Saturday 13 April 2024

In Whose Best Interests?

On The Spot: The question Q+A host, Jack Tame, put to the Workplace & Safety Minister, Act’s Brooke van Velden, was disarmingly simple: “Are income tax cuts right now in the best interests of lowering inflation?”

JACK TAME has tested another MP on his Sunday morning current affairs show, Q+A. Minister for Workplace Relations & Safety, Brooke van Velden, once boasted the only economics degree in New Zealand’s Parliament. Since the general election, however, this select fellowship of the dismal science has been augmented by fellow Act MP, Andrew Hoggard. What he would have made of his colleague’s response to Tame’s seemingly innocent question we can only guess.

The question Tame asked was disarmingly simple: “Are income tax cuts right now in the best interests of lowering inflation?”

If looks could kill, then Tame would have died then and there. Van Velden is a very intelligent woman, so, in the very few seconds she had to formulate a response to Tame’s question, she assessed the consequences of providing him with an honest answer, realised that, in this case, honesty would be absolutely the worst policy, and so, summoning her most earnest tone of voice, and with only the tiniest hint of embarrassment, she replied in the affirmative.

At this point there should have been a very loud klaxon-blast, and the word “WRONG!” should have flashed across the screen – in much the same way as incorrect answers are blasted on the British television show “QI”. Because, as Van Velden, herself, Hoggard, economics graduates everywhere, and even the reasonably well-educated person in the street, knows: cutting income taxes right now is most assuredly NOT in the best interests of lowering inflation.

I was still a teenager in the early 1970s, when inflation began to take off in New Zealand, and I remember asking my father what it was. His answer still stands as the best summation of the phenomenon I have heard. “Inflation”, he said, “is what you get when too much money is chasing too few goods.” Economists can encumber the simplicity of that definition with all kinds of impenetrable jargon; they can make it difficult and mysterious by rendering it algebraically; but, boiled right down, that is what inflation is.

If Tame had asked Van Velden another question related to inflation, her answer would likely have been entirely sensible. Zimbabwe, with a current inflation rate of 55 percent, has just issued a new currency – the “Zimbabwe Gold” (ZiG) – backed, at least partially, by the nation’s gold reserves. For those who remember the hyperinflation of the Mugabe era (I still have a Zimbabwean banknote which promises to pay the bearer, on demand, $100,000 “on or before 31st July 2007”) this will be good news. Certainly, Van Velden, if asked, would applaud the Zimbabwean Government’s efforts. At the very least, Zimbabweans will no longer be forced to rely on American currency for their day-to-day transactions.

As an economist, Van Velden would not hesitate to condemn the idea of putting additional dollars in the hands of people already under severe cost-of-living pressures. She would know that the increased spending power being injected into the economy would inevitably lead to further price rises, as the extra money chased the same quantum of goods and services.

Van Velden would also know that the prospect of tax cuts fuelling inflation would place additional pressure on the Reserve Bank to keep the Official Cash Rate higher for longer – a strategy intended to ensure that the ordinary person’s pockets remain as empty as possible, for as long as it takes to reduce demand and lower inflationary expectations – even at the cost of inducing an economic recession.

Van Velden, wearing her economist’s hat, would also understand that Finance Minister Nicola Willis, in order to avoid the consequences of being seen to replenish the reduced state revenues occasioned by tax cuts by borrowing (the example of the British Prime Minister, Liz Truss, who attempted to do exactly that, is salutary) will have no other option but to slash state expenditure dramatically. The economic and social outcomes of such policies are readily predictable. The recession will deepen, public services will falter, and the population’s pain will intensify.

It is also possible, of course, that throwing the New Zealand economy into a deep recession, and increasing social misery, will bring the inflation rate down dramatically. It is even possible that such a strategy could produce deflation – too little money chasing too many goods – with a resulting fall in retail prices. Those tempted to welcome such a turn of events should ask themselves what falling retail prices are likely to do to business profitability and employment.

