Children’s development accounts and our equity and productivity challenges

Underdeveloped human capital and low domestic savings rates explain much of New Zealand’s child poverty and its stagnating economy-wide productivity.

Lifting New Zealand’s productivity is the major determinant of future per capita incomes. Productivity growth depends on higher savings rates and capital formation, combining with more advanced human capital.

Children’s Development Accounts (CDAs) can lift human capital at the individual level.  If a CDA system achieves sufficient scale it can help lift economy-wide savings rates in productivity-enhancing ways.

What are CDAs?

CDAs are individualised savings accounts that support such purposes as education, and investment in business and other assets.  They are accounts that can start at birth and grow in value over time.  They are drawn on later in life, typically from around age 18.

Governments typically kick-start CDAs with an initial deposit, and may continue with ongoing contributions.  Children and family members also make deposits, as can iwi, churches and other NGOs.

CDAs have affinities with asset-based welfare (see Sherraden, 1991; Bynner & Paxton, 2001; Zhan &  Sherraden, 2011).  However, asset-based welfare approaches have often focused on redistributing assets such as housing.  CDAs go further and shift social expenditure that is currently for consumption into active wealth-creating capabilities.

For example, CDAs formed part of Singapore’s strategy to gear social policy to support economic development.  Singapore avoided welfare dependency through investing in individual and family education, financial assets and in home ownership rather than subsidising consumption.

Singapore used asset-based policies within a wider cradle to the grave framework.  This included baby bonuses, child savings accounts supporting school age education and health, post-secondary savings schemes, with funds later in life being transferred to adults’ Central Provident Fund accounts.

Singapore’s policies were supported by a culture of high savings, strong families and individual aspiration.

This meant people avoided poverty through their own efforts being supported by government, and without developing a culture of passive dependency.  Government therefore aligned its social policy to its economic development strategy.

Some US states have used CDAs to encourage a savings culture among deprived children, with a special focus on saving for education.  The UK, Canada, South Korea, Hong Kong and other jurisdictions have also used CDA-type mechanisms for similar purposes.

What problems do CDAs address?

CDAs address several inter-related problems:

CDAs enhance social mobility

Many New Zealand children reach adulthood with little or no savings.  They often have limited aspirations relating to future tertiary education, business opportunities or home ownership.

Evolutionary psychology argues that early life experiences shape psychology and different life strategies.  These range from risk-taking “fast life” through to “slow life” strategies (Del Giudice, 2018).

CDAs support a future-oriented slow life strategy.  The implicit assumptions are to stay at school, avoid trouble, get a good degree, become a home or business owner, and don’t have children until you can afford them.

Child poverty and how to address it is a divisive issue.  Some advocate higher family benefits, while others resent paying taxes to subsidise parents they see as irresponsible.  However, almost everyone agrees that children should get a good start in life and have equitable opportunities.

Child poverty is cultural as well as financial.  Its mindsets are mediated through families and transmitted through the generations.  These mindsets persist through both cuts in family benefits and generous increases in them.  Improving child and family wellbeing requires changed mindsets, starting with children themselves.

CDAs transfer resources to children, not to their parents. That is, they do not subsidise today’s family support.  Instead, they build financial assets for children to draw on when they are young adults.   This shapes children’s thinking towards the future. Their own future children are then born into more stable, secure and better educated households.

CDAs can complement benefits that address today’s household poverty.  They can also substitute for them.  For example, Working for Families (WFF) transfers could be invested in children’s future capabilities, equity ownership and net worth without parental intermediation.

Some NGOs such as churches and iwi have substantial resources and need a mechanism to support contributions to those they care about.  Lobby groups that advocate increased taxpayer-funded benefits for low income families are sometimes criticized for cost-free virtue-signalling.  Such groups can be challenged to make tangible financial contributions to CDAs.

 

There is strong international evidence on CDAs’ effectiveness (Elliott & Sherraden, 2013; Butrica, 2015).  Sherraden et al (2016) show that CDAs positively affect ownership of university savings accounts and assets.  They build educational expectations and other well-being indicators (Kim et al, 2015).  Disadvantaged children especially benefit from CDAs.

Children with savings accounts have better attitudes to school and higher educational achievement.  This includes better reading and maths scores (Elliott et al, 2010).  CDAs can influence educational plans for the future from as early as primary school. Even small savings tagged for education dramatically lift university enrolments and completions (Elliott et al, 2013).

CDAs have positive effects on children’s socio-emotional development, with the effects greatest for children from low income families and with less educated mothers (Huang et al, 2014a).  CDAs mean fewer behavioural problems, better academic understanding, higher motivation to study, lower school dropout rates, and better social functioning (Ko Ling Chan et al, 2018).

CDAs help build net worth that gives people more autonomy and choices in life.  Benefits from net worth include imputed rents, bargaining leverage over service providers, and collateral for business investment.  Net worth can be transferred to the next generation.

 

CDAs target a child’s psychology, however this radiates out more widely.  Children’s savings accounts lift parental expectations that children will go to university (Kim et al, 2017; Rauscher et al, 2017).  In Singapore, CDAs have enhanced parental views on the importance of children’s education, and fostered more positive attitudes toward saving (Chang-Keun & Chia, 2012). Huang et al (2014b) found that CDAs can also improve parental mental health.

 

CDAs can lift economy-wide productivity

New Zealand’s low domestic savings rates mean a high real interest rate, and a real exchange rate that weakens our tradeable sector.  Too little capital is applied to labour, and labour productivity languishes.  The tradeable sector is weakened, yet it is tradeable sector productivity that drives per capita income.

Higher savings rates can lift economy-wide productivity.  This depends on the scale and composition of capital formation, the industry structure it can be applied to, and other factors such as migration and tax policy.

Together with other schemes such as Kiwisaver and the NZSF, CDAs can lift domestic savings and economy-wide productivity if they achieve sufficient coverage, scale and funds accumulation.

Arguably, Working for Families (WFF) subsidizes low wage work and a low skill, high employment labour market model.  A thought experiment is to envisage channelling some or all of WFF into CDAs.  This would gear social policy to economic development objectives. It would divert consumption subsidies into human, physical and financial capital formation.

