Newsletter - A year of inequality debate

Inequality and poverty issues were big news this past year.

The English version of Thomas Piketty’s book, Capital in the Twenty-First Century, was published in April.  It provided an impressive collection of historical data on trends in wealth distribution. Much less impressive was the interpretation of the data and the theory that went with it.

The book was greeted with enormous enthusiasm by the political left. No surprise there. People – on both the left and right of politics - tend to accept uncritically information or views which align with their prior beliefs.

But one of the great virtues of a free and open country, and of the democratic process, is that your political opponents will scrutinise your arguments and you theirs. It’s a contest of ideas.

So how has Piketty’s book held up? A recent lengthy review by Deirdre McCloskey described the many problems with the book, and John Cochrane (University of Chicago Business School) has helpfully provided a condensed version. It is well worth a read.

Cochrane summarises McCloskey:  the book is “wrong as simple microeconomics ….and growth economics; the evidence is contrary to its thesis…. and it advocates policies - confiscatory taxation by a centralized world government - that would turn back the trade-based betterment (a better description than ‘capitalism’, as it is innovation that drives income growth) that has saved billions from grinding poverty.”

McCloskey notes that Piketty’s definition of wealth does not include human capital - the skills and education of the workers. Add back in human capital to the accounting, and you find that workers own most of the nation’s capital, “and Piketty’s drama from 1848 falls to the ground.”

The year ended with more publicity on academic work on inequality, with the Guardian newspaper featuring a working paper from the OECD. The headline was: Revealed: how the wealth gap holds back economic growth.  This headline was enough to excite those on the political left, but the subheading was even better:  OECD report rejects trickle-down economics, noting a ‘sizeable and statistically negative impact’ of income inequality.

The political cream on top was that the report identified NZ and Mexico as the two countries whose growth was most held back by rising inequality:

Does any of this stand up?

Let's start with the Guardian’s subheading, where they ever so predictably reach for the notion of “trickle-down economics”. This expression is a pretty standard fantasy of the political left, not so much a straw man as the left’s imaginary friend.  There is no such academic theory.

What about the OECD report itself, rather than the overheated journalistic version?  Was Russel Norman’s excitement in the House justified?  Had he read it, or just the Guardian report?

As always with these matters, you need to wait a bit until other academics have tested the report – its methodology, its data analysis and conceptual coherence.

An economist at the NZ Initiative, Eric Crampton, has helpfully reviewed the OECD paper on his blog, Offsetting Behaviour. You can read it here.

Crampton notes several odd aspects of the report’s conclusions.

“They find that net inequality (after tax-and-transfer) hurts economic growth, that gross inequality (pre tax-and-transfer) doesn't hurt growth, that changes in human capital (education) do not affect growth one way or another - there's a slightly negative effect of education on growth in the set of specifications, but it's not significant; and, investment doesn't affect growth one way or another.”

As Crampton notes, these are strange results. Typically we would expect investment in capital equipment and in human capital to be important for growth.

But it gets weirder still.

Digging into the report, the results suggest that all that matters is the difference between the average income and the level just below - the 4th decile. The difference between incomes at the top (the 9th and 10th deciles) and average incomes have no influence on growth.

If you took that result seriously your policy recommendation would be to increase the tax on average earners to give money to people slightly poorer than them. An odd result. Nobody now seems to be defending the data analysis in this report.

But if you did, you would wonder what the mechanism might be for inequality to affect growth?

The report suggests it would be via reduced investment in education in the lower decile cohorts.  But remember, the report found no effect of education on growth.

The authors decided this result must be wrong, and instead made the case for increased spending on education. That judgement in turn is based on other OECD papers which do find a strong effect of education on growth. Awkwardly, many of those very papers also find that inequality increases growth.

Go figure.

Let’s be positive here. The authors cite OECD research that suggests that “across 21 OECD countries human capital has a robust, positive and significant impact on long run growth”.  Yes, it does, see the McCloskey comments on Piketty earlier.

