Tertiary Education Minister Steven Joyce’s recent policy announcements  have received a generally positive welcome.  Tying an element of institutional funding to students’ course and qualification completion, requiring a reasonable pass rate for continued access to student loans, and rationalising the many redundant or overlapping qualifications; all seem to have gone down well.  Even the usual naysayers have been muted in their response.

I find all this both gratifying and somewhat ironic. In 2001/2, the reports of the Tertiary Education Advisory Commission effectively recommended doing the same things.  In July 2002, the people named to be the board of the Tertiary Education Commission (including me) reiterated their support for such initiatives.  However, some were ruled out of bounds for TEC, eg. student support was deemed to a welfare issue not an education issue. Some we didn’t have the funding mechanism to implement (and for nearly 3 years we weren’t allowed to address that either, even though we rated it the number 1 problem to fix). Some the institutions weren’t ready to concede there were problems - eg. qualification rationalisation and completion rates.  Some, like polytechnic governance, were, frankly, just too politically difficult for the then Labour-led government.  However, we’ve been jawboning away on this stuff for all of the last decade and, like water on stone, we’ve worn down the obstacles.

Given the name of this weblog - Isambard Kingdom Brunel’s personal motto En Avant or “Get Going” - you’d be right to assume that I have been very frustrated by the time taken for all this. Smart policy development and implementation seemed often to have been trumped by the need to not upset anyone.  To be fair, all the ministers I’ve dealt with have had their merits, and we’ve made increasingly faster progress.  However, there’s a palpable difference when dealing with confident and capable ministers who understand the big picture and can drive through policy change, despite the naysayers inside and outside government and the bureaucracy.  Governments can implement sweeping change quickly if they so chose and have the right people on the job.

There are still some big issues to address, not least being pricing - how much, how it’s presented, and who pays what to whom.  Any good marketer knows the importance of price presentation.  The new minister has already stated he’s interested in price as an issue, although he acknowledges this might take a little more time to work out.  Given the current pace, that shouldn’t be another decade.

Declaration: I am a non-executive board member of the Tertiary Education Commission, and was recently reappointed for a third term. 

The NZ Herald has assembled a montage of recent quotes from Treasury Secretary John Whitehead. He’s a public servant, not a politician, and it’s been many years since I can recall one in this country making such bold utterances, rather than discreet ministerial advice.

John Whitehead himself:

Fiscal sustainability:
“As an erstwhile motorcyclist, I know that when your skull has been saved by your crash helmet, the first thing you should do is replace your helmet.” - speech to Russell McVeagh, Dec 08

Capital gains tax:
“At the risk of being chased down by an angry crowd with pitchforks and flaming torches, yes this should include consideration of moving the boundaries to tax more capital gains - for example on investment property - and shifting more of the tax base towards consumption.” - speech to Institute of Directors, June 09

Being frank:
“We have a Government which by and large welcomes free, frank and imaginative advice: let’s take advantage of that.” - speech to policy leaders, June 09

Seizing the day:
“It is very important … we don’t lose sight of our medium and longer-term goals. As Hillary Clinton has famously said, ‘Don’t waste a good crisis’.” - speech to policy leaders, June 09

Being unpopular:
“We face tough decisions and can’t afford to be sidetracked or avoid decisions, even though some of them will be unpopular and painful.” - NZ Herald column, Aug 09

Being bold:
“The tough spending decisions have not yet been made… and the longer we leave it, the harder it will get. Your support in helping frame the debate and argue the case for bold change will be essential.” - speech to Institute of Directors, Oct 09

And from his department’s papers:

Tax reform:
“We see reform of the variable rates of tax on different incomes/investments, and the reduction of the top personal income tax rate, all to 30 per cent, as having greatest impact.” - Medium Term Tax Policy Challenges, Feb 09Capital gains tax:
“The extension of the income tax base to include capital gains would be a second priority.” - Medium Term Tax Policy Challenges, Feb 09

Government debt:
“No other country in modern times has (yet) seen its NIIP [net international investment position] stabilise with such a high level of reliance on foreign capital.” - Closing the Income Gaps, Aug 09

Government spending:
“The case for earlier and more substantial fiscal consolidation is much stronger than it was earlier this year… Having dealt with that initial situation, some more significant adjustment is now warranted.” - Closing the Income Gaps, Aug 09

