And,the Poor Will Always Be With Us.

Margaret Thatcher is an icon of the free marketers.  It was her Government, in the late 1970s and 1980s, which originally drove many of the reforms that were later copied by other free market governments in the West.  In some cases, such as here in New Zealand, we exceeded Thatcher’s economic expectations, implementing ‘reforms’ which she must have only dreamt about.  But, while, Thatcher may have left the UK political stage in 1990, with her resignation as a consequence of policies such as the ill fated ‘poll tax’, her economic legacy survives.

Her comments, such as there “being no such thing as society” and that “… any woman who understands the problems of running a home will be nearer to understanding the problems of running a country …“ not only provide a fascinating insight into her mind. They, unfortunately, still carry leverage and act as a basis for some people in the current political and economic sphere.     

And, it is this legacy that has found root again in statements made by New Zealand’s Minister of Finance, Bill English over the weekend.  For it was that during the weekend, English and John Key addressed a weekend leadership forum.  This forum was attended by ‘leaders’ from Australia and New Zealand.  Such forums can be dangerous places for politicians and so it proved to be so for English.  As, it was during his forum speech that he committed his latest gaffe by criticising Australia’s high wages and conditions before remarking that New Zealand’s low wage economy was actually a selling point for the country by providing it with a competitive advantage. 

He then criticised the Australians for having a poorer electoral system and a more complicated and restrictive set of economic and financial regulations. 

English’s address was interesting, in that he was telling the truth when he talked about the fallacy of closing the wage gap with Australia.  What English has done is openly admit to all that the Government had and has no intention of closing the 30% wage differential with Australia or indeed with any of the country’s other OECD trading partners. 

English essentially stated the truth that if you live in New Zealand you will need to accept low wages and salaries as well as poorer conditions. 

Rightwing Business Commentators, such as the NZ Herald’s Pattrick Smelliee were quick to endorse English’s comments, while, at the same time, conversely trying to pour oil on potentially troubled waters. Smelliee noted in his opinion piece titled, ‘Hang on, Bill English is Right,’ the following;

“He’s not saying it need be that way forever. That’s just how pessimistic Kiwis hear it. The assumption is either that we could never “catch Australia” – whatever that means – or “who’d want to anyway?”

Unfortunately, for Pattrick, that is exactly what it means.  I remember friends of mine who were devotees of the free market cause in the late 1980s espousing much the same line of thought.  They particularly emphasised that New Zealand’s economic success lay with it being competitive in terms of wage rates.  They consequently argued that low wages were the only way to get high wages. Of course, the absurdity of this argument is very obvious.  If you adhere to such a position then you have to consistently maintain a low wage economy otherwise you become uncompetitive.  Indeed, you need to be prepared to lower your wages even further if you are to successfully compete in the global marketplace.

This is not a short term approach, but a long term and permanent one.  That is exactly, what English has spelt out.    

Further, as English and others of his ilk are aware, New Zealand has actively pursued this policy prescription over the past decades. Its wage and salary rates have fallen behind other OECD nations, significantly so in some cases.  There is now a considerable divide even within the country as to what the mass of people earn compared with what is received by those in the upper wage and salary brackets. This divide, while slowing during the 2000s, has actually increased since National came to power.  

Of course, several decades ago, New Zealand used to be ahead of Australia in its rankings of wages, standards of living and productivity.  At that time, there were no complaints or concerns that New Zealand was uncompetitive or unproductive. While, New Zealand slipped in its rankings during the 1970s, its experimentation with monetarism and the free market during the 1980s and 1990’s have effectively ended any hope of this country achieving any of those rankings again. Since the 1980s, New Zealand has consistently had high rates of unemployment, low wages and salaries (as a result of economic reforms and the Employment Contracts Act) and has consistently experienced low productivity in comparison to other OECD states.

Why is that? Simply, because this is a deliberate outcome of those market led economic and fiscal policies that New Zealand has pursued since 1984.  It is a deliberate outcome of these policies to have a set level of unemployment and it is the deliberate outcome of these policies as to why, New Zealanders must have low wages in comparison with other western nations.  The Government could, very easily, increase wage rates and conditions by supporting expansionary policies combined with a more expansive range of economic targets and by imposing economic regulations.  But, it chooses not to. It has chosen to deliberately pursue monetary and fiscal policies that deliberately hold down and restrict people’s wages and conditions.   

