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The benefits of public spending

Written By: - Date published: 9:36 am, February 21st, 2011 - 97 comments
Categories: capitalism, economy, public services - Tags: ,

I should have posted this in the weekend, but if you have a spare 12 minutes some time in the day, do yourself a favour and watch this video.

We know from history, and from our own recent experience, that tax cuts don’t cause growth. Privatisation and public service cuts don’t do us any good either. What does cause growth? Public spending. What’s more, public spending is much more efficient than the private sector too…

97 comments on “The benefits of public spending”

  1. Colonial Viper 1

    Public spending – delivering services and infrastructure to the people without siphoning off 20% of the money to feed wealthy shareholders. Great, and the most reliable, necessary driver of economic activity.

    However, we still have to make sure that the leadership and operating culture inside publicly funded organisations are healthy, effective and that staff morale is good.

  2. SPC 2

    A most important factor is timing of discretionary public spending.

    For example public investment project management to ensure that there is neither strain on capacity nor lapse in work that would diminish capacity. And this should include housing – for the private sector undergoes cycles that can result in inflationary demmand and recession/looming housing shortage – so here government needs to take up the private market slack. Even to the point that government builds houses, not for Housing Corp, but to on-sell.

    We should note how China’s massive infrastructure build-up is a use of the labour supply while it remains available – before the consequences of the 1 child family impact on capacity.

    A major part of effective discretionary public sector spending is in such planning and general management of the economic cycle.

    • Draco T Bastard 2.1

      Even to the point that government builds houses, not for Housing Corp, but to on-sell.

      Not even to on-sell but to rent out. Done properly we could probably get rid of privately owned housing.

      It is part of societies responsibility to ensure that everyone within that society has a place to live.

      BTW, IMO, the economic cycle is a direct result of the wealth being channelled to the few. If our socio-economic system didn’t do that then there wouldn’t be an economic cycle.

      • Luxated 2.1.1

        Not even to on-sell but to rent out.

        I’d rather see some form of lease arrangement with a reasonably generous cancellation clause.

  3. vto 3

    Well, listening to the first few minutes I didn’t hear a lot of evidence to back his assertions. For example, he seemed to assume that public spending’s rise caused the economic growth over the last 140 years. But there was no evidence or explanation for this claimed link, merely simple unexplained statistics. Nor did he attend to the counter / reverse argument which is that economic growth caused the rise in public spending, which is the more obvious instinctual conclusion.

    Similarly, he claimed that public spending in hard infratsructure and soft infrastructure allowed growth. There is some validity to this, however his examples of health and education allowing growth to florish and his claim that private spending (eg US health care) is nowhere near as efficient were seriously flawed. For example, if he is right then public spending would also have been better to provide housing, which is an as big and important (if not more so) soft infrastructure item as health and education. We should, according to him, hand over the entire housing industry to govt… just imagine that for a second…

    Well excuse me if I don’t jump on his bandwagon, but his presentation was full of holes.

    He is an academic after all and academics deal in theory and get them right and wrong all the time. Don’t they?

    • Roger 3.1

      He initially states a correlation rather than causation effect of public spending and economic growth. He explains the causation effect through the example of infrastructure. This somewhat addresses the counter argument of economic growth causing increases in public spending because transport infrastructure, telecommunication and energy networks, and functioning utilities all enhance economic growth because communication, logistics, and staff health and efficiency all improve to the benefit of private enterprise. It may work both ways, economic growth causes higher levels of public spending which is useful in speeding up economic growth. The countries that spend much smaller proportions of GDP on public spending also have woefully inadequate health, education, and infrastructure because as he asserts the private sector is notoriously bad at this.

      Health, education, and infrastructure are natural monopolies within local and national boundaries. Efficiency is driven by competition and monopolies have the luxury of operating inefficiently since they can restrict production or services and sell way above cost (eg Telecom have made record profits through an antiquated system for years). There is competition in the housing market that provides efficiency, innovation, and difference. There is also a high level of public input through zoning, resource consent, building regulations etc.

      Government also has a vested interest in the externalities that are caused through the application of these services and are therefore better placed to coordinate these. This improves these services beyond what private enterprises could do.

      • Colonial Viper 3.1.1

        There is competition in the housing market that provides efficiency, innovation, and difference.

        Right, ‘efficiency’ and ‘innovation’ like a leaky home problem valued at many billions of dollars. Like a leaky school problem valued at $1.5B.

        • vto 3.1.1.1

          In fact Mr Viper, the leaky home problem stemmed from government interference (changing regulation) in the industry.

          • lprent 3.1.1.1.1

            vto: Speaking as someone who has spent years getting through paying to fix a leaky building (nearly going bankrupt in the process) and extracting the compensation through the courts, I’d say you’re being somewhat economical in your attribution.

            The leaky home problem was caused by the government reducing its interference. At least that was the way it was sold in the early 90’s when the idiotic legislation was being pushed through parliament. People can waffle on as much as they like about types of timber and types of buildings – but they are concentrating on trivia.

            The basic problem was that the government opened up the gateway for poor inspection of the properties and by attempting to diffuse the responsibility (and liabilities) to the point that no-one was responsible. Consequently the quality of the plans and implementation of properties plummeted as developers and builders chased short-term profits without sufficient government interference. I and thousands of other home owners paid the cost. We’ve been pushing it back to the responsible parties (mostly the councils) ever since.

            • vto 3.1.1.1.1.1

              I agree with your base premise there lprent. I was pointing out the flaw in cv’s statement that the private building industry caused the leaky home problem, when it didn’t.

              The private building industry was in fact perfectly efficient as it fitted rapidly into the size and shape of the new regulations. The regulations were the flaw, not the efficiency of the buildling industry.

