Kiwiblog

An exclusive op ed by Luke Malpass and Peter Saunders:

When Prophecy Fails: The Spirit Level and the Illusion of Scientific Socialism

By Luke Malpass and Peter Saunders

A couple of Sunday’s ago, on TV One’s Q&A programme, there was a substantial interview followed by a panel discussion about a new book called The Spirit Level by British academics Richard Wilkinson and Kate Pickett. The book claims to ‘prove’ that more equal societies perform better than less equal ones on a range of social indicators including crime, life expectancy, social cohesion, drugs, literacy and obesity.  It concludes that a radical redistribution of incomes would improve the quality of life for everyone, rich as well as poor.

This followed a forum held at Victoria University, Wellington last November to discuss the controversial book, and numerous glowing reports about the book and its authors in the New Zealand Press.

This book has been welcomed by many on the left. In New Zealand, a number of Labour politicians are pedalling it, while in Britain Guardian journalist Polly Toynbee even describes Richard Wilkinson as the 21^st century’s equivalent of Charles Darwin!  The left loves the book because it seems to provide scientific backing for their political instincts, ‘proving’ that income inequality is ‘a bad thing.’  But in reality, the book is seriously flawed, and serious left-leaning academics have begun distancing themselves from its claims.

One problem is that the income statistics are faulty.  As reported in the press, the book says Japan is the most equal country in the world.  This is crucial, for Japan performs very well on nearly every social indicator.  But the income data for Japan exclude single-person households and the self-employed, such as farmers.  More complete data supplied by the Organisation for Economic Cooperation and Development shows Japan is actually the 13^th most unequal of the 30 OECD nations.  This alone is enough to undermine most of the statistical claims made in the book.

A further difficulty is that the authors ignore some key countries which don’t fit their hypothesis.  They claim to include all the rich nations, but they leave out affluent but unequal countries like Hong Kong and South Korea, and Singapore is missing from many of their graphs as well.  These countries all perform well on the social indicators yet have high income inequality.  If they were included, as they should have been, the authors would struggle to maintain many of their claims.

Their book also ignores social indicators where equal countries tend to perform badly.  They compare homicide rates, but not suicides; teenage births but not divorce rates; government foreign aid budgets but not private charitable donations; drug abuse but not alcohol consumption.  Taking these alternative measures, it could easily be ‘proved’ that equal countries perform much worse than unequal ones.       

Perhaps the worst aspect of the book is the analysis of comparative statistics.  The authors present a series of graphs plotting the income distribution in each country against selected social indicators, and in each case they claim to show problems getting worse as we move from less to more unequal countries.  In fact, however, most of their graphs show no such thing.

One plots the homicide rates of 23 countries against their income distribution.  In 22 of the countries, the homicide rate is very similar (indeed, more unequal countries, like Singapore, Britain and New Zealand, actually have lower rates than more equal countries like Sweden and Finland).  One country, however, stands out: the USA has a murder rate three times higher than the others – and the USA is a relatively unequal country. 

Wilkinson and Pickett allow this one case (what statisticians call an ‘extreme outlier’) to distort their whole graph.  Even though there is no association between income inequality and homicide rates across 22 countries, they conclude from this one case that there is.  They even suggest that Britain could reduce its murder rate by three-quarters if it had Swedish levels of income inequality, yet Sweden’s homicide rate is higher than Britain’s!  

Many of their graphs are skewed in this way, and the problem is compounded by their failure to look for the possible influence of third variables.  For example, they compare infant mortality rates across 50 US states and find those with the greatest income inequality have the higher rates.  But the more unequal states are also those with bigger African-American populations, so is it income distribution or ethnicity that is causing the problem?  When one of us looked into this, we found that ethnicity is 18 times more powerful than income distribution in predicting a state’s infant mortality rate.  When we published this finding, Wilkinson accused us in The Guardian of being a ‘racist’!

It is true that, on the indicators they select, the Scandinavian countries tend to perform better than the Anglo countries.  But this is not because the Scandinavians have a more compressed income distribution.  Rather, it reflects deep historical and cultural differences between the two sets of nations.  We know this because when we look at other countries outside these two blocs, there is no association between social outcomes and income inequality.  Countries like Austria, France, Greece, South Korea and Singapore vary widely on their income distributions but show no pattern on the social indicators.  The claim that inequality causes social pathology is a red herring.

While the recent Q&A panel were sceptical, Professor Jonathan Boston, who chaired the Victoria University forum on the book, was quoted last year as saying: ‘We can have some confidence that more equal societies – other things being equal – have better social outcomes across a range of measures. It may not be absolutely conclusive, but I think it’s reasonably persuasive.’  He’s wrong.

