This week’s Friday Graph shows that much the same applies in respect of the latest Statistics New Zealand release of estimates of the rises in hourly labour costs.

click the graph to enlarge

The sold blue and purple lines show real hourly earnings for the public and private sectors respectively against the scale on the left hand side of the chart.  Expressed in June quarter 2006 dollars using the consumers price index (all groups) the average hourly wage rate in the December quarter 2011 was $29.21 in the public sector compared to $21.18 in the private sector.

The green line shows that the public sector average has risen sharply relative to the private sector average since the mid 1990s, (see the right hand scale).  The thick green line is a smoothed version of this curve.  (For the technically minded it is a Hodrick Prescott filter).

These graphs complement the 30 September 2011 Friday Graph here that showed that the burgeoning growth in the public sector has been associated with a squeeze on the competitiveness of the traded goods sector.

The Key government’s key economic decision in the term of the last parliament was arguably the decision to slow the growth in public spending rather than to roll the excesses back to a material degree.

Wealth gap linked to rise in infections was the headline of an article in yesterday’s Herald on the alarming rise in hospital admissions for infectious diseases.

Researchers at the University of Otago said that whereas the expected pattern for a developed country was a steady decline in the incidence of such diseases and related hospitalisations, in New Zealand they had risen by more than 50 percent in 20 years.

The increase was associated, they said, with a widening wealth gap and its social effects. On the same topic the Dominion Post quoted immunisation expert Nikki Turner as saying;

It appears to be particularly linked to the rise in socio-economic inequalities in our societies.… The burden of disease is falling disproportionately on some groups… with Maori and Pacific people carrying a heavy burden.   

It is almost as if those who have moved up the income scale have passed their share of the disease burden down the line.

The recent six-part Herald series Divided Auckland told a similar story: painting a distressing picture of the lives of Aucklanders living at the bottom of the income scale. But the articles focused mainly on the fact that some people are doing well, and the fairness or otherwise of that, rather than on why those who are struggling aren’t doing better, and what might be done about it.

The articles made a point of portraying the problem in Auckland as being one of absolute poverty – not having enough money for food – using growth in the distribution of food parcels as a measure of it.

Poverty is a highly emotive term. Internationally it is often understood to describe those who are living on less than US$2 a day, estimated by the World Bank in 2001 to be 2.7 billion people. While undoubtedly there are people, especially children, going hungry in Auckland, it is not because ‘income’ is less than US$2 a day.

One illustration of the complexity of defining poverty in the developed world is the evidence in OECD countries that obesity is more of a problem towards the bottom end of the income distribution scale.

It seems Auckland is no exception.  According to this article, a 2008 report by the Ministry of Health found that Counties Manukau led the nation in obesity, diabetes, high cholesterol and depressive disorders:

One third of the district’s adult population is obese – well over the national total of 26.5 percent – and kids don’t fare much better with 12.7 percent obese compared to the national total of 8.3 percent.

The survey says Pacific children and adults are at least two-and-a-half times more likely to be obese than the total population.

“In a sense we’d expect to be around the worst,” says Dr Jackson.

“We’ve got the largest number of children, the largest number of poor children and obesity tends to be related to deprivation and poverty – but we’d hope to do better than that.

To use the language of deprivation and poverty when referring to the issue of obesity or income distribution in South Auckland might strike many as being more than a little insensitive to the plight of the billions in the world who face real poverty without obesity.

How has the language of poverty, in the World Bank’s sense of the word, come to be associated with the issue of being at the bottom of the income distribution in a wealthy country?

One insight into the answer to this question is provided in The Welfare State We’re In, a book by James Bartholomew, in an afterword titled Why Do People Talk More About Poverty, Now That There is Less of It?

Bartholomew traces definitions and talk of poverty through the ages, looking specifically at Britain. Starting in the Middle Ages when the country suffered terrible poverty and at least 95 famines, he notes that in The Parson’s Tale, Chaucer defined the misery of poverty in England as ‘wasted hunger’ and ‘naked of body’.

