Saturday 28 May 2011

Is good economics necessarily bad politics?

Over at the Worthwhile Canadian Initiative, Frances Woolley has been wondering why the HST (previously known as the GST, a value-added tax like New Zealand’s GST), is levied on used furniture. Frances, quite correctly, notes that a sensible VAT would tax the commission part of a dealer’s income (the value-added from dealing services), but not the full value of the furniture. Eric in the comments discussed the New Zealand case, which led the comments thread to talk about the silliness of exemptions, and the limits of what is politically feasible.

This has led me to wondering if politicians consistently underestimate the economic sophistication of the voting public, or at least overestimate the extent to which pandering to a lack of sophistication will translate into success in elections.

I was living in New Zealand when the GST was first announced and debated here in 1984, and when it was implemented in 1986. By 1989 I was living in Canada and witnessing the announcement, debate, and implementation of the GST there. The thing that struck me was the parallels. In both countries, the calls for exemptions of all sorts started immediately, there were assertions that “a tax on books is a tax on knowledge”, there were cries that a value-added tax is regressive and so basic foodstuffs must be exempt (technically, zero-rated, but the public discourse never distinguishes between exemption and zero-rating), etc.

Politically, though, things were very different. In New Zealand I went to two talks by government ministers on campus discussing the GST. In one, associate finance minister David Caygill openly admitted that it would probably cost the government the next election, but it wouldn’t matter as the opposition wouldn’t actually change it. He then went on to say, “but you never know; we might become the first ever democratic government to introduce a value-added tax and still win the next election!”. Associate minister of revenue, Trevor De Cleene, soft-talked a room or angry students and converted just about everyone present over to the logic of a clean VAT. In Canada, in contrast, I went to a presentation by finance minister Michael Wilson also speaking to angry students at McGill, brilliantly explaining the definitional problems that arise when trying to exempt some goods, but completely evading the question of why his logic didn’t apply to food.

In New Zealand, the suposedly politically naive, VAT-introducing government went on to increase its majority at the next election. In my classes at McGill, I used to joke how the Canadian government looked to New Zealand to what was different about their VAT that enabled them to beat the curse of losing the next election. They discovered two differences: first, NZ introduced a clean VAT with no exemptions; second, they named it GST not VAT. So the Canadians, convinced that it was all in a name, introduced a dirty VAT, but called it the GST. The result? The government was reduced to only two seats at the next election.
So what is the political lesson from all this. One could be simply that regressions with two observations and lots of missing variables (non-Canadians please google “Meech Lake”) can’t tell you much. Another might be that, if there is an air of economic crisis about, a policy that is blatantly not populist might serve a role of signalling that a government really is trying to do what is right and be poliically sucessful, not becuase of its true merits but, in a kind of reverse Yogi Bera, be popular because of tis perceived unpopularity.

But I wonder if the message is that politicians should forget the aphorism about a week being a long time in politics, and conclude that doing the right thing can be the right policy for winning elections, even if it is not the best way of doing well in the next opinion poll? Or am I just being naive?


  1. The "air of economic crisis" explains much of the political scene in NZ at the time. People may not have welcomed change, but they accepted it was necessary and this temporarily changed the costs and benefits of policy.

  2. And the opposition Liberals promised to scrap the GST, And promptly forgot all about their promise when they won the next election. Your David Caygill was right -- about Canada, anyway.