Left academics and politicians have long flirted with the idea that socialism can be made to look ‘scientific,’ and that is why they are drawn to this book.  But all the book really does is dress up political dogma in the garb of science.  Arguments about redistribution are moral, not scientific ones, and this book does nothing to change that.  Don’t let any academic tell you otherwise. 

Luke Malpass is Policy Analyst at The Centre for Independent studies. Professor Peter Saunders is Senior Fellow at the CIS and is author of the book When Prophecy Fails: A Critique of the Spirit Level.

I’ve started reading the book and it is one of the most complete demolitions I have ever seen. The book specifically responds to the latest claims from the authors of the Spirit Level in defending their work.

You can purchase the book at the CIS website. The Spirit Level has become the bible for socialists, and to be blunt we need more people who can point out how flawed the cherry-picked research that makes it up is. Remember all the Eastern European states (before the Soviet empire collapsed) had little income inequality, but were hardly prosperous paradises.

Also of interest may be this op ed which appeared in the Australian last week.

This video is a 45 minute speech and presentation to the Centre for Independent Studies by Professor Peter Saunders. He does a devastating critique of the book The Spirit Level, pointing out all the ways they cherry-picked both the countries and the data to support their proposition that countries with less income inequality do better on many social and economic indicators.

Saunders also covers how they gained spurious causation with outliers (such as US on homicides) and ignoring third variables. My favourite part is when Saunders constructs a social misery index showing that social misery is higher (r^2-0.39, p<0.001) is countries with greater income equality by focusing on racist bigotry, suicide rate, divorce rate, reverse fertility rate, alcohol consumption and HIV infection rate.

The first few minutes are a bit dry, but I really encourage people to view the whole video. If you are really rushed for time, just fast forward every few minutes to each slide, as the slides really tell the story.

This conference is highly recommended. I know a dozen or so who have attended it, and all have raved about it.

Eric Crampton’s op ed in the Dominion Post, and online at CIS is very good.

IF THE Government said that the minimum price for a new car were $50, nobody would expect it to affect sales. Neither would an increase to $65. But it would certainly start mattering if the Government applied a minimum price of $5000 to all cars, new and used.

Exactly. Only the stupidest person could argue that a mimimum price would not affect sales at certain levels. Hence the focus should be about at what level it starts to matter.

The latest youth unemployment figures are very bad. The unemployment rate for kids aged 15 to 19 is 27.5 per cent …

This isn’t just the recession. Unemployment rates for adults are higher than they were in the boom of the mid 2000s, but the recent downturn has not hit adult workers the same way that it’s hit the kids. The current adult unemployment rate of 6.6 per cent is only three points higher than its low mark in the mid 2000s. Meanwhile, youth unemployment rates are a staggering 15 points higher.

So what changed?

Both rates usually track each other, reflecting the overall strength of the labour market. Changes in the adult unemployment rate explain a high proportion of changes in the youth rate.

But in late 2008, this relationship began to break down. Compared with a previous trend, the current youth unemployment rate is eight points higher than we could have expected given the adult unemployment rate. That’s about 12,000 kids who, given the current adult unemployment rate, we would have expected to have jobs. …

Neither can they simply be due to the current downturn: when adult unemployment hit 10.2 per cent in 1992, the youth unemployment rate was 23.4 per cent – three points lower than today – and youth labour force participation rates were higher. Bear in mind that adult unemployment today is nowhere near 10.2 per cent.

The answer seems obvious. While done with good intentions, the abolition of a lower minimim wage rate for teenagers has priced them out of the labour market.

No, the sharp increase in youth unemployment from late 2008 appears to have been caused by the abolition of the youth minimum wage in early 2008. Such a result isn’t surprising. Economist Stephen Gordon summarised Pierre Fortin’s work on this effect in relation to minimum wages: when minimum wages are below about 45 per cent of the average wage, they have little effect on employment; above that, they present a danger to employment.

By contrast, New Zealand’s minimum wage of $13 an hour is about 50 per cent of the average hourly wage – well into the range in which we expect negative employment effects, particularly for young workers.

And if the minimum wage increased to $15/hr, it would impact youth even harder.

Reinstating a youth minimum wage well below the adult rate wouldn’t eliminate youth unemployment. But it would let employers start creating new jobs that young workers could productively fill while gaining experience. It’s time to stop pricing young workers out of the labour force.