It should be clear by now why Van Velden the politician and Cabinet Minister chose to answer Jack Tame’s question as she did. Tax cuts in the midst of historically high inflation and a shrinking economy are not something any responsible government should be contemplating. Had she said as much, however, her comments would be leading every news bulletin and political journalists would be speculating avidly about her own, her party’s, and the Coalition Government’s future.

On the other hand, Van Velden could have thrown all caution to the wind and affirmed that the planned tax cuts were definitely in the best interests of the country, because they would necessitate policies aimed at shrinking the size and responsibilities of the state – something hardline neoliberal economists like herself and her boss, David Seymour, have wanted for a very long time.

Cuts in spending would also reduce the ordinary working family’s room for economic manoeuvre. With more expected of them financially, the importance of holding onto their jobs, which are (just) keeping them afloat, could only grow – making them much less likely to resist their employers’ demands to work longer and harder for less. From Van Velden’s perspective, that can only be good for productivity, good for business, good for the country.

Honesty on that scale, however, would likely have a devastating impact on Act’s performance in the opinion polls. A party that grows increasingly excited at the prospect of a large proportion of the electorate sinking into poverty, economic exploitation, and despair is hardly likely to see its poll numbers rise.

Better by far to engage in a few seconds of outrageous flannelling: “I think [the tax cuts] are. I think they are for those New Zealanders who have really, really, really been struggling […] Giving them that little bit more money in their own back pocket makes it easier for them to keep up with that rising cost of living.”

Bullshit economics, but better-than-average politics. So: Jack Tame vs Brooke van Velden? I’d call it a draw.

This essay was originally posted on The Democracy Project Substack website on Monday, 8 April 2024.


Tom Hunter said...

Of course you're ignoring the elephant in the room: private debt.

Certainly in my case any increase in money-in-the-hand from tax cuts (or anything else) is going to be applied to paying down my debt before I even start to think of blowing it on consumer items.

Why? Well you know the answer: because debt of all kinds, credit cars, cars, mortgages are hurting people badly with the high interest rates required to squash inflation, thanks to that fat idiot running the Reserve Bank and being lax on the whole thing even as the last idiot government went wild with increased spending.

That did exactly as your Dad described; pumping money into the system that started chasing the same amount of goods that had existed before (or perhaps even fewer goods given the production and logistics problems created by the Wuhan Flu lockdowns.

TBF to Labour it's pretty much what every idiot government in the Western world did, irrespective of Left-Right ideology, when all that needed to happen was to lift the lockdowns and let the economy come roaring back. The US certainly did not need more multi-trillion spending bills passed in late 2020 for Trump to sign and 2021 and beyond by Biden, but that's pollies for you.

Oh, and BTW, the massive US tax cuts of 1921-22 did not spark inflation, nor did the smaller tax cuts of JFK in 1961-62, not Reagan's in the early 1980's, when inflation actually declined even as the tax cuts took effect and then again with the Bush tax cuts in the early 2000's, nor the Trump tax cuts of 2017.

Tom Hunter said...

One more thing. Since you understand that the basic driver of inflation is the money supply growing faster than the supply of goods and services, you should also understand that tax cuts are not increasing the supply of money.

By definition tax cuts are simply shifting money from the government to private companies and people, where the decisions on what to do with it may be different. As I've argued above, people are going to pay down debt first, something we're not likely to see with governments of any stripe. And as I pointed out, if the decision is to spend it instead where's the evidence that government spending is any less inflationary than private sector spending?

David Stone said...

So Chris
Doesn't the equity of tax cuts depend on who receives them? If they are fairly distributed among high and low income earners what is the problem. It is surely the totality of money spent in the total economy that is inflationary not so much who is spending it, Though obviously those constrained to spend every cent that comes int their hands will contribute a larger portion of their disposable income (like all of it) compared to those who have the flexibility to save some for a rainy day.
I imagine that the ideology of the government is that the army of public servants and advisors that the previous administration has engaged do not contribute to the economy as much as the private sector does. And this may be correct though it is difficult to measure. And certainly recent events in the health sector strongly suggest that there is far too much private investment in developing drugs and vaccines and in assessing their safety and effectiveness and far too little responsibility taken by government in this regard.

