Minimum wage levels - capitalism is not the problem

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There are increasing pressures around the world for a rise in wage levels - namely in the United States and New Zealand. These claims are of course greatest in the the Western labour markets, where stagnant wages for unskilled workers have been a drain on private consumption, given the spectre of high indebtedness. The interesting aspect about these campaigns is just how little understanding there is about the issue. People simply don't understand, or don't care to acknowledge the reason why wages are down. Here are some critical facts to acknowledge:
1. Wage levels are not all stagnant: People will skills such as professionals have seen substantial increases in their wage/salary levels. It is the unskilled wage earners who have seen their wage levels go sideways because they are effectively competing with China. In 10 years they will be competing with Bangladesh and Africa. Even in the third world, the disparities are even greater, depending on whether you are providing a service to 'locals' or foreign enterprises. i.e. Software programmers in Asia are making a killing and you might think they are pocketing the 'wealth', but the trickle down is evident because these people want to distinguish themselves by eating at nice restaurants, living in upmarket apartments and buying brand-name clothes. The attitude is that, my parents suffered without these things for so long, so they want to have, and they want their parents to have, that which they went without. Some of these cultures are more savings/education-orientated than others, but most allocate cash for luxuries.
2. Capitalism is not to blame: The lack of wage growth among unskilled workers is the result of statism; that is government intervention into what were regarded as 'third world markets'. Under the guidance of the IMF and WB, most of these countries have since adopted austerity measures and liberalised their labour markets. Having conveyed a great deal of discipline, these countries are being rewarded with investment. Africa and central Asia are attracting the bulk of mining investment, SE and China, the bulk of the factory jobs. Now, its important to realise that this sudden rush of third world labour onto the global market has transformed these economies into tiger economies.

So its 2013, and there are various appeals being made for increases in the minimum wage. Is it justified? Well, you might be surprised to here me argue that it depends on the context. Generally, I would argue against minimum wages, however if one acknowledges that there is already distortion in the economy, then you might find that it actually makes more sense to adopt counter-distortive measures. The question is 'how you do it', because the wrong distortion can actually make matters worse. So what is the distortion we are talking about, and what are the impacts:
a. Immigration restrictions - There is little mobility between labour markets, and for good reason, this would be incredibly destabilising. It would be nice to expect a perfectly integrated labour market in future. But first the disparities in labour pricing have to be absorbed, and that could take another 2 decades if you think about all those workers who are still to be released from low-productivity jobs in Asia, Africa, etc. There must be 0.5-1 billion people to be absorbed into higher-pay jobs. That takes time; but rest assured no system will do it faster than the capitalist 'market system'. Are you worried about kids working in factories? As sad as this might sound; many actually welcome it. Of course there is the spectre of parents mistreating their kids, by forcing them to work long hours for the sake of personal luxuries, but this is a 'parenting' and regulation issue, not a problem with capitalism. i.e. Capitalism is trade between consenting adults (i.e. moral agents). It does not recognise a child as a moral agent, so any abuse of a child is a regulation issue.
b. Eventual absorption of excess labour - The excess of labour in third-world makets is really an issue of under-utilised labour that needs redeployment. Once that occurs, say in 20 years time, then a great many jobs will flow back to the West, if not before. The reason for the jobs flowing back earlier is that the third world, or at least some of these countries will be slow to reform their labour markets, to educate their kids, and otherwise slow to raise productivity, and curtail corruption.

So is the solution a higher minimum wage? And should there be a minimum wage at all? I will argue that there should not be a minimum wage because its a distortion upon the uptake of labour. NZ needs to price its labour competitively against other Western countries so that it can avail of niche manufacturing jobs as well as telecommunication, technical service jobs that could well be outsourced to a skilled NZ. There is always going to be a struggle for NZ to be economically relevant. The greater danger for NZ is perhaps the prospect of a resources boom - namely in energy production. If NZ became the oil sheikdom of the South Pacific, one could expect a huge gain in the currency, given its an economy of just 4.3 million people. This is a compelling point of vulnerability for any manufacturer; as well as being a point of vulnerability for a call centre. The good news is that this 'vulnerability' for manufacturers is likely to take 10 years to arise. Almost enough to make it a non-issue.

You have to ask yourself whether a minimum wage set at a sufficiently high level to make a difference would actually make a positive difference. The reality is that it makes it impossible for under-skilled people to get a job; whilst raising the wage value of people who are worth more. But it does this at the expense of others. The appeal of higher wages is that it might be construed as resulting in more money being spent in the economy, salary earners paying more tax. This is true for those who retain their job. But the problem is those who are marginalised by their lost competitiveness. Worse still is that higher wages at the top of the skill chain will merely boost spending, raising imports. We want more people employed for less, as opposed to fewer people for more. You'd expect unions to welcome this; but it appears they are only interested in the perceived gains extorted for members. They don't actually care whether their policies are effective or not. i.e. Unions will send members broke in order to retain their relevance. Kind of like the political parties who don't reveal this false dichotomy between arbitrary wages and distorted labour markets.

You might wonder whether Asian or 'emerging' markets could be enticed to raise their labour costs in order to make the West more productive. i.e. Might they welcome higher taxes on labour? The answer is that Asian countries are very poor and the culture is non-compliance for tax collection. They only tax imports, and the wealthy, because no one else has enough money, or would pay taxes. Most local governments have a litany of landowners who don't pay rates. Income taxes on the poor would be even harder. It is also not a desirable policy to tax that process of wealth creation that is creating jobs. This is what the West killed with its high-cost impositions. Asian countries are forcing the West to economise: expect more of it. If wealthier Asian countries were able to adopt a labour (say payroll tax), they would loose jobs to the informal economy, or offshore. They don't want to kill the goose that lays the golden egg. Why would you stop a process which is correcting the distortions created by governments in the first place.

