The good old days. Not

Marilyn Waring's interesting memoir The Political Years is an eye-opener on New Zealand in the late 1970s and early 1980s. While she has a particular perspective to emphasise, there's no doubt that the casual sexism, racism and conservatism of the day that she recalls do not square with the "we've always been progressive since women got the vote in 1893" story we like to tell ourselves.

From an economic policy point of view, it's also a reminder to those who put 'Rogernomics' and 'Ruthanasia' in the 'awful neoliberalism experiment' basket that reform was needed. Even Waring, down the left end of the political spectrum, concludes (p46) that

Within just a few months [of first being elected in 1975], I was getting a picture of incredible inefficiencies. Tariff structures were a nightmare, and were still in hangover mode from the Second World War. Licensing was a mess: those who had import and transport licences ran small fiefdoms. Transportation regulations intended to protect the railways restricted truck movements without a special licence, adding significant costs. Vast amounts of primary production were subsidised. Far too much discretionary power rested in the hands of ministers. Certainly, that meant I might lobby for gains for my constituents, but the process needed a wholesale clean-out.

She gives examples (pp45-6) of the kind of lobbying involved: letters to ministers with "requests for relief of import duty on a sports cup for presentation at the local high school and for a licence to import woven woolen fabric for the Te Awamutu and District Pipe Band".

Mercifully most of that nonsense went overboard after trade liberalisations, but it's doubtful whether our chronic propensity for micromanagement is permanently buried at a crossroads with a stake through its heart. It's not that long ago that a government minister's approval was required for a Tourette's Syndrome sufferer to have access to a medical cannabis product. And in my own narrow neck of the woods, the Commerce Commission's "cease and desist" powers - designed to provide a timely interim stop to anti-competitive conduct until the substantive issues got litigated later - were so hedged about with preconditions and provisos that they were eventually abandoned as useless.

Another bad habit not fully kicked is unnecessary secrecy. In Waring's day, Robert Muldoon would not even share Treasury's analyses with his own MPs: on p256 she recounts how

Ruth Richardson, one of six new MPs in caucus [after the 1981 election], wasted no time in asking to see the Treasury reports on the state of the economy. Muldoon replied they were confidential, amd Hugh Templeton added that the secrecy gave Treasury the 'freedom to report'. The PM noted that the reports referred to high interest rates, devaluation, running down cash balances and internal liquidity under pressure. There was no cause for alarm, he said.

You can see why the Labour government of 1984-90 brought in the Public Finance Act to require a step change in transparency.

The same dubious "freedom to report" rationale was invoked to keep the proceedings of the Public Expenditure Committee secret. The Committee - which I'd guess was a forerunner of today's Finance and Expenditure Select Committee - was charged with "examining the Annual Reports and Accounts, and the Estimates of Expenditure, for every government ministry, department and agency" (p56), a highly important accountability role, especially given the limited other avenues at the time for scrutiny of the executive. Waring, appointed to the Committee and later its chair, questioned the secrecy and was told by the Clerk of the House (p56) that

Official papers prepared at the request of the Committee have always been regarded as confidential, and the assurance of confidentiality has been fundamental to the willingness of departments to supply frank and detailed examination.

We have, thankfully, largely moved on. But even today s9(2)(f)(iv) of our Official Information Act includes, as a valid reason for withholding information, "the withholding of the information is necessary to ... maintain the constitutional conventions for the time being which protect ... the confidentiality of advice tendered by Ministers of the Crown and officials" or under s9(2)(g)(i) to "maintain the effective conduct of public affairs through — (i) the free and frank expression of opinions by or between or to Ministers of the Crown or members of an organisation or officers and employees of any department or organisation in the course of their duty".

There may be genuine occasions when these confidentiality provisions need to apply, but a few minutes on Twitter will tell you that some entirely responsible and proper 'citizen journalists' will be wondering, after bumping heads with the OIA, exactly how far we've progressed from the Sir Humphrey Applebys of Waring's day.

