Ronald Coase on Adam Smith's "Invisible Hand"    (28 November)

Misallocation of Capital    (27 November)

Has New Zealand's Economic Recovery Started?    (19 November)

Conjuring up Funds for a Tax Cut in 2000    (19 November)

Taxing Super Funds    (17 November)

MPs' Salaries    (13 November)

Scorched Earth Politics?    (10 November)

Southland as a Metaphor for New Zealand    (1 November)

Taxing Economic Activity conducted in Local Currencies   (1 November)

Ronald Coase on Adam Smith's "Invisible Hand"    (28 November)

Ronald Coase, the Chicago-based Nobel prizewinner in economics (1991), is more honest than Paul Samuelson was in quoting Adam Smith, but not much more honest. On p.83 of Essays on Economics and Economists (in a 1976 essay titled "The Wealth of Nations") he says that:

Just as Samuelson tried to make the "invisible hand" passage look like a description of a self-adjusting price mechanism, Coase carefully omits any reference to Smith's point that the invisible hand promotes domestic industry in favour of global industry, and in doing so it might override the price mechanism. In his Nobel Prize lecture, Coase says that "the economy could be coordinated by a system of prices (the 'invisible hand')".

On p.454 of Coase's copy of Adam Smith's Wealth of Nations, Smith says:

The price mechanism, which directs "industry that its produce may be of the greatest possible value" is alluded to, is the secondary consideration of "every individual who employs his capital".

I look forward one day to coming across a neoliberal economist who actually attempts to confront Smith's comments on the invisible hand in terms of Smith's on emphasis on "domestic industry". In the meantime, we have only comments critical of the new right, such as this from the Atlantic Monthly earlier this year.

Misallocation of Capital    (27 November)

Gareth Morgan (The Dairy Board: Cheesing Off Fellow NZ Businesses 24 November, NZ Herald "Single-seller Dairy Board costly for the rest of us") argues that protected businesses such as the Dairy Board have an unfair advantage in the capital market. Banks would rather lend the Dairy Board money than Infometrics, Morgan's own firm.

The implication is that firms like Infometrics would be better off if the Dairy Board was to lose its privileges; ie with a 'level playing field' unprotected firms would have access to more capital at lower rates of interest.

The real world is not like that, however. In the real world, firms form a pecking order off their own bat. In fact, the whole point of regulation is to even up the very uneven playing field that arises in a state of laissez-faire. Thus, if the dairy industry had no statutory privileges, then it is likely that the dairy industry would be at least as undercapitalised as Morgan suggests the economics forecasting industry is. Most capital would be swallowed up in an elite group of oligopoly industries in areas such as public utilities, energy, drugs and the like.

It is also interesting to consider what happened after the meat industry was deregulated in 1982. The numbers of meat processing plants ("freezing works") increased over the next 10 years, despite the fact that sheep numbers were falling from 1985. Considerably more capital went into the sheepmeat industry when both the security was reduced and the market was in decline. What happened is that each firm was expanding - including late entrants such as Fortex - in an attempt to survive by dominating the market. This was a "negative-sum-game" that could only be won by the firm or firms who could dominate the market.

Deregulation creates a form of equality that can be likened to the law of the jungle. But human beings only became special once they moved to a different kind of law. In the jungle, resources are not allocated with optimal efficiency. In New Zealand resources were much better allocated in the 1980s and 1990s in the regulated dairy industry than in the unregulated meat industry.

Has New Zealand's Economic Recovery Started?    (19 November)

In today's Herald, there were two reports about yesterday's speech on monetary policy by Reserve Bank governor, Dr Donald Brash.

The first, on the front page, by economics editor Patricia Herbert, was headed "Brash bullish on outlook". It began: "The New Zealand economy has hit the bottom and is beginning to bounce back".

The second, by Brian Fallow in the Business Herald, was headed "Turning point is yet to come". The subheader to Fallow's article states, Brash has "hit the economic accelerator". The bearish sentiment of the headlines was reflected in the article, with Fallow saying: "Dr Don Brash dispensed a large further dose of monetary stimulant to the economy yesterday, recognising that the coming recovery is likely to have to rely more on domestic than export growth".

