New York Times columnist Paul Krugman (OK he is a Professor at Princeton as well) won the Nobel Prize for economics a day or so ago. We were a little surprised and we are sure it has nothing to do with political mood swings and negative feelings towards the free market and de-regulation. Anyway - well done Paul.
Now Paul wrote an interesting column on 12 October about which response to the international financial crisis is best. In case both Helen and John have missed it because they were preparing for the debate we repeat it.
Has Gordon Brown, the British prime minister, saved the world financial system?
O.K., the question is premature — we still don’t know the exact shape of the planned financial rescues in Europe or for that matter the United States, let alone whether they’ll really work.
What we do know, however, is that Mr. Brown and Alistair Darling, the chancellor of the Exchequer (equivalent to our Treasury secretary), have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up.
This is an unexpected turn of events. The British government is, after all, very much a junior partner when it comes to world economic affairs. It’s true that London is one of the world’s great financial centers, but the British economy is far smaller than the U.S. economy, and the Bank of England doesn’t have anything like the influence either of the Federal Reserve or of the European Central Bank. So you don’t expect to see Britain playing a leadership role.
But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.
What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.
What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.
This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.
But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.
Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.
At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).
As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?
It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as “private good, public bad,” which must have made it hard to face up to the need for partial government ownership of the financial sector.
I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.
Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.
Maybe Gordon Brown should have won the Nobel Prize instead......
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Oct 14, 2008
A Bit Of Relief
In honour of Fonterra
A reader sent us this. We had seen a version before but there are some changes:
Socialism
You have two cows.
You give one to your neighbour.
Communism
You have two cows.
The State takes both and gives you some milk.
Fascism
You have two cows.
The State takes both and sells you some milk.
Nazism
You have two cows.
The State shoots you because you call one Winston.
Bureaucratism
You have two cows.
The State takes both, shoots one, milks the other, and then throws the milk away......
Traditional Capitalism
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows, You sell them and retire on the income.
New Zealand Under Clark
You have two giraffes.
The government requires you to take harmonica lessons.
An American Corporation
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.
(Then you've got to employ the Socialism concept to step in and rescue the Capitalist cows when the Capitalist system collapses !!)
Enron Venture Capitalism
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. You sell one cow to buy a new president of the United States, leaving you with nine cows. The public then buys your bull.
A French Corporation
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.
A Japanese Corporation
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called 'Cowkimon' and market it worldwide.
A German Corporation
You have two cows.
You re-engineer them so they live for 100 years, eat once a month, and milk themselves.
An Italian Corporation
You have two cows.
You decide to have lunch.
A Russian Corporation
You have two cows.
You count them and learn you have five cows. You count them again and learn you have 42 cows. You count them again and learn you have 2 cows. You stop counting cows and open another bottle of vodka.
A Swiss Corporation
You only need one cow.
The subsidy is so large you can buy a new BMW every year.
A Chinese Corporation
You have two cows.
You have 300 people milking them. You claim that you have full employment, and high bovine productivity. You arrest the newsman who reported the real situation.
An Indian Corporation
You have two cows. You worship them.
A British Corporation
You have two cows.
Both are mad.
An Iraqi Corporation
Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the **** out of you and invade your country. You still have no cows, but at least now you are part of a Democracy.....
A New Zealand Corporation under Bolger
You have two cows. Business seems pretty good.
You close the office and go for a few beers to celebrate.
An AustralianCorporation
You have two cows.
The one on the left looks very attractive.
A reader sent us this. We had seen a version before but there are some changes:
Socialism
You have two cows.
You give one to your neighbour.
Communism
You have two cows.
The State takes both and gives you some milk.
Fascism
You have two cows.
The State takes both and sells you some milk.
Nazism
You have two cows.
The State shoots you because you call one Winston.
Bureaucratism
You have two cows.
The State takes both, shoots one, milks the other, and then throws the milk away......
Traditional Capitalism
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows, You sell them and retire on the income.