              • lprent

                It wasn’t even so much the regulations at the central government level. That mostly just devolved it down for local government to take more control.

                The problem was that some local government bodies then effectively abrogated their own control by allowing crap building plans and in areas a almost complete discarding of effective building inspections. That is why there is such a patchy distribution of leaky homes across the country above variation in the rate of building in different areas. There is quite a variation inside Auckland of where leaky buildings were constructed.

                That is why I’ve always preferred the local councils and their ratepayers (as well as the builders, contractors and architects) to carry the can. They carried the primary responsibility for causing the mess.

                The regulations were the flaw, not the efficiency of the buildling industry.

                The regulations at the council level yes. The problem at central government level was the legislation that assumed local government was capable and responsible. In most cases it was. In some cases we had C&R.

              • Luxated

                The private building industry was in fact perfectly efficient as it fitted rapidly into the size and shape of the new regulations. The regulations were the flaw, not the efficiency of the buildling industry.

                Depends how you measure efficiency though, doesn’t it? By your measure your premise is correct, the building industry did reasonably quickly adjust to the new environment (unsurprising there was effectively a negative short term cost to do so and for some companies no long term cost either).

                However I would argue that the very measure with which you must look at the building industry is its ability to produce houses which are fit for purpose. A house that leaks and rots away in a decade is not fit for purpose by any measure. therefore the building industry has done no useful work i.e. 0% efficiency (energy in but no useful work out, effectively economic ‘heat’).

                • Colonial Viper

                  vto, as luxated essentially pointed out, describing an industry which causes billions in costs for the community while lining its own pockets as “efficient” is a typical economists way of looking at a situation.

                  And to clarify further. Your idea that Government interference (removing regulations) is the problem is completely mistaken.

                  The true problem is Government and regulators who refuse to accept their own role in sufficiently regulating and limiting private sector behaviour.

                  You have already tacitly admitted that if allowed, the private sector will rapidly do what is profitable for it, even if it generates billions in downstream costs for the community.

                  • neoleftie

                    well surely the building boom benefited the economy, created jobs, growth, investment just unfortunately new building codes and regulation ‘for some still not very well explained reasons’ cause a downside to the boom. look at all the downstream job creation that the housing boom caused. look at all the tax revenue generated. Now the negitives were once again the speculative nature and un-ethical and un-regulated practices that artificially raised land and house prices.

                  • vto

                    Mr Viper, a couple of things;

                    1. It was the government regulatory framework which caused billions in costs to the community, not the building industry. It is pretty well settled that the fundamental cause of the leaky home problem was one of poor central and local government regulation.

                    2. Quite why people continue to think that builders and developers were “lining their own pockets” during this time I do not know. Well, I do actually. The reason people think that is because they have a knee-jerk reaction to something they know diddly-squat about. The building industry suffered appallingly during this time. There was little work and even less money to be made. I know. I was in it. Were you?

                    3. You are right in this… “The true problem is Government and regulators who refuse to accept their own role in sufficiently regulating and limiting private sector behaviour. ” And governments of all persuasions are constantly stuffing things like this up. That is why I do not understand the left’s preoccupation with getting governments to put things right. They have a history of failure, as you rightly point out.

                    4. Don’t have a problem with your last paragraph. Human nature. Witness politicians antics as an example.

                    • Colonial Viper

                      Are you deliberately missing the point? I feel that you are.

                      Governments and regulators who refuse to create and maintain comprehensive regulatory frameworks – designed to safeguard basic standards and ensure consumer protections – and then enforce it adequately, are asking for trouble from the private sector.

                      That is why I do not understand the left’s preoccupation with getting governments to put things right. They have a history of failure, as you rightly point out.

                      Here I know you are being deliberately obtuse. What has being “Left” got anything to do with Governments doing a proper job of providing a robust regulatory framework for commercial activities to operate under?

                      You just told me that you were in the building industry. So tell me, if it wasn’t going to be Councils and central Government providing homeowners affected by leaky homes with remedies (“setting things right”), who else would? Government once more acted as the insurer of last resort. This is a role that all the shonky building developers did not want a bar of.

                      The building industry suffered appallingly during this time. There was little work and even less money to be made. I know. I was in it. Were you?

                      WTF is this relevant? Again I believe that you are being obtuse. I lived in Auckland during the years leading up to the realisation that weather tightness was a major issue, and I saw massive numbers of new developments, new apartments etc going up. Nationwide through 2004/2005/2006 it was not unusual for monthly building consents to hit the $1B mark, or pretty close to it.

                      That you did not get the work which was swirling around at the time or that the contracts for various developments went to select groups in the industry you weren’t party to is hardly relevant. Your claim that there was no money to be made in property development through those years is bullshit.

                      Although I will admit that a few big players probably took the lions share for themselves and then left the cost/quality fall out for other people to pick up the tab.

                    • vto

                      Mr Viper, you are simply not right …

                      ” What has being “Left” got anything to do with Governments doing a proper job of providing a robust regulatory framework for commercial activities to operate under? ”

                      What I said was that, given the frequent failure of govts to do their job properly (which you acknowledged with this issue as an example), why does the left have a preoccupation with getting govts to fix things? It doesn’t make sense… Oh here, lets get this outfit which caused the problem to fix the problem! (not that there is much of an alternative unfortunately, which you also acknowledge).

                      Your other point about the relevance of how much money was being made is also off the mark.

                      You and others seem to think that builders and developers were “lining their pockets” and making lots of money. They weren’t. And you simply have your facts wrong – indicating that you have a shallow understanding of this industry. Evidence “through 2004/2005/2006 it was not unusual for monthly building consents to hit the $1B mark”…

                      The vast majority of leaky homes were built between early 90’s and very early 00’s. The building code changed before 2004/2005/2006. Your timeframe is completely wrong and you don’t know what you’re talking about.

