Time to Take the Road Less Traveled

Last week I attended the Fabian Conference entitled “Fresh Ideas For A Productive Economy” held at Parliament in the Legislative chamber. It’s the third time I’ve been there for a conference and it’s a good place to debate ideas away from the main chamber. As the title says, the focus was on fresh ideas and this was very appealing given the current government has been rather light in that area.

Two key themes developed from the 8 speakers and their various proposals:

1) New Zealand’s financial position and framework must be addressed.

The current debt situation is untenable in the long run. The borrowing binge of the government is driving up the currency and causing serious problems for our export sector. Whilst NZ has, so far, been exempt from the debt dramas of the US and Europe, that may not last forever. The exchange rate is volatile, our interest rates too high and our investment in property has led to a mis-allocation of resources. Market liberalisation has seen financial markets (the capital account) rather than the productive sector (the balance of payments) drive the economy. This has led to severe imbalances within the NZ economy which are leading to entrenched impoverishment for a large section of society.

2) We must invest more in Research and Development in order to create a more dynamic, broad and innovative economy.

Our investment in people is woeful. We are a low wage, unproductive economy heavily reliant on basic commodities to pay our way. We need a revolution in investment in order to boost productivity, innovation and general skills. As a small country and economy, we have to be clever and nimble in how we generate our wealth and the revenue we need to pay for the goods we import. Our good people leave and many don’t come back. Without sustained investment into research, development and education, we will continue to fall behind. This is about building core infrastructure at the human level. See Dr Rhema Vaithianathan’s research at the University of Auckland.

There seems to be a recognition that the current system is not working and that we need to look at alternative options. The ongoing turmoil in the global financial markets is further proof that the system is irreparable in its current form. When you add in dysfunctional welfare systems and a job market seeing huge technological dislocation, then the time has surely come to take a different track.

The policy proposals from the Savings, Tax and Welfare working groups have been disappointing. Perhaps they have been limited by their terms of reference and by the selected participants, but the output shows very much a business as usual approach, looking for solutions from the same place they found the problems. So what’s the new road?

Simply it is nothing less than a revolution in the way we think about income, sovereignty, wealth and entitlements. What is it that we, as citizens, should be entitled to? How should the state pay for it? How should citizens be taxed? and so on.

I believe strongly that the answer lies in a system underpinned by a Universal Participatory Income (UPI). This a variation of the more commonly know Universal Basic Income (UBI) or Guaranteed Minimum Income (GMI). The main difference is that to receive it you must participate in society in one of the following ways: employment, education, volunteering or caring. In other words you can’t sit around doing nothing. There are always jobs to be done even if those are not in formal paid employment. In this way people will be recognised for making a contribution to society and welfare will be seen as a stepping stone to a more fundamentally just system.

The good news is that there are at least fully costed options for a GMI open for discussion. One is from Lowell Manning entitled a “Guaranteed Minimum Income for NZ” and the other is from Gareth Morgan entitled the “Big Kahuna”. They are both similar in that they see the dissolution of the welfare state and the system that supports it. No longer will there be a raft of differing benefits, just one single payment to all citizens. There are similarities in how the new GMI will be funded in that the tax base will shift from income and towards capital. Morgan proposes a Comprehensive Wealth Tax (CCT) and Manning a Wealth Tax (WT). There are slight differences in the broadness of the tax capture but they are minor in the grand scheme. Income tax would be flat and superannuation would disappear.

The key point to note is that this does not remove the incentive to find paid employment but recognises the contribution made to society by non-paid work such as raising children, caring for the sick and elderly, as well as voluntary work. The removal of superannuation would take way the silly idea that all people “retire” at a specific age.

No doubt there will be a great deal of debate around the specifics once people have got their heads around the idea. For example, one question that will be asked is whether people will have lots of children to access lots of GMI. This is easily dealt with by limiting the number of children that will be granted the child amount of the GMI (I would argue for 3, some maybe 2). This would deal with concerns that people might game the system.

