Lessons from a Washington State Liquor Referendum

A friend in Seattle recently drew our attention to a citizens-initiated referendum in Washington State on privatising the state’s liquor stores.  The vote, part of last month’s US general elections of public officials and sponsored by shopping warehouse chain Costco.

Washingtonians supported the initiative, with a 20 percent majority. Back in 2010, 53 percent of voters had rejected a similar motion.

The first interesting point, given the tendency in New Zealand to portray privatisation as a ‘right wing’ policy, is that on both occasions support for ending the state monopoly came mainly from typically Democratic-voting counties, while Republican-voting areas were most opposed.

This was hardly surprising. Governments of all stripes from around the world have gone to the polls with platforms that include the privatisation of government businesses and have been elected with sizeable majorities.

Apart from some minor modifications, this year’s liquor store sale initiative in Washington State was remarkably similar to the one in 2010, which raises another point of interest: what happened between the two votes?  The major factor, according to my colleague, was intensive public debate.  There was plenty of coverage in editorial pages, arguments from politicians of all persuasions, and pitches from supporters and opponents in advertisements and interviews.  As we know all too well, democracy is improved by informed debate, and voters, given adequate information, will on average and over time make sound decisions at the ballot box.

Another lesson from the Washington State elections, where the liquor store vote was just one of three such referenda, is the much greater acceptance of a role for referenda generally.  This is true throughout the United States, and other countries, such as Switzerland which is famous for the number of decisions it puts to its citizens via referenda.

Of course many complex matters are best delegated by voters to elected officials; but there are plenty of propositions on which voters, given adequate information, are well placed to make their preferences known directly.

Our recent referendum on MMP is interesting in this context.  The choice between MMP and its possible replacements was a complex one, and public debate and information was very limited.    Plausibly, many voters did not think they were well enough informed to do justice to the issue.  In the event, over 25 percent of eligible voters did not vote. In addition, 34.1 percent of these who did vote in the referendum voted informally when it came to choosing a preferred alternative to MMP.

But whether or not a better public debate would have changed the outcome, and whether or not we like the outcome, at least we have it, and we can accept its legitimacy because the people have spoken.

Another interesting aspect of the Washington referendum was the high profile role in the public debate taken by Costco, under the leadership of co-founder and chief executive, Jim Senegal.  Costco contributed over $20 million to the campaign.  It rallied the support of restaurant owners, local wineries and some supermarket chains that all wanted to do better for their customers.  In doing so it took considerable flak from the unions and other interest groups who spent millions of dollars opposing the initiative.

Without Senegal’s leadership, the initiative would almost certainly not have made the ballot a second time nor would it have passed so overwhelmingly.  As Seattle Times columnist Bruce Ramsey said “Most retailers don’t do this sort of thing. In matters of public controversy they are chickens.”

At the national level in the United States, Whole Foods supermarket chain CEO John Mackey is another notable exception to the rule, having argued against President Obama’s healthcare reforms and more recently discussing the need for economic freedom and less government spending.

As in the US, New Zealanders look to their political leaders to show conviction and courage when the going is tough and bold measures are required, as they are right now.  But politicians can’t progress reforms alone.  As in previous periods when New Zealand has made progress, we need business leaders to throw their weight behind the changes that are needed to ‘make the boat go faster’.

Providing business leaders with a stronger, united voice to achieve that is a key focus of the current merger talks announced last week between the Business Roundtable and the New Zealand Institute.

Bryce Wilkinson
Acting executive director

Friday Graph: The Shoe-thrower’s Index

We thought that the last Friday Graph of the year could allow for more leisurely viewing, perhaps  over some Christmas/New Year cheer.

As it happens, the Economist has been come to the party with  an ‘advent calendar’ of its top charts of the year.  One that particularly caught our eye was this interactive one for exploring survival probabilities amongst troubled ‘shoe-throwing’ countries.

click to interact with graph

If, thus inspired, you would like an interactive chart to assess the diverse economic vulnerabilities in Europe you could choose the 20 December graph from the advent calendar.

With very best wishes for the Christmas break.

Bryce Wilkinson
Acting Executive Director

North Korea in the Dark: Freedom Matters

Mark Perry at Carpe Diem has a chart that provides insight into the terrible reality of what life must be like in Kim Jong-il’s communist North Korea.

Perry found that:

The CIA estimates that North Korea’s GDP per capita in 2009 was $1,800.  That’s equivalent to the inflation-adjusted U.S. per capita GDP back in the year 1847, or more than 150 years ago (see chart below).

The comparison is even more damning when you compare the figures with South Korea.  According to the CIA, South Korea’s GDP per capita was US$30,000 in 2010, so the average South Korean is more than 15 times better off than their Northern counterpart on the Korean peninsula on this measure.

Such abstract statistics don’t resonate with many people.  But Perry has a satellite photo of the two countries showing electricity use at night that probably does.

