The limits of the state

Michael Reddell Uncategorized

Another post prompted by my recent reading.  In this case, two very different books about the role of the state:

The Tyranny of Utility should probably be read by all those in the sorts of public agencies and departments that dot Wellington and other capital cities, and which offer advice, and champion public action, newly-inspired by the insights of behavioural economics. As Deirdre McCloskey writes in her blurb “Saint-Paul stands courageously in the middle of the new road to serfdom” –  the no doubt well-intentioned paternalism that puts little or no intrinsic value on freedom, including the freedom to fail or to choose ‘badly”, in diet, education, health, savings, or speech or whatever.  As Saint-Paul notes, it is a critique of the economics approach more generally, which “does not value individual freedom per se”, only as an instrument or means.   it It is a bracing critique, and perhaps the more encouraging for coming out of France, which has been a bastion of statism.  If there is less new than in Piketty, the rather more prominent French economist, a larger proportion of this book would withstand close scrutiny.

The Fourth Revolution is written in that brisk, slightly breathless, style that characterises The Economist.   They gather a lot of interesting material, including potted accounts of interesting experiments from around the world, although for me the value in the book was as much the scrawls of disagreement that it prompted in the margins.  There is a huge degree of China-boosting that seems to lose sight of both the corruption and injustice that riddles the Chinese system, and of the fact that it will be decades, if ever, until China again approaches the living standards, and levels of productivity achieved in the West.  Singapore is lauded, but it would have been interesting to have included some discussion of Taiwan: I don’t think it is mentioned at all, and yet with more democracy and more-market than either Singapore or China it has been a hugely successful story, despite its awkward relationships with most countries.  The authors don’t directly address the sorts of issues Saint-Paul raises, and I suspect they can’t quite make up their minds what the role of the state is, or should be: at times they worry that “the state will keep on expanding,gradually reducing liberty”, but in other places they seem enthusiastic about local councils in Britain that place tight restrictions on what can and can’t be put out for rubbish collections.  More than I would, the authors emphasise fiscal policy and the need for entitlement reform. Perhaps that reflects North Atlantic priorities.  But they give too little weight to the seemingly inexorable, and probably more threatening rise, of the regulatory state.  And barely any attention at all to the incentive and knowledge problems – too easily ignored or assumed away by the well-intentioned – that bedevil so much of what government does.  Government is as double-edged sword –  and the side that is the biggest threat to life, liberty, freedom (and affordable housing in our big cities) does not get anywhere enough weight in this book.

Declining and expanding regions – and some puzzling data

Michael Reddell Uncategorized

This afternoon Shamubeel Eaqub of NZIER presented in the Treasury Guest Lecture Series.  Building from material in his short book Growing Apart and drawing on census data the highlighted the economic divergences between Auckland (and Wellington) on the one hand, and many of the other regional council areas in New Zealand.  Population has increasingly gravitated towards big cities, and many towns and some provinces are already facing the prospect of absolute population decline.

The regional mix of the population has been changing, at least ever since European settlement.  Towns have either disappeared completely, or shrunk  –  absolutely and relatively –  from their former glory. I visited Hokitika again last year, and was reminded that it was  once (briefly) one of the larger towns in New Zealand.  Shamubeel seemed to regard the shifting population mix as something for central and local government policymakers to respond to with positive programmes of action.  That seems much less clear to me.  A good maxim for policy is “first do no harm”.  Local governments in particular seem prone to doing harm.  As Shamubeel reminded us, the Dunedin white elephant stadium was an initiative of a local body, hoping a covered stadium would help boost Dunedin, with no robust cost-benefit analysis.  The individual citizens of Dunedin certainly would not have taken on such ill-considered risk themselves.  Wellington City Council seems to hanker to waste similar amounts of money on an airport runway extension.  And it is local authorities who are responsible for making land for housing scarce in growing regions.

