Friday Graph: Public Sector ‘Austerity’?

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).

Friday Graph: Is Welfare Wrecking British Society?

Today’s graph is produced courtesy of British journalist and author James Bartholomew, from his award-winning, influential book The Welfare State We’re In.

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.

click the graph to enlarge

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.

‘We’ Are a Little Confused

On Tuesday the Herald published an article by Minister of Economic Development Stephen Joyce titled Each time we say ‘you can’t’ it carries a cost. It’s an important point, and the article makes it well.

The Minister does, however, blur the argument by seemingly slipping into central planning mode  with his use of the dreaded ‘we’ word:

We need to ensure we make resources available for businesses to use.

Who exactly is ‘we’? And how do ‘they’ decide what resources to make available, and by what means?  The ‘we’ word is a Wellington speciality, and its imprecise use never fails to cause confusion by begging such questions.  See Roger Kerr’s article here on this problem.

Presumably, the Minister meant that the government wants to facilitate resource flows to their highest use through decentralised market-driven pricing, rather than by central planning direction.

Another question raised by the article was what is meant by the concept of a country’s natural advantage:

We therefore need to stop the endless debate about which industry will save us and focus on all industries where New Zealand has a natural advantage.

The concept of comparative advantage is well understood in economics, but the concept of natural advantage is not.  Did the Swiss have a natural advantage in watches, or was it a developed advantage?  If it is only a developed advantage, should ‘we’ focus on it?  What about Silicon Valley?  Should ‘we’ focus on it at all, or should ‘we’ instead just stand back and let those who think they see an opportunity go for it, if they can attract backers?

These questions were prompted in part by a salutary chart here, courtesy of the UK Economist, that focuses on the market values of entirely unnatural things, like Google and Facebook, compared to the market values of widget makers, like Toyota and McDonalds.  It is a striking chart of our times, and a challenge for central planners everywhere.

Reducing Poverty or Inequality: Which Matters More?

Today the Herald published the third in a six-part series by Simon Collins titled Divided Auckland, asserting that poverty in Auckland is rising again and the income gap between rich and poor has widened dramatically.

There would be much to commend in a focus on poverty: why people at the bottom of the income scale are not doing well at school, not making a successful transition from school to work, are getting stuck in welfare poverty traps, or are struggling to raise kids, sometimes without intact families.

Since government is the dominant player in education, housing, health, welfare and the regulation of access to jobs, such a focus on poverty should consider carefully which existing policies are likely aggravating poverty and which ones are likely alleviating it.

But this is not, unfortunately, the focus of the articles to date.  Having identified the poverty concern, the series quickly switches the focus to income inequality.

The Business Roundtable has made many contributions to public debate on the issue of poverty versus inequality in recent decades.  In an article here on the topic, Roger Kerr wrote:

Other things being equal, I prefer less inequality in incomes and wealth rather than more. But I worry much more about poverty and hardship – in New Zealand and in poor countries.

It’s easy to explain why. Imagine if all incomes in New Zealand could somehow be quadrupled tomorrow. Most people would see this as a huge advance, especially for the least well off. But inequality would remain unchanged.

Or consider what would happen if Microsoft and all its millionaire employees were to relocate to New Zealand. Income inequality would ‘worsen’. But how many New Zealanders would regard that as a bad thing?

See also Roger’s article here, my blog The OECD Report on Inequality – A Quest for Equal Poverty for All? here, the Business Roundtable’s release on Richard Epstein’s case for a flat tax here, and Buchanan and Hartley’s book Equity as a Social Goal.

The last article in the Herald‘s series is to be published on Saturday and is about ‘what to do’.  Let’s hope the focus is on what to do about poverty.

Bryce Wilkinson
Acting Executive Director

Friday Graph: Our Fragile Deficit/Debt Situation

The OECD’s first detailed economic forecasts out to 2013 were released in December.  They include projections for four measures of the fiscal deficit for general government in New Zealand.  (General government is central and local government combined, but central government is the dominant component.)

This Friday’s Graph puts these forecasts into a post 1994 context.

click to enlarge

The graph shows that general government mainly ran fiscal surpluses from 1994 until 2008.  But it has since run significant fiscal deficits, which are persisting.  (The OECD has a detailed explanation of these measures here – scroll down to the notes to tables 27-30 inclusive.)

These persistent deficits are the first real test for the Fiscal Responsibility Act 1994.  It was passed in 1994 in order to make it harder for future governments to repeat the deficit/debt spiral governments put the country into between 1975 and 1984.  The debt spiral occurred because they largely opted for ‘borrow and hope’ rather than fundamental adjustment in responding to two global oil price shocks.

