RANKIN FILE: Short Items March-April 1998

In a recent Listener column (Radio, by Philip Matthews, 25 April 1998), one person (Brendan Smyth) is cited as suggesting "mainstream radio plays so little New Zealand music" because of "the competitive nature of the radio market, which makes programmers risk-averse". Another (Mike Regal) "is less convinced by the competitiveness argument". Rather "there are so many stations in the market now that programmers can take the odd risk and not lose significant ratings of revenue."

The truth is that a stable market system is risk-averse. Market competition is a form of discipline. Competition can be unforgiving to risk-takers, while also eroding gains; markets give a big downside and a small upside. The process of competition removes "excess profits" from firms fully subject to market forces. Producers can gain a "normal profit" (ie can survive) if they respect the proscriptions that come with a stable market environment.

Notwithstanding that, a large market for a broad product (such as commercial radio) does create niches. Supplying a niche market is risky in a small economy. Regal was arguing that New Zealand's market is no longer small; he was suggesting that the risks of playing New Zealand music are small.

Niche marketing is supplying a small known market with a known product. On the other hand, creative risk-taking - innovation - is about trying new products or new processes. There is no market for products that are not known to exist.

Markets do encourage creativity, but only when they fail. In particular, in an industry that finds itself with too many suppliers, a firm that does not innovate will fail. Under such conditions, the riskiest thing to do is to not take a risk, contradictory as that may seem. This process of creativity arising from adversity - from the mass failure of markets - was called "creative destruction" by Joseph Schumpeter in the 1930s. Schumpeter's work on unbalanced growth suggests that market forces are most creative when markets are least successful!

Creative destruction is not the only way of facilitating innovation; indeed it is not the best way because firms facing a crisis may not have the means to do the new things that they might like to do. (A pure market economy is like a leaky roof: when the economy is OK [ie when it's not raining] the roof is not worth fixing. When there is a storm, a departure from routine may be essential to survival but impossible to perform. Anticipating a storm, the obvious response, is not a market response. Pro-market technocrats, like Canute, oppose storms, tides and the like; disturbances are not a part of the liberal self-regulating market utopia.)

The best system to facilitate creativity is one that provides space: space to make mistakes, space to engage in research, space to pay adequate wages. Many firms do have such space in a capitalist economy; they are the dominant firms which are least subject to market discipline. Many are trans-national. Following market culture, they tend to waste that space to pay executive bonuses and to indulge in self-promotion. Some also innovate.

Creativity is most likely to come from parties, free from the shackles of market culture, which have some control over their economic environment.

Social and national protection (a welfare state, some import barriers, and a significant public contribution) give some space to all firms in a national economy. While that space may allow a bit of "slackness", more importantly, it generates both a willingness and an ability to take risks. An economy with space for entrepreneurial discretion is an economy that does not exert too high a price on risk taking. The downside costs are minimised, while the upside gains are less easily eroded by global market forces.

Genuine public broadcasting has space. (In Australia it is "Triple-J" youth radio that supplies the niche for "non-commercial" music.) Public broadcasting, along with an appropriate public culture, has the opportunity to take risks, knowing that a fall in ratings is not death. Some discipline is necessary to ensure that ratings - the market, the private alternative - plays some role. Market forces per se are not the death of creativity. But pure market competition can be.

To engender creativity, it is not enough to create bigger markets and more niches. Creativity requires a proper balance between discipline and forgiveness. Public input provides that balance.

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Letter to City Voice on UBI (29 April)

I have followed the discussion about universal basic income (UBI) in the City Voice (April 1998) between John Robinson and John Wilson with interest. I would like to make the following comments.

It is probably a bit strong for John Robinson to consider the Government to be "audacious" in giving a UBI to the wealthy. While it is true that everyone grossing more than $38,000 per annum ($730 per week) received the equivalent of a UBI of $53 per week from 1988 to 1996, receives $76 per week at present, and will receive $99 per week from July 1998, these payments arise from a technical approach to income tax that has passed its 'used-by' date, and not as part of a cynical policy to favour the wealthy.