I agree. What the Government should do is freeze the youth minimum wage at $13/hr and keep it there until it has hit the floor of 80% of the adult minimum wage (which happens when it hits $16.25), and then have it remain at 80%.

The Centre for Independent Studies has published a paper on electoral reform, which amongst other things advocates a Senate for New Zealand.

An opinion piece has also appeared in the Dominion Post.

Here are the salient features of the CIS proposal:

• A House of 79 MPs elected under FPP
• A Senate of 31 Senators elected under proportional representation and regional lists, also for a three year term, with a 4% threshold
• Senate acts as house of review but can not amend or initiate money bills
• Senators can serve as Ministers (they don’t specify that the PM can not be a Senator – a point to be clarified)
• No Maori seats

They analyse the problems, as they see it, with the current system:

• MPs re-elected to Parliament, after being rejected in an electorate
• Top politicians such as Michael Cullen and Don Brash accountable to their parties, not to local voters
• Winston Peters as Foreign Minister campaigning against the China FTA
• Maori Party over-represented due to over-hang
• ACT gained representation and NZ First did not despite higher party vote
• On overarching joint cabinet responsibility with minor party ministers able to disagree on all issues outside their portfolios

They conclude:

Clearly, an electoral system that produces such strange and sometimes bizarre outcomes could hardly be called exemplary. Yet, this system was only brought in less than two decades ago to deal with the deficiencies of its predecessors. It could well have been a case of throwing out the baby with the bathwater, as we shall examine in this report.

They also remind us:

Any discussion of electoral reform should be based on the premise that there is no such thing as a perfect electoral system.

It is a balance between being able to deliver a coherent policy programme and having strong checks and balances on the Government.

They also note:

In a two-party FPP system, the winning party gets to implement its manifesto and can be held accountable for its promises. Under MMP, political results depend on negotiations between governing parties. What a voter eventually gets from a party may be quite different from what the party initially promised, cancelling the idea of representation of voter preferences.

I prefer MMP to FPP, but it should be acknowledged that MMP has weaknesses such as the above. It is harder to hold a party to account, when they can blame not having a majority for not implementing their manifesto.

Truing to the Senate proposal, a good point is made:

The difficulty for a Senate is to make itself relevant. In his critique of upper houses, Emmanuel Joseph Sieyes says, ‘if a second chamber dissents form the first, it is mischievous; if it agrees it is superfluous.

This is partly why NZ got rid of an Upper House. But it was also because the old Legislative Council was appointed by politicians, so had no mandate to oppose the Government of the day. A Senate, elected by proportional representation, would have a strong mandate to decline legislation put forward by the House.

Some may call this proposal FPP in drag, but that would be somewhat unfair. Let me explain.

Because the Senate would be elected proportionally, and can reject any bill (including the Budget) then no law will be passed which does not have the support of parties that gained a majority of the (threshold) votes.

So if for example Labour and Greens got 52% of the party vote and National got 48%. However National won 40 electorate seats and Labour 39.

National would get to form the Government (and that s no small thing), but Labour and the Greens could block any laws they want to, and could even force a new election by refusing to pass the budget if the Government didn’t win their support.

Of course forcing an election can have political consequences, so there would be an incentive for parties to work together to avoid this ultimate step. We see this a bit in Canada where sometimes the main Opposition party keeps the Government in office, rather than be blamed for forcing an election.

So what are the parts of the proposal I like. They are:

• Candidates stand either for the House in a seat, or the Senate in a party list. No more MPs being booted out of a seat but remaining in Parliament.
• More electorates, which means smaller electorates, making MPs more local
• Clearly defined different roles for MPs and Senators, rather than status quo where some List MPs pretend to be de facto electorate MPs
• Should result in higher quality candidates for the party lists. At the moment too many places go to MPs who lose electorates.
• A Senate would be a useful additional check on the Government and would hopefully result in better quality laws
• No more race based seats
• The party vote would still be all important in deciding what laws get passed
• A 4% threshold for the Senate, which should help keep minor party representation

But here are what I see as the drawbacks:

