The scourge of the clickbait homily
ICYMI: the government is NOT a household
Unfortunately, homilies drown the world of economics. And, adding to my frustration, many are encouraged by some economists to support their narrow view of the world, and/or perpetuate the power of the status quo.
In this context homilies are short quips that are supposedly easily understood. They are designed to relay a simplistic, soothing story so as to avoid delving into details and discourage questioning. And, with further sinister intent, the homily encourages lazy, superficial understanding of matters, thus degrading the knowledge and expertise required to confront the complex challenges facing the communities of 21st century Aotearoa.
Consequently, it comes as no surprise that soothing, simplistic, and superficial fit nicely into the world of clickbait headlines.
One homily that is, arguably, most damaging of all …
a government is like a household
it must balance its spending to match its income
otherwise it will run out of money and leave our children a burden of debt
Bluntly, it is wrong and dangerous to compare a government to a household. Such a perspective conveys and very narrow, simplistic, and erroneous view of the economic role, functions, and interactions of a government in the nation and its people, communities, and economy.
I stress, those repeating this homily are unknowingly (or knowingly) arguing a narrow role for government that is designed to perpetuate the power of the status quo.
“Government is like a household”
The government’s job is to enable the myriad of factors that are critical to the functioning and advancement of a society, including those of future generations.
Economic questions and challenges facing governments centre on the use, management, development, maintenance, and renewal of the nation’s scarce real1 economic resources. While not a comprehensive listing, the nation’s kete of resources would include
land and water, biodiversity and ecosystems
buildings, machinery, and equipment
business and workforce capability and capacity, knowledge and expertise
facilities and amenities for work and recreation, sport and culture, life and leisure
transport, energy, communications, infrastructure and distribution networks
community cohesion and respect for customs, social mores, ethics and rules for acceptable behaviours, alongside shared values and obligations
To suggest that any government tackling these economic questions and challenges is akin to ‘running a household’ indicates one is either devoid of meaningful reason or is purposefully aiming to deceive.
“Government must balance its spending to match its income”
A government must be cognisant of a far broader economic (not to mention national and community) lens through which it needs to view critical questions and challenges.
A household must always be conscious of its financial income and spending – and the balance between them over coming years. In contrast, the finances of a government – and its financial situation – must be viewed in the economic context of the goals for the advancement of society, whānau, hapū, and community aspirations, and challenges.
Financial straight jackets are imposed on governments by those (including some economists) who wish to ignore these broader roles and functions of government. Hence the assertion of arbitrarily set targets for government spending, taxes and/or government debt (whether in $ terms or as a percentage of GDP) – again, usually in the form of a quip, homily, or clickbait headline.
Using excuses like “we cannot afford it” or “we have run out of money” are a standard, but convenient, tool used by some to misdirect and avoid critical questions or challenges facing a government.
In contrast, for many (including some economists) there is much more to government than its financial accounts. The generation, use, and state of health of the nation’s real economic resources (as noted above) are critical to building and fostering opportunities for communities and businesses. The government has a central and leading role in developing, maintaining, and renewing many of these resources. In many instances, government has (or should have) a pro-active kaitiaki role in respect of the kete of real resources.
This economic role should not be subservient to arbitrarily and narrowly specified financial targets. In turn though, this economic role does need to be subservient to (or be driven by) goals for the advancement of society, whānau, hapū, and community aspirations.
“Otherwise government will run out of money and leave our children a mountain of debt”
By perpetuating some economic myths, and adding to fears we hold for our children, tamariki, and mokopuna, and introducing the word debt, the simple and soothing homily becomes a statement that no one could possibly disagree with.
A tug on the heartstrings, and a “think of the children” cliche, and – lo, and behold – it’s like the barbie and the bach, there is just no need for argument.
And so the world of homilies and clickbait continues to be used to misinform and disinform, as the status quo advocates manipulate choices and decisions to reinforce their own power.
But, as I have repeatedly asserted elsewhere, if the status quo are to be ever challenged, we must ourselves become prepared with more detailed knowledge of economics and economic concepts.
And that includes a far more sophisticated and mature understanding of debt. An earlier posting of mine is particularly relevant here. Armed with the information and understanding from that earlier posting, when assessing any burden that is being passed onto our children it is pertinent to ask
is it a financial debt or an economic debt?
and, if it is a financial debt, then the important question is who holds the government debt that is issued and who benefits from the spending facilitated by the borrowing?
Take the financial debt answer for starters.
If government financial debt is held by other individuals or organisations in Aotearoa (as most of it is), then we owe it to ourselves. Interest is paid to those NZ holders of the government debt (i.e. to those who hold these assets) and the next generation of these holders will inherit these assets. In turn, the government debt will eventually be repaid to those future New Zealanders (or be re-financed by other future New Zealanders).
