Wednesday, September 14, 2005

Would You Like Your Government Supersized?

In the midst of the dirty tricks and ugly slanging matches in the lead-up to the New Zealand election, the debate of the issues has actually reached a slightly higher standard than in the past. On TV, this has in part been due to the influence of John Campbell and TV3, who by treating the viewer with a modicum of intelligence has helped the channel make huge inroads into the urban, educated audience and forced complacent, lumbering TVNZ to up its game.

[Don't laugh], blogs have also had some impact. While they have only a limited direct audience, bloggers like Russell Brown, Frogblog (Green Party) and, National's David Farrar have hurried up the mainstream media a little by exposing contradictory statements, questioning assumptions, checking facts and uncovering sources.

But there's a highly annoying and recurring feature of the discussion that nobody has yet critiqued. This is the continued characterisation of social democractic parties as favouring "big government" and "more intervention", while conservative parties are said to support "smaller government" and "less intervention".

These phrases are rhetorical flourishes long employed by Republicans in the U.S. to skew arguments their way--if you're allowed to choose the language you've won half the battle. Yet here they've been repeatedly employed by commentators who at least purport to be giving a neutral description of policies. For example, a work colleague who was recently describing the various political parties to an American visitor, and who clearly thought he was doing so from an objective viewpoint, told her that "Labour favours big government". Amongst the media, even the mostly thoughtful Colin James in the Herald has used the same terminology.

"Big government" suggests something bloated and lumbering, conjuring up images of hordes of grey bureaucrats making everyone fill out forms. It also has sinister connotations of a multi-tentacled faceless entity intruding into people's lives. Likewise, "intervention" suggests meddling, interfering with the natural state of things.

"Less government and less intervention" meanwhile, sounds clean and crisp, with implications of freedom, fewer grey suits, and people getting on with their lives.

But what do these characterisations acutally mean, and are they at all accurate?

A literal interpretation of "big government" would seem to imply big-spending. This reflects the historical view that left-leaning governments are profligate in their social spending, while liberal or conservative governments balance the books. However, this distinction no longer seems to hold true. In New Zealand the social democratic Labour government has been a model of fiscal responsibility, while National promises to borrow more and erode the existing surplus. In the U.S., the Clinton years saw the building of a budget surplus which turned out to be an oasis between the ballooning deficits of the Reagan and George W Bush Republican administrations.

"Intervention" is an even more nebulous concept. American conservatives have spent many years railing against "government intervention", but it's not clear that they've been consistent about it. The same society which long resisted background checks for people attending gun shows swiftly moved to allow law enforcement agencies to secretly review library users' borrowing records1. And even most conservatives would be embarrassed by the question: if a government should ever "intervene", (i.e. act), should it prioritise intervening in another country by invading it, or intervening in a local disaster by providing medicine and water?

Taxation aside, it's left-leaning parties' social policies that attract the most flack from right-wingers who deride what they call "social engineering". But funnily enough, the policies of progressive administrations that have most raised the ire of conservatives have generally been about promoting less intervention in people's lives: de-criminalisation of prostitution, de-criminalization of cannabis, allowing gay couples to be formally recognised. It's a laughably perverse for people to claim, as some have, that "homosexuality has been forced on us" when the right they say they have lost is to direct their intolerance and sanction on others who are doing them no harm.

There is, in fact, a reasonably consistent distinction between the social democratic and conservative approaches as regards the role of government and the kinds of interventions each considers appropriate. But it's not at all the simplistic "less vs. more" difference with which we're usually presented.

Social democratic parties do tend to put more emphasis on government funding of health, education and social services. The wellbeing of society at large is considered to be a public venture, worthy of public investment. Progressive philosophies are underpinned by the belief that it's possible to actively reduce the inequality and unfairness of society.

Convservative parties are more prepared to tolerate structural inequalities. They emphasise the ability of individuals to overcome these barriers, and their right to be rewarded for doing so. To maintain order, however, they deploy the power of the state in a more punitive, deterring way. They promise to be "tough on crime" and bolster spending on the police and prisons.

They also spend more on defense. While progressives are more likely to be internationalists, conservatives have a more pessimistic view of human nature and believe that nation state is the broadest sphere in which the rule of law can be reasonably expected to operate. Beyond its borders, what matters is being powerful and having powerful friends.

