web analytics

The budget’s flawed premise

Written By: - Date published: 1:02 pm, May 15th, 2013 - 25 comments
Categories: class war, debt / deficit, economy, national - Tags: , ,

The Nats have made surplus by 2014-15 their one and only economic goal, because it is one that they can meet. They just keep the slashing social spending, and introducing stealth taxes until they make it. Claim success with no accounting of the damage caused on the way.

The whole approach rests on the fallacy of “expansionary austerity”. This approach is failing the world over. As has been widely covered in the media lately, the flimsy academic foundations that it rests on have recently been found to be utterly wrong. There are many good articles on the topic, this one by Bryan Gould is excellent:

Govt policies based on ‘sloppy research’

Key, English prefer to sacrifice the vulnerable than acknowledge damning case against austerity.

… Most people will know that the current government, from the moment it took office in 2008, has insisted that its top priority must be to cut spending and reduce the government deficit, thereby becoming a founder member of what is by now a dwindling group of countries that maintain that austerity is the correct response to recession.

This stance seems to run counter to the Keynesian lessons we thought had been learned from the Great Depression and to the experience today of those countries finding themselves mired in recession while pursuing austerity policies.

But, in the face of mounting evidence that they are on the wrong track, the proponents of austerity have been encouraged to stick to their guns by the work of two highly regarded Harvard economists.

Carmen Reinhart and Kenneth Rogoff published a paper called Growth in a Time of Debt in 2010 which purported to show that a country with international debts equal to 90 per cent or more of its national output would suddenly see a sharp fall in its growth rate.

For those countries with high levels of debt (and we are one of them), the lesson was clear. If they are to grow and escape recession, they must reduce debt. …

But the story has now taken an unexpected turn. A young graduate student at Massachusetts University Amherst, Thomas Herndon, was required to replicate Reinhart and Rogoff’s research. He was downcast to find that, try as he might, he could not. The young man finally discovered the truth; the research was vitiated by fundamental errors. With the help of two senior colleagues he published the results of his work and created a sensation which is still reverberating around the world.

The catalogue of mistakes is shocking. Reinhart and Rogoff had omitted through an oversight some of the key data; they had capriciously given excessive weighting to minor factors that had skewed the results; they had assembled statistics in bands so as to suggest there were tipping points (such as a 90 per cent debt to GDP ratio) that were in fact artificially constructed; and even if their conclusions had survived these errors, they had hardly considered the possibility that any correlation between high debt and growth rates might have shown that slow growth produced high debt rather than the other way around.

What this means is that policies that have kept millions out of work, condemned many to continuing poverty, destroyed a number of European economies and weighed down the whole global economy have been based on sloppy research and political prejudice.

But it seems unlikely the architects of austerity will be deterred. They will go on crucifying the poor and vulnerable, even in the face of practical and theoretical evidence that they are mistaken. …

Bryan Gould is a former Waikato University vice-chancellor and UK Labour Party MP.

Keep this in mind amidst the budget brouhaha tomorrow. The whole austerity driven focus of the budget and National’s economic policy is based on a premise which is in turn based on a spreadsheet error. Austerity and “surplus at all costs” has done this country much more harm than good, and merely delayed the recovery.

25 comments on “The budget’s flawed premise”

  1. One Anonymous Knucklehead 1

    So, the neo-liberal “conspiracy” turns out to have been snafu from the get-go. Not evil, just incompetence.

    Figures.

    • tc 1.1

      It’s not incompetence but deliberate choice of wealthy over the not so wealthy with all the consequences well laid out. They just don’t give a F.

    • Tom Gould 1.2

      Lead ‘news’ story on One News tonight has ‘journalist’ Corin Dann saying in a dramatic live cross outside Parliament “When Bill English came into office he was pretty much immediately faced with a wall of red ink. He had the global financial crisis to deal with, then the Christchurch Canterbury quakes, big deficits. He has fought and scraped to get the books back into shape. He has pretty much achieved that. But while things are looking up, he is a conservative man, fairly cautious man, so don’t expect a big spend up.” What planet is this snivelling Tory apologist on? Bill English, Corin’s hero. What a guy. I was waiting for Corin to well-up and wipe a tear from his eye.

