Drawing the line – class sizes and land sales

February 3, 2012

Many policy decisions these days are not black and white but rather a matter of where you draw the line along a spectrum stretching between two ridiculous extremes. Two news items over the past week provide good examples.

Treasury has advised the NZ government that the public education system needs to save money and to achieve this it should increase class sizes, using some of the money saved to pay the best teachers more. It justifies this policy via some convenient research that, we’re told, shows class sizes are not a factor in determining educational outcomes, whereas outstanding teachers are.

Decisions on how big classes are and how much you pay teachers lie along a wide spectrum. At the extremes are (1) having one teacher for every student, and (2) having classes of perhaps 500 under the tutelage of one fantastically qualified, motivated and remunerated teacher. Both are ridiculous.

All teachers and, I suspect, most parents believe that a key aim of educational policy should be to reduce rather than increase class sizes. Most of us can relate to experiences of some teachers and children hopelessly trying to work effectively within classes of 30 or 40.

I suspect the research being quoted is actually saying: If you have some extra money to spend in education, you should look at paying teachers more (in order to motivate them to do a better job or retain the best ones) rather than reducing class sizes. That may well be true, and at least it’s arguable. But it’s not the same as saying that if you want to save money you should therefore increase class sizes first.

The real question now is: in order to save money, should we edge the numbers up to larger classes, in the hope that the fewer teachers required will do a better job just because they’re paid an extra $10,000 pa (or whatever)?

I doubt there are many teachers who would take on the extra stress and workload of larger classes just for the sake of some extra pay. Apart, that is, for those teachers who are only in it for the money. (Free-market people always assume that everyone is in everything just for the money.) The teachers I know, while being happy to be better remunerated, would rather have less classroom stress and administrative workload than more money. This new policy will not encourage them to stay on if it is the workload that is currently causing them to leave the profession.

In any case, I hope the government can resist the temptation to tinker with the public education system for money-saving purposes. Good education will always be one of the most critical elements of a sustainable, intelligent society.

So if class size increase is truly on the agenda, under the highly doubtful argument that class sizes don’t matter, then just think how big you could make classes before things fall apart. Forty? Fifty? One hundred? According to Treasury’s argument, there is no upper limit at which the theory no longer applies, which is of course ridiculous. So every effort should be made to nudge sizes lower whenever possible and certainly not allow a creep upward.

Drawing the line likewise is presenting problems on the issue of the sale of New Zealand land to non-Kiwis. While once upon a time this could have been a black-and-white issue – ie, before the first parcels of land were sold to offshore owners – it is now a grey matter of how much is too much.

We are told that only 1% of New Zealand’s land mass is now in foreign hands, but also that the proportion of productive land held by non-Kiwis is 7%. That latter figure does raise alarm bells.

I’ve put my opinion on farm and land sales as clearly as I can in this posting: “How New Zealand could be bought out … again”, and in this earlier one: “Dairy farm buy-up will lead to NZ’s second great colonisation”. I can also see and follow the arguments for welcoming overseas investment, although my sentiment remains on the side of ‘no more sales’.

So it’s a question of where do you draw the line. The two extremes are (1) sell absolutely no land to foreigners (sorry, too late), and (2) open up all sales to the top bidders, wherever in the world they live (still possible, if we allow it).

This line is constantly moving, but in one direction only – upward. As long as NZ remains a desirable place to live and retire to (a flattering thought), make money from or secure your future food supply from, buyers from wealthier countries will continue to take part in (and usually win) land purchases.

And every parcel of land that goes to an overseas owner raises that percentage of our country that we no longer own, up from 7%. At what point does this reach alarm point, when our attitude will have to change or we must accept we are in the same position that Maori have found themselves – tenants and labourers in a country we no longer own? Ten percent? Twenty? Fifty?

This argument needs more long-term vision rather than mainly a way to maintain sovereign and private cashflow.

 

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Posted by David Armstrong

Financial trading is a blight on humanity

January 24, 2012

My previous blog post considered the lessons to be learnt from the book The End of Wall Street about the perils of global financial markets, and in it think I gave a clear indication of my distaste for Wall Street traders.