The libertarian position which consistently rejects any kind of government involvement really only flourishes in liberal economics departments and Reason magazine. In New Zealand, the ACT party, which began as a libertarian Ayn Rand appreciation club, morphed within a few years into single mother-bashing puritans who thought we should spend more on defense. Don Brash started out as a socially liberal finance wonk who just wanted to lower taxes; now he finds himself reversing his position on civil unions, promising to "rebuild" the police and end parole, and becoming an unwitting poster boy for big religion.

Tthe United States is consistently held up as an example of limited government and free-spirited commerce. But if you look closely, you find a history of pretty big government. American enterprise has long been supported by systematic intervention of its government in other countries to ensure the availability of resources and the conditions for successful commerce2. Closer to home, the US imprisons and executes its citizens at a greater rate than other developed nations. Such government activities allow heavy subsidisation of less wealthy areas through the location of military bases and prisons.

And while social democratic attempts to introduce initiatives like universal health insurance have repeatedly met with stalwart opposition, there has been no such reluctance to unleash punitive measures against activities judged destabilising to the social order. Eric Schlosser's excellent book Reefer Madness provides some illuminating case studies of the enormous resources deployed by government against individuals best described as entrepreneurial capitalists, operating in industries (e.g. marijuana, pornography) in which they have caused no direct harm3.

So it turns out that "intervention" by "big government" can take different forms. Within limits, I favour the social democratic approach, which is not only kinder, but shows good evidence of being more efficient. Ronald Reagan said that "government is not the solution to our problem; government is the problem". If he were talking about the wastage and violence of the "War on Drugs", which after many years even the British police agree has been an abysmal failure, I would be inclined to agree.

1. Post 9/11, though the provisions of the Patriot Act

2. Not necessarily a criticism. Such interventions have ranged from the generous and visionary (e.g the Marshall Plan) to the foolhardy (the creation of Al-Qaeda in 1980s Afghanistan) to the simply criminal (e.g. CIA plot to assassinate Salvador Allende).

3. Here is another good example. Look for the sly pun in the last sentence.

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Kevin H said...

I agree that TV3 is really showing up TVNZ. 3's election coverage last night was vastly superior; an excellent panel lead by John Campbell on fine form. In contrast, TVNZ had Susan Wood leading a very dry panel of academic types, with Mark Sainsbury talking to a revolving parade of guests on a particularly uncomfortable-looking couch. Who else but Campbell could keep up witty banter for several minutes on the topic of the PM's wrought iron front gate. Then the front door opened and out came the PM's parents and he said "gosh the stress and strain of the evening has certainly aged Helen Clark a few years".
Anyway Simon, your thoughtful post has prompted me to make just a few comments.
Both Labour's and National's election bribe tax policies are demand-side initiatives (not surprisingly) i.e. they would put more money in consumers' hands. To what extent would these policies fuel inflation and put upward pressure on interest rates? The answer is to the extent that the extra money is spent rather than saved. The fact is that a country cannot spend its way to prosperity. Sustainable wealth creation and prosperity comes from savings and investment, not from spending.
The problem with Labour's Working for Families package is that it puts reasonable income (well above average wage) families onto welfare, with it's attendant high effective marginal tax rates. Combine this with the fact that most NZ businesses are small-med enterprises where the main focus of owners/managers is costcutting. Let's face it - NZ is a low wage country. But we are also a low inflation, low interest rate, high economic growth country. So why is middle NZ struggling to get ahead? To really make a difference (for all NZers) we need to be investing in high-value high-wage enterprises that can be internationally competitive. But as long as we have the low-investment low-wage cost cutting business model so prevalent, together with high effective marginal tax rates caused by welfare handouts, there will continue to be little incentive for average working NZers to work harder/smarter and become more productive. And worse, there will be little ability to lift the rate of household savings.
So in summary, while there are some very good fundamental economic indicators in NZ, there are still some significant barriers to seeing the benefits of economic growth trickle down to middle and low income earners.

Susan said...

Yes, I'm with Kevin here. The so-called Working for Families Package is a handout that creates yet another layer of bureaucracy to ensure that people are "entitled". If the Labour govt was really serious about helping working families get ahead they could easily introduce income tax rebates for people with children, income splitting for people with one partner at home etc etc. And of course people like Sophia and Jeremy with a variable income will not be able to participate because of the nightmare of having to declare every little change in their income or be fined - which has happened to them before and they never, ever want to go down that road again. To me it all seems just another part of state control taking over our lives.

By the way, I am certainly looking forward to the Daily Minion's comments on the election results!

Simon Bidwell said...

I want to respond to both your comments. But first, to reiterate the main point of what was a rather long-winded post:
"Big government" vs. "less government" is a false dichotomy. Administrations that do not invest in social services end up paying more for law enforcement. They are also more likely to expend resources on punishing essentially victimless behaviours. Just because police and prisons aren't normally thought of as "government" doesn't mean they're not.