      • QoT 1.2.1

        That would be Corin Dann who framed all election-debate questions to push the neocon line. I was especially fond of “So if we went into recession and had to pass an austerity budget, would you support it?”

      • Green machine UpandComer 1.2.2

        He is exactly right about Bill. Tune in to the Australian budget with 43 billion dollars worth of cuts to see the alternate reality that Labour would have subjected New Zealand to, except it would have been worse. Bill has been fantastic, and people in the real world are grateful.

  2. karol 2

    Good article by Gould. And this by Peter Lyons in this morning’s NZ Herald:

    In 1973 the Kirk Labour Government was in power. Many Kiwis were starting to protest against French testing of nuclear weapons in the Pacific. Fred Dagg was about to become a national icon. …

    Fast forward 40 years to 2013. Over the four decades, the New Zealand economy has undergone remarkable transformations. There has been a lurch towards free markets and reduced government intervention in the economy.

    The economy is now one of the most open in the world through the removal of barriers to international trade and financial flows. Over the decades, the economy has also experienced significant inflation. The general price level for goods and services is now almost 12 times higher than in 1973. …

    Many of these changes were necessary. But the ultimate rationale behind economic reform was to improve the material prosperity of New Zealanders. Yet in real terms, the median citizen and those below him or her on the income ladder are little better off than their parents were 40 years ago. Their ability to own the roof over their heads has actually declined significantly.

    A similar story has played out in other Western economies, including the US. The bulk of the gains in economic prosperity have accrued to those above the median.

    In the post war decades, until the early 1970s, benefits of economic growth, which averaged 3 per cent a year, were generally shared across the board. In the past 40 years, increased prosperity has largely accrued to the better off in our society.

    • Colonial Viper 2.1

      In the past 40 years, increased prosperity has largely accrued to the better off in our society.

      Not an accident.

  3. tracey 3

    As long as enough people believe (and there is enough manipulation and lying by various people to help them) that the only way they will have more personal wealth is to support the policies which currently assur eonly the top 1% more wealth, we will never get off this money-go-round.

  4. UpandComer 4

    You guys need to get a sense of proportion around the idea of ‘austerity’. I’m not sure how you can accuse the govt of borrowing/spending too much money, and also accusing it of ‘austerity’ in the same breath like Russel Norman, and the posters here.

    Not using up all your monetary power by not printing money as a run of the mill policy as opposed to a monetary policy emergency procedure isn’t austerity btw guys.

    • One Anonymous Knucklehead 4.1

      Ah, I see the point has sailed right over your head: the National Party sabotaged its own revenue stream with tax cuts in a recession. Not sure why you left the revenue side of the equation out of your analysis, but my best guess would be ideological mendacity.

    • Enough is Enough 4.2

      If National had not given tax cuts to the rich we would have never gone into deficit.

      It is that simple.

      They created this crisis.

      • UpandComer 4.2.1

        That statement is silly in how untrue it is. On the spending paths that greeted National, they could have raised taxes on everybody substantially, and we would have been in deficit for the foreseeable future. I’ll rephrase and say your statement is laughable.

        I’ll also just point out that over about half of the ‘tax cut’ you refer to, without any reference to any of the other tax policy measures that ‘increased’ revenue, was brought in by Labour, remember?

        • felix 4.2.1.1

          What tax cuts are you talking about? National’s were all “revenue neutral”, remember? All they did was cut income taxes for the rich and increase all the other taxes on everybody.

          Most are worse off as a result.

          Sure, it’s not austerity if you’re one of the top few percent. But who is?

        • tracey 4.2.1.2

          Do you concede the impact of national’s first tax cuts were not to stimulate the economy?

  5. Macro 5

    Nothing new… Neoliberal economics is essentially based on false premise and junk logic/math. The media have been brought up on this tripe, so will be very reluctant to criticize it.
    There is a growing number of economists around the world who are starting to realize the enormity of the error of the currently perceived conventional wisdom of neoliberal economic “theory”. They need more voice but get little attention.