                      If you recall (though I suspect that your age is not enough to do so), following the 1987 crash the economy headed south, bottoming out in 1991. Throughout the 1990’s there was no boom. There was a minor lift around 95, 96 but that was it. In the building industry there was very little work and very little money to be made… Referring to the rise from 2003 to 2007 in this context indicates a hefty lack of knowledge.

                      So when people make rash generalisations that builders and developers were making a killing between 1991 and 2003 it needs correcting. Mr Viper, I also get the feeling you have not been in business yourself, am I right? (consultancy work does not qualify).

                      edit..
                      1. fwiw, I had one of the biggest jobs going in our region from 2004-2006.
                      2. you may wish to reflect on the fact that builders are the lowest paid of all the trades.

                    • Colonial Viper

                      Oh I’m sorry, building developers made a killing, you as a worker, or contractor, nope.

                      Yeah my time frame for the statistics was out. When I was in AKL (2000 onwards) that is when I saw a massive amount of property development work. That crosses the timeframe that you are talking about. Seems like you didn’t get it.

                      So when people make rash generalisations that builders and developers were making a killing between 1991 and 2003 it needs correcting. Mr Viper, I also get the feeling you have not been in business yourself, am I right? (consultancy work does not qualify).

                      Oh, I’m afraid you’re the one who who’s making gross generalisations here 🙂

                      Oh I’ve just found data saying that building consents in the year 2002-2003 grew strongly and totalled over $8B. That’s the period I’m most familiar with.

                    • vto

                      I think it would pay to stick to things you know something about.

                    • lprent

                      vto: I think you’re talking about the difference between Auckland and Christchurch.

                      There was a building boom going on in Auckland – especially the Auckland city area – in the 90’s and 00’s. Stand alone apartment complexes and semi-detached blocks started getting finished in the mid-90’s. Now the whole of the central city and surrounding suburbs are full of them.The resident population of central Auckland went from being a few thousand people to tens of thousands (I can see it when I’m analyzing electoral rolls).

                      Throughout the 90’s there was an almost frantic amount of in-fill housing going on in the older suburbs. In Mt Albert some of the suburbs like Sandringham increased in density by over a third from infill housing (I was having to rewrite the campaigning block system every few years to keep the pamphlet delivery loads down).

                      I have no real idea of the growth of the outside suburbs but from what I see whilst travelling the motorways the sprawl continued.

                      Auckland seemed to have a lot of building work going on from the mid-90’s to 2008. It was certainly a pain getting builders and almost any building trade according to friends who trying to renovate.

                      It has all pretty well stopped now.

                  • Pascal's bookie

                    V, bit confused here mate.

                    If govts, by their nature, suck at being in charge and getting shit right, then obviously it should be left up to private bodies to self regulate. If we follow this philosophy, then how can it be govt’s fault when the private sector ends up building a bunch of leaky buildings, for example? Did the govt demand that houses be built this way, or did they just fail to forbid it?

                    It seems to me you can blame the govt for relaxing standards, or you can claim that that government always gets it wrong so should get the fuck out, but you can’t do both…

                    • vto

                      ha ha, I know p’s b. I was definitely struggling with the logistics of how to solve the conundrum exposed by the leaky home saga and the role of government regulation versus private free market.

                      Bottom line – people bung things up, whether private or public. Just gotta watch out all the frickin time.

                  • Colonial Viper

                    vto seems like my original point criticising your statement

                    There is competition in the housing market that provides efficiency, innovation, and difference.

                    Still stands. The private sector needs a satisfactory regulatory framework to work under or its disaster. Government is the only reliable source of this framework. Passing it on to the private sector to self regulate – like Bolger et al did – hopeless.

                    Just read another report which said that leaky homes continued to be built past the regulatory reforms of 2004 – I suppose due to deficiencies in enforcement and audit.

                • vto

                  “A house that leaks and rots away in a decade is not fit for purpose by any measure. therefore the building industry has done no useful work i.e. 0% efficiency ”

                  Luxated, no. The government industry, through its overarching regulatory role, has done no useful work. i.e. 0% efficiency. The opposite of the academics proposal. Well pointed out there. Thanks.

                  The government did not produce a regulatory framework that was fit for purpose. The building industry is required by law to work under this regulatory framework. You need to get your base premises right.

                  • Luxated

                    The government did not produce a regulatory framework that was fit for purpose. The building industry is required by law to work under this regulatory framework. You need to get your base premises right.

                    The government did produce a regulatory framework that was fit for purpose, just that another government intent on ‘freeing up the economy’ stripped it away. Which is a poignant lesson in the failure of the free market, that is without a rod up its arse it will do whatever it pleases and stuff the cost to the public.

                    Yes we both agree that there was a regulatory failure, one of insufficient legislation at the time of building. But at the same time the building industry is equally if not more culpable for building homes which are unfit for purpose regardless of whether or not it was legal at the time.

                    • vto

                      “But at the same time the building industry is equally if not more culpable for building homes which are unfit for purpose regardless of whether or not it was legal at the time.”

                      Yes, well that is a tricky one. I mean, it is very difficult to expect builders to price a job at above the regulatory standard, in order to meet their own standards. The builders who did that would get no work because the person buying the house building services would, and did (there were builders who built to their standard and not the govt one), go for the cheaper option provided by the other builders who price to the regulatory standard only.

                      So, following that train of thought, at the end of the day it is the fault of home owner for going for the cheapest option. Such the kiwi way.

                    • Luxated

                      So, following that train of thought, at the end of the day it is the fault of home owner for going for the cheapest option. Such the kiwi way.

                      To truly circularise the argument you can’t expect every person building a house to know everything they should look out for in the construction process. Hence why he have regulations and attempt to trust the building industry…

                      Captcha: Afford. Some might argue we can’t afford strict building regulations.

