Thursday, 8 December 2011

The Myth of Financial Conservatism

By Arthur Monteath-Carr

When National and ACT (hereafter referred to as John Banks' ACT Party Of John Banks (An Incorporated Society for the Promotion of the Welfare of John Banks, or simply ACT for short) shook hands over their hastily assembled agreement on who would do what and to whom, the document included a number of policy initiatives that the general public weren't prepared for.

Lord High Executioner (left) and Lord High Everything Else, sign Con Game and Supply Agreement

"Buwhaaaa?" queried a sleepy, hung-over populace, groping for the "snooze" button after a hard night out on the polls. "Whuzzat? Charter schools that don't have to hire qualified teachers, can dictate their own curriculum, can cherry pick only the highest performing students and receive public funding? And they're gonna justify this with clauses that were never intended to allow this sort of silliness? Get out of town!

With respect to education, the parties have, in particular, agreed to implement a system, 
enabled under either sections 155 (Kura Kaupapa Maori) or 156 (Designated character 
schools), or another section if appropriate, of the Education Act, whereby school 
charters can be allocated in areas where educational underachievement is most entrenched

"They gonna outsource what should be core WINZ business, thus avoiding the embarassing admission that they're under-funding and under-resourcing the state sector? Naaaah, never.

They further agree to implement measures to improve the effectiveness of employment 
placement services for beneficiaries through contracting out such services to private 
sector and community organisations, as set out in WWG Recommendation 34: Employment service

"And what's this? They're gonna privatise ACC?

National and ACT agree to introduce competition for ACC's Work Account. National 
acknowledges ACT's concern about the participation of private insurers and the fairness 
of the competitive process if ACC remains a competitor for Work Account business, and 
agrees to implement policy to manage and minimise this risk

"A spending cap on government expenditure requiring government to have a very good excuse for increasing funding? Didn't we already have a similar provision requiring governement to run at a surplus? Isn't that enough?

National and ACT agree that New Zealand’s current fiscal problems were caused by 
irresponsible increases in government spending between 2005 and 2008. They agree 
that this could happen again in the future unless institutional changes are put in place 
that will better constrain excessive future increases in government spending

"And, lessee, what else... Oh yeah, and this is all somehow Labour's fault. Uh-huh. Sure. Whatevs. Don't these guys ever take a holiday? We just voted! Take a break guys!"

Yup, you heard right. National and ACT are taking the chance that everyone is just so, so sick of goddamn politics by now to ram through their agenda for the next three years. The whole thing has a sort of desperate air to it. Despite ACT's miserably low polling, despite only having 1 seat, Banksy is being given powers far beyond what his deceptively weak position might - on first glance - warrant.

This is because National likes having ACT around to take the flack for all the stuff they want to do, but have to appear "moderate" and "centrist" to court the mainstream voting public.

This is the real reason the two Johnnies had that little pow-wow. National needs ACT to be the stealth vehicle for their real agenda.
Image stolen from "The Standard," a pro-Labour blog collective.
I'd just like to draw attention to one of the spurious claims in this document: the idea that National doesn't borrow nearly as much as Labour tends to.

This blog post takes Statistics New Zealand data for the last three decades and draws up a little graph (it's at a terrible resolution; the key line to pay attention to is the yellow line denoting government borrowing, as opposed to private sector borrowing in blue) and breaks up the data by which party was in power at the time.

But, basically: In the 90's, Bolger, Shipley, et al, borrowed up to 31.8% of GDP to pay for tax cuts, core state services, and so forth. In the 2000's, Helen Clark's Labour government spent years paying that debt down to realistic levels, peaking at a comparatively sane 15.9 % of GDP , before getting the rate down to more-or-less 10% before turning the books over to National, who immediately started trending upwards in borrowing, to a pre-quake high of 16.5%, and currently sitting at a level of 20.4%, only half of which is disaster-related borrowing.
Chart taken from article cited above. Yellow line represents govt. borrowing.
The yellow line represents government debt, the blue line is private (company) debt; and the other line is the combined total. Interestingly, company debt doesn't seem to be responsive to Government policy, and instead follows trends in the global credit market, claims the article.

Despite all the evidence to the contrary, National's line throughout the election was "Labour tends to borrow excessivly," when he knows damn well that this isn't the case. When Bill English inherited the books back in 2008, he said that the Government's balance sheets and the economy were the best shape they've ever been in; and then proceeded to introduce tax cuts and increase borrowing.

"But what about the Global Financial Crisis?" I hear you ask? What about it? National's stated intention was to always introduce tax cuts for the wealthy, and they were going to do this come hell or high water. Also, the Global Financial Crisis - which we are still in the throes of, don't forget - was caused by the exact sort of wrongful, harmful, magical thinking that National and John Key are currently ramming through right now.

(Namely, the practice of borrowing more money than your country can really afford, coupled with irresponsible lending practices between trans-national corporations and banks. There's a wealth of evidence linking John Key to key (sorry) players in the unfolding drama of the infiltration of the Italian government  This is an area I need to research more about before commenting further, but those two blogs make for interesting reading).

But back to our deconstruction of the "Who's Got Bigger (Financial) Balls" narrative that unfolded throughout the election.

When your outgoings are more than your income, you can do three things to address this:

  1. Increase your Income
  2. Decrease your Spending
  3. Borrow to Fill the Gap.
In 2000-2008, Labour picked option 1, which, it can be argued, was the prudent financial course; at the time, Labour argued that the state sector had been grossly under-funded throughout the Bolger and Shipley administrations, and adjusted taxes and spending accordingly. National, from 1990-1999 and from 2008-2011, tried to do 2 and 3 while reducing their income, in the hopes that the loss of income would translate into increased capital investment in New Zealand, that is to say, new businesses generating new jobs for Kiwis.

Welp, it didn't. Instead, those with money to invest have sunk it into land and housing, where it can steadily improve in value- this process known as Capital Gain, where the value of your assets increases to the point where you want to sell it; in practical terms, this means buying a house, waiting until the market moves he price of that house up $50,000, then sell it, netting yourself a year's tax-free salary for little to no work.

Which is, y'know, fine, and the Traditional Kiwi Way of doing things; but it also serves to create the illusion of economic activity where there isn't any - no new goods or services are being created, no new jobs are being created, it's just... hot air.

(I haven't been able to find a text article outlining this argument in a hasty Google search, but Radio New Zealand hosted an argument discussion between economist Bernard Hickey and barrister Jonathan Kreb (with occasional input from former marketer (and National party supporter) Don Donovan) on the issue; here's the link; you're after the "Panel Part 1" segment at 16:08; he starts mouthing on about how NZ doesn't have real poverty about 5.50 minutes in).

So, short story long...

TL;DR: National's economic policy, in plain terms, is this: Let's let the rich do whatever they want and it'll all sort itself out. Labour's economic policy has been, "Sometimes, when you let greedy, short-sighted people do whatever they want, you don't always get the best outcome for society."

So who looks like the prudent financial planners now?

Source document for quotes in yellow: The Confidence and Supply Agreement 2011 between ACT and National

As an aside, an interesting article criticising the arguments for the sales of state assets.

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