Towards a Fiscal Council

Earlier in the year, the Labour and Greens parties released a set of Budget Responsibility Rules, envisaged at time as being the rules that would guide the two parties if they were in a position to form a government.    The actual new government, of course, includes New Zealand First, with the Greens at a partial arms-length.  Then again, James Shaw is now an Associate Minister of Finance.    The status of these rules isn’t clear, but since they haven’t been disavowed I’m assuming they will, at least broadly, provide the basis for the new government’s fiscal policy.

I wrote about the rules at the time they were announced.  I didn’t have too much problem with them, but outlined a number of areas where details might matter quite a lot –  including, for example, the fact that the appropriate prudent level of the fiscal balance should depend, in part, on the expected rate of population growth –  and areas where what look like very well-intentioned rules can be open to being gamed, potentially in quite sub-optimal ways.

My main interest, then as now, was in this item

Measuring our success in government

  • The credibility of our Budget Responsibility Rules requires a mechanism that makes the government accountable. Independent oversight will provide the public with confidence that the government is sticking to the rules.
  • We will establish a body independent of Ministers of the Crown who will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public, and will cost policies of opposition parties.

Labour and the Greens promised to establish a Fiscal Council.

If so, they will have plenty of support.  The OECD has regularly advocated the creation of such a body.  So –  from the right –  has the New Zealand Initiative.   Such entities are pretty common in advanced economies now, especially in Europe.

A few years ago, The Treasury commissioned Teresa Ter-Minassian, former head of the IMF’s Fiscal Affairs Department, to undertake an independent review of The Treasury’s fiscal policy advice.      She looked at the possibility of establishing a Fiscal Council, and wrote as follows:

As regards the possible creation of a Fiscal Council, if it were established, it should probably have a more limited role in New Zealand than in most other countries that have created similar institutions. A more limited remit for the Council would be justified by the degree of operational independence of the Treasury in forecasting and policy analysis, its well-established non-partisan reputation, its sound record of relatively accurate and unbiased macroeconomic and fiscal forecasts, and the already strict fiscal accounting and transparency requirements mandated by the Public Finance Act.

The main purpose of the Council would be to offer an independent expert perspective and commentary on the advice provided by the Treasury to the Government on fiscal policy issues, and on the decisions taken by the Government and the Parliament on those issues. Such a Council would not need to operate on a full-time basis, and therefore would not be very costly.

If the Council was constituted by a small number of well-respected national, and possibly international, figures, with substantial fiscal expertise, previous policy experience, and strong communication skills, its commentaries at key points in the budget cycle, and on such important documents as the Long-Term Fiscal Statement and the Investment Statement, could help increase the resonance of fiscal policy options and choices with the media and the public opinion, and build social consensus on needed reforms.

There are two, quite separable, dimensions to the Labour/Greens proposal.  The first element is that the Council

will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public,

and the second is that it

will cost policies of opposition parties.

In general, I support the establishment of a small body to do something along the lines of the first of those sets of responsibilities.  This is what I wrote earlier in the year

The main area where a fiscal council –  or indeed, a broad macro policy advisory council –  could add value is around the bigger picture of fiscal policy (not just rule compliance, but how the rules might best be specified, and what it does (and doesn’t) make sense to try to do with fiscal policy).

But there are still important caveats.  For example, it is fine to talk in terms of the council having “oversight of government economic and fiscal forecasts”, but quite what level of resource would that involve?  Does the proposal envisage that the core forecasting role, on which government bases its policies, would move outside Treasury?  Even if there was some merit in that, it would be likely to end up with considerable duplication –  since neither the Treasury nor the Minister is likely to want to be without the capability to have their own analysis done, or to critique the work of the fiscal council.  The UK’s experience is likely to be instructive here, but we also need to recognise the small size of New Zealand and the limited pool of available expertise.  Our population –  and GDP –  are less than a 10th of the UK’s.

Again, I think Labour and Greens are moving in the right direction here, so I’m keen to see a good robust institution created, not to undermine the proposal.   The success of such a body over time will depend a lot on getting the right people to sit on the Council, and to keep the total size of the agency in check.   Too large and it will be an easy target for some other future government –  no doubt enthusiastically offered up by a Treasury keen to remove a competing source of advice.  But make it too small, or with too many establishment figures on the Council, and people will quickly wonder what is the point.  As it is, we don’t have a lot of independent fiscal expertise in New Zealand at present (as distinct, say, from specific expertise on eg aspects of the tax system).   I presume that if they form a government later in the year, Labour and the Greens will be looking quickly to the experiences in this area of small advanced countries like Ireland and Sweden.

It would simply not be possible to offer any sort of detailed oversight of the Treasury’s economic and fiscal forecasts –  that went beyond the sort of commentary market economists or even people like me can add to the mix from time to time –  without a reasonably significant staff establishment (people who are over lots of detail, including around revenue forecasts).    And I’m not sure what would be gained by doing so.  We don’t have an obvious problem in that area.  And as the Ter-Minassian report points out, unlike the situation in many countries, the published and economic and fiscal forecasts in New Zealand are those of The Treasury, not those of the Minister of Finance.   One can overstate the importance of the difference –  the Secretary to the Treasury has a lot of irons in the fire with the Minister at any one time and so it is hard to envisage the Treasury forecasts being too different from what a Minister might prefer –  but it does provide some protection.

A Fiscal Council seems more likely to add value if it is positioned (normally) at one remove from the detailed forecasting business, offering advice and analysis on the fiscal rules themselves (design and implementation) and how best to think about the appropriate fiscal policy rules.  The Council might also, for example, be able to provide some useful advice on what material might usefully be included in the PREFU  (before the election, I noted that routine publication of a baseline scenario that projected expenditure using the inflation and population pressures used in the Treasury economic forecasts would be a helpful step forward).

As I noted in the earlier comments, presumably the government will be wanting to look at what is done in other small advanced countries.  Ireland (total cost around NZ$1m per annum) and Sweden are obvious examples.    Having said that, countries that are part of the EU (and especially the euro area) have some distinctive issues that aren’t relevant to New Zealand.  For a country in the euro, fiscal policy is the only short-term cyclical management tool available, and the risks of a tension between the short and long-term are greater, and there is less of an independent check on serious fiscal imbalances from monetary policy.   There is unlikely to be a simple-to-replicate off-the-shelf model that can quickly be adopted here, and some work will be needed on devising a cost-effective sustainable model, relevant to New Zealand’s specific circumstances.  That is partly about the details of the legislation (mandate, resourcing etc), but also partly about identifying the right sort of mix of people –  some mix of specific professional expertise, an independent cast of mind, communications skills, and so on.  A useful Fiscal Council won’t be constantly disagreeing with Treasury or the Minister of Finance (but won’t be afraid to do so when required), but will be bringing different perspectives to bear on the issues, to inform a better quality independent debate on fiscal issues.

I also wonder whether consideration should be given not just to a Fiscal Council but to something a bit broader, what I’ve labelled as a Macroeconomic Advisory Council.   The governance and monitoring model for the Reserve Bank is up for review.   There seems to be pretty widespread support for moving to a (legislated) committee-based decisionmaking model for monetary policy.    Few people seem to have yet focused on the Bank’s financial stability and regulatory functions, but the case for a committee is at least as strong for those functions.   And few people –  other than, presumably past Governor and Board members –  think the Reserve Bank’s Board has done a particularly effective job in holding the Governor to account.     Perhaps that model was always unrealistic –  the Board was inevitably always going to be too close to the Governor that it would focus more on having his or her back than on holding the Governor to account on behalf of the public.  Perhaps it is time to move away from that model, and consider whether the public interest might better be served by asking an independent Macroeconomic Advisory Council to contribute to the debate, and periodic review, of monetary policy and financial stability policy, in a similar way to what Fiscal Council proposals have in mind for fiscal policy.   Again, it wouldn’t be about second-guessing individual OCR decisions or specific sets of forecasts, but offering perspectives on the framework and rules, and some periodic ex-post assessment.    In a small country, it would also have the appeal of offering some critical mass to any new Council.

(I touched on this option in a post written in the very early days of this blog, where I linked to a discussion note on similar issues I had written in 2014. )

The second responsibility of the proposed Labour/Greens fiscal council would be the cost of policies for Opposition political parties.  I’m much more sceptical about that proposal, even though it has recently had support from Peter Wilson (formerly of The Treasury) at NZIER, and from the New Zealand Initiative.  I wrote about this idea at some length when the Greens first proposed a Policy Costings Unit (an idea which attracted quite a bit of support from across the spectrum).    I wasn’t opposed, just sceptical.  That remains my position today, and the recent election campaign –  the first for decades I’ve watched not as a public servant –  hasn’t changed my views.

This is what I wrote last January

In the end, people often don’t vote for one party or another on the basis of detailed costings, but on “mood affiliation” –  a sense that the party’s general ideas are sympathetic to the broad direction one favours.  And I can’t think of a New Zealand election in my time when the results have been materially determined by the costings (accurate or inaccurate) of party promises  – perhaps in 1975 National might have won a smaller majority if the cost of National Superannuation had been better, and more openly, costed, but I doubt it would have changed the overall result.

