Why Government Can’t Plan for the Future

Before we get into today’s Money Morning, a quick reminder that your editor is speaking at the Melbourne Adam Smith Club on Monday evening.

If you’re interested in coming along to watch and listen as we blather on for half an hour or so, just click here to download the registration form.

Anyway, we liked Dan Denning’s comment in our sibling newsletter The Daily Reckoning yesterday:

“There is something really distasteful and perverse about the amount of attention the Australian press dedicates to analysing the government’s annual budget. It’s obscene in some undefined way, and offensive at some visceral level we can’t quite define. Maybe it’s the implication that state tax and spending policies have such a huge sway in our everyday lives that we have to pay attention to them whether we like or not. Maybe it’s how seriously the politicians take themselves while exhibiting a comprehensive level of stupidity about markets. Either way, the whole thing makes us want to gag.”

We couldn’t agree more.

Yesterday evening we tuned in to the awful show Switzer on the Sky Business Channel. But it wasn’t so much what Peter Switzer had to say, rather it was the usual “Where’s our budget handout” comments from his guest.

In this case it was an interview with Australian Retailers Association chief executive, Russell Zimmerman:

“Well really there was nothing in the budget for retailers.”

[Sob!] The poor little pets. Our heart goes out to them. Maybe we’ll give the Australian Taxation Office a call and ask if we can donate another 1% of our wages to retailers. I mean, the taxpayer clearly hasn’t given them enough money already over the last two years…

Apart from the billions of dollars of taxpayer-funded government bribes which apparently helped to fill the retailers’ coffers last year.

It’s a perfect example of just how distasteful Budget season is. The way that tax cuts are reported as a “cost” to the government is probably the most vomit-inducing of all.

But aside from that it shouldn’t be forgotten that the federal government will spend around $350 billion of your money this year. So what if the retailers miss out, some other vested interest will get your tax dollars instead.

Can you grasp just how big that number is?

As we’ve mentioned before it’s around 35% of Australia’s total economic output. Add in the taxes taken by state and local governments and the figure rises to around 45% of Australia’s economy.

It’s no wonder there’s so much interest in how the government chooses to spend the loot. Page after page of analysis telling you how the government will blow your wages. Most of it of course tends to be critical that either the government hasn’t spent enough, or that it’s spending it in the wrong places.

Seldom do you see any commentary suggesting the government should stop raping and pillaging the dollars from your pocket.

In fact you’re more likely to get the opposite reaction. Such as the tax and spend Keynesian commentary of Kenneth Davidson at The Age:

“The cumulative effect of these deficits is to increase net government debt from $42 billion in 2009 to $79 billion in 2011, peaking at $94 billion by 2013. This is not a problem. Net debt will rise from 5.6 per cent of GDP now to a peak of 6.1 per cent and net interest payments will rise to a peak of $6.5 billion, or 0.4 per cent of GDP. The debt is easy to service and the cumulative increase in debt has more than paid for itself in terms of real economic growth and real jobs, even though the roof insulation and school building programs have been seriously mismanaged.”

It’s funny how the likes of Davidson and others who love government tax theft are keen for the government to take even more tax dollars.

They push this line even while acknowledging the massive waste of money spent on the dud housing insulation and school building schemes.

And as for the idea that government debt has “paid for itself in terms of real economic growth and real jobs”, well, that just isn’t true. How can economic growth and jobs be real if the government had to subsidise the creation of those jobs.

That’s not real jobs and real growth. And they know it.

It’s like saying a runner really ran a marathon even though they finished the last six miles being driven in a car.

Seriously, if the jobs ‘created’ by the housing insulation scheme were ‘real jobs’ then surely the jobs ‘created’ to clear up the mess afterwards are ‘real jobs’ too.

No-one in their right mind would claim that, even the dopey bureaucrats haven’t suggested that… yet.

Real jobs and real growth can’t just be created from thin air by a pen-pushing bureaucrat. Creating work for the sake of work using taxpayer dollars merely results in the misallocation of resources.

