Grow garden not pie

August 28, 2014

Slicing or growing the pie is a popular metaphor in discussions on the economy.

Keith Hennessey has a better one. He likens the economy to a garden:

The most common metaphor for debates about growth and income distribution is that of the economy as a pie. Some focus their policy efforts on economic growth and efficiency: making the pie bigger. Others emphasize policies that increase equity and redistribute income: how shall we cut up the pie and distribute its slices, whatever its total size?

We learn early in introductory economics that there is a big tradeoff between these two goals of equality and efficiency. Higher marginal tax rates allow for more income redistribution but create disincentives to work, save and invest and thereby reduce economic growth. Policymakers try to optimize, but at the end of the day someone has to decide whether faster economic growth or increased equity is the higher priority. . .

A flower garden is a better metaphor for looking at economic growth and income distribution. A flower’s growth depends on the individual characteristics of that type of flower and that particular seed. It also depends on common factors shared with other flowers in the same garden (e.g., the local climate, pests, the skill and diligence of the gardener) as well as its particular advantages relative to other flowers (better sunlight, soil, and water in this part of the garden than that part over there).  Although there is some interdependence, the rapid growth of a sunflower at one end of the garden largely does not come at the expense of a struggling tulip at the other end. The sunflower may have advantages the tulip does not, even unfair ones, but the fast-growing sunflower is not “taking growth” from the slow-growing tulip.

Flowers will grow at different rates for a variety of different reasons. Policymakers should focus their energies on absolute growth rates rather than relative ones. It’s not a problem that some flowers are growing faster than normal, unless (a) that growth is indeed coming at the expense of other flowers, or (b) that more rapid growth is because the gardeners are neglecting the tulips to help the sunflowers grow faster.

The role of policy makers is to provide good law to ensure competition is fair and that businesses face their share of external costs, it isn’t to interfere in the market.

In the same way it makes more sense to think of economic growth as the sum of the unequal income growths of tens of millions of separate individuals, rather than as a single growing pie to be divided. Any particular individual’s income growth depends on his innate talent, education, and skills, his effort and diligence, and some degree of luck. It also depends on common factors such as the health of the local, regional, national, and world economies, as well as shared resources like transportation and communications infrastructures and a stable and predictable system of law, property rights, and government rules.

The principal economic challenges are to maximize the growth potential of the entire economy/garden and to maximize the opportunities for those individuals/flowers struggling to succeed/grow. And just as a gardener should spend more time tending to the parts of his garden that are struggling, policymakers should devote greater effort to maximizing opportunities for those at the bottom of the income distribution to improve their lot. In the long run this means things like improving elementary and secondary education, expanding free trade, and reducing the growth burden of regulations, government spending, and debt. In the short run it means getting the incentives right so that those on means-tested government assistance don’t face exorbitant marginal effective tax rates from poorly designed income phase-outs.

Benefits should be to support those who need it while they need it, not a disincentive to people who can help themselves to do so.

The flower garden metaphor has one final advantage over the pie metaphor. A pie does not exist without a baker, whereas flowers grow naturally. The growth comes from the flowers, facilitated but not created by a good gardener. In the same way policymakers and elected officials neither “create jobs,” nor “increase economic growth.” Smart policymakers create the conditions under which private firms create jobs and in which millions of individuals combine their separate efforts to create economic growth. The origins of economic growth are in the private sector, not the public.

In an area of economic policy as complex as this, a good metaphor matters and can influence policy. Policymakers should create the conditions under which the whole economy can grow as rapidly as possible, and should devote particular effort to maximizing the potential for those most struggling to succeed. Let’s not fight about dividing up the pie, but instead work to help the whole flower garden, and all the flowers in it, to blossom.

 The garden is a healthier, more attractive and natural  metaphor than the pie and provides a much better picture of good economic management.

The election gives us a choice between the National gardeners who respect the ability of businesses and individuals and understand the conditions which will help them flourish and the Labour/Green/NZ First/Internet Mana who don’t.

Hat tip: AE Ideas


Election outcome less certain

August 28, 2014

It was inevitable that polls would tighten as the election gets closer and last night’s 3 News Reid Research poll shows that’s happening:

August 19-25, 1000 people polled, margin of error 3.1 percent

National 45 percent, down 2.5 percent
Labour 26.4 percent, down 2.6 percent
Greens 13.5 percent, up 0.5 percent
NZ First 6.3 percent, up 1.7 percent
Conservative 4.6 percent, up 2.1 percent
Internet Mana 2.1 percent, up 0.1 percent
Maori Party 0.7 percent, down 0.1 percent
United Future 0.4 percent, up 0.2 percent
ACT 0.3 percent, no change

Seats in the house:

National 57
ACT 1
United Future 1
Maori Party 2
Right total: 61

Labour 33
Greens 17
Internet Mana 3
Left total: 53

NZ First 8

The Maori Party could go left or right.

