Auckland Royal Commission

The long awaited report was produced last Friday and referenda managed one mention although one gets the feeling that

it would only be in an advisory capacity and therefore not worth the time and effort to participate. What does everyone think of the new proposals?

5.42 Ubiquitous computing and online systems for decision making have the potential
to make democracy far more participatory, both nationally and locally. The beginnings of this can be seen in cities such as Seattle where their website encourages email contact with councillors, provides tips for making e-requests, has council blogs and online public records disclosure.35 In the United States, an interactive internet system called the “Citizens’ Briefing Book” was set up for 12 months by the 2008 transition team for the new Democratic administration. American citizens were urged to log onto Change.gov and give us your idea. It can be about energy, healthcare, or reduction of our dependence on foreign oil. You decide what is important to you. Other citizens will then be able to read your ideas and make comments and suggestions.36

5.43 In a similar way, monthly internet referenda could involve residents in key decisions about their city and region. The Millennium Project expects that there will be a global move to “ubiquitous computing with collective intelligence for just-in-time knowledge to inform decisions”.37 Landcare Research sees a future move to participatory and devolved democracy, which is complicated but nonetheless productive.38

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Local Government Minister Rodney Hide today released the Report of the Royal Commission into Auckland Governance.

Minister Releases Report Of Royal Commission
Friday, 27 March 2009, 2:27 pm
Press Release: New Zealand Government

Minister Releases Report Of Royal Commission

Hon Rodney Hide - Minister of Local Government
Friday, March 27 2009

"This is an important matter for Auckland. And it is vital for New Zealand."

He said the Government wants to make Auckland the most exciting, vibrant metropolitan centre in Australasia:

* A region that attracts people and investment.

* A region that has first class infrastructure and lifestyle.

* A region that will encourage our children and grandchildren to build their futures in New Zealand.

"We're working to a tight timetable. I will be providing an update to Cabinet on Monday and the Government will continue working on the Report as a matter of urgency next week. We hope to be able to announce our response within two weeks.

"The Report is a comprehensive series of documents and the Government anticipates there will be considerable debate about it.

"I can see merit in having one Auckland organisation to drive, manage and be responsible for all planning and delivery of services.

"The proposals around management of assets, including water and wastewater, appear well thought through. Having one organisation manage all the regional assets makes a lot of sense.

"However, I have some concerns about whether the report provides for adequate local representation in our many diverse communities, and I want to look more closely at this issue.

"It's important to get Auckland governance right as our decisions will shape the future of Auckland and New Zealand for the next 50 to 100 years. We're committed to making a great city greater."

The Royal Commission (set up by the last Government) was a forum for people to contribute their views on the future of Auckland's governance and 3,500 individuals and organisations made submissions and 500 spoke to their submissions on the future of Auckland governance.

Mr Hide said: "It's now time for the Government to consider the Royal Commission's recommendations and make its decisions."

Mr Hide thanked the Royal Commissioners Hon Peter Salmon, Dame Margaret Bazley and David Shand for their work over the past 17 months.

The Report can be found at www.royalcommission.govt.nz/

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Dunne: time for a Wellington ‘super city’

It’s time to look at the ‘super city’ concept for Wellington, United Future leader and Ohariu MP Peter Dunne said today,

Media Statement
Friday, 27 March 2009

Hon Peter Dunne
MP for Ohariu
Leader of UnitedFuture


Dunne: time for a Wellington ‘super city’

in the wake of today’s Royal Commission recommendation of an Auckland ‘super city’.

“If there are reasons for Auckland to do this, then the reasons behind a Wellington ‘super city’ are even more compelling,” Mr Dunne said, adding that such a relatively small population didn’t require six local councils and the Greater Wellington regional council.

“It’s local government overkill,” he said. “A population of about 445,000 people just doesn’t need that much bureaucracy hanging over the top of it.

“Basically, there is too much piecemeal, parochial governance – and the costs that come with that – for too small a population.

“It’s unnecessary and worst of all, it imposes inefficiencies and inconsistencies and a lack of overall strategic direction on the people of greater Wellington.

“Look at the approach to big and important infrastructure projects such as Transmission Gully – the point is there is no approach, so nothing gets done as fast or as well as it should be done,” he said.

“A population the size of greater Wellington can have its democratic needs protected and completely adequate representation from one strong council base, and it’s time we looked at the idea seriously,” Mr Dunne said.

“Wellington is a super city to live in. It's time to make it a ‘super city’ too,” he said.

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Queen approves title changes; Governor-General knighted

Prime Minister John Key announced today that the Queen has finished the formalities needed to reinstate titles in the New Zealand honours system.

Queen approves title changes; Gov-General knighted
Friday, 27 March 2009, 3:35 pm
Press Release: New Zealand Government

Hon John Key

Prime Minister
27 March 2009
Queen approves title changes; Governor-General knighted

Mr Key also announced that the Queen has approved the redesignation of the Governor-General from a Principal Companion of the New Zealand Order of Merit to a Knight Grand Companion of the Order, effective immediately.


That means the Governor-General’s new title and style will be His Excellency The Honourable Sir Anand Satyanand, GNZM, QSO.

“It is fitting that the Governor-General, as Chancellor of the New Zealand Order of Merit, has a titular honour.

“I am also pleased that the Queen has given her formal approval to the changes I announced on 8 March.”

The Queen formally reinstated the titles by signing the new Amending Royal Warrant, dated 23 March 2009. (see fact sheet).

Fact sheet


The formalities relating to the reinstatement of titles into the New Zealand Honours System have been completed by Her Majesty The Queen signing the new Amending Royal Warrant, dated 23 March 2009. This new Warrant provides for:

• the reinstatement of titles at the two highest levels of The New Zealand Order of Merit; namely:

- Knight and Dame Grand Companion (GNZM); and
- Knight and Dame Companion (KNZM/DNZM).

• the opportunity for Principal and Distinguished Companions of the Order to elect to be redesignated within the Order as Knights or Dames.

• the opportunity for those Principal and Distinguished Companions of the Order who already enjoy a title in another Order of Chivalry, or as a Knight Bachelor, to be redesignated within The New Zealand Order of Merit Order as a Knight or Dame.

• an opportunity for the small number of widows of deceased former Principal and Distinguished Companions of the Order to elect to use the courtesy title of “Lady” for the remainder of their lives.

• those who elect not to accept a title to remain Principal or Distinguished Companions of the Order, and to retain their existing privileges and styles.

The Governor-General holds the office of Chancellor of the New Zealand Order of Merit. Under the provisions of the new Warrant, he retains this office. As the principal office holder of the Order, and with the reinstatement of titular honours, it is fitting that the Governor-General should also hold a titular honour.

The Queen has redesignated the Governor-General from a Principal Companion of The New Zealand Order of Merit (PCNZM) to a Knight Grand Companion of the Order (GNZM), effective immediately.

The Governor-General’s new title and style are: His Excellency The Honourable Sir Anand Satyanand, GNZM, QSO. As the wife of a knight, the Governor-General’s wife, Mrs Susan Satyanand, is entitled to use the courtesy title of “Lady”. Her new style is: Her Excellency Lady Satyanand.

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Why it's best for Govt not to be in business.

It's the end of a legend that never got started, a legend that goes back to the Muldoon "Think Big" era.

Marsden B power station sold

NBR article by Peter Gill | Thursday March 26 2009 - 10:31am

The massive Marsden B Power station south of Whangarei has been sold without ever turning out a single watt of electricity.

Built as part of "Think Big" in the early 1970s, the oil-fired station was immediately mothballed largely because of the oil crisis of that decade. It was never fired up in anger.

Mighty River Power wound up acquiring the station as part of the electricity reforms in 1999.

Mighty River's plan was to convert the plant to run on coal, being a less expensive fuel than oil. But the company was forced to drop those plans after 4000 submissions were made by locals who were vehemently opposed to the idea. Left with something of a white elephant, Mighty River decided to look for a buyer who would dismantle it and take it overseas.