  6. Shaz 6

    Rogoff’s and Reinhardt’s isn’t the only research that has been overturned. The CTU’s April economic report (http://union.org.nz/economicbulletin145) also covers the change of heart in the IMF where recent research has demonstrated that the effect of cuts in government spending is far more severe than was previously thought. The multiplier effect as it is called is the contraction in the wider economy especially in recession conditions caused by cuts in government spending.. The IMF’s historical value was set at about 0.5 i.e a $1.00 cut in spending would cause a 0.50 c contraction in the economy.
    .
    Then new research shows that the likely actual impact is more generally between 1.2 and 1.9

    In the UK this information has caused one of the biggest wrenches in the coalition government as George Osborne has had to face serious questions about the speed and savagery of cuts from the Liberal Democrats. The so far untold story here is I would have thought that the government’s story about a well performing economy is somewhat of a chimera.. Whatever the GDP effects of an earthquake driven ‘recovery’ the year on year cuts in public sector funding and capacity,cuts in services and staffing and the cap on public sector personnel will be having a similar effect in our economy.

    • Colonial Viper 6.1

      So is it time to admit that orthodox economists are nothing more than mis-guessing fortune tellers, and dangerous ones at that?

      • peterlepaysan 6.1.1

        So what is new?

        It was GB Shaw ( I think) many decades ago who observed that “if you laid all the economists in the world end to end they still would not reach a conclusion.

        The study of economics can only ever be conjectural and descriptive of hypotheses.
        It can never be prescriptive.

        The mantras and dogmas of economists (and their adherents) have more in common with religious fundamentalists than with reality.

        Somebody we think important said something, and it was recorded in a book.

        These things align with my prejudices and beliefs so it must be true.

        Anyone who questions this is an unbeliever, an outcast, a gentile, an infidel, a satanist, a North Korean, a Stalinist, a socialist, a communist……etc etc.. (and worst of all “politically correct”)..

        • geoff 6.1.1.1

          “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. ”

          –Evan Esar

  7. Huginn 7

    The response to Herndon’s critique of Rogoff & Reinhart has been fascinating.

    The defenders seem to be going through a Kübler-Ross Five Stages of Grief thing. There’s been a bit of anger and denial – a lot of ‘What’s wrong with you! Can’t you see it’s just common sense!!!!!!!’.

    Now they’re going through the Bargaining Phase with ‘It’s only a little mistake’ and ‘let’s not throw the baby out with the bath water’.

    It’s a very emotional time for these guys – it’s not easy arguing from a position of intellectual bankruptcy.

  8. geoff 8

    Let’s not pretend that Neoliberalism is just a mistake that some well-intentioned individuals made. It is merely the latest in a game that has occurred throughout history where the powerful attempt to assert as much dominance over the population as possible. That is simply the nature of power. All the concepts like neoliberalism, capitalism, socialism are just language games that power uses to grow.

  9. kiwicommie 9

    “All we are saying, is give slavery a chance!”

    • peterlepaysan 9.1

      Nah slavery is too expensive. Been tried ,and failed. A wage dependent proletariat is cheaper.
      Take away any welfare system, provide only charter schools and you wind up with a neo con lib paradise like Bangladesh. Shonkey (and his wall street/hollywood cronies) will love that.

