Too much of pop-economics is misleading to the point close to being lying. No wonder there is a widespread rejection of it by the populace. 

Journalists and other populisers get away with an economics which does not quite lie, but is often very misleading. This applies to Brexit, but let’s start off with the TPPA (Trans Pacific Partnership Agreement).

We are bombarded with the standard trope that a free trade agreement (FTA) raises economic output. However, sitting behind the claim is an economic analysis which relies on a host of assumptions. One is that following the removal of tariffs and other border restrictions the economy adjusts quickly, with the resources in the low-productivity businesses which the trade deal closes moving to high-productivity ones.

But suppose they don’t? A recent modelling exercise by a team at Tufts University assumed the adjustment did not happen and found there were losses from trade liberalisation. I think their assumptions were also unrealistic, but the exercise reminds us that ‘it ain’t necessarily so’. (FTAs such as the TPPA are often phased in, in order to facilitate the adjustment.)

But even if full adjustment takes place it does not follow everyone is better off. Following a trade deal some workers might be laid off from high-skilled, well-paid jobs, ending up in low-paid ones. What the theory says is that the gains from trade more than cover the cost of compensating those made worse off. Everyone is better off only if the compensation happens. Instead, the direct beneficiaries from an FTA deal trumpet their benefit, but ignore the worse off.

There is a tendency for the advocates to oversell the return from a deal. That was true for the TPPA, with much astonishment at how small the measured gains are actually thought to be, now it is concluded. The gains to New Zealand – mainly from lower tariffs and better access for our primary exports – are real enough and will boost farmers’ incomes. They are well worth having; but they are not HUGE. It is claimed that the RCEP (Regional Comprehensive Economic Partnership between Asian economies) FTA will give bigger gains. Don’t be surprised if we get solid gains but not huge ones. (Because the concessions are phased in, any gains will take some time to fully appear.)

FTA deals involve making concessions in return for the ones we get. Because we gave up most of our protection barriers under Rogernomics, we have had to make other concessions, such as aligning intellectual property rights.

That involves another bit of economic theory. As I have explained, the US successfully demanded extensions favourable to them but not to us and which, in my judgement, are inefficient. But the cost to us is not great and the gains from the concessions for our farm products more than offset them.

So there are two sorts of grumbles about the TPPA. One is that some of our concessions are not optimal (even so, the gains from better access for farm products more than offsets them). The other is that there is nothing in it for ‘me’. I get the downsides but others get the upsides; I shall pay for Netflix but won’t get a cent from the primary-product concessions because I am not a farmer.

This is nicely illustrated by those who voted for Brexit in England. As a rough rule the votes depended on whether the EU has benefited the individuals concerned. A lot of voters do not care whether the London financial system will suffer when Britain leaves the EU (many may delight at it suffering). The one exception to this generalisation is the age divide. As a rule, the young favoured ‘remain’, and the old favoured ‘leave’,  suggesting they have different visions for Britain’s place in the world.

This suggests that the Minister for Trade (Todd McLay) telling elite audiences that trade deals are good for them misses the point. Those he is not talking to are concerned that there is hardly anything in it – or less – for them.

The one politician who has attempted to put trade deals in a wider context is the Prime Minister. In a speech in June, John Key said he favoured New Zealand’s future as being that of ‘an open, outward-facing country, welcoming of people and ideas from other countries, and part of wide-reaching global supply chains. ... we should be a good global citizen and promote ourselves on the world stage’.

This is a framework. It does not say New Zealand should adopt the TPPA or go into negotiations over the RCEP. It says that we should think about such choices in this context.

Unfortunately Key’s speech was to the NZIIA, an elite audience. He did not present the approach at the National Party conference; I take it National supporters are not into the vision thing. We’ll see if he says the same to ordinary people elsewhere. Would it connect with them?

It is forgotten that our electoral referendum in 1993 was a kind of ‘Brexit’ referendum. The public voted for constitutional change – something which voters rarely favour. Actually they did not. The elite told them to vote for the existing electoral regime. They voted the opposite.