But while it has voted against National more times than with it, the choice of being in a stable National-led government supported by Act, United Future and possibly New Zealand First would almost certainly be preferable to it than supporting an unstable Labour, Green, NZ First, Internet Mana coalition.

The Conservative Party is now in spitting distance of the 5% threshold.

Kiwiblog shows that if it makes it into parliament, Labour won’t be able to govern:

Conservatives 4.6%

Centre-Right 59 seats (Nat 57, ACT 1, UF1)

Centre-Left 53 seats (Lab 33, Greens 17, Internet Mana 3)

Centre 11 seats (NZ First 8, Maori 3)

This means National would need the Maori Party to govern, and Labour would need both NZ First and the Maori Party (plus Greens, Mana)

Conservatives 5.0%

Centre-Right 62 seats (Nat 54,  Conservatives 6, ACT 1, UF1)

Centre-Left 51 seats (Lab 32, Greens 16, Internet Mana 3)

Centre 11 seats (NZ First 8, Maori 3)

This means National would still need the Maori Party (or NZ First) to govern, but Labour would be unable to govern under any combination.

As another example of MMP’s perversity, National would have more seats if the Conservative Party didn’t make it into parliament but could be

more likely to govern if the Conservatives do cross the line because Labour wouldn’t be able to cobble together a coalition.


Peters scared of Craig

August 27, 2014

The Queenstown ASB debate between the finance spokespeople for five parties attracted a sell-out crowd last night.

debate

The photo shows, chair Duncan Garner, Finance Minister Bill English for National, Conservative leader Colin Craig, Labour’s David Parker, Act’s Jamie Whyte and Green Russel Norman.

Duncan Garner said that the Maori Party declined the invitation, Mana didn’t reply and New Zealand First leader Winston Peters refused to come if Craig was there.

The chair gave each speaker three minutes to give a pitch then gave them a few questions before taking questions from the floor.

Labour’s trying to campaign on being positive but its finance spokesman started by being negative about the economy and the outlook.

Jamie Whyte started by quoting Adam Smith:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

He also asked who’s going to make better decisions – someone putting their own money at risk in search of profit of someone using other people’s money in search of votes?

Duncan Garner asked him to name one Green policy he agreed with and he said he couldn’t think of one.

The question Duncan Garner put to Russel Norman at the end of his three minutes was whether he could say something good about the Finance Minister and he said he’d been very responsible.

Colin Craig rattled through his policy which includes tax cuts at the lower end.

The chair asked him to say whether he’d go with National or Labour if he had the choice after the election. He said National because the party would have the most votes.

Clutha Southland MP Bill English got the biggest welcome from his home crowd.

He started by giving people the credit for their resilience, responsible and work and how important that was because the economy doesn’t just exist in an office in Wellington, it’s what people do.

That, in partnership with National-led government’s careful management of public finances, had put New Zealand back on the right track.

He said we now have a platform built on our resilience the positive encouragement from government and the most positive Prime Minister New Zealand has had that will allow us to have sustainable growth.

“You have set that direction and we can keep it,” he said.

There’s a video of the debate here.


Labour spending scares itself

August 27, 2014

Labour’s propensity for over taxing and over spending is scaring voters, it’s scaring the Green Party and it’s scaring itself:

David Cunliffe and Labour are still committed to irresponsibly spending all of the next four Budgets before the election, despite yesterday attempting – and failing – to recast their ropey fiscal forecasts, National Party Finance Spokesman Bill English says.

“New Zealanders can now see that under David Cunliffe economic history would repeat itself,” he says.

“Having been part of a Labour government that left New Zealand in recession with high interest rates, forecasts of never-ending deficits and ever-rising debt, David Cunliffe has again confirmed he has learnt nothing from the fiscal and economic mess Labour left for New Zealanders.

“Two election campaigns on, he has reverted to form with new spending promises still totalling nearly $18 billion over four years. Having been criticised for being fiscally irresponsible, he belatedly realised he had over-stretched and has attempted to back down. But it hasn’t worked.

“David Cunliffe has scared New Zealanders with his spending plans and he’s scared his partners the Greens. He’s now even scared himself. No wonder the Greens are calling for a full audit of Labour’s numbers.

“The trouble for Labour is that its claims of trimming extra spending just don’t stack up because proper costings of Labour’s tweaked promises still add up to around $18 billion over four years. And that’s before you add the Greens’ promises to spend an extra $10 billion over the same period – and who knows how many billions more by the Dotcom party.

“By contrast, National has committed only a small fraction of future Budgets. This will provide us with flexibility to deal with future shocks, speed up debt repayment or provide future tax reductions should there be room to do so.”

Labour’s spending is predicated on more tax income on the back of higher tax rates and new taxes, including a Capital Gains Tax.

It ignores the fact that increasing the tax rate and adding new taxes doesn’t bring in a corresponding increase in the tax take and can reduce it.