The problem is for Mr English that there is always someone lower down the food chain than you.  Most undeveloped nations have people who earn extremely low wages and have poor or no working conditions.  Maybe Bill English should approach them and tell their populations had fortunate they really are?

AMI – Nationalisation is not a Dirty Word

It comes as no surprise that private insurance firms might be feeling the pitch in the light of the recent earthquakes in Christchurch. So it should not have come as a shock when people were greeted with the news this morning that AMI (Allied Mutual Insurance) is facing a financial crisis as a consequence of the Christchurch Earthquakes.  TVNZ reported that,

“Christchurch-based AMI Insurance is New Zealand’s second-largest residential insurer with 485,000 policyholders and 1.2 million policies across the country. In Christchurch alone it has more than 85,000 policyholders with 225,000 policies – or about 35 per cent of the residential insurance market in the city”  

AMI has stated that although it feels it can meet its existing responsibilities to policy holders who have suffered as a consequence of the recent quakes, it might struggle to meet any future responsibilities. 

 This issue has arisen also after another, considerably smaller, insurance company, Western Pacific which is (was) based in Queenstown was placed into liquidation after the February Quake.  It could not meet its obligations to its 7000 policy holders. 

Apparently, AMI informed the Government of its potentially damaging situation in early March. The Government response has been to bail out the insurance company, a move which it announced this morning.  The Company will pay the Government $15million and the Government will extend AMI $500 Million to cover its claims and to allow it to keep functioning, if it is asked to do so by the Company and only once it has exhausted its own reserves.  Bill English also announced this morning that the real total cost to the taxpayer could be more than $1 Billion dollars.  

In the same manner that private banks had to be bailed out by Government (socialism for the rich), Government could now be asked to bail out the private insurance industry (AMI), this means that the taxpayers yet again pick up the tab for private concerns. 

Of course, to be fair, the situation is completely different. The Banks were largely responsible for their own troubles. In this case AMI and its policy holders were not responsible for theirs.  But, questions needs to be asked.  Questions such as, that in the light of these two insurance companies having problems how many others might be in the same situation? And, whether it is a good idea to have private insurance companies carry the sole responsibility for claims? And, lastly, if the taxpayer is going to guarantee insurance payouts for homeowners etc then should not the state play a more active role in the insurance area?

In 1869 the Government was faced with similar issues in relation to the insurance industry. The area was under-capitalised and those private insurance firms which were involved did so under certain conditions and only covered certain people.  The Government’s solution was to establish a state owned insurance company, Government Life.  In later years, the state came to be more and more involved in insurance and ensuring that the needs of the wider community were met.  They met those needs through the establishment in 1898 of the Government Accident Insurance Office and later of the State Fire Insurance.  All of which were effective and successful in what they did.  Prompting rebel Labour MP John A Lee to note in his 1938 book, ‘Socialism in New Zealand,’  

“Undoubtedly judged on state capitalistic lines the State Insurance Department has been a glittering success.  It has been generous to policy holders, its security has been undoubted, it has effected Liberal improvements in policies … Next to the State Advances Office, the Government life is one of the cheapest lenders in the country…”   

Government Life was renamed and sold off in the 1980s, by that ‘far sighted’ visionary, Roger Douglas.  It eventually became Tower Insurance and is one of New Zealand’s leading insurance agencies.  At the time, Douglas queried the logic of the state wanting to own an insurance company.  Why, indeed? The answer to that question is found in the pages of New Zealand’s political history and economics (never Roger’s strong points) and in the current chaos of the Christchurch streets.

There are two options in this situation.  The first is simply having the Government prop up AMI (and possibly other insurance providers) through a capital injection (in this case $500 million) and then allowing it to run as normal (which I suspect is the Government’s preferred option).  The Government’s current option does allow for Government control and ownership if AMI calls upon the cash injection, but only if it needs to. I suspect also that such ownership would only be for a short period of time.

Another option would be for the nationalisation of the company.  Such a policy would allow the Government to directly meet claims, thereby providing policy holders with long term financial security. It allows the Government a direct stake into an industry, which it should never have been removed from in the first instance. AMI has no shareholders due to it being a mutual company – this means that it is directly owned by its policy holders.  There would be no buying out of shares, merely a taking over of policy responsibilities.

Given the circumstances and the need to provide people with secure guarantees, I would go with the latter.  The Government should be a permanent player in the insurance field.