Moving up to the Tudor period, though there were still famines, poverty was less common, and by the 19^th century the lot of England’s poor had greatly improved. Then in today’s Britain:

The cost of food has fallen through the twentieth and early twenty-first centuries while incomes have multiplied. The percentage of income spent on food has fallen dramatically. Clothes, too, have become cheaper. More than 99 percent of households have a television. The major nutritional problem for the less well off in British society is obesity.

Yet as poverty has receded, talk of it has soared, according to Bartholomew, who notes that in the House of Commons in 2002, the word ‘poverty’ was used in 1307 speeches.

To work out why, he looks to two conferences.  At the UK Labour Party conference of 1959, just after the Conservative Party had won its third consecutive term, conference chairman Barbara Castle said glumly (in an aside):

“… the poverty and unemployment we came into existence to fight have been largely conquered.”  Her remark was a kind of explanation of why Labour had been in so much trouble for so long….Without poverty, what need was there for a Labour Party? It was a problem in need of a solution.

Three years later, at the conference of the British Sociological Association, a group of academics solved it, presenting a redefinition of poverty. They argued:

The amount given in what was then called supplementary benefit should be considered as the ‘poverty line’. Anybody with less income than that should be categorised as ‘in poverty’. Anyone with less than that amount, plus 40 per cent, should be termed ‘on the margins of poverty’.

And so, in what was described by one of the participants at the conference as “a mood of conspiratorial excitement”, poverty was redefined.   A British historian of this change, Keith Banting, described it as “explicitly political”:

There was a desire to shock – to use a word that, to most people, meant starvation, homelessness and lack of clothing.

Bartholomew concludes:

The word still carries the emotive force of the old meaning but now only means people who are less wealthy than others.

As the government proceeds with its Ministerial Inquiry into Poverty, it should focus on what needs to be done to improve the educational, health, work and other opportunities for people at the bottom of the income scale.

To blame their plight on those who are working hard and productively, or to present the position of New Zealand’s poorest as being in the same category as those facing desperate poverty elsewhere in the world is to fail to focus on how best to help them.

If we accept this at face value, what major telecommunications company would fail to make this investment, and why would the Crown need to be an investor?

Regardless of whether it is the best political argument, it is not the best public interest argument.

The fundamental problem with government ownership of commercial operations is that politicians have neither the skills nor the incentive to run commercial operations successfully.  There can be exceptions, for a period of time, but they are exceptions rather than the norm.

One aspect of the incentive problem arises from the conflict between political ownership and regulatory interests.  A government might be tempted to regulate in favour of its own operation either for revenue purposes or to make its performance look more respectable.

The conflict of interest issue was raised in Monday’s DomPost which carried an article on the apparent inability of Crown Fibre, the state company set up to oversee the government’s $1.5 billion of spending on the $3.5 billion fibre network, to work satisfactorily with the country’s top telecommunication companies.  The article identified the Crown’s conflict of interest problem as a constraint on its options for rectifying matters.

If this were the case, it would not be dissimilar to the problems that have prevailed with many SOEs over the years.

A commentator in a weekend newspaper suggested that the Ministers would find it hard to establish a net economic gain for New Zealanders from the sale to a foreign buyer, as any New Zealand buyer could similarly improve the land.

The rebuttable presumption from a national interest perspective should surely be that the sum of the net worth of all New Zealanders is maximised when a New Zealander sells any asset to the highest bidder, foreign or domestic.

To rebut that presumption requires some material considerations that were not priced in the auction process to be identified, followed by a convincing case that the benefits from interfering with the outcome of that process exceed the costs.  It is easy to envisage circumstances in exceptional cases, for example those relating to national security, when this might be justifiable.  It is much harder to envisage over-turning the presumption in the typical case.

Under schedule 1 of the Overseas Investment Act 2005 (OIA) farm land of more than 5 hectares is deemed to be sensitive.  The cost in dollars to New Zealanders of an action that reduces the value of all such land is potentially very large.  A 2009 Treasury/Inland Revenue paper for the Tax Working Group, put the value of agricultural land at about $105 billion.  There are also intangible costs in the form of worsened China-New Zealand relations.

In the current situation, it was Westpac who called in the receiver and Westpac is an Australian-owned bank.  A New Zealand interest arises because actions that reduce the sale price unreasonably in the eyes of lenders will make lenders more cautious to lend on farm land in the future.  That, in itself, could depress the value of farm land owned by New Zealanders.  This is in addition to the China-New Zealand relations issue.