Pilgrimage and policy

It was mostly a mix of school reunion, family and social catch-up, genealogical research and all-purpose holiday, but a trip to Ireland and Scotland also allowed a side-outing pilgrimage to Adam Smith's grave in Canongate Kirkyard in Edinburgh. If you're ever minded to visit, go round the back of the church, and the grave is up against the wall of the church on the right hand side. I didn't notice it at first, but there is also a little trail of  'Adam Smith' plaquelets set into the grass that will take you to the right spot.

I wondered about the railing around the grave and the heavy duty lock: anti-market vandals? Like the nerk that scribbled anti-Smith graffiti on the yellow explanatory notice? Not so, said the formidably learned volunteer minding the church: she said it was quite common practice to rail a grave in the 18th century (Smith died in 1790). She'd also noticed that these days visitors to the grave tended to come from Europe rather than the UK, and her experience was that UK people tended to have very little knowledge of Smith: he had (she said) completely vanished from British school curricula.

I did my usual economics-by-wandering-around on the trip. Random observations:

Ireland's standard of living has pulled well away from ours. Comparisons are iffy because of big tax-domicile accounting changes to Irish GDP and an unusually large wedge between Irish GNP and Irish GDP, but it's safe to say that living standards per capita are now some 50% higher in Ireland than here. And it shows in things like the cars people drive and the quality of the houses. Ireland's no paragon of good policy or governance, it had an unusually nasty GFC, and it's got locational advantages we don't, but for all that it's clearly made a better fist of getting growth barrelling along than we have. Sure, GDP isn't everything, but if we had incomes at Irish levels we could afford a hell of a lot more wellbeing-enhancing initiatives.

There's no border between Ireland and Northern Ireland. One minute you're on the road from Letterkenny (in the Republic) to Londonderry (in Northern Ireland) and you're calculating in euros and driving to kilometre per hour speed limits, and the next you're thinking in pounds and observing miles per hour limits. That's it. No checks, no let, no hindrance - for now. This currently free passage is yet another of the potential casualties of the Brexit debacle, since the clowns running the process didn't join up all the dots (a commitment to the Republic as part of Northern Ireland peace talks to have no borders, versus the gaping hole in the customs and regulatory frontier with the EU that post-Brexit free passage would create, leading to various proposals for rickety 'backstop' fixes). But Brexit incoherence aside, hassle-free movement is a great idea. If countries like Ireland and Britain, despite sometimes prickly relations, can organise completely free movement, why can't Australia and New Zealand?

And on Brexit, if there's a hard no-deal Brexit, it's heavily odds on that Scotland will run a second independence referendum, and I wouldn't be surprised if it succeeded. Which might enable a more prosperous Scotland to do something about the state of its roads: years of false economy 'austerity' cutbacks to spending on road maintenance have left potholes everywhere (even on motorways).

There are indeed at least some limits to tourism. If you want to see one, visit the Giant's Causeway in Northern Ireland. It's an unusual geological feature, but considerably diminished by the hordes of people all over it (and it isn't even high season for visitors yet). We'll face similar issues in due course, and I don't think our new $35 a head levy on visitors is much of an answer to anything.

Some of our food exporters also face headwinds. There is a clear push, in the Irish and Scottish restaurant trades, both to explain where your ingredients have come from, and to use local providers. VisitScotland for example has an accreditation scheme which includes among its criteria, "Quality ingredients of Scottish provenance" and "Food miles kept to a minimum". 

Finally, coming back to Adam Smith, I hadn't known that since 2008 Edinburgh has a statue of him on its Royal Mile. The story of how it came about is told here, and well done all the organisations and individuals who planned it and paid for it. How much it is a statue of Smith, however, as opposed to a generic Important Person is in the eye of the beholder: for me, it could as easily have been a memorial to a sea captain. I'd like to have seen a book, and even if Smith is the father of the dismal science, would it have hurt to have shown him smiling?

Stagnation?

I've been reading Linda Yueh's The Great Economists: How Their Ideas Can Help Us Today.  It's a clever way of teaching the history of economic thought by imagining how the big names would have dealt with current issues. We get, for example, Ricardo looking at Trump's trade wars, and Keynes looking at post-GFC 'austerity'.

In the chapter on Schumpeter ("What would Joseph Schumpeter think about how contemporary companies and countries should innovate?"), I came across a remarkable quotation which bears on another of today's supposed problems, 'secular stagnation'.

