Monday, November 24, 2008


In a few weeks or so the Reserve Bank of New Zealand will go into a huddle for a few minutes and come out gravely nodding that yes, another rate cut, probably of the order of 100 basis points is in order.

Commentators will point to global credit shortages, falling CPI etc etc. They will probably complain it isn't enough - especially given the differential between New Zealand and Europe and the US. And they will be right but Reserve Bank's wouldn't want to do anything hastily so 100 basis points is about as much as they are likely to do.

Homeowners will be happy because their floating mortgages will come down, exporters will be happy because the OCR props up the dollar and bringing it down will bring the dollar down increasing competitiveness and improving New Zealand dollar denominated revenue.

But my question is this. What difference does fiddling with the Official Cash Rate actually make to the Consumer Price Index?

The other day I downloaded a spreadsheet of the CPI changes on a quarterly basis and another on the OCR adjustments. Averaging the OCR adjustments over a quarter of tradable CPI gave me two columns: One with averaged OCR adjustments and the other with tradeable CPI. I then shifted the CPI one quarter to allow for lag and compared the two using simple linear regression. The r2 result was 0.08 which for those who don't do stats basically means there was no correlation whatsoever (you would need .75 plus to suggest a correlation). If the two columns of numbers were generated randomly you'd get pretty much the same result.

In fact the correlation between CPI and OCR is so weak it practically doesn't exist.

Over the past 18 months we have seen the price of a barrel of oil rise from US$40/bbl up to US$140/bbl and back down to US$40/bbl. That is a massive price spike and just as it did in the 70s and 80s it has generated a huge surge in prices. In theory the Reserve Bank looks through spikes like this looking for basic impacts on wages and other structural affects on demand for money. But that can be hard to do because oil prices have affected food prices and between the two of them real costs have risen astronomically.

Prior to this the Reserve Bank was increasing the OCR in order to cool down the rapid increase in house prices. But looked at in the hard light of day it has to be said that it had no affect whatsoever. The only thing that has collapsed house prices has been a massive collapse in the overly leveraged international money supply that was flooding the market.

So what does mucking around with OCR REALLY do?

When the Reserve Bank was targeting house price inflation it increased rates. The effect of that was to lead New Zealanders to borrow offshore via fixed interest rate mortgages. That increased our national indebtedness to 100% of GDP. Was that really a sensible thing to do?

The high OCR also propped up the dollar. This provided a currency guarantee for those foreigners investing in New Zealand property as a tax dodge (as we have no restrictions on foreign ownership and no capital gains tax). The increased value of the currency reduced the price of imports so we had a surge of credit card expenditure on toys which boomed out of sensible bounds and is now roughly $5 billion or over $1000 per person.

Did the OCR have any effect on housing exuberance? Frankly I doubt it. In December 2007 we learned" QV says that while house prices rose, the increase in the three month period to November this year was 11.4% compared to 12.7% the previous year". Who cares about paying 9% per annum on capital when you're getting returns like that! OCR wasn't even in the ballpark.

The ONLY thing that the OCR does is have an impact on exchange rates. We have been extremely fortunate that dairy returns and oil prices lock-stepped over the recent spike. If they hadn't we would have suffered more than we did. Managing the currency up did reduce the impact of sky-rocketing oil costs but it also meant that exporters were starting to be priced off the international market.

So we avoided some of the pain of the oil spike but we encouraged New Zealanders into foreign and credit card debt. Sounds like a policy for encouraging stupid consumerism not one for encouraging productivity.

Whats the alternative? Well here's mine. Set the OCR at 3% and leave it there.

What will that do?
1. drop the dollar ending consumerism pdq
2. encourage investment both now and into the future because 3% isn't much to beat
3. encourage internal funding of investment/mortgages rather than foreign borrowing
4. discourage borrowing from weirdly leveraged sources offshore
5. deflate current wage and price pressures

And if you want to address inflation address the real causes, e.g artificial land restrictions and government and local government charges which have been a main source of CPI over recent years. Neither of these are things the Reserve Bank Governor can do anything about.

With a fixed OCR the Reserve Bank could get back to overseeing financial institutions which - given the collapse of numerous finance companies (structures not dissimilar to 1929 era banks as it happens) - is something we arguably need a good deal more of in this country.

Radical? Perhaps. But I think worth a look.

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Monday, November 10, 2008

Red is dead, watch out for the Green machine!

The fall of the Labour Party in New Zealand is not merely the consequence of electorate boredom. Nor is it simply the consequence of bunker mentality which seems to afflict anyone in the Beehive for more than two terms. The reason the Labour Party lost is that it is intellectually bankrupt.

When Labour returned to power at the beginning of the 2000s its message of hope was simple. It would return New Zealand to the top half of the OECD for income per capita. Michael Cullen told the Chicago School mandarins in Treasury in no uncertain terms that they had a choice: my way or the highway. They knuckled under – as they had to Bill Birch before him.The problem was that after all the hoo-haa surrounding knowledge economies, and innovation the Labour Party took the easy way out. It opened the immigration floodgates – not hard after 9/11 – and fell back on the 1842 Wakefield National Enrichment Programme i.e sell the same land to newcomers for higher prices. New Zealand has been relying on this now for 160 years and when combined with an international mortgage bubble suddenly made everyone feel rich.

The Labour Party watched unemployment fall to record levels, its coffers swelling to embarrassing levels and fooled itself into believing that it was delivering on its promises. What next? It was at this point that Labour began to get religion about climate change, partly through the offices of the cunning Jeanette Fitzsimons and partly through the patronisation of the British New Labour Party who chucked Helen under the chin and told her she could be terribly important if she supported their efforts to talk up the value of carbon (which is vital to the City of London). Seeing a future swanning around being important in Europe Helen swallowed hook line and sinker and suddenly returning to the top half of the OECD seemed parochial and dull. Instead Helen decided New Zealand would lead the world on sustainability with targets even oil rich Norway would consider impressive.

Never slow to seize an opportunity the Greens went into overdrive and effectively became the intellectual leaders on both economic and social policy in Wellington. Very quietly however something was happening out in the electorate. A tear between the Labour Party’s leadership and its traditional supporters was beginning. When people who have not had much to begin with, gain something they become conservative. The Greens rank and file is however made up of both the very well-off and younger people who either can afford extra costs or simply won’t face them. Greens can go places Reds cannot. And slowly the issues started mounting up. Smacking kids, shower flow rates: Green initiatives endorsed by Labour were flowing down to the Labour base and going down like a cup of cold sick.

The more it went on the more the tear became a rend. The intellectual head of the labour movement used to commanding the attention of the masses who looked to it for protection and representation was becoming Green and biting the Red body. And newly enriched the Red body was slowly feeling bluer than ever before even if it mistrusted this new sensation. The result came to a head on Saturday 7 and Labour now finds itself without a head at all.

What will happen now?

Helen Clark’s personal failure has been to fall into the trap of ‘strong leadership’. People don’t want ‘strong’ leadership. They want inspiring leadership. The reasons leaders emphasise strength in leadership is that it does take an enormous amount of personal strength to be a leader. Compare Helen Clark the weeping Health Minister in 1986 with Helen Clark today. There isn’t a comparison. Clark has been burned, scarred and scolded into the will of iron style leader people actually can’t relate to or like. The problem with Will of Iron leaders is that they surround themselves with sichophants and burn off anyone else. Once that happens reality becomes an act of will and Government loses all sense of reality.

Labour’s problem is therefore two-fold. Most of its surviving senior people are relatively weak and they don’t have a coherent or appealing ideology. The bankruptcy in the Labour Party – like the bankruptcy in world markets is actually a lot deeper and a lot more serious than might at first appear. The role of old style unionists has diminished and the parliamentary wing looks more like the party of the gay green minority than anything that will appear to working people.
Meanwhile having carried out a brilliant campaign the Greens are strengthened and ready to become the major voice of opposition in the new Parliament. Although they will almost certainly face policy-knockbacks as the National Party blunts their sharper policies the Greens will almost certainly become the leaders of political opposition both in Parliament – and just as important on the streets.