Links to post

Recent Comments

Recent Posts

  • Saudi sheep deal still stinks
    Documents released today confirm Treasury were not aware of any threat of legal action from a Saudi businessman to justify the Government handing over millions of dollars in taxpayers’ money, Labour MP David Parker says. “Almost $12 million has been ...
    1 day ago
  • Assaults up over the past year
    The Government needs to take a good look at the latest statistics  out today from the Statistics Department that shows there were 3,000 more assaults in 2015-16 than the previous year, says Labour’s Police spokesperson Stuart Nash.  “That  is a ...
    1 day ago
  • More last minute policy from a Government with no housing plan
    Paula Bennett’s policy to fund $9 million worth of support services is much-needed help for the homeless but smacks of yet another last minute, short-sighted and piecemeal decision, Leader of the Opposition Andrew Little says. “Funding services for two years ...
    2 days ago
  • SFO given more info on ex Ministry staffer
    More information on the background and past activities of a former senior Ministry of Transport manager, being investigated for alleged fraud, is coming to light, Labour’s Transport Spokesperson Sue Moroney says. “Today, I have ensured that information on Joanne Harrison’s ...
    2 days ago
  • Petition for free vote on Shop Trading Hours Bill
    “Labour is petitioning the Government to allow National Party MPs to have a free vote over Easter shop trading legislation, says Pacific Island Affairs spokesperson Su’a William Sio.  “The Bill which allows shop trading on Easter Sundays has just had ...
    2 days ago
  • Council must build on heritage, not destroy it
    Auckland Council must move to ensure there are heritage protections in place following recommendations that demolition restrictions be tossed out, Labour’s Arts, Culture and Heritage spokesperson Jacinda Ardern says. The panel considering the Unitary Plan has recommended removing partial protections ...
    2 days ago
  • Numbers of Māori waiting for homes grows
    With the number of Māori households waiting for homes increasing by more than 20 per cent in the past year, it’s time the Māori Party admits its support of the Government’s state house sell-off has made life worse for whānau, ...
    2 days ago
  • Children’s ministry, but only for some
    The Government is stigmatising a whole cohort of young New Zealanders while leaving others behind with its creation of a Ministry for Vulnerable Children, Labour’s Children’s spokesperson Jacinda Ardern says. “Confirmation of the move by Hekia Parata, an acting Minister, ...
    3 days ago
  • QUESTIONS FOR (ORAL) ANSWER – Thursday 28TH OF JULY
    While Parliament might be in recess, there are still plenty of things that Ministers need to answer for. So the Labour team has put together six of the best questions that the Government should be answering today (plus a special ...
    3 days ago
  • Fee fi fo fum…tax swindle comes undone
    At the same time the Government is looking to pump more cash into private schools the IRD is investigating several over a tax swindle which allows parents to falsely claim private school fees as donations and claim a rebate, Labour’s ...
    3 days ago
  • Government scuppers affordability requirements
    The Government must explain why the panel considering Auckland’s unitary plan removed affordability requirements at the behest of the Ministry of Business, Innovation and Employment and Housing NZ, Leader of the Opposition Andrew Little says. “Labour welcomes the Independent Hearing ...
    3 days ago
  • National pushes on with failed state house sell-off
    Merchant bankers, overseas companies and property developers will be lining up to buy 364 state houses in Horowhenua during two days of “market sounding” meetings starting tomorrow, Leader of the Opposition Andrew Little says. “Despite a housing crisis and families ...
    4 days ago
  • QUESTIONS FOR (ORAL) ANSWER- WEDNESDAY 27TH OF JULY
    While Parliament might be in recess, there are still plenty of things that Ministers need to answer for. So the Labour team has put together six of the best questions that the Government should be answering today (plus a special ...
    4 days ago
  • Andrew Little’s International Affairs Speech
    Tena Koutou Katoa Can I begin by acknowledging: Sir Doug Kidd, President, NZ Institute of International Affairs Maty Nikkhou-O’Brien, Executive Director, who did all the organising for today’s event. Labour’s foreign affairs spokesperson David Shearer. Victoria University of Wellington law ...
    4 days ago
  • Inquiry into surgical mesh needed now
    The Government must urgently launch a Ministerial inquiry into surgical mesh after more than 500 patients have lodged claims of complications with the ACC, say Labour’s Health spokesperson Annette King.  “This is the most widespread crisis involving surgical devices in ...
    4 days ago
  • Crime on the increase yet again
    Police Minister Judith Collins’ contention that crime is falling has proven to be wrong yet again, with latest Police statistics showing an increase in most crimes, Labour’s Police spokesperson Stuart Nash says. “Figures for June 2016 show an increase in ...
    4 days ago
