Poll Dancer by Keith Ng

It's the macroeconomy, stupid

This election has brought me into a mild epistemological crisis. What has really shocked me, after seeing into the hivemind of our polity, is that nobody really knows what's going on. It's not that anyone is particularly incompetent, it's just that there are severe natural limitations on what we know and what we can know, and the confidence with which politicians and the media declare what is "true" is for our benefit - so that we can sleep at night knowing that somebody "up there" has everything under control.

Not that I have a better idea of what's going on, but as an agent of chaos I feel obligated to present my contribution to the public discourse this election - some unequivocally qualified answers and absolute uncertainties on the biggest iceberg that's floating through the fog of this election: Macroeconomics.

[Note: It's in Q&A format - or, more precisely, Things You Always Wanted to Know About Macroeconomics But Were Afraid to Ask format - because I can't figure out how to do it all in any structured form.]

Tax Cuts

Are National's tax cuts affordable?
Yes. There is money in the coffers now, and there'll be more if spending on public service is cut and the numbers are jiggled a bit.

Public services cut? It's just all of them bloody penpushers, right?
Well, their "baseline review" business is actually relatively modest - $300m for the first year, an extra $100m for the second and third year. That's a lot of penpushers to send to the gulags, but they intend to save three times as much from reducing the amount allocated for new spending.

The reason the focus has been on the former, not the latter, is probably because penpushing bureaucrats are so easy to hate (uh... except for the ones who read Public Address, of course). But the numbers are pretty clear - the present "wastage" in the public sector is secondary to capping its growth in the future.

It's possible that much of that future growth would have gone to PC bullshit anyway, and so the cut won't make much difference. It's also possible that it will.

The trouble is that I don't think even the public service knows. Such is the nature of these megalithic organisations - they grow according to the rules and environment that they themselves create, and there's no "Architect" sitting in a control room who understands the whole machine.

Short answer: Nobody knows, including National and Labour.

What numbers will be jiggled?
Capital spending that is currently paid out of cash can be paid for by borrowing instead. Think of it as making weekly payments on that $100 TV instead of paying cash for it, and all of a sudden you have a $100 more than you would otherwise have - which you can then spend on other things.

Does it mean more debt?
Yes. National's projection puts government debt at $3.2b higher that it would under Labour by 2009.

That's bad, right?
Not necessarily. Government have debts, just like households have debt. New Zealand has a pretty low debt level, so having more isn't really such a big deal.

So debt's good, then?
Well, no, it still costs money to service debt.

Er, so it's bad, then?
The increased borrowing doesn't matter a whole lot in the short-term, but we don't know how it'll pan out over the long-term. The problem is that once taxes are lowered, it's very difficult, politically, to raise them again. So, even if we assume that we can afford them over the next 3-6 years, it still might not be a good idea, because if a future government can't afford them (and we don't know either way) and they can't get rid of them, it might result in even more debt or spending cuts.

The other argument is that with the aging population, we'll be less able to afford to service the debt in the future.

Why does National hate us so?
I'm glad you asked that question, me-pretending-to-be-Lynne-Pillay.

Actually, debt is not an inherently bad thing - the question is whether we're getting a return on the debt. In this case, National insists that the borrowing is not to fund the tax cuts, it's to fund capital expenditure. (e.g. They've borrowed $100 to buy the TV, and then use the $100 they had sitting around to buy pot, but say that the $100 they borrowed was for the TV, not the er... crockery.)

Anyway, ignoring that crappy argument, let's just say that they are borrowing to fund part of the tax cut. The question then becomes: what is that tax cut going to get us? The pure right-wing answer is growth - more money will mean more spending, which will stimulate the economy and make more money.

Tax cuts = growth?
Michael Cullen says that's what the theory says, but Clinton raised tax, and then actually saw a golden era of growth, so nhhh! He says that pumping money into an overheated economy will cause inflation instead.

Roger Kerr says that that's what Cullen's theory says, but Reagan cut taxes, and that actually inflation go down. So double-nhhh!

They both agree on one thing, though: The other guy is wrong.

Working for Families

Is WFF inflationary?
If the tax cuts are inflationary, then WFF would be inflationary too. It would be less so because it's smaller, but dollar for dollar, it would have more impact because it's targeted to slightly poorer people, who (in all their poor-people silliness) go out and spend their extra money rather than put it into their nest egg.

Whether it's inflationary also depends on the state of the economy. If there's already a lot of activity in the economy, then pumping more money in with something like WFF or tax cuts would stimulate inflation. The trick to counter-cyclical fiscal management is to wait until it's just starting to cool down, then pump money in, so that the economy gets going again.

Counter-cyclical what now?
It's the idea that the government should save when it has a lot of money, then spend it when it's poor, because the spending will stimulate growth. It's like, you know, making hay while the sun is... you know... and eating hay when the sun goes... bah, I don't really know much about making hay. But you get the idea. Hay. That's what it's all about.

Uh, okay. So WFF might be bad?
Fiscally, it really is just like a tax cut. Pretty much all the bad things that can be said about tax cuts can be said about WFF. The major difference between the two is that WFF is targeted at a specific group of people, whereas the tax cuts are dispersed over the whole workforce.

Was it a last minute bribe?
Yes and no. Cullen really didn't know what was in the Pre-Election Fiscal Update until he saw it. Dodgy Treasury forecasts underestimated the strength of the economy, which meant that the government had more money than Treasury said they would. As far as problems go, having more money than they realised doesn't seem so bad, but it does have consequences.

Earlier this year, I reported that the government stuffed up big-time on giving out student allowances. The government had earmarked the money, made policies to give it out, but nothing happened - because faulty Treasury forecasts meant that the policies didn't work, because people were better off than they were supposed to be. Well, boohoo - but it does demonstrate that Treasury's repeated misunderestimation of the economy is not a stand-alone occurrence and can be problematic to the functioning of government

So it wasn't a deception on Cullen's part to hide the money - it was just a matter of Treasury stuffing up - and it was really extra money, on top of what Cullen deemed prudent to save, so it was only natural that he spent it.

But hey - a bribe from good money is still a bribe!


Originally, it was a question of fiscal management. Do you save now, or do you spend in the hope that it'll create growth for the future? Saving is safer, but spending now has a longer-term pay-off (if it translates into sustained growth). With Labour blowing the books wide open, the difference between the two parties has closed, but the question is still relevant.

On balance, I'm leaning towards Cullen, as the safe option. The tax cuts and the public service reviews are certainly interesting, and I'd like them if they worked (more growth, more efficiency - why not?), but they're all terribly speculative. The risks of a tax cut that would be locked in for a decade, chalking up debt but delivering few benefits to the economy as a whole, or even damaging it by fueling inflation is quite a big risk, not to mention the mayhem that would become our public service (which would be unavoidable in the short-term, at least)... these are all big risks. Scrooging money away? No great evil can come of that.

Still, I guess I've always had a soft spot for Scrooge McCullen. I would have a great deal more faith in his fiscal management if he'd stop throwing money at me, though.