More on Cunliffe’s Great Leap Backwards

Yesterday I noted that David Cunliffe’s recent speech on the economy contained very little beyond populist twaddle aimed at painting himself as the champion of the ignorant and defender of the bewildered. I did not, however, devote much energy to pointing out specifically where and how Cunliffe was wrong.

Cunliffe seeks to exploit the credulity of those who haven’t the foggiest notion of how an economy actually functions – those dissatisfied by the Labour Party’s refusal to once again advocate for a command economy.   And to fuel their fervour, Cunliffe threw his listeners plenty of juicy post hoc ergo propter hoc fallacies and more than a few straight out factual errors in support of their shared delusion that economic freedom has been bad for the economy.

But if Cunliffe’s case against the economic reforms of Roger Douglas in New Zealand, Margaret Thatcher in the UK and Ronald Reagan in the US is weak, is there a stronger case to be made for economic freedom?

Cunliffe’s central argument is that the world began moving away from interventionism in the late 1970s and early 1980s.  Three decades later, the world economy is flat following a recession caused by a financial crisis that began in the property markets.  Therefore, so the argument runs, free markets do not work.  Cunliffe also states that austerity prolonged the Great Depression.

With respect to the claim that austerity measures prolonged the Great Depression, it should be noted that the depression was greatest in those countries that did not respond to the crisis by cutting government spending.  In the US, Hoover responded to the economic downturn by:

  • almost doubling federal spending from 1929 to 1933
  • expanding public works projects to create jobs
  • pressuring businesses not to cut wages, even in the face of deflation
  • increasing trade barriers
  • implementing the largest peacetime tax increase in American history

Hardly austere, surely.  Unemployment in the US peaked in 1933 at about 25%, before declining to around 14% by 1937.

In Britain and Australia, where the governments responded by cutting spending and balancing budgets, unemployment rates peaked sooner at a lower level, declined faster and were below 11% in both countries by 1937.

Admittedly, correlation is not causation.  Britain and Australia may have recovered faster had they implemented a stimulus, and perhaps the depression would have been deeper in the US had they not.  But the data don’t support Cunliffe’s argument.

As for the resurgence of liberal economic policy following the post-war infatuation with Keynes, because economies are influenced by more than the economic policies of the government in power, one cannot simply look at economic performance before and after the implementation of a policy or a suite of policies and draw firm conclusions.  However, by comparing the relative performance of several economies stronger inferences can be drawn about what effect policy settings are having.

Scott Sumner of The Money Illusion had a go at this here in 2008.  Here’s his data:

Country

1980

1994

2008

United States

1.000

1.000

1.000

Argentina

0.395

0.300

0.309

Australia

0.841

0.770

0.837

Britain

0.688

0.705

0.765

Canada

0.905

0.818

0.843

Chile

0.210

0.251

0.311

France

0.780

0.730

0.713

Germany

0.803

0.812

0.763

Hong Kong

0.547

0.845

0.948

Italy

0.756

0.754

0.675

Japan

0.732

0.815

0.736

Singapore

0.577

0.899

1.064

Sweden

0.868

0.777

0.794

Switzerland

1.146

0.987

0.915

The above data, from sourced from the World Bank, show per capita income in terms of purchasing power parity expressed as a ratio of US per capita income.  Countries such as Hong Kong, Singapore, Chile and the UK whose economies were heavily liberalised have become wealthier relative to the US.  European countries who embraced economic reform less wholeheartedly have performed less well than the US.  Australia declined in the 80s, but gained ground after it began its economic reforms in the 1990s.

Over the last three decades, the period Cunliffe refers to as a “mostly unmitigated disaster”, countries with free economies have performed well relative to more statist economies.  The picture for the European countries would surely be worse had they not, during the same period, been transforming their continent into a large free trade zone.

This graph, also from Sumner (except for the label on New Zealand, which is all my own work), tells us much the same thing.

Image

Economic freedom, the bogey-man of David Cunliffe’s version of history, correlates very strongly with wealth.  What’s most interesting about this graph, however, is the extent to which New Zealand is an outlier.  All else being equal, New Zealand’s level of economic freedom in 2008 should have seen us around US$10,000 per year better off.

Sumner identifies two likely reasons for this.  The first being our geographic isolation, and the second being that our comparative advantage is in agriculture, which is still highly protected in many large economies.  Both of these explanations seem highly plausible.

Any government elected on the back of Cunliffe’s rhetoric would take New Zealand in completely the wrong direction.  Isolation would still be a problem, but New Zealand would become a steadily less attractive place to invest and do business.  Rather than seeking to turn back the clock and to return New Zealand to the days of wage orders and price freezes, a credible economic plan should seek to put New Zealand at number one on the economic freedom rankings.