However, I believe both of you are in favour of a social democratic approach in any case; your concerns are with implementation.

Kevin: agree with your comments about the problem being with low wages rather than high taxes. This is slowly becoming the consensus, even among the notoriously intellectualy lethargic print media. Perhaps we need a new slogan: "it's the wages, stupid".

Your comments are similar to those of Rod Oram in a column for the Sunday Star Times on 28 August. In the same issue there was quite a good question-and-answer session with Oram, Brian Easton, and your mate Gareth Morgan, in which they clarified that no, taxes are not really theft, yes, it's quite normal to have some redistribution within society and actually, NZ's problems are more about a lack of innovation and investment than high taxes.

It's encouraging to see the mainstream media gradually moving away from parroting the self-serving nonsense of the likes of Roger Kerr and getting comment on economic issues from actual economists, especially when they've taken salted their main discipline with a dose of history (in the case of Easton, at least).

Nevertheless ironic that the most thoughtful and progressive thinking in the paper is to be found in the business section. And dispiriting that the media and people in general still cling to the assumption that "National is pro-business".

As far as I can tell, they're only pro-business in so far as letting already-successful businesses keep more of their profits to spend on more golf games. They don't appear to have any plan for promoting the growth and innovation that we all agree the country needs.

The NZTE-adminstered venture capital grants introduced by Labour have been deried by the Kerr-ites as "picking winners". But history shows that every successful economy--Finland, Ireland, Taiwan, the US--has involved something called "strategy", and almost always involvement by government in planning and stimulating.

If anything, we need much more of this, plus more investment in science and research--at a macro level NZ is already the most business-friendly country in the world.

Now to both of your comments about Working for Families. I'm quite sympathetic to your complaints about "putting middle-class NZers on welfare" and "another layer of bureaucracy", but believe it didn't have to be that way. Cullen has taken an essentially sound idea and not worked hard enough to turn it into good policy.

I believe you would probably both agree that there's nothing too much wrong, givem limited fiscal wiggle room, with targeting tax breaks to families. And I say that as a single, middle-income earner without any dependants.

From a personal perspective, $30-a-week tax cut just isn't going to make any difference to my life. As my ex-flatmate Paul said last week (looking on the positive side)"well, it's breakfast and brunch". If I'm relying on a once off $30-a-week to grow my income, the problem is elsewhere

I would far rather see my sister and her husband, with two dependant children, less choice about their consumption patterns, and a moderate, fickle income from working in the creative industry, receive a significant break. This has a chance to make a real difference to their ability to give the kids what they need.

This is pretty standard internationally and is hardly rocket science--those who have taken on the essential role of providing and developing the next generation should pay less tax. It doesn't have to mean being "put on welfare".

Kevin ,take your point aboutthe effective marginal tax rates. Now, you as a Tsy boffin will know this better than me, but I was under the impression that WFF did include some smoothing so that thresholds don't cut in all at once? If not, then yes, clearly Cullen could have done more to avoid this.

Though I believe that the lack of investment and savings is a cultural, rather than economic problem. No matter how much more money they get, NZers are just more likely to sink it into the boat/SUV/flat-screen TV/furniture/lawnmower tna invest it. This will take a while to change.

With regard to the "extra layer of bureaucracy" in WFF, yes, I think more could be done to improve its presentation, so it is more a tax rebate and less a "handout". Inevitably, wherever there is targeting, there has to be some kind of check (i.e. that you do in fact have kids)so you will not get away entirely from form-filling. But the relationship ought to be principally with the tax department rather than WINZ--for people on a variable income they can then do some kind of quarterly washup so you don't get too out of line.

Cullen seems to have rather airily dismissed these matters of principle with the view that "it doesn't matter as long as you get the money".

But neither side has exactly covered themselves in glory. Supposedly, National was going to back their across-the board tax cuts on principle against Labour's more socialist redistribution to families. But the they realised that this wasn't going to be enough to win the election, so they decided to go for tax cuts *and* keep WFF. The thing to give was the fiscal bottom line.

On the other hand, I was sympathetic to their attempt to re-tailor WFF and have it administered through the IRD as a tax rebate, rather than as welfare. Labour would do well to recognise that people care about these things.

I am not actually all that au fait with the workings of WFF, but if the announced policies are implemented, it will be expanded significantly and be of considerable benefit even to those who previously viewed it as a bureaucratic hassle. The thing would be to try and get on top of it and take a strategy to managing the bureaucracy, rather than missing out on money to which you are entitled.

