STRAIGHT AND TRUE

JOSIE PAGANI

Turmoil in Global Politics

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United States President Donald Trump looks unlikely to be re-elected on the first Tuesday in November - but he was unlikely to win four years ago as well.

History won't repeat, and so a Joe Biden presidency looks likely.

The US President can do the maths as well.

Having spent his entire presidency putting his own interests ahead of his country, and knowing that, in a crisis, voters tend to rally around the flag and move towards the presidency, there's a chance he could provoke an "October surprise" international crisis.

That's not a prediction, but a fear. Russia wants Trump to be re-elected, and possibly so does Chinese President Xi Jinping. A confrontation doesn't feel far-fetched.

Count in India's Prime Minister Nahendra Modi, like Trump and Xi, an authoritarian nationalist, and it's been a long time since so many illiberal, race-baiters have run the most powerful countries at once.

And that's leaving aside the bovver boys in second tier powers like Turkey, Hungary, Poland and, shamefully, the United Kingdom, where the stench of incompetence is worse than the xenophobia.

Global politics are more fraught now than for ages.

If we don't see a crisis develop in the first days in office for the government we elect on September 19, what odds would we get for a crisis-free three years?

If Biden wins in the US, things don't instantly get better.

The stand-off with China will not resolve.

Democrats are under pressure from unions, and those Midwestern working-class voters that Hillary Clinton lost, to tariff China and to plan an America First post-virus recovery.

The US is unlikely to restore the international architecture Trump has torn apart. I expect to see more protectionism, and weaker global institutions. None of this is good for a trading country like New Zealand.

Isolationism has been worse for vulnerable populations.

As Scottish Labour politician Jim Murphy told me on a podcast interview, there has never been a crisis in our lifetime in which the poor have emerged better off. The global poor will almost certainly be the biggest victims of the pandemic too.

We're rapidly losing 30 years' progress dealing to extreme poverty. Famines are set to double. Up to 12,000 people could die from hunger every day globally because of lockdowns – 2000 more than died from Covid each day in April.

The Pacific is facing a dire future. Tourism is 70 per cent of GDP in some islands. That's gone and so have the jobs.

New Zealand is remote - and therefore Covid-free - but not isolated from global instability.

If the US provokes a confrontation in the South China Sea, would we have to choose between the US and China? Forced to choose sides between our largest trading partner, China, and Five Eyes partners, do any of us know which sides our major parties would take?

Pandemic responses are already complicating our international relationships. Our young are coming home from the world as visas expire, with chances for visa extensions a low priority for governments everywhere fighting sharp unemployment.

Our Government is keeping in place a ban on students here to study from countries like China, Taiwan, South Korea and Singapore, where the virus is under control and students can be tested before entry.

That is a huge lost opportunity to capitalise on our island isolation, and causes long running relationship damage. We're about to destroy a $5 billion industry that probably won't recover. Why not quarantine students in student hostels?

The relationship with China is going to get harder anyway. We can't stay on the sidelines over China's treatment of Uighurs for long. The state-sized camp China has created is fast becoming the world's gravest humanitarian scandal.

Our Government has ended our extradition treaty with Hong Kong, which was the right thing to do. China's breach of the Hong Kong agreement debases its reputation, and the injury is made worse by China's furious response that Hong Kong is an "internal matter". It isn't.

China made an agreement with the UK to leave the former colony intact. Since China now can't be trusted to respect an international agreement that is less than a quarter of a century old, how can it be trusted to honour its solemn commitments to us in our trade pact?

We now trade with China only on its terms.

Xi's nationalist authoritarian behaviour has probably over-reached, but we need to have a conversation about when the cost will be too high. The point is closer than we want to admit.

We are confronting unprecedented foreign policy challenges. We need to talk about them.
United States President Donald Trump looks unlikely to be re-elected on the first Tuesday in November - but he was unlikely to win four years ago as well.

History won't repeat, and so a Joe Biden presidency looks likely.

The US President can do the maths as well.

Having spent his entire presidency putting his own interests ahead of his country, and knowing that, in a crisis, voters tend to rally around the flag and move towards the presidency, there's a chance he could provoke an "October surprise" international crisis.

That's not a prediction, but a fear. Russia wants Trump to be re-elected, and possibly so does Chinese President Xi Jinping. A confrontation doesn't feel far-fetched.

Count in India's Prime Minister Nahendra Modi, like Trump and Xi, an authoritarian nationalist, and it's been a long time since so many illiberal, race-baiters have run the most powerful countries at once.

And that's leaving aside the bovver boys in second tier powers like Turkey, Hungary, Poland and, shamefully, the United Kingdom, where the stench of incompetence is worse than the xenophobia.