Since that post I’ve thought further about the practice of global trading currencies, securities, futures and financial instruments and have found that my attitude would better be described as abhorrence. Financial trading is actually a betting game with huge financial stakes for the players, which has huge but mostly hidden impacts on the lives of the rest of us – the 99.9% who don’t play these markets.

I was talking with a friend who in recent months has been making a comfortable living out of a scientific and business pursuit of online sports betting. I found myself reflecting on whether his income process was useful or damaging to society. My answer was “neither”.

I cannot for the life of me find anything in his new career that makes the world better. At least in Lotto a percentage of the stakes goes to community developments. Personal private-sector betting merely moves money around between winning and losing players, with the bookmaker taking a cut. At the same time, though, my friend is not actually damaging society. He’s not a problem gambler, and has systems built in that prohibit his activities from harming his family financially.

When I think of the money traders (commonly called “Wall Street”), I do not feel the same level of tolerance. Or any tolerance whatsoever. I may be wrong, but … I think they’re a blight on society, and that their departure would make every economy in every country more productive.

As with sports gambling, any damage they do among themselves is none of my concern really. These traders choose to play their game and accept that they will win some and lose some as they spend their day speculating on what will go up and what will come down in price. Some traders are bound to get into personal difficulties and probably affect the lives of their families, but apart from that, there’s no wider damage.

But unlike sports gambling, global financial traders DO have an impact on the way economies operate. With their betting they can influence the value of currencies: if they have enough funds the richest of them can outbid reserve banks and force exchange rates to move against the wishes of sovereign states. Although I don’t properly understand how it works, short selling of stocks or financial instruments can and often does artificially destroy the value of those assets. In other words, the activities of these gamblers actually affects the outcomes of what they are gambling on.

America being what it is (the land of the brave), there will always be a group of people there who are self-motivated to use whatever means they have to make easy money at the expense of others, without doing anything productive or useful at all. And the free enterprise-driven regulatory framework within which they play will always protect them. So I cannot see these trading leeches ever being eliminated unless capitalism collapses totally.

But my abhorrence of the money-market men is one reason why I support a global Financial Transaction Tax, a tiny percentage tax which would be placed on every financial transaction in the world. It may add a few dollars to my own personal banking each year, but just imagine how much money it would reap for the whole of society – and how much it could moderate the amount of betting going on among Wall Street traders – if every multi-million dollar transaction they do every day was subject to this tax!

Perhaps that would mean that these trading leeches would, however unwillingly, actually be contributing something to society for a change.

2 Comments | Business, Economics | Tagged: , , , , | Permalink
Posted by David Armstrong

The End of Wall Street

January 13, 2012

No, this isn’t a prediction of mine, but the title of the book I’ve just finished reading. Written by Wall Street Journal reporter Roger Lowenstein and published in 2010, it traces the build-up to the Global Financial Crisis (GFC) in 2008.

Isn’t it amazing how quickly we forget how grim it looked and sounded back then, when American banks such as Lehmans and other ginormous corporations went under or were bought and/or propped up by the US government, and it looked like the next Great Depression would happen?

It was just over three years ago now, but in the meantime various bailouts and much money-printing helped keep the wheels of commerce and consumerism spinning – at least for a while longer. And while they keep turning, we are led to believe that the problem is over. We may have a mild recession, we’re told, but the system will right itself in time and we’ll be able to get back to economic growth and raising our so-called standard of living.

I read this book aiming to understand a little better how it happened, and hoping to gain a view on how the capitalist system that the US has bestowed (or inflicted) upon the western world must be changed to turn things around to a sustainable system rather than business as usual which is merely delaying the inevitable.

You see – and I don’t want to sound like I’m bragging – I was one of those who sort of saw it coming, back before the experts were saying that “in hindsight the GFC was bound to happen but no-one could have predicted it beforehand”. It was in fact predictable, and this book shows how the storm gathered. Greed, irrational optimism and adherence to a credo that “values (particularly of real estate) always rise” combined to make most of us blind to what the dark clouds were telling us.

The author of The End of Wall Street is not an expert business reporter but simply a thorough researcher with a good reporter’s way of simplifying complex facts and parallel developments into a consistent, readable narrative. Not that I understood it all – but then not many people back then seemed to fully understand what the Wall Street traders in stocks, equities, securities, bonds, mortgage swaps, CDOs etc were actually doing. But I think I’ve got the gist of it now, thanks to Roger Lowenstein.

