Selena Eaqub on the importance of social enterprises after our election, the rise of clean energy, our risks from the US-North Korea tensions, earning a better quality of bad health, bashing the beneficiaries and more

Today's Top 10 is a guest post from Selena Eaqub, an economist and co-author of Generation Rent - rethinking New Zealand's priorities. She has previously worked for Goldman Sachs JBWere, the Reserve Bank and Statistics New Zealand.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Social enterprises more important post-election

With a National-NZ First coalition looking likely, poverty alleviation is likely to take more of a back seat than under a Labour-Greens government. Labour, has more generous packages for lower income people, and a stronger commitment to alleviating poverty. National tends to wait until the public really wants something before it makes changes – a powerful strategy that has in part made it successful for the past four election terms.

It does leave a gap though for the poorest parts of society and It is now up to private citizens to fill the gap by helping the community, and this can be done through social enterprises.

As reported by The Spinoff, social enterprise is on the rise, both nationally and internationally:

A recent census conducted by Social Value Lab for the Scottish Government documented 5,600 social enterprises, employing 81,357 people, with 64% of founders women, and generating an estimated £2bn for the Scottish economy. New Zealand is no slouch either. In the 2016/17 financial year, Ākina [an organisation that helps social enterprises] alone provided business development support to more than 700 organisations engaged in social enterprise activity at various stages of development.

Also on the rise are investment funds that exist to provide capital to social enterprises. Internationally, there are huge players like Bezos Expeditions, the sprawling venture capital vehicle for Amazon founder Jeff Bezos. Here, Aera VC – the investment arm of social entrepreneur and B Team co-founder Derek Handley’s Aera Foundation – has a well-established presence, and the recently-launched Impact Enterprise Fund and Soul Capital both have an explicitly domestic focus.

As stated by Docherty of Munchly, a start up in Queenstown for kids in poverty:

“A start-up business can do in six months what a council can do in ten years”. Docherty is also positive about the entrance of venture funds into the sector: “I want to have a strong impact and I need to have money to do that”. Of the critique that government should be stepping into the social gaps that exist, not business, Docherty is emphatic: “A solution is a solution”.

Munchly sells fairly priced school lunches to parents and donates part of the money back to the schools.

Another interesting social enterprise mentioned in the article is New Ground Capital. New Ground Capital develops affordable properties for sale and long term rentals, filling a gap in the market.

2. NZ ranks highly for functioning of Government and voter participation

We don’t know the outcome of the election but we are world leaders in the functioning of Government and political participation, as found by the London School of Economics.  A quality functioning government includes the quality of administration, government control of its territory and the rule of law. Political participation means citizens being involved in politics such as joining public interest groups, contacting political leaders directly, and voter turnout. At the time of writing, NZ voter participation rose slightly from the previous election to 78% without counting specials.

This graph from the article shows the quality of governance vs political participation. NZ rates highly on the quality of Government and political participation.

http://blogs.lse.ac.uk/europpblog/files/2017/08/participationgapfigure.png

Source: London School of Economics

3. Clean energy gaining traction

The cost of renewable energy is falling. 

For example, wind turbines are getting bigger and more energy efficient, as reported by Bloomberg. Clean energy will become more economical than fossil fuels one day.

The figure below shows the height wind turbines have been able to reach, with a forecast that they will be higher than the Eiffel Tower in 2026.

https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ixToPTHCI.3U/v3/740x-1.png

Source: Bloomberg

The founder of Bloomberg New Energy Finance Michael Liebreich said there are two tipping points where clean energy will be more attractive than fossil fuels:

“The first is when new wind and solar become cheaper than anything else,” Liebreich said. The slide below from his presentation indicates that in Japan by 2025 it will be cheaper to build a new PV plant than a coal-fired power generator. That milestone will be passed in India for wind power by 2030.

At that point, anything you have to retire is likely to be replaced by wind and solar. That tipping point is either here or almost here everywhere in the world. The second tipping point, a little further off, is when it’s more costly to operate existing coal and gas plants than to take power from wind and solar. The chart below, from BNEF forecasts, indicates that point may arrive in the middle of the next decade in both Germany and China.”

https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iKWsWCZoIoQY/v4/740x-1.png

Source: Bloomberg

4. Geopolitical risks from US and North Korea tensions

Tensions between United States and North Korea could put the world at risk. The BBC reported that US bombers have flown close to North Korea’s east coast as a show of force.