Mighty River has confirmed that a buyer has been found but says it is not yet in a position to announce any details.

But locals say they've heard that the buyer is from India and plans to re-establish the station there.

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Auckland as a super city with a Lord Mayor?

Who knows what is going to come out of the Royal Commission on Auckland Governance? We could end up with a city

of 1.4 million people from Pukekohe to Wellsford with a Lord Mayor. What would you like to see happens and do we let the Lord Mayor and Council run the show without the checks and balance of binding referendums?

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Is it democratic to ban smoking?

Interesting NZH story by Matt McCarten.

Matt McCarten: It's time to snuff out capitalism's worst offender
4:00AM Sunday Mar 22, 2009
By Matt McCarten

A mate of mine recently died from lung cancer. He was a heavy smoker. After taking up the tobacco drug as a teenager to be cool, he never stopped and the addiction killed him. We've heard the story many times.

Years from now, our descendants will marvel how our society believed in free enterprise to the point they legally permitted international corporations to hook young kids on to a product everyone knew killed half of them.

We legally allowed these corporations to add a drug to deliberately make addicts of their customers. Their cravings enable these faceless profiteers to rake in umpteen thousands of dollars off each victim until they died.

Unlicensed drug pushers who peddle similar products have the full weight of the state hunting them down. When they are apprehended they are imprisoned. In some countries some of these entrepreneurs are sent to the gallows.

I have sympathy for some of these other providers of death when they claim some of the drug products on the market are less addictive and harmful than cigarettes.

I've never heard a convincing argument as to the benefit of smoking. We all know it kills its customers, yet it's regarded as a normal business delivering to a market.

It should shock us that these tobacco merchants send 5000 New Zealanders each year to hospitals, mostly publicly funded, to die in pain. That's a hundred families a week that have one of their dearest snuffed out.

The tobacco industry justifies this activity as a matter of a free choice by their addicts ... sorry, their customers. As every parent knows, teenagers are image-conscious and it doesn't take much to hook many of them on to stuff that's not good for them. But unlike most of the goods marketed at teens, tobacco is the most sinister and lethal. Nicotine is deliberately loaded into tobacco with the sole purpose of acquiring an addict they can milk until the product finally kills them. Everybody in this trade knows it, and therefore is complicit in mass murder.

Even if we pretend to believe the lies that their customers willingly accept they will die from using their product, I've yet to hear them address their responsibility for two innocent people they kill each week. Yep, that's the poor suckers who just happened to breathe in someone else's cigarette smoke. In a sane legal system, the tobacco barons would be charged with homicide.

The other fib is that the taxes added on to their product cover the costs of the health services the state has to provide. It's an absurd situation where our politicians absolve any morality issues because the cigarette industry claims the taxes on cigarette packets more than pays the financial costs of the deaths and illness created by them. Even if that's true, which it's not, go figure the ethics of that argument.

One of the doosies of moral gymnastics was the cigarette industry's much heralded donation of $300,000 to the Keep New Zealand Beautiful organisation. That works out at $60 for each person they killed last year. I wonder what portion of the costs that we pay to clean up discarded empty cigarette packets and butts littered throughout our country that will cover. But then it's not about cleaning after them anyway. It's just public relations to make them look better.

It's consistent with their industry strategy of so-called social responsibility that promotes their compliance and support of legislation and controls. Any public relations like this donation is a facade to cover up the reality that they do everything they can to get around current restrictions. There has been evidence that retailers are being paid "rebates" to stock particular brands. This is actually illegal, but somehow they have us believe these are isolated cases.

But there are all sorts of rorts used to get around pesky restrictions on their trade. While they're not allowed to have advertising at the counter you can't miss the huge wall cabinet behind every dairy full of their poisons. After the Commerce Commission stopped them telling lies about their cigarette brands as "light' and "mild", they are now about to launch a new campaign around "smoke-free" cigarettes.

However, none of the arguments over cigarettes is about morality. It's just a business creating a market and then providing the goods for a profit.

Frankly, if our parliamentarians were consistent we'd let all forms of drugs, whether hard or soft, be packaged and sold. The costs of deaths and health services would be added as a tax on to the retail price in the same way as they are to tobacco. And no doubt drug pushers would argue that it's a matter of individual choice, in the same way our tobacco barons do.

I like to think it has dawned on most people that unfettered capitalism is just a form of gangsterism and is past its use-by date. You only have to look at what has happened in the United States to realise that even they now accept that doing business without morality is unsustainable.

There has to be a new conversation in our society on morality and capitalism. We could start with confronting the serious issue on why we allow corporations to legally make profits from a product that targets teenagers to kill them.

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Aussie govt to monitor blogs

Interesting NBR article... Australia’s controversial DBCDE is to start monitoring blogs, including

Chris Keall | Monday March 23 2009 - 07:33am
ISP filtering critic Whirlpool, for mentions of itself – but the government says it’s all innocent.

A tender put out by The Department of Broadband, Communications and the Digital Economy (DBCDE) asks media monitoring of print, plus websites, for mentions of its name, reports TechWired Australia.

Alarm bells were sounded by Australian privacy critics when the tender used the phrase “blogs such as Whirlpool.”

The Whirlpool site has around 277,555 members, and its community-generated content frequently includes swipes at government policy, along with many articles rating broadband service.


Whirlpool posts have been frequently of the government’s ISP filtering plan (under which six ISP’s are trialling a content blocking system) and the tender for the national broadband network (NBN) – the two key projects being pursued by Communications and IT minister Stephen Conroy, whom the DBCDE comes under.

The move comes just as Senator Conroy had praised the Singapore government for recently halting its monitoring of blogs.

A spokesman for Senator Conroy’s office downplayed the development, telling The Melbourne Age it was "only natural" that the tender include services for monitoring relevant blogs:

"Whirlpool is a long-established online platform for news and information covering a wide range of topics across the telecommunications sector," the spokesman said. "It and other websites provide valuable insight into the industries in which we work."

Sunday’s revelation about the monitoring tender comes at a bad time for Senator Conroy, already under pressure after the DBCDE’s alleged blacklist of banned sites was leaked on Friday.

The National-led government has ruled out any ISP filtering here.

"We have been following the internet filtering debate in Australia but have no plans to introduce something similar here," Communications and IT minister Steven Joyce tells NBR.

"The technology for internet filtering causes delays for all internet users. And unfortunately those who are determined to get around any filter will find a way to do so. Our view is that educating kids and parents about being safe on the internet is the best way of tackling the problem."

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Negative interest rates as an economic tool?

Economic textbook author Greg Mankiw discusses an idea put forward by a student at a recent Harvard seminar.

Reloading the Weapons of Monetary Policy

Some people are concerned that in the the fight against recession, the weapons of monetary policy are nearly out of ammunition. That is certainly the case for the standard monetary weapon--cuts in short-term interest rates. After all, short-term interest rates are already about zero, and the Fed cannot cut interest rates below zero.

Or can it? In a discussion at a Harvard seminar recently, a clever grad student proposed a solution to the zero-lower-bound problem.

Let's begin with the basics: Why can't the Fed cut interest rates to below zero? Why can't the Fed announce, for example, an interest rate of negative 2 percent? You borrow $100 today and repay $98 a year from now. A negative interest rate would certainly encourage people to borrow and spend, thereby expanding aggregate demand. And if negative 2 percent wasn't enough to get the economy going, we could try negative 3 percent. And so on.

The problem, you might reply, is that no one would lend money on those terms. Rather than lending at a negative interest rate, you could hold onto cash by, for example, stuffing it in your mattress. In other words, the interest rate on loanable funds cannot fall below zero because holding cash guarantees a rate of return of zero. If the Fed tried to cut interest rates below zero, money would dominate debt instruments as a portfolio investment.

With this background, I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that, one year from today, it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 2 percent. Losing 2 percent is better than losing 10. Of course, some people might decide that at those rates, they would rather spend the money by, for example, buying new car. But since expanding aggregate demand is precisely the goal of the interest rate cut, that incentive is not a bug but a feature!

