Alex's politico-economic blogroll: Left & right fight over Wff; Crampton's US free trade worries; Collins next Nat leader?; Charlie Chaplin

Here's my politico-economic blogroll for this week.

Apols for not getting one out last week - had something much bigger to contend with. My thoughts go out to all those in Christchurch and those who have lost loved ones and friends in this dreadful disaster.

The quake has sparked quite a reaction from all factions on how to pay for the quake.

Key and English have said govt will need to find NZ$5 billion from somewhere and are looking at making the books run red in the upcoming May Budget.

On top of this, government tax revenue is likely to be NZ$5 billion lower than forecast over the next four years, so that's NZ$10 billion we're going to have to find somewhere. Thank God we've got such a broad tax base to help with shocks like this...oh, wait.

And just a reminder for those in Botany - you have a by-election tomorrow in case you forgot. Everyone else has.

From the right.

1. Don't change Working for Families now, make it an election policy. David Farrar at Kiwiblog says National should keep its promise to not alter Working for Families during this term. Rather, they should signal changes they would like to make and campaign on them. This follows the Prime Minister's comments that govt would look to cut higher-income families from the scheme, saying they had enjoyed tax cuts last year.

Now I have long advocated that a family earning $107k a year (let alone $127k a year) should not be receiving welfare. Welfare should be for those who truly need it.

It is also economically very inefficient to tax people, and then give them some of it back as welfare. One should minimise what they call churn.

Also on a personal level, I have no qualms about paying taxes to help a family on say $40,000 with two kids. Bit I do have qualms about paying taxes to be handed over to a family earning $125,000 a year, just because they have decided to have lots of kids.

Now National said they would not alter WFF during this term, and I believe they should honour that. The earthquake recovery will not just be taking place in the next six months. It is good that National will possibly (all they have said is they are not ruling it out) look at changes to WFF, but they should make them an election policy, and implement after the election if re-elected – as they are doing with partial asset sales. It is vital to get a mandate for this. Yes the earthquake is a game changer, and you can use it to justify a pre-election change. And if the election was two years ago, I’d argue you might not be able to wait. but the election is only six months away.

You might even announce changes in the budget to take effect on 1 April 2012, but hold off making any change until after the election, so said mandate is gained.

2. We overspent on welfare and now can't pay for the quake. Cactus Kate has a go at the left and certain welfare policies over the last decade that, she says, mean NZ can't afford to help those Cantabrians most in need of welfare right now.

She thinks John Key has the opportunity to lead a "massive restructure" of the NZ economy to cope with the crisis we're faced with. 

Years of generous over-spending on welfare to those who haven't really needed it, have led to a position now where John Key is going to the world with the begging bowl and asking for help. The true state of New Zealand's finances will be commentated by business journalists for many a column inch. Let's have it folks. Let's see just how wealthy New Zealand is to cover the largest every test of New Zealand's financial strength.

Let us see how much New Zealand has overspent on welfare in the past decade whereby we cannot afford to help those most in need. Let us have the figures.

The cost of the earthquake may never truly be known. Right now businesses in Christchurch have no premises for their employees to work from, sole business owners have their families to look after rather than their clientele. Company records have been ruined, buildings are in a questionable state of safety and even if employees can make it into town over broken roads, through broken streets and broken churches, how broken are the poor souls to start productive output so soon after their trauma?

This is what the welfare state should be about. Providing temporary assistance to those who need it for acts truly beyond their control. Welfare for Christchurch doesn't even need a question. The answer is "yes".

Welfare isn't to subsidise earnings of those on the top tax rate due to WFF. It isn't to pay for those to breed more children into the world when they cannot afford it. It isn't to pay for interest free student loans to children of those who can most afford to assist their children through a University education. It isn't for lifestyle choices of knowing the taxpayer will always prop them up no matter what. Or state housing for life in areas most New Zealanders can't afford to live.

3. Cutting the top of WfF isn't going to do much. Lindsay Mitchel has a go at both Working for Families and John Key's suggestion to cut the top off the scheme. It's not going to save much money, she says, because the higher up you go, the lower the payments are.

Earthquake or no earthquake many economists regard these sorts of family spending programmes as highly ineffective and inefficient. As a vehicle to reduce child poverty they often result in more workless homes. Yes, the In Work tax credit (one of four WFF tax credits) was intended to get more beneficiaries into the workforce but at the same time an evaluation showed more partnered mothers left the work force. ( And then the recession wiped out the increase in single parent employment too.) At the very low income end Family Tax Credits to benefit-dependent families tend to keep people on benefits because of the high marginal tax rates they produce and the incentive that higher benefit-packages bring.