This is popularly taken to mean, as its Wikipedia entry says, ""a condition of negligible or no economic growth in a market-based economy". Lawrence Summers, the former US Treasury Secretary, who is often credited with giving the idea its modern boost, says the Wikipedia version is "fatalistic" and not what he meant. He says he meant a more Keynesian notion: "the idea of secular stagnation is that the private economy — unless stimulated by extraordinary public actions especially monetary and fiscal policies and, or, unsustainable private sector borrowing — will be prone to sluggish growth caused by insufficient demand". But the downbeat version has taken root.

The idea in its fatalistic format, that we are moving into an extended period of slower growth or no growth, has always seemed to me to be completely off the wall. I don't believe that we are in some kind of diminishing-return world where the payoff from the next innovation is generally less than the payoff from the previous one. I don't believe that the latest rounds of invention - such the internet and the digital revolution more generally - are in any way less momentous than their industrial and chemical and electrical predecessors. And I strongly suspect that GDP as currently measured, despite statisticians' best efforts to capture changes in its quality, is hugely underestimated. We're producing far more, properly accounted for, than the doomsayers think.

I think it's far more likely that we in the earliest stages of a huge transformation of modern economies and societies where we are only beginning to see the impact of new innovations, let alone the further payoffs that will come from the interplay and recombination of our new technologies. "Ideas having sex", as Matt Ridley put it in his excellent book, The Rational Optimist.

The stagnation believers are, in my view, akin to someone thinking that the factory system had done its dash by 1800, or that modern business methods had peaked with Ford in the 1920s. In the middle of one of the most vibrantly inventive periods of all time, we are supposed to believe that growth is running into the sands?

It's extremely implausible. It's also at odds with some of the other doomsdays the pessimists worry about. You can't believe that the robots are going to take all our jobs and think that technological change has stopped having a big impact. And It's also an enormously bad guide to policy, if it takes you down the road of thinking that the big issue is fighting over a fixed pie, rather than growing the pie.

In any event, the quotation in The Great Economists that caught my eye was this. Schumpeter felt that the Classical economists - Smith, Ricardo, Mill - had missed what was going on round them. In his History of Economic Analysis he said:

Those writers lived at the threshold of the most spectacular economic developments ever witnessed. Vast possibilities matured into realities under their very eyes. Nevertheless, they saw nothing but cramped economies, struggling with ever-decreasing success for their daily bread.

The Classical economists were wrong then. The latest crop of stagnationists are wrong now.

The power of ideas

There's a paper,  'Modelling public expenditure growth in New Zealand, 1972–2015', coming out shortly in New Zealand Economic Papers - it's online already here if you've got access - which has a go at explaining the long-term trends in New Zealand government spending as a share of GDP.

Here's what the data look like.

The paper - by Norman Gemmell (Victoria), Derek Gill (NZIER) and Loc Nguyen (Victoria) - tests out three theories. One (they call it a "public finance" view) says, there is a demand function for publicly provided services like health and education, and expenditure responds to demand changes. A second ("public choice") says expenditure reflects political pressures (eg voters' demand for greater redistribution). And a third ("public administration") says spending follows changes in how the state sector is run. And they find some support for the first two views, but rather less for the third.

I was struck by something rather different when I saw the chart. I thought it demonstrated the immense power of ideas. 

At the start of the period, we're in the heyday of programmes like Lyndon Johnson's 'Great Society' and other attempts to radically improve the scope and the effectiveness of the welfare state. We're in the era of aggressive Keynesian demand management. We're in a world with an expansive view of the commercial activities a government should or could undertake ('Think Big'). 

But by the end of it we've passed through the stagflation that discredited the theory behind the old Keynesian policies. We have new ideas on how cycles develop and what if anything we can or should do about them, with some seeing government as part of the problem rather than the solution. We're more into 'austerity' and leaving ourselves 'fiscal leeway'; privatisation and funder/provider models reflect less ambitious ideas of the scope of government.