Closing the gaps:
“There is nothing in the current projections or set of policies that suggests material progress is likely in reversing the large per capita income gap that exists between Australia and New Zealand and the average of its OECD peers.” - Closing the Income Gaps, Aug 09

Now vs 1987: “The New Zealand shake-out following 1987 was also a painful multi-year period of deleveraging - and the imbalances then were, in most respects, less severe than those New Zealand now faces.”
- Closing the Income Gaps, Aug 09

Balancing the books: “The Budget projections were finalised in April… As things stand today, the prospects for any sort of successful rebalancing seem much less favourable.” - Closing the Income Gaps, Aug 09

Further to my last post on the limitations on what governments can do to promote economic development, for those that want to read some arguments from “the other side”, there’s a  major debate going on at the Harvard Business Review Voices blog, following an HBR article “Restoring American Competitiveness,” by Gary P. Pisano and Willy C. Shih, who argue that outsourcing has undermined that country’s high tech sector. Here’s a list of posts to date:

Does the U.S. Need a Manufacturing Sector?

• Gary P. Pisano: The U.S. is Outsourcing Away Its Competitive Edge
• David B. Yoffie: Why the U.S. Tech Sector Doesn’t Need Domestic Manufacturing
• Robert H. Hayes: Global Outsourcing Is High Tech’s Subprime Mortgage Fiasco
• Andy Rappaport: Outsourcing Isn’t a Problem for Silicon Valley But Is for Detroit
• Willy C. Shih: The U.S. Can’t Manufacture the Kindle and That’s a Problem
• Laura D’Andrea Tyson: Think U.S. High Tech Isn’t Healthy? Look at the Data

Is Short-term Thinking Eroding U.S. High Tech?

• Ed Catmull: Pleasing Wall Street is a Poor Excuse for Bad Decisions
• David. A. Patterson: Scientists and Engineers on Boards Will Keep Focus on the Long Term
• Andy Rappaport: Outsourcing: The Culprit Is Capitalism, Not Wall Street
• Bob Pozen: Can We Break the Tyranny of Quarterly Results?

Is Washington the Solution or the Problem?

• Stephen R. Hardis: Beware of Gov’t Solutions for America’s High Tech Sector
• David A. Patterson: Revamping DARPA Is Vital to Preserving the U.S. Lead in IT
• Deborah L. Wince-Smith: Washington Must Help U.S. Regain the Lead in Manufacturing
• Robert H. Hayes: Gov’t Should Enlist Foreign Companies’ to Rebuild America’s Industrial Infrastructure

Update: HBR advise that the unlinked article has yet to be published online, but I’ll update ASAP.

Economies change. The pattern and places of jobs shift.  Voters demand politicians do something about it. Regional development programmes are often part of the political response, and many start to offer tax breaks, employment subsidies, building subsidies and so on.  It sounds good, it looks like action, and (I’m being unfairly cynical here) no politician hangs around long enough to be accountable for the almost inevitable lack of success.

It gets worse when you have regions in the same economy competing with similar programmes.  It just escalates into an arms-race of who offers the biggest subsidies.  Britain has a particularly bad case of regional subsidies.  In a country full of property investors and  businesses, it’s amazing that its seven regional economic development agencies build business parks, often in areas away from where business is or wants to be.  Bangor, a small university town in remote north-west Wales, has got one.  It’s been empty for years.  To throw good taxpayer money after bad, they’ve built another one 20 miles down the road at Holyhead!

Here’s a simple test. If it was your money, would you invest in a speculative large-scale commercial property investment in a remote small town.  Of course you wouldn’t.  So why should the taxpayer? Here’s another simple test.  Would this business operate in this town/region/country without this subsidy?  Why will it stay long term?  No-one in their right mind would have built a major computer factory in Ireland (2 sea journeys away from mainland Europe) if it hadn’t been for the then-cheap labour, EU subsidies and Irish tax breaks.  So it should have been no surprise when Dell announced it will close its subsidised Irish factories and move to Poland.  The Poles simply offered Dell a better proposition than the Irish.

Is there any developed country with regional economy development subsidies which has achieved sustained economic well-being that wouldn’t have happened anyway? Ah, I hear, what about Singapore?  Singapore is the exception that proves the rule, and that’s the point; it is an exception, a small city-state sitting at the hub of a key trade route, with no hinterland to worry about, and a collective will which allows it to act more like an industrial conglomerate than a country. For the rest of us, all the evidence shows that the market will determine what long-term industries you have, and where they will locate. All governments can usefully do is facilitate underlying factor conditions such as infrastructure, education, regulation and taxation frameworks, etc..  After that, like it or lump it, it’s all up to individual businesses.