Romney leads Obama for the first time in Economist poll

The Veteran notes over at No Minister that, with Newt Gingrich out of the race, Mitt Romney is left with no rivals for the GOP nomination.

He also observes that Romney is starting from behind as both Intrade and iPredict indicate.

The most recent Economist YouGov poll, however, has Romney leading Obama 47-46, which is a fairly sizable shift from recent YouGov polls, which have tended to have Obama ahead by 5 points or so.

It could be a rogue poll, but at least it livens things up a bit.

Cunliffe outlines plan for economy; forgets plan

David Cunliffe, former would-be leader of the Labour Party turned would-be leader of the Labour Party, has delivered the first of a what he promises will be a series of speeches on the economy.

Drawing attention to his speech on Red Alert, he titled his post Economic Development Ideas, and in his introductory remarks promised to tell us what a Labour economic development plan should contain. Yet nowhere in his speech is there a specific policy to be found.  Instead, he offers sustained invective against ‘neo-liberalism’ and promises that Labour is for ‘good’ businesses and against ‘bad’ businesses. His grand idea is that we should re-regulate the economy, and increase government spending.  But on the subject of what he would regulate and how he thinks the government should spend its citizens’ money he is silent. We are left to conclude that Labour would regulate ‘bad’ businesses and spend money on ‘good’ businesses (and regulators, presumably).

Despite devoting at least two thousand words to the failures of neo-liberal economic policy, not once does he deign to sully his flowery prose with anything so base as actual evidence that New Zealanders would be wealthier had the reforms that began in 1984 not taken place.  Lest unbelievers be tempted to ask for such evidence (and so no-one is left in any doubt that he is leadership material) Cunliffe deploys a Churchill quote: “The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.”  He relies on the credulity of his audience to accept unquestioned his assertion that the economic freedom New Zealanders have gained since 1984 has “mostly been an unmitigated disaster”.  I suspect Churchill would consider ‘mostly unmitigated’ to be something of a terminological inexactitude, but that is by the by.

Cunliffe’s speech may well have its merits as a means of motivating Labour’s base and laying the groundwork for a leadership challenge.  Measured against its stated goal of articulating a new economic plan for New Zealand, however, it is nought but facile verbiage, bereft of ideas, wanting of genuine thought and devoid of purpose beyond rhetorical attack on economic freedom.

Before his next speech, perhaps Cunliffe would do well to reflect on the words Churchill once dedicated to a waffly Labour politician of his own time: “We know that he has, more than any other man, the gift of compressing the largest number of words into the smallest amount of thought.”

Our unsung regressive tax

Among the Labour Party’s objections to increasing GST from 12.5% to 15% was that GST is, in their view, regressive.  Their reasoning is that because those on lower incomes spend a greater proportion on their income than those on higher incomes, who are more likely to save, consumption taxes cost the poor a greater proportion of their income than they cost the wealthy. 
 
I shall be interested then to see their views on the Ministry of Health’s notion to increase the tax on tobacco to the point that cigarettes cost $100 per packet. 
 
The excise on tobacco has gone well beyond simple cost recovery and is already aimed at deterring people from smoking.  Which is to say that government believes that adult humans are not fit to make a decision weighing the pleasure they derive from smoking against the long-run health risks, and that the government should take that decision out of their hands by making tobacco unfeasibly expensive. 
 
At $100 a packet, the cost would literally be prohibitive for most people.  So, is there any reason to expect that prohibition based on price is likely to be more effective than prohibition based on actual prohibition?  I strongly doubt it. 
 
On the contrary, I suspect that the result would be merely a gift to the gangs of an additional revenue stream.  When cigarettes cost $100 per packet, robbing a dairy or service station of 200 packets of cigarettes would be a serious earner.  Marijuana growers will not find it especially difficult to add tobacco plants to their horticultural endeavours, and their distribution networks are already established.  Since tobacco will still be legal, it will be a lot easier to smuggle into the country than actual contraband.  Indeed depending on what the street price settles at, I suspect that maxing out on the duty free tobacco allowance on one’s return could significantly offset the cost of international travel.  Once tobacco goes blackmarket, restricting supply to those under the age of 18 will be more difficult, not less. 
 
Unlike marijuana, since tobacco itself won’t be illegal, it’ll be almost impossible to target the consumers of illegally-grown, or stolen tobacco products.  That won’t stop the government going after the new producers, though.  On the contrary, while revenue from the excise will have almost completely dried up, police will be asking for new money to enable them to raid illegal tobacco plantations.
 
