Why John Key and the Buckle tax review should continue to ignore Don Brash

by Gordon Campbell Originally Published on Werewolf.co.nz

Don Brash and his 2025 Task Force have been given the job of enabling the New Zealand economy to catch up with Australia in 15 years or so – which is only fair, since it was the policy mix during Brash’s reign at the Reserve Bank in the 1990s that helped turn New Zealand into a low wage country rapidly sliding towards Third World status. Unsurprisingly, the task seems beyond him.

Even the NZ Herald has labeled as ‘predictable” the policy mix contained in the first tranche of Brash’s 2025 Report : sell assets, promote school vouchers, relax our labour laws, flatten the tax rates, scrap interest free student loans, cut government spending and entitlements, spend the Cullen Fund etc etc. In 2009, calls for flatter tax rates as a path to prosperity are the ‘daring’ economic equivalent of an old Marilyn Manson album. A tax rate around 17 -20 % was a bad idea when failed presidential hopeful Steve Forbes was touting it back in 1996, and again in 2005 - and it is still today a socially and economically regressive idea.

Brash is not the only dinosaur still walking the earth. On February 2, 2009 Dallas Federal Reserve President Richard Fisher made this widely reported remark on C-Span’s Washington Journal programme : “Protectionism is the crack cocaine of economics. It may provide a high. It's addictive and it leads to economic death," On November 17, 2009, former WTO boss Mike Moore was writing this in the NZ Herald : “ Protectionism is the crack cocaine of economics. It is a short-term addictive stimulant which becomes harder and harder to give up. “ Why are such people, who seem incapable of an original idea between them – and that includes Rogernomics aka Reaganomics - still claiming that the gleanings from the remainder bin of right wing US politics are fresh and bold initiatives ?

Prime Minister John Key, Brash’s former deputy, has indicated to RNZ’s Morning Report that these particular turkeys will not fly. Here’s how the Herald reported Key’s response :

Key said during the 1980s and 1990s New Zealand underwent radical economic reform while Australia took a more incremental approach. The trans-Tasman neighbour was now in much better shape. "In that regard I am not convinced that absolutely radical big bang reform is the right way to go," Key said.

"It would certainly have a dramatic effect on New Zealanders and in the short term it would feel very much like we were pulling the rug out from underneath them."

In other words, Key is not buying this bill of goods. Australia’s more cautious, incremental approach under Bob Hawke is now regarded by National as having been more productive than the blitzkrieg that occurred in New Zealand. The timing of the release of the 2025 report – before the Buckle tax review delivers its findings later this month - is also significant. Certainly, Key would not have wanted Brash and his die-hards on the extreme right coming out afterwards, and seeking to second-guess the Buckle review. Better to get this nonsense out of the way first, before getting down to the real business of tax reform.

Purely in the interests of vocational guidance for Brash, I can recommend one country that may be more open to his ideas : Syria. The repressive command economy ruled over by Bashar Assad and his Alawite elite are dabbling in the ways of the free market, yet not without controversy. Syria expert and economics professor Omar S. Dahi of Hampshire College, Massachusetts has been writing about the Syrian experiment in terms eerily relevant to the Brash Task Force, and to the options facing the Buckle tax review.

The neo-liberals enjoy mocking defenders of state-led development as anachronistic remnants of “old-thinking.” However it is the neo-liberals themselves who are stuck in a time warp….[Their] comments seem like World Bank literature in the late 1980s or early 1990s, [and] ignore all the changes in both the global economy as well as development theory since the late 1990s. It is true that starting in the 1980s (after the debt crises) and early 1990s (after the collapse of the Soviet Union), there was a full-scale attack on the role of the state in development by multinational institutions (World Bank, IMF, and after 1994 the WTO) as well as U.S. and Western governments.

However while these had been deaf to any objections at the time, the glaring failures of their advocated policies, as well as the success of countries with heterodox economic policies have become too difficult to ignore. The neo-liberal “model” has failed. Serious work in development today is to figure out how to bring the state back into development, and not the reverse. I am not referring only to infrastructure, such as building roads and bridges, targeting health care, or education. The goal must be for a meaningful industrial policy, as hard as it is for some to see how this particular state can do so.