It is wrong to say, as Robinson does, that the Government has in recent years "given the UBI in the form of tax cuts, to all middle and high income earners". Rather, the tax cuts this decade have had the effect of doubling the effective UBI to above-average earners.

An alternative "basic income / flat tax" approach could spread this year's tax cuts equitably. Given our corporate tax rate of 33 percent, it would be possible to ensure that every adult - not just those grossing in excess of $730 - receives an unconditional benefit of $88 per week from July this year. An income tax rate of 42 percent would be sufficient to raise the benefit amount to $150 per week.

This unconditional benefit represents the "social dividend" or "universal income" first-tier component of a UBI. A UBI is a two-tier system, however, which, in addition, assures further benefits to those with additional needs. Payments to caregivers on behalf of children represent part of the second tier.

By both integrating the tax cuts into an unconditional benefit and by assuring sufficient benefits to meet basic needs (as defined in the 1972 Royal Commission on Social Welfare), the UBI is, as Robinson notes, a genuine "centre-left" alternative to the targeted welfare mess that our tax-benefit system has become.

The very simple core idea behind the UBI is that, for a higher tax rate, we can have a higher universal income. Robinson has possibly confused his readers by using the term "clawback" rather than the term "tax rate". Certainly Wilson seems to have been confused by Robinson's language. With a social dividend of $150 per week and an income tax rate of 42 percent, persons would get to keep their $150 plus 58 percent of their gross earnings; hardly a clawback in the sense we have come to understand that word.

Today tax cuts are used to give growth dividends to higher income earners. A simple accounting integration of tax concessions and social welfare benefits would reveal to all the inequity of the tax cut approach to the payment of social dividends.

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The Community Wage as a Lifestyle Option (26 April)

On 22 April, Employment Minister Peter McCardle made his long-awaited - indeed long-feared - announcement about workfare; about the replacement of the unemployment benefit with a "community wage" that is in effect conditional on the recipients doing 20 hours per week of "community work".

The policy actually has two upsides in addition to its numerous downsides. One upside is the opportunities for the formation of new community organisations; organisations that might be able to sponsor work that the Government would never otherwise consider funding. Community work can have a distinctly "left-wing" flavour.

The second upside relates to the intention of workfare to remove "subsidised leisure" as a lifestyle option. Leisure, to an economist, means any activity that is not determined by the market. The real meaning of leisure is something like "freedom constrained by non-market social and family obligations", not something like "idleness". Leisure time is largely but not entirely discretionary time.

Compulsory part-time community work legitimates both part-time work (with its flip-side, part-time non-work) as a lifestyle option and non-market work (a traditional form of leisure) as an option. This is a big change from the social obligation to be occupied fulltime in gainful (ie market) employment. And by forming community collectives, "job seekers" (as Peter McCardle euphemistically calls the unemployed), as a part of the community, can be employer as well as employee. That relationship of collective non-market self-employment can give community taskforce workers some degree of control over their work, and hence, given that it is part-time work, quite a large degree of control over their time.

Certainly, the introduction of the community wage may legitimate the subversive mechanisms through which unemployment has already become a lifestyle choice for some: namely choosing to live away from the main cities, or through unconventional dress, hairstyles etc. We need never feel guilty for choosing to live in a small town, knowing that it has few opportunities for market employment.

McCardle, noting that many job seekers are not job seekers, says "today we have a large number of job seekers who have given up their search for work". The community wage facilitates giving up the search for market work. If we think of the work ethic as an innate desire to contribute to one's community or society, then his "personal view that the work ethic is a fundamental part of human nature and human character" may be correct. If so, then the choice of a lifestyle free from market work may be a reflection of this truth and not a misguided attempt by humans to behave in ways that are contrary to their own nature.