On top of that its less flexible employment law and other costs to and constraints on business will act as a handbrake on economic growth, wage rises and job prospects.

And that’s without taking into accounts the expensive price it will have to pay to cobble together a coalition with the Green, New Zealand First and Internet Mana parties.


Labour too late to look responsible

August 26, 2014

Economic Development Minister Steven Joyce sums up Labour’s announcement it’s dropping some yet unannounced policies:

Finance Minister Bill English isn’t convinced either:

It’s too late for Labour to try to look responsible with taxpayers’ money when it has publicly committed to four years of new spending with almost a month to run before the election, National Party Finance Spokesman Bill English says.

“Labour is desperately trying to make its big spending commitments look smaller, and has decided to not even put costings on its big spending tertiary and transport commitments.

“Neither David Cunliffe nor David Parker could this morning actually list which of their expensive spending promises would be delayed in what was a failed attempt to appear fiscally prudent.

“Labour would return to their high spending ways, with at least an $18 billion list of new spending commitments,” Mr English says.

“That’s before you add the Greens’ promises to spend an additional $10 billion over the next four years. Then then there’s the wish list of support partner the Dotcom party, which wants to spend billions more on free tertiary education and community make-work schemes.

“Whatever Labour presents now would be up for negotiation in coalition talks where the Greens would have considerable sway – not to mention concessions demanded by Dotcom.

“On top of that, the Greens and Labour are arguing over their numbers. The Greens say they want Labour’s numbers independently audited – and for good reason.  And as we saw from the weekend, they can’t even agree fairly basic stuff like where the two of them think the top personal tax rate should be.

“The last time we saw this sort of approach, New Zealand taxpayers and families were the losers, with high deficits, a stalling economy and mortgage interest rates at nearly 11 per cent. New Zealand simply can’t afford the Labour/Greens/Dotcom coalition,” Mr English says.

High tax, high spending policies under the last Labour-led government put the country into recession before the rest of the world and left us with a forecast for a decade of deficits.

If they couldn’t manage the books responsibly in good times, they’ll have no show of exercising the restraint needed to ensure we keep on the road to recovery from bad times.

 


Poll of polls

August 23, 2014

Colin James’ poll of poll :

The first poll taken after the Nicky Hager book launch, by DigiPoll for the New Zealand Herald from August 14 to 20, did not dent National’s polling average, which was 50.8% in the four polls up to mid-August. DigiPoll recorded a drop from its last poll in mid-July but gave a higher figure than the TV3 poll which dropped out of the latest four-poll average.

(Explainer: The POLL of POLLS is an arithmetical average of the four most recent major polls since mid-June ,from among the following: Fairfax Media-TV1 Colmar Brunton, TV3 Reid Research, Ipsos, NZ Herald DigiPoll, Roy Morgan New Zealand (up to June only one of its two-a-month was included) and UMR Research, which is not published.*)

DigiPoll’s 25.2% reading for Labour dragged Labour’s average down to 25.3%. That average included the Ipsos poll for Fairfax Media, which gave National much more and Labour much less than other recent polls. . . .

The Greens’ average is steady at 11.9%, within a range it has held since the last election. . .

New Zealand First has got close to the 5% hurdle, with a 4.9% average to mid-August, boosted by a high 6.5% in the Roy Morgan poll. Internet-Mana was 2.7%, the Conservatives 2.4%, the Maori party 0.9%, ACT 0.5% and United Future 0.3%. . .

There was a slight lift in the latest Roy Morgan reading (from August 4-17) of whether the country is heading in the right direction. This slight lift is more confirmation that the mood is topping out but it remains very positive. . .

The level of confidence the country is heading in the right direction is important and backs up National’s assertion that it and its policies are working for New Zealand.


Policy matters

August 21, 2014

Wayne Mapp asks: So is this going to be the first policy-free election?

One would hope not. We are still getting over the aftermath of the GFC of 2008-2011. The inequality debate is directly stimulated by that event. Christchurch has still got a lot of rebuilding to do, with all the different choices that implies.

But over the last week any substantive policy issues were virtually drowned out. How many people know about the Greens’ child and welfare policies, or National’s cycling announcement? And without actually looking it up, I could not think of what Labour has promised in the past week. On checking, it was free doctors’ visits for those over 65.

But that is the problem with non-party actors attempting to hijack election news; it crowds out the policies that will actually be the basis of governing the country. And if people can’t recall the policies of the parties due to their naturally limited bandwidth, they are more likely to revert to their general sense of which party they will support. Of course many would say that is a good enough basis to decide how to vote, but it rather makes a mockery of election campaigns and the manifesto commitments each party makes. . .

Yesterday two people who know I’m active in the National Party opened a conversation about the election.

Both said they had no interest in the side shows, both wanted to know more about policy.

Policy matters but most never gets reported and even less gets serious analysis.


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