It denies capital from being allocated to areas of the economy that actually need it.

But here’s the problem. Real jobs and real economic growth take time. Time is something not on the politician’s side. They want stuff done now before the next election.

That’s why the government insists on spending money on quick fixes such as chucking cash into the building industry and the retailers through government bribes.

Quick fixes that give the appearance of working, but only in the short-term. Like anything else financed by debt it needs to be repaid. And if the government is taxing now to fund its short term projects then it prevents those dollars from being invested by entrepreneurs in longer term and potentially more useful projects.

Real growth and real jobs can’t happen that quickly. New game-changing innovations don’t just happen overnight, they take time. You only have to look at the developments in the technology sector to see that.

And what’s more, it puts paid to the idea that only governments are capable of acting in the long-term interest. That’s most often the argument used by government lovers who say that the free market can’t be trusted to deal with climate change.

That only a coercive government has the long-term vision to act.

The reality is, the opposite is the case. Governments always act in the short term, never in the long term. What else could explain the reason behind the federal government postponing until 2013 its emissions trading scheme (ETS)?

The reason is simple, the government is only concerned with the short term. And the short term involves spending billions of dollars on make-work projects that nobody wants.

We won’t go into too much detail here, because we’ll cover it during our presentation to the Adam Smith Club on Monday, but it’s precisely this short term outlook and the desire to blow taxpayer dollars on quick fixes that ensures individuals are unable to expend their own resources on something which is clearly a concern to them.

An ETS involves people being forced to pay more money for things without any recognisable benefit. That’s not a good idea for a politician who wants to be re-elected.

Yet if solutions to the perceived problem of climate change were provided by the free market, where participation was voluntary, I can guarantee you that the majority of people would choose to take part.

That would weigh up the short term loss of disposable income against the longer term benefit to the environment.

The reality is, contrary to popular belief people are always making decisions about the future. It’s just not true to claim that individuals and business people only think about today and ignore tomorrow.

If it was true that individuals and businesses only thought about today the economy would be a mess. Producers of capital goods would only produce machinery that was ready for sale today and which would only last for one day. They would not bother creating an inventory.

The users of the machinery would only be interested in buying machines that could produce one day’s output. It would be worn out by the end of the day and therefore they would have to purchase a new one-day machine tomorrow.

Shops would only order enough goods to last them for one day’s worth of sales. The following day they would again contact the supplier and order just enough goods for that day.

Individuals would only buy enough food for one day’s use. Each day going to the shops as they had no concept of planning for the future.

You can see how ridiculous that argument is. Capital goods producers produce machinery that lasts for years. And buyers of the machinery want something that will last as long reasonably possible, certainly not for just one day.

A shop will typically re-stock once a week – unless we’re talking perishables – and individuals will do their shopping weekly. That’s all instances of planning for the future. And it’s something – again contrary to what the government lovers tell you – that is natural for humans.

This is just a simple example. But you can apply it to anything. The holiday you’ve planned in advance. Very few people would decide today to just pack their bags and head off for a three-week holiday. Such a trip is likely to have been planned months or even years in advance.

The fact is, it suits the bureaucracy to allow the myth to prevail that only governments and not individuals can plan for the long term. That way the bureaucracy can insist on taking your tax dollars today and claim it is planning for the future.

Unfortunately, while they do take your tax dollars today, all they do is spend the same dollars today, plus a bit more through debt. The kind of debt that the likes of Kenneth Davidson believes is “not a problem.”

I’m afraid it is a problem. Nanny state governments are doing their best to brainwash individuals into believing only the government can plan for the future. And many individuals believe it. Which is hardly surprising considering the government doesn’t leave you with much money with which to save for the future.

What it does leave is the promise of paying you back your superannuation savings. Although as we’ve warned before, that’s likely to be ripped from you when you least expect it.

So while Davidson says that high taxes and debt isn’t a problem it is. But it’s something that won’t become apparent to you until it’s too late.

Cheers,
Kris.

Tagged as: Australian Retailers Association, future, government, government debt, Kenneth Davidson, nanny state governments