The effects on short-term net parental incomes would initially be negative.  However, upwards pressure on wage rates would encourage businesses to invest more in labour-augmenting technology, lifting labour productivity.  This would in time translate into higher working incomes.  The longer-term outcomes both for children from low income backgrounds and for economy-wide productivity could be transformative.

CDAs can contribute to macro-economic stability and international competitiveness

In 2014 David Parker advocated a Variable Savings Rate (VSR) mechanism through which macroeconomic stability and a more competitive exchange rate could be achieved through differential Kiwisaver contributions.

When the economy overheats the Reserve Bank lifts the OCR to increase interest rates and reduce inflationary pressures.   The OCR is then reduced to counter recessions.  The proposal was to use the VSR mechanism to lift or reduce Kiwisaver contributions rather than use OCR mechanisms.

The VSR proposal was visionary, but hard to implement.  Kiwisaver is not universal.  It was initiated as a retirement savings scheme, with options added allowing funds to be drawn on for home ownership and hardship reasons.  Using Kiwisaver for yet another purpose risked further policy drift from its core retirement savings intent.

A universal CDA system could offer an alternative to the OCR mechanism through a variant of the VSR proposal.  When inflationary pressures are rising the government could sequester surplus revenues into CDAs.  This would help avoid higher real interest rates from a higher OCR.  It would also help reduce short-term political pressures to spend surpluses in low value ways.

How should CDAs be designed?

Key CDA design features are:

Universality and progressivity

CDA policies should be universal and progressive (see Cramer & Newville, 2009).  Universality means CDAs would be automatically created for every child from birth.  Voluntary CDAs that require “opting in” result in lower uptake among disadvantaged families, defeating the policy purpose.

All children should have a CDA.  This includes children from wealthy backgrounds. These children deserve respect, rather than being dismissed as “privileged”.  Universality will bolster long-term support for CDAs.

Government contributions could be weighted to children from deprived backgrounds.   Over the lifecycle, this counters Kiwisaver accumulations favouring the higher paid and the regressive effects of NZS (see Jeram, 2018).

Wide funnel for contributions, and a narrow funnel for draw downs

CDAs should have a wide funnel through which contributions can be made, and a narrow funnel through which funds can be drawn on.

It should be easy to put money into CDAs.  Contributions from all sources must be made in the confidence that they will be invested in children’s interests and not be diverted to “other purposes”.

The accounts must only be drawn on after around the age of 18 and for specified purposes. These would be tertiary education, equity investment, business start-ups and any other such investments that expand productive capability and enhance net worth.

Contributions to CDAs might be specifically identified to make visible what government, family members and NGOs contribute.  However, contributions should not be tagged rigidly for specific purposes such as study at a particular university.

One question is whether CDAs could be drawn on from age 18 to contribute to home ownership.   Doing so might see CDAs duplicate rather than complement Kiwisaver.  Home ownership builds net worth, however it does not expand New Zealand’s productive capabilities.  CDAs might be best to focus tightly on an individual’s wealth-generating capacity, for example through tertiary education or business investment, including start-up businesses.

Decisions and impacts arising from the Tax Working Party, Kiwibuild, migration policy, and whether Kiwisaver should be compulsory will all have a bearing on whether CDAs should also be used to encourage home ownership.

Simplicity

A CDA system needs to be tightly focused and as simple as possible, with minimal administrative costs and fees.

Some CDA-type accounts have underperformed because of poorly conceived objectives.  For example, they may be designed as anti-poverty measures for adults, not for children’s development.  CDAs have also been used to foster financial literacy.  However this and other mixed objectives can clutter their purpose and create a self-perpetuating administrative bureaucracy.

CDAs can encourage children’s savings through matching mechanisms and savings targets.  However, matching savings and reward-based targets make CDAs vulnerable during financial downturns.  For example, after the 2008 financial crisis the UK’s Child Trust Fund was abolished in 2010 as an austerity measure.

CDAs should not be given privileged tax advantages.  Doing so could misallocate resources, and could lead to rich families using CDAs as tax havens.

CDAs overseas have been administered through multiple providers offering diverse options.  This fragments funds and lifts administrative costs.  It does give choice, however young children from poorly educated households can hardly be expected to make well-informed decisions on fund managers.

New Zealand’s small size as an economy and experience with Kiwisaver suggests that CDAs in New Zealand should be administered by one fund manager.  As with the NZSF, one fund manager can achieve scope and scale economies. The fund manager needs to have access to administrative data, for example to ensure differential contributions go to children from more deprived backgrounds.

CDA fund management must be integrated into the New Zealand economy

The CDA fund manager must be deeply integrated into the New Zealand economy so that savings aggregate into capital accumulations that improve macro-economic performance and lift productivity.

New Zealand has a long history of giving birth to world class businesses, only to have them go offshore or be bought out and turned into branch offices of overseas companies.  Deeper and more patient capital markets would allow knowledge-intensive businesses to grow and internationalize while retaining deep roots and capturing benefit streams in New Zealand.  Over time New Zealanders would own more of New Zealand.

The CDA manager would therefore need to be a New Zealand-owned bank or fund manager, or a dedicated entity could be established akin to the NZSF.

There might appear to be conflicts between maximizing returns to children from CDAs funds being invested in international financial markets and the aim of deepening New Zealand’s capital markets.

However, domestic savings and investment schemes such as the NZSF, Kiwisaver and ACC have a home bias. This means they disproportionately invest in the New Zealand economy, while still delivering good investment returns.

CDAs should not crowd out existing public services

CDAs should not be drawn on for compulsory age education, health or other such services.  To do so would be to risk weakening the government’s existing obligations for such services.

Resilience and adaptiveness

A CDA system will be resilient over the long-term if they are adaptive to fiscal and other shocks.  Beyond an initial deposit, the government should not be locked into obligatory annual financial commitments that future administrations have a right to change.

Concentrated assets such as state-owned enterprises and the NZSF create risks that politicians liquidate them, as they are constitutionally entitled to do.  Alternatively, they can use them for misguided pet projects.