Global politics are more fraught now than for ages.

If we don't see a crisis develop in the first days in office for the government we elect on September 19, what odds would we get for a crisis-free three years?

If Biden wins in the US, things don't instantly get better.

The stand-off with China will not resolve.

Democrats are under pressure from unions, and those Midwestern working-class voters that Hillary Clinton lost, to tariff China and to plan an America First post-virus recovery.

The US is unlikely to restore the international architecture Trump has torn apart. I expect to see more protectionism, and weaker global institutions. None of this is good for a trading country like New Zealand.

Isolationism has been worse for vulnerable populations.

As Scottish Labour politician Jim Murphy told me on a podcast interview, there has never been a crisis in our lifetime in which the poor have emerged better off. The global poor will almost certainly be the biggest victims of the pandemic too.

We're rapidly losing 30 years' progress dealing to extreme poverty. Famines are set to double. Up to 12,000 people could die from hunger every day globally because of lockdowns – 2000 more than died from Covid each day in April.

The Pacific is facing a dire future. Tourism is 70 per cent of GDP in some islands. That's gone and so have the jobs.

New Zealand is remote - and therefore Covid-free - but not isolated from global instability.

If the US provokes a confrontation in the South China Sea, would we have to choose between the US and China? Forced to choose sides between our largest trading partner, China, and Five Eyes partners, do any of us know which sides our major parties would take?

Pandemic responses are already complicating our international relationships. Our young are coming home from the world as visas expire, with chances for visa extensions a low priority for governments everywhere fighting sharp unemployment.

Our Government is keeping in place a ban on students here to study from countries like China, Taiwan, South Korea and Singapore, where the virus is under control and students can be tested before entry.

That is a huge lost opportunity to capitalise on our island isolation, and causes long running relationship damage. We're about to destroy a $5 billion industry that probably won't recover. Why not quarantine students in student hostels?

The relationship with China is going to get harder anyway. We can't stay on the sidelines over China's treatment of Uighurs for long. The state-sized camp China has created is fast becoming the world's gravest humanitarian scandal.

Our Government has ended our extradition treaty with Hong Kong, which was the right thing to do. China's breach of the Hong Kong agreement debases its reputation, and the injury is made worse by China's furious response that Hong Kong is an "internal matter". It isn't.

China made an agreement with the UK to leave the former colony intact. Since China now can't be trusted to respect an international agreement that is less than a quarter of a century old, how can it be trusted to honour its solemn commitments to us in our trade pact?

We now trade with China only on its terms.

Xi's nationalist authoritarian behaviour has probably over-reached, but we need to have a conversation about when the cost will be too high. The point is closer than we want to admit.

We are confronting unprecedented foreign policy challenges. We need to talk about them.

This column first appeared in the New Zealand Herald.

Acknowledge lockdown decisions were political

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The people who paid the biggest price for lockdown haven't been consulted on the trade-offs.


I was surprised at how easily we agreed to stay home, be arrested if we didn't, and trust the experts.

We went into eight weeks of lockdown with the willingness of the terrified, believing if we inadvertently walked into a butchers instead of a supermarket we could die.

Daily speeches on kindness, rules and the Easter Bunny were celebrated across the world. We were so freaked out by that black line on the graph inching upwards towards Italy's infection rate we would have self-isolated in our toilets for a year until the Easter Bunny told us to come out.

Strict lockdown may have been the right thing to do. I don't know. Because, turns out, neither do the scientists. They don't really know if masks are safe; if lockdowns work; if you can get infected twice; or even if washing hands stops the virus spreading (but wash your hands – it's a good idea anyway).

We were sold a "Sophie's choice". It was either your health or the economy (health wins every time when you put it like that). Each day there was a new choice to be made as the risks went up and down. Why weren't we invited to help make those calls?

Instead, we were asked to trust only the experts - not scientists, because they couldn't agree – but public sector experts. They may have been right, but they were making decisions based on assumptions. And that's something we're all qualified to make.

These were always political decisions – not party political, but decisions based on values rather than science. In level 1, the values of those making the decisions have become apparent.

We were told supermarkets are okay, but greengrocers and butchers are not; groups of 10 – actually 100 - are okay, but no more. Unless you're demonstrating against something we agree with. Then 2000 people cheek by jowl, walking down the street is okay. Illicit roadblocks are allowed, but you can't visit your dying mother. Jenny Craig diets are an essential service, but not aid charities raising funds to help refugees deal with Covid.

Which businesses stayed open, which closed. Who's in your bubble who's not. And how long we stayed locked down. We went along with these rules even when they felt arbitrary.