The authors, by the way, note (p23) that "past levels of spending strongly constrain future levels – changes in spending demonstrate inertia", and you can see it for yourself just by eyeballing the chart: when it's going up, it keeps going up, and likewise when it's going down (the hump at the end is the GFC and the Canterbury earthquakes, and chances are the otherwise downward trend is still intact). That, in my view, is entirely consistent with keeping on working from the same policy playbook. And I don't think it's any coincidence that the series peaks in the late '80s as the ideas underpinning ever greater state activism got displaced, here and overseas. Our paradigms and models shifted, the policy playbook got reprinted, and the size of government fell into line.

I found myself reminded of Keynes' wording (pp383-4 of the General Theory):

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back...soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

It's also left me wondering - again ('Those who don't know history...') - why economics courses both here and overseas spend so little time on the history of economic thought and on economic history in general.

Timely cooperation

Collaborative working groups are a necessity in many industries: if you want your luggage transferred from one airline to another, or exam results at one university credited to another, or a gizmo to work in a USB port, you're going to rely on the backroom folks who have got together and worked out the protocols that make it all happen. Consumers unambiguously benefit.

Industry associations can sometimes go over the (not always obvious) line between consumer-friendly collaboration and producer-friendly collusion. The latest in the gun may be technology working groups in the German car industry, which are alleged to have colluded on collectively introducing cheaper but less effective technology to control diesel engines' exhaust. The airlines went too far when they colluded on air cargo surcharges. And it was interesting to note that the Commerce Commission's latest Competition Matters conference had a session on 'The anti-competitive potential of industry groups', possibly signalling that they've become an issue of greater interest locally, too.

But as a reminder of the large amount of welfare-enhancing cooperation that well-meaning working groups can achieve, here's a question for you: where did the time zones in the US come from?

A lot of people tend to assume it must have been the guv'mint. But as this plaque on the corner of La Salle Street and Jackson Street in Chicago reminds us, it was actually entirely the work of the private sector. The US railroads got together on the site of the plaque on October 11 1883, agreed on four time zones each an hour apart, and implemented the whole thing five weeks later on November 18. As soon as they did, it became immediately obvious that this was a hugely sensible idea, and everyone else, including the federal and state governments, fell in behind.

Can you imagine a modern western government managing to do anything as effective as quickly as the railroads did? As it was, it took the US government more than 34 years to formally ratify what the railroads arranged in five weeks.

Welfare economists are fond of 'Pareto optimality', but real life examples tend to be hard to find. I'd like to propose the US time zone setting: there can't have been anyone much inconvenienced by dropping the old system, and uncountable numbers of people had their lives simplified.

Good books - December '16

Surrounded by "isn't it awful", "the world is going to the dogs" types? Here are two antidotes: Nobel laureate Angus Deaton's The Great Escape: Health, Wealth and the Origins of Inequality and Johan Norberg's Progress: Ten Reasons to Look Forward to the Future. Both document the immense progress made in the past three hundred years by large parts of the world on multiple fronts - not just in living standards, but also in health, longevity, literacy, freedom, peace and global equality. Deaton's book in particular will remind you that a prime reason many poor countries have missed out is political: they are kleptocrat tyrannies (another reminder, if you haven't yet, to read Acemoglu and Robinson's Why Nations Fail), which is one of the reasons why Deaton is critical of foreign aid (it keeps the Mugabes going). He's got better ideas on how to help them, including making trade with the developed world easier. And Norberg is full of interesting facts, including that "285,000 more people have gained access to safe water every day for the past 25 years", and that 2,000 more people will have escaped from poverty in the time it takes you to read his first chapter.

I didn't profit from George Lakey's recent Viking Economics: How the Scandinavians Got It Right - and How We Can, Too. It's as if he went on a Seventies demo, fell asleep mid-chant - "The workers! United! Will never be.." - and woke up yesterday. And while good ideas on economic policy can and should come from anywhere and anyone, sociology isn't where I'd go looking first. It doesn't help that the "we" in the title is "the US", not "everyone", which means that when he compares Nordic health systems with America's, they're better, but then, whose isn't? So it's hard to draw conclusions about Nordic implications for everyone else. I'm pretty sure there are some good Scandinavian ideas we could pirate (particularly the Danish 'flexicurity' of jobs, and possibly the Finns' education ideas), but I wouldn't use this book as the instruction manual.