Of course, investment banks in the lead up to the 2008 crisis did far more damage than politicians could conceivable do through, for example, investing in infrastructure or regional development projects.

However, CDAs only work in the long-term and so they need to be protected from political short-termism if they are to have a chance to work.  Like Kiwisaver and unlike the NZSF, CDAs individualise assets and make them invulnerable to capricious government “takings”.

The core CDA system design must be resilient over time, however details of what fund contributions can be invested in must adapt over time. For example, if e-learning in future slashes tertiary education costs then a higher proportion of CDA accumulations might be spent on other purposes such as business equity investment.

CDAs should therefore not be fragmented rigidly into sub-funds tagged for specific purposes.

How could we make CDAs happen in New Zealand?

Few New Zealand politicians and senior officials come from deprived backgrounds.  CDAs can only succeed over the longer-term, yet politicians and officials focus on the short-term.

CDAs are a long-term investment benefiting people who may not vote for 18 years.  They have no strong voting constituency, and they will face opposition.

Beneficiary advocates will lobby for increased benefit transfers to parents, which may or may not benefit children.

Businesses employing low wage workers may sense the threat that CDAs are part of a wider strategy to wind down subsidies to low wage businesses and encourage upwards wage pressure.

Overseas-owned banks operating in New Zealand will oppose CDAs because they know there is a subtext of New Zealanders taking more control over their savings and financial industry.

However, the real barrier to CDAs will be myopic inertia and policy short-termism.  This has seen New Zealand for decades sink inexorably in relative economic terms compared to other countries.

Visionary leadership for a CDA system is needed from those concerned with New Zealand’s long-term future.  This needs to start with a focus on productivity, and be supported by a narrative for children.  A CDA system works at the macro level of economy-wide capital formation and at the micro level of individual psychology, resources and human capital formation.

A CDA will welcome every child born in New Zealand as a mark of citizenship.  CDAs will deliver resources for children and change their psychology to focus on their future potential.  More highly skilled young people then enter the workforce and lift productivity at the micro-level.

A CDA system could make a profound and enduring contribution to our socio-economic wellbeing.  Perhaps New Zealand has a few passionate, well-placed individuals that might champion and deliver such a system?

References

Butrica, B. (2015) A Review of Children’s Savings Accounts. Urban Institute.

Bynner, J. Paxton, W. (2001) The Asset Effect.  London, Institute for Public Policy Research.

Chang-Keun, H. Chia, A. (2012) A preliminary student of parents saving in the Child Development Account in Singapore.  Children and Youth Services Review 34(9):1583–1589.

Cramer, R., & Newville, D. (2009) Children’s savings accounts: The case for creating a lifelong savings platform at birth as a foundation for a “save-and-invest” economy. Washington, DC: New America Foundation.

Del Giudice, Marco (2018) Evolutionary Psychopathology: A unified approach.  Oxford.

Elliott, W., & Sherraden, M. (2013) Assets and educational achievement: Theory and evidence. Economics of Education Review, 33,1-190.

Elliott W, Constance-Huggins M, Song, H. (2013) Improving college progress among low- to moderate-income (LMI) young adults: The role of assets. Journal of Family and Economic Issues. 34(4):382-399.

Elliott, W., Jung, H., Friedline, T. (2010) Math achievement and children’s savings: Implications for child development accounts. Journal of Family and Economic Issues, 31(2), 171-184

Huang, J,, Sherraden, M., Kim, Y. Clancy, M. (2014a) Effects of Child Development Accounts on early social-emotional development: An experimental test. JAMA Pediatrics. 2014;168(3):265-271.

Huang J, Sherraden M, Purnell J. (2014b) Impacts of Child Development Accounts on maternal depressive symptoms: Evidence from a randomized statewide policy experiment Soc Sci Med. 112:30-8.

Jeram, Jenesa (2018) Embracing a Super model: The Superannuation sky is not falling.  Wellington, the NZ Initiative.

Kim, Y; Huang, J; Sherraden, M.; Clancy, M. (2017) Child Development Accounts, parental savings, and parental educational expectations: A path model. Children and Youth Services Review, Elsevier, vol. 79(C), pages 20-28.

Kim, Y., Sherraden, M., Huang, J., & Clancy, M. (2015) Child Development Accounts and parental educational expectations for young children: Early evidence from a statewide social experiment. Social Service Review, 89 (1), 99-137

Ko Ling Chan et al (2018) The longer-term psycho-social development of adolescents: child development accounts and the role of adolescents. Front. Pediatr.https://doi.org/10.3389/fped.2018.00147.

Rauscher E, Elliott W, O’Brien M, Callahan J, Steensma J. (2017) Examining the relationship between parental educational expectations and a community-based children’s savings account program. Children and Youth Services Review. 74:96-107.

Sherraden M. et al. (2016) Universal and progressive Child Development Accounts: A policy innovation to reduce educational disparity. Urban Education. 2016:1-28. 

Sherraden, M. (1991) Assets and the poor.  A new American welfare policy.  M.E. Sharpe.

Zhan, M. &  Sherraden, M. (2011) Assets and liabilities, educational expectations, and children’s college degree attainment. Children and Youth Services Review, 33(6), 846–854.

 

 

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What should we do about climate change?

 

We adapt differently to sudden shocks and to incremental change, even where the latter is catastrophic.  The former are visibly and quickly disruptive and put pressure on politicians to act now.  The latter are slow moving, with uncertain impacts far beyond political timeframes.

Mount Tambora in the (then) Dutch East Indies exploded in 1815.  This triggered global cooling and led to the “year without a summer” in 1816.  It killed thousands of people directly.  It caused global famines, civil breakdown, and mass migrations of people escaping from starvation.  It led to a cholera outbreak in Bengal that spread internationally and killed millions.  Governments responded with authoritarianism and trade protectionism.

