Hazledine and Voodoo Economics

Dismal Science

Tim Hazledine is a Professor of Economics at Auckland University. It would, accordingly, be reasonable to expect that he had a grasp of the fundamentals of accounting. Alas. Apparently not.

In a recent article in the NZ Herald, Professor Hazledine sought to reassure us that the Accident Compensation Corporation is not broke, and that talk of it being so was foolish. The sub-text was that the government had a hidden agenda (which just happens to be a familiar Labour Party theme for the past twelve months). His reasoning rested on two arguments: firstly, a specious analogy.

He painted the picture of parents facing a future obligation to fund their children's education, but not having sufficient money at present in the bank. Of course, parents assume that their future earnings will enable them to meet future obligations. No-one, says the eminent professor, believes that the parents are broke simply because they do not have the money in their pockets right then to fund an education bill fifteen years away.

See! It's the same with the ACC. It will face big bills in the future, and it does not have enough money in the bank right now to pay the bill. But it is no more broke than the case of the impecunious parents.

It is hard to believe that such economic and accounting nonsense can come from a Professor! (not a first year, junior lecturer mind) of Economics! What has the world come to when academics in their field of supposed expertise can talk such nonsense.

OK, so let's quickly expose the false analogy. It would be very easy using sixth form economics or accounting knowledge to generate a discounted cash flow value of the parents' expected future earnings to calculate whether they would have enough to fund their children's education. And if the exercise showed that they had insufficient funds, and yet persisted in funding their children's tertiary education, they would indeed be bankrupted. This is exactly the same as the ACC. There is no difference. Discounted cash flows of future income and earnings, and discounted estimates of liabilities and expenses were used to work out whether the ACC will be insolvent. It's standard practice in finance; it would also be very useful to the impecunious parents as they plan their financial future. It's a necessary part of prudent financial management.

So far the analogy holds up. But it breaks down when we recall that parents are not legally obligated to fund their children's education, as ACC is legally required to compensate for accidents: it services an entitlement. Education costs can be reduced by students taking part-time jobs, gap years, winning scholarships, or simply not getting tertiary education. In other words, both parents and children have choices. Hazledine has compared apples with oranges and come up with purple kiwifruit.

The Professor's second argument puts ACC into a special category. It is a state-funded corporation--and therefore, by means of the expropriative power of the state--its future income is not restricted. Will it be short of funds in the future? Well, unlike the poor parents trying to fund their children's education, the Government can simply vote the ACC more money. It can "create" more income with the stroke of a legislative pen. Therefore, reasons Hazledine, it is sophistry to say that it is, or will ever become, bankrupt.

We can see that the Professor does not believe in accrual accounting when it comes to the government--contrary to most in his profession. This insistence on putting the Crown into separate economic and account categories as a special case is not only commercially naive, it is politically myopic. The Crown does not have an unlimited ability to produce money without cost. It has to be borrowed from someone, or rorted from the citizens, or it has to print it. Hasn't Hazledine heard of double-entry bookkeeping?

All of these alternatives are damaging and destructive in their own way; all carry significant costs. Hazledine must know this. It's just that he thinks it ought to be ignored. One wonders why? Maybe it's because he believes Keynes was right--let us eat, drink, and be merry today, for tomorrow we are all dead anyway.

But, if that's what Hazledine believes, he should say so. In any event, to suggest that the Government has endless, frictionless, and costless deep pockets is inane, deceptive, and misleading. Like we said, if that's an exemplar of what a Professor of Economics from Auckland University actually believes, things are far worse than we first feared.

HatTip: Macdoctor