Brash is quoted by both Herbert and Fallow as having said "at this stage we are not inclined to take these glimmers of light for the world economy as the beginning of a bright new day".

How is it that two reporters for the same newspaper can draw opposite conclusions; namely that Brash is simultaneously bullish and bearish about New Zealand's growth trajectory? Is the "coming recovery" real or hypothetical? It seems that Brash's words were interpreted every which way.

Perhaps of more significance, given that shallow reporting is accepted as par for the course, is Dr Brash's realisation that economic recovery must come from within, and not from increased export sales. That is tantamount to saying that any policy which can generate a domestic recovery without a balance of payments blowout must be taken seriously. Indeed he is saying that the hypothetical recovery, which requires such a policy, has not yet commenced, because we have not yet adopted a domestic recovery policy.

A return to some form of tariff protection and exchange controls is such a policy. Furthermore, if every country seeks to stimulate domestic spending under similar new tariff and exchange regimes, then every country that is in trouble can recover, thereby creating a healthy international economy. We fix ours, and let others fix theirs. Such an approach directly contrasts with that of APEC. At the APEC leaders meeting in Kuala Lumpur this week, Japan was roundly condemned for trying to do exactly what Don Brash's words suggest it should do; namely to give priority to a domestic-led recovery.

In the 1930s' depression, all the world conferences achieved little. Rather, the classic recovery was that of Great Britain, which turned to tariff protection and to its own domestic market. There are still simple lessons from history that can be learned.

Conjuring up Funds for a Tax Cut in 2000    (19 November)

As expected, the proposal to pay tax credits to employed persons who earn less than $38,000 and who invest in superannuation funds was defeated yesterday. Its passage was not a confidence vote, yet today's vote to set next year's tax rate has been declared to be a vote of confidence.

Indeed, yesterday's vote seems to have been designed to fail. It featured a bizarre proposal to regard the tax credit that was to be added to savers' super funds as income for income-testing purposes. Thus the tax credit would cost the very people who it was meant to be helping.

The Treasurer, Bill Birch seems very happy with the outcome. Now, he says, we have $60m dollars, the money that the failed bill would have cost, to spend on a tax cut. (See "Tax-cut vote loss frees up $60m" in today's NZ Herald.)

My guess is that Mr Birch is planning to cut income tax from 33% to 32%, while increasing the threshold for the 15% "low earner rebate" from $9,500 to $11,400. Furthermore, I suspect that there is a plan being hatched to have regular incremental tax cuts. Each round of tax cuts will look innocuous, but, when taken together, high income recipients will stand to make large gains.

Taxing Super Funds    (17 November)

Parliament will vote tomorrow on a proposal to pay tax credits to employed persons who earn less than $38,000 and who invest in superannuation funds. If ACT does not support the bill, it will be defeated.

These funds, quite sensibly, are required to pay tax at a proportional rate; 33%. Thus, low income investors are not receiving the tax concessions on this income that they are entitled to.

The government's proposal is to pay tax credits to investors whose marginal tax rate is 21%. Thus, the government is accepting the practicality of the principle that the most efficient and equitable form of income tax system is that based on a proportional tax rate offset by a tax credit.

Of course it would make things so much easier if the government was much less tentative. By introducing a proportional rate of tax of 33% (or higher) for all income, and paying a universal tax credit of $100 per week (or higher) to all adults then the whole problem disappears.

Nevertheless, the very existence of such thinking - of accepting the superiority of the proportional tax / universal tax credit model as a means of achieving income tax progressivity - in both the National and Labour Parties is a highly significant step towards the realisation next century of a universal basic income.

The importance of this bill lies not in its passage through parliament but in its promotion of the proportional tax / tax credit concept.

PS One danger of this particular proposal, is that it further increases the social standing of employed persons relative to beneficiaries. That subtle thrust within National Party policy inevitably leads to the creation of a two-tier citizenship, with the concept of "public interest" increasingly coming to mean the "independent breadwinner interest". There is no practical reason, to my knowledge, why beneficiaries who participate in superannuation schemes should be discriminated against.