Kevin H said...

Sorry if my rant plagiarised media commentators - that was quite possible given all the reading I've been doing in the lead up to the election. And worse, having just re-read my blather, it sounds a bit like a Tsy paper. Aarrghh! I've been here only 8 months.
The reason I prefer 'less govt' is because I believe there are limits to what govt can do to rectify society's ills. Govt can adopt policies that promote growth, employment, education etc, and can redistribute wealth to assist those less fortunate. Govt can also regulate to encourage desirable behaviours and punish lawbreakers. Ok. I've got no probs with any of that.
But govt does all those things at a macro level, i.e. it sets the scene. But it is up to individuals and communities to determine the quality of life. Govt cannot regulate or redistribute to increase happiness and satisfaction.
Things like reducing crime and increasing education stds are the responsibilty of everyone in the community, but particularly families. The govt locks up criminals, but that is after the event. I don't want the crime committed against me or my family in the first place.
Individuals, by how they interact with family, friends and wider members of their community, have the ability to determine/improve the quality of life every day. Govt does not have that ability.

Tony said...

There are many things here to comment on, I will restrict myself to three.

The first is to point out that a government can be "big spending" (that is, when given the choice on taking&spending tax a government chooses to take&spend more) AND be fiscally responsible (that is not borrowing and spending). IMO both National and Labour were equally fiscally responsible, a point highlighted by Gareth Morgan in his commentaries before the election. The key difference between them was the principle of whether some of New Zealand's increased wealth was to be left in the pockets of working kiwis.

Secondly, do you really believe that "every successful economy--Finland, Ireland, Taiwan, the US-- has involved something called strategy, and almost always involvement by government in planning and stimulating ?" I see little evidence that to the extent that these economies ARE successfull, that government planning, investment or strategy has anything to do with it. Let's face it, if government planning and investment had any significant role in economic growth, then USSR and North Korea would be the wealthiest countries in the world, not the US and other western countries.

Just look at New Zealand. We are really wealthier now for the same reason why we have always been wealthier . . . the prices for our commodity products (dairy, wool, meat, etc.) are at their peak. We are NOT wealthy because we are more efficient (our productivity has not increased in the past few years) or by adding much value to our export products. What has the government planning done to help (or hinder) the world price for butter ?

It IS clear that to grow we need to do things better. But why would any New Zealand save, strive to do better or risk creating innovative new products ? Kiwis do not earn any more take home pay than they did three years ago so what is there to save ?

We should strive and earn some more perhaps ? But why would you with the high marginal tax rates that face many Kiwis, especially now those with (WFF) families but also many other groups ? Why did Interlock Industries, just the sort of successfull manufacturer we need, shut it's factory in Wellington and shift it's operation overseas ?

My final point is the observation that this land has really embraced Social Democracy in all it's glory. Yes, that's right. Look around . . . I see a New Zealand right at the peak of Social Democracy. Much more government and we will be a Socialist Government with Business relegated to the margins. Much less government and . . . well I am sure no maintream politician from any party will let THAT happen ever again.

I am so assured because, as you say, "the social democratic approach, which is not only kinder, but shows good evidence of being more efficient". Hurrah, we are on the right track, but a little voice presses me to ask a true Social Democrat "is THIS as good as it gets ?"

Simon Bidwell said...

All good comments from various contributors.

Tony: when you say "if government planning and investment had any significant role in economic growth, then USSR and North Korea would be the wealthiest countries in the world" you are conflating a necessary with a sufficient condition. I said that a "strategic approach" seemed to be a *necessary* condition to be a successful economy, not a sufficient one.

I also never advocated communist-style central planning, or any ongoing operational role for government in the economy. Rather, I noted that the successful countries, especially the smaller ones, seem to have asked themselves: "what things can we do that will be different, better and more valuable than everyone else?", and then gone about creating the conditions to achieve that.

The laissez-faire Chicago School of Economics prescriptions under which we operated 1984-99 assumed that innovation and growth would happen *by magic* if you controlled inflation and liberalised everything. No one really asked: exactly who is going to innovate, grow and invest? Well, in a fiercely anti-intellectual country which had spent its entire history shipping sheep carcasses off to Britain, you got the predictable result: some very lean, efficient sheep-growers, who cut their carcasses up a little smaller, and who have recently lucked out on good prices.

Meanwhile, post-84 my father's research unit and other similar ones were unbundled from their academic institutions, turned into business units and told to make a profit. Good way to promote science and research!