If you did want a good guide, try Helen Russell's The Year of Living Danishly: Uncovering the secrets of the world's happiest country. Great armchair travel from a very good freelance writer. One interesting fact is that by international standards Denmark is a high trust society - you can, and they do, leave your baby in the pram outside the restaurant - which is one reason they tolerate the government taking 54.6% of GDP: they trust their representatives to do the right thing with it. More than I could say about any recent New Zealand (or Aussie, British or Irish, let alone American) governments.

Speaking of Aussies, we don't get enough mainstream media coverage of their politics other than at moments of high drama (though there have been a fair few of those recently). I liked Annabel Crabb's Stop at Nothing: The Life and Adventures of Malcolm Turnbull: concise, punchy, well-informed. The back jacket summarises Turnbull as "colourful, aggressive, humorous and ruthless" in his pre-politics days, and looks at whether he's changed much since: not a lot, I'd say. He's also a good deal more interesting as a person than I'd imagined: it may not help his liberal-trapped-in-a-conservative-party day job much, but he'd make a good addition to most pub quiz teams.

Timothy Garton Ash's The File: A personal history is the story of what he finds when he reads the file the East German Stasi security service kept on him. He comes to a relatively generous conclusion about the 2% of the East German population who were informers for the Stasi - "What you find, here in the files, is how deeply our conduct is influenced by our circumstances...What you find is less malice than human weakness...when you talk to those involved, what you find is less deliberate dishonesty than our almost infinite capacity for self-deception" - without losing sight of the big point: "Yet the sum of all their actions was a great evil".

Boston must be the setting for more good thrillers per square mile than anywhere on the planet, the latest being Michael Harvey's Brighton (a Boston locality) where a Pulitzer prize winning journalist who'd escaped the poor Catholic Irish 'burb comes back to help his teenage friend, who is suspected of several murders. The blurb on the cover says "riveting and elegiac", and it is: fine writing. Harvey's also got a series about a Chicago based private eye, Michael Kelly: I've read the fifth of them, The Governor's Wife, which was also very good.

University of Wolverhampton professor Gary Sheffield has come out with Douglas Haig: From the Somme to Victory, an updated and revised version of his earlier (2011) The Chief: Douglas Haig and the British Army. It's a balanced account that gives Haig more credit than he usually gets, and particularly on the logistical side of running an enormous enterprise. As Sheffield notes (pp154-5), at its peak the British army in France had to feed 2,700,000 men: "To keep one division in the field for one day required 'nearly 200 tons dead weight of supplies', and Haig's army consisted of more than 60 divisions". Haig as chief executive comes out well; Haig as general, somewhat well, though I haven't been entirely shifted from the "lions led by donkeys" camp. You could argue that Haig's "one last push and we'll break though into open country" was indeed finally vindicated, but too many people died to get there. Then again, it's also hard to shake the thought that, with the technologies of the day, there was little alternative to an attritional strategy, however appalling the casualties became.

Military historian Allan Mallinson doesn't like the "lions led by donkeys" line (it's "facile"), but in his Too Important for the Generals: Losing and Winning the First World War he's not impressed by the generals' strategic grip: "nothing can acquit the high command of its failure to see beyond no-man's-land [on the Western Front] and its embrace of the 'strategy of attrition" (p330). He also believes that the politicians should have taken a stronger hold of the overall direction of the war, and in particular gone for more flanking initiatives (like a better run Dardanelles operation) as well as boosting support for Russia and Serbia, rather than letting Russia slide into revolution and Serbia lose to Austria. All of which reflects the still unsettled scholarship on the Great War: you no sooner read one book suggesting the generals were doing as well as they could than the next suggests the opposite.

In brief: anything Robert Harris turns his hand to (the life of Cicero; a dystopian world where Hitler won) is highly readable. You'll like Conclave, which (natch) is about a papal election. Carl Hiaasen's written a series of high-paced comic novels about Florida bizarrenesses: his latest, Razor Girl, is right up with the rest of them. And if you like private eye novels set back in the Roman Empire - and let's face it, who wouldn't - you've probably worked your way through Lindsey Davis' Falco and Flavia Albia series and John Maddox Roberts' SPQR series, but don't miss the equally good Russo ones by Ruth Downie. I've just finished the latest, the fifth in the series, Vita Brevis.