Unfortunately, the relevant statutory framework provides some justification for the above commentator’s view.  Section 14 of the OIA restricts the grounds for consent to matters in other sections that when examined that do not mention the consideration received for selling the land, but they do permit considerations of benefit to a subset of New Zealanders.  Justice Millar documents this in paragraphs 13, 17 and 20 of his judgement.  He records that the assessment of the Overseas Investment Office (OIO) did not make any mention of this benefit in its recommendation.

To ignore the value of consideration when assessing the value to New Zealanders from selling an asset to a non-New Zealander is bizarre.  It is akin to seeing someone trying to assess the benefits to New Zealanders of exporting while ignoring the exporters’ revenues.

Perhaps the OIO ignored the sales proceeds because of its reading of the legislation or perhaps it was because of the Westpac foreign ownership consideration.  Yet it was for the latter reason, was it effectively saying that the land was already foreign owned?

A related concern arises from the OIA’s treatment of New Zealanders’ property rights.  Section 3 of the OIA expressly states that it is a privilege for overseas persons to own or control sensitive New Zealand assets.  The corollary is that New Zealanders don’t have a clear-cut right to sell their land to the highest bidder. (The issue here is not with the tests of good character or compliance with immigration act conditions, it is with other aspects of section 16 of the OIA.)

Paragraph 58 of the judgment explains that the overseas bid offers “numerous non-economic benefits which no New Zealand buyer must offer”.  It states that riverbeds are to be offered to the Crown, along with a historic pa site, public walking access, habitat protection and riparian planting.

To an economist’s eye such considerations look like a non-transparent tax on the New Zealand vendor, since overseas bidders can’t be expected to pay for something that they won’t own.  Such hidden taxes are likely to be unfair since they are highly discriminatory and bypass normal processes for scrutinising tax proposals.  They are also likely to be inefficient because the Crown and the other interested parties are not confronted with the opportunity cost of what is being effectively confiscated from the vendor.  This means there is no transparent test of whether the new uses for the land are the best use from a national perspective.

Richard Epstein, in his introduction to A Primer on Property Rights, Takings and Compensation, here criticised the New Zealand Bill of Rights Act 1990 and the Resource Management Act 1991, the first for refusing to treat the right to private property as one of the fundamental freedoms in New Zealand and the second for the way in which it limited the future use and development of property.

The OIA appears to be another example of the neglect of the need for clarity and respect for private property rights including greater transparency in the taking of rights in land use.

In the same article he suggests that the much higher divorce rates in the US experienced by those in the lowest income quartiles may help explain why those focusing on the growth in the median incomes of the lowest income quartiles may come to more pessimistic conclusions.

A 2004 Business Roundtable publication here by UK sociologist, Patricia Morgan Family Matters:  Family Breakdown and its Consequences stressed the significance of the contribution of family policy changes – such as welfare policy, taxation and family law – to reduced family stability in New Zealand, although of course it is not the only factor.

But one proposition (made by a prominent political figure in a recent Herald article) can be confidently rebutted: it is that the crisis was caused by free markets, meaning the absence of a plethora of specific and intrusive government interventions.  This situation can’t have caused the crisis – because it did not exist.

This article, entitled The Real Causes of the Financial Crisis, by a leading US businessman in the Winter 2012 issue of Cato’s Letter attributes the crisis in good part to the undesirable unintended consequences of specific, intrusive government interventions, based on his own experience and observations.  In a nutshell, he identifies a ‘free-lunch mentality’ in government interventions that reduced personal responsibility.

… removing “roadblocks” was essentially more deregulation, when the country had one of the least regulated economies in the world”

Here the word ‘deregulation’ is used to mean the absence of government regulation of a limiting, specific, or detailed nature.  However, the term ‘least regulated’ in the second half of the sentence invokes the concept of ‘unregulated’ in the sense of the absence of any form of regulation of activity.

In practice, less reliance on specific, intrusive regulation by government necessitates greater reliance on other forms of regulation.  This is not necessarily a choice between more and less regulation.  For example, removing an entity’s statutory monopoly privileges and exposing it to open competition could expose it to a highly salutary form of regulation.