None of which will stop voters demanding that “the gumment must do something” and politicians saying “we will“.

Disclosure: I was a non-executive board member of 2 regional economic development agencies in NZ. We didn’t do subsidies; we did try (not always successfully) to address factor conditions. 

I’m chairing an Institute of Directors dinner at The Wellington Club, 6.15pm on Tuesday 4th August.  Our guest speaker is Rick Christie, addressing the question “Challenges for chairs of government companies - can a private sector model work?”

Rick had an impressive executive career, as a director of BP New Zealand, Managing Director of listed industrial group Cable Price Downer, CEO of Tradenz (NZ Trade Development Board), and CEO of investment group Rangatira. He’s even busier as a professional director - he is currently Chairman of Ebos, Chairman of ProvencoCadmus, Chairman of Argenta, and a Director of Tourism Holdings, Wakefield Health, and the NZ Pork Industry Board.

To name but a few of the positions Rick has held, until recently he was Chairman of crown research business AgResearch, Chairman of the government’s Growth & Innovation Advisory Board, Deputy Chairman of the Foundation for Research Science & Technology, and Chairman of the Victoria University Foundation Board of Trustees, He was a a Director of Television New Zealand, and a member of the Prime Minister’s Enterprise Council.

Clearly Rick must know a lot about chairing government entities! Given Wellington is the nation’s capital, it’s no surprise that the dinner sold out almost straight away; but one place (price $110) has come available.  The dinner is restricted to IoD members with at least 5 years experience as a director.  The Chatham House Rule applies to the evening’s discussion which, knowing Rick, is bound to be lively. Contact me via comment or email if you’re interested.

UPDATE: SOLD OUT

I have a lot of sympathy with hardworking citizens who argue that “I’ve paid taxes all my life, so the government should look after me in retirement”.  The bad news for those hardworking, taxpaying citizens is that the government has spent all the money, and it won’t make enough in future to keep its side of the deal.  Basically, you’ve all been conned on a scale far beyond anything achieved by Charles Ponzi or Bernard Madoff.

According to Wikipedia, a Ponzi scheme is “a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors rather than from any actual profit earned. The Ponzi scheme usually offers returns that other investments cannot guarantee in order to entice new investors, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going“.

Most state-funded universal health and retirement pension schemes are pay-as-you-go systems, i.e. current taxpayers pay for the benefits of those who have gone before. Sounds like a Ponzi scheme.  And like a Ponzi scheme, “the system is destined to collapse because the earnings, if any, are less than the payments“. The retirement welfare system was designed for a life expectancy on retirement of less than 5 years, not 20 years as now.  So a much higher level of earnings is required.  But in a few years, baby-boomer retirees will represent over a quarter of the population, not less than 5% as was the case when the welfare state first emerged. So the higher tax burden will be borne by substantially fewer people. A double whammy.

Bernard Hickey has called this intergenerational theft and suggests younger people leave the country. Where to? It’s just as bad elsewhere. For example, the  Peter G. Peterson Foundation, established by a former US commerce secretary and investment banker, has calculated the true scale of US welfare and debt obligations at US$56 trillion, or roughly US$184,000 per American. That’s 5 times  the current already-massive level of US government debt. You’ll find similar stories throughout the developed world.

For over half a century, governments and politicians have refused to face up to the problem.  Political squabbling, point-scoring, vote-buying and short-termism meant that it was constantly put aside for someone else to fix, even though most citizens understand that the system is unsustainable. Worse, our governments have squandered the past 20 years of economic growth, and our countries face at least a decade of massive debt just to get back to where we were 5 years ago, which would still leave us with an unfunded and growing welfare burden.  We citizens share the blame, with our insatiable appetite for more and more government support of our lives, and our relentless willingness to pay higher and higher house prices (classic “bigger fool” investment).

I wrote two years ago that, although I’m usually a free marketer, occasionally I accept that civil society does have a role enabling long-term incremental change; not a one-off token scheme, but a steady sustained year-on-year change.

