Economist Brian Easton says history books and policy changes such as for Three Waters and the media merger warn us ignoring economics is dangerous

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

One of the reasons I wrote Not in Narrow Seas: An Economic History of Aotearoa New Zealand was my irritation at how often conventional histories of the country ignore the impact of the economy on what happened. I chose to provide an account in which the economy (and technology) played a fuller role, rather than illustrate the various failures; I did not want it to be a grumbling book. Allow me one illustration.

I greatly admire Keith Sinclair’s scholarship. I valued, among his other historical works, A Destiny Apart: New Zealand's Search for a National Identity which tells of how towards the end of the nineteenth century New Zealand seriously contemplated joining the federation of Australian states, completed in 1901. As the merger became more formulated we chose an independent destiny. Sinclair does not mention that the New Zealand economy was more depressed in the 1880s than that of the Australian states, but that prosperity returned here faster in the 1890s (as the pastoral boom took off).

Surely, with the economic prosperity New Zealanders became more confident of being able to go it alone. I am not saying that was decisive, but it must have been relevant. It is noticeable that when we are doing badly economically relative to Australia, cries for joining them tend to be stronger.

The lack of economic history recurs in the proposals for the new history school curriculum, as you might expect if the designers were ignorant of economic history. Anyone would think the economy is irrelevant; perhaps the devisers of the curriculum are not aware that it is the economy which pays their salaries.

It is a contemporary problem too. Far too much public policy ignores economics. Consider the Three Waters proposal which transfers responsibility for drinking water, wastewater and stormwater to four entities, consolidating the current local government provision. The original proposal said that it had not worked out the financial implications of the redisorganisation. Even so decisions were made.

The background economics is that our local authorities, dependent on rates for their income, are underfunded. To cover the deficit, they have practised one of the oldest tricks in the accounting book – not providing sufficiently for the running down of their capital. Best do it for infrastructure which is not visible. Water is generally underground; out of sight, out of mind until it fails.

The Auditor-General recently reported that the amount local councils spent renewing pipes and other plant was 74 per cent of depreciation for water supply, 64 per cent for wastewater and just 39 per cent for stormwater; these were higher rates than for earlier years. (Christchurch is excluded because it had to spend up large post-quake.)

The redisorganisation will make the three waters infrastructure more visible with the expectation that the waters will be better looked after. That will be costly. The minister introducing the policy stupidly said the new configuration will lower local body rates since they wont have to fund local water supplies from them. What she did not say was how the new entities will be funded. By rates? By user charges? By central government subsidies out of its tax revenue? The lack of answers is an omission comparable to leaving the economy out of our history.

It is not simply a matter of higher charges somewhere in the system. Who pays will matter. Consider the clumsy entity which runs from East Cape to Nelson. Will the East Capers be paying for Nelson’s water infrastructure or the other way around? Perhaps the expectation is that Wellingtonians will pay for both. Who knows? Certainly not those designing the system.

There are many other examples of proposed redisorganisations which ignore the economics. The general impression is that government advisers are often as incapable of thinking about economics as historians are. I conclude with another example, the proposed RNZ-TVNZ merger.

The driver for the redisorganisation is the convergence of delivery platforms as indicated by RNZ’s renaming from ‘Radio New Zealand’. Today it delivers by radio, by television and by broadband. TVNZ is facing a similar convergence, especially with its advertising funding being undermined by new competitors. There is a logic to merging the two if the economics is ignored.

RNZ and TVNZ are funded differently. RNZ is dependent upon public funding; TVNZ upon commercial advertising. We are told that the funding division will be maintained – that there will be no additional public funding – but that it will not impact on how the entities work. (Those who tell us will not be around when their promises turn to custard. Perhaps we should tag politicians’ public pensions with the requirement that they be cut when their promises fail; it would result in fewer manifestly undeliverable promises.)

The catch is that the two funding modes are not in harmony. There will be pressures to raid the public funding to bolster the commercial funding, undermining the independence and public good elements of RNZ. We have already seen that happening within TVNZ, as the ineffective changes to it under the Clark-Cullen Government illustrate. When you are competing against others, you raid the easy money to strengthen your competition, just as when you are broke you run down infrastructure.

We will be told that provisions will be made to prevent TVNZ’s commercial arm raiding RNZ’s public service one. Yeah right. Accountants are smarter than politicians, as the Department of Internal Affair’s accounting practices have shown when they raid the funding for their archives and library activities for other purposes.

The easy solution is to fiddle the way overheads are charged. It will be simple to overcharge RNZ for its share, transferring the public funds to commercial TVNZ, thereby compromising public service broadcasting. Or newsrooms could be merged, biasing news gathering toward the audience most responsive to advertising.

It has happened before. Read Ian Cross’s memoirs The Unlikely Bureaucrat and Such Absolute Beginners. As chairman of the BCNZ he was bedevilled by the pressures between radio and television, between public funding and advertising.

Too much policy is ignorant of economics. Nor does it learn from history. As they say in the financial industry just before the next crash, ‘this time it is different’.

Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.