Month: March 2013

The Greens and the implication of exponential growth

So I was reading one of the Greens newsletters this week which left me feeling extremely confused about their economics. My criticism is not because I think Dr Norman is incompetent but rather that I think his commentary is in conflict with what I understood to be ‘sustainability’, an ethic that the Green’s advocate and that in fact the party was founded on.
 
Dr Norman this week criticised the government for a decline of 0.6% GDP in the tradable sector of the economy. He also stated:

 “A shrinking tradable sector combined with a strongly growing non-tradable sector means only one thing – increased borrowing and a ballooning current account deficit”.

I’m curious, wouldn’t a reduction in the tradable economy sit well with Green politics. For instance, he mentions that ‘manufacturing is a key sector for driving high, value-added exports and creating well-paid jobs’ yet the reduction in this sector would surely be an environmental advantage? I mean, less carbon emissions, smaller ecological footprint, ability to restore the now unused land to forest or other environmentally friendly business that would contribute to reducing carbon emissions e.g. industrial hemp farms for various products such as paper, building products, fabric and so on?
 
My question is: Shouldn’t the Green’s be advocating for reductions in exports and imports and promoting wider support for local trading – which could also create well paid jobs by enabling local business owners to employ local workers as well as minimise environmental impact? I’m not saying here that there is no room for exports in a sustainability framework, only that continued steady growth of our tradable sector is unsustainable and therefore the outcome will be no different to that of the neo-liberalism the Green’s have openly advocated against.
 
Dr Albert A.Bartlett states that ‘the greatest shortcoming of the human race is our inability to understand the exponential function’. The exponential function is a tool used to measure steady growth patterns, such as Gross Domestic Product (GDP). The benefit of understanding exponential growth is to inform ourselves of how long it will take for steady growth to double; using a simple calculation and this gives us the ability to interpret what that level of growth will mean for our society. Dr Bartlett focuses on the use of exponential growth in relation to population as this is where he sees the function as being most important due to its understatement at both the local and global level. My purpose is to show why the Greens focus on economic growth is not in line with their principles of sustainability – the very value that gave birth to the party.
 
GDP is often used to indicate the standard of living in a country and so it follows that the more economic growth the better the standard of living. But the exponential function can dispel this myth.
 
Exponential growth is measured by a constant (fixed fraction) over a fixed period of time. In 2012, NZ’s GDP was recorded as 2.5%. Dr Bartlett indicates that if it takes a fixed length of time to grow, in NZ’s case 2.5% then it follows that it takes a longer fixed period of time to grow 100%. This longer fixed period of time is called the doubling time. The doubling time (T2) is calculated  as follows: T2 = 70/(% growth per unit) = time.
 
What we can say is that if NZ’s economy continues to grow at 2.5% then in 28 years our GDP will double to 5% (Calculation: T2 = 70/2.5 = 28). This may not seem so bad, but consider the growth rates for the 28 years following each of the preceding periods:
  •          2012 = 2.5%
  •          2040 = 5%
  •          2068 = 10%
  •          2096 = 20%
As Dr Bartlett points out, we need to understand that “the growth in any doubling time is greater than the total of all the preceding growth and that modest growth rates give us enormous growth in modest periods of time”.
 
My conclusion is that if Dr Norman is concerned about sustainability then criticising the government for the decline in growth in the tradable sector is not particularly consistent with the principle of sustainability. If modest amounts of growth in that sector will give us enormous growth in a modest period of time then this will require major depletion of natural resources and massive increases in waste to sustain growth at those levels. I wonder if perhaps Dr Norman should instead be encouraging local trading (within NZ) to improve job prospects and the prospects of local business owners and support the reduction in exports rather than advocating a position that has an apparent conflict with Green Party values. 

The nonsense and (hate to say it) sense of Rodney Hide

While I’m not a typical reader of Rodney Hide, nor do I agree with much of what he has to say – most the time – but on occasion I find myself in agreement with some of his ideas/opinions.  I encourage you to read on, even if you hate the pants off Hide.

I want to focus on 3 of Hide’s articles that interested me. Note, interested does not mean I unequivocally agree with him. But for reference the articles are embedded as links below.

    Mainzeal and the mad men who drive our economy

    Hide states:

    The business failure is reported as an economic calamity. And a sign that all is not well within the wider New Zealand economy…It’s all nonsense, of course. The business collapse shows we have an economy that is working. We would be better off with more…It is traumatic and upsetting for those involved. But so, too, is life…It’s simply a part, and a very necessary part, of living….Business collapse is part and parcel of a successful economy.