The best form of regulation, as a general proposition, is provided by arrangements that allow buyers to shop around.  As Adam Smith (1776) famously pointed out, the butcher, the baker and the candlestick maker are obliged to provide us with the goods of a quality that we want to buy at a price that we are prepared to pay, not because of the kindness of their hearts, but because they need repeat business.

Of course, any notion of regulation by competition without government underpinning is chimerical.  Competition will not work well without governments doing their part in ensuring well-defined property rights that are accessibly enforceable, through informal and formal channels.  Formal channels involve the competing courts, mediators and arbitrators invoking private law (including the common law) and statutory laws and regulations.  There must be sanctions against theft, coercion and fraud.  Far from being a state of lawlessness, the rule of law is fundamental to an efficient system of voluntary exchange.

The assertion above that New Zealand has “one of the least regulated economies in the world” presumably refers to the fact that New Zealand has ranked very highly internationally for economic freedom since around 1990 (and remarkably poorly in 1984).  If so, it confuses a measure of ‘well regulated’, from the perspective of facilitating a system centred on voluntary exchanges, with the notion of ‘unregulated by anyone or anything’.  (See here and here for two introductions to the concept of economic freedom.  For more of an explanation of the role of the rule of law see the Business Roundtable monograph by Richard Epstein here.  His book Simple Rules for a Complex World, provides a detailed exposition of the need for both government and private law for a well ordered society, but with each having its place.)

]]> http://businessroundtable.wordpress.com/2012/02/17/deregulation-does-not-mean-less-regulation/feed/ 0 businessroundtable http://businessroundtable.wordpress.com/2012/02/17/friday-graph-public-sector-austerity/ http://businessroundtable.wordpress.com/2012/02/17/friday-graph-public-sector-austerity/#comments Fri, 17 Feb 2012 00:50:02 +0000 businessroundtable http://businessroundtable.wordpress.com/?p=130 Continue reading →]]> Statistics New Zealand released its December quarter 2011 employment numbers last week and this week’s Friday Graph plots the public sector numbers on a calendar year average basis.

click the graph to enlarge

The blue columns show that total filled public sector jobs have risen every year since 2005.  The rise between 2011 and 2005 is 9.8 percent with no signs of any slowdown.

The red line shows that total filled public sector jobs have risen from 22.1 percent of total filled jobs in the private sector in 2005 to 24.1 percent in 2011.

Not shown in the graph is the drop in private sector total filled jobs from 1.404 million in 2005 to 1.359 million in 2011.  Private sector filled jobs in 2011 were only 0.5 percent up on 2005.

Not much evidence here of overall public sector cutbacks to date, or of a material rebalancing of the economy in favour of private enterprise and growth.

In interpreting these figures, bear in mind the following points:

• Total filled jobs is not a good measure of numbers employed as some people have more than one job.

• SNZ’s definition of public sector is very broad; it includes local government.  That is why the number of filled jobs is so large.

• The State Services Commission has reported a small reduction in total full-time equivalent employees in (central) government departments ­– from 44,672 in June 2009 to 43,595 in June 2011.

• SNZ has total filled jobs in public administration and safety dropping by 1,000 (rounded) between June 2009 and June 2011 (from 92,000 to 91,000).

Marshalling a vast array of evidence, the book examines the British welfare state, its well-intentioned origins and its unintended impacts on the character and quality of British life.  In the author’s view:

The [British] welfare state has caused tens of thousands of people to live deprived and even depraved lives, and has undermined the very decency and kindness which first inspired it.

The chart depicts his view of the damage done to British society, highlighting how effects – such as incivility and the rise in crime – arise from a combination of causes and secondary causes:

Lone parenting, low-quality compulsory education, living on benefits, council estates and the widespread reduction of the sense that each of us must take responsibility for ourselves and our families, all of these – caused by the welfare state – have contributed to it.

The Welfare State We’re In, published by Politico’s Publishing, is an excellent read.

For a focus on remedies to some of the entrenched problems revealed in the book, and a reform programme for moving from a welfare state to civil society in a New Zealand context, see this Business Roundtable report by David Green.