If this is so simple; why are academics so confounded by the problem. Why can't economists agree? The reason they can't agree is because economists are parasites who are living off taxpayers. They are so privileged with easy money, they have become detached from the real world. They are actually not obliged to find answers. Instead they bed themselves down into 'schools of thought' and spend the rest of their tenure   fighting it out with other schools, without ever reconciling their ideas. To what end? They live in the vain hope that some bureaucrat in the PM/President's Office will proclaim them an economics genius, and henceforth they will be celebrated as the 'anointed king' of economics. They will not even care if, as was the case with John Maynard Keynes, whether the government misappropriates their ideas. This is after all why bureaucrats and academics exist - to justify government policy. Political leaders simply pick the ideas that appeal to them; that offer them a rationalisation for placing them at the centre of economic activity.

Rest assured I will never be a celebrated economist expounding like these. You have to suck up to government or business leaders to get that gravy. Nobel Prize! You must be dreaming! I'd be stoked it you'd just mention me to your kids in your next bed-time story. Yep, its a horror!



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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Was the collapse of Canterbury Finance a surprise?

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I was just going through my newspaper clippings and I came across an advertisement which is rather interesting. It is an advertisement by South Canterbury Finance, the now liquidated financial services company that was supported by the government. Some interesting facts emerge:

1. They disclose a $NZ 82.7 million Net Profit Before Tax in the year to June 2008; not so great on on the $2 billion in assets. i.e. that's 4%, and that was before the slump in the markets

2. They had a investment credit rating of BBB-, which is a pretty poor credit rating.

3. They are expanding, by adding an office in Wanganui, a dying rural town you might say given that since 2006 its population has been falling. Clearly they were appealing to a rural constituency, and they wanted to grow their assets to allay doubts.

So its not like there was no evidence of problems....and that's just from their own promotion. The problem is mostly that in NZ, no one knows how to read a balance sheet or the economic outlook. Just to put your minds at ease:

1. Look for a AAA+ or AAA- in the credit ratings; and respond when the credit agencies do because they can work on the basis of perceptions, just as you do...or context if you like. In a bull market, no one cares about a bad credit rating.

2. The outlook is for higher commodity prices, strong NZD, a two-speed economy, with high oil prices, the strong NZD going to undermine economic activity. There is going to be an attack on North Korea and Iran within a year; they will be short-lived occurrences, but they will hit market confidence, so sell your shares. The US and other central banks will then look to offer stimulus, so you might expect a recovery thereafter. Give it a year to turn around, so we are 2 years away still from the resumption of the China 'bull market' story.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Dialogue with Don Brash over central bank accountability

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This is a Facebook conversation I had with Don Brash, former Governor or the Reserve Bank of NZ, and former leader of the National Party on the current economic crisis.

Andrew Sheldon talks to Don Brash

Don, do you accept (or better still, have evidence to suggest) that governments (say the US or UK) are too cozy with bankers. When you look at how the US has bailed out the banks rather than plausibly supporting the creditors, might this point to an underhanded relationship between the two...for mutual (dubious, unenlightened) self-interest. And should not have the National Party have anticipated this crisis a decade ago...I know I did with a great many others. Why did NZ, Aust, Canada central bank governors allow it to go on... Perhaps you only want to speak for yourself? But perhaps you could also speak generally.

ADDENDUM: My criticism of US government fiscal and monetary policy extends back to 2000, however I only started blogging in 2005 – and continued my criticism.

Top of Form

Like · · October 11 at 2:46pm ·

Don Brash

Andrew, no, actually I don't think the US and UK governments have had too close a relationship with the banks. The reality is that the banks are at the very heart of the financial system - both the credit system and the payments system. The governments of the US and the UK (and of course of many other countries also) realised that the collapse of their banks would have had an impact on their whole economies which would have been utterly disastrous, so they bailed them out. Should they have regulated them more tightly to avoid the banks getting into trouble? Don't get me started! I blame the collapse of the banks in PART on the policies of some of the governments, in part on the greed and stupidity of some of the banks involved, and in part on the very tight system of regulation which actually led many people to assume taht the banks were effectively government guaranteed.

You ask why did NZ, Australian, and Canadian central bank governors "allow it to go on". I'm not sure I understand your question. The banks in those three countries are among the most robust in the world.

October 11 at 8:58pm · Like

Andrew Sheldon

By the last part of the question, I meant in terms of weighing into US, EU, Japanese govt policy decisions, an independent central bank believing that the substantive financial markets which underpin their demand have a substantive interest in 'sustained growth'. The policies of these govts have undermined global growth...that affects every economy. Say for NZ, does not the central bank have a mandate to preserve growth, thus weigh into international markets which affect their outlook?

October 11 at 9:05pm · Like

Andrew Sheldon I appreciate our banks are fine...more concerned with the broader economy, and the unsustainable interest rates which lured in home buyers, causing injury....not to mention the effects in equities.

October 11 at 9:06pm · Like

Andrew Sheldon We might reasonably expect the IMF to be independent...but sadly their role seems to be compromised by their need for OECD country funding

October 11 at 9:08pm · Like

Andrew Sheldon IMF says very little whilst 9 of 24(?) OECD countries have debts over 100% of GDP.

October 11 at 9:08pm · Like

Don Brash Not really fair Andrew. I've read plenty of IMF Papers which are highly critical of the enormous debts of many OECD countries.

October 11 at 9:19pm · Like

ADDENDUM: So does this reflect on the media’s lack of interest in bad news? Why might that be the case? It was very years ago to find a journalist offering critical views on the economic outlook. One of the few was Max Walsh, Editor-in-Chief of The Bulletin (Australia). Is the editorial content of the media skewed towards good economic news…even though there was a lot of critical economic analysis around from 2005-2008 outside of the mainstream media.

Andrew Sheldon

True, sovereignty lies with national govt...so what about central bank governors...what stops them from being more critical of foreign central banks and govts? They are independent from govt supposedly, so no embarrassment...just political integrity issue. i.e. Would Simon Power get a job with Westpac if he had an unfavourable Commerce Dept policy towards the banks....well, I know the answer because bank fees are a form of extortion...the basis of a class action in Australia as we speak.