  • Major reform of careers and apprenticeships to meet Future of Work
    The next Labour Government will transform careers advice in high schools to ensure every student has a personalised career plan, Leader of the Opposition Andrew Little says. “Today I am announcing the next Labour Government will commit to a major ...
    5 days ago
  • DOC struggles on the pest front undermine Nats’ predator-free promise
    The Government’s planned predator-free initiative comes at the same time as the Department of Conservation is facing major challenges to keep pest numbers down, says Labour’s Conservation spokesperson Nanaia Mahuta.  “DOC’s annual report shows it failed on 5 out of ...
    5 days ago
  • QUESTIONS FOR (ORAL) ANSWER- TUESDAY 26TH OF JULY
    While Parliament might be in recess, there are still plenty of things that Ministers need to answer for. So the Labour team has put together six of the best questions that the Government should be answering today (plus a special ...
    5 days ago
  • Unfunded CYF a ticking time bomb
    The Ministry of Social Development is sitting on a ticking time bomb with Child, Youth and Family out of pocket by $56 million despite increased demand for its services, Labour’s Children’s spokesperson Jacinda Ardern says. “The new entity that’s replacing ...
    5 days ago
  • Lack of any real funding in predator free proposal
    Predator Free New Zealand is a laudable idea but the Government has not committed any real money into killing New Zealand’s pests, says Labour’s Conservation spokesperson Nanaia Mahuta.  “The $28 million earmarked for this project is just to set up ...
    5 days ago
  • Andrew Little Speech to LGNZ Conference
    Thank you for having me here today. Local Government New Zealand’s work of advocating for New Zealand’s 78 local councils is critical as we upgrade New Zealand’s economy, and make sure it’s delivering for all our people. Whether in Auckland, ...
    5 days ago
  • John Key must sack out-of-depth Trade Minister
    The Prime Minister must sack Todd McClay for failing to do his job as Trade Minister and be on top of a significant potential threat to some of our biggest exporters, Opposition Leader Andrew Little says. “Todd McClay is clearly ...
    5 days ago
  • 45,000 Kiwis sent back to their GPs
    Last year nearly 45,000 Kiwis were sent back to their GPs without getting to see specialists they were referred to, says Labour’s Health spokesperson Annette King. “This is a shocking figure and underlines how far the cut of $1.7 billion ...
    6 days ago
  • Half a million smells like pure cronyism
    The National/ACT Government’s decision to pump hundreds of thousands of taxpayer dollars into a new lobby group to advocate for charter schools shows just how much of a failure their ideological experiment has become, Labour’s Education spokesperson Chris Hipkins says. ...
    6 days ago
  • Select committee changes Kermadec/Rangitāhua Ocean Sanctuary Bill
    Photo by Tom Hitchon Parliament’s Local Government and Environment Committee has made many changes to the Kermadec/Rangitāhua Ocean Sanctuary Bill in response to public submissions, particularly submissions from iwi authorities and Te Ohu Kaimoana.   Read the amended Bill and the ...
    GreensBy Eugenie Sage
    1 week ago
  • Housing map a hit as crisis spreads across NZ
    More than 55,000 New Zealanders have used Labour’s interactive housing map in its first week to see how the housing crisis is affecting their local community, Labour Housing spokesperson Phil Twyford says. “Our innovative map shows the housing crisis is ...
    1 week ago
  • Bridges must come clean about fraud within transport
    Hundreds of thousands of dollars of public money have gone missing and  the Minister of Transport, Simon Bridges must come clean after the Labour party revealed that a senior manager is being investigated for serious fraud, says Labour’s Transport Spokesperson ...
    1 week ago
  • Labour supports Spencer victory
    Labour congratulates Margaret Spencer for her tireless efforts in challenging the Government over family carer rights, says Labour’s Deputy Leader Annette King. ...
    1 week ago
  • US Warship visit welcomed by Labour
    Labour sees the United States warship visit as a red letter day for New Zealand’s non-nuclear status, which is core to our identity and has defined us a nation for 30 years, says Labour’s Deputy Leader Annette King. ...
    1 week ago
  • Time for honest dairy sector conversation
    ...
    1 week ago
  • What next? Dog kennels?
    Social Housing Minister Paula Bennett needs to explain why the Government thinks it is acceptable for it to refer families to live in garages and sheds, says Labour’s Housing spokesperson Phil Twyford. “This is a new low, just when you ...
    1 week ago
  • Banks bust a move, Government possum in the headlights
    Three of the big four banks have acted responsibly by bringing the shutters down on property speculators earlier than required by the Reserve Bank, says Labour’s housing spokesperson Phil Twyford. “It’s a shame the Government isn’t as motivated to act ...
    1 week ago
  • Latest OECD dairy forecast raises serious questions for economy
    The latest global dairy price forecast shows that New Zealand dairy farmers will not reach a break-even payout before 2019 at the earliest, and will not reach the dairy price factored into this year’s Budget until after 2025, Labour’s Finance spokesperson ...