Referring to that research the authors write:  “The evidence strongly suggests that high inequality hinders the ability of individuals from low economic background to invest in their human capital, both in terms of the level of education but even more importantly in terms of the quality of education. This would imply that education policy should focus on improving access by low-income groups, whose educational outcomes are not only worse on average from those of middle and top income groups, but also more sensitive to increases in inequality.”

Well, there is a policy that does just that. It is called Partnership Schools.

Ponder that over the holiday break, and wonder why the political left does not support this policy.

Merry Xmas!

David Seymour
Leader, ACT New Zealand

Forget today's deficit - we must focus on long term fiscal health

"Forget today’s deficit announcement – we need to focus on long-term fiscal health," said ACT Leader David Seymour.
"The Green and Labour Parties’ excitement over a tiny projected surplus turning into a small expected deficit is just childish. These are parties that wanted to hand out billions in an election lolly scramble, now purporting to discover fiscal probity.
"Labour and the Greens both had their platforms calculated as costing an additional $5 billion. Their largess would have put this deficit in the shade, and pushed up mortgage rates to boot.
"Revenue will always bounce around due to international and domestic influences, and in the short term there is no reason for the government to react to that.
"What matters is the general trend which, compared to most other countries, is promising – at least for the next few years.
"To avoid fiscal strife further down the line, we must address quality and effectiveness of spending, and scale and effectiveness of government regulation. We also need to account for an aging population and a surge in NZ Super and healthcare costs."

Celebrate volunteers by opposing regulatory burden

On International Volunteers Day New Zealand politicians must consider their responsibility in tackling the regulatory burden faced by the voluntary sector, says ACT Leader David Seymour.

“Unfortunately, regulations intended to improve practices in business can often have unwanted consequences for volunteer causes.

“One current example is the Health and Safety Reform Bill, which would treat volunteers – even casual ones – as workers, forcing organisations to take liability for the safety of people who have chosen to pitch in for events like tree plantings and disaster clean-ups.

“The practical effect of this regulation is obvious: it will be harder for communities to mobilise volunteer action. Ratepayers in particular will be hit hard, as local councils currently utilise volunteer labour for many vital services and initiatives.

“ACT is backing the Bill’s submissions from Local Government NZ and Volunteer NZ, which call for more flexible regulation towards health and safety.”

“Volunteer initiatives are always preferable to government programmes. Individuals who sacrifice their time to contribute to causes they are passionate about are far more likely to put care into a job than an anonymous bureaucrat on a fixed salary.

“Volunteer and community initiatives are at the core of what separates an adequate society from a healthy society. The fact that New Zealanders spend more time volunteering than anyone else in the OECD is something we ought to celebrate.”

Car ban for mountains problematic, out of the blue

The planned ban on car access to Auckland’s volcanoes is out of the blue and undemocratic, says ACT Leader and Epsom MP David Seymour.

“The Maunga Authority’s decision to end vehicle access to the top of Mount Eden and other cones comes after the government had promised that the Authority would not compromise existing public access and use rights [1].

“It is hard to reconcile that promise with this week’s announcement. For many New Zealanders, such as the elderly or those with injuries or disabilities, a ban on cars will effectively be an end to access.

“What stings even more is that today is 2014’s International Day of Persons with Disabilities.

“On a day when we should be celebrating inclusion and fair treatment, the Maunga Authority is threatening disabled, injured, and elderly people with, at best, a marginalising and bureaucratic process for gaining access to the summit, and at worst, a total end to their enjoyment of our mountaintops.

“Further considerations ought to be given to parents of small children, the tourists who contribute to Auckland’s economy, and cyclists, who would for some reason be included in the ban.

“Maybe some sort of restriction is justified to reduce erosion, pollution, or noise. But if that were the case, the merits of the ban should be able to stand up to public scrutiny and debate. Instead, the Authority has announced the ban from out of the blue, with no opportunity for public consultation or a cost-benefit analysis.

“The government should hold the Maunga Authority to the public-minded spirit outlined in its formation. The ratepayers who fund maintenance of these mountains deserve input.

