Roger's world

Tyler pointed to an innovative agricultural sector as evidence of Roger's influence.

Here's Andrew Coyne's lauding of New Zealand's system of public administration, in contrast to Canada's.

Many of the worst political scandals of recent years, from sponsorships to the G8 mess, have stemmed in one way or another from ministers meddling in their departments’ affairs, whether to the benefit of their party, their constituents, their friends or themselves. That ministers will meddle may be thought of as a given. But ministers would be a lot less tempted to meddle if they did not actually have the power to do so: if they were removed from any role in the day-to-day management of departments, by means of a statutory separation of the two.

If that sounds like an unpardonable limit on the discretion of elected officials, recall that we already do this in many areas of government. It’s why the courts are insulated from political influence, at least after the judges have been appointed. It’s also why we set up Crown corporations, at arm’s length from their departments. So why don’t we apply the arm’s length model more broadly—making departments less the plaything of their ministers, and more organizations devoted to delivering the best service for the lowest cost?

I’m hardly the first to suggest this: in fact, I’m pretty much describing the system already in effect in New Zealand. As part of a program of reforms in the 1980s, New Zealand turned every government department into something resembling a Crown corporation. Deputy ministers became CEOs, hired on fixed five-year terms. Instead of simply issuing directives to his deputy minister, the responsible minister negotiates an annual contract with the department CEO, setting out broad policy objectives, together with benchmarks for measuring progress. Then the CEO is left to get on with the job, with broad powers to hire and fire and otherwise manage the department as he sees fit.

In effect, the minister becomes the purchaser of services on the public’s behalf, rather than the provider. He is still accountable for the mandate the department is given, and for seeing that it is met: indeed, since the terms of the contracts are public, the effect is to greatly clarify expectations and responsibilities. But he no longer has any role in how they’re delivered. So the minister of transport still sets the broad outlines of transport policy: he just doesn’t get to decide which roads go through whose ridings. Conscientious ministers ought to find this quite liberating. It frees them to focus on their proper role: setting policy for the country, rather than skulking around in their departments’ backrooms, deciding where to place gazebos and the like.

Roger Kerr

I'm very late in posting this. Where to start?

Roger Kerr died this weekend. I first met him a couple of years after coming to New Zealand. Gracious and gentle, and utterly without pretence, it was impossible on first meeting to tell just how much of the current New Zealand policy environment was due to his hard work in the 80s and beyond.

But Malcolm McKinnon tells the story. Internal Economics II was the group headed by Jas McKenzie to analyse "the constraints on economic growth, the examination of alternative strategies for improving New Zealand's economic performance, the development of policies to put the preferred strategy into effect, and the promotion of a re-examination of existing policies which appear to conflict with that strategy." Graham Scott succeeded McKenzie. Economics II set about laying the groundwork for the revolution, bringing insights from American economists like Ronald Coase and James Buchanan to New Zealand policy. And here's where Kerr entered:

While Economics II did shift the Treasury's stance on policies, its impact on process was equally significant, and here too the role of individuals was crucial. Among those most frequently mentioned is Roger Kerr. he had joined Treasury as a 32-year-old in 1976 after graduating in French [Canterbury!], working in Foreign Affairs, and subsequently gaining an economics degree - for Deane, he was 'the most outstanding economics student I ever had when I was teaching'. When Graham Scott was promoted to an Assistant Secretaryship in 1981, Kerr became director of Economics II.
...
Recalls one junior officer of Kerr,

His energy to involve himself in things across the spectrum of the department's work was enormous. And he created the culture of peer review - you were encouraged to critique other pieces of work from across the agency, very widely, encouraged to create ideas, support ginger group discussions, brainstorms, analysts writing papers - he modelled huge amounts of those sorts of behavioru, sending thoughts and pieces to Muldoon and ministers and other agencies 'for your information'. He'd be reading prodigiously.

McKinnon includes this Sunday Star cartoon from 1991.

Kerr's blog has been compiling a list of some of the elegies, including Richard Epstein and Tyler Cowen. I haven't a lot to add. I only met Roger a few times, but we corresponded by email more often. He was always very generous with his time, even writing a note of support for the economics department only a few short weeks ago to help us out a bit during the University's fiscal turmoil. I wish we'd known just how high the opportunity costs of his time then were.