October 11 at 9:46pm · Like

Don Brash Andrew, you are certainly right that central bank governors are reluctant to criticise other central bank governors. But who would you like Alan Bollard to criticise at the moment if you had your way?

October 14 at 9:20am · Like

Andrew Sheldon Ben Bernacke, ECB gov, all govts for adopting regulation which distorts rather than protects; for sanctioning extortion or 'numbers' rather rationality as the basis of political discourse.

October 14 at 9:49am · Like

Don Brash

Not sure that I understand your argument Andrew. To the extent that central banks are preoccupied with maintaining the value (purchasing power) of their own currency, I would have thought that most developed country central banks are doing OK at the moment (as measured by inflation, which is the only basis for assessing whether purchasing power is being maintained).

I share your concern that banking regulation may have actually contributed to some of the banking system problems, but central banks are certainly not the only ones (or even the main ones) to blame for the problems in the banking sector. In the US, for example, a lot of banking system problems stem from political pressures since at least the early nineties for banks to make loans to uncreditworthy, and marginally creditworthy, borrowers.

October 15 at 7:32am · Like

ADDENDUM 1: Actually, governments have a monopoly over the initiation of force. It was the Clinton administration who deregulated the banks in the USA; thus we ought to blame there for facilitating the actions of banks, which was largely acting ‘legally’ despite a few exceptions.

ADDENDUM 2: Actually, governments should be preserving a stable or fixed amount of currency relative to growth so that purchasing power actually increases. i.e. The amount of their wealth increases whilst the value of goods remains stable. We currently have ‘flat’ or ‘non-trending’ asset prices, no income growth, and rising product prices. i.e. We have inflation, i.e. Erosion of the real value of goods. It will not readily show up because govt masks the impact of the more volatile factors, i.e. rent, fuel, food,; arguing that they are too volatile to measure. True, but in the long run, they should not be ignored.

How can you be sure of that? How do you measure economic activity efficiently?

Andrew Sheldon

If central banks were duly concerned with preserving - or better still increasing purchasing power (as we live to progress I believe) - they would take measures which achieved maximum, but sustainable growth. Notwithstanding the fact they are confined to monetary policy, as an independent agency, there is no reason they cannot have an opinion on fiscal policy, and offer another element of accountability. Rather than debase their currencies, the US central bank lowered rates to extraordinarily low levels, govts like Aust subsidised great, Fannie Mae was instructed to offer the poor loans, creating a great deal of debt, and only in the last 3 years have we seen debasement of debt with quantitative easing...but there is more to come...causing more inflation. It’s about pushing the trauma into the future. If govt would only stop distorting the economy, each would be able to achieve growth of 8-12%...not the 1-3% we are accustomed to. The idea that we can only grow at these miniscule rates is because of govt...look at the Maritime Transport Act..calls to update it in 1998...its now 2011. It will happen now immediately after the election. Meantime priority 'distractions' for govt - aside from earthquake - rugby, seabed issue. One gets the notion, govt is about putting out fires, placing defensive.

October 15 at 8:13am · Like

Andrew Sheldon

Ultimately, I blame govt for being politicians rather than statesmen. They live within the system, lacking the ideas to change it. The problem is not the central banks per se its the govt which sanctions everything they do...its the idea that people really have any influence; that we have participation, choice?? We don't. We have a pretence of choice. We have a pretense of rationality within parliamentary debate...when really its a 'numbers' extortion game legitimatised by 'participation'. Tell me what participation I had in any piece of legislation. If I make a submission, what option do I have to hear criticism of my submission? None. How am I to know if it’s been read? Can't. There is a short range agenda to stay in power which means 'slow change' rather than selling ideas because our elected MPs have not developed a coherent philosophy before entering politics. I'd actually say you are better than most. But when or if you get substantive influence, you will become inaccessible, and centralised govt and universal suffrage will ensure you are motivated by the wrong priorities. You will become like the NP and Labour - 'constrained' by the system. Banks are custodians...they are not acting in accordance with their fiduciary duties; though you are right, govt requires no compliance from them. Another problem is the unconditional expropriation of wealth by taxation. Unless a voter has the right to renounce their sanction of govt by withholding tax, they are slaves. Representative democracy is slavery; we need a meritocracy where reason is the standard of value.

October 15 at 8:24am · Like

Don Brash

Andrew, I'm afraid I don't have time (and I'm not even in Parliament yet!) to reply to all your arguments. But let me just, in defence of my fellow central bankers, say that central bankers should not be increasing the purchasing power of their currencies (that would mean steadily average falling prices, or deflation). If money is to be used as a store of value, and as a measuring rod, it is important that it neither decreases in value (as with inflation) or increases in value (as with deflation). Most central bankers acknowledge that the only way in which they can help economic growth is by keeping the value of money stable, so that consumers and producers can use the price mechanism to inform their decisions. You obviously fear that successive rounds of quantitative easing will cause inflation. Yes, it may do, but it certainly hasn't done yet, and I strongly expect those central banks which have undertaken quantitative easing to reverse that process at the first sign of inflation.

ADDENDUM: Whose fault is that Don. You joined the ACT Party just 2 months ago, and his is the only opportunity I get to talk to you, and when the questions turn a little hairy, you evade them. That is govt; you don’t need to be a parliamentarian…you think like one merely as a candidate. You are over-qualified…that is the problem.