Any conflict is likely to have flow-on effects for NZ’s economy. The first channel will be through financial markets. During periods of uncertainty, investors abandon small and volatile markets like NZ to seek refuge in safe-havens like Swiss Francs and USD. The NZD would fall. The outflow of capital also tends to increase the cost of NZ borrowing. The second channel would be through exports – likely affected by any shipping disruptions and impacts on destination countries in the pacific coast of Asia.

President Trump, insulted Kim Jong Un by calling him “rocket man on a suicide mission”. North Korea’s foreign minister Mr Ri has hit back at President Trump:

Mr Ri added that "insults" by Mr Trump - who was, he said, "mentally deranged and full of megalomania" - were an "irreversible mistake making it inevitable" that North Korean rockets would hit the US mainland.

Mr Trump, the foreign minister said, would "pay dearly" for his speech, in which he also said he would "totally destroy" North Korea if the US was forced to defend itself or its allies.

The way President Trump has dealt with the North Korean situation has been scrutinised, particularly because he has little experience in foreign policy and because he tends to say what he means. Here are some thoughts from Vox on how dangerous the approach has been.

5. How income affects your health according to your income

This clever interactive tool from The Financial Times helps to determine what the major health concerns are according to your income bracket. It is in pounds, so here is a table to determine where you sit.

Income range in pounds (£) Income range in NZD
less than 10,000 less than 18,400
 10,000-19,999 18,382-36,763
 20,000-29,999 36,765-55,145
 30,000-39,999 55,147-73,528
 40,000-49,999 73,529-91,910
 50,000-59,999 91,912-110,292
 60,000-69,999 110,294-128,675
 70,000-79,999 128,676-147,057
 80,000-89,999 147,059-165,439
 90,000-119,999 165,441-220,586
 120,000-149,999 220,588-275,733
150,000 or more more than 276,000

Source: Financial times, RBNZ exchange rate

For example, if you earn $36,765-$55,145, the biggest risk factors you are likely to encounter are sleep quality, physical quality and obesity. Health issues when your income is $165,441-$220,586 will most likely be related to alcohol, obesity and binge drinking.

6. Threats to the megacity from technology

This article which featured in The Conversation highlights areas where there are threats to the megacity from technology. The article argues that the rise of urban centres is not a given:

“As technology researchers, however, we see a less rosy urban future. That’s because digitisation and crowdsourcing will actually undermine the very foundations of the megacity economy, which is typically built on some combination of manufacturing, commerce, retail and professional services.

The exact formula differs from region to region, but all megacities are designed to maximise the productivity of their massive populations. Today, these cities lean heavily on economies of scale, by which increased production brings cost advantages, and on the savings and benefits of co-locating people and firms in neighbourhoods and industrial clusters.

But technological advances are now upending these old business models, threatening future of megacities as we know them.”

For example, some cities are too exposed to areas that have been taking over by 3-D printing (making their part of the production cycle obsolete), and cities that are based heavily on shopping malls. There will also be menial jobs taken away through artificial intelligence.

I would be careful though to apply these ideas to every city. Not all cities are exposed to the automation risks identified in the article. The benefits of having a big city are huge due to economies of scale. Businesses being able to use a larger network of accountants and web designers is much more competitive in a larger city. Meeting people face-to-face is also important and sometimes cannot be replaced with technology.

7. Beneficiary bashing

This article by The Conversation points out that people tend to have an unconscious bias against benefit claimants, whether they want to or not.

Without us knowing, our brains are busy making associations. While on the surface we may sincerely believe that men and women are equal, or that people on benefits are just regular folks who happen to need help, our unconscious minds might not be so progressive. In psychology, ideas that we hold unconsciously are called “implicit attitudes”.

Implicit attitudes develop under the influence of the world around us. Immerse your brain in a culture that routinely represents women as emotional and irrational, or in which black men are habitually portrayed as aggressive and criminal, and it will develop those associations whether you want it to or not.

This can happen even if you are part of the maligned group yourself. It is these unconscious associations that can – for example – lead a police officer to view a black suspect as more threatening than a white one.

It tested among 100 people whether they thought negatively or positively about people on the benefit, without giving them much time to think about it. It found that these people tend to view claimants negatively, associating them with words like “bad”, “useless”, and “dirty”, rather than friendly”, “clean”, or “wonderful”.