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Less than an Economic Miracle (26 April)

In the first years of the MMP transition period - the years 1993 to 1999 in which New Zealand's political system is being transformed - were seen by organised business as years in which an economic miracle had come to fruition in New Zealand. According to New Zealand Business Roundtable chairman Doug Myers "the mindset was 'relatively euphoric' ... we [thought we had] 'the freedom and the responsibility to run our businesses at international standards of excellence'" (quoted from p.19 of an article in the NZ Listener by Gordon Campbell: "The Economy; a Special Report", April 18).

In 1995, I wrote a discussion paper * questioning this euphoric view. Since 1997, Myers and most of his ideological peers have come to accept, belatedly, that I was right. There was no miracle.

Unfortunately, they have failed to draw the obvious lesson; that the reforms did little good and may have done a lot of harm. Instead, they have turned to the electoral system. They have blamed MMP. Proportional representation in Parliament is supposed to have generated a leadership vacuum, and they have switched from the flagship libertarian view that government should get out of the economy to the pragmatic realisation that the kind of economic they like can only be sustained by a politically powerful elite. They want a government that pushes unpopular reforms further, and they see democracy as a barrier to that.

What appeared to be a miracle was a rapid rush of internationally mobile capital into the New Zealand banking system. The rush was a result of a sharp tightening of monetary policy by the Reserve Bank in June 1994.

An economy flush with money always feels good, although in this case (as in 1987 before the crash) the feeling was not shared by new firms (for whom high interest is a cost rather than an income) or by firms exposed to international competition (for whom the high exchange rate was a disaster). It felt good for Myers, a beer baron, the name behind Steinlager.

The New Zealand economy is now looking very sick. It is the Reserve Bank and not democracy that is the culprit. In a recent spate in the NZ Herald (see "Auckland's Power Debacle") I suggested that the effect of the overvalued NZ dollar was to boost the Auckland property market at the expense of the real economy. Subsequent analysis published by the Herald's business columnist Brian Gaynor (March 14) proves me right. New Zealand was flush with money going to all the wrong places, as indeed many of the Asian economies have been in the 1990s (see "Savings: a Social Vice?").

Campbell (p.19), citing Gaynor's figures, notes that trading banks acquired large sums from overseas "As Gaynor points out, total bank lending to the property sector, [was] largely lent out for residential housing.... Lending to the property sector is ... three times what is being lent to the entire agriculture, forestry, pulp and paper, fishing and other manufacturing sectors.... 'The export sector has not been able to attract its fair share of the investment dollar'. ... New Zealand's export performance has been miserable" for the entire 13-year span of the reforms. ... "We are not a miracle economy."

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* "New Zealand 1995: A Miracle Economy?" Policy Discussion Paper 19, Department of Economics, University of Auckland (1995). [back]

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Tax is an Income as well as a Cost (25 April)

In Income Taxes are Production Taxes, I noted that "taxes are, like wages, a cost of production. Wages are one cost, income tax is another cost. Profit and interest are further costs. These are all 'factor costs', which represent ... income to households" [emphasis added].

Thus, income tax is a factor cost which represents the major part of the income of the sovereign. In a true democracy, the sovereign means the people treated as exact equals. The total income of the sovereign includes other taxes - consumption taxes such as GST/VAT, customs duties, disincentive taxes such as carbon and tobacco taxes - and the profits of state-owned enterprises. The total income of the sovereign represents a "social wage fund", which represents an equal social wage, a part of each citizen's personal income.

A social wage can be thought of as payment in both cash and in kind. Cash payments from the social wage are social dividends, whereas payments in kind are public goods such as public education, a public health system, defence, police etc.

Modern economically developed societies pay social dividends in various co-existing forms: eg as socially-augmented wages, as discounts on income tax (eg as "tax cuts"), as low consumer prices, or as social welfare benefits. In the purely competitive model of the economy, the consumer is regarded as sovereign, so low prices are seen as the most appropriate means of paying social dividends. Where social dividends are paid predominantly as "tax cuts" we have an implicit state of "taxpayer-sovereignty". And where the labour market is used as the means of delivering social dividends, we are in an implicit state of "paid-worker-sovereignty".