Obviously the differences can’t be due to geography, ethnicity, or anything much else of that ilk.  The obvious point of difference is in the respective quality of their institutions.  South Korea ranked 35th in the world for economic freedom on the 2011 The Heritage Foundation/Wall Street Journal index and North Korea’s economic freedom is undoubtedly immeasurably lower.

Spare a thought for human freedom and North Korea this Christmas.

Bryce Wilkinson
Acting executive director

Housing Affordability: Time for Action

Yesterday’s Herald featured an editorial and an op-ed by Productivity Commission chair Murray Sherwin on housing affordability.  They followed the release of the Commission’s draft report on this issue.  It’s a useful contribution to public debate, identifying the problems of the (artificial) shortage of land and heavily prescriptive regulation, and discounting the argument that the tax treatment of housing could explain the large rise in section prices.  The Business Roundtable made many similar points in its submission to the Commission.

The report’s key recommendations include:

  • Urgently opening up of more land for housing, especially in urban areas.  (Sections now contribute on average about 40 – 60% of the cost of a house).
  • Improved processes for consenting, to speed up the service and lower costs.
  • Improving how local council development charges for infrastructure are calculated and applied, including making them reviewable. The Commission found the current model has too much regional variation and is not transparent.
  • Reconsideration of Auckland’s draft spatial plan.  Auckland faces significant housing affordability challenges and the Commission found its current plan, with a target of accommodating 75% of new homes within existing urban boundaries, will be difficult to reconcile with affordable housing.

The Business Roundtable’s submission on Auckland’s spatial plan made the same point in reaching the conclusion that it was bound to fail.

Spending on housing, including homeownership and renting, is the single biggest chunk of expenditure for most New Zealand households and comprises the lion’s share of households’ assets and debt.

Last month an article in the UK magazine The Economist, indicated that home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden.  The same article linked to an interactive chart that allows New Zealand house prices to be put into an OECD context on a number of different measures.  For example, it enabled us to prepare this chart that indicates that New Zealand and Australia have experienced similar house price inflation relative to average incomes since 1986.

The median house price to median income ratio in the US is 3, which is the ratio we were at in the early ‘90s.  The median house in New Zealand now costs 4.7 times the median wage.  In Auckland the ratio is around 6.7 times the median wage, which puts owning a house out of reach for a great many hard-working New Zealanders.

There is no shortage of land in the greater Auckland region and the artificial regulatory restrictions on its availability to meet basic human needs have not been adequately justified in overall cost-benefit terms, presumably because they can’t be.  Keeping section prices inside the city cordon high might be in the interests of existing property owners, but that does not make it serve the interests of Aucklanders overall.

Earlier this year following a visit to Houston, Texas, Roger Kerr talked about the large flow of people and firms escaping from over-taxed and over-regulated states like California to the business-friendly, people-friendly lone star state.

Texas has no state income tax and Houston has no zoning, ie land regulation as we know it.  And guess what?  You can get a very nice four bedroom, double-garage family home in a pleasant, leafy neighbourhood for as little as US$200,000 (about NZ$268,500).

Bryce Wilkinson
Acting Executive Director

FRIDAY GRAPH: Leaders of the Pack: The Non-OECD Non-Euro Countries

The OECD secretariat has updated its forecasts for member countries and extended the forecast period to the 2013 Calendar Year.  Happily it is also forecasting GDP growth for some of the major countries that are not members of the OECD.

This Friday’s graph shows the implied cumulative growth in real GDP between 2008 and 2013 for these countries, and for groups of these countries.  The purpose is to compare how well the different countries are faring and are expected to fare up to 2013 since the onset of the global financial crisis in 2008.

- click to enlarge

 The graph shows that Australia and New Zealand are doing well compared to the OECD average.  Europe is doing very poorly, and Greece is an economic disaster.  At the other end of the scale, the growth in China, India and Indonesia is quite phenomenal.  Note too that during this period Turkey, Chile, Korea, Brazil, Israel and Poland (in that order) all outscore Australia, which is followed by Mexico and then New Zealand.

FRIDAY GRAPH: HEAVY GOVERNMENT BORROWING OVERSEAS DID CONTRIBUTE TO NZ’S NET EXTERNAL INDEBTEDNESS

It is sometimes said that the private sector is to blame for New Zealand’s large external net indebtedness because it is the private sector that owes the money.

In fact, government overseas borrowing played an important role in the major increase in external indebtedness that occurred between 1974 and 1989.

Today’s Friday Graph shows that external net public debt (which is government overseas borrowing in foreign currency denominations, net of official overseas reserves), rose sharply from 2.6 percent of GDP in March 1974 to 28.5 percent of GDP in March 1986 (see the red line in the chart).

Click to enlarge

The increase occurred because the government borrowed heavily overseas during this period in order to fund both its own fiscal deficits and the portion of the large current account deficits in the balance of payments that was not funded by a net private capital inflow.