                      As an aside I browsed through the PDF mentioned at the end of the video, apparently the Singaporean government owns 85% of the housing stock there. Could be an interesting discussion about the viability of such a concept but this thread has gone so long that I am forced to reply to myself, I’ll make a note to mention it in the next Open Mike.

                    • Pascal's bookie

                      But why weren’t orgs like master builders, the ITO’s, and various building co’s and contracters out front saying that the cheaper houses would be full of FAIL?

                      Why weren’t they saying that the regs were a minimum standard and not some sort of gaurantee of quality? Why weren’t they explaining that the lifetinme costs of a quality built building were much lower than those of one that might well leak and rot?

                      Surely in a market that sort of info would float to the surface pdq? Or is it only govt that can do this sort of thing? Cannot the market be trusted?

                    • vto

                      P’s b “But why weren’t orgs like master builders, the ITO’s, and various building co’s and contracters out front saying that the cheaper houses would be full of FAIL?

                      Why weren’t they saying that the regs were a minimum standard and not some sort of gaurantee of quality? Why weren’t they explaining that the lifetinme costs of a quality built building were much lower than those of one that might well leak and rot?”

                      Thing is, they were saying those things. Builders were saying… “look, this internal gutter will not last and this polystyrene wall cladding can’t last if you can put your fist through it.” They did say these things. Some builders refused to use these new standards.

                      Builders were saying that the buildings would fail.

                      So then they would say that to the client and the architect and they would all sort of shrug and say “well its all above board and been checked by the BIA etc so who am I to disagree”, followed by “well they say its ok, and its cheaper, so what do you want to do?” Answer being obvious.

                      Such an insidious time in the industry.

                    • Pascal's bookie

                      Understood.

                    • Colonial Viper

                      The people who were saying yes to these new materials and building methods were not the same ones who were going to be living in the house.

                      They were the ones selling them to the end occupants, who probably weren’t involved in these discussions.

                      This is the classic private sector fail. One party makes the money by cutting corners and going cheapo, and off loads the subsequent risk and cost to another party – the sucker owner/occupiers – by selling it to them ASAP.

                    • vto

                      Mr Viper, wrong again. I was referring directly to experiences between the home owner and the builder and the architect.

                      Though of course there were some in the situation you describe.

                  • Colonial Viper

                    Luxated, no. The government industry, through its overarching regulatory role, has done no useful work. i.e. 0% efficiency. The opposite of the academics proposal. Well pointed out there. Thanks.

                    Hmmmm. A good regulatory framework preventing wastage and increased cost down the track should surely be considered good for the productivity of the system.

    • Draco T Bastard 3.2

      It was a ten minute speech not a thesis presentation. I would assume that the evidence that you’re looking for is in the document that is mentioned at the end of the video

      For example, if he is right then public spending would also have been better to provide housing,

      To be honest, I think the government supplying housing would be far more efficient than the irrational housing bubbles that we get.

      • vto 3.2.1

        Government should also control and supply the food requirements of the nation. By his reckoning. This is after all the largest soft infrastructure item of them all.

        Department of Sausages anyone?

        • Colonial Viper 3.2.1.1

          Hey vto, what time mark in the video did he say that?

          • vto 3.2.1.1.1

            The time mark about 2-3 minutes in where he said public spending on soft infrastructure such as health and education, which is needed as base support for economic growth, was more efficient than private spending. That’s where.

            Or is food and shelter not necessary to support a competent and useful population perhaps?

        • Draco T Bastard 3.2.1.2

          Would there really be anything wrong with the government ensuring that our people have enough healthy food to eat? We do, after all, produce more than enough food to feed ourselves and the reason why we have people living without enough of said food is because it’s sold overseas for the benefit of the few.

          • vto 3.2.1.2.1

            Draco, you and others make fair points about the use of public spending. But it may pay to remember what things were like in the past when suggestions of increased government involvement are made.

            In fact, in the same way as the Nats are accused of forgetting the (some) disasters of privatisation and deregulation, the left should remember the (some) disasters of government provision of goods and services.

            Let me see… anyone remember trying to cross Cook Strait at Christmas and school holidays? Or how long it would take to get a telephone hooked up? Or the great five year plans of the Soviets? Or needing a licence to import anything? The list could go on of course.

            The base problem imo over the whole issue of whether private or public provision of goods and services is better is that privatisation / deregulation in NZ is still recent and raw. Can’t see the woods for the trees. It seems to me that privatisation / deregulation in NZ was flawed in its implemetation not in its concept. Lprent’s leaky home is a classic example of this – a poor regulatory structure for private interests to operate under.

            • lprent 3.2.1.2.1.1

              And I’d agree with that as well. It is a question of balance. I never forget the screwups of the past. However I also never forget who did them as well.

              The local corporate I was employed by in the early 1980’s had a Wellington based lobby staff that was bigger than their head office staff. It helped them maintain their import tariff wall that they were creaming monopoly level profits from. There was literally no incentive for the business to improve themselves so long as they could maintain the tariffs. The goods and services were horrendously expensive and not of a particularly good quality.

              The whole economy was like that and getting worse all of the time under Nationals socialist planning at the time . Wage and price freeze, carless days, and 1950’s think big projects in the wrong decade.

              I went off to do a MBA in 1985 specifically to get skills that would be more marketable overseas before bugging out and staying away. The freeing up of the economy under Labour in the mid-80’s went too far and fast (a pace closer to that done in aussie would have been much more productive), but its underlying deregulation was absolutely essential to free up the economy from the straight jacket of special interest regulation. But with all of their disruption, they were the reason that I stayed in the country because they offered a hope for the future.

