The dangerously futile crusades of the Left over Left
27 Dec 2014 3 Comments
in liberalism, politics - Australia, politics - New Zealand, politics - USA Tags: GMOs, Leftover Left, progressive politics
The SkyCity bailout: it is common for private sector mega-projects to fail
24 Dec 2014 3 Comments
in entrepreneurship, politics - New Zealand, rentseeking, survivor principle Tags: casino regulation, corporate welfare, SkyCity
SkyCity is sniffing around the New Zealand government for a $130 million bailout. The initial project estimate was $402 million for a convention centre and enlarged casino.
SkyCity was very clear when the convention centre deal was announced that it would be at no cost to either taxpayers or Auckland ratepayers. That is a clear assumption of the entrepreneurial risks – both the upside of high profits and the downside of cost overruns and losses.
The literature on mega-projects suggests that large engineering projects frequently fail to achieve their intended financial and operating objectives. Nine out of ten mega-projects have cost-over runs:
- Miller and Lessard (2000) studied 60 large engineering projects with an average size of $1 billion. Almost 40% of the projects performed very badly and were abandoned totally or restructured after a financial crisis.
- Merrow et al. (1988) found that four of the 47 megaprojects they studied came in on budget – the average cost overrun was 88%. Of the 36 projects that had sufficient data, 26 failed to achieve their profit objectives.
- Flyvbjerg et al. (2003) analyzed 258 large transport projects (toll roads, bridges, railroads, etc.). Cost overruns of 50% to 100% and revenue shortfalls of 20% to 70% were common.
Table 1 below gives more details on cost overruns in rail, bridge and road engineering projects overseas. Cost overruns averaging 27.6% were found with rail having much larger cost overruns than road or bridge construction.
Table 1: Inaccuracy of transport mega-project estimates
| Project type | Number of projects | Average cost escalation |
| Rail | 58 | 44.7% |
| Bridge | 33 | 33.8% |
| Road | 167 | 20.4% |
| All projects | 258 | 27.6% |
Source: Flyvbjerg et al (2003).
Cost over-runs are not the preserve of the public sector. Merrow (2011) found that over half of large-scale engineering and construction projects – off-shore oil platforms, chemical plants, metals processing, dams, and similar projects – had poor results: Billions of dollars in total overruns, long delays in design and construction, and poor operability and revenue shortfalls once completed.
Alchian (1950) illustrated the unreliability of cost estimation with the range of bids made in tendering processes. When contractors bid for the same project, they routinely disagree over its likely cost by margins of 20 percent. The contractors are predicting their own costs, about which they are knowledgeable, and they have an incentive to be truthful to win the initial tender. Initial cost estimates by engineers have margins of error of 25 percent (Alchian 1950).
Central to capitalism is the notion of profit and loss. Entrepreneurial endeavours that anticipated the matort well make a profit. The rest fall by the wayside.
SkyCity is a private investment that should stand or fall on the same criteria as any other business venture in New Zealand.
What should be asked by the taxpayer in all these business subsidies is what the value for money for their tax dollars is?
What is the problem that has been solved other than common garden business failure? Can this problem be solved by market process on its own at its own pace subject to hard budget constraints, competition in the market place, the threat of innovation at home and abroad, and continuous updating of the knowledge available to the entrepreneurial decision-makers by changes in prices and profits and losses. As Friedman said:
The strongest argument for free enterprise is that it prevents anybody from having too much power.
Whether that person is a government official, a trade union official, or a business executive, it forces them to put up or shut up.
They either have to deliver the goods, produce something that people are willing to pay for, are willing to buy, or else they have to go into a different business.
Losses and bankruptcies are fundamental to the success of the market economy. Losses are a clear signal that need to restructure, cut costs or go out of business. The paraphrase Mao, ‘Bankrupt one, educate a thousand’.
Corporate welfare, such as a bailout to SkyCity and at such an early stage in the investment postpones these difficult choices. As George Stigler explained:
One great invention of a private enterprise system is bankruptcy, an institution for putting an eventual stop to costly failure.
No such institution has yet been conceived of in the political process, and an unsuccessful policy has no inherent termination.
Indeed, political rewards are more closely proportioned to failure than to success, for failure demonstrates the need for larger appropriations and more power.
