On Why Nothing Succeeds Like Failure

As predicted in this column on Tuesday, the Bank of England has finally intervened to bail Britain out of its self-inflicted economic crisis. The Bank has introduced emergency measures to halt the headlong fall in the British currency triggered by the tax cut package that the Truss government unveiled last week. It remains to be seen whether this B of E’s attempt to buy Britain out of trouble will last for very long.

Meanwhile back in New Zealand, National Party leader Christopher Luxon has been scrambling to put as much daylight as possible between the tax cut package he is holding out as election bait to New Zealand voters, and the train wreck created by the Truss tax cut package. According to Luxon, things here are “incredibly different.”

And different how, exactly? Wellll…. Luxon told RNZ yesterday that National would be merely “adjusting” the tax brackets, rather than cutting taxes like Truss has done. That claim is untrue. Luxon is also promising to abolish the top tax rate. That’s mainly how he gets an $18,000 annual boost to his income from his tax cuts, while a typical worker in the squeezed middle class gets back only about $850 a year.

So what else is “incredibly different?” Luxon explained it like this to RNZ’s Morning Report:

"The UK is incredibly different from our own plan. What you've got in the UK is a more challenged economy, frankly, as a starting point. You've got massive amount of stimulus spending going on and you've got massive wholesale tax change going on as well."

Huh? So… Britain is facing a “challenged economy “– but we aren’t? They’ve got a “massive amount of stimulus spending” - but we don’t? This is desperate stuff. Surely, in every waking moment since Luxon assumed the leadership of the National Party, he has been painting New Zealand as a country wracked with a cost-of-living crisis, beset with weak economic growth, and awash with an excess of stimulus spending. Just like Britain.

Yet because we’re allegedly so “incredibly different” we can still risk embarking on an inflationary package of tax cuts, despite the UK offering us a nightmare vision of how this would be likely to end up.

Hmm. Leave aside for a moment that Truss and Luxon are both offering inflationary tax cuts that mainly benefit the wealthy, as their solutions to the cost-of-living crises that are doing most of their damage to people on low and middle incomes. There is an even more basic contradiction. Luxon appeared to be saying that New Zealand can afford tax cuts because we’re in comparatively better shape than the UK. Or was he saying that we’re in such bad shape that we need to take the risk of tax cuts, regardless? It is very hard to tell what is going on with him up top, once he’s run through his litany of slogans.

The true gospel

It may not be complicated. At base, Liz Truss and Christopher Luxon appear to be preaching the same old neoliberal gospel. They both plan to use tax cuts to starve the government of the revenue it needs to provide public services and to rebuild the national infrastructure that’s currently falling apart. To the centre right though, poverty relief and infrastructure rebuilds should be treated first and foremost, as opportunities for private sector profit. The US neoliberal tax reformers have been pretty open about their end game:

Grover Norquist, who founded Americans for Tax Reform in 1985 at the urging of President Reagan, declared in 2001: “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”

As mentioned, because tax cuts have never been a path to economic growth anywhere in the world, Luxon has been forced to distance himself from the catastrophe unfolding in Britain. In that respect, Liz Truss is doing all New Zealanders a very big favour. She is providing real time evidence of the damage National’s tax policies would be likely to inflict here.

Oh, and one more thing. Tax cuts are inflationary. They boost spending power, and increase the demand that pushes up prices. As a solution for the cost of living crisis that National has been decrying all year, they are like throwing gasoline onto a fire. And National is advocating pouring this fresh fuel onto the inflationary fires at the very same time the Reserve Bank is trying to dampen them down by raising interest rates.

In sum, National is advocating a major fiscal policy –a $1.7 billion package (at least) of tax cuts – that’s in sharp conflict with monetary policy. (Not usually seen to be a good idea). And if inflation really is the number one problem you can imagine, why offer tax cuts that would only delay the return of inflation to the Reserve Bank’s 1-3% target band? Unless of course, Luxon is secretly planning to make significant cuts in government spending of the same magnitude as the tax cuts, at much the same time. As the famed economist Paul Krugman (link below) pointed out yesterday:

Bear in mind that the federal government is basically an insurance company with an army: The great bulk of spending is on health care, retirement and the military. You can’t meaningfully cut expenditure without attacking at least one of these. So which parts of that spending are wasteful?