October 15 at 2:14pm · Like

Andrew Sheldon

Don, there is nothing inherently bad about increasing purchasing power; that is wealth creation. Yes, you can match the growth in money supply to productivity to stabilise prices, but that is not what the Fed Reserve has been doing. It has been stimulating debt levels with unsustainable low rates of interest....now there is a great deal of defaults, so debasement or recapitalisation is necessary to avoid default of that debts, say in USA, EU, etc. Mass transfer of wealth (via extortion). The poor suffer the most. Measures of inflation are entirely selective and arbitrary...just look at MS growth over productivity or economic growth.....to that you say, QE 'might cause inflation'? Ask yourself why QE is necessary at all? Why did asset prices rise so high? And how inflation is avoidable? Inflation will inevitably cause debt defaults among those not propped up. You seem to think there is no causal relationship between MS and productive capacity? It is true strong wealth creation in China and the developing world is offsetting OECD antics...but the relative distribution of capacity is going to create a productivity gap.

October 15 at 4:10pm · Like

Andrew Sheldon Don, the evidence does seem to suggest inflation ahead...this at a time of subdued confidence. Read this inflation news from the UK, and I've seen similar from Australia....

ADDENDUM: Don seems to have stopped talking to me; so because he is focused on getting higher profile attention, I thought I’d bring this to the attention of the media, because they love a controversy.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Black gold in NZ - we just need to find it!

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It is good to see the NZ government promoting oil & gas exploration. My opinion is that they are not doing enough. Here is an NZ Oil & Gas Presentation for 2011, which provides a good overview of the NZ industry. There are several points I would make:

1. The effective tax rate on oil & gas production is 20-25% of profits - based upon the 20% royalty and a nominal income tax because although the tax rate is 28%, any discovery resulting in production is only going to be realised after capital has been recouped and a scaled up exploration and development program has been advanced, i.e. Don't expect much income recovery.

2. There is a significant income for NZ from local, competitive energy supply, though oil is likely to be processed in Australia. There will be a lot of jobs and engineering work.

3. The NZ government ought not to wait for these private companies to give the country attention; it ought to expedite their own exploration efforts. i.e. Spend $50mil over the next 2 years contracting geophysical surveys over the most prospective areas. This will give a better idea for future exploration, as well as attract private interest. Establish a state oil company and seek private equity so that there is a 'bidder of last resort', and this enterprise ought to be sold off when the market for risk capital arises, or the risks fall.

The motivation for this approach is:

1. NZ has yet to have a significant oil discovery. Until that happens, NZ will not be taken seriously

2. NZ should not be letting foreign nations decide its fortunes

3. NZ needs to place some faith in its oil and gas potential

4. NZ needs to recognise the huge potential of its offshore areas - they trump the offshore mineral potential, and yet the governments primary focus is on these areas. They are getting all the political focus.

5. NZ is in a global recession. Commodity prices are high, and NZ needs to invest in income generation. There is no better area to do this than oil and gas!!!

6. NZ could have a $1 trillion future fund to match Australia's in 2030 if it appreciates its offshore oil potential

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

NZ - government policy detached from reality

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The suggestion by this consultancy International Funds Services Development Group that NZ could emerge as a future financial hub is ludicrous. There is no justification for duplication services in NZ which are offered in Australia - a market with 5-6x the size, a better climate, better pay, and a broader commodity focus. It is nonsensical. Just as importantly, there is little little investment capital or investment in NZ. It is a very small market at the 'arse-end' of the world.

Anyone investing in NZ will be doing so for only one of five reasons:

1. Domestic ties - the type of business that will always need to be local, i.e. cafes, restaurants

2. Raw material production & processing - natural resources with or without processing if competitive. i.e. Some materials are too low value or bulky without processing, i.e. iron ore, or high value commodities where transport is a low cost penalty.

3. Low cost competitiveness - The best example is consulting services or call centres. NZ has a technology and price advantage, i.e. NZ is the lowest cost OECD country in the world, so you'd have to wonder why they are not building call centres for higher value servicing than can be performed by Filipinos. It could service foreign markets when they would have to pay overtime or late night salary rates.

4. Lifestyle industries like tourism, etc.

5. High value manufacturing and servicing like niche hospital equipment designs, taxi despatching systems, GPS software. For example, consider the following example of seismic monitoring systems.

These industries are hard to create unless you know something about the world. I would encourage NZ'ers to get out in the real world, the active, industrialised countries and learn what these countries are doing. It is not enough to read newspapers and online, you need to live in these places.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

What NZ needs to do to become viable

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NZ is currently in pretty poor financial straits, however it has a great future. The nature of its mismanagement is similar to other countries, though its solution ought to be a little different. The principle problem in NZ is:

1. Low savings - The solution would be to make the 'economic surplus' discretionary is employers can reduce pay in tough times; whilst increasing savings by getting NZ'ers spending less. The amazing thing is that we are all worried about 'the levels of consumption' and greenhouse, yet a pure capitalist economy would resolve these issues, and create jobs at the same time. i.e. The 'mixed economy' is bad for the environment.

2. Low value work - By giving companies the discretion to lower wages, i.e. to offer surplus as a bonus, like in Japan, companies have an incentive to absorb the surplus labour which would about buoy wage levels, as well as attract new investment. NZ has to be competitive to overcome its disadvantages.

3. Inefficient and corrupt/extortionate market structures - There are two many extortionate market regimes in NZ. The worst is the building trade, where tradesmen are able to recoup the savings for materials purchased for the benefit of clients, then mark those products up to the client. They then work 3 days a week. The lack of competition in the building industry is part of the problem.

4. Extortion from government, i.e. Taxation is coercion. In this area, the NZ is no worse, and a little bit better than most governments. It has punitive fine policies, but not as aggressive as the USA or Australia. Local government has a strong welfare element.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

NZ - closing the gap

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The NZ government seems to have played down the chances of NZ 'closing the income gap' with Australia. The reality is that there are several issues which are driving the widening of the income gap, and there are several issues which will close it. The pertinent factors are:

1. Energy resources: The discovery of large offshore oil & gas resources in offshore NZ basins - give it 10-15 years, but it will eventually attract a lot of capital investment in NZ. There is the prospect of further discoveries being developed sooner in the Taranaki Basin, since this field is already developed. The small size of this nation means any significant discovery is going to have a significant impact on the country.

