The long and short of government

In the United States some are blaming President Barack Obama for not fixing the BP oil spill. Few of those, it seems from the commentary, stop to ask whether they would have welcomed higher petrol prices if he had imposed tough, expensive regulatory checks on drilling. Few ask if he can do what the engineers cannot.

That’s how politics works now. Leaders get blamed even when they cannot reasonably be expected to have foreseen, forestalled or fixed the problem.

David Brooks in the New York Times puts the BP spill in part down to attitude to risk. Measuring the risk in complex systems is difficult: small failings can accumulate into a sudden disaster (Three Mile Island), people acclimatise to risk (Wellingtonians and earthquakes) and they tend to place excessive faith in backups and safety devices, which appears to have shaped cavalier attitudes on BP’s rig.

Then, Brooks says, there is a tendency to match complicated (read muddled) governing systems to complex technical systems, coupled with a tendency to hide bad news. And “people in the same field begin to think alike”.

The scene is then set for “catastrophic risk assessments”. The financial crash is an example.

But would Americans living off the cheap credit have thanked authorities for a tough clampdown to correct that “catastrophic” assessment?

Would New Zealanders have thanked Michael Cullen if he had stopped the consumption and house-buying binge? Actually, they made it plain in 2005 that if he did, he would be out. John Key promised swingeing tax cuts on the strength of the bubble. Cullen spent up to cling to power.

The result is a budget now in deficit and piling up public debt to foreigners to add to the already high and risky private debt to foreigners — mostly in short-term loans.

An International Monetary Fund paper in May labelled this a “major macroeconomic and financial vulnerability”. That is a polite warning that the loans might stop one day — a risk that grows every year the balance of payments current account is in deficit, as it has been for around four decades, at times in the Cullen decade nudging 10 per cent of GDP.

Bill English has chosen a relatively mild route back to fiscal sobriety. He fears that getting “hairy chested”, as Ruth Richardson did with the “mother of all budgets” in 1991, would scythe through the government’s popularity. Spending cuts are modest by 1991 standards. Superannuation and student loans are left intact, at huge cost.

And his tax switch adds to the budget deficit. This is to the tune of $460 million in the 2010-11 fiscal year. But Labour’s David Cunliffe argues there is more to come. He cites economic analysis Labour commissioned from David Choat, once an adviser to Steve Maharey, that the budget tax switch worsens the deficit by $9 billion by 2023-24.

Choat says that is because sources of revenue such as income tax grow about 1 per cent faster over time than sources such as GST.

Cunliffe reckons “that means the government will no longer be able to sustain the level of spending on public services because it won’t have enough revenue coming in”.

Even if Choat and Cunliffe are wrong, however, there will be downward pressure on spending. New spending for fiscal years after 2010-11 is capped at $1.1 billion plus 2 per cent a year. That is supposed to allow for inflation but the Reserve Bank mostly keeps inflation in the top half of its 1-3 per cent band or higher so over time 2.5 per cent is more likely than 2 per cent. So new spending will likely be less than inflation. That is, it will fall in real terms.

You might say: just as well. That is because the budget does nothing about the large fiscal problem retiring baby-boomers pose from about 2020. The Treasury’s long-term fiscal statement last October projected soaring — and unsustainable — costs.

The wise statesman of mythology would be doing something about that now. In fact, Cullen did start siphoning off revenue to pre-fund superannuation but English has stopped that. Cullen did nothing about health costs.

It is the difference between mitigation and adaptation. When necessity requires it, politics and society will adapt to the cost pressures. Greece, which lived in a bubble of high wages and retirement at 60, is adapting right now and it is not pretty.

The mitigation alternative is to spread the cost over generations. But that contravenes Brooks’ rules of behaviour faced with complex issues. The government is so far choosing adaptation.

The same calculus applies to climate change. There the government is sticking to a modest version of mitigation, principally for reason of international reputation.

If climate change goes as the International Panel on Climate Change says, we will adapt. We might find that uncomfortable and blame politicians for not acting with foresight and firmness. But that would be against the rules of complex risk and its application to politics.

For Key, as for Obama, there are limits to wise preventive action.