A core feature of the Act is that it requires governments to achieve and maintain prudent debt levels by “by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues”.

Older New Zealanders do not need today’s Euro and US debt crises to remind them what serious economic problems governments create when they fail to keep deficits and debt under control.  Between 1976 and 1984, according to Treasury’s adjusted financial balance measure here, central government’s annual fiscal deficit to GDP ratios summed to 25 percent of GDP.  The fiscal deficit peaked at 6.9 percent of GDP in 1983-84.  Large deficits tend to persist.  Successive governments wrestled to eliminate those deficits for the next decade. By 1993, the cumulative deficits since 1976 amounted to 50 percent of GDP.  Net public debt was 48 percent of GDP, up from 9 percent in 1976.  The cost of servicing the debt peaked at 19 percent of tax revenues and at 8 percent of GDP in 1988.

So how does the current deficit situation compare?  Treasury’s projections in the 2011 pre-election economic and fiscal update (PREFU-2011) indicate that core Crown net debt, inclusive of the NZS Fund assets, will increase by around 18 percent of GDP between 2008 (when net debt was minus 1.5 percent of GDP) and 2012 when net debt is forecast to be 16.8 percent of GDP.  The sum of the actual and projected annual ratios of the total Crown operating balance to GDP between 2009 and 2012 is minus 21 percent of GDP.  In short, in just these four years, these cumulative movements are uncomfortably close to the increases that it took the earlier governments eight years to achieve between 1976 and 1984.  Another uncomfortable point of comparison with 1984 is that the Crown operating deficit for 2012 is forecast to be 6.0 percent of GDP.  Much more cheering is the fact that New Zealand’s score for economic freedom today is vastly higher than it was in 1984.  A freer economy can be a more resilient economy.

PREFU-2011 projects the elimination of operating deficits in just three years from here – by 2014-15.  But these projections assume sustained expenditure growth constraint and favourable overseas outcomes, including further increases in export prices relative to imports.

However, history shows that New Zealand governments are not good at sustained expenditure restraint, and the composition of today’s parliament gives little comfort on that score.  Meanwhile, the fragility of fiscal positions in the Euro-zone and the US is nothing short of alarming.

In short, eliminating the operating deficit by 2014-15 is far from in the bag.  The fiscal responsibility measures that are now in the Public Finance Act arguably need more mates.

The government’s welcome determination to legislate for a spending cap should help make more credible its commitment to keep control of spending growth.  But even with this measure, there is no avoiding the fragility of New Zealand’s fiscal position at this point, given the external risks.

Despite the assumed spending control to 2016, the ratio of Core Crown operating spending to GDP would still be higher at the end of that period than in any year from 2002 to 2005.

There is widespread agreement that much spending – not just on interest free student loans – is wasteful and unnecessary.  More decisive action aimed at withdrawing government entirely from unnecessary spending programmes and activities, while sustaining well-justified spending, would arouse more intense opposition in the short-term from narrow spending interests, but should reduce the fragility of the fiscal position and make the goal of eliminating fiscal deficits in a few short years more credible.  However, ill-justified spending should be eliminated regardless.  It is not in the national interest for governments to tax and spend poorly.

Treasury’s BIM on Regulation – Complacency Rules, Productivity Slows

The Treasury’s 15 page Briefing for the Incoming Government on regulation here that was released yesterday focuses on Treasury’s envisaged regulatory quality and reform work programme for the year ahead.  The new aspect of the reform work is the need to progress a new version of the Regulatory Standards Bill as specified in the National-ACT confidence and supply agreement.

The existing work programme is a worthy one, but is focused on the largely joyless task of encouraging government agencies to produce better quality regulatory analyses when many may lack the expertise or the incentive to do so.

The proposed timetable for work in a version of the Regulatory Standards Bill that is based on Treasury’s option 5, downloadable from here, envisages that the Commerce Committee would be able to invite submissions on the amended Bill in June 2012.  It would report back in October enabling the Bill to be enacted in December, should parliament choose to do so.  This is a mind-focusing timetable.

The narrow work-programme-based focus of the paper and its brevity have resulted in a briefing that provides ministers and the public with virtually no basis for assessing whether the work programme is likely to provide the community with value for money.  Exactly what is the problem that is being addressed, and will the programme effectively solve that problem in a way that maximises the net benefits to the community?

From a business community perspective, the problem definition aspect of the paper seems alarmingly complacent.  Paragraph 4 declares that the regulatory environment in New Zealand is “sound” and that “[o]ur basic regulation standards are high”, albeit while noting some slippage.

