Counting The Cost Of Government Action And Inaction

Thursday, 6 August 2020, 4:13 pm
Opinion: Keith Rankin

Money as an Unfortunate Metaphor for Cost

Especially but not only in election years, when any new policy is proposed by a major party, a ubiquitous refrain follows: "what will it cost?"; "where will the money come from?".

The context is that cost is the spending of 'coin'. Indeed I once watched a short video, made by Treasury in 1990, depicting a bag of coins as 'resources', and giving the clear message that any coin spent from that moneybag was a measure of the cost of that government action. The miserly message is, the less money spent the less cost incurred – and that the main purpose of government management was to protect the public purse. It's a powerful and simple idea, called 'fiscal responsibility' by its adherents. As such, it's a way of understanding government inaction, government parsimony, wilful helplessness. I see no reason to believe that Treasury culture has changed much since 1990.

David Clark as an inactive Cabinet Minister

In this context, I will refer to 'David Clark' as a representation of this problem in politics. The dishonoured David Clark, still a young politician in 2020, worked as a Treasury Analyst before coming to Parliament as the Member for Dunedin North. Thus, he was inculcated with Treasury culture before he entered politics. An aspirant Minister of Finance, he was rewarded in 2017 with the jobs of Minister of Health and Associate Minister of Finance. There is a clear conflict of interest in these two portfolios; the Minister of Health needs to be pro-spending, whereas the culture of Treasury is anti-spending. In his heart, Clark was a Treasury minister first, and a Health Minister second.

On 23 November 2017, Rachel Thomas (stuff.co.nz) wrote an article titled David Clark is a fan of free dental care, but says $8b health budget is 'pretty much spent'. She says he says: "We have laid out $8 billion [over four years] in [health] funding and we have pretty much spent it in the promises we have made". This is the $8b bag of coin granted to the Health Ministry, and Clark was very much involved in setting that $8b cap. (There is no evidence I know of that David Clark argued against this rigid bulk-funding approach to Health, but was outvoted by Grant Robertson, James Shaw and Shane Jones; I sense that Clark was the 'driest' of the four Finance ministers, the most insistent that such spending limits should be there and be strictly adhered to.)

Under these bulk-funding presuppositions, being a Minister of Health (or any other spending portfolio) becomes an easy job. Simply delegate to the Ministry; handing over a bag of coin with a note about political priorities. (It seems that mental ill-health drew the long straw; not cancer, nor oral ill-health. I wonder if the government will evaluate the extent of improvement in mental health that has resulted from this policy priority? Further, this moneybag mentality meant that addressing Covid19 would be at the expense of other public health emergencies.) After delegating, such Ministers will attend meetings, stonewall through media interviews, and draw their not insubstantial salaries. In Clark's case, managing his Health portfolio in this uber-relaxed way enabled him to pay more attention to his Treasury portfolio.

In Fact, to Governments, Cost is a matter of Context, not Money

When the cost of inaction is greater than the cost of action, it is completely disingenuous to choose to not act on the grounds of affordable. The coinbag approach leads to egregiously incorrect conclusions about what is affordable and what is not.

The cost of something is essentially the market availability of required resources: labour, capital, materials, ancillary services. Think 'builders', 'hammers', 'nails' and 'wholesale services'. For wholesale services, we may think of the market-coordinated 'supply chain'.

When 'the economy' is at 'full employment', that is economist-speak for 'maxed-out'. The New Zealand economy was practically maxed-out in 2019; there was little 'surge capacity' or 'supply elasticity'. That meant the cost of some new government projects would have to be met by bidding resources away from other (private or public) projects. So, Kiwibuild flopped because the economy did not have the capacity or priority to build lots of houses. The fact that there was a bag of money budgeted for Kiwibuild was irrelevant; coin cannot be magically converted into houses. You need land, builders, tools, and nails; and these were otherwise engaged. In a maxed-out economy, labour, tools and materials are scarce. The cost of Kiwibuild could not be paid simply by spending money; and it could not even be valued meaningfully in monetary terms. In a maxed-out economy, the actual cost of a project is inflated.