Roger helped introduce me to the set of people to whom a young George Mason type ought be introduced when starting out in New Zealand. When I wound up in a minor stoush with former Prime Minister Sir Geoffrey Palmer on alcohol regulation, Roger helped to show me how to craft a proper OIA request and helped make sure that the right folks got a copy of the work I'd been doing. He surely had better things to be doing and bigger fish to fry, but he always had time to help out the new kid.

Thanks Roger. The place won't be the same. And all our best to Lady Catherine. 

Damn.

Update: Seamus adds:

I would draw readers’ attentions in particular to the obit from Richard Epstein, in particular confirming the viewpoint there that, in strict contrast to the caricatured public view of the Business Roundtable and, by extension, Roger, he lived his principles on an everyday basis, making sure that “this organization would not seek to find short-term advantages for its members at the expense of the public at large.”  

His excellent talk to Andrea’s class exemplified this. I think the students were surprised that right from the outset his talk was about “human flourishing”, not about productivity, catching up with Australia, or other narrow concepts. The powerpoint slides don’t do justice to the talk he gave around them, but the final two slides are probably an apt summary of his world view.

 Here are the slides from Roger's talk with Andrea's public finance class.

Tariff confusion

Simon Power last year promised to continue New Zealand's freeze on unilateral tariff reductions; National opposed Sir Roger's bill to zero rate all tariffs.

And here's just one of the ways in which we're all benefited by National's love for the tariff status quo.

A couple of months ago, Luke Nicholas, brewer of Epic's fine line of hoppy ales, dropped me a note asking what I knew about some new tariff on the glass bottles he was using. His imported bottles jumped in price substantially. So I checked into the working tariff document - nothing new there. I emailed a couple folks in Treasury, who checked with folks in Customs. Nope, nothing there. I was wondering whether Luke somehow got hit by the voluntary environmental glass levy that I'd heard something about. Luke thought it was some play intended to hit a distiller who'd secured a big lot of cheap imported bottles destined for the ready-to-drink market.

Roger Kerr finally figured it out for me after consulting with the Ministry of Economic Development. It turns out that the tariff had never changed but it had been temporarily abated. In 2007, New Zealand's sole manufacturer of glass containers had to do some furnace upgrades that weren't set to be completed until 2009. The company agreed to a temporary tariff concession for glass products of Tariff heading 70.10. The concession was extended until September 2010 when the bottling plant was back to full strength. With the domestic producer again up to full capacity, the tariff was put back in place.

Luke, who only started bottling a few years ago, didn't know he was operating under the temporary benevolence of MED. It's really his own fault for not reading the Gazette where such changes are duly notified. As far as the little guys are concerned, the regs might as well be posted in the basement of the local planning office in a locked filing cabinet in a disused lavatory behind a door saying "Beware of the tiger".

I suppose we should at least be thankful that there was tariff abatement during the interval in which the local manufacturer was unable to supply the market. The local manufacturer, as far as the small brewers of boutique beers are concerned, continues to be unable to supply the market unless you want large lots of the standard DB bottle. But hey, small and temporary mercies.

Glass tariffs in New Zealand protect one manufacturer at the expense of everybody in the country who uses glass. Perhaps every toast raised in the next year ought finish with a curse upon the glass tariff.

State versus Private Ownership

John Key's proposed running in 2011 on partial privatization of state owned assets.

The response from both sides has been pretty disappointing.

On the one side, besides the usual knee-jerk opposition to any kind of privatization and fearmongering about that foreigners might buy shares, there's the claim that we lose money by selling an asset that currently pays the government a dividend higher than the government's net borrowing costs. So if some SOE pays a 7% dividend to the government and the government's cost of borrowing is 5%, they reckon it makes more sense to keep the asset and to borrow money to cover shortfalls.

Forget SOEs for the moment. If any firm is providing a rate of return that seems to consistently be beating the market, we'd expect the stock price to rise until the rate of return falls into line with market norms, right? And if that doesn't happen, it's probably because there's something a bit nasty hiding in the risk profile. Now think about the SOEs. If they're earning a high return, it's either because their valuation is out of whack or because there's some risk. In the former case, the government can do well through an IPO - they'll get more for it than they thought it was worth. If instead it's just that the assets are risky, looking at the gap between funding costs and rate of return misses something a bit important.

