be effective. Today, central government administrative responsibility rests with the Ministry of Local Government, which is part of the Department of Internal Affairs. On Rennie’s account it has not done a very good job. Very often, decisions were dominated by insensitive officials who had never been to the Chathams.

Instructively, Rennie describes a 1985 official options paper for the future of the Chathams as ‘offensive’ to islanders. It was certainly not designed to engage with them and would end in a stalemate. The subtext was that the market would set the right level for effective regional development; that social considerations were irrelevant. In any case, the government was blind to its past failures, and refused to take them into consideration in future policy settings. This was Rogernomics as it seeped into all our thinking.

Not much later, Treasury paper by Treasury when it was out of control – or at its Rogernomics peak which was much the same thing –  proposed to pay Chatham Islanders to relocate to New Zealand rather than continue to subsidise core utilities and other services that made livestock farming viable (like keeping the meat works going).  

Perhaps not surprisingly, an independence movement was triggered. When the independence proposal was put to a later Prime Minister, ‘pleasantly and firmly’ advised that ‘declare independence one day, and there would be soldiers on the Island the next’. (Jim Bolger had more confidence in their speed of response than I have.)

Some islanders seemed to think that the Chathams would be economically viable without central government financial support if they controlled all the fishing quota that arose from the oceans around them. They overestimate the fiscal value of the quota and the capacity of the Chatham Islands navy to enforce its use.

Slowly and tortuously a solution was found. (Secretary of Internal Affairs, Perry Cameron, played a very honourable part.) The Rogernomics solution of a commercial Local Authority Trading Enterprise (LATE) was rejected in favour of the Chatham Islands Enterprise Trust. (Rennie was chairman for its first 11 years.) Its responsibilities include the airport, sea port and transport connections plus electricity generation and meatworks. In June 2022 the Trust was worth a net $63m (almost $80,000 an Islander).

You can read the book for the details but I was struck that the Trust handled its responsibilities far better than these same responsibilities had been previously handled by central government. They knew more about what was going on, were more focused and the locals had confidence in them. There were still some government grants, even though the Trust reduced some of the previous waste because of its greater focus. I get the impression that central government could trust the integrity and competence of those who managed the Trust despite the small pool of talent it drew upon – given there were only about 800 people.

While you might read Rennie’s book for its insights into the Chathams, it also shows the possibility that we could have a stronger, more decentralised system of New Zealand local government.

Hugh Rennie (2022) Chathams Resurgent: How the Islanders Overcame 150 Years of Misrule. (Fraser Books)

Footnote: For an earlier (affectionate) column on the Chathams see here.

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.