2. Steel processing technology will eventually result in NZ producing high-titanium/vanadium, high strength steel alloys, but the technology is not quite there. NZ does however have vast resources of titanomagnetite sands between Wanganui and Auckland. It will fight with PNG over market share, and that will be another 10-15 years as well.

3. Business outsourcing - NZ wages are 30% lower than Australia, and the AUD is 0.76 NZD, so NZ is well-positioned as a business outsourcing centre, offering better educated staff than Malaysia, China or the Philippines can possibly offer. The problem is telecommunications in NZ are very expensive, and capacity is tight. Accounting services have more potential. I do however expect such solutions to offer a better outlook in the future. Expect this market to start developing, though perhaps not immediately in VOIP solutions....as NZ is not competitive.

4. Food and timber processing - Of course NZ continues to offer opportunities for value-added food output. I wonder why I cannot buy canned lamb in the Philippines, or anywhere for that matter? There is a Chinese canned lamb. I love lamb! But beef tonight. Bibinba!

I would give NZ another 10-15 years, and then I think people will start flowing back here. I agree with the Labor government. As much as I welcome privatisation and cuts in government spending, free market policies are not going to close the gap. NZ is a small market, so there is no compelling reason to spend money here, other than those opportunities above. Even if you adopt low taxes, no oil company believes any future government will retain such an 'ideological' position, so they will always pragmatically spread their bucks. NZ reforms in the 1980s did nothing to attract capital.

At the end of the day, there are compelling lifestyle reasons to live in Australia which Kiwis will never escape. They are - Australia just has a superior climate. Sydney! I wear a t-shirt or no shirt for 9 months in the year. Try that in NZ! The other is space and culture. NZ is far better when I first came here in 1986, but its still a little on the slow side outside of Auckland. NZ has more crime, but not a big issue. Maybe the greater problem is that there is so little going on that crime and dolphin sighting is all that you can report....lest you think about the outside world. The shorter day and the wind. I swear I lose two hours a day living in NZ, and its often miserably windy going outside. Its not too cold, but the wind is annoying. Australia is blissfully 'cool and breezy'. Australia - paradise...on earth. Now I know why I only bought a summer house here!

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

NZ taxing tourism might cause problems

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Is the NZ government pricing NZ out of the market? The NZ government has recently increases the GST tax rate t0 15%. Clearly the NZ government recognises that NZ is not earning enough, so is not therefore in a position to pay for services. Consumption taxes are one way to go to rein in budget deficits....but are they the best way to go. There are reasons to wonder.

1. Tax on spending: We might argue that NZ'ers spend too much....but really the greater issue is that they earn to little, that they cannot sustain those expenses.

2. Tax on tourism: One of the growth markets for NZ has been its tourism industry. Is that inclined to stay true if the government takes the easy steps of hiking consumption taxes, and then offsetting them with tax breaks for the lower income earners.

The problem is that in the context of a stronger NZD, tourists might reflect on NZ beyond the 'pretty pictures' and see that the country offers no job prospects, higher costs of living (because tourists are unfairly burdened relatively) and decide to go elsewhere. It is not even that NZ is 'so expensive', it is that its pretty expensive already to get here, and its at the 'arse end of the world'. We might ask where the government is positioning itself. The NZ is too small to interest most business people. It is increasingly expensive for students any young adults. Its so far away for busy travellers and the NZD is higher than average. So we might ask... Is NZ pricing itself out of the market?

Shouldn't the government be trying to raise the earnings potential of NZ jobs? There are signs that they are doing this. I can see that they are getting rid of disability pensions, and requiring people to show proof of working, or trying to find work. This government is the best government NZ has had in a while...but is it acting quick enough? Is its reforms as comprehensive enough? On some levels they are very good, but on some issues they make a poor case.

1. Binge drinking - too pissed

2. Speed limits - too cautious and non-intellectual

3. Consumption tax - reactionary

4. Regulation- very poor

5. Infrastructure - its building roads when it should be building fibre networks. The population is hardly growing...why build roads? This creates jobs in the wrong areas.

The trend is good...its just the rest of the world is moving as well, and NZ is at the 'arse end' of it. It needs to do it better. We need to recognise that costs are going up everywhere, and there are many ways to travel around a country. The best way to travel around NZ is to go to a car auction and buy a van...sleep in the back of it. Sadly, that route might become illegal given the complaints over 'stranded turds' in picnic and car parking areas around NZ. Not pretty. I guess one of those 'negative externalities' arising from tax or cost changes and new technology.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

A prosperous outlook for NZ - an energy boom?

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There are of course numerous factors you look at when you decide a place to invest, a place to live, or a place to holiday. For these activities NZ has a great deal of appeal because its low-income per capita has decimated the currency. It has often lagged between 0.5-0.75 USD for the last few decades. This collapse occurred after the 1960s commodities boom. In days gone, countries like Australia and NZ were among the richest countries in the world.

I can see a time in about 10-15 years when the NZ currency will be stronger. It is possible that NZ will capture some of that long-lost glory. That is a long time off. I am expecting NZ to have an energy boom. i.e. Methane hydrates mined from the sea floor, lignite pellets, and perhaps even conventional gas. With offshore oceanix areas the size of the EU, and a stagnant population of just 4.2 million, there is economic potential in those 1000-metre deep southern seas. It will take time to find, delineate and develop these resources, however one good discovery will compel a great many other explorers because China and India need energy. That is a lot of wealth for such a small country. Expect it to have its own 'Norwegian-style' economic miracle.

NZ Property Guide Philippine Real Estate Guide Japan Foreclosed Guide

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

NZ savings disappoint but there are opportunities

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We have long identified lack of savings as a problem for the NZ economy. Rabo Direct has performed a survey of 1000 NZ'ers and found that they are dismal savers. The more important question is why don't they save. I have a number of suggestions for this problem:

1. Lack of investment opportunities: There are few investment vehicles in NZ, i.e. The equity market is pretty thinly traded and is dominated by just a few stocks.