• Electorate seats go from useful for a party to vital – you win the most electorates and you get to be Government. This may encourage pork barrel politics for marginal electorates and also makes the boundary drawing process of supreme importance – who wins Govt may come down to who has the best rep on the Boundaries Commission, rather than popular appeal.
• While it will be popular, I don’t like the decrease in MPs from 120 to 110. I would go for an 80/40 split or ideally (this will be really unpopular a 90/50 (we should have 140 MPs under the cube root rule of thumb).
• A possible lack of diversity in the House. CIS argue that the recent increases in diversity is not just due to MMP, but having followed National Party selections for some decades, I know there are considerable obstacles in many seats, for woman candidates to get selected. Having said that, it is getting better – National has ten female electorate MPs to Labour’s six.
• The potential for stand off between House and Senate. This should not happen often, as the PM should negotiate a coalition that has a majority in both Houses, but not always possible. One could end up with a lost more elections.
• There may be issues of legitimacy over a Government that wins the most electorate seats but trails their opponent on the party vote. For example we may see this in the UK where Gordon Brown may win more seats than David Cameron and remain PM, even if Cameron’s party gets 5% more votes.

I think this would have been an excellent option for reform in the 1990s. I’m not sure how much salience it will have today though. However it is good to have the contribution to the debate, as it should just just be a debate on FPP vs MMP vs SM.

The Dom Post has a guest column by Stephen Kirchner from the CIS:

The idea that New Zealand can ignore inflation and grow faster through easy money and a lower exchange rate is a tempting, but short-sighted view. It ignores the fact that higher domestic prices would ultimately undermine rather than promote international competitiveness. Economic growth and export success must ultimately be built on real factors such as productivity growth, not easy money and exchange rate depreciation.

It is like cheating on an exam – only works for a while

The Reserve Bank’s primary focus on inflation recognises that monetary policy needs to be based on a single instrument and policy objective. Pursuing multiple objectives with multiple instruments, as Labour now suggests, is a recipe for incoherent policy and poor economic performance such as New Zealand experienced before its path-breaking reforms of the 1980s.

TVNZ is a good example of having multiple conflicting objectives. Either none of the objectives are achieved particularly well, or some of them are just ignored.

It would also undermine the transparency and accountability that were important objectives of the Reserve Bank of New Zealand Act. Under the current framework, the governor of the Reserve Bank is personally accountable for realising the inflation target under a policy targets agreement with the finance minister. Sustained breaches of the inflation target can result in the non-executive members of the Reserve Bank board recommending dismissal of the governor to the minister. This is no idle threat, but it would be difficult, if not impossible, to hold the governor accountable for achieving multiple objectives instead of a clearly defined inflation target.

An excellent point. More objectives will mean less accountability. The Governor will always have a get out of jail card.

Since the first PTA was entered into in 1990, the inflation target has been progressively watered down. Most notably, the inflation target has been relaxed from 0-2 per cent to 1-3 per cent and given a medium-term focus, so there is now greater tolerance of short-term breaches.

I actually believe it should go back to a 0% to 2% range. Over time even 3% inflation is too much.

Luke Malpass from the CIS writes in the Dom Post:

Consider the following facts: KiwiRail was bought for $665 million. That figure then turned out to be $690m, plus other spending commitments, and ongoing preferential treatment for Toll’s trucking business at the expense of New Zealand- owned competitors (so much for supporting local business). This failed policy has already cost the taxpayer about a billion dollars.

KiwiRail has been subsequently valued at $369m. This was an upfront loss to the taxpayer of $321m – a loss of almost a million dollars a day for a year after the purchase. Put another way, $320m of taxpayers’ money was spent for value that never existed.

Further, this valuation is an optimised depreciation valuation, a public service entity costing. In other words, KiwiRail is worthless as a business.

In order for rail to come close to commercial equilibrium (to break even), the network has to shrink from 4000 kilometres to 2300km. The government was repeatedly advised of this by the Treasury before the purchase.

The rail system required a subsidy under private ownership to operate a network of the present size. This policy will continue under public ownership – except the subsidy will get larger.

In Australia the sale to Michael Cullen was referred to as the Sale of the Century, as they got such a hugely inflated price for a failing business.

With such a commercial and political mess on its hands, the present Government has only one policy option – the reform, rationalisation and resale of KiwiRail.

I’m not sure anyone would buy it, even with rationalisation.

The full CIS report is here. There are many good parts to it:

Because rail is a static, long-lived asset, it is not well placed to respond to population changes and industrial freight flows. Nor is it well placed to respond to the greater flexibility offered by cars and trucks. Once a track has been laid, trains must travel there regardless of market forces—it is a totally sunk cost. New Zealand’s population is too small and not concentrated enough to make our currently large rail network viable. This is nineteenthcentury technology developed well before other forms of transportation became widely available; and while it still is good at transporting some freight, rail has severe limitations and is only economical in some areas.

It would be interesting to compare how many other countries with our small population have an extensive rail network, excluding Europe where the rail system is basically continental wide.