A lot of people don’t save for retirement. Quickly enforcing big personal savings just engenders political strife. Haranguing people to give up a major chunk of their income now won’t work either - their lifestyle is geared to their current after-tax income, especially those on lower incomes. Instead, you might persuade people to forego just an extra 1% of their pay each year for 10 years. Each year’s additional sacrifice is tiny and probably less than any pay rise or tax cuts. In 10 years, they’re saving 10% of their income, and hardly noticed the change. Paternalistic, maybe, but it’s what a lot of people who’ve worked for me over the years have said they’d prefer. A pity more national retirement schemes weren’t introduced on these lines, and 20 years ago. (Note: I’m not saying who adminsters these schemes, nor how).

… Doing nothing while everyone bewails the lack of progress is not the answer… small incremental change can get you to where you want to go, and it can be absorbed by society, but - and these are big ones - you need to have leadership, with long term confidence and commitment, and you need to get started.

We will emerge from recession in the not-too-distant future.  The looming baby-boomer retirement and the parlous state of national finances requires more urgent action on personal saving for retirement pensions and healthcare, not less. Sadly, I’m not hopeful anything will happen.

PS I don’t favour governments using debt to fund routine expenditure or retirement funds.  But then, I hate being in debt anyway, other than for short-term bridging funds.

General Motors has announced its withdrawal from NUMMI, its joint venture with Toyota.  NUMMI was an incredibly generous initiative by Toyota to educate its global rival about modern management and production techniques, while giving Toyota insight into operating in the US.   Although the NUMMI plant was generally seen as a (qualified) success, and GM learnt about efficient plant layout and just-in-time inventory, it (GM) never really absorbed the “lean business” mindset that infuses every aspect of Toyota.

The NUMMI plant is now 25 years old, and probably long overdue for a major overhaul/replacement.  Toyota doesn’t need it, with low demand and its own plants elsewhere in North America making similar models. Politically, Toyota might wait a while to close the only unionised shop in its portfolio, but GM’s reputation is so low, now is probably the least reputation-damaging time for Toyota to do so.

Struggling to get your head around current thinking on what governments are doing or should be doing to deal with the global economic crisis?  The New York Review of Books recently hosted a symposium with leading economics pundits Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells.  Reading the summarised text of their discussion will give you a reasonably straightforward understanding of the various camps’ viewpoints.  Although the participants do look at the bigger world picture, inevitably their discussion is somewhat US-centric.  However, the USA’s situation and policy responses will affect us all, and similar debates are happening in every country and in international forums. The NYRB article is well worth the time to read.  Just don’t expect a consensus conclusion: the debate still rages.

Thanks to SPD for the link.

Yesterday, I wrote grumpily:

As a new non-executive member of a big-spending government agency’s board, I’d frequently ask “Why is the taxpayer’s money being spent on this?”   I learnt quickly that, contrary to popular perception, we actually had very little power over what we spent, why and with whom.  That was principally decided by the ruling politicians, whose decisions (either logical or appeasing some political constituency) were effectively concreted in place until overturned, if ever, by another set of ruling politicians who had decided the issue was important enough.  We could move money at the margin, but the bulk of spending was effectively predetermined under rules set down by Cabinet, and very much seen as an entitlement by the often large and influential organisations that received it.  Getting anything significant changed takes years of argument, followed by more years to implement those changes.

This begs the question “why bother being on a government agency board, then?”  A government agency is a tool of the elected government, with a duty to carry out the wishes of that government. A government board position isn’t a platform to push your own agenda and political views; after all, it’s the government that was elected, not you.  Essentially, you bring your knowledge, skills, independence and brainpower to the boardroom, not your politics.

The strategic direction comes from the government of the day, not the board.   However, although you may not sway the outcome, in reality, often you do have some input at the policy formulation and implementation design stages.  And a key role in the major operational  decision-making within that policy context when it isn’t continuation of the status quo.  You can make a difference, promoting constructive ideas, striving to make the implementation of policy more effective, mitigating some of the crazy stuff, using good judgement in the decisions you can make, and being a champion for positive change. And sometimes, even governments can move quickly.

In other words, you can be of service to your country, your community and your industry. That’s why most people do it.  (Well, it ain’t for the pay and the hours!)  But it’s very different from being on a private sector board.