Social dividends are, in effect, targeted to different social groups, most of which receive social dividends in proportion to the private income and/or expenditure. Only social dividends in the form of cash "transfers" are paid in inverse proportion to private income.

In a true democracy, where citizens are sovereign by virtue of citizenship (rather than by virtue of expenditure, income, or labour force participation) then explicit social dividends should by paid as equal payments from the social wage. (The only distinction is between adults and children. It seems appropriate to me that minors should receive their social wage in kind, whereas their caregivers should always receive a cash social dividend as an explicit part of the adult social wage.)

Universal social dividends need not eliminate all forms of implicit social dividend. There will continue to be grounds for income transfers, for rising wages and for prices to fall relative to incomes. It is only explicit social dividends, however, that provide a transparent mechanism for maintaining equity in a technologically advancing society. As such, they enable us to see that high taxes represent high incomes (and legitimate costs) rather than arbitrary burdens imposed on sovereign citizens.

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Pareto Efficiency is a Double Standard (23 April)

Neoclassical economics uses the concept of "Pareto efficiency" as an attempt at a value-free means of establishing whether a state of activity is economically efficient or not. Being "value-free" means that the concept has no means of establishing whether one distribution of income is preferable to another.

The concept is usually taken to mean that any shift from one state to another which necessarily involves losses to one or more persons constitutes a breach of Pareto efficiency. An alternative version is that such a shift conforms with Pareto efficiency if the losers are compensated, by the winners.

Both views miss the essential point. A Pareto efficient (or Pareto optimal) state is a state in which it is not possible to move from without creating losers. A shift from one Pareto optimal state to another must create losers. But there is no loss of efficiency in such a move, because both the before and after states are Pareto efficient.

Table 1 shows an example, where incomes are allocated to "wages" or "profits", and where the line UV represents all Pareto efficient states.

To move from a particular non-Pareto efficient state (eg state A) to a particular Pareto efficient state (eg state C) may well involve losses to many parties; in Table 1 there are big losses to wage-earners and small gains to the owners of capital. Such a shift is justified as economically efficient because it is a move from an inefficient to an efficient state. Furthermore compensation should not be paid to the losers if such compensation constitutes a Pareto-inefficient departure from state C.

In this example there is an alternative Pareto efficient state (state B) which can be reached from state A without anyone losing and with both labourers and capitalists gaining. But the rules of Pareto efficiency do not demand that state B be chosen in preference to state C, as both B and C are Pareto optimal. This is why the concept is a deception. A shift from A to C does not seem to be Pareto efficient, but it is.

In practice, an attempt to get from A to C may in fact get to the sub-optimal position D. Here the double standard kicks in. Capitalists will insist on policies that take the economy from D to C, and that going from D to B is quite opposed to the spirit of Pareto efficiency.

Attempts to achieve economic efficiency (so defined) have almost always involved losses to some and gains to others. Typically, the gains from such social engineering, as in the neoliberal reform programme, accrue to a small number of already wealthy persons, while the losses accrue to the majority on average or below average incomes.

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Paul Romer on "Neo-Schumpetarian" Competition (13 April)

In his article "Beyond Classical and Keynesian Macroeconomic Policy" (from Policy Options, July-August 1994) Paul Romer explains the virtues of stormy seas of change. As I suggested, stormy seas may be no more damaging that calm seas. Nevertheless, stormy seas do pose a certain "noise" problem. Sound national policy is able to allow the national economy to respond to trend change, while insulating it from random buffeting. The problem with a calm sea is that there is no trend change; indeed the key Schumpetarian insight is that growth creates storms, and that the non-random forms of buffeting create growth. ("Schumpetarian" relates to Joseph Schumpeter, the Austrian-American sociological economist whose writings from 1910 to 1950 represent the kernel of New Growth Theories.)

Romer sees this as an argument against national protection. I see it however as an argument for insulation, which I take to mean protection from random buffeting while being accepting of real forces for progressive change. Thus national protection serves as a means of stabilisation; not of denial of change. And social protection ensures that those dislocated by change are looked after through a combination of welfare provision and educational opportunities that might lead to a new career.