Now, a reasonable counterargument is that the stock market rate of return is higher than the government's borrowing costs in general, so the asset price won't be bid up sufficiently to make the difference. But note two big problems. Sovereign debt from reasonable countries is safer than most stock market investments: the market index has to pay investors for the additional risk they take on. So selling a very safe asset (a bond) at a low interest rate while buying a riskier one (keeping an SOE) isn't a "Hey! Free Money!" deal. If it were, we'd also have proven that the government should borrow heavily on the international markets and buy up shares on the NZX. Most of us don't think that would work. So why do we think there's anything particularly special about the government's current set of asset holdings? If the argument for keeping Solid Energy in government hands is that the government's rate of return on coal investments is higher than its borrowing charges, then the government should also buy up any other firm providing a high enough expected return.

On the other side, folks largely overestimate the benefits of partial privatization. Sure, having shares trade on NZX is nice, but the government maintains a 51% share. There's no potential for an external shareholder to force changes in management if things are run inefficiently. We get some extra discipline from constant daily signals of what the market is saying about the firm's performance via the stock price, and if the share price plummeted, the Minister might want to have a chat with the CEO.

AntiDismal and Roger Kerr pointed out the limitations of partial privatization. Kerr worries that political incentives continue to be given too strong of weight in a partially privatized firm. Imagine for the moment that some town owned most of the local port company through a holdings company and that lots of retirees had put their money into this safe utility. At the margin, Council might prefer that money be paid as dividends to help keep local body rates down and to keep local retirees happy. Both make Council more likely to be re-elected. Problems stemming from deferred maintenance - those don't show up 'till somebody else is the mayor, and might be covered by insurance if there's a handy earthquake. Some folks arguing for partial privatization have pushed for restrictions on international share purchasing: the greater the requirements for local ownership, the more SOEs start looking like the stories about this hypothetical port and town.

I worry too that partial government ownership makes bailouts or other government support more likely. Socialisation of downside risk and privatisation of returns isn't a particularly good model, but incentives under partial privatisation lean that way at the margin.

Partial privatization seems unlikely to be worse than the status quo - it just seems insufficiently better to be worth the hassle. If Key's going to take flack for any use of the P-word, it would have been nice if he'd have gone just a bit farther with it. Here's a model I think could have worked well. Issue just over eight million shares in, say, Solid Energy. Just under half get sold via a float on the NZX. The rest are distributed, one each, to the just over four million New Zealanders. The SOEs get the benefits of full privatization. If "we" own the SOEs through the government, why not just hand us each a share and stop having the government as intermediary? The only plausible argument is that certain social goals are better advanced through state ownership than regulation. That's potentially plausible in regulation of natural monopolies, but we'd still need that the losses on the social side outweigh the usual benefits of private over state ownership. And while you could make that argument for the lines companies, you'd have a harder time doing it for a coal company

Andrei Shleifer noted the conditions under which we prefer state to private ownership. It makes little sense that we're privatizing our prisons before things like property valuation, red meat inspection services, or a coal mining company.

Malpass on New Zealand

Luke Malpass writes in The American that New Zealand's reforms of the 1980s were an aberration from Kiwi pragmatism and conservatism (of the "don't change things" sort). The speed of reforms fueled the push for proportional representation which has made it harder to enact any radical changes but made creeping growth of government more likely. Labour ramped spending up post 2005; National's done little to claw things back.

Government in New Zealand is ticking along in very much the same way it always has—as a managerial government. The only substantive difference between this government and previous ones is who manages government better, rather than what ideology it holds. Across the political spectrum, it is accepted that government should provide health, education, welfare, risk insurance, and economic development agencies. It should also own airlines, railways, banks, and telecommunications.

Despite all of this, there are positive signs in the May 2010 budget in the form of tax cuts and a freeze on most government spending, which point to an overall reduction in core government spending (not counting trading entities, or state-owned enterprises, which are supposed to be run like private, profit-making businesses and return dividends to the taxpayer) from around 35 percent to 29 percent of GDP over the next decade. A reduction such as this would be a massive boost for New Zealand’s moribund economy, and have a real effect of unshackling New Zealand from the creeping socialism of the last decade. A reduction would not only see much more of the economy returned to the discretion of those who created the wealth and who can spend it best, but also would signal a substantial reduction in the relative resources government can use to design frivolous and harmful new interventions in the economy. Whether this happens, we shall wait and see.

