Insights
9 November 2012, Issue 23

In this issue:
• America's real choice | Oliver Hartwich
• Will we ever have a second internet cable? | Nick Phillips
• The MMP review | Luke Malpass
• All things considered ...
• On the record

America's real choice
Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz
No one should ever compile a cost-benefit analysis of the United States elections. After a campaign that lasted about 18 months (and felt even longer), and having spent an estimated US$6 billion promoting both candidates, nothing has changed.

Barack Obama is still President, the Republicans still hold the House, and the political landscape is as polarised as before.

More importantly, the many problems of the United States haven’t moved an inch closer to a solution. That’s unsurprising since both candidates had focused their campaigns on rubbishing their opponents instead of developing credible policies of their own. America’s crisis is so severe that the outcome of the election barely matters as both sides of politics deny realities that do not fit their worldview.

The political left is unwilling to consider cuts in entitlements and discretionary spending despite a massive structural budget deficit. The political right is unwilling to discuss tax increases (and often even outrageous exemptions) to plug the fiscal gap despite the United States recording an even lower tax-to-GDP ratio (18.3%) than the notorious tax evaders of Greece (20.2%).

According to all plausible forecasts, the United States government will spend more than it receives in taxes for the indefinite future. However, indefinite overspending is not a realistic long-term option. As the former United States Presidential Adviser, Herbert Stein famously said, “If something cannot go on forever, it will stop.”

The choice for the nation did not end with this week’s elections. On the contrary, it is only after the elections that the real choice becomes clear.

Robert L. Bixby, Executive Director of bipartisan think tank The Concord Coalition, put it well:

“If the country is on an unsustainable fiscal path, which it is, and if continued partisan bickering will not solve this problem, which it won’t, and if divided government has been re-elected, which it has, then the only choices are calamity or compromise.”

To solve the United States’ economic challenges, President Obama and the Republican-led House must do what neither side wants: reform the tax system by broadening the tax base and reform all entitlement programmes to control spending.

What the United States can least afford is four more years of election campaign-style politics. Both camps must work together to avert fiscal disaster. But are Democrats and Republicans willing to cooperate for positive change?

The citizens have gone to the polls. Now the leaders must make their choice.
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Will we ever have a second internet cable?
Nick Phillips | nick.phillips@nzinitiative.org.nz
New Zealand’s second internet cable is once again making headlines, this time courtesy of Internet entrepreneur Kim Dotcom.

German born Dotcom has hatched a plan to resurrect Pacific Fibre and build a second fibre cable to the United States.

Dotcom’s project funding plan is two-pronged: first, he will attempt to sue the United States government and some Hollywood studios over the alleged unlawful and political destruction of Megaupload. Second, he will start a new online storage company called Mega.

The New Zealand government is prepared to underwrite an undisclosed amount for the Pacific Fibre project, and Dotcom’s investment would provide Pacific Fibre with the remaining required capital.

In an interview with Fairfax Media, Prime Minister John Key said, “If Dotcom’s investment plan is genuine, then Dotcom would be putting his money where other investors wouldn't.”

Perhaps more kiwis need to be like Dotcom, because he realises that the benefits of the government’s ultrafast broadband network cannot be truly captured with the current external connection limitations.

As Rod Drury, Director of Pacific Fibre, said, “We still cannot see how the government’s investment in UFB makes sense until the price of international bandwidth is greatly reduced.”

A second cable to compete against the Southern Cross cable, costing approximately $400 million, would significantly drive down the price of broadband and double New Zealand's current bandwidth.

From a policy perspective, serious questions must hang over the efficacy of the UFB network without any extra external bandwidth. Creating extra bandwidth is a good idea, as a competing export orientated country it is our international bandwidth that needs to be enhanced, not New Zealand’s internal infrastructure.

So whether or not Dotcom’s proposal is legitimate, and whether or not he will ever be involved in Pacific Fibre (one suspects not), Dotcom makes a good point about the importance of a second cable.