However, the eruption also triggered art and innovation.  Mary Shelley conceived Frankenstein while trapped by bad weather in Switzerland.  Lord Byron’s apocalyptic poem Darkness was written in 1816 in direct response to Tambora’s effects.  It begins:

“I had a dream, which was not all a dream. The bright sun was extinguished…”

At age 13 Justus von Liebeg in Darmstadt lived through the 1816 “dark summer” and the hardship it gave rise to.  This helped trigger his interest in science.  He later developed nitrogenous fertilizers and understanding of trace plant nutrients that revolutionized agriculture and helped make possible food security for most of the world.

Climate change is both natural and human-induced.  A sophist might argue that humans are part of nature – so human-induced climate change is “natural”.  A beaver’s phenotypical expression of its genotype is the dam it builds, altering the natural environment in so doing.  The World Trade Centre was a human phenotypical expression, as were the aircraft that destroyed it.  The psychology that led to “9/11” was a natural product of Darwinian evolution.

Humans may be akin to a highly invasive, weedy species.  However, we are also a sentient species and some of us can reason scientifically, project into the future, and create technologies for good or ill.

The scientific evidence for human-induced climate change is irrefutable.  We concur with Titania’s view in Shakespeare’s Midsummer Night’s Dream that climate change results from human action rather than from nature:

These are the forgeries of jealousy:
And never, since the middle summer’s spring,
Met we on hill, in dale, forest or mead,
By paved fountain or by rushy brook,
Or in the beached margent of the sea,
To dance our ringlets to the whistling wind,
But with thy brawls thou hast disturb’d our sport.
Therefore the winds, piping to us in vain,
As in revenge, have suck’d up from the sea
Contagious fogs; which falling in the land
Have every pelting river made so proud
That they have overborne their continents:
The ox hath therefore stretch’d his yoke in vain,
The ploughman lost his sweat, and the green corn
Hath rotted ere his youth attain’d a beard;
The fold stands empty in the drowned field,
And crows are fatted with the murrion flock;
The nine men’s morris is fill’d up with mud,
And the quaint mazes in the wanton green
For lack of tread are undistinguishable:
The human mortals want their winter here;
No night is now with hymn or carol blest:
Therefore the moon, the governess of floods,
Pale in her anger, washes all the air,
That rheumatic diseases do abound:
And thorough this distemperature we see
The seasons alter: hoary-headed frosts
Far in the fresh lap of the crimson rose,
And on old Hiems’ thin and icy crown
An odorous chaplet of sweet summer buds
Is, as in mockery, set: the spring, the summer,
The childing autumn, angry winter, change
Their wonted liveries, and the mazed world,
By their increase, now knows not which is which:
And this same progeny of evils comes
From our debate, from our dissension;
We are their parents and original.

Unfortunately, the most powerful elected politician in the world has neither poetry in his soul nor science in his reasoning.   His shortcomings are not unique – international agreements tend to be unstable over time because many political leaders are themselves unstable.

These problems are magnified given that climate change is the ultimate tragedy of the commons.  It is the supreme exemplar of market failure.  The costs and benefits of climate change mitigation are difficult to apportion equitably among countries and through generations.  Therefore, how realistic is it to expect that global climate change rules can be agreed to and implemented fairly and effectively?

The 2018 Intergovernmental Panel on Climate Change proposes a target to limit global warming to 1.5 degrees. This requires a 45% drop in net carbon emissions by 2080 compared to the 2010 basepoint.  This means “net zero” is achieved by 2050.  This is possible within known scientific laws and technological possibilities.  However it requires far reaching changes in production and transport systems, consumption modes and the energy systems that support them.

Climate change mitigation rules reflect political compromises.  They focus on what can be measured and complied with rather than what works best.  For example, soil carbon is a bigger terrestrial carbon store than forests but the international rules reward carbon sequestered in trees alone, not in soils.  Long-life wood products are treated as emissions, even if wood in buildings lasts centuries.

It is unlikely that humanity can organize itself effectively enough to stop human-induced climate change from having dramatic impacts.  Most of these impacts will be negative; some may be positive.

Climate change is not a morality play, and there is no cosmic justice.  Low-lying and poor Bangladesh will suffer more than mountainous and rich Switzerland.  What therefore should New Zealand do, given that we are a middle income country with stagnating productivity and in inexorable economic decline?

New Zealand can lead in niche areas where mitigation technologies we help develop can also be adopted by others.  We must focus on the opportunities to cut net emissions and to make (or save) money at the same time, rather than focusing on slavish compliance with imperfect and sometimes counterproductive rules, or trying to game or work around them.

However, is New Zealand’s polity up to the challenge?  The failure to address climate change effectively is a sin of omission rather than of commission.  It is not a deliberate damaging act, but a failure to act.

Some argue that today’s public service has too many marketing, communications and relationship management types in senior positions.  Their incentives are to make deals and keep politicians happy in the short-term, not to think through what matters long-term.  Further down the ranks the more technically able people bite their lips and say nothing (publicly).

However, long-term outcomes are the end result of many actions we take in the short-term.  Our polity moved fast and effectively to deal with such immediate crises as the Christchurch earthquakes.  It needs to act now for the long term with the skills it can apply to today’s sudden shocks, while sustaining support from the communities it is accountable to.  For our polity this is a new art form.

Our climate change strategy must focus on what makes good sense both economically and in climate change mitigation. Specifically, opportunities include:

Mass adoption of sustainable electricity

New Zealand has among the world’s highest per capita endowments of sustainable electricity.  This includes hydroelectricity, wind, geothermal, solar and bioenergy.  It underutilizes these resources, and squanders them through poor building energy efficiency and transmission losses.

Electric vehicles powered with sustainable electricity would save New Zealand billions of dollars a year in imported oil.

More supportive rules for wind power, photovoltaics and solar thermal are needed. So too for distributed generation, and energy storage systems to smooth out generation intermittency.  The technology is already available.  The failure to exploit its full potential is due to lack of leadership and regulatory barriers.

Unlike capital-intensive, unproven and unsafe adventures with hydrogen a sustainable distributed generation system would help decentralize economic power and create opportunities for New Zealand’s regions.

Give the food and fibres industries centre stage

New Zealand’s food and fibres industries have a profound existential mission.  It is to help feed, house, furnish and dress the world within environmental constraints.

