The government illusion

Again, I’m hearing increasing talk about managing the economy – specifically, I have people telling me that they don’t think the government is managing growth properly.  Now, anyone reading here knows this statement is patently ridiculous – the government is not a management committee, and John Key is not the nations CEO.

However, this reminded me of a vision that an old work colleague had towards the end of 2010 in this article.  A key point in this vision, which captures the increasing push towards such arbitrary management, is this:

The Glorious Leader displayed a humility belying his greatness when he announced that His Plan has been inspired by patriotic newspaper columnists and internet bloggers.  The Glorious Leader said that these people are not blinded by the failed and discredited dogma of His asinine predecessors.  “The baby and the bathwater both need to be thrown out because the baby grew from devil’s spawn and the bathwater has been poisoned”.  “Shrewd columnists and internet bloggers acknowledge that the nation desperately needs my pragmatic and sensible guidance to allocate the nation’s resources in the right areas” the Glorious Leader said.

Like all good economics, this is an exaggeration, a caricature, of what is actually happening.  But such extreme examples can make key points clear – namely that a determination to “pick winners” and “micromanage” the economy is folly.  As has been shown repeatedly in the past – ultimately, such policies are the result of a mere illusion of control.

  • http://www.tvhe.co.nz jamesz

    Did you write something just so you could justify posting that image?

    • http://www.tvhe.co.nz Matt Nolan

      Yes.  Although I also wanted to use the title of the post as well.

      Although I only decided to post the image as I didn’t have any time to actually write anything that involved much in terms of thought.

      • http://www.tvhe.co.nz jamesz

        I do like the title :)

  • Nathaniel

    I don’t think there is anything wrong with expecting our government to pursue policies that will generate growth – we certainly pay them enough.  Growth does not just magically appear without an environment that will sustain it.  The thing is, the growth effects of policies may not come through for 20+ years.  It is not complicated to give people incentives that any sensible person can guess the effect of.  People respond to incentives in a pretty predictable way.  The outcome doesn’t matter if behaviour is changing in the direction you want it to.  It certainly worked for student loans!  ;-)

    • http://www.tvhe.co.nz Matt Nolan

      I think saying that growth doesn’t magically appear is a stretch – but of course I would agree that government should help with the institutional setting.

      The primary goal of government is redistribution to help meet the social contract though, it also helps by sorting out co-ordination problems and pricing externalities – but none of this is the justification for much of upcoming policy ;)

  • Carter

    Nathaniels right. Its not about government picking winners at all Matt. Its about government putting in place policies that create the environment. What exactly was John Key doing when he promoted the national cycle track ? Or the Auckland convention centre complete with 500 pokie machines ? Wasn’t that him picking winners ? What about faster broadband ? Fact is Matt governments including this one pick winners . I just wish they stopped raw unmilled logs being shipped to Korea for their Korean millers to process. I wish government instead of putting a million aside for voluntary contraception would instead have the guts to make a date that from that day forward there will be no more benefit money for people who have babies they cant afford or chose to have knowing they will be a burden on the taxpayer. Oh yeah Matt and how about a government that doesn’t simply see benefits as a cheap way to keep untrained unemployed youth quiet instead of organising some work. Or they could simply drop taxes to .20cents and cut GST back to 10% and watch NZ roar ahead of Aus. But that would only happen iof we mined and drilled and we can;t knock a fea tree over and do that can we. Remember Pike River ? Men down a mine and DOc had to be consulted about cutting a few tea trees
    ! Thats a stupid government policy but not as stupid as THE STUPICITY this government forced on us.
    Ill stick to BERL Matt, they make more sense. Cheers.

    • http://www.tvhe.co.nz Matt Nolan

      “Fact is Matt governments including this one pick winners”

      Which is what I was complaining about.

      “Thats a stupid government policy but not as stupid as THE STUPICITY this government forced on us.”

      Why exactly are you disagreeing with the post, did you read it?

      “Ill stick to BERL Matt, they make more sens”

      What an incredibly arbitrary comment – feel free to like other economists more though, ultimately we all use the same framework so if they are clearer to you they are doing a better job :)

  • Carter

    Matt so you say the primary role of government is redistribution to meet the social contract. I guess you forgot to add the redistributions to meet the social contract are now massive borrowings by the billions from foreigners who dont see it like  redistribution but expect a return on investment.