              However the real problem came with the idiots of the early Bolger government who tried to accelerate deregulation and attack ‘welfare dependency’. They screwed up the first, and ensured that they entrenched the latter because they locked people into poverty through idiotic regulations. Anyone who had family who were dealing with what is now WINZ during that period knows the type of petty idiocy that Shipley and Richardson entrenched. Anyone in business at the time knows exactly how they extended the recession of the early 90’s so it lasted for most of the decade.

              The moronic inheritors of that government like Key are about to do the same thing again with their ‘welfare reforms’ aka stupid bene bashing that does nothing to create work but locks people into a poverty trap. Makes you realize that the Nats never seem to learn. To examine the shallowness of their thinking, just read DPF.

            • Colonial Viper 3.2.1.2.1.2

              Let me see… anyone remember trying to cross Cook Strait at Christmas and school holidays? (1) Or how long it would take to get a telephone hooked up? (2) Or the great five year plans of the Soviets? (3) Or needing a licence to import anything? (4) The list could go on of course.

              1) The ferry strikes and port lockouts were all bad news. And we know today that the modern public would never tolerate similar action. (Observe how easy it was for Jackson and Key to demonise the unions over the Hobbit). Regardless of that without strengthened, organised, modernised unions, you can expect workers to receive a smaller and smaller share of GDP.

              Port workers are still amongst the highest paid workers in the country. And that is thanks to union activity, historical and current.

              2) This has been argued time and time again, Telecom was already modernising when it was sold off. And outfits like Singapore Airlines, Meridian Energy and KiwiBank show it is quite possible to run highly efficient and profitable operations under public ownership.

              3) Forget the five year plans of the Soviets. Look at the five year plans of China (their latest one, no. 12, spanning 2011-2015).

              4) Import licenses did something important – reduced our expenditure on foreign currencies and stemmed uncontrolled flows of hot liquid money into the country. Today, these are major issues for our economy (including the skyrocketing of the private debt), but there are also more modern controls available of course.

              • lprent

                … but there are also more modern controls available of course.

                There would have to be. The currency restrictions that I dealt with in the 80’s like getting permission to have foreign exchange would stifle every IP based export business I’ve been involved with from the mid-90’s onwards before they started. The capital available to start export based businesses simply wasn’t available locally in the 1970’s and 80’s. Every export business then started by screwing locals behind a tariff barrier to raise enough capacity to eventually export.

                These days it isn’t that much better. Almost all of the capital to start export based businesses comes from overseas capital, either directly or indirectly from someone mortgaging their house. What we don’t have is a local capital market that allows people to raise capital to start a export business because there is a better return off the ‘risk free rate’ of investing in property. Partially that is because of the shallowness of the local investment market, but mostly it is from the way the property market operates to suck up all investment capital.

                We have to get rid of the damn property market bubble. I’d be into a property capital gains tax. I’d also not limit it to ‘investment’ properties – the cost to the economy is way too high from speculative property churning.

                Of course it doesn’t exactly help having idiots in government cutting R&D tax credits and development grants whenever they have a change of ideas or a shift in their fiscal balance. This current government has been incredibly stupid. They canned virtually every R&D and development incentive when they came into government promising ‘better targeted’ ones – none of which appear to have eventuated. It looked more like them finding something easy to cut to pay for their tax cut bribes. Typical National short-term thinking…

              • neoleftie

                shoot the chinese dont think in just five year increments they have century plans – very wise and old culture

            • Draco T Bastard 3.2.1.2.1.3

              It seems to me that privatisation / deregulation in NZ was flawed in its implemetation not in its concept.

              The privatisation concept itself has a major flaw – it gets applied to all industries, services and capital without any consideration of if it should be applied. Hell, Ben Bernanke uses a massive misrepresentation of the Tragedy of the Commons to argue for full privatisation of everything which must result in the majority of the people having nothing (this is otherwise known as feudalism).

              Telecommunications should never have been deregulated never mind sold. Sure, sometimes it could take a few weeks to get connected but there was usually a good reason for that such as there not actually being any actual lines there to connect to. That changed not because of privatisation but because new technologies came along that made it cheaper and faster to run a line to every house in the country. As I’ve said numerous times on here – if we’d kept the regulation in place and hadn’t sold Telecom we’d have FttH being rolled out already without having to put billions of taxpayers money into it.

              I remember what it was like in the past, I was there after all, but the problems we have today are because of implementing policies designed around an economic theory that doesn’t actually work. An economic theory that, quite literally, assumes away reality. If the rules around the world were all the same (That’s part of what GATT and now the WTO is about BTW) and trade was limited to completed products then free-trade might work. But with “free-trade” being more about the free movement of capital and rich people/corporations being able to buy up everything it doesn’t.

              • neoleftie

                well if we have a complete neo-liberal capitalist elite take over of all the power structures and we do become ‘surfs’ in our own country then we simply repeat history and utilise the pure theories of a Lenin. Games not over until we ran out of natural resources

              • vto

                Sheesh, you fullas put a lot of stuff up to consider and counter. If only had the time…

                But a couple of quick points. Draco you have a point when you state that ideologies simply get plastered across all sectors and industries without thought. In fact, that is exactly the impression I got from this academic.

                Detailed consideration of each industry’s circumstances is crucial. And a brilliant example is Nationals proposed sale of electricity companies. Imo that is simply too much of an important industry with monopolistic characteristics in its current set-up to withstand privatisation (e.g. how easy is it to limit supply? how easy is it for demand to increase? how important is it for our edlerly neighbours to keep the heaters on instead of turn them off to save money?).

                In the reverse though, a similarly brilliant example is playing out in Chch at the moment. Vbase is a Council owned ‘business enterprise’ charged with running and making money from AMI Stadium (bloody silly name – its Lancaster Park). So anyways, the Council boffins set up this business model and charge out there charging ridiculous monopolistic prices for drinks and snacks and intimidating everyone with their over-the-top security. So then, even in such a monopolistic circumstance, the great business model of the Council fails and Vbase owes $45 million.