John Hurley said...

Mike Hosking "get rid of __ and you might get a few more people wanting to be landlords. That's how the theory goes" - Spoken at top speed, and on to the next thought.

Hayden Donnell says we don't have buildings "as they do in most other parts of the world".
That is part of his argument for density.

He is really, (like Maserati Mike) another globalist.

Ranginui Walker said: "I resent all these people coming here. If this process continues NZ will be ruined. It will just be like any other part of the world."

Maserati Mike and Hayden Donnell are two sides of the same coin.

David George said...

Good points Tom.
Money is debt, paying down debt removes money from the system and vice versa.
A secondary effect is that if cost of living type wage adjustments (and small business price increases) are moderated by tax relief then that would reduce inflationary pressure as well.
The effect of inflation pushing more and more people into the higher tax brackets (fiscal drag) shouldn't just be ignored. Folk on modest median incomes are getting hammered from both higher taxes and higher interest rates.

It doesn't matter, as far as inflation is concerned, whether demand comes from private or public spending. AOTBE higher taxes/higher government spending or lower taxes/higher private spending have the same effect inflation wise.

Tim Enright said...

You're ignoring the main driver of inflation which is rigged markets and restricted supply that can be solved by regulation. e.g. 2 supermarket suppliers making outrageous profits...government could e.g. restrict their margins (5-10%), power gentailers in a deeply dysfunctional electricity market, Dr Geoff Betram has exposed this for decades - government could fix by restructuring how power prices are set and mandate building of renewable energy; building supplies - restricted supply e.g. one gib board manufacturer who has written the building code for their product FFS! Banking - outrageous margins and profits that could be regulated in a number of ways e.g. maximum margin 0.8%, super tax on bank profits like 50-80%, reserve bank propping up high interest rates which are a massive drag and manufacture bank profits; government ledning directly to first home buyers as it did previously for 2%. This could also fund an amzing program of social housing manufacture and do it with government or not for profit, not the private sector rip off merchants. The list goes on and on - why is this not obvious and discussed? We get the ffeble and mendacious arguments about money supply and putting too much in peoples hands leading to inflation.

new view said...

Those on the left with their blinkers on see tax cuts as a gift to those who can work or earn enough money to live comfortably. In essence all those who earn large amounts of money are greedy and should be taxed more than they are already. The fact is that many businesses and those that work in them, are struggling even though many are so called middle class. To me the government's tax adjustments won't be inflationary in the broader sense because they are being implemented in bad times not good. For most the extra money simply will buy food, go towards mortgages and help businesses stay solvent. A simple choice of preferring the population to keep working as against joining dole queues. If the government had made the overdue adjustment in good times then it would have been more inflationary. It seems when asked, whether the tax adjustments are needed, those who answer no, have enough to live on, and those who answer yes, don't. I noticed last time the media canvased this question the majority seemed not to need the cuts and wanted the money to go else where. Mmmm, the media, and how we trust them, Chris's other current article. If the adjustments are inflationary the government will mop up the excess with GST tax which will help generate much needed cash for the coffers. I Haven't seen Jacks interview, but it sounds like a gotcha situation devised by jack, and what purpose does it serve accept to show Jack as the sharp manipulative showman that he is. I don't see myself as a deep and knowledgable economic thinker but I can see the reasoning for the governments actions. BTW these actions were transparent and were devised to a/ win the election and b/ be part of a package that gets this country back on its feet. The labour party's answer to the problem would be to take more money off our productive sector and give it to the unproductive sector without increasing productivity. I know which I prefer.

David George said...

Tim: "2 supermarket suppliers making outrageous profits"

I guess you're referring to Foodstuffs (an operator owned co-operative) and Aussie owned Woolworths group.

Their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was around 3 to 4% of turnover. What's "outrageous" about that?