Wednesday 6 June 2012

Role reversals: Greens for Austerity

When it comes to funding the Christchurch rebuild, the Greens are our austerity party and I'm looking mildly Keynesian. Strange world.

My read of public finance theory, a read that seems supported on both the left and right of the mainstream economic spectrum, is that you finance things like earthquakes mostly through debt. Even if you're not looking at reasonable threats of recession, you want to do it with debt. If the threat of recession is stronger, debt's even better. As reminder, here's Krugman:
And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters.
The Greens disagree.
The Government has put earthquake recovery costs "on the credit card" rather than implementing a nationwide $1 billion levy, Green Party co-leader Russel Norman says.
In the final act of the party's annual conference at Silverstream, near Wellington, yesterday, Norman focused on the environment and the economy.
Soon after the February 2011 Christchurch earthquake last year, the Greens proposed a quake levy that it calculated at the time would raise $457 million a year, which would be tagged for disaster relief and reconstruction.
Norman said yesterday a levy set at a higher rate than originally proposed would have raised more than twice that – $1b.
That plan would have seen a levy of 1.5 per cent applied to an individual's income between $48,001 and $70,000, 3 per cent on income greater than $70,001, and the corporate tax rate bumped back up to 30 per cent from the 28 per cent it was lowered to this year.
Business would have contributed an additional $340m to the levy under that scenario.
"This is one of the best ways to get in behind Cantabrians at their time of greatest need. An earthquake levy is our way to say, as a nation, that we're all in this together," Norman said.
"National chose to put the earthquake on the credit card and leave the cost for another generation to pay off."
I love future generations as much as the next parent of young kids, but infrastructure around the Christchurch rebuild ought to last until my grandkids are in adulthood. Why would we want to bear all of the burden of it out of current income? As for credit cards, how many of them currently charge a low low 3.3% nominal interest rate for 10-year debt?

Austerity has its place. The structural deficit needs addressing - especially in the medium to longer term where superannuation costs loom large. The Greens propose a few other tax increases to plug the gap but the case for capital gains taxes seems weak; spending cuts seem more effective for achieving longer term fiscal balance.

Paul Walker also has a few reasonable concerns about the Greens ability to pick winners in enviro-industrial policy.


  1. Why does it matter when taxes happen? If I get taxed a dollar today I lose a dollar today. If the government issues a dollar of debt today I keep the dollar but save it knowing that I have to payback a dollar plus interest in the future. Where is the difference? In both cases my consumption today goes down by a dollar.

  2. Not necessarily! Carefully note that I want debt-for-rebuild paired with scheduled increases in the age of superannuation eligibility and medium to long term fixes in the structural deficit so that the long term tax burden is, if anything, lower.

    Absent that, it'll depend how strongly you expect Riccardian equivalence to hold.

  3. I'll remember this when you're Ayn Rand fanclub membership is up for renewal, because this is pretty much the capitalist response to the earthquake. Insurance companies are raising their nationwide levies to compensate for the shock to their balance sheets. The ones that haven't shut up shop, anyway.

    1. Insurance companies price to reflect risk; we've found out the place is riskier, so premiums go up.

      The government's earthquake costs, on the other hand, should mostly come out of future tax hikes. Suppose you were uninsured and part of your house burned down. Would it be so nuts to think about taking out a mortgage to spread the costs of reconstruction?