In the meantime, New Zealand continues in its holding pattern — happily drifting toward genteel poverty and a lifestyle that the rest of the world envies — even if it only exists in tourist brochures.

I'd quibble that Malpass is no longer right about there only being managerial differences between National and Labour. National hasn't changed, but Labour has been pushing harder to the populist left. But I'd expect that the last Labour Party conference happened subsequent to Luke's filing deadline for this piece.

HT: Roger Kerr.

Roger Kerr: Alcohol report fatally flawed

Kerr's comment in today's Otago Daily Times (not online as yet, as best I'm aware) is scathing:

A fundamental government requirement for policy decisions on regulation is a competent regulatory impact statement (RIS). The Treasury, now the lead agency on regulation, met the Law Commission on its review and outlined the Government's regulatory analysis requirements. The commission's July 2009 Issues Paper stated that an RIS would indeed be included in the final report.

We now find that the Law Commission and teh Minister of Justice have agreed that this report will not contain such a statement but one will be prepared by the Ministry of Justice for any Bill that the Minister of Justice introduces.

Lacking an RIS, the report fails to establish that its proposals are in the public interest.

Of course, if the RIS had been outsourced to Marsden Jacob, I'm not sure it much would have helped in establishing whether the proposals actually would have been in the public interest. As we saw in the case of the tobacco excise tax increase, even an RIS that Treasury describes as "not commensurate with the significance of the proposals" wouldn't much stop the government from implementing proposals.

ODT readers looking for my critique of the Marsden Jacob report, noted in Roger Kerr's piece, should look here and here.

Kerr makes a few other rather nice points:

• Raising the alcohol purchase age to 20 would align New Zealand with only 11 other countries; 81 others have a minimum of 18 while 12 others, including Belgium, Germany, Norway and Spain, set the age at 16. 17 countries have no drinking age at all.
• "the proposals to ultimately ban all alcohol advertising rely heavily on one anti-alcohol source, and omit its crucial finding that there is a lack of conclusive evidence from the studies of restrictions of alcohol advertising."
• Paraphrasing a great line from economist Edward Stringham, Kerr writes "Raising excise taxes on everyone to curb abuse by a minority would be like raising petrol tax to prevent some motorists from speeding." I love this analogy.

Unemployment pointer

Folks coming in from Roger Kerr's piece in the New Zealand Herald looking for the unemployment analysis should look here first, then hit the "minimum wage" tag for more.

Ninny state? [updated]

Last year, the healthists tried coining a new phrase: "ninny state". Noticing that folks were starting to push back against their various interventions into folks' personal lives, and that the term "nanny state" was on the rise, they figured the problem was in branding rather than in their meddling. And so they started saying those opposed to "nanny state" interventions were supporters of a "ninny state" and argued that their fellow travelers ought also make extensive use of the same term. Apparently they came up with this bold new strategy at a public health conference in Australia. Said healthist-extraordinaire George Thomson,

"There's a need to reframe public health activity as stewardship that protects people. We need to emphasise the advantages of the strong state, the state that protects," he told the conference. But the public health community, delving into alien territory, acknowledges it needs some help from the country's top advertising brains in coming up with catchy counter-phrases.

Yup, some clever ad-men to help them come up with ways of marketing the term ninny-state, that's just the ticket.

And so I found it pretty damned funny when Doug Sellman opened his latest salvo against Roger Kerr in today's Christchurch Press by calling Kerr a proponent of the ninny state, then went on to whine about alcohol industry advertising campaigns. So it's ok for Sellman's bunch to look for ad-men to help them with their propaganda, in addition to the millions spent already by governments on public health campaigns demonizing alcohol, but it's not ok for the alcohol industry to advertise their products? Interesting.

