Wednesday, April 16, 2008

Wat Tyler and Government spending

On 15 June 1381 Wat Tyler became the first English martyr to die in the struggle over inflation. He was run through by the 15-year old King’s henchmen in the middle of a parley over the rights of commoners to charge a fair price for their labour. Behind him 100,000 other commoners incensed by the King freezing wages after the Black Death had thinned the population by 30% a generation before and instituting a poll tax in order to prop up his unpopular wars, had gathered – threatening revolution against the Norman nobility.

These days there are no knights ready to kill those who may complain about an economic system geared to preserve wealth. Instead we have bank economists. These are the people who say that we need to increase the unemployment rate in order to reduce inflationary pressures. These are the people who say spiralling prices for food mean that we need to increase the cost of money to reduce the temptation to borrow to feed our children. In short their job is not much different to that of the knights who surrounded King Richard, they just use an ignorant TV journalist as their weapon of choice rather than a sword.

The current global economic situation is essentially a crisis in capitalism that people such as George Soros have long anticipated. What we have is a collapse of confidence in certain classes of derivatives and the institutions that are exposed to them. This is coinciding with exploding demand for energy and food as huge and hitherto low-demand nations (China and India) bootstrap themselves up to first world status. At the same time the western-world is having a crisis of confidence over its environmental impact leading it to adopt perverse policies (such as biofuels) which are not only increasing the rate of environmental degradation but also impoverishing millions of people in third world nations.

As the International Energy Agency will explain to anyone who will listen there is actually no shortage of oil. Nor as many International Panel on Climate Change scientists know is there any imminent threat of global ecological collapse. Certainly life in some places will be harder than it has been but this is not unusual in the history of Planet Earth. The only real difference is that these days shares of the surface of Planet Earth are divided into parcels which people own and those who have enjoyed owning one part of the Earth are not happy about the prospect of their bit losing value. Meanwhile the capital markets have switched from worthless mortgage derivatives to commodity derivatives and this bubble of cash is pushing up energy, food and minerals prices all over the world.

For New Zealand the situation is curious. On the plus side the market for food is buoyant and as that is our major export this is positive. On the down side the market for land has collapsed leaving many households in danger of entering negative equity in their home. Responding in a somewhat Neanderthal manner to the situation the Knights of banking reason that the cost of money must remain high because other prices are high. This is idiocy but despite the poor reasoning the answer is actually correct. In fact there is only one good reason why the cost of our money should remain high and that is to insulate the country from the rising price of energy. By maintaining a high interest rate our currency remains high reducing our exposure to currency costs of energy. Were we to reduce interest rates the cost of energy would soar increasing prices through the whole economy. For firms it’s all about making do with the revenue you have. Better high costs of capital than high prices for energy and technology.

But when prices are high, not surprisingly people get rebellious. They need to pay for food, shelter and energy (particularly in the winter) so they want more money in their pockets in order to do just that. There is no point expanding the money supply because all that will happen is that the proportions will be re-expressed in new prices. What is required is a rebalancing of where money you have actually goes. To use a domestic example, instead of saving a lot or spending your income on books or paving the drive, you spend more of it on food, shelter and energy.

The problem with this is the agency we use to spend money on things for our collective well-being – the Government - is very good at growing and very, very poor at shrinking when that is what is needed. So while in our own households we would decrease spending on certain things, because we spend on these things via an obligatory contribution we cannot cut back as we might normally do. The result is that regardless of our circumstances the Government continues to extract vast sums of taxation to do things which we don’t want them to do – in Wat Tylers time (and indeed ours) it was wage pointless wars.

If the Labour Government had any sense at all they would be announcing a vast Government austerity and efficiency programme and an equally large round of tax cuts to the bottom of the income tax level. Personally I have long been in favour of a null tax on personal income from zero income to around about $9.5k. This would eliminate tax on many Government benefits cutting the need for bureaucratic double-handling while at the same time giving wage and salary earners close on $1,425/annum or $27/week extra in their pockets. This would cost the Government roughly $6 billion or most of its surplus but it would make a helluva difference to middle New Zealand and Labour’s electoral chances. Unfortunately the Government at the moment is contenting itself with singing dopey songs and blowing raspberries at the leader of the Opposition, John Key, who is coming across as an honest man bewildered by the petty kindergarten bullying. While emotionally gratifying at a childish level such sillyness will cost the Labour Party the election – particularly later in the year when they take to driving around in their shiny new BMW Mugabe-mobiles.

And while Key has indeed doubled over and danced hard to avoid off-siding himself with the public one thing he has attacked has been the profligate expansion of the public sector – something everyone outside of Wellington (where salaries have increased fastest) will be only too happy to cheer. Indeed what Labour needs to recognise is that in reality this is the defining issue of the election and respond sensibly to it. Because if it doesn’t start to slash taxes and the public service come 2009 National will.

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