The greenhouse gas argument is also explored:

The second problem with greenhouse gas arguments for state ownership of Rail is that an emissions trading scheme (ETS) or other mechanism (such as a carbon tax) internalises carbon costs. Under an ETS, Rail might gain an input cost advantage and can pass that onto customers. This would occur regardless of the ownership of Rail.

It is highly likely one could do far more for the environment if one used the money sunk into Kiwirail, to plant trees.

shipping is more than twice as efficient as rail (in greenhouse terms), and competes along similar routes to rail. This ratio suggests that in order to get the same amount of carbon savings, the government has to compel a far greater share of freight to Rail to reach the same targets. Further, if an overall strategy of reducing congestion and greenhouse gases was so
important, then why did the previous government not look at ways to actually support that by investigating deregulation and providing incentives for other transport modes? While Rail certainly is ‘cleaner’ than road transport, it is not as clean as shipping and the substantial environmental benefits claimed for it are dubious.

The Kiwirail purchase in Labour’s dying months was a classic poison pill.

There were so many highlights from P J O’Rourke’s speech, it is hard to know where to start. I guess I’ll start with the one that resonated most with me:

The 1 trillion, 487 billion dollars that America is spending on the financial bail-out plus the economic stimulus package is equal to more than a year’s worth of U.S individual and corporate income tax payments put together. Which raises the question: Instead of a bail-out and a stimulus, why not no taxes for a year? Zero. Zip. None. Stop taxing us!

Would this be an economic stimulus? Uh, yeah.

Just imagine that – a tax free year. Think what they would do to prosperity, economic confidence and growth.

Economic freedom is the freedom we exercise most often and to the greatest extent.

Freedom of speech is important – if you’ve got anything to say. I’ve checked on the internet. Nobody does.

Freedom of Belief is important – if you believe in anything. I’ve watched cable TV. I can’t believe it.

Freedom of assembly is important – if you have an assembly to go to, the way we do.

But most people to go to the mall. And, at the mall, they exercise economic freedom.

I’ve often said I value my freedom of speech more than my freedom to vote – because I exercise it every day – not just once every three years. But O’Rourke usefully reminds us that economic freedom is the one we use the most. This is partly why things were so ghastly in the old Soviet bloc.

The worst thing in politics is “bipartisan consensus.” Bipartisan consensus – that’s like when my doctor and my lawyer agree with my wife that I need help.

He had dozens of good lines like this. Most have been used in his books, but not the same as hearing them in person.

The Free Market was killed by the Bolshevik revolution, by fascist central planning, by Keynesianism, the Great Depression, World War II economic controls, the British Labor Party victory of 1945, Keynesianism again, the Arab oil embargo, Tony Blair’s and Bill Clinton’s “Third Way” economic policies, and by the current financial crisis.

That’s ten times the Free Market as has died in the past 100 years. And every time the Free Market dies, everybody wants to know, “What would Adam Smith say?”

It’s a “Hi, God. How’s my atheism going?” moment.

A useful knocking back of those who claim this is the end of capitalism.

So how would Adam Smith fix our financial crisis?

Sorry, but it’s fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done!

O’Rouke argued strongly against bailing out banks that made bad investment decisions.

So far, the best Barack Obama has been able to do by way of an Iraq policy is to make what I think of as the “high school sex promise:” I’ll pull out in time, honest, Honey.

Heh.

Best investment I’ve made lately? I left a $20 bill in the jacket pocket of this suit last month. And I just found it this morning. (Which puts me way ahead of my mutual fund.)

Double Heh.

Not that we’d want to live in a country ruled only by the best and brightest. That would be too much like being married to Cherie Blair.

A very backhanded compliment.

Obama’s got a great economic plan. If it’s working, tax it. If it isn’t working, bail it out. If it’s just scraping by, drop the Federal Reserve Bank on it ‘till it screams for help.

The Libertarianz liked that line. They had two tables there. Was very funny when they announced that they had 20 people at the dinner, as someone yelled out “So your whole party is here, is it”

Politics is going to take over the car industry. I can predict the result – a light-weight, compact vehicle with a small carbon footprint using sustainable alternative energy. When I was a kid we called it a bike.

He also railed against bailouts of US car manufacturers.

What we get is a choice between left-wingers who can’t learn from the past and right-wingers who can’t stop living in it. Between left-wingers who want to tax us to death and right-wingers who would prefer that we get shot with an assault rifle by a lunatic in the work place.

Targets on all sides.