And then, of course, there is the fact that economists, and public agencies largely made up of economists, have their own predispositions and biases.    The Economist touched on this issue quite recently.  It isn’t that economists are necessarily worse than other “experts”, or that people consciously set out to favour one side or another in politics, but (say) whatever the merits of the sorts of policies the Greens have favoured, it is unlikely that the New Zealand Treasury (1984-90) would have evaluated them in ways that the Greens would have found fair and balanced.  Perhaps ACT might have the same reaction to today’s Treasury?  If it were only narrow fiscal costings an agency was being asked to evaluate, perhaps these predispositions of the analysts would not matter unduly (although even there, much depends on the behavioural assumptions one makes), but the Greens’ proposal includes analysis of the “wider economic implications” of policy proposals.

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

Was there a problem in the most recent election?  There was a big debate around Steven Joyce’s claims of a “fiscal hole” in Labour’s plans.     But it seemed to get sorted out in the ensuing debate.  Various experts weighed in –  including the anonymous group of former senior Treasury officials – and a reasonable consensus seemed to emerge: Joyce had probably over-egged his claim, but that the Labour fiscal numbers would be tight indeed, perhaps very tight.     Was there a need for extra taxpayer-funded analysis to deal with those claims (which were as much about framing as about bottom-line numbers anyway)?  I don’t see the gap.    And arguments about a capital gains tax, for example, don’t really depend on (soft as soap bubbles) revenue estimates, but about the merits (and demerits) of such a possible tax.  That is the stuff of the political debate.  It is up to each side to marshall their arguments –  and experts, to the extent they are helpful –  and for those of us offering independent commentary to play some role in shedding light on the claims and evidence that are put forward.     Treasury officials –  even if seconded to a Fiscal Council –  certainly can’t be regarded as a disinterested voice on such an issue.

And some of the very biggest issues of the election campaign were around emissions reduction, water use and pollution, child poverty reduction, and even immigration.  Policy in each of those areas probably has some fiscal dimensions, but in few of those areas are fiscal considerations likely to be the key factor –  whether in shaping how people vote, or in the potential economic and social ramifications of the options voters are deciding among.    Actually, the same could be said of housing policy –  a costing unit might focus on whether the KiwiBuild costings looked plausible, but that is probably of second order importance to reaching a view on what overall mix of housing. tax, land use, immigration policies might offer the best way back to a functional and affordable housing market.

As it is, election costings unit haven’t become generally established in other countries, and outside the Netherlands, I can’t a single example that seems to be working very well.  NZIER’s (Australian) economist seemed keen on the Australian approach.  Unless I missed something, when I checked their election costings website for the last Federal election, not a single policy of the main opposition party (Labor) had been costed through that process.    Labor ran the incumbent (first-term) government extremely close in that election, and it wasn’t obvious at the time that they paid any price for not utilising that process.  And nor is it obvious why they should: in the end each voter gets just one vote (well, ok, both NZ and Australian systems are a bit more complex than that, but you get my point) and in deciding to how to cast that vote, most of us are probably making some  sort of overall assessment of the values, competence, vision of the respective parties, on whether or not it is “time for change”, and so on.  We simply don’t decide –  and probably are quite rational in doing so –  by attempting to evaluate detailed policy costings, or the regulatory equivalent.  In New Zealand, apart from anything else, we know that the election policies are opening bids, going into government formation negotiations.  We also know that incumbent government are advised, on details, by fairly competent officials, and that successive governments have a track record of managing overal fiscal policy in a fairly responsible way –  sometimes blindsided by events, but usually events that not even the wisest Treasury or Fiscal Council will have foreseen.

If anything, I’ve become more sceptical of the policy costing unit idea than I was when the Greens first raised the option.    Such a unit probably can’t do much harm, but it is hard to see it doing much good either, and risks skewing debate away from the issues that, in any election, matter rather more.  It is, perhaps, a Treasury official’s dream but –  valuable as good Treasury officials are –  not what will help voters evaluate competing visions and aspirations for how best our country should be governed.

 

Interest rates: all the fuss for 1 basis point?

I watched the TVNZ Q&A interview with the Prime Minister yesterday.  Apparently, the National Party has a widely-distributed brochure suggesting that interest rates are set to rise if the Labour Party takes office after the election.   I haven’t seen the brochure, but the Prime Minister seemed determined to defend the claim, even as he had to concede that –  of course –  he couldn’t guarantee that interest rates would not rise over the next three years if his own party was re-elected.     When pushed, his claim seemed to reduce to the proposition that interest rates were more likely to rise, and perhaps might rise more, if Labour was in office.

I know that a lot of people now have a lot of debt, and most New Zealand loans reprice pretty frequently (floating rate or short-term fix).  But no serious person will argue that interest rates are quite low at present because the economy is doing well.  Market interest rates around the advanced world (and central bank policy rates) have been very low for some years now, despite all the public and private debt, because demand (real economic demand) at any given interest rate isn’t what it was.  Population growth has slowed in most countries (not New Zealand of course), productivity growth has slowed, and there just don’t seem to be the number of profitable investment opportunities there were. Globally, higher interest rates would, most likely, result from some improvement in the medium-term health of the economy.      That would be true here as well  (with the caveat that ideally one day some government would make the sorts of policy changes that would allow the persistent gap between New Zealand and “world” interest rates to close.)

But the Prime Minister’s claims about interest rates were also odd because:

  • actual retail interest rates (those ordinary people pay and receive) have been rising over the last year, and
  • both the Reserve Bank and The Treasury have official published projections showing policy interest rates rising over the next three years.

The increases in actual interest rates over the last year havn’t been large (about 25 basis points for floating rates, and something less for deposit and business overdraft rates).  But as we’ll see, those are large changes compared to the sorts of effect the Prime Minister seemed to be talking about.

And what about the next few years, on current policies (monetary and fiscal)?  These are the projections from the latest Reserve Bank Monetary Policy Statement and from The Treasury’s PREFU.

int rate projections

The Reserve Bank doesn’t expect much of an increase in the OCR over the next three years, but it is an increase nonetheless.  The Treasury seems quite gung-ho –  by the time of the next election, they expect we’ll have seen 150 basis points of interest rate increases.   I suspect that Treasury’s numbers are too high, but both sets of projections are (a) upwards, and (b) well within the historical margins of uncertainty.    Neither agency gives enough weight, at least in what they are saying in public, to the possibility – again well within historical bands of uncertainty – of materially lower interest rates.  It seems unlikely that the Prime Minister would welcome a world in which such interest rate cuts were required.

The Prime Minister’s specific claim seemed to be that the Labour Party’s fiscal policy would result in higher interest rates than the fiscal policy adopted by the National Party.  He attempted to muddy the water with talk of what any Labour coalition parties might demand, but of course on current polling it seems likely that any National-led government would also have to face coalition party demands.  So, for now, lets just focus on actual main party plans –  National’s as per the PREFU, and Labour’s as per their published fiscal plan.

There would seem to be two plausible channels through which fiscal differences might mean different interest rates.   The first would be if Labour was to run materially lower surpluses, or even deficits.  The increased demand that would flow from those annual spending or revenue choices might, all else equal, lead the Reserve Bank to raise the OCR.  But here (as I’ve shown before) are the two surplus tracks.

labour surplus

They are all but identical, especially when one bears in mind that the Reserve Bank is typically looking a couple of years ahead in setting interest rates.   If Labour does take office, no Reserve Bank Governor –  acting or otherwise –  is going to be looking at that track, with a slight difference in 2018/19 and none beyond that –  and altering his or her interest rate projections.

The other channel is through a stock effect; the effect of a higher accumulated stock of debt.   The Minister of Finance has attempted to highlight that Labour’s plans involve around $7 billion more of net core Crown debt in 2020/21.    Sounds like a lot of money.   In fact, the difference is 2.2 per cent of GDP.  And around half that difference doesn’t show up in a true net debt series (such as that reported by the OECD) at all:  it is the additional $3 billion of contributions to the NZ Superannuation Fund.  I don’t happen to think that resuming those contributions is particularly sensible, but both main parties do –  their only difference is timing –  and if contributions to the NZSF add a bit more risk (variability) to the Crown balance sheet, they don’t make us poorer.  It is very very unlikely that raising a little more gross debt to put money in an investment fund like the NZSF will have any effect at all on New Zealand retail interest rates.

But what does the research show?   Disentangling the determinants of New Zealand interest rates isn’t easy, and I’m not aware of (m)any new studies over the last decade or so.  But a couple of prominent New Zealand economists did some interesting modelling work on the issue back in 2002, for Westpac.  Adrian Orr is now head of the NZSF –  and perhaps a contender for being the next Governor –  and Paul Conway is head of research for the Productivity Commission.     They looked at the impact of net government debt (not idiosyncratic national definitions, but drawing from international databases), and this is what they found

Table 2 shows the marginal and total impact of government debt on real bond rates. Moving from a net debt level of 10% of GDP to 20% of GDP adds only 3bps to real rates and the total contribution of debt to the risk premium is only 6.5bps.

As one might expect, the effects were quite a bit larger when debt levels were a lot higher than they are in New Zealand.

