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Professor Roger Bowden

Election Year Economics: the Home Straight

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The polls all say that Team Key (the new name of the National Party) will win in a canter, with a bit of help from coalitional support riders. But then polls are often wrong and it’s as well to remind ourselves that Team NZ were 8 to 1 up at the same stage. And there are one or two dark horses still to make a running. We haven’t heard too much yet from NZ First, while the Mana Internet Party are like a random shot in the dark that could strike at any time.

Still, an economic form review seems to be in order as the parties round the bend into the home straight. These days elections are decided more on personalities than perspectives, while the economics that does come across our TV screens is as much as anything the economics of social bribery to special interest groups. That is a pity, for how the parties might differ on the big picture is arguably of much greater import for the nation. The big picture, to my mind, is all about cash flow and capital and their respective roles in creating the value of NZ Inc. The review that follows considers each in turn.

Actually our public cash flow isn’t too bad these days, though contrary to the government’s early PR, we’re not in surplus in the public accounts. The Obegal (Operating Balance Before Gains and Losses) is still negative and its past improvement is as much as anything due to the billion dollars of so of tax paid on their investment winnings by the National Superannuation Fund. But omigosh, the Obegal may very well become positive next fiscal year, ideally saving in good times to pay for the inevitable bad times. Fiscal stability, it’s called. But it’s an election year and fiscal stability will fade into the background.

On this count, Labour’s announced handouts  on ‘Best Start’ babies, 26 weeks paid parental leave and other welfare initiatives would have to be a fiscal concern, as would smaller class sizes and tablet computers for school kids, on which more below. ‘Kiwibuilding’ state houses for sale will cost a packet up front as well.  On the income side, I can’t see their proposed 36% top marginal tax rate above $150,000 p.a. as bringing in enough tax revenue to finance the $3-4 billion cost of all this, nor would disallowing rental losses against personal income.  The proposed capital gains tax could, if well conceived and executed. But that would open up a whole new can of worms for the economy, not to mention likely unpopularity with middle class baby boomers, who they hope will vote for them.  And Labour’s proposed initiatives to tax internet multinationals are not only pie in the sky going it alone but positively Orwellian in proposing to infect them internally with  IRD auditors (presumably virtual).

More recently Labour have proposed to shift the burden of EQC levies away from insurance premiums to local body rates. Labour has also flagged some changes to the Kiwisaver retirement scheme. Joining will be compulsory and contribution rates can be varied to add another inflation control instrument. The idea has merit, though raising the qualifying age for the National Super Scheme is a sure vote loser unless the pill is sweetened (it can be done [1]).

Still, credit to Labour in sticking out their collective necks with identifiable fiscal policies. By way of  contrast the Nats have stayed rather quiet on what they propose to do if re-elected to a third term. It’s business as usual until we’re told otherwise — after the election! Their major initiatives are of another genre, but by and large they belong in the domain of capital rather than current cash flow.

In this respect, I can think of two genres of policy relevance: economic capital and social capital. There are substantial overlaps of scope between the two, but it’s helpful to think about the electoral impact on both for the way that we survive and prosper as a nation.

Economic capital refers to the collective resources that facilitate public good asset value (infrastructure etc) and through this, private income and capital creation. There is indeed a synergy between public and private economic capital. Like love and marriage in the old song, you can’t have one without the other. In this respect, Labour is proposing a  regional development fund. The government had earlier announced a package of regional roading developments, allegedly financed by those public asset sales. You could argue that this is just swapping one kind of public capital for another, and yet again that the $212m package is a drop in the bucket that could easily have been financed in the normal way as recurrent capital expenditure. My own take is that the asset sales were really needed to finance the exponential Waitangi payouts: the Dodo’s ruling ‘everybody has won and all must have prizes’ gets very expensive in the real world.