New Zealand Under Clark
You have two giraffes.
The government requires you to take harmonica lessons.
An American Corporation
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.
(Then you've got to employ the Socialism concept to step in and rescue the Capitalist cows when the Capitalist system collapses !!)
Enron Venture Capitalism
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. You sell one cow to buy a new president of the United States, leaving you with nine cows. The public then buys your bull.
A French Corporation
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.
A Japanese Corporation
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called 'Cowkimon' and market it worldwide.
A German Corporation
You have two cows.
You re-engineer them so they live for 100 years, eat once a month, and milk themselves.
An Italian Corporation
You have two cows.
You decide to have lunch.
A Russian Corporation
You have two cows.
You count them and learn you have five cows. You count them again and learn you have 42 cows. You count them again and learn you have 2 cows. You stop counting cows and open another bottle of vodka.
A Swiss Corporation
You only need one cow.
The subsidy is so large you can buy a new BMW every year.
A Chinese Corporation
You have two cows.
You have 300 people milking them. You claim that you have full employment, and high bovine productivity. You arrest the newsman who reported the real situation.
An Indian Corporation
You have two cows. You worship them.
A British Corporation
You have two cows.
Both are mad.
An Iraqi Corporation
Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the **** out of you and invade your country. You still have no cows, but at least now you are part of a Democracy.....
A New Zealand Corporation under Bolger
You have two cows. Business seems pretty good.
You close the office and go for a few beers to celebrate.
An AustralianCorporation
You have two cows.
The one on the left looks very attractive.
Aug 1, 2008
How Do The Australian and New Zealand Emissions Trading Policies Compare?
Catherine Beard compares the two schemes today in today's Herald. It is good to see such a balanced analysis, as opposed to the bias one reads every Sunday in the Sunday Star Times....
The Rudd government across the Tasman has opted for a softly, softly approach to emissions trading to minimise the impact on the cost of living for Australian consumers and businesses.
The aim seems to be to ease them into emissions trading with as little pain in the pocket as possible for the first few years, recognising that the effects of putting a price on carbon will be "profound" and on a par with some of the biggest economic reforms ever made.
In New Zealand, there has been an attempt by politicians to play down the impact of the proposed emissions trading scheme, despite the fact that comparisons with other schemes show it to be the most comprehensive and expensive approach in the world.
This suggests that if the Government does manage to get small party support for the current emissions trading bill, it will not have a long life. It is hard to imagine how long a scheme would last in New Zealand if our businesses and consumers are facing increases in the price of fuel and energy at the international price of $40-50 a tonne of carbon dioxide, while Australia has capped the price of carbon at $25 a tonne of CO2.
The Rudd government across the Tasman has opted for a softly, softly approach to emissions trading to minimise the impact on the cost of living for Australian consumers and businesses.
The aim seems to be to ease them into emissions trading with as little pain in the pocket as possible for the first few years, recognising that the effects of putting a price on carbon will be "profound" and on a par with some of the biggest economic reforms ever made.
In New Zealand, there has been an attempt by politicians to play down the impact of the proposed emissions trading scheme, despite the fact that comparisons with other schemes show it to be the most comprehensive and expensive approach in the world.
This suggests that if the Government does manage to get small party support for the current emissions trading bill, it will not have a long life. It is hard to imagine how long a scheme would last in New Zealand if our businesses and consumers are facing increases in the price of fuel and energy at the international price of $40-50 a tonne of carbon dioxide, while Australia has capped the price of carbon at $25 a tonne of CO2.
Jun 28, 2008
Every New Zealander Should Read Fran O'Sullivan This Morning
We agree with every word. Fran makes the case for taking more time to get the emissions trading scheme right, and the need for a bipartisan approach that will result in a policy that stands the tests of time. We quote some of her comments:
Helen Clark's Government is at a critical crossroads on climate change.