Okay, I understand that this plan is not entirely practical. But you have to give the student credit for thinking out of the box. And his plan does address a fundamental problem facing the economy right now: Given the fall in wealth, increases in risk premiums, and problems in the banking system, the interest rate consistent with full employment might well be negative.

---
Update: Alan Taylor of UC Davis (and coauthor, incidentally, of an excellent international economics textbook) reminds me of earlier versions of this kind of idea:

The idea of using scrip to stimulate spending dates back to the 1890s, when Silvio Gesell wrote a series of books related to monetary system reform. He claimed that since money held its nominal value over time, there was little reason to be in a hurry to spend it. This encouraged people to hoard money during periods of financial stress. Gesell, following a suggestion made by Swiss merchant George Nordman, argued that a “carrying tax” on money could prevent hoarding.

Gesell suggested that a periodic tax placed on money could do the trick. By making it costly to hold money, he believed people would be encouraged to spend it. In a severe depression, the idea that spending could be stimulated by making money costly to hold seemed appealing. In fact, Gesell’s views received the stamp of approval of the renowned economist John Maynard Keynes in his General Theory. Keynes viewed stamp scrip as a possible solution to what has been referred to as a “liquidity trap”—a situation where interest rates are so low in an economy, that no one cares to hold interest-bearing assets. By establishing a carrying tax on money, the nominal rate of return on money could be lowered, creating an incentive for people to hold interest-bearing assets, which might stimulate greater production across the economy.

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Nobel prize winner talks

1992 Nobel Prize winner in Economic Sciences, Gary Becker is interviewed about the current Great Recession.

By MARY ANASTASIA O'GRADY
"What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on."

Gary Becker, the winner of the 1992 Nobel Prize in Economic Sciences, is in New York to speak to a special meeting of the Mont Pelerin Society on the global meltdown. He has agreed to sit down to chat with me on the subject of his lecture.


Ismael RoldanSlumped in a soft chair in a noisy hotel coffee lounge, the 78-year-old University of Chicago professor is relaxed and remarkably humble for a guy who has achieved so much. As I pepper him with the economic and financial riddles of our time, I am impressed by how many times his answers, delivered in a pronounced Brooklyn accent, include an "I think" and sometimes even an "I don't know the answer to that." It is a reminder of why he is so highly valued. In contrast to a number of other big-name practitioners of the dismal science, he is a solid empiricist genuinely in search of answers -- not the job as the next chairman of the Federal Reserve. What he sees is what you get.

What Mr. Becker has seen over a career spanning more than five decades is that free markets are good for human progress. And at a time when increasing government intervention in the economy is all the rage, he insists that economic liberals must not withdraw from the debate simply because their cause, for now, appears quixotic.

As a young academic in 1956, Mr. Becker wrote an important paper against conscription. He was discouraged from publishing it because, at the time, the popular view was that the military draft could never be abolished. Of course it was, and looking back, he says, "that taught me a lesson." Today as Washington appears unstoppable in its quest for more power and lovers of liberty are accused of tilting at windmills, he says it is no time to concede.

Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."

"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."

On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.

The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."

Could this behavior be considered rational? "There is a lot of debate in economics about whether we can understand bubbles within a rational framework. There are models where you can do it, but it's not easy," he says. What he does seem sure about is that "the lending would not have continued unless there was this expectation that prices would continue to rise and therefore one could refinance these assets through the higher prices." That mentality was at least partly related to Fed action, he says, because the low interest rates "generated an increase in prices and I think that helped generate some of this excess of optimism."

Mr. Becker says that the market-clearing process, so important to recovery, is well underway. "Construction in new residential housing is way down and prices are way down. Maybe 25% down. Lower prices stimulate demand, reduced construction reduces supply."

That's the good news. But he complains about "counterproductive" government policies "designed to lower mortgage rates to stimulate demand." He says he was against the Bush Treasury's idea of capping mortgage rates (which was only floated) and he has "opposed the mortgage plan of President Obama." "It goes against both these adjustments . . . it would hold up prices and increase construction. I think that's a bad idea at this time."

Yet the professor is no laissez-faire ideologue. He says we have to think about what the government can do to "moderate the hit to the real economy," and he says it should start with "the first law of medicine: Do no harm." Instead it has done harmful things, and chief among them has been the "inconsistent policies with the large institutions . . . We let some big banks fail, like Lehman Brothers. We let less-good banks, big [ones] like Bear Stearns, sort of get bailed out and now we bailed out AIG, an insurance company."

Mr. Becker says that he opposed the "implicit protection" that the government gave to Bear Stearns bondholders to the tune of "$30 billion or so." So I wonder if letting Lehman Brothers go belly up was a good idea. "I'm not sure it was a bad idea, aside from the inconsistency." He points out that "the good assets were bought by Nomura and a number of other banks," and he refers to a paper by Stanford economics professor John Taylor showing that the market initially digested the Lehman failure with calm. It was only days later, Mr. Taylor maintains, that the market panicked when it saw more uncertainty from the Treasury. Mr. Becker says Mr. Taylor's work is "not 100% persuasive but it sort of suggest[s] that maybe the Lehman collapse wasn't the cause of the eventual collapse" of the credit markets.

He returns to the perniciousness of Treasury's inconsistency. "I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."

On the subject of recovery, Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."

How about getting rid of the mark-to-market pricing of bank assets [that is, pricing assets at the current market price] that some say has destroyed bank capital? Mr. Becker says he prefers mark-to-market over "pricing by cost because costs are often completely out of whack with what the real prices are." Then he adds this qualifier: "But when you have a very thin market, you have to be very careful about what it means to mark-to-market. . . . It's a big problem if you literally take mark-to-market in terms of prices continuously based on transactions when there are very few transactions in that market. I am a mark-to-market person but I think you have to do it in a sensible way."

However that issue is resolved in the short run, there will remain the problem of institutions growing so big that a collapse risks taking down the whole system. To deal with the "too big to fail" problem in the long run, Mr. Becker suggests increasing capital requirements for financial institutions, as the size of the institution increases, "so they can't have [so] much leverage." This, he says, "will discourage banks from getting so big" and "that's fine. That's what we want to do."

Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."

There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."

As the interview winds down, I'm thinking more about how people can make pretty crazy decisions with the right incentives from government. Does this explain what seems to be a decreasing amount of personal responsibility in our culture? "When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."

That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."

Still, there remain many good reasons to continue the struggle against the current trend, Mr. Becker says. "When the market economy is compared to alternatives, nothing is better at raising productivity, reducing poverty, improving health and integrating the people of the world."

Ms. O'Grady writes the Journal's Americas column.

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Social Credit government elected!

Well you would think that was the case! USA, England and other governments are now printing money to bolster the economy. An interesting video.

Bernard Hickey discusses what these countries are up to. At this stage NZ hasn't followed suit which is reflecting in our exchange rate. If it is such a good idea now then why have these governments in the past criticised Social Credit?


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An independant body to set tax rates?

Interesting article from Infometrics about taking taxation decisions away from the government of the day and putting them in the hands of a independent body.

By Infometrics economist Matt Nolan
New Zealand faces a number of fiscal policy challenges over the near term. Tax revenue is falling, government spending may well need to rise, and the country’s credit rating is under threat.

There is one way that the government can ensure that it provides an appropriate stimulus and maintains New Zealand’s sovereign debt rating – give an independent body (akin to the RBNZ) the ability to set tax rates.

A good fiscal stimulus is said to have three elements. It must be timely, temporary, and targeted.

How would an independent body setting tax rates provide these elements?

Essentially, the government would sign a policy targets agreement with an independent body. The agreement would state that this organisation has the over-riding goal of ensuring that the government’s budget is balanced in the medium term – but there would also be scope for the organisation to allow deficits or surpluses in the short-term depending on where we are in the economic cycle.

This type of policy would ensure that any fiscal stimulus is temporary. Without the potential for the government to dig itself into a hole of debt, credit rating agencies would be more comfortable in keeping a high rating for New Zealand sovereign debt in the face of rising short-term debt.