When Labour widened the scope of eligibility for family assistance and re-named it WFF they virtually doubled the cost in the interim period. In 2005, as the opposition leader John Key called WFF "a giant welfare package". And at some point "communism by stealth". That is still true but in order to win the 2008 election he decided he could not risk undoing the scheme. There are over 400,000 families with dependent children - nearly four in five - receiving an average annual entitlement of between $6 and 7,000. Obviously, however the higher up the income scale we go, the lower the payments are. So cutting them back at the top end isn't going to save the government very much money. Not when they are talking about a $5 billion drop in tax revenue due to the loss of economic activity in Christchurch.

4. Judith Collins next National leader? Not sure whether Dim-Post is on the left or the right so this can be a centrist piece. It's about Simon Power so will throw it in here. His shock resignation has many asking who will lead National after John Key now Power has called it quits. Stephen Joyce's name is being thrown around, but Dim-Post says he thinks Judith Collins will replace JK as the next leader of National. FYI, David Farrar has a good look at the rejuvination he thinks National will need to undergo if it wishes to win three or even four terms.

With Power leaving, is it right to say he will never come back to politics? He's had 12 years and enough experience in Parliament to be the next PM. He won't get there for probably at least another 3-4 years, so why not go away for a bit and then come back to replace JK when he decides to leave. John Armstrong at the Herald speculates it could be 2020 before Power got a crack at PM anyway. That gives him a few years to build up some experience in the private sector then come back when (if) National finds itself in opposition again.

From Dim-Post:

My assumption is that Judith Collins will replace Key as National leader, and since Collins is a dangerous sociopath, Steven Joyce would be a big improvement. But as Transport Minister he’s waged a jihad against improving public transport in our largest city while approving the construction of massive new roading projects all during a period of soaring petrol prices, so I don’t think he’d be a particularly impressive party leader or Prime Minister.

From Armstrong:

He was touted as a future leader. But while National has been odds-on to win this year's election, 2014 will be more difficult. If National lost, it would mean Opposition again, possibly for two terms.

As leader, that would mean it would be 2020 before Power got the keys to Premier House. In the interim, there would always be the possibility that someone might leapfrog him.

And from Farrar:

Soon after National won the 2008 election, I pondered what National needs to do to have a lengthy Government – three or even four terms. There’s a lot of factors which are situational – policies, economy, issues, response to scandals etc. But there are also some factors which tend to be almost always true – that the public are loath to keep re-electing the same old people into Government.

So a necessary (but not sufficient) condition for a long-term Government is to rejuvenate. And this has to happen not just in your third term, but throughout. Helen Clark did some useful rejuvenbation in her third term, but by then it was too little too late.

National has 23 Ministers at present. For the sake of easy maths, we’ll pretend they have 24. To maximise chances of a third or even the holy grail of a fourth term, one has to go into your third election with half your Ministry being new, and to get a fourth term, almost your entire Government needs to be new – including arguably the Prime Minister.

From the left

5. The Standard takes on Farrar's WfF folly. The guys and gals at The Standard aren't too happy about Key's and English's Working for Families comments. Higher income families in the scheme don't cost the govt much, so why try to fiddle with it, they say. Better to put the top tax rate back up and not build some of National's motorways, Marty G says. They're also not averse to an emergency levy.

John Key has tidied up the confusion he caused yesterday and says that the quakes will cost the government $5 billion in rebuilding and $5 billion in lost revenue over the next 4 years. Big bikkies but easily covered by an emergency levy and canning the white elephant motorways. So, why are the Nats obsessed with tinkering with Working for Families?

As Zet pointed out yesterday, National has long made a song and dance about high income families getting WfF but before the 2008 election, they gave up on the policy because they learned that only 1,000 families with incomes above $100,000 get WfF and they only get $1,000 a year each on average. Such a small problem, if one concedes it’s a problem, is not worth the government and Parliament’s effort and the side-effects of trying to fix.

The solution to filling the hole in the government’s books isn’t fiddling around with WfF, generating a lot of small but hurtful income cuts for middle income families. The solution is to ask high income earners to give back the massive tax cuts they have received from National cutting the top tax rate from 39% to 33% and to stop wasting money on motorways that were already uneconomical even before this latest oil shock.