And he is in good company – the Telecommunications Users Association of New Zealand agrees that the proposal would be a huge boost for New Zealand.
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The MMP review
Luke Malpass | Research Fellow | luke.malpass@nzinitiative.org.nz
When the New Zealand Electoral Commission was asked to review how the Mixed Member Proportional (MMP) electoral system was operating, the outcome was pre-ordained: the report would extol the virtues of MMP, recommend a reduction in the 5% threshold, and scrap the one seat rule.

And so it has come to pass.

Introducing an absolute threshold without the one seat situation is good, but decreasing that threshold from 5% is not.

MMP was designed in post World War II Germany to prevent a Führer-like figure emerging. A parliament of coalitions would prevent concentration of power. New Zealand is not post World War II Germany, but a long-established democracy. But MMP in New Zealand has produced many small parties that have to be cobbled together and appeased or bought and paid for (like in Germany now).

This does not aid policymaking or accountability, and it makes coherent policy or reform agendas difficult to promise and almost impossible to execute.

Fortunately, New Zealand has had a relatively high threshold, keeping some of the more fringe parties out of parliament. For this reason alone, lowering the threshold to 4% is a mistake.

The report also wheeled out the article of faith that the MMP list ensures ‘diversity of representation’, which is ‘under threat’, so fixing a 60:40 ratio of local/list MPs should be considered.

The list does increase diversity but only at the margins, and the report’s arguments about MMP and diversity are dodgy. For example, the report argues that since 1996 only 24% of MPs in electorates have been women, compared to 43% from the list. Ipso facto, the list increases representation of women. This of course doesn’t consider that parties would behave differently if no list existed.

The same applies for Māori list representation: 21% of all list MPs have been identified as Māori, compared to 14% from electorates. This means electorate seat representation more closely reflects the Māori population than the list number! Of course higher Māori representation in Parliament than in the proportion of population is not a bad thing, but it does make the notion of the list ‘ensuring diversity’ a bit of a joke.

Perhaps the Electoral Commission has a ‘correct’ level of diversity in mind?

In short, the report is strongest in arguing what shouldn’t change rather than what should. The best recommendation is getting rid of the one seat threshold.

All things considered ...
• Graph of the week, courtesy of BBC/GlobeScan/PIPA. Barack Obama is obviously better when you don’t live with him. The Americans supported him by a nose, but how much does the rest of the world support Obama?
• Kim Dotcom: Free internet for all! Or perhaps not.
• There are advantages to being in a far flung part of the British Empire (or the Commonwealth, as it tends to be known nowadays). For example, we could help the British invade Luxembourg!
• Speaking of Luxembourg, they recently had a royal wedding. It had the obligatory random European royals – the Greeks who are actually Danish, and the Germans who have incorporated their title into their surnames, and a prince of Saxony! It was like Will and Kate’s wedding, but the music was not as good.
• How is it that our Prime Minister has ended up in The Sun for calling a British star thick?
• How many times was ‘climate change’ or ‘global warming’ mentioned in the United States presidential debates? Not once. George Monbiot is right.
• The MMP review is finished, although what the government will do with the recommendations is anyone’s guess. The report is here.
• The best and the worst United States election campaign ads of 2012.
• Is she a politician or is she a sleb? Either way, the Tories have suspended MP for Mid Bedfordshire Nadine Dorries for starring in I’m a celebrity … get me out of here.
• America is in decline … literally. Der Spiegel reports on the crumbling American infrastructure.
• Shame has always been a powerful form of retributive justice. It might be out of fashion, but making someone wear an ‘idiot’ sign might just be a good idea.

On the record
• Tipping towards Eurozone fragmentation, Oliver Hartwich, Business Spectator, 8 November 2012

Oliver Hartwich interviews Swedish economist Christian Sandström.
24 October 2012
Play video

Initiative@home with Adam Creighton.
24 September 2012

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Government vs. Markets with Vito Tanzi.
21 August 2012

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ENDS

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