The fact that the government regulates part of SkyCity’s business because it is a casino is no case for a bailout. The purpose of casino regulation is to constrain the size of that industry, not help it grow.
In these more prudish times, anti-prohibitionists cannot be this blunt about personal liberty
22 Dec 2014 Leave a comment
A taxonomy of 24 authoritarian types
22 Dec 2014 Leave a comment
in liberalism, politics - New Zealand, politics - USA Tags: economics, expressive voting, ideologies, Personality traits
Did the World Bank just solve the puzzle of low NZ growth relative to Australia?
20 Dec 2014 1 Comment
in economic growth, macroeconomics, politics - New Zealand Tags: lost decades
The World Bank published a major 300 odd page report that discussed puzzles of economic growth around the world included a chapter on New Zealand’s slow economic growth relative to Australia.
The World Bank publication is copyrighted 2015, so I assume that it has been published very recently. However, the data analysis in the chapter on New Zealand stop in 2002.
The conclusions of the World Bank with regard to the emergence of the trans-Tasman income gap were as follows:
The extent of economic freedom—as determined by propelling institutions—evolved in a similar manner in both countries.
The small differences in propelling institutions in both countries mostly netted out and as such cannot account for the differences in economic performance.
One exception was the fiscal position of the state—a rise in public expenditure after the first oil crisis entailed increased tax burdens in both countries.
A particularly sharp rise in taxation in New Zealand (in comparison to Australia) occurred during the country’s second downturn.
Differences in the size of the public sector figure prominently in the analysis of the World Bank of the emergence of the trans-Tasman income gap. The measure by the World Bank of the size of the public sector in New Zealand and Australia is reproduced below – its figure 3.3.
Figure 3.3 Government expenditure in Australia and New Zealand, 1970–2002
In particular, the World Bank was concerned about the rapid growth in the size of the public sector in New Zealand while the size of the public sector was shrinking in Australia:
In 1977–82 Australia’s government expenditure rose more slowly than that of New Zealand (and in 1975–80 Australia’s expenditure was smaller than New Zealand’s by 13 percent of GDP.
Then, as relative economic growth declined in New Zealand, between 1987 and 1990 public expenditure increased by around 5 percent of GDP from the 1982–86 level. In the meantime, public expenditure in Australia fell by 4 percent of GDP.
As a result, the difference in the general government expenditure level between New Zealand and Australia increased to over 18 percent of GDP in 1987–90.
After 1990 and until 2002 government spending in New Zealand decreased steadily—from approximately 44 percent of GDP in 1990 to roughly 30 percent of in 2002.
In Australia this expenditure was maintained at an average of 25 percent of GDP over the same period (see figure 3.3 with highlighted periods of significant increases of government expenditures in New Zealand).
A spike in the size of state sector in the 1980s may explain a delay in productivity growing rapidly again, but the state sector in New Zealand is now smaller.
Indeed, figure 3.3 above shows that the public sector in New Zealand as measured by general government expenditure has fallen by a quarter in size, by 10 percentage points of GDP in a matter of seven years between 1990 and 1996. There should be rapid growth because of the greatly reduced crowding out by the state sector but that rapid growth is not there.
Figure 2 shows that GDP growth per working age New Zealander resumed at its trend rate of 2% after 1992. This resumption of growth was in conjunction with the decline in the size of public sector tax burden rather than after it. Figure 2 shows that there was no significant growth in real GDP per working age New Zealander from 1974 to 1992. New Zealand lost almost two decades of productivity growth. Real GDP per New Zealander aged 15-64 on a purchasing power parity basis dropped from equality with Australia up until 1974 to a 30 per cent gap by 1992.
Figure 2: Real GDP per New Zealander and Australian aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1956-2012
Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics
There was no growth rebound when the burden of an oversized public sector was lifted. That is the greater puzzle. The World Bank did not address that greater puzzle. If there is a global pool of useful technological knowledge accessible at a low cost by suitably prepared people, what stops New Zealand from using this knowledge to grow faster until it catches-up with Australia and the USA?
Another puzzle for the World Bank is that it is using general government expenditure estimates by the OECD.
When tax revenue as a percentage of GDP is used to measure the size of the public sector and the burden on private sector initiative, figure 3 shows that the tax burden in the two countries is not that different and is in the low 30% range, not the 40% plus range as is suggested by the general government expenditure data in Figure 3.3.