Presumably, what it means is that New Zealand ranks well internationally for regulatory quality.  But this is not, unfortunately, evidence that our regulatory environment is sound, let alone of a high standard.  Other counties with similar rankings to New Zealand are struggling to improve regulatory quality, acknowledging that they have a real problem.

Contrast paragraph 4’s level of comfort with this sentence from page 116 of the 2025 Taskforce’s 2009 report, remembering that this Taskforce was serviced by the Treasury:

Good estimates done in other countries, using a variety of methodologies, suggest that as much as a third of the income gap to Australia could be closed if we were able to move New Zealand to world best practice across all major of regulation.

Another concern is that the briefing does not have any recognisable framework for assessing the nature of the regulatory quality problem.  For example, it does not acknowledge that regulation is generally best achieved by open competition backed by private (civil) law sanctions against fraud and coercion.  State regulation may help facilitate a mutually beneficial transaction between two parties that does not occur voluntarily because of some remarkable impediment, but careful examination is required to make sure that it is not instead benefiting one party at the expense of the other party.

The briefing does not identify the key incentive problems with government regulation, both on the demand side and on the supply side.  Narrow-purpose interest groups, firms, and government regulators will always lobby for more government regulation for self-interested reasons and there are equally conventional political economy reasons for politicians to respond to those self-serving demands.  Further, there are incentive reasons why policy agencies might hesitate to lean against these forces by providing good quality analyses that expose the ill-justified nature of the hidden transfers of costs and benefits.

There is a significant difference between a bureaucratic approach to regulatory quality based on good intentions, leaving current incentive structures in place, and the incentive-based approach taken by the Regulatory Responsibility Taskforce (RRT). This can be illustrated by comparing the RRT’s list of regulatory principles here, against which new and existing laws and regulations should be tested, and the Best Practice Regulation Principles and Assessments checklist provided in Annex C of the Treasury briefing.

First, Annex C has no presumption in favour of liberty or security in the possession of private property.  Rather than being an exception to the norm, regulation by government is the only form of regulation that the Annex (and the briefing itself) acknowledges.  Contrast this with principles 7(1)(b), 7(1)(c) and 7(1)(i)(ii) in the RRT’s report.

Second, Annex C pays no attention to the question of who would win and who would lose from a proposed law or regulation.  It thereby pays no attention to the issue of regulatory incentives or whether such wealth or income transfers would be compensable under a system of voluntary exchange and therefore should be compensable under a forced exchange.  Contrast this with principles 7(1)(c) and 7(1)(i) (v) in the RRT’s report.

Third, Annex C does not aim to preserve the supremacy of parliament in respect of delegated taxes and charges or ensure a role for the courts based on merit review being the norm.  Contrast this with principles 7(1)(d) and 7(1)(g) in the RRT’s report.

Fourth, in contrast to the focus on accountability through certification proposed in the RRT’s report, the lack of accountability envisaged in Annex C can be illustrated by its first principle – that economic objectives are given ‘an appropriate weighting’.  Setting aside the puzzle as to why the focus of a cost-benefit assessment should not be on citizens’ overall welfare, ignoring the formally irrelevant distinction between economic and non-economic aspects, who would determine what weighting is appropriate?  Further, if the courts defer to the regulator’s inevitably subjective opinion on the matter, as seems likely under judicial review, what accountability is provided by the later principle in Annex C – that regulators must be able to justify decisions and be subject to public scrutiny?

When a regulator is required to pursue conflicting objectives with no clarity about the trade-offs, any decision concerning those trade-offs is formally as good as any other decision.  Purposeful management is formally impossible. These common situations make the desirable principle in Annex C that ‘the regulatory regime provides predictability over time’, little more than wishful thinking.

In August last year Roger Kerr wrote:

The lead departments on regulation are Treasury and the Ministry of Economic Development (MED). For years they have been telling the world that “New Zealand has a high-quality regulatory environment.  For years the private sector has been arguing that it is staggering under an avalanche of regulation (reflected in sagging productivity growth rates).  I have never known such a gulf between private and public sector perceptions.

Indeed.

Statistics New Zealand is due to release its productivity estimates for the year ended March 2011 on 15 March this year.  The Business Roundtable will review the productivity slowdown situation after these estimates are published.