But for that borrowing, the government would have had to allow the exchange rate to depreciate, likely improving external competitiveness, and reducing the deficit in the balance of trade in the balance of payments.  New Zealand’s level of net external indebtedness today would have been lower if balance of trade deficits had been lower during this period and on a sustained basis.

The exchange rate was floated in February 1985.  This eliminated the pressure on governments to borrow overseas in order to defend an administratively-determined exchange rate.

It is primarily the large ongoing fiscal deficits that lifted the total net public debt to 40.4 percent of GDP in March 1986 and to 50.1 percent in June 1992 (see the black line in the chart).  Thereafter, fiscal surpluses and asset sales reduced the overall net public debt ratio.  A paper prepared for the Business Roundtable by Wellington economist Phil Barry titled Does Privatisation Work? assessed that privatisation proceeds reduced the net public debt ratio to GDP by around 15% of GDP between 1992 and 2000.

Returning to the red line, after 1986 it became government policy to eliminate the Crown’s exposure to currency risk.  Between 1986 and 1992 this was achieved in good part by replacing overseas currency debt by domestic currency debt (see the rise in the blue and black lines).  The Crown’s net external debt was eliminated by 1997.

Reducing the Crown’s net external debt in such a manner does not reduce New Zealand’s net external indebtedness.  This is because the Crown must give the foreigner a claim on New Zealand of equal value, for example, cash borrowed from New Zealanders or ownership of a commercial enterprise.

It follows that the level of New Zealand’s net external indebtedness today is in part a legacy of the ‘fixed’ exchange rate regime that applied during the 1974-1985 period.  That regime arguably prolonged New Zealand’s loss of external competitiveness, aggravating the cumulative trade deficits in the balance of payments.

Dr Bryce Wilkinson
Acting Executive Director
New Zealand Business Roundtable

THE OECD REPORT ON INEQUALITY – A QUEST FOR EQUAL POVERTY FOR ALL?

On 5 December this week the OECD reported that the gap between rich and poor in OECD countries has reached its highest level for over 30 years.  Its press release here called for governments to act quickly to tackle inequality.  The full report is “Divided We Stand: Why Inequality Keeps Rising”.

The New Zealand media was (commendably) quick to latch onto the chart in the press release that indicated that the degree of inequality appeared to have increased the most for New Zealand between ‘the mid-1980s and late 2000s’.  (For the record, when the data behind the chart is downloaded and examined, Sweden narrowly tips New Zealand out of first slot on this measure.)

Despite some of the rhetoric apparently to the contrary in the press release, the OECD’s analysis, conclusions and recommendations look very orthodox and commendable – the way to help people at the bottom of the income distribution is to improve their educational and workplace opportunities.  Here are some quotes:

“The main driver behind rising income gaps has been greater inequality in wages and salaries, as the high-skilled have benefitted more from technological progress than the low-skilled.  Reforms to boost competition and to make labour markets more adaptable, for example by promoting part-time work or more flexible hours, have promoted productivity and brought more people into work, especially women and low-paid workers. But the rise in part-time and low-paid work also extended the wage gap.”

“Investing in human capital is essential to promote employment and employability, and to tackle inequality. Indeed, our report clearly indicates that up-skilling of the workforce is by far the most powerful instrument to counter rising inequality.”

“The single most important factor to both reduced wage dispersion amongst workers and higher unemployment rates is educational attainment.”

“The evolution of earnings inequality across OECD countries in recent decades could be viewed mainly … as “a race between education and technology”.

The report also finds that, compared with market returns, government tax and spending policies generally do have an overall redistributive effect in favour of the lowest income distribution groups.  Again this finding is unexceptional.  Those who are on benefits and not working obviously do not earn a market income from wages.

What the figures do not, and cannot, show, is the effect of tax and spending policies on the lowest income distribution groups compared to policies that are more likely to help them move out of poverty and up the employment ladder.  These include greater diversity and flexibility in education, a welfare system that does not trap people on benefits through high effective marginal tax rates, and the removal of barriers to employment of young, unskilled, would-be workers, such as high minimum wages.

But all these observations and findings apply regardless of the size of the income gap or whether it is widening or narrowing! 

A key problem with the focus on income gaps rather than on improving the skill attainment and job prospects  for those currently at the bottom is that it panders to the absurd Marxist notion that the rich have somehow got rich at the expense of the poor.  Yet there is no basis for saying that people who are not working are poor because others are earning good incomes by working hard and productively. Wealth generation is not a zero sum game.

Another key problem is that the OECD’s measure of inequality proposes that New Zealanders would be just as well off if everyone were poor as they would be if everyone were rich. This is because the only thing that matters under this measure is equality of outcome.  The ideal income distribution is reached when differences in effort and skill go unrewarded. Those who work hard should earn no more than the most idle in the community.

It is a curious thing that the OECD considers this proposition to be so unexceptional as to be not worth drawing to anyone’s attention in its press release.

Dr Bryce Wilkinson
Acting Executive Director
New Zealand Business Roundtable