Getting back to my earlier point, excise on tobacco is highly regressive.  The poor are much more likely to smoke than the wealthy: those living in decile 1 and 2 areas smoke 2.7 times more than those living in decile 9 or 10 areas.  They therefore spend a much greater proportion of their wealth on cigarettes.  Since most of the cost of tobacco now is tax, the poor are spending more both in absolute and relative terms on tobacco excise than the wealthy.  This is money that they are not spending on their children, and is therefore directly contributing to the so-called child poverty that Labour and the Greens usually advocate increasing taxes on the wealthy to alleviate. 
What I find most interesting about this discussion is that Des O’Dea, apparently a health economics lecturer at Otago, while opposing a $100-per-packet price on the basis that it would stimulate a black market trade, acknowledged that the tobacco excise was hurting low-income families but said that that was the point. 
 
So, according to the nanny statists, you can’t allow the poor suffer because they’re too lazy to work; you can’t allow the poor suffer because they have more children than they can support; you can’t allow the poor suffer because the economy has tanked and the government needs to cut costs; but, if they have a habit of which you disapprove, by all means don’t just let them suffer – actively implement policies to make them and their children poorer. 
 
Although I don’t think that the Ministry of Health is seriously recommending a $100-per-packet price on cigarettes, I would nevertheless be interested in political parties’ views on the paper.  Opposing further hikes to the excise seem to me to be the sort of thing that both sides of the house should be able to agree on. 
 
The Left should be opposed to making the poor poorer. 
 
On the Right, National should realise that their Smokefree 2025 goal violates their stated values of individual freedom and choice; personal responsibility; and limited government. 
 
Meanwhile, ACT’s website still proudly proclaims that the party’s principles are that individuals are the rightful owners of their own lives and therefore have inherent rights and responsibilities and that the proper purpose of government is to protect such rights and not to assume such responsibilities. 
 
In practise, however, I suspect that both sides of the house will agree to lift the excise again next year.

Globalising intolerance

David Farrar reported the other day that Senator Bob Brown, the leader of the Australian Green Party, has called for a “global parliament … under the grand idea of one planet, one person, one vote, one value”.
David wonders whether this notion is supported by the New Zealand Green Party, but notes that the concept “could never [happen] with so many countries presently governed by repressive regimes”.
I too would like to know whether the New Zealand Greens are supportive of such a concept.
Let us imagine for a moment that such a parliament were to be established.
Would the Greens be comfortable allowing a global parliament to ban things worldwide of which a majority did not approve?  What if this global parliament sought to outlaw homosexual behaviour worldwide.  Or even simply prevent legal recognition of same sex unions internationally?
Out of a global population of seven billion, there are about two billion Christians (of whom about one billion are Catholic), one and a half billion Muslims and a billion Hindus.  So that’s 4.5 billion belonging to religions that have historically been hostile to homosexuality.  I acknowledge that large chunks of the Western Christian population have fairly nuanced views on homosexuality now, but note that even the Anglican Church is opposed to legalising same-sex marriage in the UK.  Moreover, most of these 4.5 billion people live in countries in which there is next to no separation of church (or mosque or temple) and state.  As such, there is a very strong likelihood that a global parliament would hold a majority view against the legal recognition of same sex unions.
Would the Greens be content to see the rights of New Zealand gays infringed because of the religious views of the world’s most populous nations?  And indeed, what of the rights of women?  Equality between the sexes is more advanced in New Zealand than almost anywhere else, and a majority of the world’s women at this stage would most likely not be of the view that there should be full equality.  So would the Greens accept a global parliament abolishing our legislation preventing sexual discrimination?  Or domestic violence, for that matter, which is much more accepted in a majority of the world’s countries than it is here in New Zealand or elsewhere in “the West”.
If not, would they concede that the power of a majority of global citizens to impose their views on others via the ballot box ought to be limited?  And if they concede that, then why do they believe that a majority of New Zealanders ought to have unlimited rights to impose their views on other New Zealanders?
Why should a majority of New Zealanders be able to impose their will on other New Zealanders, but not a majority of foreigners?  Is that not essentially racist?
I don’t think the concept of a global parliament is necessarily bad, but I do think it serves as an excellent theoretical example of why the powers of all democratic institutions to interfere with individuals’ activity should be strictly limited.

Nonsense and Leftist Sensibility

It is a truth universally acknowledged by the Left that a young man, possessed of relative depravation, must be in want of other people’s stuff.

The existence of poverty, or at least inequality, must, according to this model, be a primary cause of criminal behaviour.