What the traders and banks were in fact doing was speculating on the value of anything they could get their hands on or could imagine mathematically (particularly future values), and more often than not with no inkling of the value or riskiness of those things. The name of the game was not owning anything but rather moving money, IOUs, stocks, bonds, mortgages, sliced mortgage securities, and other intangibles around between themselves, collecting a percentage along the way with each transaction along with any capital gain.

They made the hamster’s treadmill spin faster and faster (going nowhere in particular, of course) until, one day, it seized up. Perhaps a bearing broke or a spoke snagged. The Wall Street traders and banks were left with nothing tangible, nothing of intrinsic value, and no way of borrowing money to pay for the stuff they had in their hands or the debts they owed when the treadmill snagged.

Now we’re seeing something similar in effect, though different in substance, in the Euro crisis. All bailout plans are merely attempts to keep the hamster’s treadmill moving, short-term ways of keeping cash moving around by borrowing from anywhere and using the period of time before repayment is due to work out some way of doing it again to keep the lenders happy.

Anyone who publicly says what is pretty obvious – that this cannot be sustained even in the medium term – is considered an unwanted pessimist or doom-merchant. The goal of the wheel-greasing process is to maintain enough confidence among consumers and money dealers to see the system through another day, week or month. The horizon appears to be little further than this.

My view remains as I wrote in August in this post, that it’s the change of tide we should be reacting to, not the waves. The tide is coming in and we’re the children on the beach trying to build defences and diversion channels to stop the individual waves from destroying our sandcastles. In the end, the tide will win.

As Roger Lowenstein concludes, the lessons are there for the learning, and if we don’t learn them and make the changes necessary to our capitalist system, we will continue to get it wrong.

2 Comments | Business, Economics | Tagged: , , , , , | Permalink
Posted by David Armstrong

Mixed feelings on Occupy movement

January 5, 2012

I’ve been pondering my attitude to the “Occupy” demonstration movement, given my history of taking part in demonstrations in my 20s and 30s and my empathy with people who are prepared to take an unpopular stand and be abused for it.

The curious thing for me is that I don’t seem to be able to muster much feeling about it, one way or the other. Why would that be?

Hopefully it’s not that I’ve passed a certain age when the discomfort of unpopular protesting is unattractive; when the people seen on the TV in their occupation tents look scruffy, insincere or thoughtless; when I think I have better things to do with my limited time. Pity help me if I’m letting that level of superficiality affect my judgment!

My first problem (and that of so many other people who are not up with spontaneous social media networking and the like) is that the target of the Occupy movement – especially in New Zealand – is not clearly defined. On the Vietnam war and the Springbok tour, we all knew precisely what the issue was and what we protesters (and our opposition) wanted. With Occupy, the target appears to be the ultra-rich 1% of the capitalist world. Or is it the capitalist system as a whole? Or is it the establishment? I guess the ambiguity reflects the difference between a “campaign” and a “movement”.

And if the target of the occupiers is one or all of these, exactly what is it that they would rather do and how would they start to achieve it. Unlike Vietnam or “the tour”, there is no single action or policy change that will stop excessive greed/wealth/capitalism.

So I find it difficult to rouse a feeling of solidarity with the occupiers as they camp out on public land in Auckland, Wellington and several other centres. Also, compared with the size of the occupying “forces” and the policing responses in America and the UK, the Kiwi groups are pretty ineffectual, apart from causing some short-term damage to grass cover, some health issues and general annoyance to a minority of opponents.

It’s actually a problem for protesters if no-one is inconvenienced or angered by them, so it is to be expected that the occupiers will persist and try new tactics even when many think they’ve had their fair time. But in the end their gains will be small, if any.

On the other side of the coin, the right to protest is in my opinion absolutely vital to any healthy society. Near the top of my list of life’s guiding principles will always be the knowledge that all it takes for a dictatorship to be established is for good people to say and do nothing. To not stand up against bad policies is to pay no respect to the people over the centuries who fought for democracy and individual freedom.

So the occupiers are right to keep before our faces one of the biggest societal problems the world is now facing – the growing gap between the ultra-wealthy 1% and the so-called 99% who must show restraint in their life choices or are simply too poor to have any economic options at all. The issue should be something we are all aware of and prepared to think about.