Figure 3: tax revenue as a percentage of New Zealand and Australian GDP, 1965-2011
Source: OECD Stats
There are no 14 point gaps in tax burdens in figure 3 as suggested in the World Bank’s analysis. This is because the World Bank’s using general government expenditure shown in its figure 3.3 reproduced above.
A major conclusion about the causes of New Zealand’s poor growth performance in the last few decades should be robust to different measures of the size of the public sector, but it is not.
Economic reforms returned real GDP growth per New Zealander aged 15-64 from no growth from 1974 to 1992 to the previous two per cent trend rate from 1993. There was no sustained productivity growth rebound beyond 2 per cent growth a year for New Zealand to recover the lost ground in the 1980s and 1970s. That is the great puzzle that the World Bank did not address, much less solve.
Was Moynihan, right? The role of prospective success in assortative mating in family poverty
19 Dec 2014 1 Comment
The war on drugs: Drug induced mortality rates compared
18 Dec 2014 Leave a comment
in applied welfare economics, comparative institutional analysis, economics of regulation, political change, politics - Australia, politics - New Zealand, politics - USA Tags: drug decriminalisation, marijuana decriminalisation, Portugal, war on drugs
How much do the top income earners actually earn in NZ?
16 Dec 2014 Leave a comment
in economic history, income redistribution, labour economics, politics - New Zealand, Rawls and Nozick Tags: top 1%
Source: topincomes-parisschoolofeconomics
Note: top income share data for adults for New Zealand adults go back only as far as 1953.
To begin with, a large number of people who see themselves as middle class will have to reclassify themselves in terms of class membership.
More importantly, they will have to pick up on their class consciousness because they are either in the top 10% as any successful professional is because the average income of the top 10% in New Zealand is $128,000. With a bit of luck, these members of the ruling class will be able to afford a house in Auckland without having to borrow from mum and dad.
Pretty much every successful professional is in the top 5% in New Zealand, with an average income of $170,000.
These rich have a lot of people look down upon and order about as junior or senior members of the ruling class, even if they did know they were a member of the ruling class until they looked at the diagram above. Welcome to the ruling class. Goodbye to the middle-class. Get over it.
As for the top 1% in New Zealand, they have an average income in 2011 of $336,000. Once again, successful professionals, successful entrepreneurs and what’s left of the rentier class will have to accept that supreme power as the ruling class of the capitalist system is open to just about anybody who does well at university and enters the professions. Are there no standards?
As for the top 0.5%, data on the top 0.1% stopped in 1989, they earned an average of $457,000 a year in 2011. That is starting to look like good money, though you do have to brush shoulders with celebrities, athletes and more than a few successful small entrepreneurs, but at least you are starting to earn a lot more than your average suburban doctor who is a member of the top 10%.
The ruling class is not what it used to be – the rentier class, old money. That the rich of today – the ruling class of the capitalist system – is open to many ordinary people who are new rich or just plain urban professionals, athletes, musicians and celebrities is a common finding all round the world. As Piketty and Saez explained for the USA:
This rise in top income shares is not due to the revival of top capital incomes, but rather to the very large increases in top wages (especially top executive compensation).
As a consequence, top executives (the “working rich”) have replaced top capital owners at the top of the income hierarchy over the course of the twentieth century.
Many of the rich both in New Zealand and overseas are working rich who made their money themselves and came from middle class or upper middle-class backgrounds.
Many of these rich are well educated smart people rather than the inheritors of wealth. The working rich and most of the rich of the 21st century must be well educated because so many of them are professionals in occupations where you must succeed at university to get in the ground floor, or they are athletes, musicians and other celebrities who must work their way up from the bottom.
A large number of New Zealanders who regarded themselves as middle class action are part of the rich – the top 10%, top 5% and banging on the doors of the top 1% or better – so they better start carrying themselves about with the airs and graces of the ruling class. Better practice by putting a plum in your mouth.
p.s. There was a big spike in top incomes in 1999. It seems like a lot of people in New Zealand brought forward income in 1998 and 1999 in anticipation of the election of a Labour Party government in the 1999 New Zealand general election, and an immediate increase in the top tax rate from 33% to 39% for incomes over $60,000.
Utopia, you are standing in it! 
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