The best forms of national protection are moderate tariffs and foreign exchange taxes. Unlike licences, quotas and barriers, they tilt the "playing field" in favour of domestic economies while keeping them open to international market forces. And explicit tax-funded social dividends are the best form of social protection, because they ensure that every member of a society is drawing non-labour income from the dynamic growth process (growth dividends). Indeed long-term dynamic growth was made possible by the stormy seas ("creative destruction" was Schumpeter's term) that themselves arise from the growth process. (Uncertainty, properly buffered, is good, not bad, for growth.) Such growth is (or at least can be) environmentally sustainable, because it represents qualitative rather than quantitative change.

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Welfare and Workfare in the 1930s (13 April, 1998)

The debate about the pros and cons of workfare vis-à-vis welfare is much the worse for a lack of historical content. How did the different approaches to relief stack up in the 1930s, during the recovery from the Great Depression.

Contrary to widespread belief, different countries experienced depression in different years (although 1932 was just about the worst year everywhere). The countries that did best in both limiting the mid-depression downside and raising the post-depression upside were those which had introduced unemployment benefits in the 1920s. Of particular note are Great Britain and Sweden, both of which suffered very badly in 1921-22. Both countries experienced strong domestic-led recoveries after 1932, thanks in large part to the role of the benefit in limiting the erosion of demand for wage goods (ie the kinds of goods and services that working class families spend most of their incomes on).

New Zealand, while experiencing a somewhat later recovery, switched from workfare to welfare during the period in which Gordon Coates was Minister of Finance (1933-35). New Zealand's subsequent recovery was startling, and much more rapid than that of Australia, whose recovery stalled after 1935.

The two most dramatic examples of countries staying in depression until 1940 were France and the USA. The former really struggled to recover because the redundant workers either returned to peasant farms or to their North African homelands. They contributed nothing to domestic demand, unlike the unemployed of Great Britain.

The USA followed a workfare programme. While effective in creating some well-paid jobs and some infrastructure, the programmes provided nothing like enough money to rekindle the pre-depression demand for wage goods. It took a war to rid the American economy of mass unemployment.

In the 1930s, welfare worked. Workfare did not.

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In Stormy Seas? (12 April, 1998)

The following piece appeared in the "Loose Change" section of the NZ Sunday Star-Times (12 April):

Accustomed to hearing New Zealand described as a small, open economy, World Bank chief economist Joseph Stiglitz's recent comments may interest this country: "Small open economies are like rowing boats on an open sea. One cannot predict when they might capsize; bad steering increases the chances of disaster and a leaky boat makes it inevitable. But their chances of being broadsided by a wave are significant, no matter how well they are steered and no matter how seaworthy they are."

Perhaps Stiglitz made his comments after reading Brian Easton's 1997 economic history of New Zealand In Stormy Seas?

Personally, I'm not really happy with the analogy that New Zealand is like a boat at the mercy of random, violent yet ephemeral outside forces. Nor do I believe that small nations are at the economic mercy of larger nations. (They may be at the military mercy of larger nations, or in danger of cultural imperialism, or even of environmental catastrophe.) It may require more protection to create a diverse economic society in a small country than in a large country. Choosing diversity and less inequality over static efficiency is a political choice.

As long as countries like New Zealand have morally and technically competent people, then their economies can flourish. Protection may create some static inefficiency; the payoff is diversity and dynamism. Some technically competent people might leave on account of real wages being lower than in, say, California. But, under the helplessness and specialisation induced by pure free trade, many more people are likely to leave, as they will have no choice if they are to pursue the occupation of their choice. Indeed, small countries that see themselves as specialist producers are likely to lose people to places like California, even (especially?) when the global seas are calm. But they are no more likely to lose their best-educated people than are places like Oklahoma and Oregon.

Societies can choose to insulate themselves from external economic forces. Insulation is not withdrawal. Putting out stabilisers is not putting up the shutters. Insulation is simply focussing on the economic wants of a nation's own citizens with minimal distraction from the noise outside.