The key observation that gives rise to this view of criminal behaviour is that, in any given society, criminality and relative poverty are strongly correlated.  There is no good evidence, however, that there is a direct causal relationship between the two.

If one believed that there existed a direct causal relationship between relative poverty and crime, one would predict that the global financial crisis, which increased both absolute and relative poverty, would have increased crime rates.  But it didn’t.  Crime rates in New Zealand, the US and Australia, to use three examples close to hand, continued to track downwards despite increased “inequality” and higher unemployment rates.

An bureaucrat acquaintance remarked to me recently that it was clear that countries with comprehensive welfare systems had lower crime rates and that the solution to crime in New Zealand, therefore, was perfectly obvious.  One of the reasons I so wholeheartedly support ongoing reduction in the size of central government is that I am sick to death of hearing officials advocate the expenditure of billions of taxpayer dollars based on analysis so shallow I couldn’t float my rubber duck in it.

How many countries in the world really can be said to have comprehensive welfare systems?  Perhaps a dozen if you took a generous interpretation of what constitutes ‘comprehensive’.  Too small a sample size to really draw meaningful conclusions.  But even were one to accept that Scandinavia and a few other Western European countries represented a meaningful sample, there are at least two important reasons to distrust any conclusion that their welfare systems are responsible for their low crime rates.

For a start, in many European welfare states, you cannot simply leave school and start collecting welfare.  Before sucking at the teat of the taxpayer, you are expected to have actually spent some time paying tax.  In most, the period of time one can continue to receive welfare is more strictly limited than it is in New Zealand.  As such, many of those who, in New Zealand, pursue careers as welfare recipients while moonlighting as criminals would wither never have qualified for welfare in the first place, or would have been kicked off after a couple of years.

Secondly, most welfare states tend to be fairly ethnically homogenous, and, even in non-welfare states, ethnic homogeneity correlates positively with low crime.

Even if social welfare does reduce crime in the short run, which is possible, it’s still not a good solution for at  least two further reasons.

First, it’s prohibitively expensive.  And since welfare dependency is heritable, it gets more expensive the longer it goes on.  Prison is a much more cost effective approach to crime reduction.

More importantly, because welfare dependancy is heritable, the inevitable increase in the ‘underclass’ population will cause crime to go up in the long run, even if welfare payments are slightly reducing the proportion of those members of the underclass who do resort to crime.

Economists’ views on the minimum wage

David Farrar today posted on the minimum wage, noting that, despite the much higher median wage, and much higher GDP per capita in the UK, their minimum wage (just increased) is only 88% of ours.

A regular commenter on Kiwiblog posted a link to a 2006 paper reporting on a (smallish) survey of American economists conducted by Robert Whaples. Among the issues on which the economists were surveyed was the minimum wage.

The Kiwiblog commenter used this quote from the paper in an attempt to highlight the lack of consensus among economists on the efficacy of minimum wages.

The efficacy of the minimum wage continues to divide economists. As Table 3 shows, almost half (46.8%) have concluded that the federal minimum wage should be eliminated, while a slightly smaller number (37.7%) favor increasing it.

First off, I think it is worth noting that 46.8% is not slightly more than 37.7%. It’s a significant difference. Of the 77 economists who responded, 36 thought that minimum wage should be abolished altogether, and 29 thought that it should be increased. That’s a 24% difference. There’s nothing “slight” about it.

Here are the full results.

The federal minimum wage in the U.S. should be:

  • eliminated. 46.8%
  • decreased. 1.3%
  • kept at the current level. 14.3%
  • increased by about 50 cents per hour. 5.2%
  • increased by about $1 per hour. 15.6%
  • increased by more than $1 per hour. 16.9%

At the time of the survey, the federal minimum wage in the US was $5.15 per hour. Only 16.9% of respondents thought that the federal minimum wage should increase by more than $1 per hour.

What that means is that 83.1% thought that minimum wage should be $6.15 per hour or less. As best I can make out, the median personal income in the US in 2006 was a little under US$33,000. The annual income on $6.15 per hour, assuming 2080 hours per year would be about $12,800. So 83.1% of economists opposed lifting the minimum wage above about 39% of the median wage.

It’s also worth noting that in 2006 the US ecomony appeared to be in good shape, and unemployment levels were low.

So, the Kiwiblog commenter has rather helpfully, though entirely inadvertently, highlighted what is actually a clear demonstration of consensus among economists* that the New Zealand minimum wage is too high.

Unfortunately, it’s set to go even higher in a few days.

*To be fair, 77 isn’t a great sample size.