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Insights Issue 14/2014 - 24 April 2014
In This Issue
•  Democracy in Decline | James Allan
•  Let no rich manís pastime go unfunded | Jason Krupp
•  'I' is for incentives | The ABC of economic literacy
•  All Things Considered
•  On The Record

Democracy in Decline
James Allan | Guest Contributor |
Next month, I will be presenting my new book at three functions hosted by The New Zealand Initiative. Democracy in Decline is part lament and part call to arms. It is about the decline of democracy in five of the oldest democracies on earth, countries that, before just about anywhere else, worked out how to count everyone as equal and then let the numbers count as a way to resolve debatable and contested social policy line-drawing disputes. It is about inroads into letting the numbers count democratic decision-making in the United States, Canada, the United Kingdom, Australia and New Zealand.

Some of this democratic erosion is due to: unelected judges adopting ever more expansive approaches to interpreting bills of rights; the ever-inflating pretensions and claims of international law in both its treaty-based and so-called customary forms; supranational bodies such as the European Union; and the essentially aristocratic preferences of lawyers, self-styled human rights activists, special interest promoters, lobby group members and bureaucrats, who calculate that they will lose in the court of public opinion and so prefer to do an end-run around majoritarian politics.

The book begins by setting out the differing baselines and starting point commitments of our five longstanding democracies – countries that differed on initial commitments to democratic decision-making, and still occasionally do. From there it argues that in all five countries the trend today is downward, and that democracy is in decline.
The second part of the book considers the causes of that decline, and that the blame lies with some shifting combination of over-powerful judges, with the pretensions of international law, supranational organisations and undemocratic elites.

The third part shifts from the causes of decline to the ways in which that decline is kept largely from view, examining how the decline in democracy in New Zealand, Australia, the UK, Canada and the US is masked or disguised. Here the focus is on the various ploys that are used to mask this decline in letting the numbers count decision-making.

Democracy in Decline then finishes with a short consideration of the challenges that threaten even more decline in democratic decision-making.

In the author’s view, majoritarian democracy delivers the best consequences, on average, over time. The recent decline in that sort of democracy in five of the oldest, most stable and successful democracies in the world needs to be stopped and then reversed. Starting now.

The New Zealand Initiative will host Professor James Allan in May for a lecture tour to promote his new book Democracy in Decline. For more information, and to register, click the links below.

Let no rich manís pastime go unfunded
Jason Krupp | Research Fellow |
Consistency is regarded by some as a hallmark of a good politician, so by this logic Economic Development Minister Steven Joyce should be commended for steadfastly fronting the government's apparent commitment to ensuring that expensive recreational pastimes get well-rewarded.

The latest beneficiary of the taxpayers’ purse is the New Zealand Open pro-am, an annual golf tournament which takes place at The Hills and Millbrook course in Queenstown.

According to The New Zealand Herald the event has received $2 million in funding over the past three years from the Major Events and Development Fund, and is on track to receive another $1.5 million for next year’s televised event. 

Why should non-golfing taxpayers subsidise golf? The world is short of many important things, but televised golf is not one of them. As if to rub salt into the wound, the event is being hosted by jewellery magnate Sir Michael Hill, who occupies the enviable 35th position on the NBR Rich List, with an estimated wealth of $300 million. Much worse, the tournament has failed to achieve its projected ticket sales, secure a spot on the One Asia tour, and to submit a financial stability report detailing how it will wean itself from the government’s purse. And yet Mr Joyce continues to back it, saying it is a hair's breadth from succeeding. So what? So are many other struggling enterprises.

The government’s decision is consistent with other dubious handouts for expensive pastimes. Earlier this year it provided a bigger tax break for Hollywood in the form of James Cameron’s Avatar film franchise (against Treasury’s advice).

In similar vein, spending in New Zealand by Emirates Team New Zealand in the last America Cup challenge largely went to boost the incomes of highly-skilled people, including internationally-mobile crew and boat builders. Asserted benefits for hapless taxpayers appear to assume arbitrarily there is no better way to attract overseas funds to soak up unemployed resources—that is, if any were soaked up.

With this track record, one would could forgive even polo, croquet, fly fishing and show jumping event organisers for devising plans to obtain a seat at the corporate welfare table.

Subsidies to attract overseas funds for events make no more sense intrinsically than subsidies for exports. The government should look first and foremost to Treasury for advice on these matters.

'I' is for incentives
The ABC of economic literacy |
Incentives are the little magnets that guide human activity. But that doesn’t mean things always go according to plan.
Take the “cobra effect”: an anecdote set in the time of British rule in colonial India. In order to decrease the number of venomous cobras, the British government offered a financial incentive to the public for every dead cobra.
The problem is, the government underestimated the enterprising and creative nature of the Indians. People were now purposely breeding cobras in order to receive the bounty.
The problem wasn’t that the public had not responded to the incentive. It was that they had responded too enthusiastically.
Such is the nature of incentive schemes. Those who offer incentives must be aware of what motivates people, where their self-interest lies, and the unintended consequences of trying to direct human behaviour.
Incentives are the reason we wake up in the morning, go to bed at night, and do everything in between.
In their simplest form, incentives are costs or benefits that motivate consumer, business or individual decision-making. In economic terms, incentives are a market mechanism for producing mutually beneficial results.
The most common example of how incentives produce mutually beneficial results, is price. Sellers have an incentive to maximise their profits, it is in their self-interest to do so. However, buyers have an incentive to get value for their dollar, and maximise their utility.
Basic trade economics stipulate that the buyer and seller will arrive at a mutually agreeable price when both respond to incentives and pursue self-interest.
Of course, this is only a simplistic account. In the real world, people may continue to buy certain goods even as the price rises exorbitantly. Petrol is one example.
However, incentives are not simply the decision to buy or not to buy. On an individual level, they can also encourage creativity and innovation. The rising price of petrol could provide the incentive to take fewer frivolous trips, drive more sensibly, plan journeys that cover multiple errands, or car pool.
On a business level too, rising prices provide incentives for competitors to enter the market, seek out alternative fuel sources, or for current petrol retailers to improve their service or reduce their prices in other areas.
Because of human creativity and innovation, predicting responses to incentives is never easy. As economics professor Glen Whitman argues, “What distinguishes good economic thinking from bad is recognition of the subtle, creative, and often unforeseen ways that people respond to incentives.”
Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘J’ for Jobs.

All Things Considered
  • Graph of the week: this graph shows stock market losses during selected financial crises dating back to 1720 … not to mention the cyclical nature of economies.
  • Was this political funding gaffe the National Party’s version of an own goal, or did they know something we didn’t?
  • When it comes to paying your debts, it’s wise to remember that China clearly has a very long memory.
  • Japanese inventor Hirotaka Osawa has attempted to create an artificial eye that truly is the window to the soul.
  • What are public servants paid for? Across the ditch it’s for nailing down software that replaces images of their PM with pictures of cats.
  • New Zealand's productivity paradox is now even discussed on the world's most popular economics blog.
  • If you like the idea of a mad anarchist’s solution to traffic congestion, then move to Ethiopia.
  • More bad news for the US economy: the New York Times has reported that Canada has now overtaken the US in regards to middle-class wealth.
  • Break out the anti-bacterial alcohol! It turns out that everyone's money needs laundering. If you want to dispose of your filthy banknotes, you can always send them to us.

On The Record

Tom Peters on New Zealandís financial performance
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The New Zealand Initiative Annual Report 2013
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Teaching Stars: Transforming the Education Profession
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