Saturday, May 16, 2020

Crisis Budget

Modern governments offer a full-service salvation. They have to commit to doing more than previous governments in order to get elected. All political parties have played this game, and it has gained resonance as faith in God has declined. Consequently, governments are now expected to solve every human problem, including supporting businesses when they face a crisis, and providing work of people who have lost their jobs.

The problem is that there are significant limits on what governments can do. They cannot create real jobs. In the 1970s, the NZ government tried to deal with unemployment by making the Post Office and the Railways to take on extra staff, but this resulted in bloated inefficient organisations with more staff than they could use.

Governments have the power to make people do things that they do not want to do, but that is not much help in an economic crisis. They can take money from some people and give it to others, but that is not very helpful either. Governments can set interest rates low, so it is easy for businesses to borrow, but during a crisis, additional debt is not usually the solution. The other thing governments can do is borrow money without limits, and spend it.

Given these limits, I was interested to see how the current NZ government would respond to the coronavirus crisis when it presented its annual budget last week. A budget is a presentation of the government’s plans expressed in financial terms. And there is a huge expectation that the government will deal with every problem that worries people. (I was going to say that the expectation is unfair, but the politicians have encouraged it, so it probably is fair).

The problem is that politicians are ordinary people just like you and I. Some are really clever, while others are plodders who got where they are by being in the right place. They are skilled in managing the political process and communicating it (not an easy task) but they are not skilled in solving economic problems. And they always protect their power, because they know that when it is lost, it is almost impossible to recover it. So they have to pretend that they know what they are doing even if when they don't.

Unfortunately, politicians do not have the wisdom of God. They don’t have the wisdom needed to solve all the economic problems the economy currently faces. I feel sorry for them because they do not have the wisdom and knowledge to do everything they have promised to do, especially during a crisis.

The Minister of Finance is a career politician. Politics is what he has always done, so he is not an expert on economics or crisis solving. He got the role because it is a powerful position and he missed out on the roles that would normally fall to the deputy leader of the winning party, due to coalition compromises.

Government leaders can get economic advice, from the government bureaucracy that has been put in place to support them. Unfortunately, the people who work in these departments are just ordinary people, too. Some are very clever, but many are mediocre. Most want to do what is right, but they also care about promotion and advancing their career.

Commentators who probably know have said that the skill level in the departments that are responsible for the economy has declined in recent years. The is probably true. Once people in the public service used to stay in one area for many years and become experts in their field. That rarely happens these days. People work in an area until they are competent and then rotate to another area of work. They find that this is the best way to get promoted, but it means that there are very few highly skilled experts left in the core government departments.

The reality is that the government and their economic advisors do not know how to resolve the current economic crisis. There is no textbook they can look up, or expert they can call, to find out how to do it. The truth is that no one knows what to do in a crisis like this one, so governments tend to revert to doing what they have always done.

They can look at crises in the past to see what was done then, but they were different, and many of the government plans to resolve them were not that successful. During the Great Depression of the 1930s, some government actions made the situation worse, and it took a war to get things going, so that is not a helpful example. During the Global Financial Crisis, governments around the world spent billions trying to resolve the problem, but the recovery was weak and sluggish and many of the causes are still causing problems. In each case, the politicians claim that the situation would have been worse, if they had not acted, but there is no way of knowing if this is true.

As I expected, the budget turned out to be the best efforts of a government committed to full-service salvation, but without a clear understanding of what to do. They do not know how to resolve the current economic crisis, so they chose to do what governments have always done: borrow billions and spend it on various projects they hope might work. When the money is all gone, I suspect that we will look back and wonder where it all went.

The restoration of the economy will actually come through creative and innovative people identifying new opportunities and creating new businesses to meet the opportunities they perceive. It will be assisted by existing businesses identifying openings or gaps in the market, and expanding to meet needs that people have. How quickly that can do that will depend on how smart and innovative the people of the nation are. Rather than expecting governments to rescue us, the people of the nation should be looking to lead the recovery themselves. Time will tell if we are up to it.

Expecting a godlike government to deliver us from all our troubles is a mistake.

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