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The cost of doing (next to) nothing

Written By: - Date published: 11:26 am, February 27th, 2009 - 18 comments
Categories: economy - Tags:

Bill English is holding the country’s purse like an old woman on the subway. Far from doing what every other country is doing, injecting an adrenaline shot of spending into the economy to restore confidence by breaking the negative cycle, English is repeating the mistakes he made when he was Finance Minister during the Asian Crisis in 1997-98. He is taking money and jobs out of the economy by cutting government spending and undermining people’s confidence to spend by raising questions around the sustainability of superannuation by letting rumours swirl around the future of the Cullen Fund.

What every other country has realised is that essentially this recession, as with any recession, is a crisis of confidence*, the opposite of the irrational euphoria that existed just a couple of years during the boom. How do you restore confidence? By breaking the downward cycle. And you do that by using government spending like an adrenaline shot. A big boost that means that businesses suddenly can stop worrying about cutting production and firing people, that six months from now people look around and say ‘hey, I’ve still got my job after all, nothing to worry about’. The Government doesn’t have to keep putting these injections in. If the negative cycle of layoffs and decreased consumer spending is broken for only a short period, confidence is restored. That causes the economy to start ticking over by itself again.

English doesn’t get that. First and foremost, English is a former Treasury official from the dawn of the neo-liberal revolution. He is anti government and anti government spending to the core. Therefore, his instinct is to see a recession as a reason to cut spending on public services, not to use the Government’s muscle to stimulate the economy. Thus, he frets over our credit rating more than losing jobs. Ultimately, he thinks that New Zealand will only be pulled back into growth once the rest of the world recovers. So, his priority is to keep the books as balanced as possible in the mean time by cutting spending as tax revenue falls.

What that thinking misses is that he is actually worsening the Government’s fiscal position by refusing to spend government money to save jobs. Consider – the median employed worker’s income is $40,000. They pay $7210 in tax a year. If that person loses their job and goes on the dole, they’ll get about $11,000 a year after-tax from the Government. So, the net fiscal cost to the Government of a person on the median wage losing their job and going on the UB is $18,000 a year. That’s before you get into the flow-on costs in housing, health, crime etc. And, on top of that, you’ve got the vicious cycle effect of that person losing their job and not only decreasing how much they can spend but making others nervous of losing their jobs. On the other hand, not everyone can go on the dole, and there will sometimes be savings from Working for Families tax credits. But, overall, it seems to me that it makes economic sense for the Government to spend thousands of dollars to save a job, if that job would otherwise disappear.

Paying the wages for a worker while they do training one day a week (or one day a fortnight, which Key is said to be keen on), is one example of how this could be done. But, unfortunately, English’s response to such ideas has been ‘no money for that’. He simply won’t countenance new spending at that kind of level, even though it will protect the government’s fiscal position. While he has his firm grasp on the public purse it won’t happen. Key is going to have to pry him off if the Government is going to act to save jobs and stop the budget blowing out. The outcome of the conflict between Key’s desire to stay popular even if it means taking on left-wing ideas and English’s hard-right economics will have a major bearing on how well ordinary Kiwis weather the recession’s storm.

[* unless we believe that underlying this global recession is the fact that we have hit the world’s natural limits to growth and no government believes that, even though it might be true. Personally, I await further data. ]

18 comments on “The cost of doing (next to) nothing ”

  1. higherstandard 1

    “But, overall, it seems to me that it makes economic sense for the Government to spend thousands of dollars to save a job, if that job would otherwise disappear.”

    I’d temper that by pointing to the bail out of the motor companies in the US which in my opinion is insanity – save jobs/industries in NZ that have a future in the medium and longer term everyone should realise that sometimes companies must be allowed to fail.

  2. HS. agreed completely. I would like to see an Obama-style Green New Deal.

    • higherstandard 2.1

      I think we’ll find Obama is full of hot air …. much as today’s conference.

      I’d like to think that’s just my cynicism coming through but I doubt it.

      • Pascal's bookie 2.1.1

        Here you go,

        http://www.whitehouse.gov/omb/budget/

        Obama’s budget, already written, already online. Fill yer boots. And note that this is the budget, not the stimulus package, that’s something else again. And then there’s the health care reforms, which he is also doing this year.

        You can agree or disagree with what he’s doing, but he is doing a lot.

        • higherstandard 2.1.1.1

          Hot air, converted to waffle on paper, detailing how to spend money printed out of thin air, much of which will end up here – business as usual in the Us of A until the US dollar heads west.

  3. John Dalley 3

    The irony of Nationals double standard was not lost on me when John Key said that they where trimming the cost of renovations to Government House. Nice little PR statement you may think, but here’s the irony, this is construction work with all the associated trades just the thing JK has said we need to preserve in this country.
    I fear this National Government is going to talk a lot and do nothing constructive to assist the country through this recession.