On these internationally comparable net debt measures, current net government debt in New Zealand is about 9 per cent of GDP, and on both National’s plans and Labour’s will fall from here.   Labour reduces public debt a bit less than National does over the next few years, but recall that by 2020 even on the Treasury measure of net debt the difference was 2.2 per cent of GDP.  Applying the Orr/Conway model results (that 6.5bps for 10 percentage point change in debt), and even that increase will produce only around a 1 basis point change in interest rates (with significant margins of uncertainty around those estimates).   And these are long-term government bond rates they were modelling.  Any effect on short-term retail rates –  probably zero –  would be indiscernible.

Are they other possible differences in interest rates that might show up depending on who wins the election?  These ones occurred to me:

  • both parties, but perhaps particularly Labour, look likely to have some difficulty keeping to their announced spending plans in the next few years, given baseline cost and population pressures and the recent electoral auction.  Whether that would result in smaller surpluses depends on what other offsetting actions respective governments might take (and, of course, what happens to revenue flows).
  • one reason why Labour’s net debt numbers are a bit higher than National’s is Kiwibuild.  In the Labour fiscal plan, they allow $2 billion of new and additional debt to get the Kiwibuild programme going (intending to roll that forward as new houses are built and sold).  I suspect that much of the Kiwibuild activity will displace private sector construction, but if it doesn’t –  and it actually adds to total construction activity –  that would put more pressure on available resources and –  all else equal –  increase the chances of OCR increases in the next few years.   But since both sides agree that more houses need to be built, it is hard to see how either could describe any such increase in the OCR as a bad thing –  if anything, in their own terms, it would be a mark of success.
  • Labour is talking about reducing net immigration inflows.  I’m a bit sceptical as to whether they would carrry through on that, given the evident decision to downplay the issue since Ardern took over. But if they do follow through, there would be a reasonably material reduction in overall demand and resource pressures over the next 12-18 months (especially as their proposed cuts are focused on the student sector).  All else equal, that would reduce the chances of OCR increases in the next couple of years.
  • Labour is promising Reserve Bank reforms.  Much is likely to depend on the key individuals they appoint, but –  all else equal –  their proposal to add an unemployment objective would be likely to reduce the chances of near-term OCR increases.  (In the longer-term there is a risk, that would have to be managed, that such a reform could slightly increase longer-term inflation expectations, and thus the level of nominal interest rates.)

In the end, this is fairly silly debate.  The differences in fiscal policy are small, and the track record of the two main parties over 30 years now is of pretty responsible fiscal management.  Debt levels are low and, absent a severe crisis, near-certain to remain so.

And interest rates do move around.  In well-managed countries they most often rise when economies have been doing pretty well, and they fall when something bad happens.   What will determine what happens to interest rates –  market and official –  over the next three years?  It won’t (overwhelmingly) be our choice of Prime Minister, but –  in the famous phrase of Harold MacMillan, former British Prime Minister –  “events, dear boy, events”.

And we, they (politicians) and the Reserve Bank should fear the sort of events that could yet take our interest rates quite a bit lower than they already are.

Scattered thoughts on tax and fiscal policy

It has been a quite remarkable rookie error by the Labour Party that allowed the mere possibility of specific tax increases to become such a major part of the election campaign, in a climate where the government’s debt is very low, and where official forecasts show surpluses projected for years to come.   If government finances were showing large deficits, and there was a desperate need to close them, that political pressure might have been unavoidable.  Closing big deficits involves governments taking money off people who currently have it –  by whatever mix of spending cuts or tax increases – and doing so in large amounts.   But the PREFU had growing surpluses, and Labour’s fiscal plan had almost identical surpluses for the next few years –  without relying on any further tax changes that might have flowed from the recommendations of the proposed Tax Working Group.

These are the surplus projections

labour surplus

Of course, Treasury GDP forecasts can’t always be counted on – and it is seven years now since the last recession – but there is quite a large buffer in those numbers even if the economic outlook changes.  But the other side of politics wasn’t disputing the (Treasury) GDP assumptions.  And it seems to have been lost sight of that in a growing economy, with low and stable debt levels, modest deficits (on average) are the steady-state outcome (consistent with low stable debt).     That might involve decent surpluses in boom years, and perhaps quite big deficits in recession years (as the automatic stabilisers work on both sides) –  but again the Treasury numbers, which both sides are basing their numbers on, say that at present we are in the middle (estimated output gap around zero, unemployment still a bit above a NAIRU, and on the other hand the terms of trade above average).

I guess it was always the sort of risk Labour faced in changing their leader so close to the election (things move fast and something –  who knew what specifically –  was almost bound to not work out well), but it was all so easily avoidable.  They could have:

  • stuck with the Andrew Little policy (now reverted to) of no changes flowing out of the TWG process to come into effect before the 2020 election,
  • they could have reverted to the 2014 policy (a specific detailed capital gains tax proposal, perhaps including revenue estimates), or
  • they could have committed to any package of TWG-inspired changes implemented before the next election being at least revenue neutral (if not revenue negative).   This latter sort of commitment would have been easy to make precisely because of the large surpluses in the projections both sides are using (see chart above).

After weeks of contention and uncertainty –  some reasonable, some just fear-mongering – they’ve finally adopted the first option.

But you have to wonder what the proposed Tax Working Group will be left to do?  In practice, it looks as though it might most usefully be described as a capital gains tax advisory group –  to advise on the practical options and details on how to make a capital gains tax work, as well perhaps as to review the evidence and arguments for (and against) such an extension to our tax system (my reflections on the CGT option are here).

They’ve ruled out increases in personal or company tax rates, they’ve ruled out GST increases, and they’ve ruled out a land tax affecting the land under “the family home” (which is most of the value of land in New Zealand).    They apparently haven’t ruled out revenue-neutral packages that involve a reduction in income tax rates, but this looks like a pretty empty suggestion.  Why?

The first reason is that they claim that their suite of policies are going to solve the housing crisis.   I’m a bit sceptical about their claims (and those of the government), but if they are right, how much revenue do they suppose there is likely to be from a capital gains tax anytime in (say) the next 20 years?  Treasury once produced some rather large revenue estimates, but (from memory) they involved some sort of muted extrapolation of the experience of the previous 20 years.       Both sides of politics seem to think they can stabilise nominal house prices, and then let income growth and inflation reduce real prices and price to income ratios.   If so, there are no systematic capital gains on housing  –  and idiosyncratic ones (particular cities or specific locations that do well) won’t add to much revenue at all.    Of course, it might be different if the housing measures fail, but Grant Robertson yesterday seemed pretty adamant.

“What we are signalling is, the Labour Party’s policy is that our focus is on fixing the housing crisis. That is our focus.

A capital gains tax might (or might not) be a sensible addition to the tax system, but it shouldn’t raise much money.

What else is there?  I’m sure tax experts have various small things they’d like the working group to look at, but it is hard to believe there is anything that could raise much revenue.    For some, a land tax looked promising –  my own scepticism is here.  But Labour has now ruled out a tax on the land under “the family home”, which effectively nullifies any possibility of a sensible, credible, and enduring land tax.

It is one thing to rule the family home out of a capital gains tax net.  Even for most of those left liable for capital gains tax (CGT), the effective liability can be deferred for many years (reducing the present value) simply by not realising the gain (not selling the asset).  That is even more true with the sort of institutional holders than many seem keen to encourage into the rental market.  And, of course, there is only a liability if prices actually go up.    Those are among the reasons why the overseas literature tends to find little evidence that a CGT would make much useful difference to the housing market.

A land tax would be different.  It is a liability year in, year out.  Owner-occupiers (and associated trusts etc) wouldn’t pay it, but everyone else would.  It would be a huge change in the effective cost of (say) providing rental services.

New Zealand real interest rates are the highest in the advanced world.   A very long-term real government bond rate is around 2.5 per cent at present (the real OCR is currently zero or slightly negative).  So suppose a government imposed a 1 per cent per annum land tax on land not under owner-occupied dwellings.     Relative to a risk-free rate of, at most, 2.5 per cent that would be a huge impost (40 per cent of the implied safe earnings of the asset –  the appropriate benchmark since the tax itself isn’t risk-dependent.)   It would dramatically lower how much any bidder who wasn’t planning to live on the land could afford to pay for the land –  by perhaps as much as 40 per cent.

That might sound quite appealing.   Rental property owners (actual and potential) drop out of the market and land (and house+land) prices plummet.    But wait.   Wasn’t the political promise that they weren’t trying to cut existing house prices?    And what about the people who –  because of youth, or desire for mobility –  don’t want to own a house and positively prefer, for time being at least, to rent.    And what about farmers?  Lifestyle blocks (presumably exempt from the land tax) instantly become much more affordable than farming (which presumably does face the tax).    To what social or economic end?

Attempt to impose such a land tax and my prediction would be (a) that it would never pass, since it would represent such a heavy impost on a large number of people (and yet on not enough to raise enough revenue to allow meaningful income tax cuts to offset the effect), and (b) if it did pass, exemptions and carve-outs would quite quickly reduce it to the sort of land tax we actually had in New Zealand only 30 years ago –  which only affected city commercial property.

Now perhaps there is a limited middle ground.  There is a plausible case that can be made for use of land value rating by local councils rather than the capital value rating system that most councils now use.  I’m not aware that we have good studies suggesting better (empirical) outcomes in places that still use land value rating, but the theory is good.  The problem, of course, is that by ruling out a land tax on the family home, Labour would appear to have ruled out (say) using legislation to encourage or compel councils to rely more heavily on land value rating.   Perhaps that might leave undeveloped land within existing urban areas as potentially subject to land value rating?  There might be some merit in that, but the potential seems quite limited.