Furthermore, with this central body setting tax rates, the fiscal response to a recession would be immediate – with the central body able to immediately lower taxes if the environment requires it. This ensures that the fiscal stimulus would be timely.

However, it is not immediately clear that such a policy would fit into the category of a “targeted stimulus”. In order to see how this policy would at least be no worse than current policy in terms of targeting we have to think about how it interacts with government spending.

Given that the government still controls spending, it determines where any stimulus will be targeted in the end. As a result, the final stimulus to the domestic economy will be just as targeted as in the case when taxes are not set by an independent authority.

As well as satisfying the temporary, timely, and (to some degree) targeted criteria for any short-term stimulus, the independent determination of tax rates would also have medium term benefits:

Greater transparency surrounding the cost of government policy,
A greater level of intergenerational equity – as current generations are forced to take on the cost of their own spending,
Increased certainty surrounding the medium term level of taxes.
However, there are issues with such a scheme. Beyond the potential operational concerns (which may be substantial), there are three primary issues which would need to be thought through:

The doctrine of no taxation without representation,
The issue of “which” tax rates could be centrally determined,
The question of the appropriate “timing” when raising this tax revenue over the medium term.
Although I strongly believe in the concept of no taxation without representation, I do not think that the independent determination of taxes betrays this principle.

Over the medium term, tax rates will be set solely in response to government spending. As government spending is determined by elected officials, the tax burden is still implicitly set by a representative body.

The issue of what type of tax rates the central body would control is more difficult to deal with.

Although having an independent body setting distortionary taxes (income taxes, consumption taxes) may make sense, it doesn’t necessarily follow that other taxes should be set centrally (eg petrol or cigarette taxes), or that the structure of the tax system should be set independently.

The solution to this issue would be to have all tax rates tied to a single “choice rate” of the central authority, according to a policy targets agreement between the authority and the government.

Such an agreement would ensure that the underlying equity and externality argument for the structure of tax system is still controlled by government – leaving the central authority with only one rate to choose when trying to balance the budget.

The final question of timing is also essential. In an environment where taxes are determined outside of government, the independent body would want to time tax increases differently when extra spending is investment than when it is consumption.

This implies that in order to implement this policy, we need a clearer distinction between government consumption and government investment – a distinction that would provide the added bonus of increased transparency in government spending.

Although there are important issues to be ironed out, the concept of centrally set tax rates has a lot of merit – both in terms of our short term and longer term requirements of society.

_______________

* This piece first appeared in the Dominion Post on February 28, 2009. Infometrics is an economic information and forecasting company based in Wellington. To find out more, see its website link text.

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Bank of England 'prints money'

Retirement plans of millions of Britons at risk after Bank of England 'prints money'


The retirement plans of millions of Britons have been put at risk after the Bank of England's controversial plan to create money tore an unprecedented hole in pension schemes.

By Edmund Conway Economics Editor
Last Updated: 10:51AM GMT 09 Mar 2009

In a mere 24 hours the size of the pension deficits facing some of Britain’s biggest companies has jumped by around £100 billion to a record £390 billion - the equivalent of over £150,000 for every member of a final salary scheme.

The increase is a direct result of the Bank’s announcement this week to create £150 billion and pour it directly into the financial system, experts said.

It sparked further criticism of the authorities for endangering the financial future of Britons’ savers in their efforts to bring the financial crisis to an end. The Government and Bank have already been accused of obliterating the incentive to save by slashing interest rates on savings accounts and visibly attempting to stoke up high inflation in the years to come.

The Bank was accused of hammering the final nail into the coffin for Britain’s final salary pension schemes, which have seen their deficits climb in recent years, partly as a result of Gordon Brown’s decision as Chancellor to levy a £6 billion tax raid on pension funds’ dividends.

Some 2.5 million workers are currently signed up for these schemes which provide retirees with a guaranteed annual income when they reach the appropriate age.

Having enjoyed a small surplus only a year ago, these funds have also been hit by the fall in the stock market over the past year.

However, the effect of the Bank’s scheme has been to increase the deficit between what is in the funds and what is needed to pay out future pensioners by an almost instant £100 billion. Although some expect the deficits to fall in the years ahead as the economy improves, insiders warned that this could be the final straw that persuades companies to shut down these schemes altogether and turn instead to far less generous defined contribution plans.

However, experts warned that even these more parsimonious schemes, which 8 million workers are subscribed to, will suffer as a direct result of the Bank’s actions. The amount these people receive from their pension depends not only on the size of pot they amass over their working life but on the rate of the so-called annuity which provides them an annual income from the moment of retirement.

Over 600,000 people are due to retire onto these schemes over the next year. Should annuity rates fall a further percentage point, it will mean the annual pension of someone with a £100,000 pension pot may drop from around £7,000 to £6,000.

Experts said anyone retiring in the coming years may face an instant decrease in what they could hope to expect from their pension.

Tom McPhail of Hargreaves Lansdown said: “The sad truth is that pensions savings are going to be what pays the price for these efforts to bail out the economy in the short term. The apparent plan is to try to fix today’s problems at the expense of our children - by paying a shedload of money which will have to be paid back tomorrow.

"It will hammer the final nail in the coffin of final salary schemes, as well as cutting the annuity rates for anyone with a defined contribution set to retire imminently.”

However, public sector workers, many of whom are on generous final salary schemes, will be unaffected by the increase in deficits, since their pensions are paid by taxpayers rather than cash-pressed companies.

The problems stem from the dramatic impact the Bank’s plan has had on Britain’s debt markets.

So large is the amount of cash the Bank is creating for its economic rescue package that the prices of all the assets it intends to buy jumped at an unprecedented rate in the hours following Thursday’s announcement.

Unfortunately for pension funds, the amount they are compelled to spend on their pensions over the coming years depends on the interest rates on government debt. These have fallen since Thursday by the biggest amount in history. Meanwhile share prices have continued to fall, further reducing the amount pension funds have already saved in their pots for tomorrow.

“This is really bad news for pension funds however you look at it,” a senior City analyst said. “This was an unfortunate consequence of what the Bank has done. Pension funds are now facing some extremely unpleasant deficits. Likewise if you are planning to get an annuity in the coming years it will also be lower.”

Furthermore, the deficits are likely to balloon even higher for as long as the crisis continues, experts added.

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Political commedy

WARNING: This guys uses some swear words but is rather funny describing political leanings. A short video to amuse you.



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Blog notice:

Have something to say? If you receive blog posts via email or through a reader like Google Reader, there is no point in replying

to the email or emailing me your comments/opinions. If you reply to the email I am the only one who sees it, that doesn't post it on the blog! That is what the blog is for so if you have something to say then say it on the blog by posting a comment for everyone to read under an appropriate POST heading. You can do this anonymously if you wish or simply put your name and or a website if you belong to some other organisation.

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1999 Christchurch City Council referendum policy

I came across this document just recently. In the past the Council has considered referendums but finally rejected them. Is it time for a change Christchurch?