    At first glance, I interpreted this article as saying that the free market wants business to fail. So, I thought I’d ask the biggest defender of the free market I know of (@MarkHubbard33) how he interpreted Hide’s piece. His response was in summary, that “business failure is the natural, necessary way for the market to fix malinvestment: that aids innovation and the big problem with bailouts were they kept alive zombie business concepts/models, and hindered innovation”. In comparing this response and reading Hide’s piece again, I suspect Hide’s view is identical.  

    What I understand from Hide’s comments is that business collapse is natural and indicative of a healthy economy. My problem with his theory is that in a later article he implies that providing a living wage to employees is bad for business.

    My question is, if you are for the free market and accept that businesses collapse is natural and necessary, why then is a living wage considered as something that would cause a business to fail?  

    For instance, if the labour market demands a living wage and the business is not in a position to pay it, then surely it is a zombie business and therefore deserves to collapse under the free market doctrine.

    I suspect a response to that claim might be that government legislating what employers must pay (at minimum) is intervention and not the natural course of the market. In my view, this is weak. The government are enacting what the labour market are demanding – the right to be remunerated for the value they provide to the business. Of course, the particular framing of this claim may suggest that if a business cannot afford to pay a living wage then the employee is arguably not providing the business with the value they seek in return for their labour. Although I don’t buy that argument either, since without the employee’s labour, that is, the skill used to produce the good or service, the business would not be able to turn its resources into a revenue stream. The business does not fail because of the labour provided – it fails because the business relies on an ineffective business model that ‘hinders innovation’.

    Bravo: The real business class

    So lets look at what Hide has to say when it comes to paying a ‘living wage’ to employees:

    …many businesspeople don’t make the minimum wage, let alone the “living wage”. They work all hours. They sweat about making the wage bill each week. The income they generate pays all our wages, either directly or indirectly...Business would survive without government. But government wouldn’t survive without business… business success is the social success that matters most. It’s the success of providing what people actually want at a price they are prepared to pay.

    I’m not compelled by this argument for he reasons set out above and additionally, I find Henry George’s argument more persuasive: 

    wages are the product of the labor for which they are paid

    George uses the example of an egg company that hires a group of workers to collect eggs and in return they receive a fixed wage. The fixed wage is paid in money that represents the eggs because the sale of eggs produces the cash to pay the wages.  This may in fact be what Hide meant. But in my view Hide overlooked that without labour the business would not generate the income to pay wages. So the importance is not the business, it is in fact the labour.  

    I’m amused that Hide on one hand says its natural and in fact a sign of a healthy economy where businesses collapse since innovation derives from these failures.  And on the other hand businesses that are struggling should be assisted by the government twofold – firstly, by not legislating a minimum wage thereby privileging the business over the labour, and secondly, by leaving it to the government to provide social security for the workers whose employers cannot afford to pay them a living wage. Has Hide forgotten that the government represents the people and not business? Well, not according to his latest piece in the NBR that I will discuss below.

    Problems solved

    I enjoyed this piece while at times I seethed much of what he said was palatable and some of it even sensible. Lets look at his idea for Christchurch first. Hide says:

    The government should butt out of Christchurch…Property rights should be recognised and reaffirmed rather than endlessly pinched, the region should be declared tax-free and oppressive laws such as the Resource Management Act, OSH and the Employment Relations Act deemed inappropriate.

    It was all going well until he spouted the bit about deeming laws that address fundamental rights of individuals inappropriate [in bold – emphasis added]. 

    What I like about this suggestion is that he is right about the government butting out – CERA is an impediment to the direct democracy of the people of Christchurch. CERA is an installed regime intended to ignore the plight of the people for the benefit of some crony government agenda. 

    I’m also impressed by his tax free zone, although in my opinion, this should be limited to personal income tax and GST because I’d be suspicious about some (external) businesses finding loopholes and using the tax free status of the region to create profits that didn’t feed back into the community. And this would undermine the whole point of declaring Christchurch a tax free zone. The advantage of a tax free zone is that individuals would have their full wage to assist them in rebuilding their lives which would go some way to providing the necessary relief in the wider community. It would also benefit the local businesses because people would have more money to spend and would be more likely to spend thereby circulating more money in the region without having to artificially create more money (banking) or printing more money (QE). I’m not entirely sure how such a scheme could be implemented, but on the face of it, I think Hide’s idea has merit. I suspect his reasons are because such a scheme would be more favourable to businesses, while I prefer the idea for the benefit of the community as a whole. 