                Yes, that’s right, $45 million.

                So what does the great and wonderful Tony Maryatt (Bob Parker’s right hand man and ceo) propose to do about it, using his wonderful skills and talents in the real world??? He simply falls back onto the ratepayer and says “We simply can’t sit back and let a Council company fail.”

                That’s right Tony. About time you guys woke up.

                Council has no business being in business because it does not operate as a business. It is simply impossible for the exact reason you state. So don’t do it.

                Governments (central and local) can fall back on their jackboot power and simply take the money from our back pockets. They are unable and do not operate as businesses so they should not even try.

                Btw that $45 million is about $100 for every man woman and child in Chch. Bloody stinks. Let Vbase fail.

                • Draco T Bastard

                  Stadiums almost inevitably don’t make money especially in small towns like Chch. The ones that do are usually the ones that the public has paid for in some hidden way (tax breaks, road upgrades etc) and the “profits” go directly to the private owners. We’ve got a few of the bloody things in Auckland and I’m reasonably sure that not a single one covers it’s costs (Last I heard NS Stadium was in the red about $45m backed by council loans and it’s not owned by the council).

                  They are unable and do not operate as businesses so they should not even try.

                  Almost none of what governments do can be run as a business and what they do have that can be run as a business is almost always a natural monopoly and shouldn’t be so run.

                  Stadiums are such an example – it’s provision is a service. Charge for entry, charge for use and rent out stalls etc but don’t expect to make a profit out of it or even to cover costs. To be able to do that it’d pretty much have to have a game going everyday and that’s just impractical.

                  • neoleftie

                    what i so love is the double dipping mini elites using our rates or taxes to build stadiums to provide entertainment to the masses and then over charge us to use what we already have paid for. Gotta love the elites – too clever and connected for us poor worker’s.

                  • vto

                    Yes, right, that’s what I was saying in a way. Which leads to the next broader issue of why ratepayers should pay for others in such matters…

                    Christchurch City Council looks likely to proceed now with yet another such sinkhole to ratepayers pockets. It is about to back a velodrome so that all the mad cyclists can race around.

                    Where does it end? I do not see why money that could go to my kids education or similar gets forced by jackboot threat out of my wallet and into the frothing mouths of rabid cyclists. They can f..k off and use their own money to get their own thrills.

                    Its time there was a revolt. Perhaps we could learn something from the egyptians and tunisians. Give the power back to the people!

                    • neoleftie

                      unfortunately we are too civilised to become united enough and threaten the established order.

    • Luxated 3.3

      VTO, you missed something very important in that video mentions the actual work he talking about. Granted the link is the video description which isn’t available in embedded videos.

      For those interested in the research the link is . I haven’t had time to read it yet but it may well address your points to your satisfaction, VTO.

    • bbfloyd 3.4

      vto,,, you just wasted two minutes of my time telling me about yourself…i didn’t need to know in all honesty…

      and yes, publicly funded housing DID improve the quality,and availability of housing for people, and improved the level of outcomes for a greater number of the children brought up in them… where were you living prior to the 1990’s? or were you living yet then?

      • vto 3.4.1

        bbfloyd, you have just made me waste four minutes of my time trying to figure out where I was telling you about myself.

        And I suspect the publicly funded housing you are referring to is the very very very small component that was Housing NZ and its ancestors. My point was about the entire industry and not that component. A bit tangential there.

  4. Bored 4

    A comment in passing: if the objective of our economy is “growth” then the result will be an epic “fail”. We have reached the apex of, and are going downhill on the two major categories that impact upon the size of our economy: energy and resources.

    When the word “growth” is mentioned ask a few more pertinent questions:

    • What more important measures should we use (i.e gross national happiness etc)?
    • Can we get the same without growth?
    • Does the strategy cushion us from the overall decline?
    • Is it sustainable?

    • neoleftie 4.1

      Hmmm well if we have no net increase in population and a universal controlled ‘dole’ type of system based on production / consumption then we dont need growth just a complex product / service replacement model. A super dooper planned economy.
      Interstingly if we didnt have a elite capitalist class then the income bands would be quite condenced – the rise of a super expanded all encompassing middle class; no top or bottom class.
      BMW’s for everyone

      • Bored 4.1.1

        Neo, you miss the point entirely. What its about is how to manage inevitable contraction in a manner that looks after everybody. Planned economies are based on growth models and wont deliver. In a straight market model of contraction those with least suffer most.So the question is bloody difficult to answer but requires agreement that growth is not going to be a parameter in the future.

        • neoleftie 4.1.1.1

          maybe but a contraction due to a scarcity of energy and resources. energy is surely renewable and endless, we are just used to a few easy and controlled methods i.e oil, resources once again if and when the need has arisen to an extent where the system must be compelled to act then resources can be utilised efficiently – name one resource that cannot be manufactured or renewed in the long term. What colour does red and green make again…a natural shade i beleive.

  5. Alistair 5

    I guess that if one new public sector job creates two new private sector jobs the private sector should be dismayed at the decrease in public sector employment. If nothing else they should at least be aware of the interdependence of the two sectors.

  6. mikesh 6

    vto
    given the high price of housing these days it might have preferable to have handed over the entire housing industry to government long ago.

    • vto 6.1

      But mikesh, in the last few years the biggest rise in housing costs has come from local authorities increasing development taxes (in Chch it put the cost of housing up by 5% in one hit) and from central government (GST rise has just put the cost up by 2.5%).

      So those two combined have resulted in an average $300,000 house now costing $322,500.

      Good one.