And I don’t just hate bad politics. I hate all politics. I even hate democracy.

Imagine if our clothes were selected by the majority of shoppers, which would be teenage girls. I’d be standing here with my midriff exposed.

Amongst the humour is a powerful reminder that the state should not decide all things for us. That we should get to decide what light bulbs to use, what shower pressure to have etc.

Last year the U.S. Congress passed “The Farm, Nutrition and Bio-Energy Act of 2008.” This was $285 billion dollars worth of agricultural subsidies and price supports. $285 billion dollars is five times the pre-war gross national product of Iraq. For what the “Farm, Nutrition and Bio-Energy Act of 2008” is costing American tax payers, we could have avoided the war with Saddam Hussein and just bought his god damned country. (And I bet we could have sold it to China for a profit. The Chinese want oil. Hand’em the deed to Baghdad and let ‘em go get it. Give the Communist Chinese a little taste of Falluja and they’d be wishing for monk riots in Tibet.)

A great solution to Iraq and China!

So, while I’m holding the cow’s head and my friend is holding the cow’s middle, Pete takes this freezing cold syringe thing and inserts it into a very personal and private place of the cow’s. Then what Pete does, is he stick his arm into an even more personal and private place of the cow’s – all the way up to the elbow.

Now, Pete does this not to get on the internet with a pornographic website, but so that he can feel the tip of the inseminator tube through the cow’s intestine wall and guide that tip into the cow’s uterus.

It was a pretty gruesome thing to watch and, I’m glad to say, since I was up at the cow’s other end, I didn’t watch it. But I’ll tell you one thing – I will never forget the look on that cow’s face.

It was the same look that I got on my face – for the same reason – when I read the “Farm, Nutrition and Bio-Energy Act of 2008.”

This probably got the most laughs of the night – again it was superb humour but with a serious message underneath.

Once more, huge kudos to the CIS for bringing P J to NZ. A great night.

I had a superb time at the P J O’Rourke dinner last night, and associated after match entertainment.

The night got off to a good start, when I ran into the Director of the CIS, as I was looking for my name at the table list. I only registered a couple of days ago and wasnt part of a formal group or table, so was not sure who I would be with. I was hoping it wouldn’t be a bunch of boring auditors so had requested on the form to be with some interesting people. I asked Greg if there were any interesting people at my Table – Table 8. He said “Well you’re with me and P J O Rourke, so is that interesting enough”. I managed to restrain myself from hugging Greg – but how seriously cool is that.

The dinner at Sky City was excellent and great conversation at the table. PJ’s speech and then Q&A session was simply stunning. Not only is he the funniest political speaker I have ever heard – he also delivered such a powerful strong message in favour of limited Government. I will blog some quotes from his speech, once I have a copy. It really was superb.

I could not resist in the Q&A asking him if he supported private mercenary armies, as written about by David Shearer, and O’Rourke said that is just about the only area he doesn’t support a private sector role. So I was amused that Labour’s Mt Albert candidate may be to the right of P J O’Rourke when it comes to the role of the private sector. PJ was amused over dinner to find out that one of the chapter headings of Shearer’s paper was “Give War a Chance” – the tile of one of O’Rourke’s best known books.

As I have said before, I think it is excellent Shearer has been willing to advocate that decisions on private sector involvement should be made on the basis of pragmatism, not ideology. Shearer basically says “If they can provide a better outcome, then don’t be put off by the fact they will make a profit from it”. All centrists and rightists should welcome such an outbreak of common sense in Labour, and support him. Matthew Hooton covers this theme in NBR:

What Mr Shearer advocated was that a controlling legal authority – the UN – retain ultimate responsibility for initiating, funding and regulating peace-keeping, but have flexibility in going about it.

If a company like Blackwater, Pathfinder or Executive Outcomes was better placed than soldiers from national armies to undertake a particular operation, then the UN could contract them.

This is a classic funder/provider split model. Admittedly, Mr Shearer went one step further in proposing it be applied to military operations, but his idea is no different in principle to the New Zealand Ministry of Education funding Kura Kaupapa Maori or other private schools, the Department of Corrections contracting out prison services or rehabilitation programmes, or employers choosing approved alternative insurers within the framework of a national ACC.

In each case, the state would remain responsible, being the initiator, funder and regulator, but its agencies would be able to choose the best provider of the service.

Instead of crying “privatisation”, our leaders should be expected to debate such ideas more intelligently than was evident this week.