It can rush blindly ahead and enact legislation that will give rise to the biggest economic restructuring in a generation, with huge negative consequences for smaller Kiwi companies and workers in the medium term.
Or it can reach across Parliament and seek to forge a genuine multi-partisan consensus in the knowledge that Labour's chances to milk global warming as an election issue will be stymied.
National's John Key could use his vaunted street smarts to call Clark and offer to remove climate change from the election agenda so the two major parties can work together to forge legislation.
We thought that National had been offering this since the last election...
Clark, who has portrayed herself as an international climate change warrior by setting a goal for New Zealand to be one of the world's first carbon neutral countries, will not want to back down. She has so exaggerated New Zealand's record internationally on combating climate change - when emissions have continued to soar during her Government's time in office - that her credibility is jeopardised.
A bit mean Fran, but true
The real problem is that Kiwis are unprepared for the enormous changes that will follow the introduction of the Climate Change (Emissions and Renewable Preference) legislation.
The economy will undergo an economic restructuring that will dwarf the changes wrought by Sir Roger Douglas in the mid-1980s. Higher prices for basic inputs like electricity and fuels will ensure that many jobs are lost during the transition to a green-collar economy.
This is inevitable. It is the upshot of transforming to the new international paradigm where exporters from high carbon-emitting economies face emerging trade barriers.
Clark and other Cabinet ministers who were part of the Douglas-reform era Government, repudiate the "misery" that was inflicted by ripping the struts out from under farmers, companies and families during the 1980s without introducing measures to reduce the pain of adjustment.
But now they they seem hell-bent on repeating the exercise. Let's not be in any doubt. Jobs will go.
A report by Australia's influential Commonwealth Scientific and Research Organisation (CSIRO) this week forecast some three million jobs in that country's polluting industries could be under threat after an emissions trading scheme comes into effect in 2010. The Australian jobs market would recover from 2017 and then soar as new jobs were created in areas like renewable energy, energy and water-smart buildings, green appliances and other sustainable lifestyle products.
We made the 1980s analogy ourselves yesterday. Not a good time for jobs to be going. And which jobs will be going? It will be Maori and Pacific Islanders who suffer most.
Kevin Rudd's Government is already facing up to major transitional costs. But here, it's still head-in-the-sand territory.
The problem is most business/land/ agriculture lobbies point to negative consequences without conceding the potential upside, while the NZ Business Council for Sustainable Development points to new jobs that will be created but does not focus enough on the downside.
It is incongruous that Clark has not drawn on the 1980s to develop programmes to offset the transition.
Rudd has Penny Wong, we have David Parker. It is not just the NZ business Council for Sustainable Development that sees opportunity Fran. You are being far too narrow. Have you not noticed the big accounting firms rubbing their hands with glee? Then there is the NZX with their baby TZ1. And then there are the commentators like Rod Oram who make heaps on the speaking circuit.
Parliament's finance and expenditure committee hasn't grappled with the big picture, despite official reports warning of the consequences to jobs. It is an outrage that the select committee took a mere 16 hours to consider more than 60 reports on the Climate Change (Emissions Trading and Renewable Preference) bill and was given just three days to consider more than 1000 amendments.
Yes, this was not Charlie Chauvel's finest hour.
A reality check - it is a given that New Zealand does need to put a price on carbon emissions so that the transition to a low-emission economy gets under way.
But forcing through ill-thought-out legislation by making yet more absurd concessions to get minor parties like NZ First over the line in a re-election frenzy will not increase either Clark's reputation or that of her Government.
Business and environmental lobbies are now deeply concerned at the results. Environmental lobbies believe there are now so many exemptions that costs will unfairly fall on smaller businesses and families. Businesses warn of a transfer of wealth elsewhere.
Some of this worrying could be eased if the Government built a safety valve into legislation to protect against high and volatile carbon prices. But, as it stands, an economy where exporters are hostage to the vagaries of the dollar is about to be hit by more uncertainty.