“Matters of public access to our beautiful maunga should be matters of public consultation.”


[1] "There will be no changes to existing public access and use rights. Third party rights including infrastructure, buildings and leases will be maintained.“

Stock rustling set to continue under lax laws

The theft and illegal slaughter of farm stock can only be expected to continue if tougher laws are not introduced, said ACT Leader David Seymour today.

NZ Farmer today reported on David Searle, who found three dead ewes on the edge of his property yesterday morning, with another six missing.

“It makes for a grim read, but what’s grimmer still is that this is an ongoing problem for rural New Zealand,” said Mr Seymour.

“It’s a crime that often goes unreported, but is estimated to cost farmers $120 million each year. One Southland farmer had 1200 ewes stolen in July alone.

“Stock thieves are comparable to burglars in that they are rarely apprehended, offend repeatedly, and have little regard for the sanctity of property.

“ACT would have equipment used in the theft confiscated, as is the case for fisheries offences, and increase maximum jail sentences to reflect the harm done to farmers and their vulnerability in remote areas.

“Farmers have called for tougher laws, as has the national association Federated Farmers. ACT won’t let stock rustling and other property crime become a career option in New Zealand.”

Newsletter - Partnership Schools

Partnership Schools: The Path to Quality Education
November 11, 2014

You may find this recent newspaper article on Partnership Schools of interest.

I did, and for this simple reason.

The article fairly presents the difficulties some schools are having in this early establishment phase. As common-sense would suggest, and as recent research shows, the average quality of schools improves over time (e.g. see the US National Bureau of Economic Research: The Evolution of Charter School Quality). Rome was not built in a day.

The article also fairly presents some of the undoubted successes so far in New Zealand.

For many students these schools are proving truly transformative, turning around lives, rescuing them. It is profoundly moving to read of this, even more so to be privileged – as I have – to witness it.

In my Maiden speech in Parliament I mentioned a visit to one of these schools where, as I chatted to the students about their experiences in other schools compared with their experiences at their new Partnership School, one young girl said “I didn’t know I was smart until I came here”.

Who could fail to be affected by that?

Now, consider these accounts of lives being transformed, and weigh that enormous positive against some of the negative comments in this article and elsewhere by opponents of these new schools. For opponents to describe Partnership Schools as part of an “ideological drive to disestablish public education” is not just wrong, it’s childish and daft. Most of our public schools provide excellent educational opportunities - just not to all children.

I am sure these opponents are good people, committed educators, but some of their attitudes are appalling.

Fancy giving parents options; giving them choices which might dramatically improve their children’s chances in life. We should be doing everything possible to facilitate this, not block it.

The opposition to Partnership Schools reflects politics and ideology. Opposition political parties would close down these schools no matter how good they might be. And just tough luck for the kids caught in the crossfire of politics.

That can reasonably be described as an extreme ideological view, one that is hard to defend on any moral or fair-minded basis.

Would those politicians be prepared to visit these schools, and tell the children and their parents, face-to-face, that they intend to close the school? And tell them why.

David Seymour
Leader, ACT New Zealand

Newsletter - Stocks and Flows

Social Housing: Stock and Flow Confusion
November 7, 2014

This is the first issue of what will be a regular newsletter, commenting on and reacting to political and other issues. On this occasion, the topic is the debate over social housing reform, one where opposition politicians and many commentators seem hopelessly confused over what is, and is not, important.

It’s been interesting watching the responses to National’s planned reform of social housing. The political responses are not just steeped in ideology, but almost drunk on it. Nobody seems interested in debating the real issue – of how best to provide for the housing requirements of those most in need.

One tactic is to try and frame it as a case of asset sales, as if that is some sort of gotcha – pretty feeble from an ACT perspective, of course.

Governments are always selling things – used cars, old office equipment, farms, and even surplus houses – so it’s hardly a big deal; and of course governments are always buying and investing in things, typically far more than they should.

But secondly, and most importantly, nobody seems to have a clue about the distinction between stocks and flows; between assets and their income flow (or financing cost).