These were not decisions that should have been left to public health experts alone because what do they know about the risks we're prepared to take?

That's why the constant reminder to "be kind" jarred. Not to downplay kindness. It's an uncontroversial quality that we can agree makes everyone better off.

But imagine you've been made redundant. You're driving home, worried how you're going to pay the mortgage, or find another job when no one is hiring. You feel irrelevant in the "new normal". Then you see a neon motorway sign flashing "be kind". Nothing that is happening to you feels kind.

Meanwhile the "experts" in the public sector are more in demand than ever. They don't doubt their worthiness. It's easy to be kind when your job is guaranteed.

The people who paid the biggest price for lockdown haven't been consulted on the trade-offs. They deserve political representation too.

Instead, politics has divided too neatly; left on the side of health, right on the economy. The left champions kindness and sees the state as the answer. The right believes in responsibility and the market.

What gets missed is community.

None of this is new. Parties of the left across the world had become dominated by urban, university-educated liberals who joined the Labour party to make someone else's life better.

I'm proud to have a degree, but when nearly everyone in the Labour party has one too, how can it truly represent the people? Only 26 per cent of New Zealanders have a tertiary qualification.

What Covid has revealed, in New Zealand and the riot-torn streets of the US, is that class still matters in politics, especially if there's no one representing you when the big decisions are made. Acknowledge lockdown decisions have been political. Very few have been based on science. All are based on values. Therefore more people should have their values represented at the table - those whose lives and jobs have been thrown into chaos by this virus, as well as those whose health is at risk. That's how you build a legacy of kindness that endures beyond Covid-19.

Trump and Brexit didn't happen because people are ignorant, but because people think they are being told they are ignorant. And elites, even when they talk kindness, are always undemocratic.

What I want to see in the 2020 Budget

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All political decision-making is about choices between competing priorities. Who should benefit? Who should pay? Which services should be collectively funded and provided, and which privately?

Therefore, when the budget is announced I will not be overly occupied with the deficit or the debt track.

We are entering a second phase where choices lurk: Should the government spend to help stabilise business so that the recovery will trickle down to everyday families in jobs, or should cash go straight to families in the belief that spending will trickle up to businesses as we storm back to cafes, furniture stores and garden centres?

A 'bit of both' you say? Well you can do that too, but every dollar you spend on one end of the seesaw is one you don't spend on the other. Politics is about choices.

Therefore I would like to see two main pillars to the recovery: First, send money directly to the poorest and to working families. Trust us to spend it right. Second, pour money straight into projects that can get going immediately - within a month.

A massive conservation program could create tens of thousands of jobs for suddenly-jobless tourism, hospitality and retail staff. The government could pay local councils in every corner of the country to clear weeds and pests, build paths - they could get started in a matter of weeks and no one needs to leave town.

In the past, I have strongly supported infrastructure spending as both stimulus and nation-building. But planning and consenting delays mean capital intensive projects can't start fast enough. Speed to employ and pay wages should be the top priority.

House-building is the best stimulus. It can be started fast, employs more people than just about anything, and the outcome is, well, housing. Yes, Kiwibuild didn't work, but it was devised by people who thought the problem was people with Chinese-sounding names buying homes in Auckland.

What Kiwibuild should have been was a massive state house building program. We need one now. Housing developed and owned by local councils can be funded by central government at exceptionally low interest rates. Experienced non-government agencies, like Salvation Army and iwi authorities, can be quality partners as well. Provide the capital and get them to locate them, build them, house people.

To do that, the government will have to legislate for special development zones. In Wellington, for example, there are large tracts of land (one estimate is more than 40% of the city's area, not counting reserves). Along with spaces in Porirua and the Hutt, large urban redevelopment projects could be started within a couple of months, mixing housing, commercial, retail and education spaces like Canary Wharf in London and Barangaroo in Sydney.

I am less enthusiastic about using more public money for bailouts. Risk is part of business. Wage subsidies were right for the short term issue where businesses were torpedoed by government policy decisions - that was crucial. Rent subsidies are awkward because, if you own a retail business you are much more affected than if your business is owning property. A better outcome is to legislate rent reductions in proportion to declines in turnover and keep the taxpayer out of it. A restaurant that had to close would share the pain with the landlord.

But politics is choice, and mostly what businesses need are customers, not hand outs. This is why a rapid stimulus cheque for everyday households is my top priority.

It could be partly delivered through the winter electricity subsidy, which provides cash directly with fair-ish targeting, without distorting markets.