  4. Far from doing what every other country is doing …

    Perhaps it might have something to do with the fact that these countries experiences are on a significant scale larger than NZ. We don’t see anywhere the same level of problems with banking, nor the same level of problems with mortgages (the two issues are linked). Yes, problems with finance companies but that is a separate issue.

    The irony of course was that when the right was screaming for tax cuts because that’s what every other country is doing, you’re answer was quite different.

    That’s not to argue that things won’t get progressively worse but the reality is that our long term improvements are linked to that of our trading partners.

    By all means soften the landing but as with your argument on the Cullen Fund, we need to see the big picture.

    • IrishBill 4.1

      The problem with the argument for tax cuts in New Zealand was that we already had very low tax rates.

      One thing this recession has done is made people realise how suicidal the tax cuts National wanted in 2005 were.

  5. Redbaiter 5

    “What that thinking misses is that he is actually worsening the Government’s fiscal position by refusing to spend government money to save jobs”

    The reason that we are in this mess is that we allowed politicians to take our money and spend it.

    National needs to stop thinking like socialists (and that bat eared commie fuckwit Obama), and do something that really helps the economy.

    Like cutting taxes and cutting government spending.

    Its not your money you left wing politicians here and in the US, and when you have taken it , you have wasted it.

    Spent it on unworthy things like propping up the uneconomic businesses of socialists posturing as businessmen, or you have dissipated it by handing it out to worthless bludgers in return for their vote.

    Now, step aside and let the people who earned that money spend it as they wish. That, as unpalatable as it is to any socialist, is the only true path to economic recovery. Everything else is either lies, or smoke and mirrors that will only exacerbate the situation.

  6. Redbaiter 6

    “What that thinking misses is that he is actually worsening the Government’s fiscal position by refusing to spend government money to save jobs’

    The reason that we are in this mess is that we allowed politicians to take our money and spend it.

    National needs to stop thinking like socialists (and that bat eared c*mm*e fuckwit Obama), and do something that really helps the economy.

    Like cutting taxes and cutting government spending.

    Its not your money you left wing politicians here and in the US, and when you have taken it , you have wasted it.

    Spent it on unworthy things like propping up the uneconomic businesses of socialists posturing as businessmen, or you have dissipated it by handing it out to worthless bludgers in return for their vote.

    Now, step aside and let the people who earned that money spend it as they wish. That, as unpalatable as it is to any socialist, is the only true path to economic recovery. Everything else is either lies, or smoke and mirrors that will only exacerbate the situation.

    Oppps, sorry- forgot aboput nanny filter.

  7. Redbaiter 7

    I give up.

    IrishBill: By which I assume you “give up” the outdated and absurd economic ideas that you have clung to for so long despite them being empirically, and repeatedly, disproved?

  8. Ari 8

    Can we not compare our failure of a finance minister to poor old ladies who have done nothing wrong but hang on to their limited retirement money during a downturn? A much better comparison would be that he’s holding the purse strings like his business mates on a pay day 🙂

    And you’re right, Redbaiter, it’s not “your” money, it’s our money. We ought to spend it in the way that evidence has suggested works best when we give it to the government. Untargetted tax cuts, while they fit your ideology nicely, do very little for the economy as a whole, and are much better spent on keeping up employment levels to take us out of the recession. You know, keeping the nice taxpayers who have done their bit in their jobs, rather than giving them fifty damn cents back from their pay packet before they get fired.

  9. monkey boy 9

    That was an interesting and informative post.

  10. IrishBill 10

    Agreed. Solid post, Steve. I’d add that national are desperate to not seem out of step with the rest of the world which is why they are trying to create the impression of big spending without actually spending. We are going to see some real tension as Bill tries to shift public opinion toward cuts around too fast and people cotton onto the government’s misdirection on the issue.

  11. djp 11

    What every other country has realized is that essentially this recession, as with any recession, is a crisis of confidence

    I disagree with this assertion (and this seems to be the point that your whole post relies on).

    This recession is an awakening. It was caused by malinvestment. People are now realising that:

    a) their assets are not worth as much as they (wished) to believe

    and

    b) they have been spending too much because of point a)

    Seriously Steve a shot of “confidence” aint gonna fix a) or b).

    Remind me never to come to you for budgeting advice 🙂

    • Felix 11.1

      Correct, to a point.

      But really, no-one actually believed that their house became more valuable in 6 months without them improving it – they just had confidence that someone else would think it was more valuable.

      Sometimes expressed as the “bigger fool” principle.

      OK, there are some really stupid people who probably actually believed it but there’s not much you can do to protect people from that degree of ignorance.

      Actually, there probably is but you need to start young and give kids some basic economic education before they get too caught up in the consumerist nonsense we call a culture.

  12. CASSE 12

    For further data and logic on limits to growth – and the prospects for a prosperous steady state economy – feel free to peruse the resources of the Center for the Advancement of the Steady State Economy.

    Brian Czech, Ph.D., President
    Center for the Advancement of the Steady State Economy

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