2. Lack of business opportunities: NZ is at the arse-end of the world with a small market. You would have to go to Easter Island to find a country with worse investment demographics.

3. Population demographics: NZ is home to welfare dependents, unaspiring lifestylers and retirees waiting to die. If you are looking for career opportunities, business opportunities in NZ, you are not likely to maximise your possibilities here.

4. Access to the Australian market: NZ really needs improved access to the Australian market. Of course it is coming, but Australia is not going to rush because its better for NZ given that Australian incomes are 30% higher. Mind you, it probably balances out because Australian savings are probably 30% higher. i.e. There disposable income to spend on NZ products is probably similar.

5. NZ financial literacy is pretty low: Most NZ'ers do not participate in financial markets from an early age, so they are less inclined to have stocks, and will take longer before they have a house. If they do invest in any property they would probably buy a 'batch' pad and they would not even consider it an investment, even if it is a poor store of wealth.

6. Slim job prospects: It is hard for NZ's to find jobs. There are few job creation opportunities, few people in this population demographic are going to be consummate spenders, so there is little economic activity. Depopulated rural towns struggle to even support their proprietors.

All of these factors are better in the cities where there is population is growing, its more international, better educated, more aspirational and wealthier in terms of their appreciating assets and disposable savings. But the culture does not match Australia because its not as pervasive. A big factor is rising incomes and property prices. NZ needs to move into higher value job creation which will generate more export earnings. It desperately needs to seamlessly integrate with Australia if it can swing that. It needs better communications (data-VoIP) capacities.

NZ Property Guide Philippine Real Estate Guide Japan Foreclosed Guide

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

NZ Privatisation - on whose terms?

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Surprise surprise! NZ's self-proclaimed 'leading' investment banker is an advocate of privatisation. In this latest article he wants to see the National Party prepare state owned enterprises for sale. The government has said they will only do this in their 2nd term.

I personally have no privatisation of state assets. In fact I am so keen on privatisation that I would like to see the police force, post offices, even judicial services privatised. I see no reason why we shouldn't privatise everything....oh, except one! The problem is that the people overseeing the process have no personal credibility when it comes to moral values.

I have yet to see a privatisation program which was structured in the interests of the public, who purportedly own these assets. It was all about the major stakeholders, namely:

1. The government

2. The investment bankers

3. The lawyers

4. The brokers

5. The foreign buyers

The taxpayer really comes a slim last with consideration. They will certainly get the long term benefits that arise from greater market dynamism, but even the competitive advantages are often slim. Here is why? Naturally competitive markets are a rich tapestry of competing interests, i.e. There will be some corporations who integrate gas and electricity, others who might vertically integrate coal mining and power generation, and still others who might combine power and retailing, even engineering consulting, or operations overseas. When we have investment bankers organising asset sales, they go:

1. Every corporation gets a gas generator, a hydro generator, or maybe they decide instead,

2. Every corporation specialises in a certain 'species' of generating plant, whether gas, coal or wind.

The implication is that all companies look at the same, so there is very little basis for 'price differentiation', or they asset holders become specialised, so the least advantageous, say coal-fired power generators are cross-subsidised by the others.

The reason why this is important is that it determines the quality of your privatisation outcome. If there is no basis for price differentiation, you get a lot or collusion among the parties with any competition being cheap rhetoric. If the assets are sold as specialised packages, then you get stratified asset operating costs, which results in one more expensive producer being carried by the others. i.e. In NZ, 75% of generating plant operates at near-zero cost, whilst 15% are expensive gas-fired plants. These gas-fired plants set the price at the margin. Prices can drop off-peak only so low as to knock the gas-fired producers out of the market.

The implication of this is:

1. Investment bankers get paid more for delivering the outcome which is good for government - higher asset prices so they can get pay for what they want to pay. In the process they leave taxpayers with a market structure which results in high prices, low competition, or high collusion.

2. The government gets to pay off debt, gets to distance itself from the industry. i.e. It can blames executives for their high prices, knowing it can do nothing to intervene.

3. Foreigners often get cheap assets because there is a shortage of buyers for such assets. Often these markets are risky, because they are still quasi-government owned, and they are still developmental in terms of market maturity.

It might simply be easier and better for the government to corporatise these assets, then say to the directors that they can have 5% of any profits they can deliver over their previous profit. Or to say that the company who exceeds their counterparts, gets 10% of any profit advantage. Of course you would have to start with a level playing field, and you would have to strip out the effect of fuel cost variability. It might just be a more favourable precursor to privatisation. It would allow the government to sell efficiently run assets, as opposed to bureaucratic sloths.

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Author: Andrew Sheldon

Resource Rent Tax Applied Critical Thinking |

www.SheldonThinks.com

Making NZ competitive

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Why is there this obsession in NZ to compare their economic performance with Australia? Why is the standard of the good? As an Australian in NZ, it strikes me as pathetic on so many levels. That is not to say that Australia cannot be beaten, but such a comparison kind of suggests you are 'equal bed fellows'. We are not. We are very different.

For starters. Australia has immense mineral and energy wealth. NZ has relatively little, and what exists tends to be tied up in national parks, and not open to development.

The next point is - Australia has a rapidly growing population of 21 million, and NZ has just 4.3 million people, awkwardly split between two islands, and its stagnating. Why? Because every time that NZ seems to start growing, a group of Kiwis seems to leave the country. Usually in recessions when there is no jobs, but even retirees are inclined to leave for sunnier Queensland. Even the immigrants 'freshly acclimatised' in NZ, move to Australia when they get their citizenship. Why? Because NZ business will not recognise their MBA or PhD qualification, so they were only ever able to aspire to a store manager position at Pizza Hut.