New Zealand should aim for world leadership in nitrogen management.  Fertilizers account for around 10% of the input costs for pastoral farming.  More efficient use will reduce nitrous oxide emissions and water pollution, while saving money.

Many New Zealand pastoral soils already have high carbon levels.  However there is potential to sequester more carbon, and to use biochar as a long-lived carbon store with spin-off benefits such as bioenergy and specialized product opportunities (see Winsley, 2007).

When carbon in tree roots and forest soils is included mature kauri forests have the world’s second highest per hectare carbon storage in the world – second only to Eucalyptus regnans with acacia under-storey.  Kauri is one of the world’s greatest timbers. There are classic boats where the kauri has outlived metal fastings that corrode and have to be replaced while the wood is still in good shape.

Anything you can do with oil you can do with plants.  Rubber can be made from guayule, Russian dandelion and other plants as well as from Hevea and oil.  Wood can make liquid and gas biofuels, chemicals and pharmaceuticals.

Redwood grows well in New Zealand and is a valuable timber internationally.  It is well suited to growing on slopes where its root structure locks soil into place.  This reduces flood events, erosion and soil carbon loss.

Douglas fir is a valuable lumber and is well suited to CLT and other highly engineered applications.  It thrives at higher altitude and in colder environments where farming is marginal.  Radiata pine is a fast-growing and profitable timber suited to very poor soils, and with versatile applications.  These include as an engineering building material.

Multi-storey buildings can be made from engineered wood products rather than steel and concrete.  They can deliver superior earthquake resilience and fire resistance while sequestering carbon.  Mass adoption of wood engineering technology can transform radiata and other fast-growing softwood species into higher value products.

What next?

Climate change will rewrite the world’s history.  It will have dark moments, lots of farce, however it does not need to turn into tragedy.

The above actions may make a substantive contribution to climate change mitigation, especially through technologies they create having wider international applications.  Even if they fail to do so the above actions will create some “no regrets” economic opportunities for us, and avoid us being cursed by our descendants.

Reference

Winsley, P. Biochar and bioenergy production for climate change mitigation.  NZ Science Review Vol 64 (1), 2007. https://pdfs.semanticscholar.org/83cc/ad73f3f0f29cc11734b23f08437282be1663.pdf

 

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What the NZ Initiative might learn from Keynes

 

Ideas, knowledge, science…these are the things which should of their nature be international. But… above all, let finance be primarily national.

J M Keynes, 1933[i]

The New Zealand Initiative (NZI’s) Embracing a Super Model report notes that NZS is one of the world’s best pension schemes.  It is simple and universal.  It does not discourage people working beyond retirement age. It delivers good outcomes for elderly people.

The report advocates lifting NZS eligibility age in line with rising life expectancy, and retaining the CPI link. It suggests delinking the NZS from wages so that wealthy elderly people do not capture disproportionately the benefits from productivity gains that might otherwise be more fairly shared.  However, delinking would over time create relative poverty for the elderly.

The NZI report does not address the potential for retirement and other savings policies to lift domestic savings in ways that flow through to capital formation and economy-wide productivity gains.

The New Zealand Superannuation Act 1974 established a compulsory scheme to lift savings and investment, while supplementing the pension.  However, the 1975 election result saw this replaced with a universal non-contributory scheme with age 60 eligibility.  This may be New Zealand’s worst ever economic decision.

Brian Gaynor estimated that had it been retained the 1974 scheme would now be worth around $500 billion. We would have deeper and more patient capital markets, and lower real interest rates. New Zealand would be among the top OECD economies.  More of our high productivity businesses would be global players, owned and anchored in New Zealand.  New Zealanders would have higher incomes, and our retirees would be better off.

New Zealand’s low domestic savings rates explain much of its stagnating productivity, and therefore its modest per capita incomes.  Low domestic savings rates mean a high real interest rate, and a real exchange rate that weakens our tradeable sector.

Higher savings rates can lift the capital to labour ratio, which boosts labour productivity.  This depends on the scale and composition of capital formation, the industry structure it can be applied to, and other factors such as migration and tax policy impacts on capital allocation, including between the tradeable and non-tradeable sectors.

Even when they invest globally, domestic savings and investment schemes have a home bias and contribute disproportionately to our economic development. When terminated after just 37 weeks, all of the 1974 scheme’s investments were in New Zealand.  Over 40% of Kiwisaver funds are invested here.  The NZSF has around 15% of its funds invested in New Zealand, including in tradeable sector and technology-based businesses.  ACC invests significantly in New Zealand equities and in infrastructure.

The NZSF was established in 2001 to partially pre-fund superannuation liabilities.  The NZI argues that contributions to the NZSF should not be at the expense of paying down debt. However, government can borrow cheaply.  The NZSF provides a mechanism for governments to sequester surpluses, preventing pressures to spend today.  It helps capital formation within New Zealand.

Politicians might try to use the NZSF for ill-conceived pet projects.  However, it can be used for wealth-creating investment in for example enabling infrastructure and in knowledge-intensive businesses that become internationally competitive, while retaining benefit streams in New Zealand.

In 2007 Kiwisaver was launched.  Were it made compulsory with higher employer and employee contributions our retirement provisions would come close to those enacted in 1974.

Looking forward, the NZS eligibility age can be gradually increased to reflect life expectancy gains.  Compulsory Kiwisaver would lift capital formation and give people a lump sum at 65.

However, higher income people will save more through Kiwisaver and through other savings instruments than the lower income. This can compound relative inequality among the elderly.

A comprehensive and equitable savings and investment package could be completed through universal Children’s Development Accounts (CDAs).  Community groups and families as well as government could contribute.  Higher contribution rates to CDAs for more deprived children would counter the regressive effects of NZS and of Kiwisaver accumulations that favour the higher paid.

CDAs would support savings for tertiary education, equity investment, business start-ups, and other means of expanding young people’s wealth-creating capabilities and enhancing their net worth.  They would lift aspirations leading into tertiary education and equity investment.  More highly educated young people would enter the workforce and lift productivity.