So, while the burden of this government debt is passed on to our children, so is the ‘burden’ of holding the equivalent asset! In this situation, the primary problem for consideration (and management) is not the quantum of government debt, but the distribution of the assets within the communities of Aotearoa. There is undoubtedly an equity lens that needs to be applied here, but that’s for another post.
However, there is some government debt that is held by foreigners, and these re-payments are a potential financial burden. Although much of this government debt is denominated in NZ currency, such debt has to be acceptable to foreigners. In essence, this portion of government debt (ie. that held by foreigners) requires re-payments to be made in foreign currency.
To acquire such foreign currency requires institutions, individuals, enterprises, and businesses in Aotearoa, to produce and export goods and services to overseas buyers. Consequently, this component of government financial debt (i.e. debt that is held by foreigners) comprising obligations for interest and/or repayment in foreign currency entails real resource costs on the future communities of Aotearoa. To be clear, these real resource costs are incurred because a portion of the nation’s kete of real economic resources needs to be devoted to earning future export income.
And, so, a segue to economic debt considerations. But before I turn to there, I would like to list (for completeness) some other specifics that distinguish a government from a household. In particular, a government
can borrow without a mortgage (i.e., it can issue paper without collateral)
can borrow at more favourable interest rates than any household or business or other organisation within the country
can refinance its debt indefinitely
has the power to tax and levy other charges
can allow, enable, control, regulate, or forbid economic activity by organisations in sectors or industries, including monopoly and/or oligopoly situations
can make decisions that can significantly improve or endanger the financial and/or economic position of individuals, households, businesses and/or other organisations in the country
And so, economic debt
Financial debt is not a constraining issue for government. In contrast, the kete of real resources required for economic activity, and the benefits and opportunity costs in their competing uses (assessed over an appropriate length of time), reflect the binding constraints under which any government must operate.
As per previous examples, the use, management, development, maintenance, and renewal of the nation’s kete of real resources are at the centre of a nation’s economic challenges and decisions. And so, the state (or health) of this kete are the true measure of the legacy and/or debt left for future generations to enjoy and/or bear.
And where borrowing is involved, the financial debt that is held by foreigners requires additional real resources to be devoted to producing or delivering future export earnings. This potentially adds a further burden on future communities of Aotearoa.
In addition, there is a similar argument to the private sector debt of New Zealanders that is held by foreigners. Again, my earlier post refers. In particular, the private sector debt of New Zealanders – that is the borrowings of other New Zealanders outside of government (eg. private sector corporates, businesses, and households – that is held directly (or indirectly via the banking system) by foreigners also implies a real resource cost on future communities of Aotearoa.
The country’s external debt – which is largely that of the domestic non-government private sector – is of much more significance for future economic prosperity and sustainability, than is domestically held and NZ-denominated government debt.
Consequently, the economic debt that is left to future generations depends on
the state (health, resilience, quality, and fitness) of the kete of real resources
the portion of the real resource kete that is required to be devoted to the generation of export income
Where the state of this resource kete is not fit for purpose for future challenges, then the investment required to enhance, modernise, and lift their quality and capability are a measure of the economic debt to be borne by future generations.
Where the quantum of real resources required for future export income severely curtails the choices and opportunities of future generations, then that also reflects the economic debt left to future communities of Aotearoa. This is a measure of real resources – that are nominally a legacy for future generations to enjoy – but, in actuality, over which they have little influence or control.
In essence, the destiny of the future communities of Aotearoa is intrinsically connected to the real resources over which they will have control – that is, their economic sovereignty.
Rainy day surplus for fiscal headroom
And, now, it is perhaps pertinent to refer to a couple of other, related, homilies.
The rainy day surplus is prudent. On the other hand, there’s not much point in having a surplus in anticipation of future rainy days, when many of your people are already under water.
Fiscal headroom is needed just in case of emergencies. On the other hand, in the event of an emergency I suspect a stash of food, water, clothing, shelter, and medical supplies, may be more useful than that stash of cash surpluses from yesteryear.
In a nutshell, economics takes priority over financials.
Access to well-maintained fit-for-purpose real resources are the legacy that future generations will welcome.
Prudent financial performance statements are likely to be met with cynicism. Especially if the accompanying legacy is a real resource kete comprising a range of depleted and dilapidated network connections and facilities, a dispirited workforce heading for pastures beyond, parched waterways and land blocks with drained nutrients, and communities struggling to search for belonging.
Control over future decisions – the economic sovereignty of hapū, region, community, or nation – is undoubtedly tied up with the quantum, state, and health of the resource kete we leave for the future generations of Aotearoa.
Debt or legacy? Yes, absolutely, that is what we leave our children. But, our children, and tamariki, and their mokopuna, deserve way more thought in our decision-making than unthinkingly abiding by and paying homage to – praise be –a clickbait homily.
The term real is used here (and throughout this note) and in economics to distinguish from financial. Financial resources are limited to money, cash and bank balances; whereas real resources include the broad range of elements required to advance society and deliver on community aspirations.