It is January, still the school holidays, and I can’t bring myself to read Reserve Bank background papers on bank capital issues (although I recommend Kate MacNamara’s piece on Stuff, drawing on some of those papers) so I thought I might do a post on an off-topic issue –  fines – that has bugged me for a long time but which I didn’t used to be free to write about (while my wife was at the Ministry of Justice).

There are two things that bother me about our system:

• the way that maximum fines, set out in all manner of bits of legislation, are not indexed for inflation,
• the way that fines are not systematically varied with the financial means of the offender (unlike the financial effects of a prison sentence or even community service).

As is right and proper, Parliament sets maximum fines for various offences when the legislation creating the offence is passed (or amended).    Legislation isn’t often revisited –  parliamentary sitting time is scarce –  and some legislation creating offences will have been passed very recently but some was passed decades ago. But inflation is thief of the value of money, particular as a reasonable amount of time passes.   A maximum fine set at, say, $10000 in 1990 would have to be set at about $18000 now just to be the same in real terms, and even that wouldn’t keep pace with real income gains.

For offences where there is both an imprisonment and a fine option open to the judge the problem is particularly egregious.  Take a piece of legislation passed 30 years ago that provided for a year in prison or a $5000 fine.   Parliament presumably set those two numbers with some sense of the relative value of time and money 30 years now.  But time has got more valuable and money has got less valuable.

Back in the days when I first became aware of this issue, perhaps there was an argument that in future it wouldn’t matter much: the Reserve Bank was required to target 0 to 2 per cent annual inflation, and there was a consensus that there was an upwards bias in the CPI of perhaps as much as 0.5 to 0.7 per cent per annum.   But over time any biases have been reduced as SNZ improved the index, and the inflation target was revised upwards.  As a matter of policy, we ask the Reserve Bank to reduce the purchasing power of money by around 2 per cent per annum.  In 36 years, the real value of any nominal sum (eg a pre-set maximum fine) will halve.

Inflation has been a systematic issue for decades and yet nothing has been done to index our maximum fines for inflation.     Sure, formal indexation isn’t a big thing in the private sector (although we –  sensibly enough –  index our welfare benefits), but (a) there are few nominal contracts that last anywhere near as long as the gap between Parliament reviewing and updating penalty levels, and (b) citizens have no redress or avoidance mechanisms –  the fixed nominal fines are Parliament exercising its sovereign power and we (and the judges for that matter) just have to live with it.  Offenders cannot be fined as heavily –  in real purchasing power terms –  as Parliament intended in passing the law.

This issue should be relatively easy to fix, and should not be enormously controversial if some MP or government were to pick it up.    For all new legislation/fines, the maximum fine could be set in terms of “fine points” (eg a $10000 maximum fine might be expressed as 10 fine points where a fine point is defined as equal to $1000 as at (say) 31 December 2019).     The value of those fine points in today’s dollars could be adjusted every quarter with the CPI, with the resulting nominal values readily available to anyone on a table maintained on the Ministry of Justice website.  For existing legislation (and fines) where fines have been set in nominal dollar terms,  once the date that fine came into law in known the nominal value of the fine could be adjusted each quarter (much the same table) with changes in the CPI.   If one wanted to be more far-reaching –  and I would –  one could index fines to changes in some index measure of wage rates.  That would maintain better the intended relativity between the cost to the offender of a fine vs that of a prison sentence. But just addressing the inflation indexation point would significantly improve the situation as it stands now.

The bigger issue –  and frankly the one that exercises me more –  is what appears to be a fairly deep injustice that fines are not consistently or systematically adjusted for the financial means of the offender.    Consider a sentence for a particular offence that would have someone imprisoned for a year.   Whether you are on the minimum wage or earning $250000 a year you are out of the private labour market for a year, unable to earn more than the small amount prisoners get paid for their labour.    A prison sentence costs (in dollar terms) a higher income person more than a lower income person. But a fine is a quite different matter.  For someone on the minimum wage, a $5000 fine might be almost ruinous while for the person earning $250000 they’d pay it readily enough without materially constraining any other choices.  Many cases in our court system result from unpaid fines.  Sometimes that will be pure choice by the offender, but not always by any means.

To be sure, under the Sentencing Act judges may decide not to impose a fine if they believe an offender does not, or would not, have the means to pay it.  But that is (a) a discretionary choice of a particular judge, (b) does not seem to allow (formally) a diminished fine (rather than simply not levying one at all), and (c) does not, of course, allow for a higher fine –  above the statutory maximum –  for a higher income (or wealthier person).  And as an old piece of Ministry of Justice research I found put it, drawing on a survey of judges

Lack of adequate information, particularly regarding the means of the offender, was considered to be an important factor limiting Judge’s ability to adjust the amounts of fines imposed.  About two-thirds of the Judges said they would never or only seldom ask for a written statement of means.  Time pressures were clearly one of the main reasons why this was the case.