So, as I say, it looks as though the proposed tax working group should really just be a CGT advisory group.

And that would be a shame because, whatever you think of the merits of a CGT, it isn’t the only issue that would have been worth addressing in a proper review of the design of our tax system.  For 30 years now –  since what was a fairly cynical revenue grab (recognised at the time by those involved) in 1988/89 –  our tax system has systematically penalised returns to savings  (both relative to how we treated those returns previously, and relative to how other countries typically treat such returns).    The prevailing mantra –  broad base low rate –  which holds the commanding heights in Wellington sounds good, until one stops to think about it.     We have modest rates of national savings, and consistently low rates of business investment –  and our productivity languishes –  and yet the relevant elites continue to think it makes sense to tax capital income as heavily as labour income.  It doesn’t, whether in theory or in practice.   They don’t, for example, in social democratic Scandinavia.  They don’t –  when it comes to returns to financial savings –  almost anywhere else in the advanced world.    We should be looking carefully at options like a Nordic system, a progressive consumption tax, at inflation-indexing the tax treatment of interest, and at whether interest should be taxed (or deductible) at all.

Plenty of people are worrying about the potentially radical nature of some aspects of a possible new left-wing government.  I come from the market-oriented right on matters economic, but I worry that in these areas they won’t be radical enough –  won’t even be willing to open up the serious issues that might be contributing to our sustained economic underperformance.  And frankly, when the debt levels are as low as they now, and sustained surpluses appear to be in prospect, if ever there is a time to look at more serious structural reforms it is now.   It is a great deal easier to do tax reform when any changes can be revenue-negative (actually the approach taken by the current government in 2010 –  see table of static estimates here) or (depending on your orientation) used to increase public spending.  But it looks as though another opportunity is going to be let go by.    That would be a shame.

(Having mentioned the 2010 package in passing, I am a little surprised that the increase in the effective rate of business taxation in that package doesn’t get more attention.     It often passes unnoticed because the headline company tax rate was reduced, but as the published Treasury assessment at the time put it

While the tax package lowers the company tax rate, changes to thin capitalisation rules and depreciation allowances mean that, on average, firms will pay more tax as the reduction in the company tax rate does not fully offset the impact of higher taxable income owing to the base-broadening measures. As a result combined company and dividend tax revenues are estimated to be about 3-4% higher than in the absence of the package. In the case where all investment is financed by equity, this could increase the user cost of capital by about 0.6%.
Using the New Zealand Treasury Model (NZTM) we estimate that the increase in the user cost of capital leads to the private business capital stock reducing by 0.45% compared to what would have been the case in the absence of the package.

Not obviously a desirable outcome for an economy that had, for decades, had low levels of business investment.)

And finally, a chart showing in just what good shape New Zealand public finances are relative to those in the rest of the advanced world.   New Zealand government debt has increased relative to GDP under the term of the current government (mostly some mix of a recession and earthquakes), but government debt as a share of GDP has increased in most other countries too.   Here is the gap between New Zealand and the median OECD country, using the OECD’s series of general government net financial liabilities.   Our net financial liabilities last year were around 5 per cent of GDP on this measure  (seven OECD countries have less net debt, or have net assets).  The median OECD country has net financial liabilities of 40 per cent of GDP.  But here is the gap, going back to 1993 when the data commence for New Zealand.

gen govt net liabs nz less oecd median

It is quite a striking chart –  and took me a little by surprise frankly.   If you didn’t know when the two changes of government had occurred, there would be no hint in this chart.  For almost 25 years now we’ve kept on lowering our net debt relative to that of other OECD countries, through good times (for them and us) and for tougher times, under National governments and Labour ones.  There just isn’t any obvious break in the series.  And as we have a lot fewer off-balance sheet liabilities (eg public service pension commitments) the actual position is even more favourable than suggested here.

I’m not a big fan of increasing government debt as a share of GDP –  and low as current interest rates are (a) productivity growth is lower still, and (b) our interest rates are still the highest around.  But you do have to wonder quite what analysis backs up the drive for still lower rates of government debt to GDP, absolutely and relative to the rest of the advanced world.   And persisting with the “big New Zealand” strategy of rapid population growth makes the emphasis on very low levels of government debt even more difficult to make much rational sense of.

The big projected deficits in 2008

As part of the current political debate about the relative capability of the two main parties to manage the government finances responsibly, I sometimes see references to the large deficit forecasts that greeted the incoming National government in 2008.

I wrote about this issue a few months ago, in response to some specific claims made by one analyst at the time.  I’m reproducing the bulk of that post below (not indented).  My bottom line, supported with documentation is

But on best Treasury advice, the then Labour government thought they were leaving an essentially balanced budget [ie the 2008 Budget, their final fiscal policy choices], on top of an already very low debt level, not deficits.

 

It is certainly true that when the current government took office in November 2008, official fiscal forecasts showed large deficits for many years into the future.  But the last fiscal initiatives of the outgoing Labour government had been the 2008 Budget, the parameters for which were set out in the Budget Policy Statement released at the end of 2007.

Throughout much of the previous Labour government’s term of office, a key theme of fiscal policy developments had been the surprising strength in revenue.  It was, in many respects, why the fiscal surpluses were so large during those years –   Treasury and the government kept being taken by surprise, and Treasury was (prudently) cautious about treating the surprises as permanent.  If it was just a series of one-offs, or something cyclical, it wouldn’t have made sense to increase spending or cut taxes in response.

The Treasury gradually revised upwards their assessment of the underlying fiscal position.  Unfortunately, they took a particularly optimistic stance by the end of 2007.  I can recall the then Prime Minister making much of the fact that Treasury was now assuming that most of the revenue gains would prove permanent (and thus could support some mix of increased spending and lower tax rates) without the risk of dropping back into deficits.  I joined Treasury on secondment in mid-2008 and I have seen documents written to the Minister of Finance during early 2008 stating that reassessment.  I was under the impression that some had been released, perhaps as part of the pro-active release of 2008 Budget papers, but on checking that link on the Treasury website, I couldn’t see the paper in question.

But the facts of the reassessment aren’t in dispute.  Several Treasury staff produced a paper last year on the process of getting back to surplus, including the background to the deficits.  Here is what they had to say

Over the period 2005-2008, the Treasury increased its estimates of structural revenues by around 1 percentage point of GDP each year, and by 2008 the Treasury considered most of the operating surplus was “structural”

and

When the tax reductions [along with further spending increases] were announced in Budget 2008, the Treasury was still predicting the operating balance to remain in surplus through the forecast period, albeit at a lower level.

With the benefit of hindsight, the degree to which the surpluses were structural was overestimated. Although the tax reductions announced in 2008 turned out to be well-timed from the perspective of stabilising the economy following the GFC, their permanent nature added to the subsequent structural deficits.

Here is the chart from the 2008 Budget Economic and Fiscal Update.

Figure 2.6 – Total Crown OBEGAL

Figure 2.6	- Total Crown OBEGAL.

Source: The Treasury

That document was signed off  by the Secretary to the Treasury as representing his best professional assessment of the economic and fiscal outlook, incorporating the effects of announced government policy.  In New Zealand –  unlike many countries – the forecasts are those of the professional advisers, not those of the Minister of Finance.

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and circumstances as at 9 May 2008 that were communicated to me, and of other economic and fiscal information available to the Treasury in accordance with the provisions of the Public Finance Act 1989.

John Whitehead
Secretary to the Treasury

14 May 2008

The projected surpluses by the end of the forecast period were tiny –  essentially the budget was projected to be in balance by then.  The economic and revenue outlook had worsened over the first few months of 2008, after the broad parameters of the Budget had already been sketched out in the BPS.   As we now know, New Zealand was already in recession by May 2008.   But on best Treasury advice, the then Labour government thought they were leaving an essentially balanced budget, on top of an already very low debt level, not deficits.

Of course, the government was wrong in that assumption.  But, specifically, Treasury was wrong in its best professional advice.    Perhaps the government would have run quite expansionary discretionary fiscal policy anyway, even if Treasury had been less optimistic about how permanent the revenue was.  They were, after all, behind in the polls, and the PM’s office –  didn’t Grant Robertson work there? –  would no doubt have been putting a lot of pressure on the Minister of Finance.  But that hypothetical didn’t arise.    They didn’t have to make such awkward political choices –  their own professional advisers told them they could have tax cuts and spending increases, and still keep the budget in (modest) surplus.  The Opposition National Party shaped its, more generous, tax cutting promises on much the same sort of Treasury forecasts and estimates.  (And a few years earlier, the 2005 election had partly been a bidding war as to how best to spend the surplus –  not whether there really was a structural surplus).

It wasn’t Treasury at its finest.  It is, perhaps, a reason to be cautious about just how much a fiscal council might add.   Would such a body, faced with similar circumstances –  a long succession of revisions upwards in revenue –  have really reached materially different judgements about the outlook then?  Perhaps.  We can’t know, but back in 2008 Treasury was using its best professional judgement, and the mistakes were still made.