Surely it is in New Zealand's interests for both major parties to come up with a solution that will stand the test of time.
Agree fully
Helen Clark's Government is at a critical crossroads on climate change.
It can rush blindly ahead and enact legislation that will give rise to the biggest economic restructuring in a generation, with huge negative consequences for smaller Kiwi companies and workers in the medium term.
Or it can reach across Parliament and seek to forge a genuine multi-partisan consensus in the knowledge that Labour's chances to milk global warming as an election issue will be stymied.
National's John Key could use his vaunted street smarts to call Clark and offer to remove climate change from the election agenda so the two major parties can work together to forge legislation.
We thought that National had been offering this since the last election...
Clark, who has portrayed herself as an international climate change warrior by setting a goal for New Zealand to be one of the world's first carbon neutral countries, will not want to back down. She has so exaggerated New Zealand's record internationally on combating climate change - when emissions have continued to soar during her Government's time in office - that her credibility is jeopardised.
A bit mean Fran, but true
The real problem is that Kiwis are unprepared for the enormous changes that will follow the introduction of the Climate Change (Emissions and Renewable Preference) legislation.
The economy will undergo an economic restructuring that will dwarf the changes wrought by Sir Roger Douglas in the mid-1980s. Higher prices for basic inputs like electricity and fuels will ensure that many jobs are lost during the transition to a green-collar economy.
This is inevitable. It is the upshot of transforming to the new international paradigm where exporters from high carbon-emitting economies face emerging trade barriers.
Clark and other Cabinet ministers who were part of the Douglas-reform era Government, repudiate the "misery" that was inflicted by ripping the struts out from under farmers, companies and families during the 1980s without introducing measures to reduce the pain of adjustment.
But now they they seem hell-bent on repeating the exercise. Let's not be in any doubt. Jobs will go.
A report by Australia's influential Commonwealth Scientific and Research Organisation (CSIRO) this week forecast some three million jobs in that country's polluting industries could be under threat after an emissions trading scheme comes into effect in 2010. The Australian jobs market would recover from 2017 and then soar as new jobs were created in areas like renewable energy, energy and water-smart buildings, green appliances and other sustainable lifestyle products.
We made the 1980s analogy ourselves yesterday. Not a good time for jobs to be going. And which jobs will be going? It will be Maori and Pacific Islanders who suffer most.
Kevin Rudd's Government is already facing up to major transitional costs. But here, it's still head-in-the-sand territory.
The problem is most business/land/ agriculture lobbies point to negative consequences without conceding the potential upside, while the NZ Business Council for Sustainable Development points to new jobs that will be created but does not focus enough on the downside.
It is incongruous that Clark has not drawn on the 1980s to develop programmes to offset the transition.
Rudd has Penny Wong, we have David Parker. It is not just the NZ business Council for Sustainable Development that sees opportunity Fran. You are being far too narrow. Have you not noticed the big accounting firms rubbing their hands with glee? Then there is the NZX with their baby TZ1. And then there are the commentators like Rod Oram who make heaps on the speaking circuit.
Parliament's finance and expenditure committee hasn't grappled with the big picture, despite official reports warning of the consequences to jobs. It is an outrage that the select committee took a mere 16 hours to consider more than 60 reports on the Climate Change (Emissions Trading and Renewable Preference) bill and was given just three days to consider more than 1000 amendments.
Yes, this was not Charlie Chauvel's finest hour.
A reality check - it is a given that New Zealand does need to put a price on carbon emissions so that the transition to a low-emission economy gets under way.
But forcing through ill-thought-out legislation by making yet more absurd concessions to get minor parties like NZ First over the line in a re-election frenzy will not increase either Clark's reputation or that of her Government.
Business and environmental lobbies are now deeply concerned at the results. Environmental lobbies believe there are now so many exemptions that costs will unfairly fall on smaller businesses and families. Businesses warn of a transfer of wealth elsewhere.