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Economic vs. Political Sovereignty (8 April, 1998)

We hear a lot in the media today - especially by left-wing commentators - about "economic sovereignty". Unfortunately, the term is being misused.

The term is used in particular with reference to the debate on globalisation, the MAI (Multilateral Treaty on Investment), and tariff protection. We are told that a global level playing field for investment acts as a breech of a nation's economic sovereignty. Surely, however, this is a breach of political sovereignty. Each nation's sovereign government is subject to the global "market" forces which are in reality the collective will of international capital. Government's which follow the optimal economic policies for a "closed economy" (policies which include high taxes and high wages) are render their nations uncompetitive when in competition with other nations. Unfettered international competition makes democratically elected governments more accountable to international market forces than to their peoples.

Economic sovereignty is about ownership at the national level, and the assertion of the rights of ownership. Thus the privatisation of public assets is an issue of economic sovereignty. Even more important, the denial of an income stream to the owners of public assets constitutes a breech of economic sovereignty.

Economic sovereignty is about the payment of a social wage.

Political sovereignty is about governments acting in the interests of their electors (their constitutional principals), and not in the interests of alternative principals, such as the collective power of international capital.

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Jenny Shipley's Denial (5 April, 1998)

On Radio New Zealand's "Insight 98" programme today, Mrs Shipley said that, "worldwide, there is a burgeoning of costs that is perplexing governments". While this statement is certainly true in all its nuances (see Rankin File articles about cost capping and cost raising), the perplexion is entirely voluntary. Jenny Shipley is in denial. (One part of a "Code of Government Responsibility" might be that a government mustn't be perplexed when the only answers that are available to it are answers that are distasteful to it.)

The problem arises because contemporary western governments choose to treat economic policy and social policy as quite separate. Thus, it is presumed, problems deemed to be "social" neither have an economic facet nor an economic cause. The cause must be social. The logic is pure fallacy.

The reality is that the neoliberal reforms have been an expensive failure everywhere. They have created many costs that did not exist before, or, if they did exist, existed to a much lesser extent. They are called external diseconomies, social costs, financial costs, business services, managerial costs, transactions costs, high real interest rates and high profit expectations.

Mrs Shipley also claimed that the welfare state was targeted until the 1970s, and that the universal benefits of the 1970s (presumably she means the DPB and National Superannuation) proved unaffordable in the 1980s. In fact, it was the failure of the economy to grow in the late 1970s and from 1985-1992, the ensuing decline in employment growth, and a huge increase in expenditure on public administration from 1984 to 1987, that created the budget deficits.

It is quite wrong to suggest that a political decision was made to switch from targeted to universal welfare provision in the 1970s. To some extent the matter is a play on words, because "targeted" can mean "conditional" or "means-tested" or both, whereas "universal" does not always mean "unconditional" or "non-means-tested". The meaning of universal is dependent on the socio-economic context of the time. In the era of full male employment from 1937 to 1977, the issue of means-tested unemployment benefits rarely arose. Men and single women either had fulltime jobs, or they were jobless. If they were jobless they qualified for a universal unemployment benefit. They got the same benefit whether they were rich or poor.

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Health Reform? the "Stencil" Approach (26 March, 1998)

Jane Clifton's column about the ongoing "reforms" to the public health system (Listener, March 28), "The Heart of the Matter", is particularly perceptive. She invokes the image of Plato's Republic, with technocrats par excellence (eg former Treasury Secretary, Graham Scott) drawing up a rigid "prescriptive, mechanistic, finitely costed, recipe" for health services; in short a "stencil".

In a world of stencils, public agencies each deal with the things that they are prescribed to do, and they are budgeted on that basis, and only on that basis. When customers - eg sick people - seek health care services from a public agency, they are turned away if their problem doesn't fit that which the agency is mandated to treat. Customers who cannot get the right labels for their conditions find themselves in a Kafkaesque maze where their problem must always be attended to by someone else. We call it "falling through the cracks". The Accident Compensation Commission (ACC) has become a good example of a such prescriptive organisation.