There is a bit of a tendency afoot to suggest that the current National-led government has done a better job of fiscal management than the previous Labour government did.  I’m not really convinced by that story.   I’d accept that the previous government might have had an easier job than the current government has –  since one inherited modest but growing surpluses, while the other inherited deficits.  The current government had some nasty shocks (earthquakes) but also some of the best terms of trade in decades and the weakest wage pressures.      But if we expect our politicians to be guided by professional advice in areas like this, the previous government did what most orthodox opinion advised them to, keeping on delivering surpluses and reducing outstanding debt.  Probably they should have emphasised tax cuts more than spending increases, but this particular debate is about overall fiscal balances.

By the end of Labour’s term, government spending as a share of GDP was rising a lot –  but then Treasury was telling the government the money was there to spend.  And for all the talk of how the new Labour/Greens rules commit a new left-wing government to keep spending at around current National government levels, that level is around the average level that prevailed under the previous Labour government.

core crown expenses

There are things I’d criticise about the previous government’s policy. Allowing big structural surpluses to build up, as happened in the first half of the term, set the scene for a big spend-up later (which would have been big tax cuts if National had won in 2005). It is probably better to recognise the limitations of knowledge and typically keep both surpluses and deficits small. But it is easier to say in hindsight than it might have been at the time.  And in 1999 [when Labour had come to office], the severe fiscal stresses of 1990/91 were pretty fresh in everyone’s memory.

 

Tougher than Ruth Richardson?: implausible spending numbers

An overnight commenter on yesterday’s fiscal post made this suggestion

I wonder if some improvement in the PREFU could help. As you say, the Health budget has been increasing by $6-700m for the last couple of years, but is forecast to change by only minor amounts in future years. No one seriously believes that do they? Why not have assumptions for GDP, population, inflation, interest rates, demographics etc included in the PREFU numbers (maybe they are), and adjust the future years costs/incomes accordingly. So rather than having flat-lining health numbers, adjust for population, (health) inflation, demographics etc. I would hope that this would allow us to get a better sense of how promises stack up relative to a ‘normal’ expectation of what might happen. If someone wants to ‘deliver a modern health system’, but they aren’t going to increase the health budget, at least it would hopefully be apparent.

It may be far from perfect, but should at least be a bit more realistic?

I have a lot of sympathy with what the commenter suggests.  It is, more or less, what Treasury already do for the medium-term fiscal projections (beyond the four year budget window), and it wouldn’t be hard for them –  or an independent Fiscal Council –  to do something similar for the four years of the PREFU numbers (in addition to what is done now, rather than in substitution).   The numbers would be illustrative, and one might need to provide some ready reckoners to allow for different assumptions, but illustrative scenarios can still help to illuminate debate.

In that spirit, how would one look at the Health budget?   As I noted yesterday, in Labour’s fiscal plan they expect to spend $2361 million more on health in 2020/21 than the (basically flat) PREFU numbers.  To be clear, those PREFU numbers do not reflect what a re-elected National government would expect to spend; they just reflect what has already been allocated.

The Labour Party has claimed that their numbers allow for cost increases that would result from continuing inflation and population growth, as well as making provision for the various policy measures they have promised.    In the plan document they summarise this as

Reverse National’s health cuts and begin the process of making up for the years of underfunding that have occurred. This extra funding will allow us to invest in mental health services, reduce the cost of going to the doctor, carry out more operations, provide the latest medicines, invest in Māori health initiatives including supporting Whānau Ora, and start the rebuild of Dunedin Hospital.

The language suggests quite a lot more of an increase in spending than would be implied simply by inflation and population increases from here.

As it happens, we do have some insight as to how they think those inflation and population pressures should be allowed for.  After yesterday’s post a commenter sent me a link to a June 2017 press release from then-leader Andrew Little, which in turn linked to some work Infometrics had been commissioned to do for Labour on whether health spending had kept up with inflation and population pressures over the term of the current government.    In the tables in that short piece of work, Infometrics use CPI inflation and they allow for demographics pressures (ie the combination of an ageing population and a growing population) using (a) actual population growth and (b) some Treasury numbers that weight the population by its demand for health services.  With an ageing population that seems to lead to a demographic increase in demand for health services about half a percentage point higher than the population growth rate  (a bit more in years of low immigration – migrants on average are younger and have less short-term demand for health services).

If we take the Treasury projections for CPI inflation and population increase (from the PREFU), and apply the same sort of ageing population factor that Treasury and Infometrics have previously used, this is what we get.

CPI Inflation – Tsy forecast Population % increase –  Tsy forecast Total demographic % increase Implied % increase in health budget to keep pace $m increase
2018/19 1.7 1.5 2 3.7 608
2019/20 2.1 1.3 1.8 3.9 665
2020/21 2.1 1.1 1.6 3.7 655

If this approach is roughly right, the health budget (total Crown basis) would have to increase from the PREFU estimate for 2017/18 of $16432 million to $18360 million by 2020/21 just to keep pace with inflation and demographic pressures that are expected/forecast but haven’t yet happened.  In Labour’s fiscal plan, they expect to spent $18757 million on health in 2020/21.

On this basis – a methodology we know they used quite recently –  there is some margin between the expected (fiscal plan) numbers and those required simply to keep pace with future cost pressures.  That margin is $397 million in 2020/21.    But they argue –  the numbers are in the tables – that the health budget has been underfunded just for cost and demographic pressures during the term of this government to the tune now of almost $300 million per annum, and if one goes to their Health policy the first additional specific policy promise –  around GP fees – is itself estimated to cost $259 million a year, starting next year.  (Of course, National has made a similar promise in this area.)   It looks likely to be very difficult to deliver all those promises, and cover the basic inflation and demographic cost pressures, within that $18757 million.      That isn’t really surprising because, as I illustrated yesterday, the numbers suggest that health spending as a share of GDP won’t be changing –  and will be lower than it has been for most of the last decade.

Labour health

My actual interest in health policy and the health budget is quite limited (although my wife tells me I’m getting old and so should be more interested), but it is worth noting that Infometrics (and Labour apparently) used CPI inflation as a measure of the cost pressures. Ideally, one would want to use a specific index relating to health system costs.  I’m not aware that we have one in New Zealand –  certainly not one widely available –  but I did have a quick look at the CPI components data.

% increase since 08/09
CPI 13.2
Dental services 27.9
Paramedical services 29.1
Hospital services 32.3

Perhaps there might be some reason to worry that the CPI understates health inflation pressures (although it is true that the item “therapeutic appliances and equipment” –  one of those low inflation tradables – increased by only 2.6 per cent).    Even 1 percentage point more health inflation in total over three years would make considerable inroads into the margin Labour seems to have to deliver more medical services (or the same ones at cheaper prices to users).

In a sense, my larger point in yesterday’s post was about how plausible it is to expect to see government operating expenditure falling further as a share of GDP.  That is what both parties are promising.     Here is a chart of core Crown spending as a share of GDP, stripping out finance costs, and simply looking at the things governments are purchasing and the transfers they are making.

core crown spending 17 election

The data only go back, in this form, to around 1994.  But government spending as a share of GDP –  again excluding finance costs – hadn’t been any lower than shown in this chart (and was mostly higher) in the previous 20 years.

So the National Party’s proposed spending numbers would be smaller as a share of GDP than at any time in the last 40 years, and Labour’s would be smaller than at any time except for two years in the last Labour government that were (a) only very slightly lower, and (b) proved unsustainable, with big increases in spending over the following few years.  Grant Robertson and Steven Joyce: both tougher than Ruth Richardson.

A small government person might well look at these numbers with pleasure, and assume that the government was getting out of whole areas and handing responsibility back to citizens. I recall discussions with the late Roger Kerr who talked of how an advanced economy could have a basic safety net welfare state and still keep spending perhaps 10 percentage points lower than shown in this chart.     But he didn’t have in mind, for example, relentless increases in the share of GDP devoted to NZS (as both parties promise for the next two decades).    Or moves towards fee-free tertiary education.  Or real increases in welfare benefit rates.  Or……

If we compare what the state was spending on things 10 or 12 years ago and what either main party wants to spend on things over the next few years (Labour more than National of course, but in historical perspective the differences are small), how credible is it that the spending share of GDP will be able to be held so low?  Yes, the burden of some spending programmes has been wound back, but it isn’t easy to think of things the state has simply decided to stop doing, and it easy to see areas (in the current electoral auction) where there is pressure to do more.     And it is not as if, in recent years, productivity gains (non-existent for five years now) have been giving us “free lunches”.

I’m not taking a view here on what the appropriate level of spending (or taxes) should be.  My own biases would be to lower both selectively (but also run smaller surpluses).  It is simply a point about the realism of the numbers both parties are campaigning on, given what they say they want to be able to deliver.

But I am still a bit perplexed, as I said yesterday, about why an opposition party campaigning against serious sustained underfunding in various key areas of government spending, and wanting to do some big new things, would also be campaigning on cutting government spending as a share of GDP –  just smaller cuts than the current governing party is promising.   Perhaps it would make some sense (economically) if we were in some sort of fiscal or debt crisis –  all those debates in the UK about the appropriate pace of “austerity” –  but we aren’t.    Net core Crown debt (properly measured) in the last financial year was 9.2 per cent of GDP.    Quite what the political imperative, or the economic narrative, is for further reductions from there is a bit beyond me.

