The economy, thank God, does not resemble my household budget. 

Still, National will tell us they have the books in order because they’ve listened to our grandparents' voice of reason: ‘don’t spend more than you earn, and if you get into debt, spend less and save more. Batten down the hatches and wait for the recession to pass.’


Can we agree to ban the household budget metaphor from the election campaign? Probably not, because its a good story. It makes sense not to spend more than you earn, right? Who wouldn’t agree with that?

Except that if we ran the economy like a household budget we’d be a basket case.

I should stop spending when my outgoings exceed my income. But if a government stops spending in tough times, at the same time that I’m saving and business is struggling to invest, then demand falls and the end result is a vicious cycle of reduced growth, and therefore reduced savings.

Only governments have enough scale to keep or get a struggling economy going.  

The ‘fallacy of composition’ holds that just because something is good for me and my family doesn’t make it good for the economy.

I like to buy a flat white every day, but because my income doesn’t stretch to a daily overpriced coffee, I’ve cut down to buying one flat white a week. That’s good for my budget because I save money. But if everybody stops buying coffee, the economy won’t get the benefits of me saving. Coffee shops would lay off staff. Those staff without jobs, living on savings or dole, cut back their spending and yet another business goes under.

Individuals may have no choice than to cut back. 

Unlike households then, the way to increase growth across the whole economy is for governments to increase spending. But they should spend on the right stuff - Tough decisions on where to spend government money have to be made, whether its a Labour or a National led-government. Some activities grow the economy faster than others. Building schools grows the economy more than giving tax cuts to people who already have a lot of money and will save their tax cut in a recession, rather than spend it all. (People with less money, however, do spend everything, and therefore helping poor people is better for growth.)

Here’s another reason my household is not like a government at all. I don’t control the currency. Unlike governments, if I’m short of money my options are limited. I resort to my credit card, some borrow off family. Others go to loan sharks. Governments have more options. They can issue bonds in the form of low interest IOUs. (I definitely can’t issue an IOU to pay the electrician). Governments can raise taxes, or even print more money. Banks lend more or less simply on the basis of their predictions about what the government will do with interest rates.

In other words, in recessions, governments have multiple tools to use, and they need to move in the opposite direction to us. That is, they need to spend in the downturns. (Likewise, when the economy is doing well, governments should not splurge.)

The real test is not, who will balance the fictitious household budget, but what will each party spend on to make any recovery last longer than the election cycle. 

Will the government support projects that will create new jobs and raise the incomes of most of us - not just a few of us? Or will they spend it on election bribes, hand outs to casinos, and nice-to-haves, like referendums on flags, cycle pathways - even selling existing assets. (Buying back assets also has to be weighed against creating new assets - it's better to start a bank than buy one back.)

Who will be honest enough to tell us that the economy is far more complex than a household budget, and tough decisions will need to be made?

 

 

 

Comments (14)

by Fentex on March 27, 2014
Fentex

I think NZ's economy has benefitted because while National kept purse strings stiff they  still borrowed plenty and kept cash flowing and were able to do so because previous governments paid debt down in preference to lowering taxes.

I think plenty of deficit scolds would have liked NZ to have had a large debt that could be used by National as an excuse to cut welfare spending and justify greater asset sales and privatising of government functions - but Labours insistence on paying debt down rather than lowering taxes took that string out of their bow (because sans forboding debt the argument we couldn't risk borrowing fails) to everyones benefit.

In short we have done well because our governmnets have managed to pay down debt when they could so we oculd borrow cheaply when needed.

Our biggest danger now is that we will have a government that having taken on debt doesn't tax sufficiently to pay it down so we will have cheap credit available when next we need it.

And that really is a lot like home finances. Where people go wrong in arguing national accounts aren't like home finances is when they confuse all home finances with scrooges accounts.

by Alan Johnstone on March 27, 2014
Alan Johnstone

"Here’s another reason my household is not like a government at all. I don’t control the currency."

The government doesn't control the currency either, the reserve bank does. Frankly that's a good thing as I wouldn't trust one of any hue with it.

Otherwise, it's basic keynesian economics from Josie which is fair enough, but too many keynesian miss the other half of the coin where governments are supposed to run a surplus during good times and pay down the debt, in the meta term, even governments can't spend more than they earn and must balance the books.

by stuart munro on March 27, 2014
stuart munro

The Guardian linked this helpful guide for the perplexed: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/...