We have been told often enough that neoliberal economics is all about creating a marketplace, which means that it is driven by what the customer "demands". The reality is the opposite. It is an attempt by the government - an agent unresponsive to its principals - to bound costs and then to cut them. It is seen as worthwhile to pay managers $100 to cut $101 of clinical costs. None of that is what the customers of the public health system want. It may however be what the tax-avoiding capitalists who profit from the use of public domain resources want, or think they want. (It's not clear that fiscal costs can be cut this way, let alone social costs.)

We urgently need a fiscal contract between the users and the owners of public domain resources. In such a contract the users pay tax to the government, acting as a responsive agent to its citizen principals. These owners receive a social wage in return, which must include an "organic" customer driven health care system. Health care agencies must treat people, and not just prescribed medical conditions.

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Act's Social Policy: Prescriptive Insurance Programmes? (24 March, 1998)

Act are pushing for a 20% tax as the centrepiece of its programme for the Taranaki by-election, and hence for the next general election. They don't say what services they want to cut; rather they say what they will fund: namely items relating to security and police, the machinery of Government, foreign relations and trade ministries, treaty claims, and ministries which advise on such things as conservation and minority interests.

It appears to me that the big items omitted are health, education and social welfare. Therefore the issue is how Act's ministries would manage those issues, given that they won't simply go away. It seems to me that the big clue is the CRSS proposal ("compulsory retirement savings scheme") which in September 1997 was defeated in a national referendum by a ratio of 92 to 8.

As soon as we get a neoliberal government - unhindered by centre parties such as New Zealand First - then we can expect nearly half of our income taxes to be replaced by a new set of taxes that will be called insurance premiums. Like the CRSS proposal, these premiums will be regressive, in that there will be a nominal flat rate, but with exemptions to those people who fit certain criteria. Exemptions will go to those who already have comprehensive private health insurance, unemployment insurance, approved private retirement savings programmes, or are paying for private education. Exempted persons will be, in the main, the top 5-10% income recipients.

Act will not cut taxes at all. Rather, they will rename much of what we call tax, and fit it into a prescriptive "insurance" straightjacket. Low income New Zealanders will find that they have virtually no lifestyle choices; ie no freedom. Compulsory payments will rise, not fall, for most New Zealanders. Those payments will go into insurance funds from which the money managers will prosper. And the insurance programmes will only fund claims that fit tightly defined prescribed criteria. Many people seeking to claim on their "insurance" will be refused by the unaccountable grey men and women staffing these new bureaucracies. Each bureaucracy will follow its prescribed rules to the letter, sending elsewhere customers who don't fit.

If we think ACC is a problem, then Act's Brave New World constitutes the remainder of that iceberg.

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How many Beneficiaries? (23 March, 1998)

Richard Prebble, Act's leader and MP for Wellington Central, apparently believes that one of the greatest symptoms of our social malaise is the number of beneficiaries (Paul Little, Listener editorial, 28 March 1998). The figures quoted for the number of beneficiaries in New Zealand appear to vary from 200,000 to 850,000, so Mr. Prebble's policy to halve the number of beneficiaries seems rather ambiguous. Furthermore, it is not clear whether Act see the numbers of beneficiaries as mere symptoms of the malaise, or as the malaise itself.

The UBI (universal basic income) approach to taxes and benefits neatly resolves the situation. From a UBI perspective, every taxpayer is a beneficiary, on account of the ordinary tax concession implicit in the graduated scale of income tax. At present, every person earning over $34,200 per annum receives an annual "tax benefit" (ie a benefit paid as a tax concession) of $3,933 (set to rise to $5,130 in July). All people receiving between $0 and $34,200 of taxable income gain tax benefits somewhere between $0 and $3,933. The July "tax cuts" will be no different to any other form of benefit increase.

There is nothing wrong with being a beneficiary. Perhaps 95% of adult New Zealanders are beneficiaries. Well over a million of those are entitled to benefits in addition to tax concessions; mostly family support tax credits, accommodation supplements, student allowances and New Zealand Superannuation.