Thoughts prompted by Joyce vs Robertson

If Steven Joyce had simply noted that the Labour Party appears to have made so many specific policy promises that if they were to form the next government it would be very hard to deliver on those specific policy commitments, meet ongoing increases in the cost of normal government activities, and yet at the same time meet the specific spending, surplus, and debt numbers they’ve outlined in their fiscal plan, a useful and constructive exchange might well have followed.  My summary stance: I think that looks like a reasonable conclusion.  How much it matters probably depends largely on how much weight you put on the importance of those surplus and debt numbers.

I didn’t read the Labour fiscal plan when it was released.  The specific policy promises had already been announced and in an MMP era, in particular, documents of this sort always seem like not much more than opening offers going into potential negotiations around the formation, and conduct, of a new government.    They also involve a degree of ritual obeisance to the belief that economic forecasts have much value; a ritual belief that while entirely conventional leaves me cold (whether opposition parties or government agencies are doing it).

None of us knows what the terms of trade will do over the next few years, or net migration, or the myriad of other things here and abroad that will affect the economic and fiscal outlook.  Even the rate of inflation will affect how large the operating allowance should sensibly be each year (since it is nominal –  and cost pressures will be different if the Reserve Bank delivers inflation at 1.2% than if it delivers 2.2% inflation).   Of course, we want specific promises to be costed, and on a multi-year basis.  But this debate hasn’t been about specific policy costings.  And beyond that, the amount of information in these documents is really quite limited.   Among other things, Labour’s numbers use exactly the same GDP track as in the PREFU, but presumably they expect their wider economic policy measures to make some difference to that (eg somewhat less immigration  –  at least in the first year –  and perhaps appointing a Reserve Bank Governor who might generate a bit less unemployment and a bit more inflation –  two measures deliberately used here because they have offsetting effects on nominal GDP).

But, for now, lets play the game.

Labour has laid out their numbers in a series of summary tables.  They have explicitly identified numbers for each of their (revenue and expenditure) major policy initiatives, and made explicit summary provision for the cost of a group of less expensive policies.  And they identified how much (or little) still unallocated money they would plan to have available.   The resulting operating surplus numbers are almost identical to those in PREFU, but where they do take on a bit more debt –  to fund NZSF contributions and the Kiwibuild programme – they also allow for additional financing costs.

And then they had BERL go through the numbers.    People on the right are inclined to scoff at BERL and note that they are ideologically inclined to the left.  No doubt.  But all they’ve done on this occasion is a fairly narrow technical exercise.  They haven’t taken a view on the merits of any specific policy promises or even (as far I can see) on the line item costings Labour uses.  And they haven’t taken a view on the ability of a Labour-led government to control spending more broadly.   They’ve taken the Labour numbers, and the PREFU economic assumptions and spending/revenue baselines, and checked that when Labour’s spending and revenue assumptions are added into that mix that the bottom line numbers are

consistent with their stated Budget Responsibility Rules and, in particular

  • The OBEGAL remains in surplus throughout the period to 2022
  • Net Core Crown debt is reduced to 20% of GDP by June 2022
  • Core Crown expenses remain comfortably under 30% throughout the period to 2022.

An economics consultancy with a right wing orientation would have happily signed off on the same conclusion.  The numbers add up, on the material they were given.  In that sense, there is no $11.7 billion “fiscal hole” and the opening claim by Steven Joyce on Monday was simply wrong.   Arguably, irresponsibly so from a serving Minister of Finance.

But where there is more of an issue is that Labour’s spending plans on the things they are promising mean that to meet these surplus and debt objectives, on these macro numbers, there is very little new money left over in the next few years.     That might not sound like a problem –  after all, why do they need much “new money” in the next few years when the things they want to do are already specifically identified and included in the allocated money in the Labour fiscal plan.      The answer to that reflects the specifics of how the fiscal numbers are laid out, and how fiscal management is done.   Government departments do not get routine adjustments to their future spending allowances to cope with, say, the rising demands for a rising population, or the increased costs from ongoing inflation (recall that the target is 2 per cent inflation annually).   Rather, they are given a number to manage to, and only when the pips really start squeaking might a discretionary adjustment to the department’s baseline spending be made.  Any such discretionary adjustments comes from the “operating allowance” –  which thus isn’t just available for new policies.

You can see in the PREFU numbers.   Health spending rose around $600 million last year, and is budgeted to rise by around $700 million this year (2017/18).  And then….

$m
2017/18 16432
2018/19 16449
2019/20 16481
2020/21 16396

No one expects health spending to remain constant in nominal terms for the next three fiscal years.  But there will need to be conscious decisions made in each successive Budget to allocate some of the operating allowance to health –  some presumably to cover new policies, and much to cover cost increases (wages, drugs, property etc, and more people), all offset by whatever productivity gains the sector can generate.

And here is why I think there are questions about Labour’s numbers.  By 2021, they expect to be spending $2361 million more on health than is reflected in these PREFU numbers.     About 10 per cent of that increase is described as “Paying back National’s underfunding” and the rest is labelled as “Delivering a Modern Health System”.

This is how they describe their first term health policies

Reverse National’s health cuts and begin the process of making up for the years of underfunding that have occurred. This extra funding will allow us to invest in mental health services, reduce the cost of going to the doctor, carry out more operations, provide the latest medicines, invest in Māori health initiatives including supporting Whānau Ora, and start the rebuild of Dunedin Hospital.

That sounds like an intention to deliver materially more health outputs/outcomes (ie volume gains, or reduced prices to users).

In response to Steven Joyce’s attack, Grant Robertson is reported as having told several journalists that Labour’s health (and education) numbers include allowances for increased costs (eg rising population and inflation  –  and inflation in the PREFU is forecast to pick up) as well as the costs of the new initiatives.   Perhaps, and if so perhaps a pardonable effort to put a favourable gloss on the proposed health (and education) spends –  ie sell as new initiatives what are in significant part really just keeping with cost and population pressures.  I say “pardonable” because governments do it all the time.

In this chart, I’ve shown core Crown health expenditure as a share of GDP since 2000, and including Labour’s plans for the next three budgets.  (Labour show total Crown numbers, but I’ve taken their policy initiative numbers –  ie changes from PREFU –  and applied them to the core Crown data, which Treasury has a readily accessible time series for.  The differences between core and total Crown in this sector are small.)

Labour health

In other words, on these numbers health as a share of GDP over the next three years would be less than it was for most of the current government’s term, and virtually identical to what it was in Labour’s last full year in government, 2007/08.    Some of the peaks a few years ago were understandable –  the economy was weak, and recessions don’t reduce health spending demands.  But even so, we know that there are strong pressures for the health share of GDP to increase, as a result of improving technology (more options) and an ageing population.  Treasury’s “historical spending patterns” analysis in their Long-term Fiscal Statement last year had health spending rising from 6.2 per cent of GDP in 2015 to 6.8 per cent in 2030.

Without seeing more detail than Labour has released there really only seem to be two possible interpretations.  Either Labour hasn’t allowed for the ongoing (ie from here) population and cost increases in their health sector spending numbers, or there must be much less in the way of increases in health outputs than the documents seem to want to have us believe (eg “reversing years of underfunding”).  One has potential fiscal implications.  The other perhaps political ones.    Glancing through Labour’s health policy, which seems quite specific, I’m more inclined to the former possibility (ie not allowing for population and cost pressures), but I’d be happy to shown otherwise.

Eyeballing that chart –  and as someone with no expertise in health –  it would look more reasonable to expect that health spending might be more like 6.5 per cent of GDP by the end of the decade, in a climate where a party is promising more stuff not less, and with no strategy to (say) shift more of the burden back onto upper income citizens.

One could do much the same exercise for education.  Labour has seven line items in its “new investments” table.  Most of them are very specific (including increased student allowances and the transitions towards zero-fees tertiary education).     There is a general (large) item labelled “Delivering a Modern Education System” but in the manifesto there are a lot of things that look like they are covered by that.    There isn’t any suggestion that general inflation and population cost increases are included, but perhaps they are.  But again, here is the chart of education spending as a share of GDP, including Labour’s numbers for the next three years.

labour education.png

I’m not altogether sure what some of those earlier spikes were (perhaps something to do with interest-free student loans), but again what is striking is that Labour’s plans appear to involve spending slightly less on education as a share of GDP than when they were last in government.  And that more or less flat track from here doesn’t suggest a party responding to this stuff

National has chosen to undermine quality as a cost-saving measure. After nine years of being under resourced and overstretched, our education sector is under immense pressure and the quality of education is suffering. The result is a narrowing of the curriculum, more burnt out teachers, and falling tertiary education participation.

and at the same time committing to flagship policies around things like student allowances and fee-free tertiary study.

Again, it begins to look as though Labour has included in its education numbers the ongoing multi-year costs of its own new policies, but not the ongoing cost increases resulting from wage and price inflation and population increases.  Again, I’d happily be shown otherwise.

Of course, there is some unallocated spending in Labour’s numbers, but the amounts are very small for the next few years, and some of these sectors are very large.  And although population growth pressures are forecast to ease a little in the next few years, inflation is forecast to pick up and settle around the middle of the target range, so there are likely to be increased general cost pressures (including, for example, wage pressures if as Labour state in the fiscal plan document “by the end of our first term, we expect to see unemployment in New Zealand among the lowest in the OECD, from the current position of 13th”).