(not formatted well so click on the title link above)
CITIZENS INITIATED REFERENDA RR 11201
Officer responsible Author
Legal Services Manager Peter Mitchell

Corporate Plan Output: Public Accountability

INTRODUCTION

The purpose of this report is to address the following resolution passed by the Council at its meeting on 28 October 1999:

“That the Council resolve to seek a report from its officers on the feasibility of the
Christchurch City Council implementing a system whereby local residents could require
the Council to hold a referendum on a particular issue, such report to cover the issues
set out in the Citizens Initiated Referenda Act 1993, the financial implications of such
referenda and the basis on which decisions would be made as to which questions would
be put to a Citizens’ Referendum.”
REFERENDA GENERALLY
Referenda have been used in New Zealand for more than a century as a means of
making a decision on issues of public policy. The most common subject matter of
referenda has been the liquor licensing issues over the course of the twentieth century
and since the enactment of the Citizens Referenda Act 1993 there have been various
matters put to the public.
With regard to local authorities, section 121 of the Local Elections and Polls Act 1976
provides:
121. HOLDING OF REFERENDUM WITH ELECTION--
(1) A local authority may direct the Returning Officer to conduct a referendum
on any matter relating to--
(a) The services that are provided or that may be provided by the local
authority; or
(b) Any policy or intended policy of the local authority.
(2) More than one referendum may be conducted at the same time.
(3) The result of any such referendum shall not be binding on the local
authority.
(4) The local authority shall determine whether the matter that is the subject of
the referendum affects all or part of its district or region and shall direct
the Returning Officer to conduct the referendum over all or some of the
electors of the district or region accordingly.
(5) A referendum may be conducted in conjunction with any election or poll or
separately.
(6) A referendum conducted pursuant to this section shall be deemed to be a
poll.
Apart from this reference there are no other statutory provisions as to the conduct of a
referendum by a local authority.
I understand the thought behind the Council’s resolution of 28 October 1999 is for a
system whereby citizens of Christchurch could “demand” that the Council hold a
referendum on a particular topic, whether or not the Council wished to hold a
referendum. Further I understand that it would be the intention that, as with national
referenda, any outcome of a particular referendum would not be binding on the Council.
It is on this basis that I have approached this report.
It is my intention to consider the feasibility of a citizen demanded system of the Council
holding referenda. It is not my intention to discuss the value of such a system and
whether or not referenda would enhance the democratic process in Christchurch. Those
issues are properly for elected members to decide.
I will consider in summary form the provisions of the Citizens Initiated Referenda Act
1993 and then the application of that system at a city level.
CITIZENS INITIATED REFERENDA ACT 1993
The 1993 Act provides that a petition seeking the holding of an indicative referendum
can be presented to the House of Representatives. Such a petition can be by one or
more persons and it is intended to specify the question that is proposed be put to the
voters. Each petition can only relate to one question.
A person proposing an indicative referendum petition must submit the proposed
question, accompanied by a draft of the proposed petition, to the Clerk of the House of
Representatives.
The Clerk is then required to advertise the proposal, including the wording of the
questions, and call for comments. Following consideration of submissions received and
consultation of the comments the Clerk must decide the wording of the “precise”
question to be put to voters in the indicative referendum. The question must ensure that
only one of two answers may be given to it.
On being notified by the Clerk of his approval the promoter of the petition then
proceeds to promote it and collect the required number of signatures on approved forms.
The petition must be signed by not less than 10% of eligible electors in New Zealand.
All expenses relating to the printing of the petition and its promotion are to be met by
the promoter.
The promoter must deliver the petition to the Clerk within 12 months after publication
of a notice advising of the Clerk’s approval of the proposal and the Clerk must then
certify that the petition has been signed by the required number of eligible electors. If
there are insufficient electors the promoter may collect more signatures within a two
month period and resubmit the petition.
Upon receipt of a certified petition the Governor General must, within a month, appoint
the day on which the referendum is to be held. Such date must be within 12 months
after presentation of the certified petition to the House of Representatives.
There are provisions for the House to defer holding the referendum so that it can be held
in conjunction with a general election and the 1993 Act also contains the mechanics for
the holding of the referendum, the publicity that may be given to it, limits on
expenditure promoting the referendum and the duties on returning officers. All
expenses incidental to the holding of the referendum, except for the expenses of the
promoter in relation to the proposal and collecting of signatures, is to be met out of
public money. Nothing in the 1993 Act requires Parliament to act on the outcome of
any referendum.
The 1993 Act provides no specific guidance as to the scope or nature of the permitted
subject matter of a referendum and there is no limit on the subject matter to matters
which are competent or appropriate for the New Zealand Government to action. It
would appear that the only barrier in this regard are the expenses of promoting the
petition on the promoter which would regulate frivolous proposals.
The only express provision in the Act regarding subject matter is that the Act states that
a petition cannot deal with:
(a) the subject of an election petition under the Electoral Act 1993 in relation to
Parliamentary elections; or
(b) a petition relating to the conduct of an indicative referendum itself.
CITY COUNCIL SYSTEM
It would be technically feasible to have a similar system at a local authority level.
Such a system could be based upon a petition being made by one or more persons to the
Council, that a person appointed by the Council (and I will refer to this matter below)
would settle the question so that it is capable of only one answer, and that upon receipt
of a petition signed by X% of eligible electors in Christchurch City then the Council
would hold a referendum at a time it specified or in conjunction with the triennial local
government elections. As with the national referenda, the result of any referendum at a
local level would not be binding on the Council.
Regarding the number of persons required to trigger a petition, the system would have
to be persons who are registered on the electoral roll and eligible to vote in City Council
elections and polls. Presently there is a total of 223,552 persons, being residential
electors and ratepayer electors.
The 1993 Act has 10% as the number required to demand a referendum. In the
Christchurch context that would be 22,385 persons across the City. Alternatively a
higher or lower percentage could be required.
The approximate cost to hold a stand alone referendum is $300,000 and this arises
principally through the cost of mailing the voting paper to all eligible electors in
Christchurch. If a referendum was held in conjunction with the local body elections the
cost of the referendum would be approximately $50,000.
A key role in any citizens initiated referendum system at the local level would be the
person who determines the wording of the precise questions to be put to the voters in a
referendum. As noted above the 1993 Act requires that the question must be such as to
convey clearly the purpose and effect of a referendum and such as to ensure that only
one of two answers may be given to the question. There is no equivalent in any local
authority context to a position such as the Clerk of the House of Representatives.
While the Clerk is an officer of Parliament he is seen as being independent of the
Government of the day in terms of making a decision on the question to be put to the
voters.
The closest analogy in a local context would be the position of the Returning Officer.
That would be one option or alternatively some other Council officer who has the
confidence of the Council to act in an independent manner could be appointed to the
task of settling the question to be put to the voters.
I also believe that if there was to be a local system then there would have to be stricter
criteria regarding the subject matter of any referendum. Given that such referenda are
relatively expensive it would be appropriate to ensure that the subject matter was
something upon which the Council was capable of acting if it choose to accept the result
of a referendum. In that regard it could perhaps be appropriate that the person who
decides the form of the question would also be empowered to make a decision on
whether or not the question was one which the Council was able to act upon.
As with a national referendum it would be a matter for the promoter of a local
referendum to meet the expenses of obtaining the signatures of the required percentage
of the voters of Christchurch to the petition for referendum. The checking of those
signatures could be carried out by the Council as is the case at present with other
situations where the Council can be receiving petitions, for example in an amalgamation
request.
I would envisage that the mechanics of the conduct of the referendum itself would be
those used for the carrying out of a poll and which are presently set out in the Local
Elections and Polls Act 1976. An issue that would need to be considered further would
be the grounds upon which the result of a referendum could be challenged through the
courts as is presently provided for in other types of polls. In this regard clearly there
could be additional expense for the Council. At the national level there has been one
judicial review of the Clerk’s decision to determine the question to be put to electors
and that is a potential expense which could also occur at the local level.
As with the public service, Council units would have a neutral role in providing
assistance on the formulation of the question which would be the subject of a
referendum. However, it may be that at times a Council response to a proposed
referendum could be considered appropriate. Such a response could involve a
declaration of support for the proposal, an indication of willingness to take account of
public debate over the issue, rejection of the proposal or the provision of information
that might assist the debate.
If the Council was minded to support the proposal then an approach could be made to
the promoter in that regard so as to avoid the need for a referendum to be held.
CONCLUSION
It is feasible for a system for the holding of local referenda to be initiated by the Council
providing the Council is willing to fund the potential expenditure that is involved.
At the present time a local authority is empowered under the Local Elections and Polls
Act to hold referenda on any matter that it chooses to do so. So a voluntary system as
provided for in the 1993 Act could be adopted by the Council with some modifications
and applied to the existing legal provisions. However, those existing provisions are
dependent entirely on the willingness of the Council to fund any referendum proposal
which it receives.
If the Council desired to have a system whereby electors could demand as of right a
referendum provided the required signatures were obtained then in that regard the
Council could promote a local bill which would be drafted in the format of the 1993 Act
at a local level.
The City Manager comments:
The following section deals with the potential purpose and some of the implications of
citizens referenda.
Firstly, the purpose. Most of the commentary and academic analysis of referenda
procedures is written in the context of the use of binding referenda. As noted by
Mr Mitchell, our legislation explicitly states that referenda are not binding, although
statutory change could be introduced. It is argued by some that referenda processes,
particularly binding referenda, are somehow “more democratic”. Others dispute this,
pointing out that there are differing concepts of democracy, namely participatory
democracy and representative democracy. The democratic model on which governance
is based in New Zealand is of the representative mode. As elected members are well
aware, they are held accountable to those on behalf of whom they exercise power and
make decisions through the electoral process. This is not “less democratic” than a
system based on use of plebiscite, it is just different.
There are significant accountability issues which arise when the two systems are mixed.
There is a loss of accountability when a governing body such as a council has key
decisions taken from it and determined by binding referenda. This is why the New
Zealand approach has been for Parliament or councils not to be bound by referenda but
for a referendum to be an input to the decision-making process rather than superseding
the accountability of elected members.
Given this there are two potential purposes for citizens initiated referenda: a mechanism
for raising issues which the Council has not addressed and a mechanism for providing
input as to community attitudes on a specific issue. It is therefore relevant to review the
extent to which our existing processes and mechanisms provide for issues to be raised
with Council and community views to be canvassed.
The following are among the ways in which issues can be raised by Christchurch
citizens for consideration by Council:
- petition to community board or Council
- delegation, seeking speaking rights at a meeting
- submissions on Annual Plan
- approach to an officer in person, (including one of the community or other
advocates) in writing or by telephone
- approach to an elected member
- complaint to the Ombudsman or Audit office on use of legal remedy
The following are all ways in which the views of citizens can be and are canvassed by
Council during decision-making process:
- consultation on the Annual Plan
- consultation on a specific policy draft, programme or project proposal
- consultation with interest groups, residents groups, community boards, etc.
- annual citizens survey and other statistically significant survey methods
- special consultative procedures under the Local Government Act
Given the New Zealand governance framework, the key reasons for seeking increased
use of referenda would be if it led to appropriate issues being raised which are not
otherwise considered by the Council, or provided a significantly better quality of input
of community views to decision-making than is available with current methods.
Two other matters should appropriately be raised, firstly, the relatively high cost of
referenda, not simply the polling cost of approximately $300,000 per ballot in
Christchurch, but also the marketing cost of providing information and raising of
awareness for a ballot. Secondly, the technical difficulty of wording sometimes
complex issues in a closed way so as to secure a ‘Yes’ or ‘No’ response.
Recommendation: That the City Council and Community Boards continue to develop
practice for effective community consultation but not in the area of
city-wide referenda.
Chairman’s
Recommendation: That the above recommendation be adopted.