Brash of course, is not alone in opposing a leading role for the state in devising a valid national industrial policy. Evidently, NZ Treasury Secretary John Whitehead also finds it hard to envisage a positive role for the state in economic development. In July, Whitehead gave a speech

in which he repeated the neo-liberal position on the subject. “We have to raise the quality of public spending and ensure the lion’s share of increased national resources goes not to the public,” Whitehead said, “ but to the private sectors. Every dollar that is spent by the public sector is a dollar that is not spent on business investment, or left in taxpayers’ pockets, or saved.”

Incredibly, this negation of a positive role for the state in industrial policy was being promoted by Treasury right in the middle of a recession created by the private sector, and at a time when economies around the globe have needed to rely on massive infusions of cash from the public purse. Regardless, Whitehead’s speech continued to tout the superiority of private sector models of efficiency and governance. Yet for much of the past 40 years in the US, it has been the prime advocates of low taxes and small government – Ronald Reagan and George Bush II – who have presided over massive deterioration of debt to GSDP ratios, as this graph clearly shows. ( Also, see the note at the end of this article.)

The supply side voodoo of law tax being an engine of growth and financial health hasn’t worked. John Key and Bill English at least seem to have moved on. Perhaps it is time our business community did likewise.

Reality charts a different path to economic development. As Dahi goes on to explain, no currently wealthy country ( including those in Western Europe, North America, and Japan ) has ever achieved wealth without “substantial and long-lasting state intervention in economic development, and direct protection and promotion of national industry.“ Same with the newly industrializing countries, including the so-called Asian tigers…China and the emerging South American power Brazil have used even more direct and varied methods of state intervention.”

By contrast, those countries that have followed the path taken by New Zealand - and which is still being advocated by Brash - have failed and will continue to fail. “Countries which have closely followed the neo-liberal path have witnessed disappointing results in economic growth, but more importantly have also been subject to increasing inequalities, social fragmentation, and periodic financial crises.”

On the historical evidence, the reality is that no country in the world has successfully managed sustained levels of growth and human development solely through free trade and free markets. Much as they may applaud New Zealand’s credulous free market zeal, our trading partners have never practiced what they preach on this point. As Dahi says, all countries that are now rich, including the industrial powers of Western Europe and North America, still maintain “subsidies for their farmers, quotas for their textiles, huge state spending on military R&D, trade sanctions against many other nations, and state funding for R&D in the pharmaceutical and biotechnology industries - all protectionist measures... Free trade harms the less developed countries' national manufacturers. and thus their prosperity in the long run.”

This is not a rhetorical point. Earlier in this decade, Alice Amsden’s 2001 book The Rise of the Rest, and Ha Joon Chang’s Kicking Away the Ladder (2004) have provided the empirical chapter and verse for the point that New Zealand continues to ignore : that economic success results from a hard-headed combination of protectionism and regulation ( on anti-trust and other fronts ) by government, working in active partnership with the private sector. Not from a combo of periodic handouts of income tax cuts ( to stimulate the domestic economy) and corporate tax cuts ( to help out exports ) and beyond that…hoping for the best from the market.

Dahi concludes : “America, and Japan as well as the newly emerging countries such as the so-called Asian tigers (South Korea and Taiwan, Singapore) have become rich through extensive and persistent state intervention to promote industrialization (the oil-rich low population countries are a different story of course) . In fact the extent of state intervention in the late industrializing states mentioned above has been much deeper and varied, using a wide variety of carrots and sticks measures.

What Chang and Amsden ( and I would add, Dani Rodrik of Harvard University) have found is this : “The most successful countries were (a) those with more equitable land and income distribution, achieved through state intervention, (b) those who decided to “make” technology domestically and rather than “buy” or simply import it, and who used domestic savings or bilateral loans to finance development rather than foreign direct investment,( c) those who successfully enforced a reciprocal control mechanism of government protection in return for monitorable performance.”

What New Zealand has done instead over the past 30 years has failed where-ever it has been tried : “On the other hand, countries that underwent rapid (trade and financial market) liberalization, deregulation, and privatization have witnessed disappointing results. There is a depressingly large literature on this, documenting, among other aspects such as lower growth and increased inequalities, the periodic crises following capital account liberalization (Mexico 1994-95, Turkey 1994, 2000-2001; Argentina 1995, 2001; Russia 1998; South East Asia 1997-98; Brazil 1999.