Disclosure. Bryce Wilkinson, the author of this note and acting executive director of the Business Roundtable, was a member of the Regulatory Responsibility Taskforce

Udacity: Blowing Away the Bricks and Mortar

A popular Stanford course on artificial intelligence that routinely attracts around 200 students, was recently offered free online to anyone who wanted to ‘attend’, writes Charlotte Allen in Has the Higher-Ed Revolution Begun?  The course attracted 160,000 students from 190 countries.

Former tenured Stanford professor and robotics expert Sebastian Thrun, and Peter Norvig, research director at Google (where Thrun also works, designing cars that drive themselves), teamed up to teach the course free online, including testing, grading and ranking the students.  About 20,000 completed the course, receiving grades comparable to those of the Stanford students who took the ‘bricks-and-mortar’ course.

The article puts the cost of a year’s tuition at Stanford at about US$40,000 pa per student, while the cost of the tuition for the 160,000 students, had they been charged, would have worked out at about US$1 per student.

It’s not the first time top universities have offered free courses online, but:

What made last fall’s Thrun-Norvig course different – and revolutionary – was its certification component. The two instructors were effectively warranting independently of Stanford that the online students who passed the course had learned as much about artificial intelligence and had been held to the same standards as the Stanford students who took the bricks-and-mortar version.

Thrun, who resigned his position at Stanford a few days ago, is now setting up an online university he’s calling Udacity, which plans to offer high-quality courses that are either free or cheap, and hopes to attract hundreds of thousands of students.

What a fabulous development, opening up access to top-quality courses not just for US citizens, but also for people living in countries that offer very few choices, least of all the chance to attend anything like an elite traditional US university.

Briefings to Incoming Ministers Released Today

The Prime Minister has just released here 67 Briefings to Incoming Ministers (BIMs) prepared for the new government by responsible   ministries and agencies.

The Treasury prepared three briefings which are available here.  This post comments only on its briefing on the medium-term economic outlook, prepared before the general election of November 2011, which also contains the Treasury’s advice on the key policy changes necessary to increase trend economic growth.

Treasury’s medium term economic outlook briefing

Here are some of the main points in the executive summary:

• The BIM is upfront that New Zealand’s economic performance has been poor for some time.  It also considers that the high net external debt is reducing the economy’s resilience.
• Its remedies for the resilience aspect have a savings focus.  It considers that the most immediate and direct thing government should do is to return to fiscal surpluses.  In addition, it considers that the government should aim to raise national savings relative to investment.
• To materially raise economic growth, Treasury recommends “a wide and ambitious programme of reform across education, welfare, tax, regulation, science and innovation, infrastructure and the management of natural resources”.

In the body of the briefing, there is a welcome concern about the problem of the squeeze on the traded goods sector that has become apparent since around 2004.  This focus was missing from Treasury’s 2008 briefing.

Part 7 of the briefing addresses this competitiveness issue.  It has two sections.  The first looks at making the international business environment more competitive.  It acknowledges the increased restrictiveness of the screening of overseas investment, but misses the desirability of eliminating remaining tariffs (which are effectively a tax on exports) and leaves the issues of tax and regulatory competitiveness to the second section.  The second section, Policies to Improve the Domestic Business Environment, acknowledges the need to move tax rates down, but is not clear that this should be done by reducing the expenditure burden.  It expresses worthy intentions about improvements in regulatory, science and innovation, infrastructure, and natural resource management policies, but does not indicate how incentives might be materially altered to achieve these improvements.

Here are some other initial reactions:

• It is good to see the acknowledgement that wide-ranging changes are necessary if a material step-up in economic growth is to be achieved; marginal changes will not suffice.
• The briefing is surprisingly silent on the likely gains from privatisation/losses from failure to privatise.
• The briefing ducks the important question of whether fiscal surpluses should be achieved by expenditure reductions or revenue increases.
• The need for a more flexible labour market, particularly when unemployment is running at 5-7 percent, is not stressed.
• The argument for lifting national savings explicitly in order to address the competitiveness/resilience problem is unconvincing.

With respect to the second point, it is disappointing that the briefing does not acknowledge or respond to the empirical point that the Business Roundtable has been stressing for many years – that it is almost unknown for countries to experience very high sustained rates of economic growth when government spending is over 40 percent of GDP on the OECD’s measure.  Why would New Zealand expect to be an exception?  Government spending is much lower in Australia, and it is doing much better.