The gurus who seek to import approaches wholesale from the US fail to note that it is a big country with a huge local market, a critical mass of skilled, educated people, awash with money for research, and the ability to invest and take risks.

And even there, the government played a huge historic role in getting things going (kick-starting the military industrial complex for one),and continues to subsidise and stimulate left, right and centre (though a lot of this is just pork-barrelling). In addition, its military & intelligence wing has always been handily available to ensure secure resources and trading conditions for American companies.

As far as I know, no country has done brilliantly from scratch just by following the neoliberal formula (cut taxes, deregulate, lower government spending, privatise). Argentina followed the World Bank / IMF prescriptions to the letter, and it went under big time.

When I was in Peru, I saw a country *desperate* for investment in infrastructure, and for some kind of strategic direction that would recognise, support and promote the brilliant things people are doing locally (e.g. with alpaca products, jewellery, boutique wines). But Peru is also on the neoliberal pill.

What countries like Peru need is a New Deal like the US had in 1930-50s, to build infrastructure and drag people out of poverty, butwhich developing nations were denied though fears of communism.

Of course, Argentina and Peru have other, deep problems. But this is exactly the point--you have to look at the social, historical and physical realities of the country and population before just doling out a glib formula from Harvard. What works in the US won't necessarily work elsewhere, and it's not even how the US got where it is.

Which brings us back to NZ. Tony and Kevin both ask what needs to happen for us to do things better. Well, that is the $100 billion question. But I would suggest that the answer is *not* "more of the neoliberal pill". As Oram, Morgan etc. admit, we are not particularly highly taxed as a country, and in fact the World Bank already ranks NZ as the most business-friendly country in the world (sorry should have included the link with my original post).

Why did the Wtn manufacturing business move overseas? It could be for any number of reasons. If the tax rate was zero, some people would still move to be closer to their markets, etc.

Finally, I don't believe it's quite fair to say that "The key difference between [Labour and National] was...whether some of New Zealand's increased wealth was to be left in the pockets of working kiwis".
Labour proposed to leave significantly more wealth in the pockets of working families (whether you call it a tax break or "welfare" is moot), while National appeared to intend to leave a smaller amout of wealth in the pockets of all workers. Then it said bugger it and decided to do *both*. The bit to wiggle was the fiscal responsibility clause.

Oops, and I haven't even had been a time to able to clarify my points about "social democracy" which were more about government's role in society than the economy. Will have to wait for another day.


Kevin H said...

I'd like to hear your further thoughts on govt role in society Simon, so hope you write soon. Just to clarify, even tho my last post in this series probably made me sound like a Libertarian, I assure you I definitely do not have a poster of Lindsay Perigo on my wall.

Tony said...

You make some good points, but I am still confused by what you really believe we should do differently (if anything at all).

On your first assertion that

"I noted that the successful countries, especially the smaller ones, seem to have asked themselves: 'what things can we do that will be different, better and more valuable than everyone else?', and then gone about creating the conditions to achieve that."

I do not see ANY evedience that this is what actually happened. Did the Swedish government identify Heavy Truck manufacturing was something they do differently and better than everyone else, or did Scania and Volvo just work to make a better product ? Did the Finland government really PLAN to become a the home of the largest mobile phone maker ? Yes, I am sure you can show me examples where a government planned for something to happen, and it actually happened (the deregulation and privatisation of New Zealand Telecoms springs to mind). Equally I can show you examples where the government plans created a shambles (the degegulation and partial privatisation of electricity springs to mind).

Secondly, you deride the failure of the "World Bank / IMF prescriptions" of the "neoliberal formula" giving Peru as an example. Then at the end (I know you could not resist) you report "the World Bank already ranks NZ as the most business-friendly country in the world". I would then ask what NZ government gave NZ this rating and what did they do to achieve this rating ? Lets look at the list going back:

The current Labour Govt ? no NZ had the very high rating when they came to power. They have maintained NZs rating in some areas (others have slipped).

The previous National Government ? Well partially, NZ went to the top end of the scale following the introduction of the Emplyment Contracts Act freeing up the labour market.

The previous Labour Government ? Well NZ's World Bank rating before the Lange Labour government (i.e. under Muldoon) govnerment was very bad. It was during the this government that NZ lifted it's rating towards the top of the World Bank lists relating to areas such as "most business friendly". And what did this government mainly do. You have already said it "cut taxes, deregulate, lower government spending, privatise". It may not have worked for Peru, but I seems to have worked here.

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