Perhaps we need to focus policymaker attention on getting government out of the way, and allowing market adjustments to work.  For example, to help make growing towns and cities more affordable and responsive mandate that property owners everywhere have a presumptive right to build houses/apartments up to three storeys high (I’m looking out on one that high as I type).  And on the other hand, look to wind back onerous central government infrastructure mandates, especially for declining areas.  Citizens of those area are likely to choose themselves to settle for less than the best.  And reversing the proposed new earthquake building standards, which have destroyed value across the country (and especially in older regions) for little or no expected savings of human life.   Perhaps more controversially – and a subject to which I will return – cut back the large scale programme of inward migration.  This is a central government programme, whose direct effects are concentrated in Auckland, puts pressure on non-tradables prices across the country, and undermines the competitiveness of tradables sector producers concentrated in places like (eg) Hawkes Bay, Waikato, Otago, or Nelson.

For all the elite discussion around the importance of Auckland to New Zealand’s economic prospects, today’s regional GDP data was more than a little puzzling.  According to SNZ, nominal GDP per capita in Auckland has been trending downwards relative to that in New Zealand as a whole for the last 14 years.  No doubt the recent high terms of trade are part of the story, but I don’t know quite what to make of these data.

Auckland per capita GDP

A forgotten result of World War One

Michael Reddell New Zealand economic history

From 2014 to 2018 countries like ours are marking the centenary of successive phases of World War One.  For New Zealand, next month’s commemorations of the 25 April 1915 Gallipoli landings may well be the high point –  complete, no doubt, with rather saccharine portrayals of the enemy, devoid of any reference to the systematic Turkish massacres of their own Armenian subjects which, rather hauntingly, date from 24 April 1915.

But this is a blog about economic matters.  And for New Zealand, World War One marked the end of the Gold Standard.  Like the other British Dominions, New Zealand did not have a central bank at the time.  Commercial banks took deposits, made loans, and issued paper banknotes.  By law, these had to be convertible into gold, on demand, and banks held substantial gold reserves.  With the UK (and Australia) also on a Gold Standard, this established a very stable series of fixed exchange rates against the currencies of the economies most important to New Zealand.

There had been a departure from the gold convertibility provisions earlier, at the time of the BNZ crisis of 1894 –  convertibility was a double–edged sword, helping to build well-founded confidence in the value of deposits, but potentially exacerbating a crisis if a contagious run on banks looked like taking place. But that suspension was, and was always envisaged as, temporary.

When World War One broke out, New Zealand’s Parliament had already been considering banking legislation which would allow the Government, in an emergency, to suspend the convertibility into gold of notes issued by commercial banks. and declare bank notes themselves legal tender.  We can easily read the contemporary accounts thanks to the National Library’s wonderful Papers Past. The proclamation declaring that New Zealand was at war was not read until 5 August, but on 4 August the banking amendments were passed under urgency in view of the imminence of war.  The legislation also gave the government power to prohibit the export of gold during the period convertibility was suspended.

The next day, as part of New Zealand’s entry into the war, convertibility was suspended and gold exports were prohibited.  The suspension was initially for one month, but it was later extended.   New Zealand bank notes were never again convertible into gold as of right.  LIke many things, it was quite unforeseen in 1914.

What followed was a curious arrangement, which appears to have confused some eminent modern students of historical monetary arrangements (including Barry Eichengreen in his great book Golden Fetters).  Unlike most Gold Standard countries, New Zealand never resumed any sort of gold convertibility requirement after the war was over (unlike, say, the UK which did so in 1925).   Indeed, at least until the negotiated devaluation of January 1933, and perhaps until the opening of the Reserve Bank in 1934, there was no direct or indirect government control over the issuing, or management, of money in New Zealand.  In the jargon, there was no nominal anchor, only customary practice.  In fact, until the onset of the Great Depression, the banks managed their lending policies to ensure that notes were convertible into sterling (but not to gold) at par.

Good institutions – and the lack of them

Michael Reddell Institutions

I’ve read two very different books lately about societies in which the powerful plunder, while the legal systems offers few reliable protections against such abuse.

The British novelist Rana Dasgupta now lives in Delhi and has written Capital.  The title of this series of vignettes is a play on words –  Delhi is both the political capital of modern India, and it is a city in which moneymaking and trading on the power of political and bureaucratic connections is rampant.   India isn’t a country I know that much about, and the book was both fascinating and disconcerting. India has had democratically elected governments since Independence – in contrast, say, to  Burma, Bangladesh, and Pakistan – but it is scarcely a credit to democracy.

Written in a very different style, US academic Karen Dawisha’s Putin’s Kleptocracy is a relentless detailed account of the way Vladimir Putin has played the Russian system, to enrich himself and his cronies, as part of the complex mesh of, sometimes extremely brutal ways, he has established pretty pervasive control.  At best, Russian can now be described as an authoritarian quasi-democracy. Dawisha’s UK publisher refused to publish the book, apparently in fear of the weight of the onerous UK libel laws falling on them, but Simon and Schuster in the US have published it.

Both books are recommended, but they are very different.  Dasgupta is an easy read –  a sometimes dizzying series of pictures of people, his own Indian family included, that illustrates what modern Delhi has come to represent.  For 450 pages of text it has 4 pages of footnotes.  Dawisha, by contrast, has 350 pages of text and almost 70 pages of bibliography and notes –  the detail is what makes the case against Putin so strong.

Dasgupta himself draws some parallels:

“Earlier in this book we saw how fondly and often India was likened to America.  But for the most part, this was pure ideology. India has much more obvious similarities to America’s alter ego: Russia.  India and Russia had both had systems of state-run capitalism that had foundered by the 1980s, generating a new class of clever, underground entrepreneurs who came into their own after the old systems – almost simultaneously – collapsed.  Both countries developed systems, after that point, in which the existence of electoral democracy did not prevent the emergence of a class of oligarchs who used the political system to take control of their countries’ essential resources.  Both of them had capital cities, Moscow and Delhi, where the people watched with resentment as a small number of people used the immense power of large-country politics to their immense advantage.”

A year on from his book, with all the subsequent adventurism in Ukraine, this may be a little unfair to India.  But I was struck more by the contrast between these two countries, and the advanced Northern European tradition of which New Zealand is part.  No country has been totally free of corruption, and constant vigilance is required against, for example, sweetheart deals with those who cosy up to the powerful.  But it is difficult to see how India or Russia could reach even New Zealand’s (barely) First World living standards without far-reaching changes in the political and legal systems.  And, as always, entrenched interests, that don’t arise from nowhere, are a powerful obstacle.  And perhaps that is why, with few exceptions, the countries that were rich 100 years ago are still the rich countries today, as Ed Glaeser illustrated a few years ago.

New Zealand’s economy in World War Two

Michael Reddell New Zealand economic history

I’ve been reading, in quick succession, the three non-military books in the New Zealand official war history series:

F.L.W. Wood’s The New Zealand People at War: Political and External Affairs

J.V.T. Baker’s War Economy, and, in two volumes,

Nancy Taylor’s The Home Front

The books emerged quite slowly. Michael Bassett records that the 1950s Holland government wanted the history series to stick to military matters, and it was not until the Nash government that Baker and Taylor were commissioned.  Even then, Taylor’s work wasn’t published until 1986.

Read together they are a fascinating set of accounts of the civilian side of New Zealand’s involvement in the war.  My prime interest is the economics volume, but I was also struck by, for example, how far-reaching press censorship was in New Zealand –  often apparently to avoid political embarrassment, more than to safeguard military secrets.

War Economy is full of details –  perhaps too many in places, but it is detail that is hard to find elsewhere.  What it lacks is much of an analytical framework, not supplied in other economic histories of New Zealand (or, as far as I can tell, in scholarly articles).  If our universities were not now almost entirely devoid of economic historians, a modern analytical history of the period, drawing in more cross-country comparative analysis, would be a great opportunity for someone.

Two things from the period did stand out.

The first is that, while New Zealand, devoted almost as much of its GDP to the war effort as any of the major combatants (at peak similar to that in the UK, although the UK held the peak for longer), material living standards for the civilian population seemed to remain relatively high –  notably the quality of the diet, access to petrol etc.  Perhaps that partly reflects just what a rich country New Zealand then was.  Using Angus Maddison’s data:

Featured image

New Zealand’s GDP per capita in 1939 was second highest of those countries shown.  It may have been easier to devote a larger share of GDP to the war in a rich country like New Zealand than in a relatively poor one like the USSR, where a larger share of resources would have to have been devoted to subsistence.