6. English said high-level WfF wouldn't save much himself. NoRightTurn picks up some comments Bill English made in 2008 about how cutting the top end off Working for Families wouldn't save much.

take it from Bill English back in 2008:

“A careful analysis of Working For Families reveals there would have only been small savings had National opted to remove those on higher incomes from the scheme.

“Taking higher-income families out of WFF saves very little money, at least in the short term.

“As at 31 March 2007, around 1,000 families earning over $100,000 were receiving WFF, and payments to those families totalled only $1.1 million."

$1.1 million is chump change for government, and SFA compared to the ~$5 billion cost the government is looking at for the earthquake. So why are Key and English talking about it? To get us to buy their myth that they can cut WFF at the top while not leaving anyone else worse off. As I've already pointed out, it can't be done. Any WFF cut which affects those on higher incomes will inevitably reduce entitlements for those on lower incomes as well. And that's where the real savings are.

7. Auckand vs Christchurch. Russell Brown at Public address has a look at 'what now' in respect to rebuilding Christchurch. How big now will the Auckland vs Christchurch fight for govt money be? Will Len Brown realise he won't be getting as much money from Wellington to grow the country's biggest city? What will this mean for Auckland's growth - and rates there?

And, of course, Fran O’Sullivan declared that John Key “should not hesitate to ask other New Zealanders to play their part towards financing the rebuilding of Christchurch,” and then, glibly, that Christchurch’s disaster should be “the spur for Auckland’s leadership to get on to its own feet and stop being a drain on the nation’s finances”:

It’s now time for Len Brown to flick a few of the Auckland Council’s gold-plated assets to fund his pet infrastructure project instead of asking for tax funds.

There’s no sense that she’s done any real work on the numbers involved. And it might also be observed that setting up Auckland vs Christchurch as a zero-sum game isn’t a very smart thing to do right now.

Economics blogs

8. Worry about the rebalancing when unemployment's under control. Matt Nolan at TVHE picks up on Key's comments that the economic imbalances NZ faces are the same now than before the quake, and that Budget 2011 will still be focussed (partly) on savings and investment. Nolan wonders why we're aiming to kick consumption in the guts now, and not once unemployment is under control.

“Rebalancing policies can be poorly timed too”. On Twitter Alex tweeted “the basic issues on imbalances nz faces are as relevant today as last week key says”. However is this really true?

In part it is, we are still in a position of deficient demand and so it is still a poor time to be instituting these sorts of structural issues.

What do I mean?  Well, the point of “rebalancing” is shifting NZ away from consumption towards exports and some types of investment.  I don’t really agree with everything that has been said, but if I did there is an issue – why are we aiming to knock down consumption when we already have weak domestic demand and elevated unemployment.  Even if the structural change is right in the long-term the transition path matters – and ignoring it will merely lead to a repeat of the mistakes of the late 1980 and early 1990s.

Why do I say mistakes – well because many of the policies instituted during this period were technically “right” but the timing was poor.  When unemployment is near normal levels, and economic activity is back towards trend, THEN we can think about structural change – introducing such change now will simply exacerbate a cyclical slump.

9. Eric Crampton's TPP worries. There are a lot of worries from various parties on the US joining the Trans Pacific Partnership free trade agreement. Crampton shares some worries on US agriculture lobbyists.

I’d put decent money that, if America signs onto the deal, there’d be years of costly arbitration before New Zealand had any kind of increased access to American dairy markets. For starters, American dairy farmers would argue that failure of the New Zealand competition authorities to prosecute New Zealand dairy cooperative Fonterra as a monopoly constituted a subsidy under US law and justified counterveiling duties.

Never mind that Fonterra has to rely on farmers voluntarily choosing to supply it with milk rather than supply one of its competitors, and that it’s legally required to supply some of its milk to some of its competitors, while the US dairy compacts and market orders are state-enforced cartels that do everything but shoot potential competitors. If the United States was happy to continue trade action against imports of Canadian softwood in the midst of Hurricane Katrina rebuilding, despite NAFTA, why ought we expect any better for New Zealand dairy?

In exchange for the illusion of access to American dairy markets, we’d likely get some pretty restrictive copyright and intellectual property rules. The hubub over investor protection provisions don’t much worry me – odds are that such provisions would only give a slap to the parts of our Overseas Investment Act regulations that need the slap.

10. Totally irrelevant video. Charlie Chaplin boxing scene from his movie City Lights. I watched this film twice this week as a cheerer-upper. One of the funniest films of all time made back in 1929.