The counter to this is that, when an economy has spare capacity – has substantial unemployment – the actual cost of a project is deflated. Projects are cheap when labour, capital and materials are abundant.

Projects are generally Expensive when Governments have Budget Surpluses, and Inexpensive when Governments have Deficits

Government projects are cheap in a recession or contraction, and are expensive in a full-employment expansion. In 2020 – quite unlike 2019 – the world economy (including the New Zealand economy) is in recession. Resources are abundant, government projects are cheap.

The problem for people inculcated in Treasury moneybag culture is that, in recessions governments are running deficits; government revenue is diminished, government debt is increasing. So, if you believe that the cost of something – the affordability of that something – is a function of current revenue, then you end up concluding that projects are expensive in recessions and cheap in expansions; you conclude the exact opposite of the truth.

Governments can afford the most when they have the least money, and can afford the least when they have the most money. Thus, the economic cost of the Christchurch earthquakes (which occurred in a period of high unemployment and government revenue shortfalls) was substantially lower than it would have been if the earthquakes had occurred in 2019. More pertinently, the wonderful recovery from the Hawkes Bay earthquake of 1931 was very cheap because it occurred during the Great Depression. In 1931 there was an abundance of builders, hammers and nails. The opportunity cost of the 1931 rebuild was very low, because that rebuild was not competing with other projects.

In 2020 there is plenty of capacity in the dentistry industry to expand its output. There are enough dentists, and there are plenty of people displaced from tourism and retailing who could be trained to provide ancillary services, as dental assistants. (Actually, there was no shortage of economic capacity to provide urgently needed dental services before the Covid19 emergency devastated the tourist industry.)

It is capacity, not coin, that determines the cost of any public project. Yet the present New Zealand government, and the one before that, and the ones before that (going back to 1985), all regarded coin as a measure of cost.

In fact, before the late 2010s, the New Zealand economy has never been at anything like full capacity since the 1970s. There were so many public projects that could easily have been afforded from the 1980s to the 2010s. Instead we sent our unemployed young people to Australia – where too many of them became criminals – and we passed a law (the 1994 Fiscal Responsibility Act) that enshrined the idea that the cost of a public project should be measured in coin rather than in available economic capacity.

The world in 2020 is awash with unspent money, as it was in the 2000s. That said, a government should – indirectly or directly – borrow from its own central bank. At present, such borrowing is practically costless. Governments should avoid foreign currency borrowing; it is always better to be in debt to oneself (as Japan's government is) than to be in debt to foreign moneymen (as Argentina's government is).

There is no actual monetary constraint on providing free dental care to young adult New Zealanders. And there is certainly no capacity constraint. There is, however, a wilful monetary constraint – an unwillingness to employ now-orthodox economic insights from the 1930s. Such neglect ensures that New Zealand will suffer a major crisis of oral ill health in coming decades. Too many of the workers New Zealand's economy will depend on in coming decades will be literally toothless; many will be diabetic as well.

Cheap Action is better than Expensive Inaction

The cost of not addressing emerging health crises will be massive. The actual cost of providing necessary and affordable dental care today is much less than Treasury-minded ministers presume it is.

When it is much cheaper to fix a problem that to suppress it, we should fix it, regardless of how little money our toothless Treasury Ministers have decided to put in the moneybags they hand to the spending Ministries. Finance for public purposes is not a scarce commodity in 2020. Ministerial gumption and responsibility are the scarce commodities.

We start by removing all Cabinet Ministers with the David Clark mindset, replacing them with men and women who understand that, if the actual cost of a desired action is less than the cost of inaction, then such action should take place. The actual cost of an action is always lower – often much lower – when economies have spare capacity, as they do in 2020, compared to when an economy has full employment.

(Hear Doctors want self-testing cervical smear rolled out – Morning Report, Radio New Zealand, 6 August 2020 – for another example of unfathomable government inaction.)

© Scoop Media

Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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