      And they (local and central govt politicians) bleat on about bringing the costs down. But they NEVER do anything to bring costs down.

      edit: and that is on top of rates increases to pay for failed council business ventures (Vbase anyone?)

      • Draco T Bastard 6.1.1

        It’s between $1200 ans $1400 per square meter to build a house (Varies depending on location and design, Chch is in the $1400 bracket). So, a typical 100m house is between $120k and $140k. I believe getting council permissions gets up to ~$20k to ~30k. So, to build a house it’s sub $200k. Add section price to that.

        Development taxes are somewhat different. They aren’t on a per house basis but on development basis and are there to help cover the costs of adding in the increased infrastructure that the development site will need. Note that I say help cover because they don’t fully cover those costs. The shortfall is made up through your rates so you’re actually subsidising the developers profits.

        And they (local and central govt politicians) bleat on about bringing the costs down. But they NEVER do anything to bring costs down.

        That’s probably because costs are always going up. Inflation and increased services will do that. They bleat on about bringing down costs so that they can elected – after all, how many NZers are going to vote for someone who’s going to promise to increase rates? The problem is that the cost increases can’t actually be avoided.

        Increase the size of the city and the expenses will go up. Waitakere City had the highest rates in Auckland and everybody complained about it pointing out that Auckland City rates were much lower. What they never took into account was that Waitakere City had more roads, more schools, more parks and was, quite simply, a much bigger city – with less people in it. And the developers wanted to make it even bigger (Why do you think I’m such a fan of high-rise apartments? They make cities much cheaper than a spread out suburbia).

        • vto 6.1.1.1

          Draco, development taxes apply to new housing. The land development (section) on which the house gets built is where the development tax gets applied, as you say. In Chch, that increase on the section cost amounted to an average 5% increase on the total section and house cost. I could dig out the numbers in proof if I could find them again.

          As for development taxes subsidising developers profits, that is so far wide of the mark. Every industry requires certain margins to operate within the risks and returns of that industry. Pre the increased development tax the margin in the development industry would have been x%. Post the increased development tax the margin in the development industry would have been x%. Otherwise the capital moves elsewhere.

          Such cost increases are always passed on to preserve the industry margin. Otherwise the capital employed in that industry moves elsewhere. So your statement that developers profits were / are subsidised is simply a nonsense. This applies to every industry where costs are imposed (all else being even).

          You know, as an aside, when the Chch City Council proposed this increased development tax, do you know how they sold it to the public? By saying that the developers will pay the increase… that it was a charge on the developers and not the end home-user…

          Well that was just a monumental lie by Garry Moore. He knew exactly that the cost would be passed on to the end-user, such is the fact of industry margin preservation explained above, yet he told the end-user that they would not be paying it. Blatant liar. How some of these politicians sleep at night I do not know.

  7. Tammy Gordon 7

    Here’s the link to David Hall’s paper

    http://www.psiru.org/reports/2010-10-QPS-pubspend.pdf

    this and a 40+ slide show are also up on the PSA’s website http://www.psa.org.nz

  8. Nick C 8

    Interesting that he argues that private debt is the problem. He’s right that private debt is a problem, but so is public debt (although the extent to which each is a problem varies by country; you would be hard pressed to argue that public debt is not a problem in the US, Greece, Spain, Ireland etc). Private debt is probably more of a problem in NZ than public debt.

    He then proceeds to argue that government promotes economic growth because it encourages consumers to spend a higher percentage of their incomes. Maybe if consumers were spending less of their income and using it to pay off debt there would be less private debt..

    • lprent 8.1

      Private debt is probably more of a problem in NZ than public debt.

      There is no ‘probably’ about it. Even with the prolific way that the NACT government is spewing debt to pay for their tax cuts, it’d probably take a decade for the public sector to get to the same level of indebtedness that the private sector is currently trying to service. Cullen did a very effective job in making sure that the majority of revenue increase through the 00’s went into cutting public debt and even storing some away to cope with future expenditure.

      It is going to be be bloody awful if overseas economies start to heat up with the consequent upwards shifts in our private interest rates. Then we’d probably get the third recessionary dip.

      • neoleftie 8.1.1

        Interestingly the Tories used outdated fiscial stimulous models of tax cuts during a recession that have been proven not to work at providing economic system stability.
        Those Billions of tax cuts dollars should have be public expenditure increases which would have balanced out the drop in private sector investment. Growth or stability has to come from somewhere and if the private sector cant or wont then the state must in a meaningful long term way. The opportunities for some serious infrastructure programmes which would have directly created semi skilled jobs etc has now been missed.
        Cullan paid down public / state debt so we had the ability to borrow upto prudent and accepted level during the forecast recession. Treasury in late 07 had forecast this crisis we face today.

        • Colonial Viper 8.1.1.1

          Treasury in late 07 had forecast this crisis we face today.

          Hmmmm I doubt that. IMO If Cullen had seen advice like that he would have never approved tax cuts.

          • neoleftie 8.1.1.1.1

            Well would you take direct hearsay as good enough..
            Think about it…Lab were tired by then, facing little chance of re-election, had the cash, wanted to use the cash and ‘lock it up’ so the Nats couldn’t play with it and do too much damage.
            Labour ‘in my humble opinion’ would rather be outa office for only 3-6 years and come back in to ‘save the day’ after both the terrible Tories and a terrible downturn had done the damage.

            Another rerun of the helen years this time under H3 is in the making.

            • Colonial Viper 8.1.1.1.1.1

              I saw a presentation by Ganesh Nana (BERL) where he put up Reserve Bank advice to Government dated either Jun or Jul 2008, stating that interest rates would likely have to go up by the end of 2008 to control expected inflationary economic growth.

              Of course, the GFC hit full force in Sept and that was the end of that.