How much does it matter?  After all, we don’t know many specifics on the policy initiatives National (and/or its support partners) might fund in the next term, and there was the strong suggestion the other night of a new “families package” in 2020 (which would come from any operating allowance).  Quite probably the next few years will be tough, in budget terms, for whoever forms the government.  After all, the terms of trade isn’t expected to increase further, and inflation is.  And there is a sense that in a number of areas of government spending things have been run a bit too tight in recent years.      On the other hand, Labour participated in this ritual exercise and it looks as though they may have implied rather more fiscal degrees of freedom than were actually there, if –  critical point –  they happened to want to produce a surplus track very like National’s.    Gilding the lily isn’t unknown from either side of politics of course.

But perhaps the bigger question one might reasonably put to both sides is why the focus on (almost identical) rising surpluses?   These are the numbers.

labour surplusWhen net core Crown debt is already as low as 9.2 per cent of GDP –  not on the measure Treasury, the government and Labour all prefer, but the simple straightforward metric –  what is the economic case for material operating surpluses at all?   With the output gap around zero and unemployment above the NAIRU, it is not as if the economy is overheating (the other usual case for running surpluses).   Even just a balanced budget would slowly further lower the debt to GDP ratios.   One could mount quite a reasonable argument for somewhat lower taxes (if you were a party of the right) or somewhat higher targeted spending (if you were a party of the left, campaigning on structural underfunding of various key government spending areas).

Labour is promising to spend (and tax –  thus the surpluses are the same) more than National.  But their commitment (rule 4) was to keep core Crown expenditure “around 30% of GDP”, not “comfortably below 30 per cent”.

labour spending

28.5 per cent is quite a lot lower than 30 per cent (almost $5 billion in 2020/21 – not cumulatively, as GDP is forecast to to be about $323 billion). And 30 per cent wasn’t described as a ceiling. And in the last two years of the previous Labour government, core Crown spending was 30.6 per cent of GDP (06/07) and 30 per cent of GDP (07/08).

It is a curious spectacle to see a party campaigning on serious structural underfunding of various public services and yet proposing to cut government spending as a share of GDP.  It would be difficult to achieve –  given the various specific policy promises –  but you have to wonder, at least a little, why one would set out to try.     We simply aren’t in some highly-indebted extremely vulnerable place.

Finally, the affair of the last 48 hours has revived arguments for some sort of offiical costings unit to be set up, as Labour and Greens have called for (in their Budget Responsibility Rules) and people like the New Zealand Initiative have also apparently favoured.  I’m much more sceptical of such proposals, and covered some of the reasons in earlier posts (when the Greens first made a play of this issue last year, and when the Labour/Greens rules were announced).   I support the idea of a Fiscal Council –  as Labour/Greens have proposed, and as past external reviewers have suggested  –  although would favour something more macroeconomic focused (ie advice and review functions on monetary policy as well as fiscal policy), but I don’t think the case for a costing unit has been made.

As I noted in one of those earlier posts

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

And this particular dispute wasn’t even about the details of the costings of individual policy proposals.  It seems to have been more or less sorted out through the cut and thrust of political debate and expert commentary.  That feels to me like the way I’d want the system –  competing political parties, open democracy – to work.  No non-partisan experts can reasonably decree that one set of spending plans is or isn’t feasible or appropriate –  much of that is inevitably about politics.     There are gaps in our debate –  it was notable in the last couple of days that no academics were quoted, even though for example, Victoria University likes to hold itself out as policy-focused, and they even have a professorial chair in public finance –  but it isn’t clear that spending more taxpayers’ money to cost political party proposals (according to the particular model of that particular group of technocrats) is a high priority use for scarce fiscal resources.

(I noticed a couple of journalists last night describing me as “dryish right” and thus happy to fling mud at Labour.  I’d probably accept “dryish right” broadly speaking, but I’m sufficiently disillusioned with the total failure of this government to deal with housing, and the failures (and, what are in effect, lies) around productivity growth that I’d be more than keen to see a serious credible alternative.  As it happens, Labour’s policies around monetary policy and the Reserve Bank –  issues of some importance to me, even if not of wide general interest – seem to be heading the right direction.  I’m more sceptical as to whether they have more of an effective economic strategy than the government does.  Which is by way of saying that I like to think I’m an equal opportunity sceptic –  who doesn’t usually vote on economic issues anyway –  and if some of this post does identify some challenges for Labour, it isn’t because I’m champing at the bit to see Mr Joyce succeed.)

 

A radical alternative to macro policy?

Last Friday, an outfit called Strategy2040 New Zealand, together with Victoria University’s School of Government, hosted a lunchtime address by an Australian academic, Professor Bill Mitchell of the University of Newcastle.   He is a proponent of something calling itself Modern Monetary Theory, but which is perhaps better thought of as old-school fiscal practice, with rhetoric and work schemes thrown into the mix.

Mitchell attracted some interest on his trip to New Zealand.  He apparently did two substantial interviews on Radio New Zealand and attracted perhaps 150 people to the lunchtime address –  a pretty left-liberal crowd mostly, to judge from the murmurs of approval each time he inveighed against the “neo-liberals”.    In fact, the presence of former Prime Minister Jim Bolger was noted –  he who, without apparently recanting any specific reforms his government had put in place, now believes that “neo-liberalism has failed New Zealand”.     Following the open lecture, 20 or so invitees (academics, journalists and economists –  mostly of a fairly leftish persuasion) joined Mitchell for a roundtable discussion of his ideas.   Perhaps a little surprisingly, I didn’t recognise anyone from The Treasury or the Reserve Bank at either event.

Mitchell has it in for mainstream academic economics.   Quite probably there is something in what he says about that.  Between the sort of internal incentives (“groupthink”) that shape any discipline, and the inevitable simplifications that teaching and textbooks require, it seems highly likely there is room for improvement.   If textbooks are, for example, really still teaching the money multiplier as the dominant approach to money, so much the worse for them.   But as I pointed out to him, that was his problem (as an academic working among academics): I wasn’t aware of any floating exchange rate central banks that worked on any basis other than that, for the banking system as a whole, credit and deposits are created simultaneously.  He quoted the Bank of England to that effect: I matched him with the Reserve Bank of New Zealand.    And if very few people correctly diagnosed what was going on just prior to the financial crises in some countries in 2008/09, that should be a little troubling.  But it doesn’t shed much (any, I would argue) light on the best regular approach to macroeconomic management and cyclical stabilisation.  Perhaps especially so as (to us) he was talking about policy in Australia and New Zealand, and neither country had a US-style financial crisis.

He seemed to regard his key insight as being that in an economy with a fiat currency, there is no technical limit to how much governments can spend.  They can simply print (or –  since he doesn’t like that word – create) the money, by spending funded from Reserve Bank credit.     But he isn’t as crazy as that might sound. He isn’t, for example, a Social Crediter.    First, he is obviously technically correct –  it is simply the flipside of the line you hear all the time from conventional economists, that a government with a fiat currency need never default on its domestic currency debt.     And he isn’t arguing for a world of no taxes and all money-creating spending.  In fact, with his political cards on the table, I’m pretty sure he’d be arguing for higher taxes than New Zealand or Australia currently have (but quite a lot more spending).  Taxes make space for the spending priorities (claims over real resources) of politicians.  And he isn ‘t even arguing for a much higher inflation rate –  although I doubt he ever have signed up for a 2 per cent inflation target in the first place.

In listening to him, and challenging him in the course of the roundtable discussion, it seemed that what his argument boiled down to was two things:

  • monetary policy isn’t a very effective tool, and fiscal policy should be favoured as a stabilisation policy lever,
  • that involuntary unemployment (or indeed underemployment) is a societal scandal, that can quite readily be fixed through some combination of the general (increased aggregate demand), and the specific (a government job guarantee programme).

Views about monetary policy come and go.   As he notes, in much academic thinking for much of the post-war period, a big role was seen for fiscal policy in cyclical stabilisation.  It was never anywhere near that dominant in practice –  check out the use of credit restrictions or (in New Zealand) playing around with exchange controls or import licenses –  but in the literature it was once very important, and then passed almost completely out of fashion.  For the last 30+ years, monetary policy has been seen as most appropriate, and effective, cyclical stabilisation tool.  And one could, and did, note that in the Great Depression it was monetary action –  devaluing or going off gold, often rather belatedly – that was critical to various countries’ economic revivals.

In many countries, the 2008/09 recession challenged the exclusive assignment of stabilisation responsibilities to monetary policy.  It did so for a simple reason –  conventional monetary policy largely ran out of room in most countries when policy interest rates got to around zero.   Some see a big role for quantitative easing in such a world.  Like Mitchell – although for different reasons –  I doubt that.    Standard theory allows for a possible, perhaps quite large, role for stimulatory fiscal policy when interest rates can’t be cut any further.

But, of course, in neither New Zealand nor Australia did interest rates get anywhere near zero in the 2008/09 period, and they haven’t done so since.    Monetary policy could have been  –  could be –  used more aggressively, but wasn’t.