Progressively diverting Working for Families into CDAs would gear social policy to economic development objectives.  It would convert consumption subsidies to wealth-creating investment.  This would also remove subsidies to businesses that pay low wages, and create upwards pressure on wage rates.  Businesses would then invest more in labour-augmenting technology, lifting labour productivity.

The capital formation that the CDAs and Kiwisaver would drive would underpin the productivity growth that would give all New Zealanders higher incomes.

CDAs could also contribute to the macro-economic stability purposes David Parker envisaged in his proposed Variable Savings Rate (VSR) mechanism.  When the economy is over-heating surplus government revenue could be sequestered in CDAs.

CDAs would lift wealth-creating capability, productivity and net worth at the individual and the economy-wide level.  NZS would continue to be linked to CPI and wages.  Workers and retirees would over their lifetimes benefit from the greater wealth-generating and net worth benefits from both CDAs and Kiwisaver.

The full benefits of the above savings, investment and retirement package would only accrue later this century. In the long run we are all dead, however we will feel more alive in our working, saving and investing lives when we know future generations will be wealthier, more secure and more equal.

[i] John Maynard Keynes, “National Self-Sufficiency,” The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-76.

 

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Two poems from Simonov and Bornholdt

Konstantin Simonov’s poem Wait for Me inspired Russia during the Great Patriotic War. Most soldiers knew it off by heart.  Many carried with them a locket with the poem and a picture of their wife or girlfriend inside.

Wait for Me by Konstantin Simonov.

Wait for me and I’ll return, only wait very hard.
Wait when you are filled with sorrow as you watch the yellow rain.
Wait when the wind sweeps the snowdrifts.
Wait in the sweltering heat.
Wait when others have stopped waiting, forgetting their yesterdays.
Wait even when from afar no letters come for you.
Wait even when others are tired of waiting.

Wait for me and I’ll return, but wait patiently.
Wait even when you are told that you should forget.
Wait even when my mother and son think I am no more.
And when friends sit around the fire drinking to my memory
Wait and do not hurry to drink to my memory too.

Wait for me and I’ll return, defying every death.
And let those who do not wait say that I was lucky.
They will never understand that in the midst of death
You with your waiting saved me.
Only you and I will know how I survived:
It was because you waited as no one else did.

Wait for Me is read below by Laurence Olivier:

https://www.youtube.com/watch?v=LQ2gMcFx3No

New Zealand has never faced an existential crisis such as the Great Patriotic War.  However, on our more humble individual level many of us take risks tramping, and Jenny Bornholdt’s 1989 prose poem Make Sure speaks to us:

 

Make sure by Jenny Bornholdt

Make sure you fall in love with a man who you know will survive in the bush.

This way, when he is three nights overdue from his trip and the search and rescue team is out looking for him and the helicopter has been called back because the weather is closing in and they’re interviewing you on television in a close-up camera shot, asking you what you think his chances are — hoping you will cry and your lip will tremble — you can look them straight in the eye and say you know he will be all right, he has had plenty of experience and he knows what to do, he was carrying plenty of food and warm clothing and he is strong.

Even if he is hurt, you know he will be all right.

He’s a fighter, you’ll say. He won’t give in.

But the weather is closing in, you must be worried, they’ll ask. You keep your resolve. He will be all right, you say. I know he will.

Jenny’s poem is read below:

https://www.youtube.com/watch?v=rHzuvf-q-3s

…and sung by a choir:

https://www.youtube.com/watch?v=cVxENfYelsc

 

 

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Reflections on Kenneth Arrow and health economics

Kenneth Arrow’s 1963 paper Uncertainty and the welfare economics of medical care created health economics as a coherent field.  It argued that markets do not work well in medical services.

Medical services demand is unpredictable.  People look through a veil of ignorance about future health risks.  Adverse selection and moral hazard mean risk-bearing devices such as insurance do not allocate resources efficiently.  Medical service prices may be unrelated to value.  Revealed preference may be revealed ignorance.

To counter such problems, medical services are heavily regulated and publicly funded.   High professional expectations and the trust they give rise to reduce the risk of doctors exploiting information asymmetry between themselves and patients.

Medical qualifications confer property rights on practitioners.  These property rights also create duties to patients.  When there are more qualified candidates than places, medical school entry can favour those best able to overcome cultural barriers that impede information flows and healthcare access.

In his 1963 paper, Arrow was aware of but did not address wider sociological health drivers.  Health is an indivisible social phenomenon: no-one is an island.  Diseases can be contagious.  Low socio-economic status within rank-based hierarchies can create stresses that erode immune systems.

Antibiotic drug resistance is an unintended negative externality arising from doctors doing the “right thing” for an individual patient without recognising the cumulative impacts of many other doctors also doing “the right thing”.

Medical systems should therefore be managed within a social cost benefit framework that takes account of all private and social costs and benefits, whether or not they are revealed through market trades.

The opioid epidemic reflects US health care system weaknesses. The US lacks comprehensive and affordable medical care coverage.  Drug companies overly influence the FDA regulatory system.  Without social cost benefit analysis that measures all relevant variables it appears “cheaper” to give patients a prescription than to support wider approaches to pain management such as physio and cognitive therapy.

Kenneth Arrow preferred the contemplative to the activist life. He liked the freedom to see the world from others’ perspectives, the weaknesses in one’s own arguments, the ironies, and the freedom to unlearn as well as learn anew.  His 1963 paper was mainly concerned with information (knowledge) asymmetry. He might also have noted that a fundamental health sector problem is the difficulty specialists have in “unlearning” what is untrue.

In 1847 Ignaz Semmelweis discovered that many women who had given birth died from infections caused by doctors with poor hygiene practices.  His reward was ostracism, and death in a lunatic asylum.

Barry Marshall in the 1980s inferred that bacteria rather than stress or spicy foods caused stomach ulcers. The medical establishment initially rejected his insights, until a 2005 Nobel Prize vindicated him.  Marshall’s work advanced understanding of links between the Helicobacter pylori bacterium and stomach cancer.

Today’s challenges include the incentives governing how new knowledge is created and turned into technology.

