Economic Vandalism

Treason is not Too Strong a Word

Watching the budget charade this week, one could not help the odd sardonic smile. For nine years the Labour government has sown to the wind. Now it (along with the country, unfortunately) is reaping the whirlwind.

Firstly, there is the bold lying effrontery of the Finance Minister, who for years has sermonised on the evils of going into debt to pay for tax cuts, now suddenly has apostatised and tells us that it is a good thing. For years, tax cuts have been forbidden because they are inflationary, and because Labour is a socialist government, and socialists raise taxes and spend the money (according to Cullen). Now, economics is suddenly colour conscious: Labour tax cuts are not inflationary—only National ones—and it's OK for a Labour government to cut taxes when one's own political survival is at stake.

Secondly, in our hubris and pride, we have foolishly forgotten that New Zealand is a poxy little economy. As a people we have believed our own venal cheerleaders. If it is to survive at all, let alone prosper, New Zealand has to compete globally. Labour politicians have forgotten (or possibly have never realised) that in today's world, capital is both mobile and global. People also are globally mobile. Thus the two absolutely vital components of economic production—capital and labour—are not locked into New Zealand, but can move elsewhere in the globe. In the case of capital, it can often move offshore instantaneously.

The only thing that will keep capital and labour (productive people) in New Zealand long term, producing the goods and services which enable us to trade with the world, which in turn will allow us to maintain and even increase our living standards, is the prospect of achieving a better return on both capital and labour in New Zealand than in most other places in the world. Sadly, these conditions no longer apply in this country. Hence, we are seeing a people flight as hundreds depart weekly to offshore countries looking for a better life for their families. And hence, we are seeing exorbitantly high interest rates in New Zealand as the riskiness of investing capital in New Zealand increases, requiring higher interest rates if it is to be kept here.

So, Dr Cullen spends up large, and cuts taxes. The financial markets correctly see that this is damaging to the economy. It is inflationary. So, immediately, the financial markets increase the price of money—interest rates rise—negating the spending and tax cuts. Meanwhile, all Cullen can do is gloat in Parliament that he has eviscerated National's tax-cut fox, and tossed it back to them. He has left nothing in the Government accounts. It has all gone. His gloat and glee is at the expense of the country. His actions in office have become self-serving. He and his Government have done real and substantial damage to us all, destroying ordinary lives on the rack of their insatiable personal greed and ambition.

In the modern economic global world the only way ahead for New Zealand is to have the leanest, meanest racing machine on the block. When Labour took over nine years ago, we were well on the way to building that competitive productive machine. The Indycar series was in sight. Now, we are left with a clunking Eastern European skoda. It only took nine short years to weaken and blight the country. It will take at least twenty years of hard grind to get it back to where it was.

So, what went wrong? Firstly, you have to keep capital and labour in New Zealand. That is priority number one in economic policy settings. In order to do that, you have to make it attractive for both to stay (or come or return). Reducing tax rates—especially in a world where our global competitors are reducing their tax rates—is absolutely critical. This is doubly effective—it rewards both labour and capital; workers and investors—at the same time.

There has been a lot of scaremongering talk that tax cuts are inflationary. It turns out that government spending is far, far more inflationary—and it is always inflationary—because government spending is viewed by everyone as an entitlement. It is rarely at risk; it can rarely be taken away. Once provided, the political dynamic is such that people regard it as their inalienable right. Since they don't have to work for it; since the handout is “free”, it falls into the syndrome of “easy comes, easy goes.” Almost all government hand-outs translate immediately into consumption spending, pushing up consumer demand, fueling inflation. Interest rates rise.

Tax cuts are far less intrinsically inflationary. Why? Because a tax cut means that you get to keep more of what you earn. But what you earn is not without cost. You know what it took to earn that income. Therefore, there is a latent social and economic tendency to husband and use tax cuts wisely, because the cost of earning the money is always in your face. Entitlements and hand-outs have no such price attached. They are free money. Money for jam. There is always an insouciance attached to government largesse. Spend it up quick and go back to the trough for more. It's easy!

