Tuesday, August 21, 2018

Sooner or later, Atlas shrugs

When the new government manoeuvred its way into power in New Zealand last year I was prepared to give it the benefit of the doubt. The coalition agreements signed by the parties didn't look too extreme - they were promising to spend a lot more money but they weren't proposing to raise income taxes in this term. Their regional development policies, anti-immigration stance and ambivalence on the Trans-Pacific Partnership trade agreement actually looked a lot like Donald Trump's populist platform (although there is little in the latter that I support). The problem is that what was said in the coalition parties' manifestos and agreements was only part of the picture, as is now being revealed.

This government believes it can govern by fiat - the prime minister, Jacinda Ardern, demonstrated this when she announced her ban on oil and gas exploration without even taking it to cabinet. Other policies that her government has announced include new petrol taxes, the introduction of a Zero Carbon Act (which, based on the government's own numbers, is estimated to reduce our GDP by between 10% and 22% by 2050), increased welfare payments across the board, and raising the minimum wage to one of the highest in the Western world. The government is also reviewing tax, through its Tax Working Group, and all indications are that it is likely to introduce a capital gains tax.

New Zealand used to be known for its light-handed commercial regulation but even under the previous National Party-led government, businesses faced a raft of new, expensive and intrusive regulations such as a new and far more onerous health and safety act, an emissions trading scheme, and further controls on development in the growth-killing Resource Management Act. While the previous government lowered company taxes early in its term, most Western countries have reduced theirs further with the result that New Zealand is now one of the most highly-taxed countries for business. All of this precipitous policy-making has understandably caused a crisis of business confidence and the new government's response has been to chastise business leaders for their lack of enthusiasm. Their bewilderment at the sudden loss of business confidence shows they are a bunch of dogma-driven, wilfully-ignorant, arrogant fools.

Sooner or later, as Ayn Rand said, Atlas shrugs. Most people are happy to go along with being taxed and regulated, accepting the view that some government intervention in the economy is the cost of a democratic society, but there is a tipping point at which the productive members of society refuse to continue to be the milch cows for the unproductive. This tipping point is recognised in economics by the Laffer Curve - the empirical observation that continuing to increase tax rates ultimately results in lower revenues. Of course socialist governments often solve the problem by bringing out the guns - as we have seen in Venezuela - but history proves that free men and women are far more productive than slaves and that liberal, capitalist societies outperform repressive ones on every measure. Wise governments recognise this and backoff on the socialist policies - as the government of Sweden has done in recent years.

I have written before about how New Zealand's so-called 'rock star economy' wasn't worthy of the name even before the current jitters. It will be interesting to see whether this coalition government backs off on some of its ill-considered, dogmatic policies. If it doesn't, I think New Zealand will continue to slide into economic ignominy.

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