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Sir Roger Douglas: Ten Lessons for the Recession

Sir Roger puts forward his ideas on how to deal with the recession.

Saturday, 14 March 2009, 2:33 pm
Speech: ACT New Zealand

Friday, March 13 2009

Hon Sir Roger Douglas Speech to ACT Annual Conference 2009; Raye Freedman Centre, Epsom Girls' Grammar, Silver Rd, Epsom, Auckland; Friday, March 13 2009.

"When a man, a business, or an entire society is facing bankruptcy, there are two courses that those involved can follow: they can evade the reality of their situation and act on a frantic, blind, range-of-the-moment expediency - not daring to look ahead, wishing no one would name the truth, yet desperately hoping that something will save them somehow - or they can identify the situation, check their premises, discover their hidden assets, and start rebuilding." - Ayn Rand.

As a nation, New Zealand faces a choice over which course of action we adopt. So far, it seems as if New Zealand is following the first course of action.

Unfortunately for us, that course of action will delay the correction needed to end the recession.
The "rolling maul" of initiatives supported by National will increase the size of Government. In so doing we will begin to forfeit more and more of the money we earn to the Government.

There are some positive things going on. Rodney's work on regulatory reform is one of the things that will get the economy started again. But we need to do more.

Borrowing beyond our means, to increase the amount of spending, is what households have done over the past 10 years - and has led to our current recession. Now the Government wants to try the exact same strategy to get us out of the recession.
The only effect of borrowing and spending will be to create ever-larger boom and bust cycles.

Alternatively, we could take the second course of action - which will see a correction take place sooner. That correction will hurt, but the hurt is unavoidable - it will have been caused by large household debt, a spiralling balance of payments deficit, and an unaffordable spending binge undertaken by the Labour-led Government.

Pretending we can avoid the pain of economic contraction may make us feel better in the short term, but pretence will add to the pain we feel when the inevitable adjustment occurs.

If we're going to take the second course of action, we need to learn some lessons. Today, I am going to talk about the Ten Lessons for a Recession.

Lesson One: If a company fails, the free market has not failed

There seems to be this idea that if finance companies collapse, or Fisher and Paykel downsizes, it is somehow the failure of the free market. The reality is the complete opposite.

The capacity for free markets to reveal failure is one of its great virtues.

Capitalism relies on a system of profit and loss. The capacity for profit ensures that companies aim to meet consumer demand; the capacity for loss weeds out the failures and stops more resources being wasted on them.

Whenever anyone suggests that a company is failing because of the free market, what they are really saying is that the company is failing because consumers do not want to buy its product. That is a force for good.

In terms of the failure of the US financial system, it is becoming increasingly clear that that crisis was not caused by deregulation. The banking sector is the most heavily regulated sector of the US economy. Laws that forced lenders to provide loans to those who could never repay them created a housing bubble and resulted in a large amount of sub prime loans.
If anything, the financial crisis should make us more - not less - sceptical of Government interference in markets.


Lesson Two: If you're in a hole, stop digging

New Zealand's economy has been shrinking since the beginning of 2008. We have been getting poorer. Other countries that we like to compare ourselves to - like Australia - are not yet in recession. The financial crisis has been affecting us both, so why have we been in recession so much longer?

We've been in a recession for longer because of failing Government policy. In New Zealand we have been moving in the wrong direction - we've have moved from a Government geared towards growing our wealth, to a Government geared towards redistributing it. This pushed us into a recession, and now the financial crisis will hurt us further.

We need to admit that we have been digging ourselves a hole. As citizens, we got it wrong, and have been adopting policies that have stopped productivity growth. These policies have effectively halted our economic growth.

By admitting that we got it wrong, we can reverse these failing policies and implement new ones. We can move away from high taxes and low growth, and start aiming for a low-tax high-growth system of Government.


Lesson Three: Quality Government decisions can help

The decisions that the Government makes during a recession significantly impact on how quickly the country will move out of the recession.

As evidence of this, look no further than the Government response to the Great Depression in the US. They managed to turn a stock market crash into a 10-year slump. As Roosevelt's Treasury Secretary Henry Morganthau said in 1939:
"We have tried spending money. We are spending more than we have ever spent before and it does not work. … I want to see this country prosperous. I want to see people get a job ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"

Clearly Government can worsen a recession.

But Government can also alleviate the harmful effects. New Zealand found itself in a recession in 1991, and the Government decided to cut the overall level of Government spending to share the pain equitably between the public and private sector. The effect was obvious and beneficial.

By 1993, New Zealand was back to solid economic growth. Between the third quarter of 1993 and the end of 1997, growth never slipped beneath three percent. For much of that period it was above five percent.

So how do we restore economic growth? The only way out of a recession is to reverse our trend towards low productivity growth. Productivity growth drives wage growth.

Since 2000, our relative labour costs - the costs of hiring and employing people - have increased by 60 percent. Labour told us these policies - like the extra week of annual leave - were employee benefits. They were benefits for people in jobs, but hurdles for those out of work. They will now act as a major barrier to re-employment for those who lose their jobs.

