The long and the short of offsetting a slowdown

Who gets hurt when the economy slips? How can that hurt be eased? This is where the economic debate is turning. And there is more to it than tax.

A slowdown hurts the poor first. No one much notices, except food banks, which for some time have been reporting rising demand, and budget advice services, helping people trapped in loan-shark debt and/or skewered by rising prices for essentials.

The next to be hurt are those seduced by white-shoe finance companies and the grubby likes of Blue Chip. Savings, often the difference between getting by and scrimping, evaporate.

Now the hurt is reaching middling people. They hurt in different ways and amounts, depending on their savings, debt and investment histories (including in property), when they changed houses last, their lifecycle stage (children or not, for example, in stable units or recently separated) and their job and income prospects.

The middling people’s hurt makes fast tax cuts politically mandatory. Tax cuts are a quick fix to make households’ wages and salaries go further when must-have items like fuel and food get dearer.

Household finances are here and now. Government educational, health and social services are over there, down the track and someone else pays. And what if there is a bit more government debt as a result? Tax to pay the interest on that additional debt is next year, next decade, next generation. The mortgage, the credit card minimum payment and the petrol to drive the kids to school are this week.

Michael Cullen’s immediate conundrum is that his hoarding of government finances (until 2005) didn’t abolish debt. It privatised it. And now the bill is coming in and the tide is going out for the government.

Cullen’s response, apart from a late throw of the tax dice this coming Budget, is to try to shift the argument on to the long term — to counter the analysis, which we will hear again at ACT’s conference this coming weekend, that lower taxes mean faster economic growth and, eventually, more prosperity for all.

The usual way tax plays these days as an argument in elections is about the distribution of the fruits of labour and profits: should individuals get more and so do more for themselves in learning, sickness, untoward events and old age (National, sort of, if you peer through John Key’s thickening fog) or should the state get more and do more (Labour, by instinct, tradition and raison d’etre)?

Michael Cullen wants to move on. His line, trailed in a speech on February 7 in which he said he wanted “to lead a new debate”, is that reducing socioeconomic inequalities enhances capitalism’s growth capacity. You might call this a “new social democracy”, adding, Cullen says, a dynamic dimension to Labour’s traditional static moral argument for social spending.

It ties to a line of analysis that economic growth is strongest over time in capitalist economies, that rapid economic growth produces inequalities of wealth and income and that if those inequalities grow too wide and then rigidify they constrain future growth: those locked into lower incomes and welfare have limited incentive to strive to contribute to an overall lift in welfare because they don’t get much of it. High aspirations inspire effort; low aspirations don’t.

Contrast rigid, underperforming Brazil last century with mobile, rich United States and Sweden, where there was a belief among most at the bottom of the downward trickle that they or their children would have a real prospect of rising.

The United States did this through the “idea” that in the land of the free everyone could make good: large numbers did and Mexicans still are. Europe — and this country — greased the mobility cogs with state education and other underpinnings. East Asia’s post-1970 success is built partly on attention to education.

The result: capitalism delivered GDP growth, which widened inequality, which mobility offset, thereby underpinning capitalism and so more growth — a virtuous mutually reinforcing dynamic.

In his February 7 speech Cullen argued that Labour’s workplace regulation and “fairness” spending in the 2000s enhanced economic growth.

He is premature. The boom was in large part debt-binge-fuelled; we have yet to live through the bust; a big reducer of inequality has been the transition of large numbers from benefits to jobs, more a factor of business growth and, in part, 1990s policies than Cullen’s spending; and societal changes are likely to affect economic growth rates only after a lag.

But the general idea that socioeconomic mobility is an integral element in sustained economic growth (and, of course, vice-versa) is not just leftish dogma. Bill English, coming from a different set of precepts, says that is “absolutely” the case.

So the real question underlying the gathering hurt is not who can give the fastest, biggest tax cuts to ease today’s pain. It is about which set of policies will recapture for tomorrow last century’s powerful growth-and-mobility dynamic.