Cullen has deliberately taxed and spent for ideological reasons. He has boasted that that is what socialists do. He is a socialist, running a socialist government. (Helen Clark appears a relative ignoramus in such things. She seems to have been just led by the nose in economic matters.)

Secondly, to compensate for the labour drain, the Government has deliberately encouraged immigration. This has proved to be a distortive, short term palliative that has seriously damaged the economy. Instead of facing the question as to why labour was preferring to leave the country, the Government said, “No problem. We will just replace them with immigrants.”

As the wealthy immigrants flowed in, the price of houses rose. As the price of houses rose, turbocharged by restrictive development prohibitions and impediments, a secondary, speculative cycle took off. Everyone jumped on the bandwagon. People splurged on debt to buy houses, with the intention of letting house price inflation float them upwards to easy wealth. The consequence: inflation rose. The Reserve Bank has to increase interest rates. The dollar consequently rose to unsustainable, speculative highs—and stayed there for years. Why—because overseas lenders and speculators liked the taste of our relatively high interest rates—so they bought New Zealand dollar assets. Our exporting, productive, tradeable sector of the economy has consequently been hammered.

Overseas speculative capital (to fuel consumption, not production) has flowed in. Domestic, productive capital has flowed out seeking better returns offshore—and at an increasingly alarming rate. The upshot—when the speculative overseas capital leaves—as it surely will in time—the New Zealand capital base will have been dangerously depleted.

Thirdly, the current Government has done more than any administration in living memory to create a debt culture. There is an irony here. Because the government sector was running surpluses, but was choosing to spend the surpluses in “giveaways” rather than reducing the surpluses through tax cuts, the private sector rationally concluded that it could afford to take on more debt on its own balance sheet. After all, there are few things more certain in life than a government paycheck or handout. So, New Zealanders have felt sufficiently secure to take on more debt. And more debt. And more debt. “Don't worry. Good old Mickey Cullen will be there to help us out if we need it. He had better! We voted for him.”

Over 40% of debt financing for the private sector now comes from offshore. We are spending the savings of Japanese housewives and Belgian dentists. Oh—yes—one day they will want it back, but don't worry, Mickey Cullen will be there.

Then, the inevitable global economic dislocation occurred (they always do—from time to time). But because the New Zealand economy had been growing obese on economic fast foods and because it had become totally dependant for its lifestyle and consumption of the fat of overseas lenders, the credit crunch has hit us hard. And it is about to hit us very, very hard. Wait until the speculative New Zealand dollar collapses—as it inevitably will—and see the pain hit the consumer, the poor and the vulnerable.

If the New Zealand dollar drops by 50%—which is likely—petrol at the pump will jump sharply and will stay up. A fifty percent drop in the dollar will mean that food prices will rise in the region of another 50%. Let a block of cheese hit $30: wailing and gnashing of teeth will be heard throughout the country.

Finally, this Government has welcomed and promulgated the greenist religion of preservation over production. It has made a virtue of doing nothing with our natural resources—except to frame them as a spectacle to be looked at. It has sought to regulate every productive business according to the greenist mantra: cobble, restrict, and control so that the values of preservation override the ethics and values of production. The detachment of the Government from the realities of those who are striving to produce tradeable goods and services is almost beyond belief.

Marie Antoinette said, “Let them eat cake.” But our Government has said, “Let them suck air. But don't you love us. At least it is clean.” We live in one of the resource-richest countries of the world, but our government has turned it into a no-go zone. If any doubt the charge, just reflect on the maniacal Emissions Trading Scheme—which Prime Minister Clark insists is still going ahead. And the result—more capital migration offshore. The whole country will be poorer and beggared as a result.

But, let's be in no doubt. The blame for this catastrophe needs to be rightly sheeted home to a profligate, venal Government, which for nine years has promulgated evil economic policies based on theft and gratuitous self-indulgence.

That will be the Clark and Cullen legacy. Welcome to the socialist workers paradise, 21st century style.

We believe that it would be appropriate to create a new national honour: the Honnecker Medal for Human Progress and Achievement. Clark and Cullen should be the first and only recipients. Then, they should be banished from New Zealand shores for the term of their natural lives.