Exactly. Which significant areas of government spending does Luxon regard as wasteful - beyond the likes of giving rich people an extra $18,000 a year they don’t need? This Luxon interview in April with TVNZ’s Jack Tame remains essential viewing on this point. Despite repeated invitations from Tame, Luxon doggedly refused to identify where significant savings in so-called “wasteful” government spending should be made. All up, Luxon offered examples to Tame that amounted – at best – to only 2% of current government spending.

Similarly to no avail, RNZ also made repeated attempts yesterday to clarify whether – instead - Luxon aimed to borrow the extra money to finance his tax cuts, just as Truss has done in Britain. Borrowing, Luxon insisted, was a “separate issue.” If you say so, man.

The art of failing upwards

Should we be surprised at such displays or fiscal and monetary ineptitude? Not really. The myth of National’s alleged expertise in managing the economy currently rests – in large part - on Luxon’s experience in running Air New Zealand. Yet Air New Zealand is nothing like an ordinary Kiwi business. It requires very little entrepreneurial skill to run an airline that enjoys such a dominant position in its domestic market, and where – because it is deemed to be an “essential” industry – the company’s failures on international routes will always be underwritten by a government standing behind it with an open cheque book.

There would hardly be a CEO in the country blessed with such a certain cushion against failure. In every respect, Luxon’s background is less like a Kiwi businessman, and more like that of a chief executive in the New Zealand public service. The man has never had to put his own money at risk. This may help to explain why Luxon is so very cavalier about pursuing his ideological whims, in the sure and certain knowledge that he is insulated from any personal consequences for his actions.

Why failure is a success

Earlier this week, I cited a commentary on the tax cuts myth by Paul Krugman, the Nobel Prize winning economist/New York Times columnist. As Krugman showed with data from the Reagan and Clinton years, there is no evidence to back the proposal that tax cuts deliver economic growth. (Somewhat to the contrary, the Clinton boom years came on the back of tax increases.) Overall, there is no reliable causal link - either way - between tax cuts and economic growth. This Krugman quote is worth repeating:

I’ve written a lot over the years about zombie economic ideas — ideas that have failed repeatedly in practice, and should be dead, but somehow are still shambling around, eating policymakers’ brains. The pre-eminent zombie in American economic discourse has long been the belief that cutting taxes on the rich will create an economic miracle.

On Tuesday, Krugman returned to the same subject from a few different angles. Given that the tax cuts myth is known to be a sham, why do centre-right politicians kept on peddling it? To paraphrase one of his main conclusions: it could be because the tax cut myth enriches [and arguably, flatters] the corporate donors who deliver the big political donations.

Meaning… The tax cuts myth tells the wealthiest New Zealanders that the tax policies that would benefit them more than anyone else, will also serve a higher social purpose. Everyone’s boat will allegedly be lifted on the tide of economic growth unleashed once the government – with all of its taxes and its red tape – gets off their backs. [Spoiler alert: this happy result doesn’t happen in real life.] It is a fantasy. Still, who wouldn’t put big bucks behind a political party that tells the captains of commerce that the same policies that serve their naked self-interest are also acts of social benevolence?

That’s one reason why the tax cut myth is so hard to dispel. From the vantage point of people who stand to benefit the most from them, how could tax cuts possibly be wrong? Long ago, the investigative journalist Upton Sinclair put his finger on the problem: “It is difficult to get a man to understand something,” Sinclair wrote. “when his salary depends on his not understanding it.”

Exactly. Corporations get tax breaks, politicians get donations. The public gets shafted, and becomes ever more cynical. It comes to distrust everything that governments say and do. And that serves the anti-government agenda of the right wing populists perfectly. There is a downward spiral in public trust. People as limited as Christopher Luxon and Liz Truss can then readily fall upwards into power.

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