Some of this worrying could be eased if the Government built a safety valve into legislation to protect against high and volatile carbon prices. But, as it stands, an economy where exporters are hostage to the vagaries of the dollar is about to be hit by more uncertainty.
Surely it is in New Zealand's interests for both major parties to come up with a solution that will stand the test of time.
Agree fully
Jun 23, 2008
Obama's USA: The Next Argentina?
Why do we worry about Obama's economic policies? Because they won't work. We have seen them before.
We are not the only observers to have noticed the similarity. Mary Anastasia O'Grady has written this in today's Wall Street Journal:
As the presidential campaign drones on, Barack Obama and the Democrats are fleshing out the promise of "change" with some specific, big-government policy proposals. Many are familiar, perhaps because they already have been tried – in Argentina.
That country has gone from South American breadbasket to world-class basket case. For the long version of how it happened and why Americans might not want to try it, hop on a flight to Buenos Aires.
Read the rest of the article
We are not the only observers to have noticed the similarity. Mary Anastasia O'Grady has written this in today's Wall Street Journal:
As the presidential campaign drones on, Barack Obama and the Democrats are fleshing out the promise of "change" with some specific, big-government policy proposals. Many are familiar, perhaps because they already have been tried – in Argentina.
That country has gone from South American breadbasket to world-class basket case. For the long version of how it happened and why Americans might not want to try it, hop on a flight to Buenos Aires.
Read the rest of the article
Jun 16, 2008
Lower Taxes + Slimmer Government = Higher Growth
Interesting opinion piece by Keith Marsden (ex World Bank and ILO) in today's World Street Journal.
Marsden reports the results of some research he has undertaken
My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.
I compared their records to the 10 higher-taxed, bigger-government economies: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005).
Most governments have reduced their top tax rates and spending-to-GDP ratios over the last decade or so, according to data published by the OECD, IMF and World Bank. But slimmer governments have done so at a faster pace, and to significantly lower levels. Their highest tax rate on personal income fell to a group average of 30% in 2006 from 36% in 1996. Top corporate rates were lowered to an average of 22% from 30%. Their average ratio of total government outlays to GDP fell to 31.6% in 2007, from an average peak level during the previous two decades of 40.4%
Investment growth jumped to an average annual rate of 5.9% in 2000-2005, from 3.8% over the previous decade. Exports have risen by 6.3% annually since 2000. The net result was a surge in economic growth. The IMF reports that GDP soared in the slimmer-government group at a 5.4% average annual rate from 1999-2008 (including its forecast for the current year), up from a 4.6% rate over the previous decade.
Over that same period, the bigger-government group was more timid in its tax reductions. Their highest individual rates declined to an average of 45% from 49%, and corporate rates to 29% from 35%. Furthermore, their average spending-to-GDP ratio only fell to 48.3% from a peak of 55.2%.
The bigger-government group therefore failed to gain any competitive advantages in global markets by generating or attracting larger investment funds. Their investment growth slowed to an average annual rate of 0.8% in 2000-2005, from 4.1% in 1990-2000. Their export growth rate almost halved to 3.1% annually in 2000-2005, down from 6.1% in 1990-2000. The bottom line is a drop in their average annual GDP growth rate to 2.1% in 1999-2008, from 2.3% over the previous decade.
Nor did they balance their books. They ran budgetary deficits averaging 1.1% of GDP in 2006, whereas slimmer governments generated an average surplus of 0.3% of GDP. Their net government debt averaged 39.2% of GDP in 2006, more than four times higher than the latter's. Interest payments on their debt took 2.3% of their GDP, compared with an average of just 0.5% in the slimmer-government group.
Slimmer-government countries also delivered more rapid social progress in some areas. They have, on average, higher annual employment growth rates (1.7% compared to 0.9% from 1995-2005). Their youth unemployment rates have been lower for both males and females since 2000. The discretionary income of households rose faster in the first group. This allowed their real consumption to increase by 4.1% annually from 2000-2005, up from 2.8% in 1990-2000. In the bigger-government group, the growth of household consumption has slowed to a 1.3% average annual rate, from 2.1% during the 1990-2000 period.