    Another idea I liked of Hide’s was in relation to the Ministry of Business, Innovation and Employment. Hide says:

    Get rid of the Ministry of Business, Innovation and Employment. That alone would signal that government understands that business, innovation and employment aren’t things that flow out of the Beehive.

    In my view, he’s right. Government is about governance and not dictating what the economy should be doing. While I see a role for government in facilitating the employment relationship, its not the role of government to determine what is innovative for the private sector. I appreciate that some people believe that some ‘public-private partnerships’ have been successful, but I don’t think this justifies the relationship since success is almost always measured in profitability. We elect the government to represent us as a people and when governments are in partnership with business there is a clear conflict of interest and conflicts of interest are deemed highly inappropriate in most professions.  

    To conclude, for all the BS that Rodney spouts and his deliberate trolling of the left, he does happen to have some good ideas and opinions. What I am finding is that despite the differences in opinions or how our opinions and ideas are formed, where there is common ground we should probably work from there. Surely, its far more productive than slinging mud back and forth. 

    Protest partial privatisation – boycott Mighty River Power

    Following the SC decision on the Wai case, looks like there is going to be a final push against Asset Sales in which various union groups and other movements are calling for a National Day of Action (Date: 27 April 2013).

    This week the MSM asked what National’s Plan B would have been, had the SC decision gone in favour of the NZMC. Its irrelevant. Who cares. They would have legislated against any finding. Much the same as Labour did with the Foreshore and Seabed. We can assume this.

    But what was the Plan B for those in opposition to asset sales? A referendum that wouldn’t be held until after at least the first few SOE’s were partially privatised? Relying on Labour & Greens to create more widespread participation through actual action something that they’ve failed to effectively do already?

    In the meantime they’ve left it to Mana’s activists, unions, blogs and other social movements to keep the issue live.

    So Plan B now appears to be another mass demonstration. This is not the 1980’s. And its not Egypt. It might feel like an exercise of citizen power but there are always a few who manage to deflect from the real purpose by using the march as a platform for spreading their anti-Key sentiments. When they do that, citizen power is lost. National laugh off the protest as a bunch of radical left wing haters. It does more damage than good.

    To make matters worse, opposition Leader, David Shearer ain’t gonna make the protest credible since he struggles to string together a single coherent sentence. And while the Greens will provide valid arguments, National have developed a knack for making common sense sound completely irrational.

    Yes, I did just make that statement – the Greens argument is common sense because its not just focused on economic advantages or disadvantages but takes into account both social and environmental factors which are highly relevant and seldom considered.

    I appreciate that there are people who are not opposed to the sale of these assets – in fact many, including Treasury see the full privatisation as providing more economic benefits. I also can understand the diverse philosophies/ideologies that compel people to either oppose or support privatisation schemes. But my point here is not to debate whether or not we should as a country partially privatise state owned assets. I want to focus on a more effective form of protest using our real power, that is, as Consumers.

    BOYCOTT MIGHTY RIVER

    Mighty River Power claims that its retail brands have a combined national market share of 18% of the physical electricity sales by volume. They boast around 370,000 customers.

    The Greens have released figures that suggest they have collected 370,000 or so signatures for a citizens initiated referendum and the polls tell us that around 80% of New Zealander’s are opposed to the partial sell down.

    Consumers are in control. Without them, businesses fail. This protest that is being organised needs to promote this power. The threat of loss of customers is enough to devalue a company. Actual migrations of customers will be even more effective. If those who oppose assets want to prevent the sale – then they must use their power as a consumer and boycott all Mighty River Power retail brands such as Mercury Energy.

    The effect of this is in order to retain profits the company are likely to have to drive up its power prices – this would inevitably force other users to transfer their service to other power companies. The loss of customers (and customer instability) and hence lost profits is less attractive to potential investors and is the only effective way of getting the government to respect our power as citizens and consumers. As consumers we can drive down the value of the SOE’s in a show of opposition to its proposed partial privatisation. We often forget that governments serve us we do not serve them.

    Its foreseeable how the government will respond – they’ll blame those who divest from Mighty River Power for its imminent sale. Its BS. They plan to sell anyway whether you take this action or not. Counter the rhetoric. Those who oppose these asset sales need to get smarter not angrier. They need to anticipate counter-responses and take more direct actions. Protesting about sales is a start but its not the same as taking direct action to prevent them. As a consumer in a consumption society – we have the power.

    According to the NZH Mighty River is in the process of being listed on the ASX:

    http://nzh.tw/1086852 now is the time.