Perhaps things have changed since then, but the basic issue hasn’t.  A nominal dollar penalty falls far more heavily on a poor person than on a wealthier person.   That probably offends most canons of justice  –  including perhaps the idea that “from whom much is given, much is expected” –  and is quite inconsistent with the way we treat imprisonment (where time is the standard unit, not dollars).

It would seem to me to be fairer –  albeit more complex to set up and administer in a fair and equitable way – if Parliament were to specify a maximum fine in terms of units of time equivalent, which would be translated into dollar terms for a particular offender by reference to the income and/or wealth of that individual (or company, where the fines apply to corporates).  One could think of a (relatively minor) offence that might have a maximum fine of seven days.     Subject to some de minimis (so having no income doesn’t enable you to escape punishment altogether, or leave prison as the only option), the specific amount an offender could be liable to face would be adjusted by income: for a student earning $100 a day (say) it would be a $700 fine, while for a highly-paid public servant earning $1000 a day, it would be a $7000 fine.

This isn’t a novel idea at all.  It is the way they do things in Finland for at least some offences (and have apparently for a long time).  This article notes various other examples, including the UK, where there is an income-adjustment formula for traffic fines.  And here a scholar looks at the possible constitutional obstacles to such a system in the US and concludes that they are not insuperable.  In our political system there are, of course, no constitutional obstacles –  Parliament can pretty much do what it wants –  but the real issues might be whether the additional administrative costs were worth it, and how severe the evasion opportunities might be.  Then again, when we sentence people to prison we have to go to a great deal of effort and expense to keep them there.

Of course, one might deal with this by having very much higher maximum fines and allow judges lots of discretion to reduce the actual fine according to the means of the offender.   Judge love discretion, and need to have some, but it isn’t obvious why a formal linked to wealth/income would not be more transparent and predictable and, frankly, fair.

Justice would be better served if potential fines were calibrated to the income/wealth of the offender, in much the way they (effectively) are for custodial or community service sentence –  where time (the common unit) is much more financially valuable to a (erstwhile) high income person than to a low income person.

A few years ago, in slightly whimsical post-holiday mode, I did a post highlighting a snippet I’d discovered in the Whakatane museum that until about 1950 the Whakatane port handled more shipping tonnage than Tauranga’s did.   These days, of course, Whakatane’s “port” is known only for sports fishing and White Island tours and Tauranga handles the most cargo of any port in the country.  How economies change in just a few decades.

This summer we spent our holiday at Waihi (with my in-laws) and Waihi Beach.  I’ve come to quite like Waihi, and it seems I’m not the only one.  Just a few months ago it was named the “most beautiful small town” in New Zealand, and if that surprised me a little it is certainly a pleasant place, with an air of prosperity about it – and decent French and German bakeries  – one often doesn’t find in small towns these days.     It seems to share in the same sort of insane zoning practices that hold up house prices almost everywhere (if you get on the right side of the council rules there is apparently money to be made subdividing semi-urban sections –  which in any sane world wouldn’t happen for a town set surrounded by large amounts of fairly flat rural land.)    As for the air of prosperity, probably it helps to be on the main road from Auckland to Tauranga, but Waihi has a more prosperous feel than Paeroa, 15 miles nearer Auckland, and I presume that must be down to mining –  represented by the huge open-cast pit perhaps 50 metres from the main shopping street.

What perhaps makes Waihi something of an anomaly is that it is both prosperous and well-kept and yet has fewer people than it had 100+ years ago.

Just prior to World War One, Waihi had an estimated population (31 March 1913) of 6740.  By New Zealand standards, that made it a big place.    Here were the urban area populations at the time.  Of course, then the urban population was mostly in handful of large cities (the old “four main centres”)

but Waihi was the 13th largest town/city in the entire country, not much smaller than places like Nelson and Plymouth (and ahead of those other six places I’ve shown, all now substantial cities).  Of those top 13, only Waihi and Palmerston North were not ports.

And why?   That was (gold) mining.   Waihi was by far the largest gold mining operation in New Zealand (and had been the location of the major miners’ strike the previous year –  a confrontation that at its height involved 10 per cent of all New Zealand’s police, and the death of one striker).    And mining in New Zealand wasn’t on a trivial scale.  These were the days of the Gold Standard, when many monetary systems (including our own) were backed by/convertible into gold.  In 1910, New Zealand –  mostly Waihi – accounted from just over 2 per cent of the world’s annual gold production.  Gold production was similar to that from the Australian state of Victoria.  Of the Australian states, only Western Australia produced a lot more (3 to 4 times total New Zealand production).