Alexander Fleming and Graham Liggins captured little private benefit from their great medical advances.  However, much innovation requires the incentive of intellectual property (IP) rights granted in exchange for public access to knowledge.

Excessively long-term rights can lead to monopolistic rents (supernormal profits).  Single “buyer” agencies such as Pharmac can countervail monopolistic power.  Contestable market theory suggests that the simple threat of competitive entry can erode rents and expand access to medical technology.  For example, the Four Thieves Vinegar Collective publishes instructions for making low cost versions of drugs and devices without itself actively making and marketing them. https://en.wikipedia.org/wiki/Four_Thieves_Vinegar_Collective.

However, there are deeper problems to address than countervailing market power.  The potential for IP rights can distort research targets and therefore inventive activity towards what might deliver a profitable proprietary drug rather than what can deliver the best health outcomes.

For example, billions are spent trying to develop drugs to counter amyloid plaque build-ups in the brain associated with Alzheimer’s.  An effective drug would be a mass market blockbuster since patients have years to live and generate profits.  This prize may be channelling Alzheimer’s research into narrow scientific pathways based on what may deliver a proprietary drug rather than what may lead to the most effective treatment.  This may be at the expense of, for example, non-appropriable stem cell research.

Neuroplasticity treatment of some cognitive conditions may come from free on-line resources and cultural products more so than from drug advances.  Some immunological, vaccine-based and combinational off-patent drug therapies may be unattractive to the pharmaceutical industry but effective in improving health.  For example, cervical cancer can be prevented through low cost vaccinations.

The basic science community’s self-referenced nature creates different problems for  research pathways and methods.  It shapes research to fit its methods and win peer respect rather than to create technology.  Scientists become accountable to each other more so than to patients.

Both research directed at creating proprietary rights, and undirected self-referenced basic research may be misallocating human capital and financial resources on a massive scale.

Medical research should create technology that works, regardless of the property rights potential.  Technology connects science to the real world.  It creates demand for and gives targeted direction to basic research.  Pragmatic trials on how treatments can be brought into clinical practice need to complement randomised control trials.

It is plausible that medical research priorities should initially exclude cost benefit considerations when research targets are first defined.  This ensures the most effective research routes are followed.  The cost effectiveness of any resulting treatments may be inescapably prohibitive.  However it is more likely that cost benefit will be mainly dependent on how society chooses to define property rights over knowledge.

Since 1963, behavioural psychology has given deeper insights into economics.  “Baumol’s cost disease” afflicts industries such as health services where tasks are hard to automate.  However, psychology also plays an important role.  People are not dumb objects that can be manipulated like steel parts on an assembly line.   There is near infinite individuality, making it difficult to develop standard operating procedures or predict how individuals will behave.

The finance, gambling and advertising industries have long manipulated human psychology.  The health sector has lagged, though the gains could be enormous.  For example, overcoming psychological hurdles to regular medical check-ups would boost early cancer diagnosis and successful treatment rates.

Behavioural psychology suggests that too many options to choose from leave people confused.  Like Kiwisaver offerings, patients need a choice of credible, regulated options.  If patients can’t decide doctors should do so for them.  In some cases, the government should determine through regulatory intervention.

Government can use its regulatory powers more actively in an evidence-based way, and within a social cost benefit framework.   After all, huge health gains have come from fluoridation, iodised salt and banning lead in paint and petrol.

A social cost benefit analysis of a regulatory ban on smoking would factor in greater longevity, productivity and well-being.  Tobacco tax revenue would drop, and superannuation and other age related costs would rise.  However, money spent on cigarettes would be spent more wisely.  People would be more productive longer in the paid and unpaid workforce.  The end result would be net lifecycle wellbeing enhancement.

Medical knowledge is vast and it is more and more difficult to detect the signal in the noise.  Specialists dominate medicine, and information may flow within but not between disciplines.

Complex problems such as pain, mental health and obesity that may have genetic, psychological, biomechanical and sociological dimensions are addressed as if they have one reductionist cause.  The “solution” is profitable such as proprietary drugs or surgery, or simplistic such as a sugar tax.

Obesity likely arises from a combination of sociological, cultural and genetic factors, and the food industry’s manipulation of behavioural psychology and neurological pathways to drive food and beverage consumption patterns.  Integrative solutions are needed, and most of these will be non-proprietary.

Given this, do we need an amplified General Practitioner speciality, or competencies within it?  Can we embed within specialities more explicit connections with other disciplines?

Kenneth Arrow was a conceptual, mathematical and theoretical genius.  He was famously kind to people.  Right up to his death at 95 he was also an economic technologist, tackling real world problems.

As our thinking grows from the foundation he created, health economists and medical researchers must become technologists. That is, they should aim to get things done.  However, they must be wary of simplistic solutions to complex problems that traverse disciplinary boundaries, where psychology, individual variance and social context matters, and where received wisdom can be as dangerous as ignorance.

Perhaps the greatest challenge for health economics and medical innovation itself is the ability to see with fresh eyes, undistorted by financial prizes, peer networks and today’s textbooks, and to create technology that makes what is learnt productive in the real world.

As a small, agile country without a politically powerful pharmaceutical industry New Zealand may be well placed to take a lead in niche areas of medical innovation opportunity.  Let’s invest more in medical research, do things more cleverly, and see what we can achieve!

 

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Matariki, Walt Whitman and the Pleiades

In Walt Whitman’s On the Beach (1871) a father and daughter gaze up at the night sky:

On the beach at night,

Stands a child with her father,

Watching the east, the autumn sky.

Up through the darkness,

While ravening clouds, the burial clouds, in black masses spreading,

Lower sullen and fast athwart and down the sky,

Amid a transparent clear belt of ether yet left in the east,

Ascends large and calm the lord-star Jupiter,

And nigh at hand, only a very little above,

Swim the delicate sisters the Pleiades.

From the beach the child holding the hand of her father,

Those burial-clouds that lower victorious soon to devour all,

Watching, silently weeps.