One of the main advantages will be a huge simplification in the fiscal framework. No more welfare bureaucracy, a very simple tax system and the knowledge for people that they can move between different forms of work, knowing that they have a basic income to support them. This will lead to a more efficient and productive economy and will ultimately lead to a more cohesive society.

It would be the most revolutionary change in the fiscal systems since welfare was first introduced and now is the time to start discussing and debating the different proposals.

TEDxEQChCh: Christchurch- the City of Innovation

It’s been 10 days now since the amazing day that saw 700 people pack into the Aurora center to be inspired around the rebuilding of Christchurch. As one of the organisers it was a relief to see the event run smoothly and generate the kind of excitement and energy we had alway hoped for. This couldn’t have happened without a huge amount of support from a huge army of volunteers and of course a bunch of committed organisers. The photo stream is now up and shortly the videos will be going up. I can’t wait to see them and write about them individually though some have already here, here and here. For me, some strong themes emerged from the day which I think are worth mentioning.

- Cities are about people. That should be our first and foremost consideration.

- Community participation and engagement are key. Listen to the people and you will find out what they want.

- Sustainability. We need a city that is built to last. That means thinking ahead to what the future will bring.

- Innovation. This is a time to embed innovation into the new city. With so much creation ahead, it’s time to really bring this to the fore.

- Branding. It’s time to look beyond the Garden City. Let’s be known for something different, something new. Anything.

I’m going to start with Christchurch: the City of Innovation. That’s what we do. We are a city of ideas, inspiration and invention. We attract the best and smartest to live in our amazing city. We are a talent utopia.

What’s your branding for the new Christchurch?

Danger: Moral Hazards Ahead

Capitalism and free markets.

What a great idea. It’s a shame no one has actually tried it out or bothered to let homo rationalus economicus that it’s an urban myth. We operate mainly in a state sponsored system of capital markets underpinned by arcane and often opaque trading rules and regulations.

The provision of capital is key to any functioning economy and has been since the beginning of time. Each empire had its own approach to coinage to support trade and the governing class or head of state. The first pillar of modern capitalism was established in 1694 with the formation of the Bank of England. Thus began the first stirrings of the fractional reserve banking system and the modern financial system.

I’ve previously covered the many bailouts experienced by the banking system and the Bank of England itself and in some ways our current malaise is no different. The central precept of free markets is that they should operate on their own merits - caveat emptor.

I’m not going to discuss that fallacy here but focus on the problems of bail outs. Why should a failing business be rescued by the state? The simple answer to that is when it has implications for the national economy or issues of national security (often regarded as twos sides of the same coin). We have seen the fiasco in the US, the UK and Europe. We have seen the banking system bailed out, private companies bailed out and yet we still hear the mantra of free markets, trade and market liberalisation and privatisation repeated.

Here in NZ we have seen South Canterbury Finance bailed out and most recently AMI. On both occasions the government intervened to provide capital from taxpayers for businesses which had clearly failed. In the case of SCF depositors were guaranteed under a standard deposit guarantee framework but bondholders also benefitted to the tune of $350m. Those bonds should never have been covered under a deposit guarantee scheme. Investors enjoyed a big free lunch here at the expense of the taxpayer. In the case of AMI, the government intervened to support an insurance company who didn’t have enough reserves on hand post the February 22nd quake. The government could easily make a good case for supporting AMI, in terms of providing it with backstop liquidity but in doing so it needed to be very clear that it was suspending any belief in free markets.

The moral hazard is clear but the implications have not been explored. On one hand the government wants to bail out private companies who are clearly responsible for their own position. At the same time they want to promote policies like privatisation because, wait for it, private companies are more efficient than public ones.

It’s very clear that the neo-liberal dream is in tatters but no one seems to want to wake up and smell the reality. Market morality is indeed quite hazardous.

Dinosaur Economics: Bill English loads up more debt

Bill English, the NZ Finance Minister, has predictably gone for the traditional response when considering how to pay for the rebuilding of post-quake Christchurch: he wants to borrow $10bln and add further to the mountain of debt New Zealand already struggles under.