What about now?   There is still gold (and quite a lot of less-valuable silver) being mined in Waihi.  In fact, just recently Labour ministers overruled one of their Green Party colleagues on a decision that will facilitate mining for some years to come.

But relative to what is going on elsewhere it is a shadow of what it was (and, of course, much less labour intensive).   Total New Zealand gold exports are now about 5 per cent of those of Western Australia.  As a gold producing country, New Zealand now ranks between Ethiopia and Finland, mining about a quarter of one per cent of the world’s new gold production (did you know –  I didn’t –  that China is now, by some margin, the largest producer of gold?).     Most likely, there is a lot of gold elsewhere in the Coromandel Hills, but the political barriers to exploiting it remain formidable.

And as for Waihi, if the mine and its gold and silver production helps keep a town fairly prosperous and well-kept, the latest SNZ population estimate is only 5160, just behind Dannevirke, Carterton, and Dargaville.  Waihi’s population means it is now only our 56th= largest urban area, almost halfway down the SNZ list.  The smallest of the other places on my earlier chart –  Blenheim –  now has six times Waihi’s population.  In fact glancing down the list of 115 urban areas from 1913, Waihi’s drop in the ranking looks more precipitate than any other town in New Zealand, perhaps matched only by a handful of (then much smaller) South Island mining towns.

Natural resources really can make a difference.  Even today, they are the difference between Waihi and numerous down-at-heel rural communities scattered around New Zealand.

It was anything but a slow news week globally, but here in New Zealand not much seemed to be happening (not even much summer, at least in Wellington).    Perhaps that was why the Sunday Star-Times chose to devote two full pages (with the promise of more in the next couple of weeks) to the hardy perennial cause of –   in the words of the headline – “More financial literacy needed”.   Especially (it appears) for kids, from schools.  In years gone by, there have even been public opinion polls –  paid for by people championing the cause –  suggesting that the public agree.

I’m as sceptical as ever, perhaps more so as my own kids have progressed through the education system.  What follows is mostly from a post I wrote on the issue a few years ago

I’m sceptical at a variety of levels.  First, and perhaps most practically, these surveys (and the reported views of advocates) never ask what people would prefer schools to stop teaching.  There are only so many hours in the day/year.  I’d face the same question as to what should the schools stop teaching, but given a choice, personally I’d rather that schools were required to teach a sustained course in New Zealand and British/European history than that they teach so-called financial literacy.   Kids are exposed every day to their parents’ attitudes to, and practices with, money and things.  They aren’t directly exposed, to anything like the same extent, to maths, science, history, or foreign languages.

Second, as far as I can see, the evidence is pretty mixed as to whether teaching “financial literacy” makes any difference to anything that matters.  Are countries with higher “financial literacy” scores richer as a result, more stable, happier?  And a recent report (page 32) for our own government agency that deals with this stuff actually showed that, for what it is worth, the “financial literacy” of New Zealanders scored quite well in international comparisons.  What is the nature of the problem?

Third, why would we expect that the government, and its representatives, would be good people to teach children about money?  …at a bigger picture level, in one way or another governments are the source of most financial crises –  Spain, Ireland, Argentina, the United States, China.   Governments are more prone than most to undertaking projects that they know provide low or negative economic rates of return.  Governments face fewer market disciplines than citizens. And governments don’t have to live with the consequences of their mistakes.  So perhaps I could support a civics programme that included a section on critically evaluating election promises and government policy announcements.

Fourth, much of the discussion in this area is quite strongly value-laden.  And no doubt it has always been so.  I recall the day when our 6^th form economics class was visited by a banker, to try to promote savings etc.  He brought along a hundred dollar note –  this was 1978, and it was probably the first time any of us had seen one.  Trying to set up a discussion about the merits of bank deposits (probably with negative real interest rates at the time), he asked us all what we’d do with the $100 if we had it.  Various class mates rattled off their spending wishes, but the banker was totally flummoxed when one of my friends, a strong Christian, told him that what she’d do was to give it away.

And where, for example, in all the discussion of financial literacy is there any reference to the idea that one of the best routes to financial security is to get married and to stay married?  There are elements of both causation and correlation there, but finding the right spouse, and learning what is required to make a lifelong commitment work, is almost certainly a more (financially) valuable lesson that knowing that when interest rates fall bond prices rise.  But it is not one we are likely to hear from the powers that be –  particularly not under the current government.

And fourth, this becomes an excuse for yet more bureaucratic/political bumpf, reinforcing a sense that governments should have “strategies” about everything and anything.  I was somewhat surprised to learn that our government has a financial capability strategy.  Why?

Building the financial capability of New Zealanders is a priority for the Government.  It will help us improve the wellbeing of our families and communities, reduce hardship, increase investment, and  grow the economy.