For example, your term deposit is a stock; the interest income is a flow. If the term deposit interest rate is 5%, and I promise to give you five dollars a year for ever, you are in the same position as if you had a $100 of your own to deposit.

When you reach retirement age and start receiving NZ Superannuation payments, you receive a “flow” of income for the rest of your life. Instead, and equivalently, the government could borrow and give you a one-off (a “stock”) payment sufficient for you to buy an annuity giving the same flow of income. Either approach has exactly the same expected outcome.

Stocks can be converted to flows, and vice versa.

It’s the same issue in housing. The government can buy a house (it will be borrowing a “stock” of cash to do so, to buy the asset) and let you live in it at a subsidised rate, giving you a “flow” of rental subsidy.  Or the government could sell a house it already owns (an asset that is effectively funded by a “stock” of debt) and just pay you a “flow” of rental subsidy to rent from some provider on the market, whether a purely commercial or a social provider.

What matters is access to the housing: whether that is done via government owning a stock of assets or funding a flow of rental subsidy is entirely a second order consideration, essentially just a financing decision.

Another confusion that springs from not understanding stock and flow distinctions is to argue that the cash from any houses that are sold, should immediately be spent. Absolutely not. Selling the stock and spending that as a flow would be wildly irresponsible. Spending just the flow equivalent of that stock (roughly the interest income, or debt servicing cost of it) would be broadly neutral.

The real issue here is how to get the most effective structure of social housing assistance to those most in need.  To start shifting from a system overwhelmingly dominated by the government owning a massive stock of houses, and move at the margin to increase the proportion funded by a flow of rental income support, seems like a total no-brainer.

A healthy system is one where we try lots of approaches, where there is experimentation, competition and a range of options.  That is why markets are so effective, because it is a relentless process of experimentation to find out what works best.

We need more of this in social housing, in education (which is why partnership schools are so important) and in the health sector.

When you see responses to these social housing proposals that focus obsessively on whether or not they represent asset sales, you know that the response is entirely ideological – that person is not thinking, not interested in the real issues.

The same applies when people complain that a property developer might make a profit out of building or providing social housing.

That represents another form of ideological ignorance – in fact one even worse than not understanding stocks and flows.

Businesses are funded by a mix of debt and equity: the business pays interest to the owners of their debt (that might be to a bank, or to those who have purchased the business’s bonds in the debt markets); and it distributes profit (the residual, high risk part) which is paid to the owners of the equity in the firm.

Would you seriously expect people to provide equity for no return? Profit is just the label for that highly uncertain return, just as interest is the label for the more secure (because it gets paid before equity owners see anything) stream of interest income from a business.

The proposed reforms show that the government is doing some serious thinking about how best to provide social housing to those most in need. It’s time opposition politicians started thinking too.


David Seymour
Leader, Act New Zealand

Housing Affordability

Andrew Atkin explains, step by step, how housing affordability has been destroyed in New Zealand. 
There is a special focus on the impact of Metropolitan Urban Limits.

Speech: Reply to Prime Minister's statement on ISIL

Delivered by ACT Leader David Seymour to Parliament, 5/11/2014:

I rise on behalf of the ACT Party in support of the proposals announced this morning.

My party believes that the first and most important role of the State is to protect citizens against thugs. This duty applies whether the thugs reside overseas or within our borders.

Given this extraordinary power, however, the State does have a tendency to overreach. Over the past century, much of classical liberals’ attention has been rightly focused on resisting the overreach of the State. That was right, I say, because those Governments did suppress freedom of movement and freedom of contract. Many of my remarks are directed at civil libertarians, of whom I count myself as one, but my remarks will be unlike some of the more ostentatious appeals to that constituency made earlier.

Actually, I want to congratulate the Prime Minister and the Acting Deputy Leader of the Opposition on very fine speeches. I began to appreciate some of the opponents of MMP until I saw that Peter Dunne made a very fine speech too.

We support the intention to ensure that proper parliamentary processes are followed, and it is even while we, for very good reason, are speeding them up a little.