At current government bond yields this is likely (presuming the issue is in longer term bonds) to cost over half a billions dollars a year. That’s right $500-550m a year in cost, just to access the money we need.

Bill English has our recent proposal to use new public money in front of him but so far we have heard nothing back on it. Other than an earthquake levy, which has been ruled out also, there are no other proposals on the table.

I look forward to hearing why the Finance Minister thinks paying $500m a year is a good idea for something we could do ourselves.

New Zealand 2025: Envisaging the Future

Before the earthquake of February 22nd I had been working on an outline for where I saw NZ today and where I believed it could be in 2025. It’s very much a hi level view but it’s a starting point. Though things have changed since the big shake my vision hasn’t. If anything it has simply reinforced my thoughts. Over time I will flesh out the different ideas and hopefully make it more accessible to all. In the meantime feel free to think about where you believe we can be in 2025.

As Yogi Berra said, “if you don’t know where you are going, any road will lead you there”.

Welfare Working Group: On Yer Bike

The Feb 22nd rumble has delayed my analysis of the WWG report into long term benefit dependency but in between shoveling silt, delivering chemical toilets and getting our chimneys removed, I have managed to have a peek. I only looked at the executive summary paper but there is a fuller report for those who want to look at some of the detail behind the argument.

There has already been some outraged commentary on some of the more sensitive aspects of the report but it’s worth a closer look. Clearly we have a serious problem with the benefit system at the moment: there are 376,000 people on some form of benefit (79,058 on unemployment (UB), 68,056 on sickness (SB), 99,269 on invalid’s (IB) and 99,289 on the domestic purposes (DPB) plus other smaller categories). Having 167,325 people unable to work through ill health or disability is a major issue but that’s really a health problem not an economic one. Having nearly 100,000 sole parents on benefits is a serious social problem reflecting the breakdown in the family as well as unstable and unhealthy relationships. That leaves 79,000 unemployed and actively looking for work. That is a big number at a time when the economy is heading for a double dip recession.

So those are the important numbers but what does the WWG have to say about them? They outline 8 key reform themes amongst 43 recommendations (42 would have suggested a dark sense of humour!)

1) The key theme of the report is the importance of paid work. That’s interesting because I imagine most people would like to have paid work to do. Unfortunately with 79,000 unemployed it suggests there isn’t enough paid work around (certainly not enough suitable jobs). So it’s all very well saying paid work is the way forward but if the jobs are not there then it becomes a platitude. The focus on paid work also ignores the fact that many people do very important unpaid work: this includes child rearing (100,000 sole parents on the DPB), caring for the unwell, volunteering and other unrecorded contributions. This is where the report really misses the target. By only offering up paid work as a contribution to society it misunderstands how society functions, seeing society as a simple economic structure. If we valued unpaid work then that might be the case and actually there is a very sensible way of doing that which I will come to later.

2) Reciprocal obligations: this reinforces the paid work theme by making sure people are taking all reasonable steps to find work even if this means moving about the country (echoes of Norman Tebbit and his infamous and misquoted “on yer bike” remark). 2 comments here: Reciprocity is important. A benefit is a gift from the taxpayer in times of hardship. In return one is expected to do one’s best to find a job or at least re-train in order to find a different job. The problem with treating labour as a highly mobile input is that families are disrupted. Still it’s a fair point to make. With online job search sites now available, people can find suitable jobs all over the country. However, relocating may not be as easy (or cost efficient) as it sounds. This leads into the next theme.

3) Taking a long term view: the WWG recognised the need for further investment into education, training and job finding services. This makes sense. Every time someone becomes unemployed they need a thorough assessment of their abilities and potential opportunities. At that point upskilling and retraining can be offered. From what I have heard the current system is a bit lackluster in this department.

The remaining 5 themes are fairly standard fare: measuring outcomes, focus on Maori (31% on welfare, 41% of DBP recipients), focus on at-risk children (220,000 living in benefit households), cross government approach (bringing in health and education departments as well as the community) and more effective delivery (new outcomes focused agency). All standard stuff.