And now for something completely different...

...namely Ann Pettifor presenting at last night's Law and Economics Association of New Zealand (LEANZ) meeting in Auckland, on the topic, 'Money and the neglected genius: John Law 1671-1729'.

And different it certainly was: the title didn't give much away, but what she aimed to do was to argue that what everyone conventionally learns about money and credit in the economics textbooks is wrong, and that there is a different and better way of understanding what is going on.

The traditional view, she said, has several components. One is that money is secondary: the things that matter are the 'real' things like production and consumption, and money is a lubricant but of no other great importance. Another is the traditional way we think about banks as financial intermediaries that take in people's savings (as deposits) and lend them out (as bank loans) to people who'd like to make use of them. And another is the view that there is a market which matches the supply of money or credit with the demand for it, with the price of money (the interest rate) set in the usual way to match the supply up with the demand.

Instead, she said, money and credit are far more important than conventionally realised: she mentioned, for example, the obstacles to economic activity in developing economies from the lack of a properly functioning monetary system. She said that banks do not need, in fact, to wait till deposits roll in: MegaBank, for example, can unilaterally make two computer entries on its book, one crediting a squillion dollars to MegaCorp's bank account, the other recording a squillion dollar loan to MegaCorp, and immediately the money supply and the stock of credit will go up by a squillion dollars. And she argued (I think) that the interest rate is set autonomously by various human agencies (particularly central banks and commercial banks) and is not the end result of supply and demand matching up.

From a policy point of view she argued that we used to manage banking regulation and monetary policy better, pointing to a period from 1945 through 1971 when there were no financial crises: things have gone worse, she felt, since deregulation. She also argued that the banks, left to their own devices, overwhelmingly lent to relatively easy-to-assess activities like property (creating bubbles in the process) rather than to more productive activities that would have been better for economic growth. And since, on her view, credit is more or less infinitely creatable by central and commercial banks, and in the case of central banks is backed by governments' effectively bottomless ability to tax, we should have little truck with 'austerity' policies. She noted, for example, that we can create money up the wazoo when we want to fund wars or bail out banks, but don't seem to be able to apply the same logic to getting economies rolling or saving the planet's climate, a view that the UK Labour Party has also come to with its proposal for "People's Quantitative Easing".

It's not every day you get someone having a go at knocking over everything you've ever learnt, so full marks to AUT's Policy Observatory, who have brought Ann down to New Zealand and have arranged a wide range of meetings for her: it's good to get challenging, and even iconoclastic, points of view. And special thanks too to Sarah Keene and the team at Russell McVeagh who generously hosted last night's event, and to Richard Meade who does all the legwork to make these Auckland LEANZ events a goer.

Did I get my own mind adjusted? Hmmm. I can see some of her points, but I'm still left with quite a few questions. I'm still not overly inclined to the view that we can print-money our way out of anything: the other week I went into a stamp and coin dealer in Wellington and bought a ten trillion Zimbabwe dollar note for $14, so clearly there are finite limits to what you can do. Ditto running up vast quantities of government debt which (Ann seemed to me to argue) must always be serviceable due to the government's ability to tax. There certainly used to be a view that countries could never go bankrupt (at least when issuing debt in their own currency), but maybe that's also a conventional wisdom that needs challenging. And while John Law may well have been a neglected genius, his experiment of creating one of the earlier paper-money banks and letting rip with it didn't end happily for anyone.

Food for thought all round, and maybe time for a bit of reading, too. Chatting to Ann before the kick-off, she told me that the definitive biography of John Law was written by my lecturer in undergraduate monetary economics at Trinity College Dublin. Law had an extraordinary dramatic life and was a pioneer of early economic theory (Ann principally mentioned his Money and Trade Consider'd with a Proposal for Supplying the Nation with Money of 1705), so I reckon it's time to track down a  copy of Antoin Murphy's John Law: Economic Theorist and Policy-Maker (Oxford University Press, 1997).