People without much money spend more of any stimulus. Researchers have studied how households in the US spent their $1200 stimulus cheques. Individuals with less than $500 in their bank accounts spent almost half of their stimulus payment within ten days—44.5 cents per dollar received—while individuals with over $3000 in their accounts did not respond to the stimulus. The authors conclude that stimulus measures are most effective when targeted to households with 'low levels of liquidity.'

Finally, we need the budget to give an indication of the long term pathway to pay for it all.

There will need to be substantial changes to deal with debt. A tax system that is heavily skewed to personal income and consumption is already placing too much burden on working people.

We are going to have to move quickly to shift a significant part of the tax base from everyday incomes to capital. Not just capital gains, which simply treats one class of income the same as any other income, but capital itself. Especially where capital is locked up in land values.

We can use depreciation rules to deal with business needs for capital equipment like tractors and machinery. The real gap in the tax system is the treatment of land and share values. As they over-inflate, wage earners have to pay an ever greater share of tax.

Capital values will accelerate fast as the economy recovers. The budget this week needs to signal that some of that value will be captured in tax, just as wages are.

The budget is about choices, and this one more than ever needs to be a budget that stimulates the economy by helping everyday families.

MINIMUM WAGE


Critics of a higher minimum wage want to tax you more.


When the government this week increased the minimum wage by 50 cents an hour, to $15.25, it claimed it would increase wages for 152,700 low-paid workers.

Critics said the increase would cost jobs.

But the research shows that raising the minimum wage to modest levels doesn’t necessarily increase unemployment — and might even reduce it.

The pioneering academic study of the minimum wage was published by economists David Card and Alan Krueger in 1993.

Prior to their research, economists had always struggled to isolate the effects of a minimum wage increase from other economic conditions. For example, minimum wages are often raised in economies that are booming.

In the 2000s, the Labour government increased the minimum wage every year, while unemployment fell to record lows.

But most of the time you can’t just fence off one part of the economy and study it in isolation. The study by Card and Krueger was a breakthrough because they were able to analyse the effects of increasing the minimum wage in nearly ideal conditions.

In 1992, New Jersey increased the minimum wage in the fast food industry from $4.25 to $5.05 an hour. Neighbouring Pennsylvania kept it unchanged. Classical supply and demand theory said that if the price of something went up, then demand would surely fall, so it would have predicted that the New Jersey minimum wage increase would have meant the state lost jobs compared to Pennsylvania. The opposite happened. Card and Krueger found New Jersey’s fast-food restaurants actually increased jobs by 13 percent compared to like businesses in the other state.

The fallacy in predicting the minimum wage is to consider a single business in isolation. It’s true that a cafe might hesitate to take another worker when the hourly rate increases. Down the road a widget-maker might replace a job with a machine.

But across the economy the introduction of those machines, and the skills to operate them, lifts overall productivity. Some minimum wage jobs get replaced by higher-skilled, higher-earning workers — who in turn have more disposable income to buy a flat white at the cafe.

People often believe that the government can’t increase wages just with the stroke of a pen — that if it tries, there is a trade off between wages and jobs. But the evidence is that a higher minimum wage doesn’t just help people who earn the least. It increases wages across the whole economy and possibly even creates jobs.

Up to a point.

There is obviously a level at which the increases become uneconomic, and there is still uncertainty about where that line sits. But we do now that the lower the minimum wage is set below the amount you need to live on, the more taxes have to rise on middle and high earners.

Here’s why: If a person earns $15.25 an hour and has a family, they will likely receive a taxpayer income top up.

Although John Key once called Working For Families ‘communism by stealth’, these days there is a broad political consensus around it. No one serious disputes that people should get a helping hand if they go out to work but don’t earn enough to support their families. People should have enough income to live on.

The lower the minimum wage, and the more people earning the minimum wage, the more taxpayers will have to spend to top up wages through Working For Families.

Therefore, everyone who opposes increasing the minimum wage to levels high enough to live on is really calling for higher taxes on everyone else. The money to top up low wages has to come from somewhere.

This is not ideology, as Barack Obama would say. It’s maths: Lower wages result in higher wage subsidies to reach the minimum income families need.

Higher minimum wages are not just good for the people who receive them, they’re good for everyone. They help to increase wages across the board by driving more skills and investment into the economy and raising productivity, which raises wages for all of us.

It’s not good enough that there were 153,000 hard working New Zealanders who were earning less than $15.25 an hour before the latest increase was announced.

If you want to cut taxes, or you want the government to spend more on services like schools and hospitals, then the top priority has to be lifting wages.

This column was first published in the New Zealand Herald.

TRADE

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A post about TPP to make everyone think again


This blog post is one of the most interesting analyses of the flaws in arguments offered by economists on both the pro- and anti-TPP sides of the debate.