And the second point is the dramatic transition, from New Zealand being on the brink of default in 1939, to New Zealand being, in effect, defaulted on just after the war.  In 1939, in the wake of the imposition of exchange controls, Walter Nash emerged from a humiliating mission to London, with a very onerous schedule of overseas debt repayments.  If the war had not been looming –  which made the British government keen on maintaining good relations with the Dominions –  it is quite possible that New Zealand would have been unable to rollover maturing debt at all, probably ending in a default to external creditors.  By just after the war, New Zealand  –  having markedly reduced its external debt ratios during the war – made a substantial gift to the UK: in reality, Britain was quite unable to meet all its obligations and needed some of them written down.

In a paper a couple of years ago, some IMF economists looked at examples of countries that had markedly reduced their overseas debt.  The New Zealand experience during WWII was as stark as any of those reversals, but is too little studied.  It seems to have mainly resulted from a determination to pay for as much of the war as possible from taxation, together with the controls and rationing that limited private sector consumption and investment.  What it was not down to was any strength in New Zealand’s terms of trade:

Terms of trade (3)

The terms of trade fell during the war years –  our import costs rose as global inflation increased, but there was little adjustment in the prices of the agricultural/pastoral products New Zealand sold to Britain.

A  fascinating phase in New Zealand’s economic history, to which I may return.

Why New Zealand languishes

Michael Reddell New Zealand economic history

New Zealand’s long-term economic underperformance, and what can be done about remedying it, should be one of the most keenly-debated topics in New Zealand public life.  Sadly, it isn’t.  Too many of our political and economic elites seem to view it as something for the too-hard basket, or perhaps are simply reconciled to declinism, or implicitly take the view that “New Zealand is still a nice place to live, and me and my children will be fine –  after all, they can always leave”.

I don’t think that is good enough.

To the credit of The Treasury, they have sometimes sought to engage with these issues.  A couple of years ago, they ran a series of lunchtime presentations for staff, inviting in various people to offer their views.  I was one of those invited –  and the invitation encouraged me to be a little provocative.  As it happens, the presentation itself never happened, but I took the opportunity to write down what I would have said, in pretty much the style I would have said it.  I’ve distributed copies to a wide range of people, then and subsequently.

The very short version of the story: New Zealand had an abundance of productive land, made valuable by the urbanisation of Britain and the emergence of refrigerated shipping in the late 19th century.  That natural endowment, and the associated technological innovation, was  –  and is – enough to support very high living standards for a quite limited population.  Since World War Two, New Zealand has had no big new opportunities –  unlike, say, Australia’s mines or Norway’s oil – and our governments haves repeatedly handicapped the country’s prospects by pursuing large programmes of inward migration.  Particularly in the last 25 years, governments have been actively hindering adjustment  –  more than replacing the many New Zealanders who have responded to market opportunities and left.  Growing population has rarely, if ever, been a basis for successfully lifting per capita income.

I’d write some things a bit differently now, and I will flesh out many of the points in later papers and entries on this blog, but for now here is one hypothesis for

Why New Zealand languishes

As ever, I will welcome comment and debate.

An introduction

Michael Reddell Uncategorized

I’m starting this blog to offer my thoughts and perspectives on a range of issues around economics, economic history, and public policy.

I’m a New Zealander.  That means I have a particular interest in New Zealand issues and institutions, and the decades-long disappointing performance of the New Zealand economy, but I will also be commenting on a range of global issues.

My primary expertise is in macroeconomic policy and related institutional design, but I will range wider.  Policy, by its nature, involves choices and judgements.  Most of those are, or should be, made by elected politicians.  That means that in discussing policy it is futile to think that one can avoid politics. But if there is advocacy here, it will be for my own views, and for the analysis of others that I find persuasive, not for any one or other of New Zealand’s political parties.