We support the moves to tidy up inconsistencies between the powers of the police and the Security Intelligence Service, inconsistencies that unduly hamper justified monitoring of internal threats.

The other moves—the funding boost to the New Zealand Security Intelligence Service, the changes in respect of passports, the narrow changes to emergency surveillance, and the sunset clauses—all appear to be measured and restrained in scope.

But the issues being considered today go well beyond those internal matters, and they do so because it is not always the State that is a threat to liberty, or even other States that are a threat. The contest in the Middle East and the threats of global terrorism in recent decades are coming from Stateless entities, or at least currently Stateless entities, as their ambition is to create their own State.

We need hardly debate whether there is a contest of values at stake in respect of ISIL. That entity represents the antithesis of civilised values—values of liberty, the rule of law, freedom of association, freedom of religion, and democratic institutions. But the question is whether we should get involved at all.

As a country we have throughout our history played our part in defending not just the borders but also the values of free and democratic societies and of modern civilisation. It is true that the military contest in the Middle East is not our fight in so far as they are not our borders, but the contest about the kind of society that will prevail in that region is of profound interest and concern to free societies everywhere. Here the issue is very much a contest of values, the spread of those values around the world, and the threat those values are to free and open societies.

We do not need to document or list the brutalities of ISIL. We have seen it on the news most nights. ISIL does pose a threat to the people of Iraq and Syria and the broader Middle East. Their current operational threats are in the Middle East and North Africa, but their declared threats are global and specifically directed at the Western liberal democracies.

They are not just theoretical threats. As we have seen in Australia and Canada recently, their adherents and supporters are capable of random acts of violence. The scale may so far be small but their aspirations are not. One option might be to sit back and wait to see what else they are capable of, wait until their capability either wanes or others more directly affected work to ensure ISIL is defeated, or wait until they succeed in a violent provocation of sufficient scale that a military response becomes the only option. But it is not at all clear whether for free societies generally a purely defensive posture is possible, at least not if we wish to maintain a free and open society in our world.

A purely defensive posture would be a garrison State, the wagons circled, a wall put up, with extensive and intrusive surveillance within. That is not the free and open society so painfully built and fought for through the past century and before. And that simply is the case for playing our part and contributing.

We would all much rather that none of this was necessary. New Zealand is a small country well away from the immediate theatre of struggle in the Middle East. In a direct sense, this is not our fight. They are not our borders at threat. But the values at stake are our values. The aspirations of ISIL do not reach our shores, but they affect our way of life. So the case for playing our part, however small that might be, is a strong one.

Is helping those directly at threat from ISIL a worthy goal and the morally right thing to do? Yes, it is unambiguously so.

Is stopping ISIL achievable? With a broad international contribution the answer must surely be yes, because it has to be.

To allow a street-less gang, one utterly pitted against our freedoms and way of life, to dominate a large swath of territory in the Middle East as a launching pad for broader aspirations is unthinkable. In that sense the situation in Iraq and Syria has direct relevance for our domestic security, our values, and our economy as a small trading nation dependent on international trade and the rule of law internationally.

For New Zealand to make a small contribution to international efforts, to prevent the humanitarian crisis from deepening and to support the capabilities of those directly in the firing line, seems a justifiable and proportionate response entirely in keeping with our traditional values.

We must, of course, be aware of unintended consequences, of mission creep, as they say. From what the Prime Minister has said, no more is being contemplated than humanitarian aid and capacity building for crucial Iraqi institutions, including the army. The ACT Party can support these limited and proportionate measures. They signal a willingness by New Zealand to play our part.

The question that matters is whether this is a struggle that is warranted. From what we know so far, it is. Thus we support the limited moves announced today, the intention to seek broad political support for them, and to pursue due process in implementing them. Thank you.

David Seymour answers reader questions for the NBR

Yesterday ACT Leader David Seymour took part in an Ask Me Anything session with the National Business Review. He answered questions on a variety of subjects, including Landcorp, Auckland transport, Working For Families, ACC, dating, and more.

It was an excellent session, and can be read here: