OnPoint by Keith Ng

Let's try that again, but shorter.

Budget 2011 is not a reversal of fortunes. We saved $1.2b over four years - that is the only thing that happened. There is no need to explain or dismiss the miracle cure, because we're still in our sickbed.

This $1.2b isn't all it's cracked up to be. It's coming out of money the government was pumping into private KiwiSaver accounts. This means less government debt, but it also means less money available for investment, nd in the long-term it means people will have less saved. This isn't a net negative, it's just a net zero - nothing's really changed.

But there is a distributional impact: The employers' tax credit when mainly to high income earners. They made more money, so saved more, so their employers also contributed more and got more tax credits for it. So by cutting the employers' tax credit, they've made KiwiSaver less skewed towards the rich.

That is all.

(Realised that I was kinda droning on yesterday. So here it is again, crispy.)

ALSO: New visualisation from Chris McDowall over at SciBlog!

Commentators over at the Herald (Hickey & Young) have both questioned this Budget's "heroic" growth forecasts. It's a good concern - why is it that, whenever Key's around, a whole lot of nothing happens and then suddenly we don't need to worry? How is it that we have "A Credible Path Back to Surplus" when we are sitting on a godawful deficit?

With the heroic growth forecasts, it's Christchurch. While its impact on revenue is a short-term kick in the nads and the reconstruction costs is another kick in the nads, the money being pumped into the reconstruction effort will boost growth and revenue in a few years' time. This is why Treasury predicts such strong growth: Because we've already paid for it.

But the growth forecasts isn't what's driving our Path Back to Surplus. Despite the growth effects of the reconstruction effort, the total impact on revenue is still going to be negative. The main reason why we're on "A Credible Path Back to Surplus" is the cuts to spending. The total effects of the spending cuts add up to $1.2b over the next four years. Not coincidentally, our operating balance is around $1.4b higher over the next 4 years.

So... what? $1.4b is neither here nor there. In the last Budget, when English cut the future operating allowance, it had a similar impact. So this is kinda like that. It's kinda boring. But English is focusing on this "A Credible Path" line because he wants us to look at a single point in time in four years' time, not at the $16b deficit hole we are in the moment, nor at the long-term fiscal abyss that we're trundling towards.

Yes, if Treasury is right (and they might be), we'll be back in surplus in a few years, but none of the fundamentals have changed. Moreover, the biggest cut - $2.6b's worth - in this Budget is coming out of Kiwisaver. The argument is that money the government pumps into private savings isn't real saving, since the government has to pay for it. But the reverse is true too. We've stopped borrowing to save: that doesn't give us MORE money. It only looks like savings on the book because Kiwisaver subsidies count as a spending.

They are in the sense that it's going from government funds into private investment accounts. But in terms of how much money the country will have in ten, twenty year's time, we haven't suddenly become $2.6b better off. This is a mirage.
It also rests on the assumption that people won't abandon KiwiSaver because of the changes. This is actually quite reasonable. $20-a-week government contribution (which is getting cut in half) exists purely as incentive to get people to save. It's not the amount that matters, but the fact that it's free money, and all you need to do to get it is to not quit KiwiSaver, which is a hassle anyway. KiwiSaver was conceived around the notion that people will do whatever as long as it's too much trouble to not do it - this doesn't change that.

The sneaky part is removing tax credits for employers' contributions. Together with the increase in minimum contribution, the bottom line is that employers will have to pay more, and this will flow through to lower wages in the next few years. Don't forget, this is the argument National ran against Kiwisaver when it first began, that employer contributions ultimately came out of employee's pockets.

(ALSO: If you haven't seen my Budget visualisation Radioactive Donut in Friggin' Space, check it out. And if you have a crappy browser, you can see my other, less psychedelic Budget visualisation over on Stuff.

Sigh. I've been learning to code and design for the past year. Prose is hard now.)

Commentary to come. In the meantime, please enjoy this Budget visualisation, lovingly titled: Radioactive Donut in Friggin' Space.

Best viewed in Chrome, or IE9. It'll be a bit slow on Firefox, and will look like refried ass on IE8 and below. 

(Yes, I wrote this. I have been an absentee blogger because I've spent the last year in a secret mountain dojo learning how to make visualisations.)

In its first update since the Christchurch earthquake, Treasury lowered their GDP forecast by $15b. The Government has ran with this and are preparing us for a massive cut in this Budget, saying that “everything changed” since the earthquake. That's not quite true:

The change to our economy is strictly temporary, but more interesting is where that change came from:

 “Over the 2011 to 2015 March years, nominal GDP is expected to be a cumulative $15 billion lower than in the Half Year Update (around 1.5% of nominal GDP over the whole period). This is mostly related to the weaker outlook we were seeing prior to the February earthquake, which accounts for $10 billion of this change.”

Guess “two-third of everything changed since Treasury realised their forecast for recovery was wrong” doesn't have the same oomph. What's changed is that we haven't come out of the recession as well as we'd hoped; what hasn't changed is that we are still stuck in the same hole – indebted, underperforming and aging fast. The earthquake was an additional kick in the nuts, but even if it didn't happen, we'd still be in the same position today.

This is why the “how do we pay for the rebuilding” debate makes no sense. On one hand, English pooh-poohs the Greens' proposals for a levy because we shouldn't take money out of the economy while it's so fragile. Yet, as No Right Turn points out, spending cuts have exactly the same effect as new taxes. The only way to inject money into the economy is to use money from outside the economy. In this context, that means taking on debt.

