Much too little ado about doing nothing

Last week, in regard to Obama’s planned second stimulus package, I argued that the default position of government should be to avoid interfering in the economy.

I now feel an urge to reprise the topic for a couple of reasons. In response to New Zealand’s credit downgrade last week, John Pagani (inaugural winner of the University of Auckland’s bad stat contest, recycler of a graph that won the same competition another week, and something of a low-hanging fruit when one feels the need to poke holes in leftist nonsense) has blogged that the government needs a plan for the economy. He believes that the lack of such a plan is the reason that New Zealand was downgraded. He also appears to believe that Labour’s election platform is just such a plan.

So we’re clear on this, the key weaknesses that Standard and Poor’s highlighted as reasons for the downgrade were:
– high household and farm sector debt;
– dependence on commodity prices; and
– pressures on government spending from an ageing population.

These are all problems that could be addressed by decreasing the government’s involvement in the economy. A lower tax-rate would increase disposable income giving people more money to save (and, incidentally, instantly redress the debt/disposable income ratio). A more lightly-regulated labour market combined with lower taxes and fewer bureaucratic obstacles to doing business would increase the range and diversity of businesses and go some way to reduce our reliance on commodity prices. Although, to be fair, while the ratio of arable land to labour supply remains high, I think New Zealand will always be somewhat dependent on commodity prices. Moreover, the pressure on government spending from the aging population exists because the government has committed to paying people superannuation from the age of 65, which is one thing if people only have another five years left in them at that point, but a whole lot less fine if they have another 25 years left. Government sending clear signals that it intends to back away from its commitment to funding people’s retirement would also give people a very strong incentive to divert their tax-cuts into private savings accounts.

Not surprisingly, the sort of plan that Pagani envisages involves further increasing the government’s role in the economy. As such, he doesn’t recognise the current government’s gradualist approach to reducing the role of government as being a plan. For socialists, “leading” and “planning” must always involve doing more and controlling more and, most of all, spending more.

And so it is with the Green Party.

The Greens have released their new jobs plan in which (among other things) they plan to use tax money to sponsor the development of green business in New Zealand, with a view to New Zealand seizing 1% of the global renewable energy technology market. Hilariously, they use a quote Sir Paul Callaghan, whom they describe as “one of our leading scientists”, in an attempt to lend credibility to their policy. Within days, Sir Paul appeared in the New Zealand Herald with this to say:

“The Green Party announced last week a policy of focusing significant government investment in the area of “Clean Technology”.
In their document they correctly quote me as saying that New Zealand needs to be a smart country where talent wants to live. As part of that view, I strongly believe that we have to protect and restore our environment.
Surely, then, I should support the Green Party suggestion. On the contrary, I oppose it wholeheartedly.”

Why?

“New Zealand is 0.2 per cent of the world’s economy. In other words, the world’s economy is 500 times bigger than our own. As a result, we tend not to succeed in highly obvious technologies ….
Indeed, the higher the profile of a new wave of industry the less likely it is that New Zealand will be world leaders in it, for the very reason that anything that sounds pretty important to the world will attract the attention of the big technology investors….
Our brilliance has been in the “weird stuff” that the big players don’t think to exploit.
So here is the risk. Politicians latch on to fashions, and the latest fashion is Clean Technology. Ten years ago it was Biotechnology. There is a huge danger in the application of political bias to the “smart economy”….”

So, what can government do to ensure that New Zealand businesses can take advantage of the “weird stuff”? It can, I believe, stop trying to pick winners, and simply ask itself in what environment businesses like to operate. Among other things, businesses like low taxes, low regulatory costs, affordable supply of appropriately skilled labour, good access to markets and a stable, predictable regulatory environment.

Most of this is most efficiently achieved by government doing less, not more.

And yet, the theme of political discourse in New Zealand is about how government should intervene, not if. Voters are encouraged to wonder how government can fix their problems, not to ponder how many of their problems are of government’s making, nor to build their own lives independent of largesse compulsorily acquired from others.

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