Is the wealth gap one of our biggest problems? Like an increasing number of commentators in recent months, I believe it is. Particularly the notion that the gap between the top few percent and the rest is actually widening. It’s a huge problem – and a potential time bomb – because the consequences affect every part of every society – even, eventually, the top 1%. But that’s too big an issue for me to tackle in this article, so I’ll give it some further thought in a separate post soon.

1 Comment | Community living, Economics, Social issues | Tagged: , , , , | Permalink
Posted by David Armstrong

The reality of state asset sales – what’s the purpose and who will buy?

November 21, 2011

I may be wrong but …. there seem to be some vital pieces of logic missing in the debate over selling shares in some of New Zealand’s public assets to private investors.

Hopefully someone with greater understanding of finance and stock markets, and who knows how to count in billions, will be able to help me out.

There are two parts to the election debate about whether or not to sell 49% of five NZ state-owned enterprises – the economics of it, and the ideology underlying private sector versus state sector ownership of large infrastructure businesses.

The incumbent National party is going to the electorate with the policy of selling 49% of the enterprises (Air New Zealand, a coal miner and three electricity generators) into private hands.

Initially the rationale was to raise $7 billion (or $8b, one minister said) and to use it to retire that much debt. That seemed pretty clear-cut. As the election campaign got underway, and noting the trouble in overseas debt and equity markets, the number got revised to several alternatives depending on which National minister was talking, with the most common figure now $5b – $7b. A good enough estimate – what’s a mere $2 billion between friends? (Or does this mean National is really just guessing? Well, of course they are to a degree – how can anyone calculate how much you can sell anything for on an open market?)

Then the fudging began. In order to make the policy look more attractive, National framed it as selling some assets so as to fund other new assets (presumably ones that would otherwise not be built). These new assets – about $1b worth I believe – will include better facilities for schools and better roads. So, that’s $1b less for retiring debt, so we will need to borrow more to cover that gap.

Then National decided to make the sales proceeds into a fund for election sweeteners. First off the block was nearly half a billion for irrigation schemes, which will benefit farmers and then hopefully trickle down to the rest of us. So that bit of public asset sales revenue will go to the benefit of a few. Other recipients from the same fund are promised elsewhere.

In summary, a significant proportion of the funds raised by selling 49% of five state assets will now NOT go to retiring debt, so the National party needs to borrow more or cut a few billion off public services to achieve its target of getting back to surplus within its timeframe.

If I’m wrong in my logic and calculations, please someone tell me.

The other thing I may be wrong about, but would welcome correction, is the question of who will buy the shares. We’re talking about $5 – $7 billion that needs to be raised or, apparently, it’s not worth the sales going ahead. And National is sure that the large majority of the money will come from Kiwis. My questions are:

1. Is there $5b – $7b floating around in New Zealand, outside of the share market, looking for companies to invest in? If so, where is it?

2. If a hunk of that money is to be supplied from part of what Kiwi shareholders already hold in the New Zealand share market, what is the point of moving it from the existing NZ companies to these new ex-state assets? How will that help boost investment in local business and development? Or if locals will need to borrow to buy shares, that puts our (private) borrowing in an even worse state when we’re being encouraged to save more and reduce debt.

3. I assume that such large sums of money could come from Kiwisaver providers, the Super fund, iwi and other large NZ investment funds. But that would mean that most individual “mum & dad investors”, who National is boasting will love to buy shares, will in fact only own shares indirectly, as part of funds they have no control over.

4. Getting back to fundamentals, how many New Zealanders will be able to afford shares in these assets on the open market? There can be no financial concessions to Kiwis because that would reduce the amount raised, so the government will be aiming to get top dollar from everyone. Only the wealthy investors of this country, with money to spare, will be able to afford any significant holdings in the sold assets.

5. As with the similarly contentious issue of the sale of NZ farms, the top money is overseas. In any open market where the seller is after as much money as possible, the buyers will be the ones with the most money. And it won’t stop at the initial public offering; in time the initial buyers will want to sell, especially if the price is right, so eventually non-Kiwis will own pretty much all of the 49%.

 

2 Comments | Business, Economics, Politics | Tagged: , , , , | Permalink
Posted by David Armstrong

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