These views are similar to how some NZers view poverty. Poor people are often stigmatised in society. For example, parents of poor children can be blamed solely for spending too much on alcohol and drugs and being bad parents. They may not understand the circumstances that put them there.

8. Aussie market slowing

Bloomberg reported that Australia, one of our major trading partners is slowing. Australia exports a lot of iron ore, but this has been trending down since 2013.

Australia’s biggest export earner, iron ore has significant sway over the nation’s currency, with the pair moving largely in line over the past five years. That means renewed signs of a glut in the steelmaking ingredient are likely to weigh on the Australian dollar, with options on the currency skewing further into bearish territory last week as iron ore capped its first two-week retreat since the start of June. The Aussie is currently hovering below 80 U.S. cents as iron ore at Qingdao port, China, trades at its lowest level since July 28. This is after it slipped below its 50-day moving average -- usually a bearish sign.

https://assets.bwbx.io/images/users/iqjWHBFdfxIU/inK9RXpdlkEA/v9/740x-1.png

Source: Bloomberg

This chart shows NZ export volumes to Australia. It appears export volumes haven’t suffered, but is not benefiting from the strong growth between 2008 and 2012.

9. Comparing healthcare systems

This handy interactive article by The New York Times compares the healthcare systems in different countries. Countries can differ in terms of public vs private funding, and how individuals are insured.

NZ spends 11% of GDP on healthcare. It is free or low cost to NZ residents and work visa holders. Non-residents can use our services but at a cost.

We also have Accident Compensation Corporation, which covers part of the costs for residents and work visa holders if they have an accident.

It is comprehensive and ranks well in the OECD. There can be waits for elective surgery for example, but there is private healthcare if you can afford it, or could be covered by private insurance.

10. Passive investment wins over active investment

The housing crisis in Auckland is not improving, especially after the most likely potential election result being a National-led Government. Many of the other parties had policies to fix the housing market, which will take a long time, but it’s a start.  There are other options to housing investment because it is still important for people to save for their retirement - these are passive funds, which tend to do better than active funds.

In the United States, passive funds outperformed active funds.  As reported by AEI, Warren Buffett made a $1m bet a decade ago that the S&P500 stock market index (passive investment) would outperform hedge funds (active investment). Passive funds, which usually follow an index such as the S&P500 have lower fees. Hedge funds incur higher fees because it involves fund managers buying and selling funds, according to what they think will beat the market. It is generally quite hard for active funds to beat passive funds because by the time you take away fees, the return is often lower.

http://www.aei.org/wp-content/uploads/2017/09/sphf-1.png

Source:AEI

Buffett found that:

A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund.

Therefore, the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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23 Comments

I have a couple of issues here;

#1 Labour's policy to address child poverty - i found little of substance. i would be looking for the creation of good, secure jobs at a good level of income (at or above the living wage at least) to provide a long term future, not some temporary bribe to put more money in beneficiaries hands.

#4 While most of us are looking in gob-smacked awe at Trump and his actions and rhetoric, to accuse him of being the threat is just plain wrong. NK has done nothing but bluster and threaten the world since 1953, after failing in it's invasion of SK. And the world and all it's leaders since then has done nothing about it, and now it has nuclear weapons and is threatening to use them, against all the worlds laws! And you're blaming Trump?! GET REAL!

So where did North Korea get its weapons/backing from? China? Possible. But...

During the world war of 1939-45, the future of the Japanese empire was decided at Allied summit meetings. In the short term, pending the return of Korean independence, Korea, a Japanese colony since 1910, was to be occupied north of the 38th parallel by Soviet Russia. To the south, a United States military administration under the direction of General Douglas MacArthur would control the area from its headquarters in Tokyo.
In the North, the Soviets backed a Stalinist regime under their client Kim Il-sung and created the North Korean Peoples' Army, equipped with Russian tanks and artillery. In the South, the chaotic political situation resulted in an American-backed administration under the presidency of Syngman Rhee, whose openly declared aim was the imposition of national unity by force.

http://www.bbc.co.uk/history/worldwars/coldwar/korea_hickey_01.shtml

Yes and two and a half generations from the Korean war, NKs population will have no idea of what actually happened (media indicate that they tell their people that the US invaded them, starting the war) and under a tightly controlled regime SKs aspirations of reunification are becoming an ever distant fantasy that is increasingly unlikely and virtually impossible without great human and financial cost. The Post conflict militarist SK regime is long past, and other solutions need to be explored. But leaving a regime like NKs in place with nukes to hand is an increasingly risky proposition.