The reality is that PM's do not like to tell their electorate how it is. The reality is that NZ ought not be comparing themselves with a stallion like Australia, but a 'cross-bred' like South Australia. South Australia has a similar population to NZ, and its fairly isolated. At this point it has about as much mineral production capacity as NZ, but I actually expect that to change in generations to come. No one wants to live in Sth Australia too, but that also will change. South Australia will be the next WA boom! So where does that leave NZ? Probably comparing itself to Tasmania, which only has 300,000 people. :)

The reality is NZ has huge culturally entrenched attitudes to work which need to change. It has some huge disadvantages to fight, and it really is not doing enough. The problem for the government is that they are just happy to be in power. Why make changes which will get you tossed out of office. The country clearly needs to break into technological niches, but how do you attract investment. NZ at this point is a bloated welfare state. I see no great desire to change that. The leaders here are 'nice', but they don't inspire confidence in their ability to make changes. Helen Clark had bigger gonads than these two leaders. One of them was even challenged by a 'homo in a tizzy' last week. :) Stereotypes aside. NZ has never had a good leader, so it doesn't know what its missing. None of them convey a positive message.

So what needs to be done. Well if we acknowledge that NZ cannot compete with Australia on low value minerals, we have to acknowledge that NZ can compete on competitively priced, increasingly skilled and productive labour. It is a small market, so NZ has to focus on developing niche-technologies like IT, medical devices, biotechnology, etc. There is also great appeal for NZ in other areas like arts and literature, as certain regions like Wanganui could foster services for these people to attract residents, and flow-on business.

There is a need to attract capital, so it would be desirable to reduce decrease consumption taxes and income taxes, and increase 'dead' capital taxes, principally land taxes. This would result in better utilisation of the land, as well as avoiding tax evasion. The welfare state has to be curtailed, local government needs to be curtailed, as its very inefficient, with majors who don't know what they are doing. There is a need for training, but its to no end unless you have the right corporate incentives to attract business. Actually, NZ is in a very competititive wage gap, i.e. It has English skills so it competes with Australia above (30%+ wages) and countries like Malaysia, Philippines, Thailand and India, with their obvious skill and language difficulties. They need to recruit from these areas, but they need to avoid marginalising these immigrants and nurturing their skills. Not alienating them, and forcing them into Pizza Hut jobs.

There is potential for New Zealanders as well. However they have a skills-experience disadvantage. These foreign immigrants have a culture-leadership-confidence weakness. A lot of these Asian migrants are very skilled. We must remember that many of them have been able to leave the country because they are wealthy, skilled, educated and successful. This is NZ's opportunity to grab them. They are keen to work.

The opportunity really falls upon NZ business to identify and make use of these skills. My partner is an example. She has an Psych degree and MBA from the Philippines. She managed 50 call centre staff in the Philippines, she has vast expertise in online marketing and search engine optimisation. She is not a strong leader, so she needs people to tell her 'conceptually' what to do. But she is incredible at execution, multi-tasking. Great work ethic. Very few people in NZ can do what she can do, and she can also offer a competitive edge because she has former contacts and employees offering outsourcing opportunities in Asia, to further increase productivity.

There are opportunities there if NZ wants to take them. Where are the leaders? Managers? Both in business and unfortunately government because it retains such a tight grasp over the economy.

Not all immigrants come from Asia of course. There are a lot of Europeans and Americans coming to NZ, but I would suggest they are mostly coming to retire. If NZ wants to go that way, and stay a retirement village, then I guess high consumption tax is the way to go.

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Author: Andrew Sheldon

Resource Rent Tax Applied Critical Thinking |

www.SheldonThinks.com

Do NZ property inventories indicate anything?

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SMH Online has reported that property inventories in NZ appear to have bottomed. The weeks of sales inventory has fallen from a peak of 50.2 weeks in June 2008 to 31.5 weeks this June 2009. This need not translate into higher sales, but I believe it has. We bought our place in November 2008, which we think was the perfect time to buy because of the calamity on financial markets. We bought from an old couple in their 70s who probably thought we were looking at another Great Depression.
Insofar as market timing is concerned I believe buyers will have another opportunity to enter the NZ property market. I would also suggest that city properties have further to fall. I would not be buying city property at this time. My advise is to buy under-loved rural property if you must, as we did. We bought a lovely Victorian home in a small 40,000 town reasonably close to Wellington for $NZ78,000 ($US40,000). Since then the exchange rate has recovered and we believe the property has found a floor in this segment.
The next opportunity will come with city property, but not until people are squeezed by higher inflation. The property market is highly leveraged, and NZ is worse than most countries in this respect, which means great opportunities. Such issues are discussed in our Buying NZ Property report.
I don't want people to read too much into these inventory numbers because people are only going to sell at the top if they think the market has a lot more to fall. Buyers in rural areas will have recognised a bottom and pulled their property from the market. Buyers in the city will mostly be thinking their home is a long term investment, that it no longer makes sense to sell. That does not mean prices will not fall more. It just means people cannot see the inflationary outlook. Clearly that is going to impact on employment, interest rates, and the average over-leveraged home owners capacity to pay off their mortgage.

How should the NZ government boost the economy?

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It so happens that the NZ places a great deal of weight on what I think. In fact every day before the Prime Minister eats his Sultana Bran he calls me up and asks me "Andrew Andrew, what should I do, I can't live without your insights". Anyway, I thought I'd share some of the advice I gave him today.....

First of all, I am no Keynesian advocate. I deplore the idea of stimulating the economy simply because I deplore the economic policies that leave the economy in a situation where there is excess capacity, whether because of over-investment or over-consumption. Over-investment is of course the result of bad planning, over-consumption the result of excess debt creation. In the case of the later, this occurs because of government. The US government is key because:
1. Its the largest economy in the world
2. It is the largest financial centre in the world, and London is just as bad
3. It is the world's reserve currency, which means that most debt is denominated in USD, so they don't have to worry about repaying foreign currencies, since they just print their own cruddy currency to repay the world. This of course tells you to expect a fall in the USD. Which makes me think the Japanese have more to worry about then the USA. China will be ok as well because they are the centre of future growth. Poor Japan though. Those innocent souls investing in postal savings bonds at 1% return on investment.. he he. No wonder the governments wanted to sell the scheme. hehe. Nope, very sad. I keep telling people you cannot trust government. They are evil people. Why do you vote for them.