              • neoleftie

                interesting and the causation of the expected inflationary growth? – flow on effect from tax cuts maybe or hot money flooding in seeking a nice home due to our oh so nice high interest rates. my base premise is that our economic system is out of wack.
                We are at the mercy of short tern money flows taking advantage of our high dollar and interest rates. i should quote figures i know i know but our dollar etc is traded way way above our size and global position. Our man Cunliffe, as you pointed out, just might put a few more monetary levers in place to try and control this movement.

      • Nick C 8.1.2

        My point then Iprent is that if private debt is the real problem then we would be better off cutting taxes to give the private sector more money to pay down that debt.

        • Colonial Viper 8.1.2.1

          possibly…but who in society has the worst debt:income ratios? My bet is that it would be those earning <<$100K p.a.

          Further the real issue in NZ is that our wages are low. People don't mind being taxed harder if they are still getting more in the pocket when it is all taken into account.

          • neoleftie 8.1.2.1.1

            interesting but do we take into account a range of factor, not just level of wages, maybe standard of living etc, CPI, freedom indicator.
            wise man once said “save save and then co-op the system to your advantage” if we cant win and change the system then co-oped it to your benefit. In the 70’s there was some talk of labourites pooling there money and utilising the markets to get a return so as to better themselves in a collective manner. surely if someone has a prudent debt gearing then they are an acceptable and responsible player in the market place…

            • Colonial Viper 8.1.2.1.1.1

              Problem is that too many Labour types don’t know how to pool assets and generate maximum return on investment. They think far too much in the way that most people do. Work an hour get $20. Work another hour get another $20.

              Not really the way to get ahead in the long term.

        • lprent 8.1.2.2

          I pay taxes for services. I would want to pay taxes to have the services available like I used Saturday a week ago when surviving a heart attack. Or that my niece used 11 weeks when delivering my great nephew. Or the unemployment that another famil member used when the company they aimed for fell over, and they had to pay the rent while hunting for another job. Or my parents superannuation.

          Private debt is private. It always carries risk. I can’t see any reason to help people for being lousy gamblers.

          If people want to be part of society then they pay the taxes for society to run. If they want to pay down debt then I have no problem with them doing so. If they want to get the state to reduce their obligations to society and become freeloaders, then they can buzz off to somewhere like Somalia where they can have exact the social services they wish to pay for.

          As a side issue, the private business sector pays tax on profit. Recessions reduce profit and therefore tax. That should fix the issues for businesses. Recessions also reduce interest rates, and should have helped people with mortgages. If they can’t survive with those boosts then dropping tax rates is unlikely to help them. They just took piss poor decisions. Eventually they’ll find the social safety net on their way down.

    • neoleftie 8.2

      surely private debt in new zealand is a issue due to the fact we have to borrow so much of it from overseas. If we had a better saving record then the influx of money from overseas wouldn’t unbalance the economy so much.

      • Colonial Viper 8.2.1

        One way to slow the influx of money overseas is to make it expensive for house buyers to access it. Another way is to make trading the NZD more expensive and less predictable.

        Increasing our local savings rates are a possibility (and what the Core Funding Ratio is helping to accomplish) but tough to ask when households are already under a mountain of debt that they are paying off with every spare dollar.

        • neoleftie 8.2.1.1

          our interest rates are massively high now. maybe another cause in the lack of direct internal private investment or R & D – too expensive for companies to borrow. also if one drills down into the data set of productivity you find that reinvestment in capital etc is akew contributor to low productivity figures and not as MSM would suggest low productivity or effort by workers

          • Colonial Viper 8.2.1.1.1

            You mean our retail interest rates available to you and me are “massively high”? Yes they are.

            No surprise then that Westpac makes $6M profit a week from its NZ operations and ANZ about $16M profit a week. All sent back to support the lifestyles of Australian shareholders, who thank from the bottom of their hearts the hard working Kiwis paying off their mortgages.

            data set of productivity you find that reinvestment in capital etc is akew contributor to low productivity figures and not as MSM would suggest low productivity or effort by workers

            Yeah I had a look at the summary data presented by the Savings Working Group and that’s what has basically happened. The low risk and tax benefits of putting money into houses and farm land has meant that putting money into machinery and technology has been much less attractive.

            • neoleftie 8.2.1.1.1.1

              whilst we were off selling our banks and other assets the aussies in the same period and exposed to the same WC theory direction ring fenced their banking sector. hence they retain more profits within the aussie system and all its implied benefits

    • burt 8.3

      rOb also blatantly ignores that during the last Labour govt public spending increased faster than inflation and the economy slowly shrank into recession. But hey, that’s not part of the party talking points so I wouldn’t expect rOb to notice.

      • lprent 8.3.1

        And the population increased as well. The percentage of the population over the age 65 and over rose. The birth rate per thousand of population went up. The number of people doing higher education increased. We started to save for an expected revenue shortfall with excess costs happening in 20 years.

        But if you want to be simple, you can do a Burt and just look at single factor in a complex situation and pretend you understand the issues.

        Queue whining for pointing out some self evident stupidity……

  9. burt 9

    We know from history, and from our own recent experience, that tax cuts don’t cause growth.

    And we also know from history and our own recent experience that Labour govt policies result in recession as a result of a stagnated economy.

    So what do we know – that tax cuts alone are not enough to reverse the damage done by Labour….

  10. joe90 10

    Following the Wisconsin public service showdown I came across this breakdown.

    Annual Cost of Benefits Estimate

    Based on expected annual salary of $50,000.00

    Annual Employer Cost Annual Employee Cost
    Health Insurance $28,735.20 $5,652.00
    Retirement * $5,700.00 $100.00
    Social Security/Medicare ** $3,825.00 $2,825.00
    Total: $38,260.20 $8,577.00

    Estimate of the Value of Your Total Compensation

    $88,260

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