The most important thing we can do to reduce the number unemployed people and end the barriers for productivity growth is to make the labour market flexible again. That means freedom to contract between employer and employee over wages and other entitlements. Eventually we should move to dismantle the Employment Court and rely on the common law.


Lesson Four: You can't spend the same dollar twice.

Following an interview with Prime Minister John Key, the Wall Street Journal recently reported that New Zealand was not adopting the so-called "fiscal stimulus" approach that other countries were.

Unfortunately, it was wrong. Government expenditure - was already out of control under Labour - has been brought forward. Costly campaign promises are being implemented. There is even talk of building a cycleway to create jobs. In addition, the Government is thinking of paying people not to work - the nine day fortnight.

The tax reductions could have been very positive, had they been accompanied with suitable reductions in spending.

Whenever I hear talk of the Government "creating jobs," I am reminded of a story that is told about Milton Friedman.

Friedman was in China and the Government was taking him around construction sites showing what it was doing. At one particular dam project workers were using spades to move the earth, while some diggers lay idle around the construction site. When Friedman asked why they were not using the diggers, the wise bureaucrat responded that construction of the dam was being used as a job-creation scheme. By not using diggers, they could employ more people. Friedman replied that if the Chinese Government wanted to create even more jobs, it should take the spades away from the workers and give them all teaspoons instead.

The point of the story is that making work is easy - but making work does not make us wealthy.

Make work schemes, like the cycleway, will divert people from productive work to less productive work. That is a recipe for poverty, not prosperity.

In the 70s and early 80s we learnt that there was no such thing as a free lunch. Today, we need to learn that there is no such thing as a free fiscal stimulus.

Let's think critically about the fiscal stimulus.

Every extra dollar taxed by Government is a dollar that employers are not spending hiring someone new.

Every extra dollar borrowed by Government is a dollar that companies are not borrowing to last through the recession or expand output.

Every extra dollar spent by Government is a dollar not spent by the productive sector.

Fiscal stimulus comes at a real cost to everyone, and benefits a few special interests. The costs to everyone will disproportionately fall on the poor. The special interests who will gain from stimulus are the well-organised lobby groups.


Lesson Five: Incentives matter.

When Labour introduced free physiotherapy as part of ACC in 2004, it was meant to cost $9 million. It is already costing $139 million - an increase of over 1,400 percent.

How could the Government get the figures so wrong?

It happened because Labour did not understand that incentives matter.

If something is "free" to the consumer, but charged to the taxpayer, they will seek more of it. It doesn't cost them and, instead, the costs are spread across everyone. In the process, overall costs will go up and taxes or levies will have to rise to meet them.

That is why promises of "free" services - like doctors visits, healthcare, or transport for superannuitants - always end up costing far more when paid publicly than they ever would if paid for by the individuals themselves.

Equally, incentives work in the opposite way too. If we get the incentives right, we can harness every individual's concern for their own self-interest and use it for the public good.

Everyone cares about their wages. If we lowered taxes across the board, people would have higher post-tax wages. That would encourage them to work more; that work would produce more goods and services for other people to consume.

Self-interest only works against the general interest if the incentives are wrong. Let's all clearly understand once and for all that incentives affect behaviour.


Lesson Six: Focus on the dollars, not the cents.

Government expenditure and tax are directly related. All Government expenditure must be paid for - be it through current taxation, or future taxation. That is why tax cuts without cuts in spending are meaningless.

Government waste must be eradicated - we can't afford it at the best of times, let alone an economic downturn. Any waste we can get rid of means that we can cut taxes. Cutting taxes frees up resources for the productive sector to usefully employ.
When I say cut Government spending, that's not just spending on conferences like National seems to think. National is worried about the cents; but we should be far more worried about the dollars.

We need to prioritise. Every dollar that Government spends should be going towards ensuring that people have access to needed social services. That means we should be axing whole programs and Government bodies. The Families and Charities Commissions, the Ministry of Economic Development, and the Ministry of Youth Development, do not deliver the things that voters actually need. They should be amongst the first to go.

Longer term, the only real way to slow Government spending is to leave the money in the hands of individuals, who have an incentive to seek quality social services while keeping costs down.

That system requires competition. Competition does not just mean private hospitals competing against public hospitals. It should also mean public hospitals competing against public hospitals.

Tax credits for education, health, and welfare (sickness and accident insurance) would see control restored to individuals and costs decreasing. Let's give people back the control and responsibility over their own lives.

In this scenario, the role of Government would be in ensuring that every New Zealander had the capacity to actually purchase their required social services within the marketplace. Every one could and should have access to the best medical treatment, schooling, and insurance protection that only the wealthy can currently afford.


Lesson Seven: Lift our sights, aim high.

Over the last two years we have had $30 billion dollars wiped off the stock market. Over the last year we have lost $30 billion dollars on our housing stock. If you add in finance company losses, New Zealand Super Fund and ACC losses, you get between $70 - $80 billion dollars.

That's about $18,000 for every man woman and child in New Zealand. The economic downturn is hitting New Zealanders hard.
Within that context, it is very easy for New Zealanders to lose hope.

The Government could respond by working hard so it appears that they are doing something. But doing something is a poor substitute for doing the right thing.

If we look beyond the short term pain to the medium and long term, we can move beyond the present despair. Only by lifting the sights of New Zealanders, who are rightly concerned about the future, will we be able to work through the mess Government has created.

We could set a goal, and measure all new policies against the goal.

I want that goal to be making New Zealand prosperous again. Let's beat Australia by 2020.

The 80s and early 90s reforms were very successful at stopping us getting relatively poorer. But we want to be getting relatively wealthier. We need to achieve sustainable economic growth of five percent per year. That should be our target. Every policy proposal should be tested against that target - does it help or hinder?


Lesson Eight: Costs of the downturn must be borne equitably.

I have already talked about how the average New Zealanders is suffering - how the losses so far from the economic crisis has seen a loss of value of $18,000 for every man woman and child in New Zealand. For your average family, that is $72,000.

It is unfair that the private sector bear the full cost of the crisis. Promises that there will be few reductions in the number of bureaucrats and that spending will not be cut forces the private sector to suffer more than it needs to while the public sector continues on as before.

Why should we not insist that the public sector, staffed by well-paid bureaucrats, also face the kind of cuts that a recession requires? Why should some be protected while the more vulnerable are not?

Statisticians talk about rates of unemployment. The real rate of unemployment felt by an individual who loses their job is 100 percent. Someone who loses their job at Sealord does not care what the rate of unemployment is. They want another job.
Is the best we can do - a nine day working fortnight? Look, if we free up resources from the public sector, and if we ensure that there are few barriers to the offering of employment opportunities, we can do a lot better for those who lose their jobs. We can grow the number of jobs and ensure people can get back into work quickly. But we need to grow the number of productive jobs, not the number of unproductive ones.

Any person who runs a household knows what a reduction in household income requires: spending must be cut. If government taxation revenue goes down - as it has - then any responsible Government must also cut expenditure. There's plenty that one can describe as wasteful. That is the only way to ensure that the pain felt by any one individual is not unmanageable.

Lesson Nine: We need choice and competition.

I've already talked about the need for choice and competition within health, education, and welfare insurance. But the real domain of the central planners is in infrastructure - in roading, water, and electricity.

No politician or bureaucrat knows enough to plan for us all. We must rely on more spontaneous forms of organisation - those that occur through the market.

If you think of your life as a series of interactions with private and public organisations, you will quickly become aware of the failures of the public sector.

We queue in cafes for a minute; we queue in traffic jams for hours. We can choose what we want to have for lunch; but we cannot choose the level of coverage provided by workplace insurance. We never seem to have a shortage of food, but we all know of someone waiting on a hospital waiting list.

Those areas that are dominated by central planners deliver poor services for too high a cost. Only through choice and competition can we unleash the potential of the marketplace.