Faster economic growth in the first group also generated a more rapid increase in government revenue, despite (or rather, because of, supply-siders suggest) lower overall tax burdens.
Slimmer-government countries seem to have made better use of their smaller health resources. Total spending on health programs reached 9.5% of GDP in the bigger government group in 2004, 1.6 percentage points above the average in the slimmer-government group. Yet slimmer-government countries have raised their average life expectancy at birth at a faster pacer since 1990, reaching an average level of 78 years in 2005, just one year below the average for bigger spenders. Average life expectancy is now 80 years in Singapore, although government and private health programs combined cost only 3.7% of its GDP.
Finally, spending by bigger governments on social benefits (such as unemployment and disability benefits, housing allowances and state pensions) was higher (20.3% of GDP in 2006) than that of slimmer governments (9.6%). But these transfers do not appear to have resulted in greater equality in the distribution of income. The Gini index measuring income distribution is similar for both groups.
Other forces clearly helped to narrow income disparities in slimmer-government economies. These forces include wage-setting practices, saving habits, the availability of employer-funded pension schemes, and income sharing among extended families.
Both groups reduced the share of defense spending in GDP over the past decade. The slimmer-government average fell 0.1 points to 2.2% in 2005, but this level was 0.5 percentage points above the bigger-government average. The average share of armed forces personnel in the total labor force in the bigger-government group fell to 1.1% from 1.5% in 1995, whereas it grew to 1.7% from 1.5% in the slimmer-government group.
Information on public order and safety expenditures is incomplete. But for the 11 countries for which data are available, slimmer governments seem to take their responsibilities more seriously. They spent an average of 1.8% of GDP on these functions in 2006, compared with 1.5% by bigger governments.
The early supply-siders were right. My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.
Marsden reports the results of some research he has undertaken
My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.
I compared their records to the 10 higher-taxed, bigger-government economies: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005).
Most governments have reduced their top tax rates and spending-to-GDP ratios over the last decade or so, according to data published by the OECD, IMF and World Bank. But slimmer governments have done so at a faster pace, and to significantly lower levels. Their highest tax rate on personal income fell to a group average of 30% in 2006 from 36% in 1996. Top corporate rates were lowered to an average of 22% from 30%. Their average ratio of total government outlays to GDP fell to 31.6% in 2007, from an average peak level during the previous two decades of 40.4%
Investment growth jumped to an average annual rate of 5.9% in 2000-2005, from 3.8% over the previous decade. Exports have risen by 6.3% annually since 2000. The net result was a surge in economic growth. The IMF reports that GDP soared in the slimmer-government group at a 5.4% average annual rate from 1999-2008 (including its forecast for the current year), up from a 4.6% rate over the previous decade.
Over that same period, the bigger-government group was more timid in its tax reductions. Their highest individual rates declined to an average of 45% from 49%, and corporate rates to 29% from 35%. Furthermore, their average spending-to-GDP ratio only fell to 48.3% from a peak of 55.2%.
The bigger-government group therefore failed to gain any competitive advantages in global markets by generating or attracting larger investment funds. Their investment growth slowed to an average annual rate of 0.8% in 2000-2005, from 4.1% in 1990-2000. Their export growth rate almost halved to 3.1% annually in 2000-2005, down from 6.1% in 1990-2000. The bottom line is a drop in their average annual GDP growth rate to 2.1% in 1999-2008, from 2.3% over the previous decade.
Nor did they balance their books. They ran budgetary deficits averaging 1.1% of GDP in 2006, whereas slimmer governments generated an average surplus of 0.3% of GDP. Their net government debt averaged 39.2% of GDP in 2006, more than four times higher than the latter's. Interest payments on their debt took 2.3% of their GDP, compared with an average of just 0.5% in the slimmer-government group.