You won’t be so surprised if you recall that the elite had told them that Rogernomics was good for them. As it happened, 80 percent of households suffered a reduction in their income (many would not recover to the pre-Rogernomics level for over a decade). Over half the labour force was forced into unemployment. Rogernomics was not good for them.

Now you may say – especially if you are a member of the elite – that this was all necessary. But the elite never acknowledged the hurt of the policies. (Was it necessary to cut the incomes of the bottom 80 percent in order to increase the incomes of the top 10 percent?) As far as the majority of the population was concerned, they were lying. The electoral referendum let the public tell the liars what they thought of them; the palpable hurt that the elite expressed on losing the referendum was very satisfying to many.

The elite has hardly learned from the lesson, continuing to misuse economics to mislead the public. Most probably believe the claims they make; serious intellectual analysis is not New Zealand’s forte, and in any case it is comfortable to believe if you are doing well then everybody else is too. The vacuum was compounded by a very conscious policy of the Rogernomes to undermine the status of those economists who criticised their shallow analysis, thereby dumbing down the level of public economic discourse; it has not recovered.

Here, and elsewhere, chunks of the populace are rejecting the neoliberal paradigm as being out of touch with their reality. They express their doubts in different ways – via Trump, Sanders, Brexit, Corbyn, and a host of dissatisfaction movements on the European continent. Those who articulate the superficial popular economics do not know they are relying on underlying assumptions which do not apply. Many of the public feel their rhetoric is wrong, even if they do not know the reasons.

Comments (6)

by Fentex on July 11, 2016

Everyone is better off only if the compensation happens.

I've been thinking this has a lot to do with Brexit - that at the same time workers were compelled to compete with lower waged economic migrants neo-liberals were demanding lower taxation and reduced welfare to implement austere policies.

Those two things don't fit for the refusal to share the benefits of overall increases in wealth.

It'd all make much more sense if the taxes of poorer people were reduced ahead of the capital owners who benefit most from trade and investment liberalisation. 

by Fentex on July 11, 2016

 As I have explained, the US successfully demanded extensions favourable to them but not to us and which, in my judgement, are inefficient. But the cost to us is not great and the gains from the concessions for our farm products more than offset them.

I think the costs to us are going to be much greater than most believe and more than offset the expected gains. IP regulation creates large incentives to leverage wealth against competitors which NZ cannot compete with.

by Moz on July 14, 2016

"Everyone is better off only if the compensation happens"

Has there ever been a case, anywhere, that the compensation has happened? My experience has been that whenever a reform or trade deal has happened that it's seen as an opportunity to further exploit and demean the losers, rather than a time when the losers need to be compensated. I suspect the jump from campaigning to convince people that the idea is good, and the opposition are therefore bad, to saying "we won, time to help the opposition" is hard to make even with the best intentions.

by Andrew Hart on July 16, 2016
Andrew Hart

Not disagreeing with Dr Easton's article but in the example of Kiwi Fruit; TPP would give Kiwi Fruit growers an extra $30 million dollars due to the removal of trade tariffs in countries like South Korea.

by Brian Easton on July 17, 2016
Brian Easton

Moz: There are stirrings in the US to pay more attention to assisting those damaged by trade liberalisation, using an Act which is in existence but currently rarely applied. In fact the liberalisation associated with Rogernomics in the 1980s sometimes provided for assistance with adjustment for those affected, but usually only if they were politically powerful enough.

Andrew Hart. Korea is not a part of the TPPA but the free trade agreement negotiated with Korea gives gains to kiwifruit farmers as you describe, and also to dairy, meat and some horticultural farmers. There are also gains for suppliers of fish and forest products. There are gains like these if the TPPA is implemented too. 

by KJT on October 11, 2016

The populace  are well aware that we are being rorted.

It is the economists, politicians  and intellectuals who seem to believe in the, now, totally discredited, Neo-liberal paradigm.

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