Better not to have the policy debate moored to the false analogy of personal finance.

by BeShakey on March 27, 2014
BeShakey

"too many keynesian miss the other half of the coin where governments are supposed to run a surplus during good times and pay down the debt"

Like Cullen did in the face of enormous pressure to cut taxes? In the end he caved a bit towards the end, but there seems to be little recognition that National spent most of their time in opposition promoting a policy that would have had a crippling effect during the recession. While Labour (who are often claimed to be economically irresponsible) took an approach that played a large part in us not being mentioned in the same breath as Greece.

by Andrew Osborn on March 29, 2014
Andrew Osborn

Labour had the easy years. Any fool could run an economy during those times.

National has had the GFC, South Canturbury Finance and the Christchurch earthquake.

So comparisons cannot easily be made.

 

 

 

 

by Draco T Bastard on March 29, 2014
Draco T Bastard

Still, National will tell us they have the books in order because they’ve listened to our grandparents' voice of reason: ‘don’t spend more than you earn, and if you get into debt, spend less and save more. 

Not that either National nor Labour ever do that. They always spend more than we have due to the need to eternally grow the economy pushing it well beyond our nations sustainable use of resources. This unsustainability is exaggerated by the fact that we export so much of those resources with the end result being that we will be forever poor.

and therefore reduced savings.

We don't need savings. Never have done. Same as the fact that we don't need foreign investment. Why don't we need any of these things? Because the government has the power to create money and then tax it out of existence. If we as a country want to do something, say build several windfarms to replace all the fossil fueled generators, then all the government needs to do is to print the money to pay the people to do the necessary R&D, mining and construction to build them. That money will then be taken out of the economy through taxes. By keeping the creation and destruction of money balanced we would have a viable and dynamic economy. One that would be able to provide for everyone.

Only governments have enough scale to keep or get a struggling economy going.

The government are the people thus it has the maximum scale available which is why cooperation works far better than competition.

Governments have more options. They can issue bonds in the form of low interest IOUs. 

Government don't even have to issue IOUs - they can just create the money with no interest on it at all.

Banks lend more or less simply on the basis of their predictions about what the government will do with interest rates.

The one thing we must do as a nation to make our economy viable is to stop the private banks from creating money.


by stuart munro on March 29, 2014
stuart munro

AO,

National are useless and contemptible - their years are always hard because they make them hard. Labour made the economy improve a bit - not terribly hard seeing as we're 40% behind where we should be on the growth curve.

The Gnats are responsible for the SCF debacle, not fixing Christchurch, and failing to capitalise on the GFC. Useless much? We'd have caught Australia's standard of living by now if not for the pernicious follies of neo-liberalism, and the kind of crude corruption that saw Gerry Brownlee hire Shipley for the Christchurch rebuild - not because she's any good at anything, but because he could give her our money. It's not good business - the right winger trolls should've crucified the pair of them, but they too are unprincipled, corrupt, and incompetent.

by Andrew Osborn on March 30, 2014
Andrew Osborn

Stuart,

You really do see things through tinted glasses. Take a deep breath and try to see the bigger picture.

First off. John Key is Helen Clark (but not in drag). Nearly all the Clark era major policies he inherited, he maintained. Even radical stuff like 'working for families', kiwisaver, student loans and featherbedding the movie industry. They've even extended the gay marriage thing. The current National govt is Labour Light and nowhere near being truly Tory. Their impact so far has only really been around the fringes. Tightening up on welfare a little where there was clear abuse, sorting out police management, trimming the civil service to streamline and save costs (If I recall the Clark era added about 45,000 civil servants to the payroll). So if you were a fan of Clark you should really be voting for her offspring - Key. ;-)

Next, arguments relating to the chch earthquake are moot because we don't know how a Labour govt would've handled them. As someone who was actually involved in the recovery I can assure you it has been a tough job and I don't know how we could've done it differently. 

Then there was SFC. It was always a ticking bomb. It ticked all through the Clark era and many years before that. I'm not sure how better a Labour govt would have handled this debacle. The lesson for all govts coming from this was the need for far tighter oversight of the industry.