Still, you get the idea  ̶  an election platform should contain some reference to the enhancement of the nation’s economic capital. A well educated workforce is one such ledger entry. Labour thinks smaller school class sizes will fix things, together with a subsidy on tablet computers of $100 for every schoolgoer from grade 5 up, and a ‘Leadership College’ for teachers. The Greens want extended preschool education (enlightened childminding, if you like). National thinks expert mentoring by specialist teachers will help raise teaching standards. I cost out the two alternatives as roughly the same, once you sort out all the operational fishhooks with Labour’s scheme; all up about $400 million a year. As an educationalist I have considerable doubt about effectiveness for the three R’s, for it is these basic skills that count, and diversionary e-gadgets are not the answer [2].  National has flagged tertiary education as an underperforming area for review but with no details as to how they propose to fix the NZ university mess. Given that the TEC has itself become part of the problem with supervisory failures and incentive distortions, don’t hold your breath for any real outcome.

The other kind of capital is social capital. It’s a hard notion to pin down, and one on which social philosophers have written copiously through the years, with little agreed outcome. It is not the same as the ‘social contract’, or ‘social justice’, which are foundation of the ‘human rights’ movement and oppressively censorious political correctness. My own take on social capital is closest to the eminent commentator Robert Putnam, embodied as a social network with civic participation, mutual trust and a common perception of social values.  Social capital is under constant threat from divisive issues that break up the perception of the whole, and it is a legitimate role of government to foresee and forestall such adverse outcomes.

I can think of two or three damagingly divisive issues of this kind, as well as more minor matter of mutual trust such as peddling political intervention. Our record immigration numbers has been raised by NZ First as a current election issue. In British politics it has seen the meteoric rise of Nigel Farage and his UK Independence Party, while there are echoes elsewhere in Northern Europe. You have only to travel around London to become aware of the walls of suspicion that impede normal human interactions. This is no longer a city of communicants. With people of fundamentally different cultures, the problem is only rarely with the first generation of immigrants; it is with the second, just as the Australians are now finding out, and the British before them. I think NZ First do have a point as to numbers and sources, a potential vote winner among the older generation, who can remember and hanker after things as they were.  It’s always a bad idea to write off Winston. However, you’d have to say that with the sudden lurch toward political correctness so evident in its policy platform as a whole, this is not the NZ First of old and that may cost them their 5%, now that NZ Conservatives are in the wings.

ACT’s continued promotion of charter schools (the public funding of sectional interests) raises further  issues of social capital, one unavoidably linked with immigrant communities, as the Brits have been finding out.  Beyond that, I continue to have serious doubts about their educational effectiveness together with a suspicion that the deadweight cost of supervision will negate any economic advantages from the creation of substantially novel human capital.

Embedded in all the above is the perennial issue of economic growth versus income or wealth redistribution. It’s not the problem here that it has become in the US and parts of Europe. But all the same, there is difference of focus between the two major parties. National has in the past focused on removing growth impediments, and it will be business as usual for them if they get a third term. Labour is more explicitly redistributional in its policies. Their coalition partners the Greens are even more so, adding their own platform of environmental protection with the inevitable trade off against economic growth. But it’s as well to remember that inflation has adverse redistributionary effects. On this front the Labour-Green policies are suspect, not only on spending as such, but on the living wage and proposals to reform the Reserve Bank Act. The Maori Party have also hopped on the living wage bandwagon.

When election time comes by, economics is the Devil’s scripture. What the politicians assure us ain’t necessarily so, either as a truth proposition or as likely effective in its outcome. It may instead have a basis in welfare of special interest groups and professional capture. There’s more than a trace of this in some of the platforms, especially it comes to education. But then, professional capture is itself all just economics. I’m sorry I’m an economist.

Finally, all the above is a survey not a prescription. One thing does stand out: they’re all about spending wealth, not creating it. As to what policies I’d really like to see in place, that’s a story for after the election.


1. On this see e.g. my paper with Dawn Lorimer Ex post flexible state superannuation mechanisms,  available on http://www.wellesley.org.nz/papers_public.asp

2. I read that half the nine year olds in the UK don’t know the answer to 7×8. I learned it by plainsong chant at Morrinsville Primary in a class of size 52. I can’t say I feel damaged by the learning experience, nor my classmate Ross Ferguson, the geneticist who created  the gold Kiwifruit.