Absolutely. Privatisation has been a hysterical catchcry from Labour for too often. We need a sensible rational debate on increased utilisation of the private sector, without the kneejerk backlash. Hooton continues:

His selection will mean Labour will never again be able to cry “privatisation” when contestability of service delivery is suggested, and will open the possibility of a more sensible debate about the current structure of the SOE portfolio. New Zealanders can only gain, both as consumers of public services and investors in state assets.

Indeed National would welcome David Shearer into the Labour Caucus. It will largely nullify the privatisation issue for National. If Shearer is confirmed as the candidate (which is highly likely as Head Office control 3/7 votes) I will not be surprised if some National Party members vote for him tactically – knowing the huge boost it will be to have in the Labour Caucus one of the world’s leading proponents (his articles have been cited in scores of other research in this area) of legitimising private sector involvement in military operations.

Anyway once again big thanks to CIS for organising the P J O’Rourke dinner and to all those who went out on the town afterwards. It did mean I was late filing my NBR column, but 3 am is a very bad time to try and start writing it.

I know dozens of people who have attended a Liberty & Society conference and all bar one of them have raved about it. The sole dissenter was Cactus Kate who complained that the hosts (CIS) are too left wing

If you are a undergraduate, postgraduate or recent graduate, and broadly identify as classical liberal then consider applying. It is a great experience.

The Centre for Independent Studies has published a critical analysis of KiwiSaver. I am actually a reasonable fan of KiwiSaver (but not of how they did it with no consultation with business), so disagree with the conclusions in the CIS analysis. However I support most of their analysis, which I will summarise here:

• Most people were already saving enough for retirement, with 80% of couples saving enough to maintain a level of consumption similar to or better than in pre-retirement.
• With KiwiSaver and New Zealand Super combined, it is now possible for a someone on the average wage to retire on a higher income than they enjoy during their working life.
• It is over the top to have a subsidised saving scheme on top of an age pension that is the most generous in the OECD.

This is a very strong point. People are being over-taxed and over-subsidised now. The NZ Super scheme is the most generous in the OECD as it is neither means nor asset tested. You combine that with a scheme that all bar the very stupid or very poor take part in with an average 10% of salary saved per annum, and you end up with higher incomes in retirement than during your working life.

• KiwiSaver largely benefits the wealthy, who can afford to save more.

Yep, and every wealthy person I know is making sure they get the maximum subsidy from the taxpayer, and self employed people are upping their salaries so they get to claim their employer contribution as a tax expense.

• KiwiSaver politically and economically threatens the future of New Zealand Super and makes means testing more likely in the future.

I reached this conclusion during the budget lockup, when it was announced. There is no way in 30 years time we will have both NZ Super (including Cullen Fund) and KiwiSaver. Dr Cullen has actually destroyed the consensus over publicly funded non means tested superannuation. If he was a National Minister, the left would be baying for his blood.

• Evidence from around the world suggests that subsidies for savings schemes do little to actually
  increase overall savings. Instead, people tend to shuffle around existing savings to take advantage
  of the subsidies.

Yep. Most incentives change individual behaviours rather than change the fundamentals. However as the incentives for KiwiSaver are so strong, and as you have to opt out of it in a new job, I do think it will have some impact on overall savings levels.

• It is now more rewarding for people to join KiwiSaver than it is to pay off debt or a mortgage, or
  to invest in business or an education.

The CIS paper actually quotes me as saying “You have to be very very poor or very very stupid to turn down an up to 2:1 subsidy”. And indeed, the level of subsidy is so high that it makes sense to borrow money so you can save it!

• The requirement for employers to contribute 4% of a worker’s salary will put downward pressure on wages and job growth.

Of course. Employers look at the total cost of remuneration. What is unfortunate is those that do not join KiwiSaver may be punished for the cost of those who do join.

• The total cost will rise to $2 billion a year, which is more than New Zealand spends on its entire defence force.

It is a lot of money, and not sustainable on top of the Cullen Fund and NZ Super. But it is not necessairly KiwiSaver which should go.

• The easiest way to fix KiwiSaver is to scrap the generous incentives to contribute,

That is one way to fix the problem, but not my preferred one.

CIS are looking at this in terms of what is best for New Zealand, and they may be correct. But first let us look at this from the view of the left:

1. Penalises poor people who can not afford to save
2. Gives the greatest advantage to richer people
3. Allows rich self employed people to avoid more tax
4. Pushes wages down
5. Undermines universal provision of superannuation
6. Privatises savings from the state to the private sector

KiwiSaver is everything the left should hate. I guarantee you if Bill English had introduced this, it would have been denounced.