But look where we are now! Our unemployment is now down to the same level as Aussie and dropping. The manufacturing sector is booming on a broad base. We have a strong balance of payments. We have an innovative IT sector that has global reach. All despite a strong NZD. Kiwis are coming back from Australia and are helping to fuel a housing boom in Auckland. Crime is down. It looks like the strong actions of the Neo Liberals are atlong last taking effect. Unlike Aussie with its entrenched union corruption, the taxpayer isn't propping up a useless car industry and we have a national airline that is actually paying for itself. If we keep this up we have a golden future!

What's not to like?

 

 

by Draco T Bastard on March 30, 2014
Draco T Bastard

Next, arguments relating to the chch earthquake are moot because we don't know how a Labour govt would've handled them.

Better than National as they would have been looking after the people rather than the corporates.

 It was always a ticking bomb. It ticked all through the Clark era and many years before that. I'm not sure how better a Labour govt would have handled this debacle.

That ones easy - they would have let SCF into the guarantee scheme and all the investors would have lost on the risk that they took.

But look where we are now!… 

That's got to be the biggest littany of lies I've seen from you yet.

http://thestandard.org.nz/and-now-for-the-real-news/

Thing is, with National in charge things will get worse for the majority even if we did have a "rockstar economy" which we don't.

by Draco T Bastard on March 30, 2014
Draco T Bastard

GAhhh, no edit. I mean that Labour wouldn't have let SFC into the guarantee scheme.

by Andrew Osborn on March 30, 2014
Andrew Osborn

Draco: Better than National as they would have been looking after the people rather than the corporates.

Exactly how did they look after the corporates? In fact when AMI failed they could've left the insured with no cover. Instead they stepped in like good socialists and bailed them out.

As for SCF I wouldn't have let them in either. I would've let all those mum&dad investors understand what 'moral hazard' is, but once again this socialist leaning National Party govt stepped in and bailed them out. If they hadn't, every whiny little lefty in the country would've been complaining about how they'd been  left to sink.

As for littany of lies - you're using The Standard as a reference????? At this point you lose what little credibility you had left.

 

by stuart munro on March 30, 2014
stuart munro

AO,

John Key is not Helen Clark - she was a nasty piece of work, but she was never a thief.

National have made a dog's breakfast of Christchurch. The presumption is basic competence - any drunken monkey would have done better, if they weren't corrupt.

You don't understand about the SFC at all. This was a crony deal whereby all the Gnats furry mates got a slice of public pie. Sucking on the public teat - that's the Key thing.

What's not to like? It is pitiful fantasy you paint. The manufacturing sector is shedding jobs right left and centre. Balance of payments is enjoying a brief and unsustainable flutter on inflated returns from China. But tax receipts are falling, reflecting the real state of the economy - stagnant and shrinking. Unemployment is falling, not from job growth, but from Bennett's pogrom, and we are catching Australia not because we are growing but because Abbot is wrecking the place. (half the current issue is the sunset of the car industry - which has a lot further to go)

The level of discontent is much higher than anything I've heard before - much worse than under Muldoon. People are really angry, and they know exactly who wrecked the place. The people who keep things running are going backwards. Hard work doesn't pay. The wheels have come off and you and the Gnats are still whistling in the dark.

 

by stuart munro on March 30, 2014
stuart munro

But the biggest thing is how the Gnats blew our competetitive advantage - we came into the GFC much stronger than our trading partners - but the Gnats frittered away that advantage on corrupt dealings and ideologically driven policy failures like asset sales. Their legacy is a mountain of debt, the normalization of institutional corruption and a persistent pattern of negligible real growth.

What's not to like? A dark age robber baron would have done a better job. And the sooner they meet the natural fate of dark age robber barons the better.

by Draco T Bastard on March 31, 2014
Draco T Bastard

Exactly how did they look after the corporates?

They went into talks with them to discuss how the insurance companies would pay. They came out of those discussions with palns to save the corporates. As far as I could make out, the red zone was part of those plans as a number of insurance companies that had full payments to make to people in the red zone suddenly decided that the houses could be fixed. The implementation of the red zone meant that the insurance companies wouldn't need to pay out as much.

If they hadn't, every whiny little lefty in the country would've been complaining about how they'd been  left to sink.

You obviously missed the fact that it was the left that was complaining about the SFC bailout.

As for littany of lies - you're using The Standard as a reference?????

Yep, because it's usually referenced to facts rather than the spin that you were obviously using.

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