As exhibit A in his argument for a much more aggresive use of fiscal policy was the Kevin Rudd stimulus packages put in place in Australia in 2008/09.   According to Mitchell, this was why New Zealand had a nasty damaging recession and Australia didn’t.  Perhaps he just didn’t have time to elaborate, but citing the Australian Treasury as evidence of the vital importance of fiscal policy –  when they were the key advocates of the policy –  isn’t very convincing.   And I’ve illustrated previously how, by chance more than anything else, New Zealand and Australian fiscal policies were reamrkably similar during that period.   And although unemployment is one of his key concerns –  in many respects rightly I think –  he never mentioned that Australia’s unemployment rate rose quite considerably during the 2008/09 episode (in which Australian national income fell quite considerably, even if the volume of stuff produced –  GDP –  didn’t).

On the basis of what he presented on Friday, it is difficult to tell how different macro policy would look in either country if he was given charge.   He didn’t say so, but the logic of what he said would be to remove operational autonomy from the Reserve Bank, and have macroeconomic stabilisation policy conducted by the Minister of Finance, using whichever tools looked best at the time.  As a model it isn’t without precedent –  it is more or less how New Zealand, Australia, the UK (and various other countries) operated in the 1950s and 1960s.  It isn’t necessarily disastrous either.  But in many ways, it also isn’t terribly radical either.

Mitchell claimed to be committed to keeping inflation in check, and only wanting to use fiscal policy to boost demand where there are underemployed resources.    And he was quite explicit that the full employment he was talking about wasn’t necessarily a world of zero (private) unemployment  –  he said it might be 2 per cent unemployment, or even 4 per cent unemployment.     He sees a tight nexus between unemployment and inflation, at least under the current system  (at one point he argued that monetary policy had played little or no role in getting inflation down in the 1980s and 1990s, it was all down the unemployment.  I bit my tongue and forebore from asking “and who do you think it was that generated the unemployment?” –  sure some of it was about microeconomic resource reallocation and restructuring, but much it was about monetary policy).   But as I noted, in the both the 1990s growth phase and the 2000s growth phase, inflation had begun to pick up quite a bit, and by late in the 2000s boom, fiscal policy was being run in a quite expansionary way.

I came away from his presentation with a sense that he has a burning passion for people to have jobs when they want them, and a recognition that involuntary unemployment can be a searing and soul-destroying experience (as well as corroding human capital).  And, as he sees things, all too many of the political and elites don’t share  that view –  perhaps don’t even care much.

In that respect, I largely share his view.

Nonetheless, it was all a bit puzzling.  On the one hand, he stressed how important it was that people have the dignity of work, and that children grow up seeing parents getting up and going out to work.   But then, when he talked about New Zealand and Australia, he talked about labour underutilisation rates (unemployment rate plus people wanting more work, or people wanting a job but not quite meeting the narrow definition of actively seeking and available now to start work).   That rate for New Zealand at present is apparently 12.7 per cent –  Australia’s is higher again.     Those should be, constantly, sobering numbers: one in eight people.      But some of them are people who are already working –  part-time –  but would like more hours.  That isn’t a great situation, but it is very different from having no role, no job, at all.  And many of the unemployed haven’t been unemployed for very long.  As even Mitchell noted, in a market economy, some people will always be between jobs, and not too bothered by the fact.  Others will have been out of work for months, or even years.   But in New Zealand those numbers are relatively small: only around a quarter of the people captured as unemployed in the HLFS have been out of work for more than six months (that is around 1.5 per cent of the labour force).       We should never trivialise the difficulties of someone on a modest income being out of work for even a few months, but it is a very different thing from someone who has simply never had paid employment.  In our sort of country, if that was one’s worry one might look first to problems with the design of the welfare system.

Mitchell’s solution seemed to have two (related) strands:

  • more real purchases of good and services by government, increasing demand more generally.  He argues that fiscal policy offers a much more certain demand effect than monetary policy, and to the extent that is true it applies only when the government is purchasing directly (the effects of transfers or tax changes are no more certain than the effects of changing interest rates), and
  • a job guarantee.    Under the job guarantee, every working age adult would be entitled to full-time work, at a minimum wage (or sometimes, a living wage) doing “work of public benefit”.     I want to focus on this aspect of what he is talking about.

It might sound good, but the more one thinks about it the more deeply wrongheaded it seems.

One senior official present in the discussions attempted to argue that New Zealand was so close to full employment that there would be almost no takers for such an offer.   That seems simply seriously wrong.    Not only do we have 5 per cent of the labour force officially unemployed, but we have many others in the “underutilisation category”, all of whom would presumably welcome more money.     Perhaps there are a few malingerers among them, but the minimum wage –  let alone “the living wage” – is well above standard welfare benefit rates.   There would be plenty of takers.   (In fact, under some conceptions of the job guarantee, the guaranteed work would apparently replace income support from the current welfare system.)

But what was a bit puzzling was the nature of this work of public benefit.    It all risked sounding dangerously like the New Zealand approach to unemployment in the 1930s, in which support was available for people, but only if they would take up public works jobs.  Or the PEP schemes of the late 1970s.   Mitchell responded that it couldn’t just be “digging holes and filling them in again”.  But if it is to be “meaningful” work, it presumably also won’t all be able to involve picking up litter, or carving out roadways with nothing more advanced than shovels.  Modern jobs typically involve capital (machines, buildings, computers etc) –  it accompanies labour to enable us to earn reasonable incomes –  and putting in place the capital for all these workers will relatively quickly put pressure on real resources (ie boosting inflation).   If the work isn’t “meaningful”, where is the alleged “dignity of work”  –  people know artificial job creation schemes when they see them –  and if the work is meaningful, why would people want to come off these government jobs to take existing low wage jobs in the prviate market?

The motivation seems good, perhaps even noble.  I find quite deeply troubling the apparent indifference of policymakers to the inability of too many people to get work.   The idea of the dignity of work is real, and so too is the way in which people use starting jobs to establish a track record in the labour market, enabling them to move onto better jobs.

But do we really need all the infrastructure of a job guarantee scheme?  In countries where interest rates are still well above zero, give monetary policy more of a chance, and use it more aggressively.   For all his scepticism about monetary policy, it was noticeable that in Mitchell’s talks he gave very little (or no) weight to the expansionary possibilities of exchange rate.    But in a small open economy, a lower exchange rate is, over time, a significant source of boost to demand, activity, and employment.    And winding back high minimum wage rates for people starting out might also be a step in the right direction.

And curiously, when he was pushed Mitchell talked in terms of fiscal deficits averaging around 2 per cent of GDP.  I don’t see the case in New Zealand –  where monetary policy still has capacity –  but equally I couldn’t get too excited about average deficits at that level (in an economy with nominal GDP growth averaging perhaps 4 per cent).  Then again, it simply can’t be the answer either.    Most OECD countries –  including the UK, US and Australia –  have been running deficits at least that large for some time.

It is interesting to ponder why there has been such reluctance to use fiscal policy more aggressively in countries near the zero bound.   Some of it probably is the point Mitchell touches on –  a false belief that somehow countries were near to exhausting technical limits of what they could spend/borrow.      But much of it was probably also some mix of bad forecasts –  advisers who kept believing demand would rebound more strongly than it would –  and questionable assertions from central bankers about eg the potency of QE.

But I suspect it is rather more than that –  issues that Mitchell simply didn’t grapple with.  For example, even if there is a place for more government spending on goods and services in some severe recessions, how do we (citizens) rein in that enthusiasm once the tough times pass?  And perhaps I might support the government spending on my projects, but not on yours.  And perhaps confidence in Western governments has drifted so low that big fiscal programmes are just seen to open up avenues for corruption and incompetent execution, corporate welfare and more opportunities for politicians once they leave public life.  Perhaps too, publics just don’t believe the story, and would (a) vote to reverse such policies, and (b) would save themselves, in a way that might largely offset the effects of increased spending.      They are all real world considerations that reform advocates need to grapple with –  it isn’t enough to simply assert (correctly) that a government with its own currency can never run out of money.

I don’t have much doubt that in the right circumstances expansionary fiscal policy can make a real difference: see, for example, the experience of countries like ours during World War Two.    A shared enemy, a fight for survival, and a willingness to subsume differences for a time makes a great deal of difference –  even if, in many respects, it comes at longer term costs.

But unlike Mitchell, I still think monetary policy is, and should be, better placed to do the cyclical stabilisation role.    That makes it vital that policymakers finally take steps to deal with the near-zero lower bound soon, or we will be left in the next recession with (a) no real options but fiscal policy, and (b) lots of real world constraints on the use of fiscal policy.  Like Mitchell, I think involuntary unemployment (or underemployment for that matter) is something that gets too little attention –  commands too little empathy –  from those holding the commanding heights of our system.  But I suspect that some mix of a more aggressive use of monetary policy, and welfare and labour market reforms that make it easier for people to get into work in the private economy,  are the rather better way to start tackling the issue.   How we can, or why we would, be content with one in twenty of our fellow citizens being unable to get work, despite actively looking –  or why we are relaxed that so many more, not meeting those narrow definitions, can’t get the volume of work they’d like  –  is beyond me.   Work is the path to a whole bunch of better family and social outcomes –  one reason I’m so opposed to UBI schemes –  and against that backdrop the indifference to the plight of the unemployed (or underemployed), largely across the political spectrum, is pretty deeply troubling.

But, whatever the rightness of his passion, I’m pretty sure Mitchell’s prescription isn’t the answer.