Too often the pro faction can see no evil, and the anti faction can see no good. Harvard professor Dani Rodrik is an economist who accepts reasonable people can fall on either side of the agreement, and weighs the evidence on either side. One deeply concerning observation in his post:

In regions with industries hit hard by competition from Chinese imports, wages have remained depressed and unemployment levels elevated for more than a decade. Falling employment in such industries was expected; the surprise was the absence of offsetting employment gains in other industries. Advocates of trade agreements have long maintained that deindustrialization and the loss of low-skill jobs in advanced economies have little to do with international trade; they are the product of new technologies. In the current TPP debate, many prominent proponents still cling to this line. In light of the new empirical findings, such nonchalance toward trade has become untenable.


This is an argument against not just TPP, but liberalisation generally. I was growing up in the UK in the 1980s when Thatcher’s liberalisation was closing the mines. The Coal not Dole campaign failed. We were right to fight for those communities but picked the wrong battle. We were trying to protect the job, not the worker. The Tory Government had no interest in rolling out incentives for new industries to open up in the old coal mining villages.

But two crucial differences apply for New Zealand.

Wage depression and job losses occur in protected industries when liberalisation first occurs. For New Zealand this phase was in the 1980s and virtually completed by the late 1990s. There is ample evidence of regions in New Zealand that lost wages and jobs for a decade as predicted when protection was removed.

Today, those losses have already been incurred. That’s why we didn’t see a repeat devastating round of fresh job losses and wage cuts after the China FTA was signed. The TPP won’t — and can’t — have the same effect as the earlier impact because protections in New Zealand have already been eliminated.

Second, the outcome analysed is modelled on a counter-factual where no TPP exists. But that is misleading. The real alternative is a trade bloc across the Pacific, that includes Japan, the US, Australia, Canada — but excludes New Zealand.


INEQUALITY


Does inequality slow everyone down?


Has a trial on London Underground escalators uncovered a mathematical formula to reduce inequality? They discovered that organising the transport system around a few who want to go further and faster than everyone else holds back the many.

The protocol on the London Underground has always been to stand on the right of an escalator so people in a hurry can walk past you on the left and get to the top quicker.

This works OK on short escalators. But on long, steep escalators the results are surprising. Fewer people are inclined to walk up long ones, so the benefits of getting some to the top faster diminishes.

Researchers asked commuters at Holborn station to stand two abreast, and not walk up. They chose Holborn because it has one of the steepest escalators. At a vertical height of 24 meters, only 40 per cent of commuters would even contemplate walking to the top.

The results seem counter-intuitive: Standing still on the escalator was faster and more productive.

Operating the system for the few who wanted to run up had halved the capacity of escalators and created crowding at the bottom. Everyone but the few running up the outside went slower. Add to that the effect researchers called ‘the human ellipse’, where we don’t like standing adjacent to someone on the same stair, and we prefer a stair between us — above and below. The ‘stand aside’ system was grossly inefficient.

An escalator that carried 12,745 customers between 8.30 and 9.30am in a normal week, for example, carried 16,220 when it was designated standing only. Getting people to stand on both sides meant 31 more passengers get on to the escalator every minute — an increase of 28%. At a vertical height of 24 meters, and walking on the left, the present system accommodates 81.25 people per minute. With both sides standing still, the escalator could carry 112.5 people each minute.

Everybody moves faster when the system is more equal.

But not everyone welcomed losing the choice to walk. “Can’t you let us walk if we want to?” asked another. “This isn’t Russia” “This is a charter for the lame and lazy!” said another. The pilot was “terrible”, “loopy,” “crap”, “ridiculous”, and a “very bad idea”. One man pushed a child to one side to get to the top faster.

My maths are not up to it, but can someone derive the algorithm from these figures, then apply it to inequality?

Assume vertical height is the accumulation of wealth, and for these purposes let the person standing still on the escalator represent the share of increasing GDP of working people. The few who run to the top are individuals who accumulate wealth fastest; making them increase their ‘vertical height’ at the same rate as others would be the equivalent of an redistributive tax on their wealth or income.

Using a model built from these assumptions, what could we say about the benefits for overall productivity in the economy of a more equal economy?

I think the analogy works: Most people can’t avoid the long queues caused by congestion on the escalators, just as most working people, by definition, can’t be the few who rush past to make it to the top. There is an effect on overall wealth production from some people taking a greater share than others. If you can calculate the size of the growth effect, and compare it to the incentive effects of working harder, you can probably derive the ideal tax ‘wedge’ — the optimal level of taxation in the economy.

5 February 2016. First published on Medium.

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