Now CIS are saying this is bad public policy, even if it is something the right should love (which demonstrates that they are not as ideological as critics claim).

I support KiwiSaver because it is inevitable that it will lead to means (and maybe asset) testing of NZ Super. And I believe in means testing.

I support KiwiSaver because in 20 years or so (once takeup is near universal) the $50 billion or so in the Cullen Fund will be dished out into people’s KiwiSaver accounts. And after giving over $25,000 to each family, no future Government would ever take it out of their KiwiSaver account.

I support KiwiSaver as I would rather choose my investments manager, than have the Government do it for me.

I support KiwiSaver as it will lead to a reduction in the size of the state.

So while I agree with much of the analysis of the CIS, I disagree with their conclusion to scrap the incentives and subsidies. Instead just wait for the Cullen Fund to be privatised and NZ Super to end up means tested, and probably CPI adjusted instead of wage adjusted.

On the 15th of April, in Auckland, the Centre for Independent Studies is hosting a free forum on big ideas to supersize the NZ economy. The speakers are:

• Dr Don Brash, former Reserve Bank Governor
• Andrew Little, National Secretary, EPMU
• Phil Rennie, CIS Policy Analyst
• Dr David Skilling, Chief Executive, The NZ Institute

It is at 6 pm on Tuesday 15th  at theQuay West Suites, 8 Albert Street, Auckland.

It is free, but please go here to register.

I’ll certainly attend if in Auckland on that day. I like the balance of speakers they have arranged, so there will be plenty of ideas.

Cactus Kate has been in town for a couple of days, and has been lots of fun catching up.

I first met Cactus over a decade ago after she went on a Centre of Independent Studies course, along with a couple of friends of mine. I expressed surprise that she didn’t actually hook up with anyone on the CIS course, and she stated that it was because everyone at CIS is far too left wing

Monday Night was meant to be a catch up with Un-PC Lesbian but she pulled a sickie. Cactus and I consoled ourselves with some nice bottles of Moet down at Concrete. We were later joined by Karen Fuchs and eventually Ten after her prick of a boss allowed her to finish work at 10 pm. I have to say that there are few things as good as decent champagne – not the usual crap which passes for it in NZ.

Eventually dinner seemed a good idea but very little open at 11.30 pm on a Monday night. Eventually went to an Indian restaurant on Courtney Place whose name I can’t remember and whose food was pretty umm about forgettable also.

Tuesday was Cactus’s annual date with her secret Business Roundtable lover. I am their official chaperone. We had a stunning lunch at Shed Five – mainly thanks to the new waiter Scott who was just hilarious. After I took a call from someone, Scott confisicated both my phones for the next two hours and told any callers I was lunching with company and not to be disturbed. He arranged a non stop flow of Moet (Cactus lives off it) and mineral water, and kept us highly entertained. He refused to allow secret lover to have coffee until he had finished his dessert, as it will spoil the taste. The highlight was after we have moved onto cocktails and I had a raspberry Manhattan which didn’t quite work for me, so I left it slightly undrunk. Despite me not complaining, Scott insists on tasting it to check if anything was wrong, and it was priceless as his face screwed up and he loudly proclaimed the cocktail as disgusting and undrinkable, and he went off to the bar to point out you put raspberry not cherry into that particular cocktail. Scott was great and made the lunch a great success, on top of the excellent food.

Cactus then put on her union president hat for her Fairfax meeting, and we caught up after that at Monsoon Poon – always a good reliable choice. It was packed full, so we ended up dining up at the bar, which of course suited us fine.

Fortunately for my continued good health, Cactus flies out this evening, but we do have lunch with Parliament’s second most famous blogging MP today, after he wouldn’t miss a few unimportant votes last night to join us.

UPDATE: For the benefits of all the wives and existing mistresses of Business Roundtable members, I will clarify that if Cactus did have a secret BRT lover, I would not be blogging about it here! It is just carrying on a joke I made last February and carried on as to my delight I was asked by journalists last week in Auckland if it was true Cactus was having umm relations with a member of that fine body. Mind you I do hear she is preparing an application as to why she should be hired as their intern

The Centre for Independent Studies, of which I am a proud member, is seeking a Policy Analyst or Research Fellow for their NZ Policy Unit. The job is based in Sydney but you end up back in NZ a fair bit.

I would have loved a job like this when I was an employee, and the current staffer has described it as the best job he has ever had.

If you have the right skills, experience and background and want to join the brain-drain, then this may be for you.

I’m also running a (free) ad for them for the job.