MPs' Salaries    (13 November)

The annual ritual of MPs getting bigger salary increases than ordinary workers continues. And the usual cliché responses follows. Some say it is an outrage; others say that "if you pay peanuts you get monkeys". Spare me.

There are just two issues. If others in receipt of income from the social wage fund - the "public purse" - get their pay increases indexed to CPI inflation, when why not politicians as well? This issue is particularly pertinent in light of the changes to the indexing rules recently foisted on pensioners. And in light of the reduced real pay and rising workloads of university lecturers. (This week it was announced that, in addition to those stresses, the University of Auckland is looking to reduce staff numbers by 100.)

Perhaps the most important issue relates to the formula by which politicians' pay is set. MPs' wages are set by the "independent" Higher Salaries Commission, which is required to recommend pay increases that maintain relativity with managerial salaries in the (corporate) private sector.

So there is a way in which MPs - or at least government MPs - can influence their own salaries. All they have to do is pursue economic policies that lead to inequality; policies that favour the interests of private sector managers. Interestingly, that's exactly the policies that all our governments have followed since 1984.

It may well be that government politicians have not been thinking about their own salaries (or at least not consciously thinking about their salaries) when deciding what economic policies to pursue. Nevertheless, when, for many years in succession, MPs get higher percentage pay increases than the great majority of New Zealanders, we should learn to ask just why it is that the people in the private sector whom politicians identify with are being rewarded so much better than the remainder of private sector employees.

Managers may be important, but I don't think that they are any more important than they used to be. Do we now have a system of 'managerialism' because policymakers identify with managers?

Scorched Earth Politics?    (10 November)

The Government has shot itself in the foot again. This morning we heard that the country's major voluntary-sector service agencies are to have their government funding slashed. There is no significant fiscal benefit arising from this move, and certainly no electoral benefit.

This move follows a few weeks after the government decided to renege on the formula for retirement income (negotiated in 1996 through the multi-party accord) to index New Zealand Superannuation to 65% of the average wage. In that instance there were no electoral benefits, and virtually no fiscal savings to meet any current fiscal crisis.

The only explanation that I can think of is that, on retirement policy, the government wanted to sabotage the multi-party accord, thereby making retirement income a major political issue for the next parliament.

Likewise, funding for the voluntary sector. Much of the criticism of social policy has come from voluntary social service organisations, many of which are church-based. One of the most important recent initiatives was the 100 Year Hikoi of Hope. Associate Minister of Social Services, Nick Smith, has claimed that moneys is being taken away only from the talkers (read critics who run "newsletters and talkfests" [Radio New Zealand news]), and not the doers (read compliant organisations that provide jobs for the community wage scheme).

It appears that the National government has given up any thought that it might be re-elected. And it has come to realise that it cannot push through any more right-wing economic legislation. So, like an army in retreat, it is burning the villages, seeking to make recovery under the next government as difficult as possible. National's view is, presumably, on the 2002 election.

The government is punishing the its critics, wherever it can, through the chequebook. That is a theme that Brian Easton has long noted as being a hallmark of the style of politics associated with "the commercialisation of New Zealand".

Southland as a Metaphor for New Zealand    (1 November)

To properly understand where New Zealand fits into the brave new global economy, we need to see ourselves as a province, not as a nation.

The global economy is becoming like that of a very large non-trading nation (a large "closed economy" in the jargon). Within its borders - which means the whole planet - it already contains virtually-free flows of goods, services, capital and labour. The vision behind, for example, the MAI (Multilateral Agreement on Investment) is to remove the "virtually" with respect to capital flows. (The vision of the WTO - World Trade Organisation - is to do the same for goods and services. It will be interesting to see whether a similar international organisation or treaty seeks to promote the free international flow of labour. Philosophical consistency requires it.)

The global economy is sharply different from the world of international economics. Classical and neoclassical (ie "textbook") economics is based on a world of many independent sovereign nation states - a community of nations - which trade with each other for their mutual advantage, but which have fixed supplies of capital and labour. The neoclassical vision is very different to the neoliberal vision. The former advocates trade instead of capital and labour mobility. The latter advocates global laissez-faire.