To my mind , the most interesting point made in this analysis revolve around the notion of “ entrepreneurship.” What the (would be ) economic reformers in New Zealand over the past 30 years have in common with their neo-liberal friends overseas is the promotion of a social vision in which the New Zealand economy is comprised largely ( or entirely ) of entrepreneurs : in essence, the rhetoric of reform and its policy mechanisms have taken as read that the prime economic condition if one where everyone can ( and should ) start their own business, and preferably one that exports. This approach is, as Dahi says, an excuse for the withdrawal of the state from responsibility, and from its necessary role in social and economic development.

“Most people do not want to be self-employed,”Dahi says,”and for a very good reason. The average rate of return from self-employment is low and risky. What most people really want is to be employed as wage labourers with job security. If entrepreneurship has a role (which it does), it must be subsumed within a larger developmental model whereby entrepreneurs are responding to the ‘right’ incentives.”

Reform too readily becomes a fetish object, and an end in itself. Within this mindset, the reformers “know” that they have the right reform package, and only vested interests and timid politicians are preventing this bold vision from being enacted, and utopia realized. Brash’s words, when releasing his Task Force report politics were a classic of this type :

"Our view is that the recommendations would give us a very good chance of achieving the prime minister's vision but we do not underestimate the difficulty of the politics involved."

Ah, the politics. Always so difficult. People, with their trifling concerns and little agendas, always getting in the way of the vision. No fault to be found with the ideas : only with the political will required to implement them. Tough decisions always need to be made. Leadership, which used to mean protecting other people from danger, is now taken to mean the readiness to expose others to it.. “Only in this mindset,” Dahi says, “ do we see crusading free traders fighting the archaic and parochial state apparatus who can’t see beyond their noses. So let me be clear: there is no such thing as reform. Reform in all countries is a socially constructed process, shaped by the strength of social forces to suit their interest. The ‘promised land’ the neo-liberals point towards, if only we’d listen, is a fiction. What they’re advocating is an illusion, a myth which, in the name of its pursuit provides an avenue for the powerful and well-connected to bend the political economy to their own interests…”

So what can, and should be our response ? “Our role should be to continue to insist on the inclusion and empowerment of weak and under-represented social groups {because} there is much more to the neo-liberal project than just removing the role of the state from playing a leading role in development. Once the population is re-configured as a ‘burden on the state,’ [as it has in the official economic discourse] every form of social spending is up for elimination. And [before long] health care and education which until now have been thought of as rights also turn into privileges to be subjected to the logic of markets.” Maybe then, Dahi says, the dream will have finally arrived : one nation under Brash would simply be overflowing with entrepreneurs.

Footnotes:

1. The graph that I cited does not contain the debt to GDP ration likely under the Democrat, Barack Obama. The causes however are fundamentally different : namely, the recession, and the severely damaging revenue impact of the unsustainable Bush’s 2001 and 2003 tax cuts. Econobrowser sums it up this way :
http://www.econbrowser.com/archives/2009/03/debt_trajectory.html

“Bush erased massive surpluses and increased the debt held by the public by something on the order of $4.3 trillion (the debt change from end FY 2001 to projected FY 2009 minus stimulus bill) while the output gap averaged a (negative) point. Obama's budget (in addition to the stimulus bill), according to the CBO, will increase the public held debt by $2.3 trillion (change in end FY 2009 minus stimulus bill to end FY 2013), during the deepest recession the US has faced since the Great Depression….This seems to me a substantive difference. Moreover : “ the biggest single proposal in the Obama budget contributing to the deterioration in the 10-year budget outlook is, contrary to public perception, not big spending on bailouts or stimulus or even longer-term health care reform, and not temporary tax cuts that are designed to provide immediate stimulus to the economy at only near-term cost, but rather permanent extension of most of the Bush (2001 and 2003) tax cuts, whose costs grow dramatically over time.”

2. The economic evidence for the belated discovery made by John Key and Bill English about the superiority of the Australian incremental approach has been in the public domain for the past ten years. See for instance the 1999 paper by Canterbury University economist Paul Dalziel entitled : New Zealand’s Economic Reform Programme was a Failure

ENDS

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