Weep not, child,

Weep not, my darling,

With these kisses let me remove your tears,

The ravening clouds shall not long be victorious,

They shall not long possess the sky, they devour the stars only in apparition,

Jupiter shall emerge, be patient, watch again another night, the Pleiades shall emerge,

They are immortal, all those stars both silvery and golden shall shine out again,

The great stars and the little ones shall shine out again, they endure,

The vast immortal suns and the long-enduring pensive moons shall again shine.

Then dearest child mournest thou only for Jupiter?

Considerest thou alone the burial of the stars?

Something there is,

(With my lips soothing thee, adding I whisper,

I give thee the first suggestion, the problem and indirection,)

Something there is more immortal even than the stars,

(Many the burials, many the days and nights, passing away,)

Something that shall endure longer even than lustrous Jupiter

Longer than sun or any revolving satellite,

Or the radiant sisters the Pleiades.

The Pleiades are named after seven sisters in Greek mythology. They were known to cultures around the world for thousands of years, mentioned in the Iliad and the Odyssey, in Hesiod and in the Bible.

For Maori the Pleiades were Matariki, a mother and daughters.  They marked Matariki for centuries, as we mark it now.

In Whitman’s poem the daughter senses her mortality in the burial clouds, and her father consoles her. There is something that will last longer even than the lord-star Jupiter, and the delicate sisters the Pleiades.

Feelings of mystery, awe and spirituality are cultural universals. They may involve wilderness, love, birthplaces, churches, or watching the sun rise when young dawn shows her rosy fingers. We should accept such feelings in the same way science accepts our other illogical traits.

Einstein said that ‘the most beautiful and profound experience is the feeling of mystery. It underlies religion as well as all deeper aspirations in art and science.’  He sought to understand laws of nature while his violin touched the divine.

So celebrate Matariki, and read Whitman’s poetry!  Touch the stars through Mozart and Shakespeare!  The feelings evoked drive great science, music and poetry, because we know what we are but know not what we might be.

 

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What Nassim Taleb is on about, and why you should read him

If you have something to say do so simply.  Nassim Taleb drifts between probability theory and Mafia morality codes.  He peppers his work with insights from the Levant, ancient Greece, Rome and central Asia, through to modern Iraq and the Beltway.  His rambling style, verbosity and arcane references lose many readers, and his personal attacks turn others off.  Yet he has much to say.

In Black Swan, Anti-fragility and Skin in the Game Taleb addresses three inter-related questions.  Why do bad things like financial crises and the Iraq and Syrian debacles occur?  Why do good things, from great literature to traditional cooking survive?  Given these, how should we behave?

Black Swan argues that extreme outlier events have impacts vastly disproportional to their statistical probability.  In a normal distribution, some extreme tail risks can be so catastrophic we can’t afford to take them.

Genetic engineers, economic forecasters and financiers ignore the risk of extreme outliers.  Investment bankers and policy makers caused the 2008 GFC because they had no skin in the game.  After such events, bureaucrats then develop regulations that grow in complexity and make future black swans more likely.

Resonant with Hayek’s Pretence of Knowledge and Joshua Ramo’s The Age of the Unthinkable, individual creativity and innovation should be fostered in a devolved not centrally directed way. Rather than over-regulate financial instruments it may be better to reduce risks obliquely, for example by lifting individual savings rates and fostering more devolved, small scale and relational banks and investment agents.

Anti-fragile argues that some things are fragile and break too easily, some are robust but don’t improve over time, and others are both robust and evolve over time – the anti-fragile.  Anything that is anti-fragile has more upside than downside from random events.

An ancient cathedral is robust enough to outlive Le Corbusier and New Zealand leaky home architects.  However, it does not improve over time. Some Christian beliefs and canonical literature such as Shakespeare can be robust and improve over time as they inspire further human endeavour.

Adversity creates learning and adaptiveness and makes things anti-fragile.  Jewish culture has been anti-fragile for over 2000 years. Getting sick improves the immune system and makes people healthier.  Israeli attacks on Hizb’allah actually strengthened it by forcing it to adapt.  Overuse of antibiotics leads to bacteria becoming more resistant.

Keynesianism is an anti-fragile economic paradigm.  Obamacare is so cleverly designed it will survive the Trump administration’s attacks and become stronger – it is anti-fragile.  Kiwisaver might prove to be anti-fragile in the New Zealand context.

In Skin in the Game Taleb argues that leadership and business success depends on people taking risks and bearing the up and down sides.  Most great firms are started by those with skin in the game and grow organically.  CEOs create less value than entrepreneurs who have put their houses on the line.

You should also be prepared to put your body on the line.  Taleb cites warrior kings who died leading their armies. George Orwell wrote that the English aristocrats he disparaged for their dimness were morally sound because they were prepared to die in war.

Duels between two people with skin in the game can stop conflict between them spreading wider.   Menelaus and Paris’s duel in the Iliad could have ended the Trojan war if Aphrodite (someone with no skin in the game) hadn’t interfered.

Politicians who dodge the draft are often the worst warmongers. The Iraq invasion resulted from politicians and their advisors not having skin in the game.

Learning comes from practical engagement with the world rather than risk-free theory.  Unschooled street traders learn the English and arithmetic needed to trade. Steve Jobs was a craftsman more than a theoretician.  Artisans have soul as well as skin in the game, and this drives their success.

Taleb associates skin in the game with moral symmetry between people.  This includes such principles as the Golden Rule: “do unto others as you would have them do unto you”.  He adds a “silver rule” – “do not do to others what you would not like them to do to you”.   He who seeks a benefit should bear the cost if things go wrong.  You should not give advice that you yourself are not following.

Taleb argues that an authentic conversation must be on equal terms. Caveat emptor is unethical.  All involved in a transaction should have the same information.    This overcomes information asymmetry and bounded rationality, and reduces rent seeking.  He cites the Islamic ban on gharar, a form of trade with high uncertainty which can damage other parties.

Taleb highlights some basic rules to live by.  Live by the Golden Rule rather than pay lip service to it.  Ignore what people say and watch what they do.  In business, only trust people who put their money where their mouths are.  Learn in the real world, not through abstractions.  Keep things as simple as possible.

When readers put their skin in the game, Taleb’s insights stay with them.  However, he could say things more simply, following one of his own rules…

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