This is a make or break time for the Greens and they have to win. For if, as promised the nation does hold a referendum on MMP at the next election and selects FPP or STV the Greens risk losing all influence in the Parliament. Their goal, therefore, must simply be to outshine the Labour Party in Parliament and out-inspire the Labour Party with young people on the street. Their ultimate goal must be to completely eclipse the Labour Party within ten years.

The Green Party needs its idealism but it also needs to get a lot stronger as a realistic alternative to Labour with corporate New Zealand. It needs to develop a more sophisticated economic view and it needs to adopt a careful balance of co-operation and antagonism with business. If the Greens are careful they will also need to step up their push into the labour movement as well and show more sympathy for the role of workers in large industrial enterprises than their purist policies have to date.

While the National Party will hold the policy pen for the next three to six years the more interesting struggle will be on the left as the Greens emerge as a force to be reckoned with regardless of electoral system we may ultimately choose.

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Tuesday, October 7, 2008

Bullshit And The End of Economics (as we know it)

The slow tottering collapse of the global credit dominoes is so completely similar to the slow motion destruction of wealth that occurred between 1929 and 1932 that it leaves one awestruck at the scale and complexity of the problem now confronting our world.

For this is not merely a bear market or a correction. This is a full fledged 1929-scale disaster, which will send high speed ripples through the monetary ether to rear tsunami-like when they eventually reach retail level. This is the "uh-oh" moment. And in a few years we will wonder how we managed to crawl out from under the wreckage.

But what is interesting about this disaster is that, like the one that preceded it, will, inevitably raise serious questions about the intellectual underpinning of academic economics. In theory this crunch should not really be happening, and the vortex of fear uncertainty and doubt that is sucking down world markets should reach a rational limit before it turns into a giant whirlpool that sucks everyone under. The problem is the theories are wrong. The Lemmings are in charge and Rationality's goose has been thoroughly cooked.

The most respectable theory of the Depression by Friedman and Shwarz increasingly dispensed with the detail of the 1929 meltdown in an effort to refine a model to explain this historical catastrophe in one simple variable: money supply. Money supply contracted so there was a Depression. The somewhat fawning apology of Ben Bernake to the (now) late Milton Friedman in agreement that the latter was correct in his assessment that the Federal Reserve policy was the source of all Depression era ills should, I think come back to haunt the Federal Reserve Chairman. For the obvious rejoinder is that money supply contracted because there was a Depression not the other way round. And it is one thing for Bernake to read about theoretical monsters in books but another thing to meet them up close and personally and what these academics have lost in their analysis is the scent of fear and the sheer awe that a financial whirlpool of this size engenders.

When one reads the views of working economists who witnessed the Depression first hand it is precisely this experience of events spinning out of anyone's ability to predict or control them which makes the biggest impression. The Federal Reserve Board's of both the United States and New York (the biggest market) were simply overwhelmed by the scale of events. And yes they did (New York more slowly than the Fed) cut discount rates down to 2% but it made no impression as markets entered a terminal vicious cycle. The panic of those in the market was simply faster than the ability of regulators to respond.

One also realises that the biggest name of the era - John Maynard Keynes - was essentially nothing more than a strutting columnist with no power and a very acid pen. His famous remedy to unemployment was essentially a PC version of a war economy which didn't happen anywhere. In fact all the nations which did recover from the Depression quickly (eg Japan, USSR,Norway or Sweden) were either directly (Japan, USSR), or indirectly (via Nazi rearmament) profiting from increased militarism. Those that took up Keynes suggestion didn't really recover until World War Two when they were forced to re-arm.

The simple - and perhaps banal - explanation for both the 1929 and the 1987 and the 1998, and the 2008 crises is non-performing loans. In 1929 it was leveraged buy-outs and Florida real-estate. In 1987 it was leveraged buyouts again. In 1998 it was Asian cronyism, and in 2008 it was dodgy mortgages. People have leant others money at rates which are in excess of the borrowers rate of return or ability to pay. This is obviously irrational but what is fascinating is not only that it keeps happening but that we apparently refuse to learn from it. And the problem it seems to me is that economics does not seem to be able to account for bullshit.

Bullshit is the difference between a rational decision and an irrational one. The interesting thing however is that the difference only appears to be relative. That is because we all live lives which incorporate some degree of bullshit (Hands up if you ever bought a designer anything). And when the bullshit mounts up and one is bobbing around in it ( as anyone who bought a house in this country in the past ten years will probably be suspecting at the moment) it becomes very difficult to know the difference between extreme bullshit and just ordinary background bullshit.

I must confess I have a great deal of sympathy for George Soros's on-going struggle to be taken seriously by academic economists. Soros's theory of reflexivity is considered beneath academic contempt because it is not expressed mathematically. However what it does do is account - and account most profitably - for bullshit. Soros's technique is essentially to estimate the latent capacity for bullshit in any market on the way up and the residual levels of bullshit on the way down. He then buys long or short as required, pocketing the difference both ways.

Its a technique that requires his very Hungarian capacity for paranoia, self analysis and honesty. As he says, he is always looking for the flaw, in any system and is only happy when he has found one, because - well because then he has found the bullshit.

And Soros's point, and I think this is his most important one, is that nobody: not market participants, not regulators, not politicians, nor yet academic economists is immune from bullshit. As such he has recently been savagely criticising regulators (and indirectly academics) for buying into the market's bullshit that there was no need for regulations to contain the level of debt and debt hedging risk because the unfettered market will always have a solution to any crisis.

Well I suppose running screaming to taxpayers is a form of solution. It's just not the one they seemed to be talking about when they were bullshitting everyone.

There are still a huge number of issues that this disaster will put into play. The biggest is the question of the future status of the US dollar and whether military hegemony still indeed translates to ownership of the currency of last resort. Over the next few decades I have no doubt that this post-War convention will be replaced with some entirely new monetary convention.

But a more important question will be whether - now that bullshit has so clearly been found to be the foundations of the monetary temple - economics will begin a process of creative destruction on itself and start to incorporate more appreciation of the distorting effects of bullshit on not just prices, but markets themselves.

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Wednesday, September 10, 2008

Deception or Democracy

It's the highest court in the land. And yet the withering light of day brought to bear by businessman Owen Glenn in front of the privileges committee yesterday has revealed a pit of slimy things desperately slithering for the protective obscurantism of the very privileges parliament rests on.

Without a doubt New Zealand First leader Winston Peter's credibility has gone. The "no" sign he displayed in February when asked whether he had solicited donations from Mr Glenn has been flatly contradicted by the man who paid them, with records as proof. Now in the gun is Labour president Michael Williams who's mendicant approaches to Mr Glenn extended so far as asking him for a job; and Labour Prime Minister Helen Clark who has been more than parsimonious with the truth regarding what she knew about Mr Williams and Mr Peter's fundraising activities.

To my mind this is no longer a question of whether the Labour-led government is teetering on the brink of being validly termed 'corrupt'. We now have a whole package of deception which goes right to the very core of the parliamentary process and calls into question the very integrity of our Parliament as an institution.The question is no longer a political one about this Government but a constitutional one about all Governments and that is this: do we really trust these buggers to constitute the highest court in the land?

I admit that my disgust with the behaviour and duplicity of MPs has had a long gestation. It began when MPs elected under MMP took advantage of their constitutional supremacy to change the basis on which they were appointed to parliament after they were sworn in. Voted in on the list of one party they renounced this and changed their allegiance for another. To my mind this is manifestly undemocratic. If you make representations to the public that you will serve one set of policies before election to not do so after it is fundamentally deceptive marketing. Businesses can't engage in such behaviour, why should MPs be able to get away with it?