At the end of the day innovation comes down to individual entrepreneurs with good ideas. Central planners suppress good ideas and prevent them taking hold. We know that bureaucrats are far less innovative than entrepreneurs like Alan Gibbs or AJ Hackett.

If we really want to solve our problems with infrastructure, let's replace the planners with the entrepreneurs.
Lesson Ten: Communication matters.

Voters place a higher value on enhancing their medium-term prospects than on action that looks successful short-term, but only by sacrificing larger and more enduring future gains.

People fundamentally understand that sometimes decisions that create short term pain will be worth it in the longer term. Politicians need to communicate that reality to the public, and stop trying to sell free lunches that always turn out to cost far too much.

There is a deep well of realism and common sense among the ordinary people of the community. They want politicians to have guts and vision to deliver sustainable gains in living standard.

Inadequate politicians see instant popularity as the key to power. If their rating slips, they feel threatened. They look for policies with instant appeal to create continuous public bliss.

That approach flies in the face of reality. There is no free lunch. Every decision involves trade-offs, which do not vanish just because some politician chooses to ignore them.

The sordid fact is: instant solutions do not have instant popular appeal. Notoriously, they are peddled by politicians who actively blind themselves and others to the facts about the situation.

The problem with compromise policies is simple. They do not produce the right outcome for the public at the end of the day. So they come back to haunt the politicians responsible for them.

As costs and distortions accumulate, such Governments resort to misrepresenting and suppressing vital information about future economic prospects, to warp the judgement of the voting public.

Too often, they end up locking themselves and the public into their own nonsense. No one escapes until a crash has liberated the suppressed information, and consigned them to oblivion.

Politicians need to be honest and upfront with the public. They need to communicate not only what they are doing, but what they hope to achieve. If politicians are consistent in what they say and how the inform the public, then they will be seen as credible. Consistency leads to credibility, and credibility creates the kind of confidence that people need before they are willing to change.


Conclusion

Look, this recession will end. We can control how quickly it will end and how fast we will grow once it has ended.
We can continue down the redistribution path. But that is a path to poverty.

Alternatively, we could aim to increase our productivity and stimulate economic growth. That will require a change of direction and a change of culture.

We should celebrate free enterprise and entrepreneurship. We should adopt policies that encourage innovation and competition. We should move away from tired old state monopolies and introduce new ways to deliver our social services.

We can be wealthy again, but only if we finish the job.

ENDS

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Gaynor: Banks print money

Interesting article in the NZH by Brian Gaynor. This is exactly what banks do in NZ and if any other private business did it we would call them counterfeiters. Is it time the government took steps to stop this?

New Zealand's ongoing obsession with residential property is bizarre, particularly when the main cause of the international economic crisis is a massive over-investment in housing.

Newspapers, television and radio are fuelling interest in the topic with hopeful stories about housing affordability, plunging mortgage interest rates and rising buyer interest. They are cheerleading and cajoling the banks into reducing mortgage interest rates yet there is almost no sympathy for retirees who have experienced serious erosions of income because of lower interest rates.

Amidst all this media attention there are strong arguments that the New Zealand economy would be in a much better position if we treated houses as a place to live rather than the country's main wealth creator.

The worldwide housing bubble of the 2000s was caused by a surge in credit rather than a shortage of land or population pressures.

Prices rose dramatically in most countries, particularly in the 2003-07 period, with the median New Zealand sale price surging 113 per cent from $165,000 in June 1998 to a peak of $352,000 in November 2007.

The root causes of the bubble were the whiz kids on Wall St who printed money through a number of clever and unregulated activities, particularly derivative and securitised debt.

Financial institutions effectively print money but their activities are usually highly regulated.

For example if an individual lodges money in a bank, the bank creates additional money or credit by lending a high proportion of this to other parties. The depositor still has an asset in the form of his or her bank deposit while the borrower(s) has acquired a loan that can be spent. The amount of money banks lend is controlled by regulation.

The unregulated Wall St investment banks had far fewer restrictions on their money and credit-creating abilities. The five large investment banks, Bear Stearns, Lehman Brothers, Morgan Stanley, Goldman Sachs and Merrill Lynch, were able to create far more money and credit than the regulated banks through the clever use of derivatives and securitised debt instruments.

These great big Wall St money-making machines created a huge amount of new money and most of the world's banks were keen to obtain their share of this additional credit.

Our banks were no exception and the accompanying table shows the total amount of New Zealand bank funding sourced from offshore and the total amount of bank residential mortgages.

The first point to note is the massive increase in overseas-sourced bank funding, which soared from $31.6 billion in June 1998 to $139.9 billion at the end of January 2009. These overseas borrowings now represent a whopping 40.9 per cent of total bank funding compared with just 25.5 per cent in June 1998.

In other words, almost 50 per cent of bank funding growth since June 1998 has been sourced from overseas.

The figures are even more frightening when it is noted that the current level of bank overseas funding is equal to 78 per cent of New Zealand's GDP compared with just 31 per cent of GDP in mid-1998.

A higher percentage of these overseas borrowings were channelled into the housing market with total bank residential mortgages leaping from $51.4 billion in June 1998 to $156.3 billion at the end of January 2009.

The clear impact of this on house prices can be seen when we break the figures into two five-year periods;

In the June 1998 to June 2003 period, total residential mortgage lending increased by $28.3 billion and house prices by 27 per cent.

Between June 2003 and June 2008, mortgage lending surged by $72.3 billion and house prices by 62 per cent.

It was the huge weight of money, sourced from overseas through our banks, which created the housing bubble, not the shortage of land or population pressures.

This massive offshore funding has negative implications for the economy because we pay interest on these overseas loans, which boosts the current account deficit, but houses cannot be exported and do not earn any overseas exchange. Indeed, it can be argued that a housing bubble raises imports and the trade deficit because new and renovated houses can contain high levels of imported materials.

There is also an argument that the average house price shouldn't rise by more than the rate of inflation. It is easy to understand why Sky TV's share price rises when it adds new channels and subscribers, but why should the value of a house double when no extra rooms have been added and nothing else has been done to it?

There was another round of headlines regarding the housing market during the week, with the Reserve Bank dropping its cash rate from 3.5 per cent to 3 per cent, a number of banks cutting their mortgage rates, a bank economist talking up the market and price data from Quotable Value and the Real Estate Institute.

The latter's monthly price and sales volume releases are usually presented with positive spin, regardless of market conditions, and this week's announcement was no exception. Under the heading "Activity Returns to Residential Market", the report had a number of positive comments.

One of these was that there was a significant upturn in sales volume in February, compared with January, but it failed to mention that January was the worst month ever and February is always better than January because the former includes the holiday period.

Total dwelling sales of 5228 in February were down 17.7 per cent compared with February 2008 which in turn was 32.1 per cent below February 2007 figures.

The key to the property market over the next year or two is the level of funding available to prospective buyers and the pressure on existing homeowners and investors to sell because they are experiencing financial difficulties.

A number of general observations can be made about bank funding:

Between June 1998 and June 2003, the banks lent an additional $470 million per month on residential mortgages. This funded the purchase of 3500 houses per month at the median sale price, assuming 80 per cent debt funding.

Between June 2003 and June 2008, bank lending increased by $1.2 billion per month and this would have funded the purchase of 5100 houses each month using the same assumptions as above.

In the past three months, which is when the credit crunch has really bitten, bank mortgage lending has risen by just $350 million per month funding the purchase of only 1300 houses per month, assuming 80 per cent debt funding and the $330,000 median price.

The state of the residential housing market has been primarily dependent on the availability of credit. The market boomed between 2003 and 2007 because our banks imported massive amounts of credit.

This money is fast disappearing as the credit boom of the past decade has turned into a credit crisis and our banks will not be in a position to maintain the same level of house funding as they have in the past because we don't have sufficient domestic savings to meet the demand for housing finance.

This shouldn't be viewed as a negative development because we need to generate far more wealth from productive, foreign exchange-earning activities and reduce our dependence on residential housing, which is mainly fuelled by unsustainable overseas borrowings.

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