But ah, there's another difference. Cutting spending is permanent, while a levy is temporary. It doesn't make sense to pay for a one-off event with a permanent spending cut – unless they're not doing it to pay for the one-off event. And this is where I get horribly torn. I started off this year wondering how we'd ever get the political will to make the necessary cuts, and now I know: By pretending it's for the quake.

I feel filthy for supporting this sort of spin doctoring. This kind of public deception is why we are constantly unable to enact policies that are clearly necessary. But here we are. We know we need to reduce our deficit, National has been presented with the opportunity, and the prospect of us arriving at the same place through rational public debate is slim. It stinks, and it's not free either – the most immediate cost is a more depressed economy, since we would be deliberately not inject money into the economy, when it's the best time to do so.

Another objection is that cuts by National will probably be disproportionately borne by the poor (but possibly not – we'll see). Here's my other argument: At some point, we'll need to concede some ground. As a political reality, we have no choice; but as a matter of political morality, we can't expect cuts to further our values, and discount the values of the Right as invalid. If we accept that cuts are needed to reduce our long-term deficit, then we need to accept that some of them will fall on things that we consider to be worthwhile.

It doesn't mean we're obliged to concede everything because National is in power. But if we are completely unable to compromise, the deficits will eventually bury us all.

I am glad that we'll get to have this argument. At the last Budget, I complained that English got his massive debt reductions from committing future governments to cutting spending – thus avoiding having to do much himself. This time, he's taking it on the chin.

The people supporting price gouging in Christchurch are not evil. They come from the same starting point that I do: We have more demand than we have supply – how do we decide who gets it and who misses out?

The overriding goal is to get resources to those who need it the most. If someone along the line makes a profit from it, that's beside the point. Fairness and equity doesn't fill up your petrol tank.

Without price gouging, we still ration, but on a crude first-come-first-served basis. This does nothing to direct resources to those who need it the most. It comes down to chance and your ability to wait. It's a wasteful, punishing system – people lose hours waiting in line, when they could be doing something useful, which is a very real cost to everyone.

But even though the status quo is bad, it doesn't mean that price rationing is better.

On petrol price gouging

Eric Crampton, a economics lecturer at Canterbury, argues specifically for price gouging on petrol. Even though there is enough petrol for everyone who needs it, because of uncertainty over supply, people are stocking up on petrol just in case. This creates a vicious cycle because those people who are hoarding petrol create an actual petrol shortage, which scares other people into hoarding petrol.

Crampton argues that doubling prices, just for a few days, will induce “intertemporal substitution” (that's Economistspeak for “waiting”) among hoarders, while those with genuine need will shell out the extra cash.

The dodgy part of his logic is the assumption that hoarding is a weak (i.e. elastic) demand. Hoarding is entirely different from normal consumption. It's born out of uncertainty over future supply (“Will the tankers arrive soon?”) and need (“Will I need to drive out of town in a hurry?”).

With a product like petrol, people are not just buying transportation, they are buying security. Many people are willing to pay a huge premium to buy that security, so it's difficult to raise prices enough to stop them. And if you did raise prices that high, you're guaranteed to hurt many people with genuine, immediate need, or make it unaffordable for them altogether.

Moreover, the root of the problem is that people feel insecure. A sudden, massive spike in price will make this worse. This is why price gouging is not a solution to petrol hoarding.

On general price gouging

With other goods, such as groceries, the perverse effects of uncertainty and insecurity don't come into play as much, so the economic arguments for price gouging is much stronger. And as I said earlier, fairness and equity doesn't fill up your petrol tank or buy you milk.

However, it does scare off looters, check on your grandmother and drive you to the hospital. (It might also buy you milk.)

The most remarked upon fact after the earthquake is the way in which people have been helping each other. Many people have acted in complete defiance of economic self-interest, and as a result, housing, labour, transport, equipment, all kinds of goods have been given to people who most need it.

Somebody can probably wrangle an explanation out of this that's consistent with classical economics. Perhaps helping the community is in their own long-term self-interest, and perhaps helping others means that they get helped in return.

But the bottom line is that a whole lot of people told the rational economic agent to take a hike*, and as a result, they did a much better job of efficiently allocating resources (that's Economistspeak for “helping people and getting shit done”) than the market ever could.

I will fisticuffs anyone who reckons that this – people helping each other because they goddamn wanted to – was not an efficient outcome.

Price gouging may, in fact, be a good way of allocating milk or beans. It may prevent empty shelves or long queues. But the price of this is that people will despise their corner dairies and resent their rich neighbours, who will in turn be suspicious of them.

Fairness and equity – encapuslated in “we're all in this together” – is nothing less than the core of community. If you fuck with this, you're fucking with the core that's holding a community in crisis together, with people's goodwill towards each other, with a spirit that's allowing it to do things it could never do under normal circumstances.

The efficient allocation of milk and beans is utterly inconsequential in comparison. So yeah, don't price gouge.

(UPDATE: I haven't quite made up my mind about builders gouging though. The "extraordinary goodwill" argument is weaker, since things will be back to normal (well, the new normal) in the timeframe in which they'll be working; the allocative efficiency arguments are stronger, since prices really would encourage builders to move to Christchurch in a useful timeframe.)