There has been a bit of an uproar over 2 recommendations:

- One is over the 14 week return to work proposal: this is actually about addressing the issue of having further children whilst on welfare and it is designed to act as a disincentive. This ties in with the expectation to look for work once your youngest child reaches 3 (up to 20 hours a week). It is quite specific to people who already have children and go on to have another one whilst on welfare. I think it’s reasonable to ask people to put off having further children until they are in a stable financial situation. Otherwise we do get into the potential situation of multiple children to extend time on benefit. The WWG notes that the government should monitor this policy closely and apply further financial disincentives if necessary. John Key has already said he’s uncomfortable with this proposal and this demonstrates how difficult this issue is to address.

- The other is the furore over teenage pregnancy and contraception. One of the proposals is to offer free long term contraception to women on welfare as a way of helping to ensure no further pregnancies. This ties in with a post from 2008 which looks at incentives around teenage pregnancy. It’s always preferable to see behaviours change intrinsically but it is likely to require some serious incentives to capture the attention of young people and use that to show that there are alternatives. Whether it’s annual payments into a savings scheme such as Kiwisaver or housing deposit. Incentives do matter and can help bring about lasting change.

Two fundamental changes have been proposed from these 8 key themes:

-  A new single work focused welfare payment called Jobseeker Support (with more focused supplementary benefits above that).

- A new agency called Employment and Support New Zealand (ESNZ) to implement new approach.

Interestingly enough they ruled out a guaranteed minimum income on the basis on large costs and transitional problems (they relied on a Treasury report which I will discuss in an upcoming post) but have tried to move the various benefits to a single payment, the Jobseeker Support. This really is the crux of the problem: how can people be supported whilst they are in between jobs, yet at the same time not penalised or disincentivised not to work at the margin and how can we make sure people are gainfully occupied when there are no jobs available. The UK has had a go at welfare reform as well coming up with a Universal Credit which again tries to simplify the payment process whilst incentivising the work search.

To summarise the report:

- Paid work is where it’s at.

- Labour is mobile and should go wherever the work is with appropriate support.

- Better training, support and rehabilitation is needed to help people into new employment.

- We should discourage women from having further children on welfare, teenage pregnancy and get sole parents in the workforce when their youngest turns 3 (or 14 weeks if you’ve been silly enough to have another one whilst collecting your benefit).

- Reciprocity and obligation: there’s no such thing as a free lunch.

- Invest for the future.

- Reduce beneficiaries by 100,000 by 2021.

- Improve efficiency in structure and delivery of benefits and employment prospects.

All in all these are sensible suggestions in a perfect world so what’s missing? Jobs for a start. As well as poor outcomes from an education system under strain, poor health from a section of society living in poverty and wages which for many have gone nowhere over the last 20 years. Unfortunately the WWG were given a poisoned chalice (governments have become good at outsourcing bad news) since the problems of welfare are deep seated and structural. I think they have made a reasonable fist of it despite the headline hysteria. So what’s my take on it? I’m a big fan of basic income, which comes in many forms, because I believe we have a structural decline in the availability of jobs which is going to get worse as technology strides ahead. However, there is never going to be a shortage of work. That’s the critical difference. Work can be paid or unpaid. By ignoring the value of unpaid work the WWG leaves itself with few options other than the ones they have recommended.

This is why I personally favour a conditional basic income to replace all benefits and superannuation (which I will discuss in more detail in another post). I’m glad the WWG raised the issue of reciprocity and obligation as I think it’s a very positive way to look at welfare. I’m also in favour of more investment into education and training for the workforce (the recommendation for all 16/17 year olds to be in paid work or training is good). Overall there is a need to really look at the future of work in a changing society, the embedded inequality and lack of positive pathways for many. The WWG is a very worthwhile effort at bringing some issues out for debate. It certainly doesn’t have all the answers and it does look at work through a very narrow lens but it’s a discussion we need to have with clear heads. This is just the start.