The National Strategy for Financial Capability led by the Commission for Financial Capability provides a framework for building financial capability. It has five key streams:

• Talk: a cultural shift where it’s easy to talk about money
• Learn: effective financial learning throughout life
• Plan: everyone has a current financial plan and is prepared for the unexpected
• Debt-smart: people make smart use of debt
• Save and invest: everyone saving and investing

On this measure, might we assume that “debt-smart” would mean taking as much interest-free student debt as possible and paying it off as slowly as possible?  Not an approach I will be encouraging in my children.

More generally, I’m not sure that any of these items represent areas where we should expect governments to bring much of value to the table.  One might marvel that human beings had got to our current state of material prosperity and security –  let alone how our pioneers built a country that was once the richest on earth – without the aid of government financial literacy/capability strategies. And since when has a traditional Anglo reticence about matters of money been something for governments to try to change?   Better perhaps might be a focus on improving the financial capability of governments.

The Commission’s own research (p 26) shows what one might expect, people develop more “financial literacy” as they need it.  So-called “literacy” is low among young people (18% of 18-24 year old males are “high knowledge”), who don’t need it much.  It rises strongly during the working (child-rearing, mortgage etc) years (53% of 55-64 males are “high knowledge”), and then looks to tail off a little in retirement.  All of which is unsurprising, and (to me) unconcerning.

I know the so-called Commission for Financial Capability doesn’t cost that much money, but as I’m sure they would point out, every little counts.  The money they fritter away on national strategies and capabilities is money that New Zealanders don’t have to spend, or save, for themselves.

As an easy way into this, consider this US-government funded online quiz, a shop window for a US project on better understanding financial literacy.  I imagine that most readers of this blog will score 6/6, while the average American scores 3.  But then stand back and ask yourself why the average American (or New Zealander) needs to know the answers to these questions, phrased rather in the manner of a school economics exam.  People who read blogs like this take for granted a knowledge of the answers, but in what way has that knowledge made your life, or mine, better?

Back to 2020.  As ever, in the Sunday Star-Times articles there is no hint of what schools might sensibly cut back on to squeeze in more financial literacy teaching (or “money mojo” as a couple of middle-aged commentators suggest calling it).     It isn’t as if our core school academic results –  maths, English, science etc-  are so impressive that the marginal time would be a zero cost resource.  There are only so many hours in the day, weeks in the years, years in a school life.  And in recent years, schools have been told to add “digital literacy” to their teaching, they are about to be required to teach New Zealand history (something I generally welcome), and seem to devote ever more time to climate change issues (“all we ever heard about in social studies”, in the words of one of my kids).    And yet you’d have thought that binding budget constraints would have been one of the ideas anyone wanting to teach financial literacy would be conscious of themselves, and take seriously.

Similarly for all the talk in the articles about how tough life is, there is no hint of any recognition that (say) average labour productivity (the underpinning of average material living standards) even in underperforming New Zealand is now more than 50 per cent higher than it was when I left school.   And equally no hint of any recognition of the role governments –  the people who would be teaching “financial literacy” –  have played in the alarming underperformance of our economy.   There is some mention of housing challenges, but none of the conscious and deliberate choices governments made, and keep on making, to render decent houses all but unaffordable to young families in our larger cities.     Fix that at source and life (financially) would be a great deal easier for many of our lower income people.  But that would involve governments making good and responsible choices, not continuing to shred the prospects of each successive generation.     Even then, there would still be no obvious role for governments doing “financial literacy” education, but at least our governments might have a little more credibility as some fount of discipline and financial wisdom.

Parents do “financial literacy” all the time –  not necessarily in the words they use (some more reticent than others) but in the choices they make, and which kids see them making.  About consumption, about debt, about giving, about choice and opportunity cost, about budget constraints (if not in quite those words), about celebration (and self-denial), about partnership –  about casts of mind (extravagant, frugal or whatever).   We model –  often inadequately perhaps –  the values we encourage our kids to live by.   It is how society works, and always has.

And I’m quite sure I don’t want Jacinda Ardern, Chris Hipkins, Simon Bridges, Nikki Kaye (or the teachers’ unions) getting in the way with their corrosive views.  Rather better that the politicians focused on fixing the stuff that governments messed up in the first place.  I was having a sad conversation yesterday with my daughter, who asked if it was really true that houses had once cost less than $100000.   I had to explain briefly the idea of general inflation, but went on to tell her that when I was first house-hunting in 1985 I’d looked at several decent places priced at around $80000.   Adjust for the CPI and that would be around $230000 today, but try looking for a house in south Wellington for $230000 –  even one with 1985 type fittings, decor etc –  and you’ll be stiff out of luck. Even at twice that price it would be almost impossible.  That is deliberate government recklessness.