North Korea also shares a border with Russia. There have been reports that the North Koreans have been supplied with oil by the Russian union. NK has been a buffer state for the Chinese and the Russians since the 1950's and there is no chance of Westernisation or reunification. SK doesn't have the will and the trillions for it anyway. NK has used bluster for decades to get what it wants from their neighbours and from the West.
Trump has no understanding his US history let alone Asian history, he is a fool if he thinks he can solve the NK problem. A nuclear catastrophe is much more likely on Trumps watch, given the chaos he causes.

When NK gets deliverable nukes, will it say;"right, give me SK or we'll nuke Tokyo" ? the alternatives being either yes(goodbye SK and hello more nukes),or the no being 10-20 million dead if NK is taken out (plus radiation) (plus risk of WW3).
Is this NK's suicidal end-game brinkmanship?? Possibly egged on/aided by Putin ?

I don't know, but what is known is there are 9 countries with nukes (not counting Iran). The US has been the only one to use them so far. The deterrent effect (in terms of M.A.D) has been the main reason for holding them by Nuclear powers since the 1950's. it is unlikely North Korea's rationale has been substantially different to what India, Pakistan and Israel contemplated decades earlier, in countering the potential threat from their enemies. The deterrence of M.A.D only works if the threat of retaliation is close to 100%, so Japan and SK need to be included in a "nuclear umbrella" similar to what much of what Europe faced in the cold war with UK, France and the USA facing off against the USSR.
Trump is not a stabilising factor in all of this, he was allegedly quoted last year saying "if we have nukes why can't we use them"

NK has perhaps 60 nukes so it is too late to remove them from the Nuclear club.
https://www.businessinsider.com.au/nuclear-weapons-stockpiles-world-map-...

Best thing would be to go in hard against that situation.
Let CNN report on the clean up.

In response to #1. Isn't that exactly what the National government have proposed? An extra $25 in your back pocket per week.

True, Labour have yet to show much in the way of substance. However, National have been sitting in the box seat and claiming (with great cheer) falling numbers on the benefit and still more and more people on low income wages cannot afford reasonable housing or access to healthcare.

What interests me is how a child is deemed impoverished?

From my mathematical understanding it is about increasing the household's income.
For example, a child is deemed to be living in poverty if their household income is hypothetically below $24,000p.a. Let's say 130,000 families.
Now if all of these families have their benefits increased by $25 per week or $1250 p.a then let's say 30,000 of those families are now above that threshold.
Fact is, they're still not much better off and within 2 years are likely to fall back below the threshold as income (in real terms) falls.

Job creation in the regions and wage growth will drive the "poor" incomes higher and their standard of living will be "comfortable" given the cost of living in those regions. Ie, Whanganui, Northland, East Coast.
https://www.tvnz.co.nz/one-news/business/call-centre-brings-jobs-and-a-w...

Murray86, your statement is illogical as are all politicians that talk of job creation.

We run an economic system based on price stability (inflation = 1% to 3%) and with that comes an inherent unemployment rate. We can never have full employment. At best we get about 4% unemployment when economic conditions are favourable.

Beneficiaries are beneficiaries due to the economic system. It is not their fault.

We have to address true poverty in NZ and stop treating the unemployed as a subhuman species and provide them an adequate income.

#2 Wow, the UK's a lot worse than I expected on both measures.

#3 I doubt there's a local council anywhere in the country that would grant a consent for a 300 metre tall windmill.

A National- NZ First coalition looking likely? That is a big call

WP's personality comes to mind. Does he really want to be overseen by a woman and one 1/2 his age? Would sitting at the table with the Greens just too much of a dead rat for WP to swallow?

3. One day? What happens to wind turbines and solar panels in a major storm - https://www.youtube.com/watch?v=1AAHJs-j3uw&feature=youtu.be

"June marks a continuation of a record-long major hurricane (Category 3 or stronger) landfall drought in the United States. The last major hurricane to make landfall in the U.S. was Wilma on October 24, 2005. This major hurricane drought surpassed the length of the eight-years from 1861-1868 when no major hurricane struck the United States' coast. On average, a major hurricane makes landfall in the U.S. about once every three years. The reliable record of landfalling hurricanes in the U.S. dates back to 1851."
https://www.ncdc.noaa.gov/sotc/tropical-cyclones/201706

From the initial reports I have seen so far the wind turbines did just fine under Irma. In terms of Puerto Rico, also lets make sure we compare solar and wind v other generation sources in terms of survival in a major event, and also how fast the repairs are for each generator to get back on line.

