Ronald Reagan once said “the nine most frightening words in the English language are, I’m from the government and I’m here to help“.

We have been force-fed a similar diet for over thirty years. The essence of the diet is, “markets good, governments bad”.  Firms are efficient in their production because of market discipline. Governments are not.

This rhetoric is a staple in the United States. It conveniently overlooks the huge impact the federal government had on the economic development of America. From subsidising the opening up of the country through the rail system, the Honestead act to encourage widespread settlement, to the construction of national highways. Virtually all of the components of the Apple’s iPhone were developed by agencies associated with the American government such as NASA or the military.

Governments often can get it right. Economic history contains numerous examples. A well-functioning society is a mixture of activist government and market forces. This is called a mixed economy. The essence of modern politics is deciding the extent of the mix. It is generally in the interests of the rich and powerful to prefer the market over the government.

The unwillingness of this current government to fund decent pay increases for public servants, including teachers, is part of this larger debate and agenda that has prevailed in New Zealand in recent decades. It is the belief that government funded services are always less efficient than the private sector. It is the “market good, government bad” delusion which we have been indoctrinated with since the 1980s.  Sometimes it is called TINA; there is no alternative. It denies the historical reality that the most prosperous growth period in human history was the post war period to the 1970s. This was a period of mixed economic systems in much of the West. Financial sectors were tightly controlled. Governments were more activist. It was accepted that governments played a crucial role in the economy particularly in the area of equality of opportunity.

“Market good, government bad” is then used to justify tax cuts because people “always know best how to spend their own money” aside from cigarettes, alcohol, meth, fast foods and various other bad things. Higher tax rates for upper income earners act as a “disincentive” for them to work more. Lower tax rates for upper income earners “create more investment and jobs”. Higher tax rates will cause an exodus of talent offshore.  Blah blah blah. Bloody socialists. We have heard this mantra many times over the years. Yet there is no agreed “optimal tax rate” in any serious economic literature. It is purely a political choice. It could be easily argued that a well-funded education and health care system serves to create and attract talented people.

The reality is that an underfunded government means lower quality public services particularly in health and education. It means less of a hand up for the most vulnerable and needy in our society. It means teachers and other public servants can’t afford to live in the big cities.

Meanwhile affluent citizens are able to afford another rental property, private health insurance and private schools for their children.

This is not about the politics of envy. It’s just the politics of reality. We live on a small set of islands. It’s too small for the economic apartheid that has evolved in recent decades. Eventually it costs all of us if too many of us have been left behind.

If we want a quality public sector we need to fund it. But a crucial factor must also be accountability in delivery.

I suspect this government has gained power without a long term strategy to achieve this change towards a better funded public sector. This is now being viciously exposed as unions clamour for justifiable catch ups for their members.

The previous government certainly had a long term strategy. It was to shrink the scope and quality of public services and cut real wages for government workers. The magical budget surplus would solve all our problems. They could give people their taxes back, particularly upper income earners. The market place could then weave its magic once the weeds of government had been severely pruned. This is why we have arrived at the current sad situation.

This government needs a coherent long term strategy because deferring to more task forces and working groups and other talk fests won’t cut it forever. The majority of Kiwis voted against further tax cuts and a more minimalist government.

Peter Lyons teaches Economics at Saint Peter’s College in Epsom and has written several Economics texts. 


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