Ok, I've fallen off topic here. So back to stimulus. Given that the US and other Western governments have created this slump in demand, and they did that by stimulating household debt/demand. Surely the only justification for now going out and stimulating government demand/debt is by increasing the productive capacity of the economy. So how might the government do that. I can suggest the following ideas:
1. Investments that use as much local content as possible
2. Investments that provide stimulus to every aspect of the economy, eg. rural and city, white collar and labourers.
3. Investments that increase the domestic productive capacity, reduce costs, or increase efficiency, prefereably in those areas that need it.
4. Investments that will provide work to small business as opposed to big contractors sending most of the profits abroad

So lets look at some possible projects:
1. A very fast rail service from Auckland to Wellington: Such a service will go through mountains (like Japan), or alternatively around the coast via New Plymouth if that saves on capital costs. The attraction is the jobs created, local railway making, local raw materials (iron sands). The trains could be made in Australia, the technology imported from Germany, France or Japan. This is one of my favourites because it would be more energy efficient, reduce emissions, replace old train services, stimulate regional economies before & after. The argument could be made that NZ'ers could not afford to buy the tickets. True. Next!
2. Energy projects would make a lot of sense but NZ already uses renewable and domestic energy supplies, so there is no point in investing in them, unless it was a proposal which would reduce imported oil used as a transport fuel. This makes a lot of sense. The question is how? The railway idea helps, but its probably not viable. NZ has no car industry, so it does not make sense to start one given the small size of the economy. It would not be feasible to convert cars to electric engines, or to replace them. An attractive option however is to produce biodiesel from wye and bio-ethanol from timber. This would take time mind you, but why not start the problem with annual crops like maize and sugarbeet. Within a decade NZ would no longer need imported oil. Another compelling program would be a search for coal seam gas. I actually know a lot about this having just prepared an energy report on the subject. The intent or hope is that by government kickstarting coal seam gas expenditure through Solid Energy, it will be able to establish a competitive gas supply to the conventional suppliers, and it will also kickstart investments in gas reticulation pipelines on both islands. The consequence will be cheap gas, which will attract more industrial activity as well given the weakish NZD.
3. Communications projects make a lot of sense as well. The future is very much going to be technology driven, and I think by offering cheaper, high speed internet NZ has the potential to rejoin the technology race. It is lagging in this respect. I think the key to improving things is to make NZ a more attractive place to live. Over-investing in property did not help as now we are going to witness a lot of job losses. High speed data therefore makes a lot of sense, as well as getting computers into schools.
4. Education makes a lot of sense too, but what is the point if people just go overseas. Unless NZ can appeal to people, attract higher income jobs, it has little hope of doing that. I think most people have a bad perception of education frankly. There is this obsession with formal education. I consider myself a pretty smart guy, and truth be told, I learned most of it by reading books, analysing issues, breaking down arguments. Any education needs to be critical and systematic, it does not need to be formal, and it does not need the sanction of government. There are better ways to convey credibility to prospective employers than getting a certificate from a government.

I can't think of any other investments that people should make, but there are probably more. Tell me what you think!

Weak NZD a boon for emigrants

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The NZD is currently languishing at 49.5c in USD terms. The implication is that NZ becomes very competitive in the global market place. This is important in the areas where NZ has an advantage:
1. Food products
2. Forestry
But it also means NZ has a strong point in terms of software programming and web design. There are a great many services you can outsoource to Asia, but as regardless of where you look, you will pay for skills. Traditionally we would not expect a backwater like NZ to offer competitive skills. In fact the low average wages in NZ tends to drive skilled labour out. This is why in previous years we have seen people moving out of NZ as retirees moved in.
In certain areas like software programming, where businesses are not requiring daily contact with clients, and can readily deal with client issues over the internet, the reasons for basing a business in NZ are compelling. NZ in this context becomes one of the cheapest places to set up a business. My partner runs a business LVG Consulting which can perform low-end search engine optimisation in the Philippines, but by partnering with local skilled video design editors, she is also able to project manage an array of online product marketing services with greater skills that would cost far more in the larger markets. She operates this business from a rural town in NZ because the town offers all the support we need, and offers a very attractive environment to live and to raise kids. The town is full of vacant office space if you retire a shop front, and buying such property at the current low exchange rate makes a lot of sense. There is even a local college which offers a source of recruits. The college is even attracting graphic design students from Asia. It is remarkable just how international NZ has become in the two decades. The shift started when Asians saw the country as cheap place to learn English.
The big news is that Australia, NZ and the ASEAN group of nations have negotiated a free trade agreement. On top of an already weak NZD, access to Asian markets can be considered a very attract development. You can expect a lot of investment in NZ to flow from this decision. NZ productive land land over a certain size is out of bounds, but there is still possibilities for Asians to engage in food production in NZ to supply their markets. There is of course the opportunity for Chinese, Malay, Singaporean, Filipino millionaires to buy holiday houses in NZ as well - given the possible trade implications. NZ has traditionally been a expensive place to travel, but that is changing. The opening up of Trans-Tasman flight routes has recently seen the price of NZ to East Coast Australian flights plummet. Expect more of this as the NZ Prime Minister seeks further integration of the NZ-Australian markets. There will be flow-on effects for NZ. NZ of course makes a lot of sense for tourists because of its cheap currency and world-class landscapes. Cheaper access through Australia should also make a lot of difference.
If you are interested in buying property in NZ - we recommend our NZ Property report. The amazing aspect about NZ is that its just not for millionaires. You can buy a house here for as little as $US35,000. You can get more value in NZ than in the Philippines. The best value remains in Japan. Of course people like the Philippines for other reasons.