PS, "September 2017 has generated the most major hurricane days (17.5) of any calendar month in the Atlantic on record" some other records have been broken also.

#1 "Labour, has more generous packages for lower income people, and a stronger commitment to alleviating poverty. National tends to wait until the public really wants something before it makes changes – a powerful strategy that has in part made it successful for the past four election terms."

Apart from being untrue, this is a really dim-witted, lefty view of the world.

You could equally argue that Labour only cares about inputs (which trap people into benefit dependency and rob them of personal responsibility) and that they don't give a fig about outcomes.

Moreover, the relative incomes measure of poverty that Labour favours is utterly stupid. Using their measure, you could increase all income by 100% and leave the number of people in poverty unchanged.

It is quite irrational to speak of clean energy without differentiating as to whether it is dispatchable - such as geothermal which we are blessed with vs solar and wind which are intermittent and require backup up.

The two are quite different and each have their place but you cannot design a reliable 24/7 system without recognising this constraint and the costs it entails.

South Australia's system illustrates how lack of dispatchable capacity causes blackouts. The battery backup solution is a joke.

Records in SA show periods as long as 3 days where the wind has not been sufficient to generate - solar won't work at night and with some 1700 Mw of wind at full power their 100 Mw battery will provide very limited backup for a very short period.

With summer coming and Hazelwood closed across the border it's going to be a very high risk period if the wind were to drop off for any length of time. They can't assume the interconnect will always be available at full power.

As long as the renewables can generate a surplus then pumped hydro is an option. You can re-gain about 80% of the energy used to pump the water back in times when solar and wind are not producing.

Absolutely right - Re renewables ... the Bloomberg conclusion (or forecast as it apparently applies to costs after 2025) is just plain wrong.
Reason; Intermittency of supply versus fossil fuel which is geared to demand peaks. Once you factor in either
- adding sufficient battery storage
- building far greater capacity to compensate for low wind/sun
- paying & maintaining for a backup fossil fuel based system
then costs go through the roof.
eg Up to 6x the cost in this example... http://euanmearns.com/the-real-strike-price-of-offshore-wind/

Small problem for SA is they do not have any pumped storage - nor is any planned.

The Snowy project - still years away is not in SA.

#1 just smacks of all those number crunchers whose primary interest is presenting positive numbers to the press over actual results. They just need to be seen to be doing something. The solution as presented: get rich people to give some of their money to you for guilt assuaging hugfests.
#2 just doesn't quite ring true somehow.
#3 Those with fossil fuel assets will be wanting to screw the last cent out of their cash cow and will fight tooth and nail any attempt to build viable options. Note Aussie politicians decade long deliberate stifling of alternatives at every turn and attempted deferral of the power producers shutting down coal fired units. Rather than transitioning to renewable they are doing their best for their mining concession mates by preventing anything but coal from becoming baseload and wailing about blackouts for orphans and other such battlers if it does not remain that way.
#4 While he may be intemperate, as has already been pointed out, how is this Trumps fault?

Its time we grew up as a country and stopped being best friends with the USA.
Our relationship is stained with blood and the suffering of the countries that USA has invaded.
What started out as a so called war on terror has become a sick joke. We are backing the terror. We are part of the problem.
The FBI identified the Twin Tower hijackers as mostly Saudis. The USA has not attacked Saudi Arabia but has attacked every small country trying to pull out of OPEC's petro dollar trade scheme.
Our war on terror is a war to preserve the US dollar as the worlds reserve currency of trade.
Our media feeds us a constant barrage of US propaganda.
If we sat back and thought about North Korea and thought about the media we receive it follows the same pattern as the media reports that turned out to be rubbish about the other countries USA has attacked.
USA drags us into its conflicts not for a few more weapons but to help legitimize their behavior
Its time that we choose our friends more carefully..

I heard on the news this Morning our Prime Minister has tried to reach out to Winston Peters
But didn't get a response.
Don't try to predict the unpredictable!