Slimmer-government countries also delivered more rapid social progress in some areas. They have, on average, higher annual employment growth rates (1.7% compared to 0.9% from 1995-2005). Their youth unemployment rates have been lower for both males and females since 2000. The discretionary income of households rose faster in the first group. This allowed their real consumption to increase by 4.1% annually from 2000-2005, up from 2.8% in 1990-2000. In the bigger-government group, the growth of household consumption has slowed to a 1.3% average annual rate, from 2.1% during the 1990-2000 period.
Faster economic growth in the first group also generated a more rapid increase in government revenue, despite (or rather, because of, supply-siders suggest) lower overall tax burdens.
Slimmer-government countries seem to have made better use of their smaller health resources. Total spending on health programs reached 9.5% of GDP in the bigger government group in 2004, 1.6 percentage points above the average in the slimmer-government group. Yet slimmer-government countries have raised their average life expectancy at birth at a faster pacer since 1990, reaching an average level of 78 years in 2005, just one year below the average for bigger spenders. Average life expectancy is now 80 years in Singapore, although government and private health programs combined cost only 3.7% of its GDP.
Finally, spending by bigger governments on social benefits (such as unemployment and disability benefits, housing allowances and state pensions) was higher (20.3% of GDP in 2006) than that of slimmer governments (9.6%). But these transfers do not appear to have resulted in greater equality in the distribution of income. The Gini index measuring income distribution is similar for both groups.
Other forces clearly helped to narrow income disparities in slimmer-government economies. These forces include wage-setting practices, saving habits, the availability of employer-funded pension schemes, and income sharing among extended families.
Both groups reduced the share of defense spending in GDP over the past decade. The slimmer-government average fell 0.1 points to 2.2% in 2005, but this level was 0.5 percentage points above the bigger-government average. The average share of armed forces personnel in the total labor force in the bigger-government group fell to 1.1% from 1.5% in 1995, whereas it grew to 1.7% from 1.5% in the slimmer-government group.
Information on public order and safety expenditures is incomplete. But for the 11 countries for which data are available, slimmer governments seem to take their responsibilities more seriously. They spent an average of 1.8% of GDP on these functions in 2006, compared with 1.5% by bigger governments.
The early supply-siders were right. My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.
Feb 10, 2008
Fran Looks At Cullen's Slight of Hand
Fran O'Sullivan in today's Herald on Sunday looks critically at the call made this week by Finance Minister Cullen for employers to increase wages. Fran gives Cullen a good basic lesson in economics. Then she hits him hard where it hurts:
Labour will not borrow to pay for tax cuts, will not cut services to pay for tax cuts, will not exacerbate inflationary pressures and will not allow tax cuts to lead to greater inequality in society.
The final condition is potentially the most damaging one to New Zealand's ability to claw back its competitive advantage as far as talented people are concerned.
Inequalities are a fact of life, Dr Cullen. That's why we live in a capitalist society rather than a communist one, and offer incentives to improve your lot.
It's a moot point whether Labour's decision to wipe incentives for New Zealanders to improve their lots - through some misguided desire to make an equal society - has simply encouraged more people to move offshore.
In any event, Cullen's comments would be treated more seriously if the Government had applied a salary freeze for Cabinet ministers until other New Zealanders caught up, or a higher tax threshold for those earning more than $200,000.
The fact is that Cullen and Co have paid themselves very nicely over the past eight years and also ensured good pay rises for those on the State payroll. Meantime they have squeezed the retained income available to companies by taking too long to cut the corporate income tax rate.
Jan 30, 2008
Lunch With The Undercover Economist
In his blog En Avant Jim Donovan has highlighted the forthcoming visit to New Zealand by Tim Harford, author of The Undercover Economist and an opportunity to hear him speak on 29 February. He is in NZ to promote his new book The Logic of Life . We might book a table also Jim. Thanks for the tip.
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