    Govts cant pick winners but neither can anyone else, except maybe Buffet, Gates and a few. But what govts can do is create a climate for growth. I dont see the taxation system here as a good climate for growth and thats why over 52000 people left for Au last year.

    Gotta laugh at the ANZ economist who just a month ago was predicting higher mortgage rates and today ANZ anmponces a 5,25% rate. Whatever happened to your predistion ANZ ? Eat it up humble pie

    • http://www.tvhe.co.nz Matt Nolan

      “guess you forgot to add the redistributions to meet the social contract are now massive borrowings by the billions from foreigners”

      If the borrowing is “structural” then this is due the poor choices by government – and the fact they aren’t balancing the books.  If the deficit is “cyclical” then it implies the foreign investors would be happy to loan the money at a relatively low rate of return due to the cominbation of credibility and low risk of repayment.

      “Govts cant pick winners but neither can anyone else, except maybe Buffet, Gates and a few. But what govts can do is create a climate for growth. I dont see the taxation system here as a good climate for growth and thats why over 52000 people left for Au last year.”

      People can’t pick winners – but the big difference between an individual and a government doing it is whose funds they are risking.  Personally I don’t think massive migration to Australia should be seen as a problem as itself, as you say it may be a symptom of something (such as the tax system) – it is important to look at these sort of issues rather than walk around and say what the government should invest in for a direct ROI like they are a corporation.

      “Gotta laugh at the ANZ economist who just a month ago was predicting higher mortgage rates and today ANZ anmponces a 5,25% rate. Whatever happened to your predistion ANZ ?”

      To be fair, the environment changed substantially – and if I recall, ANZ was on the low end for increases, which is why they were suggesting floating.  The world is uncertain, they were just providing a narrative to help us all understand it.

  • Nathaniel

    I am glad that Carter agrees with my comment (after all, I am always right) although I cannot agree with his comments really.  Firstly, I may not see things exactly the same way as Matt but I appreciate him stating his opinion and inviting feedback.  Ideally that feedback would be constructive but I don’t think Carter’s comments fall in that category.  The original posting raised questions in my mind about the purpose of government.  I agree that a country should not be run like a corporation, although the government could learn some things from the way successful businesses are operated.  I still think that the state’s role goes beyond static redistribution.  A ship captain’s role for example is not just to stop the ship from sinking but to stop it sinking while taking it somewhere.  (A nerdy analogy would be that the mission was to boldly go, not boldly hover)

    I am curious about “saying that growth doesn’t magically appear is a stretch” … so growth does just magically appear?  real per capita GDP growth?  The Invisible Hand may be powerful, but not that powerful. :-)

    Regarding the ANZ prediction, everyone knows that predictions are made on the basis of information available at the time the prediction is made.  Implicitly the prediction assumes nothing unexpected happens.  Since the unexpected can always happen, predictions are never guaranteed to be right.  Most of the time that they are right, it was just good luck.  :-)

    • http://www.tvhe.co.nz Matt Nolan

      “I agree that a country should not be run like a corporation, although the government could learn some things from the way successful businesses are operated.  I still think that the state’s role goes beyond static redistribution.”

      Fair enough, and a valid point of view.

      “I am curious about “saying that growth doesn’t magically appear is a stretch” … so growth does just magically appear?  real per capita GDP growth?  The Invisible Hand may be powerful, but not that powerful”

      It is, as long as the institutional structure is appropriate.

      I think we both agree that government has a role in setting up the appropriate institutional structure (laws etc).  I would just be cautious about taking this too far – the burden of proof has to be on additional government action improving outcomes, and this isn’t always the case :P

      • Nathaniel

        The pursuit of self-interest (where such self-interest may include contributing to the interests of certain others) would only generate sustained improvements in social welfare (lets say economic potential) with unfettered competition and perfect information.  Neither exists in the real world so the power of the Invisible Hand is constrained.  You could perhaps set up an institutional structure for unfettered competition (although this would involve massive disruption to existing structures that protect incumbents) but perfect information is impossible to obtain.  Removing information asymmetry would be all that we could hope for (but the incumbent problem arises again).

        I agree that the onus is on government to convince the public that a particular policy is beneficial.  I don’t think the focus on outcomes is any use, for much the same reason as a prediction that mortgage rates will rise is not much use.  The intention and likely effect of the policy is the important thing.  You never know whether the “outcomes” that you see are because of the policy or something else unobserved, no matter how much econometric wizardry you do.

  • naveen

    great post