They really do need some better branding though. The term "ninny state" does not Google very well at all. The first hits I get on it suggest the term is far more used to describe the implementation of nanny state policies by ninnies, or when the objects of nanny state attention so internalize the preaching that they start advocating it themselves (ninnies then being the micro to the nannies' macro); articles going back to 2005 have it as an alternative description of paternalistic government policies.

It's doubly funny when Sellman implies civilization itself is at stake when "ninnies" advocate rolling back his preferred regulations:

These democratically agreed restrictions and controls are what many of us refer to as "civilisation", the result of 200 years of social development in Western democracies.

Recall, of course, that very good argument can be made that the brewing of alcohol helped give rise to "civilization" thousands of years ago. Personally, I'd put modern civilization as going back a bit farther than two hundred years in the West and I'd note the rather decent contributions made in the mid-East a thousand years ago (and also a couple thousand years prior to that) and in China going even farther back, but that's a bit beside the point; Eurocentrism is the least of Sellman's problems.

Sellman says that Kerr's argument consists of naught but cobbled-together assertions about alcohol that ignore his preferred "facts" about alcohol. Of course, Sellman isn't exactly above ignoring facts he finds inconvenient. He says Kerr ignores that there are 700,000 "heavy drinkers" in New Zealand. Well, there's good reason to ignore that number: it's pure nonsense. Utter rubbish. The only way to get that number is by counting up any woman whose consumption totals more than 20 grams of alcohol per day on average and any man whose consumption exceeds 40 grams. That's less than 2 pints of standard 5% beer for a bloke, and less than a pint for a lady. Complete nonsense. The only measure on which it can start making sense is if health is the only thing that anyone anywhere values. The very best existing evidence suggests that mortality risk is minimized for men somewhere around one standard drink per day and for women somewhere around half that, but moderate drinkers start facing increased health risk, relative to teetotalers, at around 25 grams per day for women and just over 40 grams per day for men. So Sellman's "heavy drinkers" are folks who have just barely started drinking at levels where they see increased risk relative to non-drinkers.

But let's stick with Sellman here and have health as the only permissible goal. The very best evidence suggests that overall mortality risk is minimized at consumption of a bit over half a standard drink per day (average for men and women), and yes these numbers have never-drinkers separated from former drinkers as reference group. Relative to these very moderate drinkers, teetotalers have about a 16% increased risk of death. Should we be forcing non-drinkers to take their daily dose and whinge endlessly about the risks of under-drinking? If not, then the 16% increased risk isn't worth worrying about, right? If it's only risks over 16% that are worth worrying about, mortality risk (relative to teetotalers) is only 16% higher for folks drinking just under 60 grams per day (eyeballing from the graph): the cutoff for "high risk" drinking for men. So why count men drinking more than 40 grams, Doug? Is it so you can get a bigger number? You should be careful: when the numbers get too big, folks start being a bit skeptical. And 700,000 heavy drinkers in a country of just over 4 million people is obviously nonsense. Most folks will run a mental tally of their friends, counting up the ones that would fit a common-sense notion of heavy drinking, and find 700,000 utterly implausible.

Further howlers:

Contra-Sellman, New Zealand society is hardly "organized in such a way as to maximise heavy drinking and therefore alcohol profit." We have fairly high alcohol taxes in place already - taxes high enough to counterbalance any plausible external costs imposed by alcohol abusers; anti-alcohol public service announcements aren't exactly scarce; the police can lock folks up for being drunk and disorderly; you can't buy spirits at the supermarket; bartenders can be in legal trouble if they continue to serve obviously heavily drunk patrons.... We may not have your preferred set of heavy regulations, but things are hardly set up to maximize heavy drinking. It's hard to imagine the mindset that reckons the current slate of fairly restrictive alcohol regulations is the result of the government being entirely in the pocket of the alcohol lobby.

But the most irritating bit is Sellman's concluding comment:

Which state - "ninny" or "nanny" - is likely to encourage individual responsibility? The answer is neither. Highly restrictive "nanny state" families are prone to producing emotionally stunted children with no initiative, but laissez-fair "ninny state" families with no clear rules or regulations often produce out-of-control children. The answer, of course, lies in the middle ground.

For Sellman, the state is parent, trying to bring up its citizen-children with just the right amount of freedom, with himself providing sage advice about where that sweet spot lies. What a ninny.

Update: Doug Sellman responds in comments, below.