The problem is who are ya gonna sue? And which court would hear the case? The simple problem is MPs have been personally admitted to the 'highest court in the land' and the highest court in the land (made up of MPs) sees nothing wrong with deceiving the public.

Well its about time that it bloody well did!

To my mind this is where our shiny new supreme court should wake up and do something for their outrageous salaries. My plan is this: We establish basic constitutional principles of electoral representation (and not just for Parliament mind) which define the essence of our democracy; We then elevate the supreme court above Parliament in respect of these laws alone; We allow the public the right to bring actions against political parties and MPs under these laws. This would make an election manifesto a promise to the elctorate that could be the subject of legal action not an exercise in spin. Politicians utterances would be actionable if they played fast and lose with the truth. And if the Supreme Court decides a by-election is required a by-election takes place; and if a politician engages in deception then the Supreme Court should have the right to censure or remove that politician from office.

For some reason New Zealand has always prided itself on its lack of corruption. But in my view that hasn't been because there isn't corruption. Its because like the monkeys who see no evil, hear no evil, and speak no evil, we simply didn't allow anyone to look for it, talk about it or do anything about it.

Our laws relating to defamation are absurdly strict and the penalties for hurting someone's reputation are out of all proportion to the penalties for maiming or blinding them. Our police ( not as straight themselves as they pretend) have not shown much interest in fraud, and our Parliament is trying to close down the Serious Fraud Office! The public are gagged and blinded from the get go. No wonder they are relatively easy to deceive.

The danger is that a new broom in the Beehive will simply be as slick as Labour was when they were first elected. Will it take nine years before the rust starts to show through their chrome and we go through the same apalling spectacle all over again. Or will Mr Key's talk about electoral reform actually attempt to do the unthinkable and introduce honesty into our system of parliamentary democracy.

We will all just have to wait and see.

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Friday, August 22, 2008

Towards true consultation

I am gradually coming to the conclusion that "consultation" is one of the most abused words in the policy lexicon. What it means is the agency which must consult will develop a "consultation document" which contains a large number of half-truths and policy options that it supports. It then releases this for "consultation" to a suitably balanced selection of groups who can be relied upon to contradict one-another. It then amends any obvious flaws in its original document and releases this as consulted upon policy. The agency gets what it wants, the groups are silenced and the politician can then say the process was fair.

Well it wasn't.

The process is completely dishonest and its time more effort was put into making consultation a bit less of a circus and a bit more bloody democratic.

This is, admittedly, quite difficult. Most topics which are consulted upon are highly technical. The average person is simply not equipped to take part in the debate at all. However simply putting everyone together in a room and capturing what everyone says is no way to give such people a fair shot at being listened to.

In my view true consultation must be a form of Hegellian Delphi process. The first stage of consultation should be to establish the degree of expertise held by those who wish to express a view. This should be done by setting a completely independent panel of experts to assess a first round of written submissions and score respondents in terms of the sophistication of their response. The independent panel should also determine the common issues and the range of disagreement on these issues. This will produce a two dimensional graph with expertise on the Y-axis and range of views on the X-axis.

The independent panel should then appoint expert viewpoint leaders based on the diversity of views expressed. That is the viewpoint leader will have the highest score on the Y-axis and all those with similar views on the X-axis will be referred to the Viewpoint leader to provide material.

The agency should then convene a meeting of Viewpoint Leaders to discuss the main issues in question. The object is to determine the number of positions that exist on each issue in question. Each Viewpoint Leader can refine their own position upon exposure to opposing views. Where Viewpoint Leaders find themselves in agreement with other Viewpoint Leaders on any one issue this is resolved into a shared position.

The next stage is the construction of a survey questionairre booklet in order to determine the level of support each Position has among the public. Each position is briefly explained in writing by the Viewpoint leader or leaders. The text is then edited to improve comprehension and reviewed by the leaders to ensure no meaning is lost. The questionairre will be constructed on a scoring basis such that issue will have a total of 10 points which respondents can allocate to each position. The Viewpoint Leaders then review the overall questionairre to sign it off.

The Agency then tenders independent survey companies to develop a survey frame construction methodology. These are reviewed by the Viewpoint Leaders who can only veto a tenderer. The Agency then commissions the survey which must have a margin of error of 2% at the 99th confidence interval, i.e involve 4,356 respondents. The frame is contacted to obtain agreement to take part in the survey. Respondents are then mailed the questionairre booklet. They have two weeks to consider their scores and do any further research they care to do. At the end of this period the surveyors call those that have not submitted scores online, and visit those who have not been contacted by phone.

The positions are now scored and votes allocated to the Viewpoint Leaders by position. The Agency calls a meeting of View point Leaders to discuss the issues. The final text is determined by the Leaders with votes being used to resolve any conflicts.

The result should be a policy which has the support of the population behind it.

While this process may seem expensive and protracted, I frankly don't think it is any more expensive or protracted than the bullshit processes being used by New Zealand Government agencies today.

The only problem with it is that it makes politicians redundant as it throws into question the extent to which "representative democracy" actually represents the population.

And we couldn't have that could we?

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Monday, July 14, 2008

Productivity - What should we do

There is a very good graph on a blog named Misty Window which captures the essence of New Zealand's economic malaise.
Essentially what it says is that we work like bastards and achieve very little for it.
Sadly we have been doing this for rather a long time. One cannot help recalling that the definition of insanity is "repeatedly doing the same thing while expecting a different result". By this definition New Zealanders are insanely hard workers.

That is not a good thing.

There are a number of nations worth highlighting in comparison with New Zealand on this table. France - earns more and works far less; Ireland earns much more and works a bit less; Australia earns more for slightly less effort; and Greece which earns about the same as us for bugger all effort. Can we learn anything from these comparisons? I think we can.

First of all we have to recognise that the scorn UK-US academics show for their continental cousins way of doing things is far from deserved. The ultra-market philosophies inflicted on us during the 1980-90s have not delivered the productivity gains promised of them.

In fact they delivered to New Zealand precisely what they delivered to all the other nations that adopted them: a new kleptocracy of rich bastards who took off with the best state assets, milked them for all they were worth and flicked them on. Some ended up in the hands of Australians ( eg all our main trading banks who now effectively fleece the country on a daily basis) and the rest (which were always hopeless) ended back in the hands of the Government again ( NZ Rail, oops I mean Kiwi Rail, and Air New Zealand).

That is not to say I am a wild fan of Muldoonery but in my view the ideological stance of the ACT Party and the Business Roundtable is simply unsupported by the evidence. It's like the Pope believing "just say 'no'" is a reasonable policy for combating AIDS in Africa. Their ideology is based on ideological assertion not evidence.

So what do we need to do improve productivity?

Well the first answer is for Government to recognise that we are a very small country and that solutions from the EU or America can't be translated to a nation with a population the same size as that administered by Birmingham City Council. That means recognising that there will be market failure in New Zealand and that the market model may not be the most administratively efficient means of delivering services. For example there was a time when disputes between the transmission arm arm of the Electricity Department and the generation arm were solved in the tea room. Now they involve two State Owned Enterprises and a truckload of expensive Q.Cs in front of the Court of Appeal. Where is the efficiency in that?

Then we need to get to grips with our education system. Our productivity is low because the average New Zealander is employed in a dumb job doing things which are dumb and they are paid accordingly.

If one held a class warfare view of the world one would argue that it's all the bosses fault. Our productivity is poor because our bosses are poor managers. This is true. They are poor managers but the more important question is why are they poor managers? The answer is because for a lot of them bullying workers is about as far as they have got in terms of management sophistication. The Business Roundtable and the National Party compound this error by suggesting that bullying workers more through unfair employmenmt contracts will achieve greater productivity. Hello? You tried that already and it didn't work.

The real problem is managers come from the workforce. There is no class warfare in the workplace because there is a lot of mobility in New Zealand. One day you're a manager. One day you're staff. But the problem is the workforce is poorly educated. And they are poorly educated because our education system is simply not very good. Its run by teachers who tend to go into a defensive circle like a flock of sheep as soon as something new comes along. Most are happy doing what they have always done and very unhappy being told that has to change. That said we have to face the fact that the PPTA and the NZEI have proved themselves tougher at facing down ideologues in the past than anyone might have given them credit for. The reason is simple, its a tough job and nobody else wants to do it.

To improve education we have to change the debate:

1. We have suffered a vicious circle in the teaching profession. Conditions have got steadily worse, pay relativity has got steadily worse and the teaching unions have become more and more entrenched in defending their members against reforms. The result is a profession in steady decline. And with each passing year this is inflicted on another cohort of school entrants and leavers. There is only one solution. A unilateral move by Government to improve the conditions of teachers. This includes huge reductions in administrative workload, realistic solutions to school discipline problems, better resourcing and of course better pay. If people see teachers have a good job there will be more competition for the work and more outrage at poor performers who hang on doing the same old.

2. We also need to change the role of the teacher from one that is inherently confrontational to one that becomes a form of subversion. One way to do that is recognise that teaching should not be limited to "the teacher". Everyone should be taught how to teach because it is the same thing as teaching everyone how to learn. Teaching is a core business management function. Learning is a core corporate activity. Every child should be taught to teach as part of the core curriculum. Not only does this teach a great many skills in presentation and organisation it also breaks down the divisions between the teacher and the learner. It is pretty hard to sit and snicker at the back of the class when you know it will be you the rest of the class will be snickering at if you do a bad job. Teaching should be recognised as a personal talent as well as a body of knowledge so that while everyone understands how it works only those who are particularly good at it take it up professionally.

The next issue in terms of addressing productivity we need to examine is the role of Government. This applies to Education but also well beyond it.

3. We have created the ridiculous situation whereby we have a bureacracy that pumps out vast amounts of glossy verbiage on developing strategies for things like teaching critical thinking when absolutely none has been applied to the glossy strategies in the first place. The level of waffle coming out of Wellington has reached epic proportions and this is based on the very female habit of refusing to criticise manifestly stupid ideas because the act of criticism will be interpreted politically rather than as improving the riguor of the output. Thus every stupid and manifestly obvious idea is 'nurtured' because it was collected on a whiteboard during some group-think session somewhere. There is a need for at least one independent organisation within Government to provide a quality check on the integrity, evidential basis, and consistency of the policy documents emerging from Wellington. These documents create a huge headache for the rest of the country and they are not as good as they should be.

4. Our systems of local governance don't work. One of the biggest problems is the funding of local government. At the moment local government funds itself by restricting access to land thereby creating land value inflation (which is highly productivity depleting as it attracts otherwise useful resources) so it can charge higher rates and making up vast numbers of complex conformance rules so it can charge more for compliance costs. Local government is fundamentally incentivised to fuck the country up.

What is needed is a complete overhaul of the government structure so that local government is incentivised to develop the country sustainably. This isn't the same as sustainable management (enshrined in the RMA) but very much anthropocentric capitalist development which creates value for future generations a la Brundtland. We probably need to return to some from of Provincial structure which essentially gives each provincial government the scope and incentives to develop their regions.

This might,for example, mean that provincial government gets two thirds of its local income tax take while central government gets the remainder, GST, witholding, excises, environmental and similar taxes as well as a uniform rate. Naturally this would also mean the budgetary devolution of some central Government functions such as education, social welfare, health and policing to Provincial control. In effect each Province would become a mini state funded and equipped to maximise its own potential. Suddenly local government would stop being a brake and become a powerful accelerator of national development. It would also become a politically central part of New Zealand life encouraging greater participation in public life and more critical thinking of local issues.

5. Further to the previous point the Inland Revenue Department also needs to be re-focused on the regions. The IRD has developed an apalling culture of state leechism which fails to recognise its deadweight costs on the economy . It needs to be re-oriented to a role of regional development and given more incentives to be more responsive and responsible to local tax payers.

6. Wellington's role needs to be rethought. Instead of trying to think for the regions it should restrict itself to setting national standards, international standardisation and harmonisation, international negotiation and national level operations. It also needs to seriously think about developing a few real industries such as film and software.

Then there are broader issues which also involve the private sector which we need to consider.

7. Our financial system is skewed to all the wrong things. Because of the way assets are counted in banks reserves mortgages have twice the value of other securities. The result is banks only lend for mortgages while assets such as shares are regarded as monopoly money. With luck the current credit crunch might finally convince the world financial standards setters that a package of dumb mortgages is a lot less safe than shares in Standard and Poors A+ stock and lead to a revision of these rules.

But for too long our financial institutions have regarded New Zealand equities as rubbish while investing in dodgy overseas ventures like Enron. At the same time our rules surrounding the issuing of equities and prospectuses are respectively unduly restrictive and far too slack. Disclosure is poor and the sophistication of investors, frankly pathetic. It would be nice to see some sort of promise of action surrounding the domino collapse of second order finance houses in New Zealand at present. Unfortunately this depression-era echo is being swept under the carpet by the same people who brought us the 1987 Stock market crash, hiding behind the same disgusting protections that for some reason we afford con men in pin stripe suits.

Then there are some sensitive issues that cut to the heart of this country.

8. Sady, and there is no way to gloss over this, Maori are a fuck-up. Too many are in jail. Too many are drunks and smoke too much (tobacco, dak and P). Too many hit their kids. Too many crash cars. Not that any of my Maori friends or neighbours have done these things but statistically it's a fact. There are too many fucked up Maori. And its not because they are poor, as some people think. Its because they are Maori. Their rock:Tikanga is their strength but it's also pulling them under:

  • The first is that there are some elements of Maori culture which are just plain dumb, and more Maori need to speak up about them and say so. The main one is there is simply too much fear embedded in it: fear of violence (ask any Maori taxi driver); fear of standing out at school; fear of losing face; fear of the new. The antidote to fear is drink and the result of drinking is idiots courage. Maori need to address their fear of fear.
  • The other one is the culture of getting away with it. The French have this too but they combine it with charm rather than violence. Too many Maori try to get away with things rather than be honest. Those that do this typically rob other Maori. They rob them of their wealth; and they rob them of their mana. Sometimes they rob themselves of their own mokopuna. There is also an intellectual level of "getting away with it" where some hide behind a cultural smokescreen. Instead of sheltering this under the skirts of kinship Maori need to reclaim their mana by being honest about Maori who embarass them and renounce the backsliders.
  • Finally Maori have to recognise that in the 21st Century the feudal structures of the Marae, the sacred role of elders etc, are rituals and nothing more. Young people must question and women must speak out. The suffocating silence that hangs over so much that is Maori must lift like a mist to expose everyone to scrutiny. Maori have naturally sharp tongues and none of them should be stilled.

These can only be addressed by Maori leaders. What can Pakeha do?

  • Well first of all they can stop ripping them off and give back the land they stole. Progress on the Waitangi process has been slowed through a cynical strategy of devaluation and those in Government who are perpetuating it should be exposed for the racists they are.
  • Then they can stop processes of systematic oppression through Police recruitment policies and education.
  • And finally Pakeha need to stop sneering and start learning Maori language and tikanga as a matter of national pride. Maori is the defining culture of our country and it should be more embedded in our hearts than it is.

Finally we need to get about tough on outlaws. A very large proportion of the crime is carried out by a very small proportion of the population. Surveys of those at the recieving end of different levels of the justice system show that each fears the next level of state sanction. But once someone has been to prison once the fear of going back is reduced markedly. For some not being in prison has been a reason to commit crimes up to and including murder. While the UN may not sanction execution I personally think hanging is less of a punishment than keeping some people alive.

8. Finally we need to institute a prison of last resort. This is the prison you only come out of in an urn. Why? Because there is a small but significant population of New Zealanders who simply have no fear of our prison system. They operate from it, through it and within it. These people have a corrosive effect on other prisoners, their families, their friends and everyone they come in contact with. They are walking evidence there is a viable alternative to remorse and that you can get away with it in New Zealand. They are the evidence that discipline means nothing. The prison of last resort is the cure. A place where people who have simply proven that they cannot be trusted ever again can be sent to live to die. A place very hard to visit and a place with no cell-phone coverage. My pick for its location is Pitt Island, East of the Chathams.

So that's my solution to our productivity problem: education; eliminating state bullshit; local incentivisation;reforming financial markets; responding honestly to Maori issues; and re-establishing a sense of consequence for anti-social lifestyles.

Well, its more policies than the National Party have announced so far anyway!

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Friday, May 30, 2008

The Great Power Cock-up of 2008

It's late May. The sun is shining, there is no wind, and it's a slightly nippy 10 degrees Celsius. According to NIWA its la Nina, ( and according to the recently launched Winterpower website, it's sinking New Zealand deeply into the shit.

Winterpower ( ) shows that electricity demand is up, hydro lake storage on which we depend on for 60% of our electricity is well down, wind has not contributed significantly all winter, and Contact has been forced to re-fire a 32-year old asbestos-ridden, gas-fired station in New Plymouth to keep grid levels up. Electricityinfo ( shows that electricity prices are high and climbing.

God, it seems, is not on Energy and Climate Change Minister David Parker's side. For Mr Parker has bet his, and the country's future, on renewable energy. So much so that he has pretty much banned the development of any new thermal (that's Natural gas and coal burning) power stations. In a classic case of counting chickens, he crows that he has proposals for hundreds of megawatt/hour wind farms on his desk.

The problem is David, wind farms only produce power when the wind blows. It ain't blowing David. And when it ain't raining either that makes New Zealand's reliance on clean green renewable energy, and you, look rather dumb.

Parker's response to that is that geothermal energy is renewable and doesn't rely on the weather. That's true, and New Zealand has an abundance of potential geothermal energy. The problem is that for the past decade or so getting a resource consent to build new power stations has been very very difficult. The result has been that all the new generation has been from the expansion of thermal stations. But David, in his wisdom, has switched this option off at the mains. So now we have a choice. Either renewable power gets built or we pay whopping power bills. Unfortunately the people objecting to the renewable stations never seem to make this connection. They just don't want them in their backyards.

Unfortunately NIMBYism (Not In My Back Yard) has been elevated to almost constitutional status in New Zealand by the sacred Resource Management Act. In fact we also have NIYBYEMism as well (Not In Your Back Yard Either Mate) because anyone can object to notified developments - even if they live hundreds of miles away and just don't like the idea.

So, for example, if anyone comes up with a plan to provide a vast South Island irrigation project and generate 3,000 Gigawatt hours in the process, minority Members of Parliament living in Coromandel feel it is incumbent upon them to begin a campaign to stop it in the name of .. well NIMBY and NIYBYEMism. And they can, and they did.

The real problem is that there is a huge disconnect between the lofty idealism of Mr Parker and Green Party leader Jeanette Fitzsimons and the average kiwi or cockie who wants hot water for the shower and power to run the milking shed. David Parker talks of geothermal power, Jeanette Fitzsimons talks about tidal. Both are great ideas. The problem is we needed them installed last week and given the vaguaries of the way we do things in this country they may not happen for another 20-years.

This is the point that Bryan Leyland repeatedly tries to make. Bryan is an electricity consultant who regularly gets up Minister Parker's nose by pointing out embarrassing things like the lack of water in lakes and the stillness of the air. Despite the pillorying he gets Bryan is on record as being perfectly ideologically neutral about this. He used to get up the nose of Max "More Markets" Bradford ten years ago when theNational Party Energy Minister tried to sell everyone the notion that private power markets would solve everything . Bryan simply says electricity is too big to play ideology with. Do anything that invites supply failures and you commit political suicide as well as cost the country a fortune.

So will David Parker back down on the thermal ban? If he were sensible he would. He's been forced to back down on the Emissions Trading Scheme somewhat, although its still a lurking disaster. The question is whether he really has the sense.

The problem is not his intentions, which are certainly good, it's just that the road he is busily paving with them leads to hell, not heaven. Why? Because he doesn't understand details, he bullies experts and he just won't listen. So he will end up smiling and blinking in front of bright lights of the news cameras looking idiotic with egg on his face.

The problem is the Parker and the Government are trying too hard on climate change. Climate change really spins the props of maybe 15% of the population. It vaguely bothers 35%. But it doesn't matter at all to 50%. That isn't to say the 15% aren't right. But 15% is a minority grouping not a dominant party one. And when it comes to implementing taxes you need more than vague concern.You need broard support.

My view is that it has always been easy.

  1. Redistribute some fuel taxes (including new Jet/Avgas, Maritime bunker and diesel) into carbon taxes
  2. Fund new roads out of debt ( new roads do reduce CO2 emissions despite what the Greens say)
  3. Start a low carbon tax on electricity from gas and coal and ramp it up to the marginal cost of carbon capture and storage technologies over 40 years.
  4. Spend carbon taxes on sink Assigned Amount Units and forests on Crown Land
  5. Create a Public Private Partnership between the Crown and Private forestors to excess sell sink credits on the world market as a single desk once Kyoto targets are reached
  6. Begin a GhG intensity star-rating scheme for tourism, industry and farming.
  7. Promulgate the Ghg intensity scheme to the International Standards Organisation.

Instead of "making the taxpayer squeal" (which so delights the looney sadists in Inland Revenue) this scheme is light on the stick and long on incentives. It includes taxes on long distance travel which we can shut the Europeans up with; it provides long term price signals for those investing in thermal generation that it will either be temporary or they will have to mitigate; it provides incentives to forestry and industry rather than scourges. But more importantly it minimises resentment and rejection which is currently killing all the other schemes the Government is coming up with in this current electoral winter of discontent.

Unfortunately it is simply too easy. No officials will be able to travel to distant conferences to present papers of world leading market design. Diplomats who specialise in debating the finer points of commas in communiques could stay home. Ministers won't be able to beat their chests in UN forums. Nobody important would gain - just the voters.

It would however be quietly effective, creating a positive mood for embracing the necessary adjustments our economy needs to make in a carbon constrained world, gently and fairly, like a midwinter sun.

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Wednesday, April 16, 2008

Wat Tyler and Government spending

On 15 June 1381 Wat Tyler became the first English martyr to die in the struggle over inflation. He was run through by the 15-year old King’s henchmen in the middle of a parley over the rights of commoners to charge a fair price for their labour. Behind him 100,000 other commoners incensed by the King freezing wages after the Black Death had thinned the population by 30% a generation before and instituting a poll tax in order to prop up his unpopular wars, had gathered – threatening revolution against the Norman nobility.

These days there are no knights ready to kill those who may complain about an economic system geared to preserve wealth. Instead we have bank economists. These are the people who say that we need to increase the unemployment rate in order to reduce inflationary pressures. These are the people who say spiralling prices for food mean that we need to increase the cost of money to reduce the temptation to borrow to feed our children. In short their job is not much different to that of the knights who surrounded King Richard, they just use an ignorant TV journalist as their weapon of choice rather than a sword.

The current global economic situation is essentially a crisis in capitalism that people such as George Soros have long anticipated. What we have is a collapse of confidence in certain classes of derivatives and the institutions that are exposed to them. This is coinciding with exploding demand for energy and food as huge and hitherto low-demand nations (China and India) bootstrap themselves up to first world status. At the same time the western-world is having a crisis of confidence over its environmental impact leading it to adopt perverse policies (such as biofuels) which are not only increasing the rate of environmental degradation but also impoverishing millions of people in third world nations.

As the International Energy Agency will explain to anyone who will listen there is actually no shortage of oil. Nor as many International Panel on Climate Change scientists know is there any imminent threat of global ecological collapse. Certainly life in some places will be harder than it has been but this is not unusual in the history of Planet Earth. The only real difference is that these days shares of the surface of Planet Earth are divided into parcels which people own and those who have enjoyed owning one part of the Earth are not happy about the prospect of their bit losing value. Meanwhile the capital markets have switched from worthless mortgage derivatives to commodity derivatives and this bubble of cash is pushing up energy, food and minerals prices all over the world.

For New Zealand the situation is curious. On the plus side the market for food is buoyant and as that is our major export this is positive. On the down side the market for land has collapsed leaving many households in danger of entering negative equity in their home. Responding in a somewhat Neanderthal manner to the situation the Knights of banking reason that the cost of money must remain high because other prices are high. This is idiocy but despite the poor reasoning the answer is actually correct. In fact there is only one good reason why the cost of our money should remain high and that is to insulate the country from the rising price of energy. By maintaining a high interest rate our currency remains high reducing our exposure to currency costs of energy. Were we to reduce interest rates the cost of energy would soar increasing prices through the whole economy. For firms it’s all about making do with the revenue you have. Better high costs of capital than high prices for energy and technology.

But when prices are high, not surprisingly people get rebellious. They need to pay for food, shelter and energy (particularly in the winter) so they want more money in their pockets in order to do just that. There is no point expanding the money supply because all that will happen is that the proportions will be re-expressed in new prices. What is required is a rebalancing of where money you have actually goes. To use a domestic example, instead of saving a lot or spending your income on books or paving the drive, you spend more of it on food, shelter and energy.

The problem with this is the agency we use to spend money on things for our collective well-being – the Government - is very good at growing and very, very poor at shrinking when that is what is needed. So while in our own households we would decrease spending on certain things, because we spend on these things via an obligatory contribution we cannot cut back as we might normally do. The result is that regardless of our circumstances the Government continues to extract vast sums of taxation to do things which we don’t want them to do – in Wat Tylers time (and indeed ours) it was wage pointless wars.

If the Labour Government had any sense at all they would be announcing a vast Government austerity and efficiency programme and an equally large round of tax cuts to the bottom of the income tax level. Personally I have long been in favour of a null tax on personal income from zero income to around about $9.5k. This would eliminate tax on many Government benefits cutting the need for bureaucratic double-handling while at the same time giving wage and salary earners close on $1,425/annum or $27/week extra in their pockets. This would cost the Government roughly $6 billion or most of its surplus but it would make a helluva difference to middle New Zealand and Labour’s electoral chances. Unfortunately the Government at the moment is contenting itself with singing dopey songs and blowing raspberries at the leader of the Opposition, John Key, who is coming across as an honest man bewildered by the petty kindergarten bullying. While emotionally gratifying at a childish level such sillyness will cost the Labour Party the election – particularly later in the year when they take to driving around in their shiny new BMW Mugabe-mobiles.

And while Key has indeed doubled over and danced hard to avoid off-siding himself with the public one thing he has attacked has been the profligate expansion of the public sector – something everyone outside of Wellington (where salaries have increased fastest) will be only too happy to cheer. Indeed what Labour needs to recognise is that in reality this is the defining issue of the election and respond sensibly to it. Because if it doesn’t start to slash taxes and the public service come 2009 National will.

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Friday, February 29, 2008

Will National be a one-term wonder?

The polls are fairly unanimous. After nine years in power the Labour Party is shaping up for its biggest trouncing since 1990. Already a stream of MPs are deserting the sinking Party seeking jobs in academia or further afield. Meanwhile the rear-guard of newish Ministers seems to be adept only at opening their mouths to change feet. Environment Minister David Parker descended to a completely humilating squabble with Solid Energy's Don Elder at an energy conference recently while Health Minister David Cunliffe's determination to sack the Hawke's Bay DHB - despite it only having held one meeting since it was elected - has stirred up a hornets nest of antagonism in a region already furious over Transport Minister Annette King's refusal to sell the local airport to the Regional Council so that they can extend it for jet aircraft.

Despite a relatively buoyant economy the public have had enough. But what exactly have they had enough of? For National may think it has this 2008 election in the bag, but unless it recognises what Labour is doing wrong it could very rapidly feel the public boot on its collective butt come 2011 as well.

After a year on the road meeting as many interest groups as he can National Leader John Key has summed it up very well in recent months. The public are sick of Labour's perceived arrogance. The assumption, common among many ideologues, that the Government has the right to correct the public's naughty behaviour. This boils over in the so-called "Smacking law" which eliminates the defence of parental responsibility from common assault. Parents all over the country are up in arms about the bill and already there are enough signatures on a petition to force a citizens initiated referendum at the 2008 election.

Another less stated thread is the frustration with the apparent influence of the minority Green Party over their Labour partners. While the Greens appeal to at most 20% of New Zealand's population they deeply irritate the other 80%. In Australia or Ireland where the Green parties are hopelessly ineffective this wouldn't matter but the New Zealand Green Party boasts Jeanette Fitzsimons who is one of the most singularly effective politicians in New Zealand politics. Ms Fitzsimons influence on Helen Clark, Pete Hodgeson and David Parker is subtle but very effective and even as they distance themselves from the Green Party the Labour Party has ultimately embraced Green leadership lacking any other ideas.

Ultimately it all comes down to some basic ways of operating. New Zealanders want a government that is forward-looking, collaborative, accountable and bases its decisions on rational evaluation. Increasing the Labour Party is perceived as being autocratic, unaccountable and basing its decisions on political rather than rational reasons. Quite rightly people fear such outlooks and draw rude cartoons of such leaders dressed as Adolf Hitler etc.

But the key question is how different will National be?

For the moment National is lying low in the grass hoping the public will delude itself that a change in political leadership will bring about whatever policy change it is that Labour has annoyed them with. Key's strategy is to "smile and wave, boys, smile and wave" hoping this mass delusion will deliver National the Treasury benches. But his real problem is that his shadow cabinet team is every bit as potentially autocratic, unaccountable and politically irrational as Labour is. There are a lot of people in National who have waited a long time for a chance at power and have probably lied awake many a night relishing the prospects of their first weeks in power.

But where Jim Bolger and Bill Birch had a powerful grip over the National line-up it is unclear whether the same is true of John Key and Bill English. For the fact is Jim Bolger and Bill Birch had served their apprenticeships under Robert Muldoon and had a clear idea of the pitfalls of that approach. John Key and Bill English are by comparison extremely inexperienced while some of their cabinet colleagues are more experienced than they are. The first main test of the Key-English leadership will be the ability to keep these 'junior' Ministers under control when they get excited with the reins of power some time in March 2009.

If National want to be more than a one-term wonder they are going to have to continue to go slowly. They are going to have to adopt a 'chairmen of the board' outlook rather than the 'leadership' trap Labour's current Ministers seem to have fallen into. That means more democracy, accountability, collaboration and rationalism then perhaps some of the Ministers may have patience for.

The big question is, will they be able to do it? If so they can look forward to virtually eliminating the Labour Party as a political force in the way that maestro Keith Jacka Holyoake did during the 60s. If not election 2011 will administer a severe kicking.

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Tuesday, February 12, 2008

UN - 60 years old and deeply flawed

The United Nations was founded by the United States 60-years ago. Now as it turns sixty in my opinion its time to ask how the fundamentals of its structure defined in the post-WW2 period will ever be re-examined?

Officially the UN came into being in 1945 but many nations were heavied into joining the alliance against Germany, Japan and Italy purely because they worried about being excluded from the forthcoming world club. The fundamental issue of the day was the obvious conflict between the Comintern and the rest of the world. While it was hoped this son-of-the-League-of-Nations would be stronger than its predecessor history has amply demonstrated that it has been every bit as weak and unrepresentative as the League ever was.

There is a lot of nonsense written about how the United Nations differs from the League of Nations. Wikipedia - ever a good source of nonsense replicates much of it in its critique of the League. Namely

  • The League, like the United Nations, lacked an armed force of its own and depended on the Great Powers to enforce its resolutions, which they were very reluctant to do. (for example see anything to do with Israel)

  • Economic sanctions, which were the most severe measure the League could implement short of military action, were difficult to enforce and had no great impact on the target country ( for example Iraq)

  • The British Conservatives were especially tepid on the League and preferred, when in government, to negotiate treaties without the involvement of the organization (substitute US Republicans)

  • The League's neutrality tended to manifest itself as indecision (Bosnia/Rawanda)

  • Another important weakness of the League was that it tried to represent all nations, but most members protected their own national interests and were not committed to the League or its goals ( see UNFCCC)

Today the issues confronting the world are very different to the ones that existed in 1945. Today the two main issues are environmental degradation (including climate change, and food provision) and migration (including refugees, terrorism and war). The threat of nuclear annihilation while lurking in the background is nowhere near as real as it was a mere twenty years ago. As such we need to ask ourselves whether the structure of international relations is as representative as it ought to be.

Indeed it was at a post-Bali briefing where I came to the conclusion that the UN's response to the global climate change emergency has been to put hundreds of lawyers in a room representing diverse national interests. The histrionics over what would eventually be a bland set of sentences that committed nobody to anything much can only be described as one of the most expensive wastes of time ever committed by national Governments. And frankly this is all one can expect from the UN. It is a plenary for discussion - it is not a preliminary to world government.

The biggest problem with the United Nations is that like the League it largely reflects a world defined in Europe. Consider these questions:

  1. When will EU Members surrender their UN seats in favour of the EU? (answer: never)
  2. When will China's provinces - each every bit as large as European nations get representation at the UN (answer: never)
  3. When will the States of the US or India ever get represented at the UN (answer: never)
  4. Why are the borders of African nations still those defined by the European colonialists at the Berlin Conference in 1884? (answer: because it suits their largely corrupted rulers)

The fact is the only democratic redistribution of UN representation occurred with the collapse of the Soviet Empire. Even then there is still the question of whether Prussia will ever be revived as a Baltic state.

What I am trying to point out here is that while the United Nations may look perfectly normal to European eyes - to everyone else in the world it is a strange distortion of political reality. As such who it represents is very much open to question.

I am not about to propose any solutions to this institutional dilemma partly because I don't have any, but largely because it wouldn't matter if I did. All I think is important is that we begin to ask ourselves, as citizens of this planet, when this institution will ever change to better reflect the very different world 2008 is from 1945.

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Tuesday, January 22, 2008

Initiative or Compliance? Lao Tze had the answer.

Rosemary McLeod had a very important wee comment in her Sunday Star-Times column recently. The theme of her article was on how by regulating the disciplining of children we are actually hindering it. She cites the example of a Christchurch dad out riding with his kids who gave an older child a clip for failing to heed his safety warnings. As she points out having Police charge the father for this "assault" sends a very odd message to the children. She expands on this theme by pointing out that the Justice Ministry's youth crime prevention scheme report paints a sorry picture of complete failure. Whereas social discipline in nations like Japan is exemplary this is rejected because it is achieved at the cost of considerable domestic violence.

McLeod's point however goes to the very core failings of the Nanny State. In the Nanny State there is no initiative only compliance. The Nanny State knows best about everything. The Nanny State revolves around the rules and the rules are meant to deal with every contingency. It tells us what to do.

The problem is that it places a huge demand on the those making up the rules.The position was brilliantly lampooned by Vladimir Nikolaevich Voinovich in "The Life and Extraordinary adventures of private Ivan Chonkin" when one character bursts into tears in sympathy for Joseph Stalin at the beginning of the war.

"Its so hard for him because he has to think for all of us", she sobs.

Under the Nanny State people don't think for themselves, the State thinks for them. Thus a father who in the fear of the moment takes the initiative to drum a lesson into his errant son's head must be brought to compliance without any regard for the consequences of that action in itself. What is ironic is that when the legislation was introduced the public were assured the Police would use their initiative. It turns out however that under the Nanny State the Police feel they aren't allowed any. They too must comply.

A perfect example of the idiocy of is the latest case of schoolyard rapes in Lower Hutt. According to this report teachers were given long explanations about what they could and couldn't do sometime before these attacks happened. Now once upon a time a teacher with a stick would have prevented these crimes by whacking the miscreants. Sore bums and kids know their place.

Now, thanks to the Nanny State the safest course of action for the teachers is not to take responsibility but refer everything to another department (ie Police). Teachers are now more concerned about compliance than initiative or responsibility and the criminal element among their charges knows it. And now the Minister Chris Carter is getting in on the act by blaming the teachers again! The messages are so conflicted nobody knows what the masters want.

Worse the official system of compliance is failing. The average time spent waiting for justice for important cases is now 305 days. People are getting away with crimes because the system of compliance is proving too slow to deal with events. Without initiative everything ends up floating to the top and the top simply can't cope with the workload. The result is we are building a nation of compliers who wait for others to take responsibility - who in the end don't. In the end this just perversely rewards those who defy the system altogether!

Unfortunately a nation of compliers is not a nation that achieves anything. Achievement in every field comes from initiative. Initiative comes from taking an idea and running with it. By its very nature the outcome of initiative is unknown. Compliance is about preventing initiative. Its about denying people responsibility. And worryingly it is, in essence, the heart and soul of today's New Zealand government. Throughout government every official quivers in their shoes hoping they have correctly second-guessed the Ministers desires. Ministers appropriate all initiative and the Government goes into a state of thahn (from Watershipdown: terrified seizure).

To my mind this should be turned on its head. Instead the whole purpose of government should be to encourage initiative in the schoolyard and in the adult world. Government needs to embark on a new quest. A quest for empowerment and initiative. This is actually quite simple because it means Government does less and people do more.

All Government must focus on very strongly is what it is against rather than what it is for. What Government's are against is actually quite a short list, namely: corruption; dangerous selfishness; malice and thoughtlessness. Government is not a place to create things. Governments are hopless at that. It is a place to stop things and the things it should stop is behaviour we don't want. Moreover it needs to be do so with maximum initiative of its own.

A government built on initiative is one that passes down a lot of freedom and a lot of responsibility. Its sole concern is to swiftly and appropriately punish corruption, dangerous selfishness, malice and thoughtlessness. At the same time, however, the punishers themselves must not be capable of evading responsibility (as for example the IRD or Police who seem to be so good at it). Nor does this mean endless recursion. There are simply three lines: the first line which responds to infringers ofthe rules (Police, IRD etc), the second line which audits the enforcers, and the third line which represents those enforced. A triangle in effect.

Of these at the current time it must be said it is the second line which is weakest. Too many Ministrys and Departments simply audit themselves. The role of the Ombudsmens Office, State Services Commission, the Audit Office and the Statistics Department has been badly weakened. These independent offices need the resources to protect citizens against state corruption; dangerous selfishness; malice and thoughtlessness.

At all times the focus must remain on the means. Have those charged with a responsibility achieved their required outcome with corruption, selfishness, malice or thoughtlessness? If not leave them alone and let them get on with it. If not intervene quickly and effectively so that the benefit of behaving badly does not gain any positive reinforcement. This is precisely what adults supervising children do and it makes immediate sense as a philosophy of government as well.

Restructuring Government for initiative means dismantling a lot of it. It also means politicians following the advice of Lao Tze " Do nothing that everything may be done". For the opposite is indeed "do everything that nothing may be done". It is a hard lesson for those who wish to believe they are achieving something in politics but a vital one if our nation is not to slowly lose its capacity to think, grow and adapt.

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Wednesday, January 9, 2008

Wellington Delenda Est!

Well perhaps not destroyed - after all I live here too - but at least seriously deconstructed. Why? Because (in my view) our government is badly maladjusted. It has ceased to provide the population with the benefits of communal regulation and ownership that government is needed for and has become a temple for a vast community of self-serving Mandarins whose principle purpose is self aggrandisement.

The problem is at once simple and intractable. Government has forgotten who its customers are. Ask in high places of most government departments who an official serves and the answer is either a Minister or a Ministry or a set of client government agencies. The notion that the object of government is to facilitate the wealth, health and security of New Zealand citizens has vanished into the PC-waffle of an enormous library of strategies, annual reports, manuals and guidelines. Process has replaced outcome as a measure of performance. If the process is correct the outcome doesn't matter.

Perhaps the best illustration of this over the past nine years has been the Government's transition of emphasis from when it was first elected, back in 1999, to where it is today. Back in 1999 the Government made a great deal of noise about the need for New Zealand to become an innovative economy. In 2001 we had the "Catching the knowledge wave" conference featuring Professor Michael Porter with the new Prime Minister talking up innovation. Then slowly Labour lost interest in innovation as it failed to achieve anything and became aware of how badly past governments had neglected infrastructure. It threw ever increasing sums at infrastructure and yet for all the money it spent progress remains painfully slow. Then last year the Labour decided that climate change was the go and brought out plans to introduce the world's most ambitious greenhouse gas market. The result will have serious consequences for most of the productive economy. Slowly the Politicians have given in to our bureacracy which has proven itself to have no idea how to create opportunity and innovation but is very good at penalising people and burying them in regulation.

If you want a metric of New Zealanders views on opportunity one need go no further than net migration figures. The simple fact is people migrate to where they see safety and opportunity. After 9/11 foreigners fled here and kiwis either came or stayed home. Since then those who live primarily in the UK and South Africa see opportunity in New Zealand. Those who live in New Zealand see it in Australia. Today, from this metric, we can see New Zealanders are nearly as disillusioned as they were after nine years of National.

To my mind the issue of Kiwis migrating to Australia is more significant than wave of Poms migrating here. Britons (or British based kiwis) are comparing their opportunities in a very competitive labour market with their opportunities in New Zealand. Their incentive is to achieve a better life-style by trading off less income against less stress. Kiwis by comparison are simply comparing their potential opportunities in our sister Australian states with their opportunities at home. In other words the go-getters are going. The cruisers are coming. Looked as a single domestic Australasian migration market New Zealand does well at pulling in outsiders who want to take it easy but very badly in competition with New South Wales, Victoria, Queensland and most recently Western Australia for those who want to "get ahead".

The reason we do badly has nothing to do with the intrinsic qualities of any of these Australian States. Australia's advantages as a land are easily matched by its disadvantages. It has everything to do with the way we are governed - and the fact is New Zealand is governed very badly indeed. What attributes am I referring too?

  • Small-mindedness - NZ government is immensely small-minded
  • Penny-pinching - the notion of investment is unknown to our bureaucracy
  • Mean-spirited - NZ government policy is dour, harsh and grasping
  • Arse-covering - Covering butt is more important than outcomes
  • Knocking - NZ government prefers to knock citizens down than help them up

Nowhere could this be better documented than in the New Zealand short film "Here to help". Now it is certainly true that seeking broadminded, helpful generosity in any inland revenue office in any government of the world is likely to be a somewhat Quixotic venture but there is a special distinction that applies only to New Zealand government revenue agencies. That is that New Zealand has the fourth highest tax revenue/GDP ratios in the world. It is fully a third higher than Australias. Moreover the New Zealand tax surplus is nearly the size of Norway's despite the fact that Norway is primarily an oil producing nation and New Zealand's main export is cheese. In short our government is at its best when bleeding us white.

And perhaps having a high tax/GDP ratio might make sense if New Zealand had a particularly generous social welfare system, excellent healthcare and/or education system but the social welfare system is barely adequate, the healthcare system can't compete with first-world nations and the education system holds together more on good will than good management.

For what a lot of this comes down to is the apalling cock-ups perpetrated by the 'reforming' Labour government between the years 1984 to 1990 and then further compounded by the National Party from 1990 until 1993. This was a set of reorganisations and privitisations following in the line documented by Naomi Watts in The Shock Doctrine. But as
Reforming Education, 1989-1996, The New Zealand Experience, written by Graham and Susan Butterworth shows most of the reorganisation was carried out by the operationally ignorant pursuing half-baked interpretations of foreign theories. The result was a Government system which is hugely inefficient and distortionary.

A few examples are perhaps required.

The Electricity Department was broken up into a series of State-Owned Enterprises. Originally intended as an interim step toward privitisation that never happened. The result is disputes that used to be resolved in Rutherford House now get resolved in Court at enormous cost. All Electricity SOEs generate not only huge profits but also pay large amounts of tax while the price of electricity rises. The market, which was meant to encourage private sector investment in generating capacity has, in fact never done so. The net result is that we have pretty much the same electricity system we always had but pay loads more mostly for huge overheads for administration.

The Health Department was broken up into first a series of Crown health agencies and then later District Health Boards. The idea was that they would provide better financial management of burgeoning health expenditure. In fact what has happened is that nearly all of them are in huge debt to the Crown (ie spending didn't stop) any attempts to sell health services to foreigners were politically crushed (so much for innovation), the doctors are pissed off and leaving and the nurses and service workers striking to recover lost income. The notion that local communities would hve input through elected representation is, like local government democracy, a farce. And when things go badly the Minister steps in and appoints a new board (as for example at Capital Coast Health). Meanwhile important preventative functions that were once managed by the Department (food safety) have been largely lost.

And perhaps the ugliest of all the 1990 creations is our system of local government. Before the reforms New Zealand had a hotch-potch of buroughs, city councils, catchment authorities, pest destruction boards etc. This was all rolled into a system of very corporate little territorial local authorities and regional authorities based on catchment boundaries. The result was that a lot of smaller communities lost their sense of control over local resources while some mayors let their newfound corporatism go to their heads and embarked on raising debt to silly levels. Gradually over the years however more and more central Government duties have been delegated to local government on the assumption that it is 'representative' but with voter turnout averaging below 50% it is hard to claim that these institutuions are democratic at all. Left with no other levers to raise funding local Government has pressed its powers into private property at an astonishing rate such that now practically any improvement becomes a matter between a property owner and fee collecting local government rather than property owners. Local Government has also done its best to raise property prices ( on which its rates are derived) by limiting the supply of land for development. The result as this study by MED economist Arthur Grimes has shown is that prices have been unduly increased.

For the simple fact is New Zealand, with only 4 million people, is very small. Some city councils manage four million people without anything like the overheads or tax-take of the New Zealand Government. In theory the government of New Zealand should be very light, very nimble and very cheap. In fact it is very heavy, very slow, and very expensive.

All of this is basically to suggest that Wellington needs a complete and total ground-up overhaul. But instead of carrying out more 'Shock' tactics what is really needed is a serious investigation into the principles of Government in New Zealand. We need to think long and hard about the framework for governance and administration. Setting objectives and limits which do not get changed every six years when one Party finds them inconvenient.

We need to think about:

  • Who is government for? and how is that demonstrated?
  • How is its integrity to be protected?
  • What output targets should be defined either as absolutes or as ratios?
  • What must the New Zealand Government never do? (one should never constrain what is allowed only what is not allowed).
  • What are the processes for defining interim strategies and targets?
  • What are the limits of Ministerial authority?

Ideally these issues would be set in a Constitution but the practically of that is somewhat wanting. A better approach would be to begin by developing a set of principles for the State Services Commission and the Audit Office. The State Services Commission together with the Audit Office would then require the Commissioners and chief executives of the various Government agencies to work towards meeting these objectives.

If nothing else the 1980s proved that the revolutionary approach to restructuring produces hastily cobbled together structures at enormous cost and disruption. What is needed is an evolutionary approach towards clear goals and targets. Ideally in this way government will then progress toward a smaller size, greater responsiveness and a more supportive approach toward the endaevours of the private sector which ultimately supports it.

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