Benefits are a rightful part of our private incomes. Maurice Williamson (in Parliament in 1997) was quick to point out that public money granted to Aotearoa Television in 1996 became private money once paid. Likewise money from public funds paid to public servants and beneficiaries is private money once paid. That's not a malaise; that's normal life.

Beneficiaries have as much right to all of their private incomes as anyone else; yes, all 2.5 million of us beneficiaries.

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How big a Social Dividend? (23 March, 1998)

If we assume that all government income constitutes a social wage fund to be allocated to all adults, and that income tax revenue is a simple proportion of "GDP at factor cost", then it is a comparatively simple matter to calculate the value of the individual social wage.

If the tax rate is 33%, then the individual social wage will be 33% of GDP per capita. In the case of New Zealand at present, GDP at factor cost is about $85 billion. There are about 2.7 million adult residents. Thus GDP per (adult) capita equals about $31,500, which, at 33%, equates to an individual social wage of $10,400.

If we allocate all indirect taxes and profits of state-owned enterprises (SOEs) to government consumption and investment, then $10,400 represents the maximum adult social dividend that can be afforded from a 33% tax rate.

It is very useful to note that the GDP per capita number used here - $31,500 - approximately equals the average annual fulltime wage in New Zealand. Thus a simple rule of thumb is to multiply the average wage by the tax rate to calculate the maximum affordable social dividend. (I have Brian Easton to thank for this insight.)

There are of course difficulties in achieving such a maximum. It may not be possible to collect the full 33%, and the funds from indirect taxation and SOEs may not be enough to fund the public goods we demand. Nevertheless, such a technique represents a simple way of checking the costings of UBI (universal basic income) proposals, and a potent means of evaluating trade-offs between tax rates and social dividends.

A rise in the tax rate to 43% gives an additional 10% of GDP to the social wage fund, and an additional $3,150 to the maximum social dividend payable, making it up to over $13,500 for every adult New Zealander.

The social dividend implicit in the new 1998 tax scale is $5,130 per resident adult. Everyone grossing $38,000 or more will pay 33% income tax and get an effective rebate of $5,130. We can afford to treat that amount as an explicit social dividend, and to ensure that no adult receives a lesser amount from the social wage fund.

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Ruth Richardson's Act (22 March, 1998)

In an extraordinary speech last week, former Finance Minister Ruth Richardson (the deposed Saddam Hussein of NZ politics; the author of the 1991 "Mother of all Budgets") told her new party, Act NZ, that Act must work to remove the mixed member proportional electoral system (MMP), to reduce the number of MPs to 80, and to reduce taxes to 20% of GDP.

The most extraordinary aspect of the speech is that Act is itself a product of MMP, and that in the electoral system the NZ far right is angling to replace MMP with (SM, the supplementary member system), Act would get at most two MPs in Parliament (Mr. Prebble plus one list MP). (In a national referendum in 1992, both SM and the old FPP - first past the post - systems were comprehensively rejected.)

With 80 MPs, 30% of MPs would be Ministers inside or outside of Cabinet. In a two-party parliament, in a country without provincial assemblies or a senate, this system would give the leaders of the governing party extraordinary power to impose their will on a subject population. While Act clearly would not be that party, the mere presence of Ms Richardson giving suicidal advice lends credence to the view that Act is really only a front for the right wing of the National Party (Mr. Williamson's "National B" party).

Ms Richardson is looking for an electoral system that will give her political friends power to impose a 40% cut in public revenue, despite the fact that all the polls say that the people overwhelmingly want better social services ahead of tax cuts. Indeed, in a political and economic democracy, the efficient tax rate is determined in large part by the relative preference of the people for collective goods over private goods.

The people are not demanding fewer collective goods. The appropriate tax rate in a democracy can only be determined by ordinary citizens' preferences; not by the pseudo-scientific literature, paid for by organised business interests and their acolytes within government, which keeps coming up with as if by magic the number 20%.

Rankin File