With respect to the last point, the briefing does not acknowledge that the gap today between domestic investment (by residents and foreigners) and savings by residents is largely a legacy of the debt accumulated during the large balance of trade deficits that New Zealand ran between 1975 and 1986.  The gap between investment and savings since 1988 has been driven by the need to finance the accumulated external debt.  From 1988 to 2004 in particular, it was not a story of an excess of domestic spending over domestic production.  To illustrate: between 1988 and 2004, the balance of payments current account deficit averaged 4.0 percent of GDP, despite exports exceeding imports on average by 1.3 percent of GDP.  The balance of trade surpluses during this period establish that domestic spending was on average less than domestic production, despite an average national savings ratio of only 3.2 percent of GDP.  In contrast, domestic spending exceeded domestic production on average between 1951 and 1971 when the national savings ratio averaged 16.1 percent of GDP.  A more thorough and disaggregated analysis is needed.

Teach First NZ Initiative: Why Not Give it a Go?

This week a New Zealand Herald editorial came out strongly against a joint proposal by the not-for-profit organisation Teach First NZ and the University of Auckland that is designed to help tackle one of New Zealand’s most concerning social problems – educational underachievement in low socio-economic communities. It’s a trial programme in which 20 top university graduates could be recruited to work as teachers after a six week intensive training course.

Teach First NZ’s aim, according to its website, is:

to make teaching a top graduate choice, attracting highly-qualified and well-rounded university graduates – often those who may otherwise have initially chosen corporate careers – to low-decile secondary schools for an initial two-year teaching commitment.

The Herald’s argument against the trial comes down to three points:

1. The university graduates would be out of their depth, especially on behavioural matters

That is for the hiring principal to evaluate.  It’s a risk that any hiring principal could be expected to assess as with any new teacher that might be hired.  Also, these are fresh, capable “highly qualified and well-rounded university graduates” who would also receive on-the-job mentoring by other teachers.

2. Based on Australian and US evidence, about half don’t continue with teaching teachers

True, but they’re not all expected to, as the Teach First website spells out:

To this end, our participants receive training, support and networking opportunities designed to prepare them for leadership roles in education, business, the public sector, and beyond. We plan to support our alumni to remain engaged with the Teach First NZ mission – whatever field they ultimately end up working in beyond the two years. While many will stay in schools, others go on to work in wider education or business, forming partnerships with schools, mentoring students, or becoming school trustees.

Furthermore, the editorial omits the UK from its international examples. A quick look at Teach First UK’s website tells a very positive story, as do the summary facts in Wikipedia:

Since launching in 2002, Teach First has placed increasing numbers of participants in schools each year with 163 joining in 2003, up to 560 in 2010 – and has an ambassador community (alumni) of over 1,200.

Teach First is now rated seventh in the Times Top 100 Graduate Recruiters, with the number of applicants rising from 3,000 in 2009 (with 22% of applicants accepted to the programme) to around 5,000 in 2010 (with 11% accepted).

3. “…[it] demeans existing teachers and their profession. The insinuation is that anyone can become a teacher after a crash course.”

But it is not “anyone”: they will be “highly-qualified and well-rounded university graduates” selected especially for their capacity to do the job. What is the danger? That principals are not competent to make hiring decisions or that the graduates might do a better job than their teacher predecessors/colleagues and embarrass them?

Low decile schools are often stuck in a vicious circle of not being able to attract high quality teachers because the school is underachieving, and underachieving because they can’t attract high quality teachers. It would be surprising if principals who are having trouble recruiting good teachers at present and the parents of pupils attending those schools would not welcome having the option of hiring a fresh, good-all-round, top university graduate teach their kids.

The core idea is to improve schooling opportunities for kids in low decile schools.  And we’re talking here about an initial trial of just 20 highly-qualified university graduates to see if they can help in struggling schools.  Why on earth is the Herald clobbering such a small trial where principals still make the hiring decisions?  It’s surely worth a try.

Friday Graph: Household and Government Savings: An Inverse Relationship

This Friday’s graph uses Statistics New Zealand’s newly released statistics on household savings in 2011 to plot annual general government savings between 1987 and 2011 against household savings.

The striking feature of the chart is the ‘scissor-like’ tendency for household savings to be low when general government savings are high and vice versa.  Intuitively, this makes sense.  Governments can lift their own savings by taxing households more heavily.  With less money to spend, households cut back on both spending and saving.

Click to enlarge

The same intuition applies in other countries of course.  A colleague has drawn our attention to a similarly striking graph here in respect of the United Kingdom. (See the fifth graph from the left.)

Another colleague has remarked that a large body of formal research internationally confirms the inverse relationship, and noted that estimates of the magnitude of the effect tend to cluster around 0.5, meaning that an increase of $1 in the government deficit (and therefore in private sector claims on government) tends to be associated with a 50 cent rise in private savings.

Bryce Wilkinson
Acting executive director