To understand globalisation, we must look inwards, not outwards. We must look at how provincial economies (and, for federal nations like Australia, state economies) develop within the context of their nations.

To that end, where does New Zealand fit, as a province of the world? It's quite easy. New Zealand is to the world what Southland is to New Zealand. And Auckland is to the world what Invercargill is to New Zealand. If we want to see New Zealand's future in a globalised economy, we need to look at Southland and Invercargill today.

For most of this century, the Southland economy has been prosperous, if one-dimensional. It has two, perhaps four staples: sheep, energy, native forests, tourism. Thanks to both its prosperity and its economy's simplicity, it's most significant export has been its people; its well-educated people. Yet Southland also imports people (from other parts of its world; ie from the North Island of New Zealand) looking for a more simple lifestyle, for affordable farm land or for what is perceived as a relatively unspoilt environment.

Invercargill is a quirky, friendly city, a gateway to a scenic wonderland, with a popular reputation for being boring, even uncultured. That is not dissimilar to Auckland's image (inasmuch as it has an image at all) in London, New York or even Sydney.

The futures of New Zealand and Invercargill are not pre-determined. With new information technologies, Southland may have a new future within New Zealand as a good place to be switched on while easily able to switch out. Likewise, New Zealand may have a future that is different from Southland's past and present. But the forces that are presently working to depopulate Southland are working similarly on New Zealand as a whole.

Taxing Economic Activity conducted in Local Currencies    (1 November)

Radio New Zealand's Insight 98 programme today was about, in particular, "green dollar" local exchange cooperatives. Green dollars are a form of notional local currency, whereby members are allocated green dollar credits, and cooperative members spend their credits to buy goods and services from each other. They are also known as barter exchanges.

For most of us, such cooperatives are examples of local initiatives to avoid the poverty of unemployment or reliance on casual work that pays wages in New Zealand dollars. But tax economist Patrick Caragata (see "The Caragata Tax Report; a Nail in the Coffin of the Fiscal Contract" and "Reply to Patrick Caragata on Taxes") could only discuss the issue in terms of the "black" or "illegal" economy. Green dollar activity, as tax evasion, was criminal (albeit "soft" crime).

In reality, local cooperative enterprise adds more to the public domain than it takes out. The pragmatic solution is for Government to leave green dollar exchanges alone, recognising that they enable people to maintain their skills, to maintain the work habit (which, after all, was the official reason for replacing the unemployment benefit with the community wage), to make fewer requests for special benefits, and to make fewer demands on the criminal-justice system and the various other agencies of the poverty industry.

The economically correct solution is for the taxing authority to join the local cooperative. Thus taxes would be levied in local currency, and local currency revenue would have to be spent by the government in that community, purchasing services from members of the exchange.

A useful analogy is to imagine a new international tax authority; an institution designed to levy taxes to pay for international public goods (ranging from global security [eg dealing with people like Chile's Pinochet and Yugoslavia's Milosevic] to the management of the global commons [eg the oceans, the rainforest, the atmosphere, Antarctica] ) and to tax international transactions (ranging from untaxed Internet commerce to the transnational corporations which use tax shelters, transfer pricing, and creative accounting).

Would an international tax authority expect New Zealanders to pay international taxes in United States dollars? Would Somalians have to pay their share in US dollars? That would place absurd pressure on the balance of payments of countries already unable to pay their foreign exchange liabilities. (Interestingly though, it was the introduction of money taxes rather than taxes in kind that, more than anything else, forced the transition from feudalism to capitalism in the middle part of the present millennium.)

In reality, an international tax authority would tax each nation in its own currency. Likewise, a national tax authority should tax a local currency cooperative in its own currency.

Patrick Caragata's solution, as always, is to cut taxes to the bone, thereby (he claims) lessening the incentive for us to embark in tax evasion. That solution cannot work, of course, because lower tax rates mean lower benefits, which mean that such communities would have even less cash with which to pay taxes, and would have an even greater need to acquire services via barter exchange. His solution would lead to a great expansion of the informal economy, including its genuinely criminal element.

© 1998 Keith Rankin

Rankin File