    1 week ago
  • National’s reckless, out of touch approach to economy exposed
    Today’s economic assessment from the Reserve Bank highlights the danger to the New Zealand economy from a National government that is recklessly complacent in the face of a housing crisis and a struggling export sector, Labour’s Finance spokesperson Grant Robertson says. ...
    1 week ago
  • GP’s visits get more expensive
      Visiting the GP is set to become more expensive after the Government ignored warnings that people were not receiving access to affordable  healthcare, says Labour’s Health spokesperson Annette King.  “Over 400,000 New Zealanders who should be able to access ...
    2 weeks ago
  • Farm prices bear brunt of dairy downturn
    The slump in dairy prices that has seen farm prices drop to their lowest level since 2012 and down a third from their peak in 2014 will be of concern to farmers, banks and our overall financial stability, Labour’s Finance ...
    2 weeks ago
  • Reserve Bank “gets on with it”, National carries on in denial
    The proposal by the Reserve Bank to tighten loan to value ratios for investors shows they are prepared to do their bit to crack down on speculators, while National is still stuck in denial mode, Labour’s Finance spokesperson Grant Robertson says. ...
    2 weeks ago
  • Housing crisis holds up interest rate cuts
    The housing crisis that National still wants to deny is stifling the New Zealand economy, says Labour’s Finance Spokesperson Grant Robertson. “The latest Consumers Price Index shows that all prices excluding housing and household utilities decreased 0.5 per cent – ...
    2 weeks ago
  • Housing crisis holds up interest rate cuts
    The housing crisis that National still wants to deny is stifling the New Zealand economy, says Labour’s Finance Spokesperson Grant Robertson. “The latest Consumers Price Index shows that all prices excluding housing and household utilities decreased 0.5 per cent – ...
    2 weeks ago
  • Govt’s state house sell-off ramping up
    Government plans to ramp up the state house sell-off by selling another 1000 houses in 2016/17 will mean more families in need missing out, says Leader of the Opposition Andrew Little. “New figures show the Government plans to sell 1000 ...
    2 weeks ago
  • Govt’s state house sell-off ramping up
    Government plans to ramp up the state house sell-off by selling another 1000 houses in 2016/17 will mean more families in need missing out, says Leader of the Opposition Andrew Little. “New figures show the Government plans to sell 1000 ...
    2 weeks ago
  • National must reassure exporters on dumping case
        The National Government needs to show our key exporters that they are in control of any anti-dumping case against China before it damages some of our most important industries, Labour’s Finance spokesperson Grant Robertson says.     ...
    2 weeks ago
  • National must reassure exporters on dumping case
        The National Government needs to show our key exporters that they are in control of any anti-dumping case against China before it damages some of our most important industries, Labour’s Finance spokesperson Grant Robertson says.     ...
    2 weeks ago
  • Papers describe litany of incredulity
    Treasury documents which slate the Government’s plans for a national bowel screening programme confirm the proposal was nothing more than a political stunt to cover up underfunding of the health sector, Labour’s Health spokesperson Annette Kings says.  The papers were ...
    2 weeks ago
  • Effect of rampant house prices widens
    The latest house price figures from REINZ show the housing crisis expanding throughout the country, says Labour’s Housing spokesperson Phil Twyford. “We are seeing steep increases in median house prices in Central Otago Lakes – up 42.4% in the last ...
    2 weeks ago
  • Public invited to have say on homelessness
    People who are homeless, those who were once homeless, those working with the homeless and concerned New Zealanders are being asked to share their experiences and solutions to this growing issue with the Cross-Party Homelessness Inquiry. This inquiry was launched ...
    2 weeks ago
  • Sorry seems to be the hardest word
    An apology from Hekia Parata to the people of Christchurch is long overdue, Labour's Education spokesperson Chris Hipkins says. "As if the earthquakes weren't traumatic enough, Hekia Parata and the Ministry of Education then attacked the one thing that had ...
    2 weeks ago
  • Housing crisis affecting more than 98 per cent of NZ
    Labour’s new housing map shows the housing crisis is now affecting more than 98 per cent of New Zealand, Leader of the Opposition Andrew Little says. “Housing pressures have seen house prices rise faster than wages in all but four ...
    2 weeks ago
  • Uber might not be a taxi firm but it must pay tax
    Uber needs to explain how it paid only $9000 in tax when it earned $1m in revenue and is one of the fastest growing companies in the country, says Labour’s Finance spokesperson Grant Robertson. “Uber New Zealand appears to be ...
    2 weeks ago

Public service advertisements by The Standard

Current CO2 level in the atmosphere