There was understandable public and political outrage over a Commerce Commission report which pronounced that New Zealand electricity generators had garnered $4.3 billion in excess electricity pricing.  Yet when I first heard the news, I found it hard to believe.  It seems my suspicions were warranted.  Several commentators have spotted fundamental flaws:

• The report’s author used the Californian electricity market as a comparator.  NZ is nothing like California.  The NZ system is heavily reliant on hydro-electricity, versus coal, gas and nuclear in California.  Due to geographic topology, our hydro stations have limited lake storage, unlike California’s out-of-state hydro-electricity suppliers.  And most importantly, we aren’t connected to a continental power grid with hundreds of other generators able to supply electricity in a locally dry year.
• The report focused on wholesale pricing, not retail.  No evidence was provided as to whether excess wholesale spot prices were passed onto consumers. The typical electricity customer is shielded from wholesale price movements because the retailers charge the same price all year.  That pricing effectively includes an “insurance policy” against high pricing during periods of high demand or low availability.
• While wholesale spot prices can vary wildly every half hour, most actual wholesale pricing is smoothed by hedge contracts (yes, financial derivatives can be useful).  It is only at the margin that higher (or lower) spot prices have an impact.
• The overwhelming bulk of retailing is by the generators themselves. The wholesale market and the associate hedging contracts are between those players, so it’s a nett-nett effect.
• If excess profits were being made, extra generating stations would be built by competing generators to win greater shares of those excess profits.  Yet, growth in long run capacity has closely matched growth in demand.

Typical of the naive reaction to this fundamentally flawed report has been the call for electricity to be priced at the lowest cost of generation, not the highest.  No-one would build new generating capacity. Put it another way, would you sell your house for what it cost to build forty years ago? No, thought not.  Electricity is no different.

The present NZ electricity market mechanisms have some problems, but the system works better than anything before, and it works reasonably well.  NZ has some of the lowest power prices in the world, and its electricity generation is on the whole cleaner than most.

Everyone in the NZ electricity industry that I’ve met in the last few days had the same instant reaction.  Why, before the report was released, wasn’t it reviewed by someone who actually knew something about the logic of the NZ market?

I doubt that the media frenzy over the report’s release will be matched by a similar level of media attention to the fundamental flaws in the report and its misinterpretation. Nor will there be a serious media investigation into the motives of a part of the Commerce Commission that is under political pressure over its effectiveness.

This was a beat-up that shouldn’t have happened.

US president Ronald Reagan once described the role of government in the economy: “If it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidise it.“  That certainly sums up government behaviour right now.

At at an Institute of Directors breakfast this morning, economist (aka. dismal scientist) Andrew Gawith spoke about the global economic crisis and the need for change. I had the mixed privilege of delivering the vote of thanks.  I say mixed because, while Andrew is a nice chap and a great presenter, he had me grateful that the windows don’t open in the 5th floor dining room of the prestigious Wellington Club; otherwise his audience might have been jumping out of them. (Update: I was wrong - they do open.  Eek!) Andrew’s presentation was  largely a summary of the scale and causes of the current global crisis.  He doesn’t offer much hope that we’re through it yet - 2009 will get worse and 2010 will be flat at best, he says. (One bright note for NZ readers - China and India’s demand for protein will keep climbing, and so Kiwi farmers will once again save the day).

I won’t rehearse Andrew’s case - you’ll be largely familiar with the themes by now if you read the financial pages of your morning newspaper.   I will paraphrase some points he made regarding the role of government and regulation.

• Deregulation arguably went too far (notably the repeal of the 2nd Glass-Steagall Act in the USA, the emergence of unregulated players in mainstream savings and investment everywhere, and the loosening of bank equity ratios).
• Regulation didn’t cover some of the more recent  “innovative” financial instruments.
• Even where regulation existed, the regulators were either woefully indifferent or incompetent.
• Financial institutions have become so big, at an order of magnitude dwarfing the largest industrial corporations, that governments have no choice but to prop them up, even if the cost will cripple future generations.  Yet no-one is looking seriously at how to address this “too big to fail” problem.
• Regulation won’t stop unethical behaviour.  You can’t legislate for morality.

Andrew concluded with a strong message for his audience.  The economic crisis wasn’t only a failure of regulation, but also a failure of morality. Boards of directors set and enforce the moral stance of their organisations; ethics, values and responsibility - old-fashioned virtues that are still highly relevant.
Disclosures: Andrew Gawith is a principal of economics consultancy Infometrics and of Gareth Morgan Investments, which manages part of my family trust’s investment portfolio. I am a member of the Wellington Club.