From: Foundation for Economic Growth
Each to his Own
By Phil Scott
Jul 5, 2004, 16:25
Each to his own.
One of the things I notice is that a number of politicians are trying to “guide” business or “lead” business in this, that or some other direction. I also notice business people thinking that “If only I could get my hands on the levers of power for a year or two, I would get things cracking.” I suspect that “doing” politics and “doing” business are so different from each other that each should concentrate on what they know best and leave the other to the “experts”.
The following is a quote from a recent Reserve Bank article:
“Government should avoid intervening on behalf of specific industries or groups, because such interventions are often driven by political or interest-group considerations rather than promoting general well-being or increasing economic efficiency. Even well-meaning government interventions are often behind the curve and contrary to what an efficient marketplace would deliver.
Does this mean that government has no role in promoting growth apart from having stable monetary policy, low tax rates, balanced budgets, and limited regulation? Not quite. Effective government interventions should instead be focused in areas where there is a clear government purpose owing to an externality or market failure. Consider several such areas:
1 Providing information
Collection of data and provision of information certainly is the quintessential public good. There are important areas where New Zealand’s system of economic statistics should be improved. New Zealand lacks official measures of productivity. Statistics New Zealand has done important work recently in building toward a capability of measuring total factor productivity, eg by its work on capital stock statistics. Academics, the Treasury, and consultants have worked on constructing productivity measures.
2 Infrastructure
There is evidence that physical infrastructure investments by the government can raise productivity. For example, the US interstate highway system evidently raised productivity (see Fernald (1999)). I am not suggesting that a network of four-lane superhighways would be appropriate in New Zealand, but infrastructure investments appropriate to the geography and industries of New Zealand would be productive.
3 Education
There is also evidence that high levels of education attainment contribute to economic growth. General-purpose skills, such as those provided by a good university education, are increasingly important in the changing economy. New Zealand has an admirable record in literacy and had very substantial increases in university attendance. These are policies that should show sustained, long-term benefits in economic performance.
4 Tax policy
As discussed earlier, additional capital accumulation will be required if New Zealand is to grow faster. Reducing the taxation on the returns to investment and saving is one effective lever for promoting capital accumulation. The theory of optimal taxation suggests that capital should be taxed at a relatively low rate. Many countries implement policies to reduce the tax rate on capital. For example, the US Congressional Budget Office estimates that the effective marginal tax rate in the US on capital is half that of on labour. New Zealand’s current tax system is more neutral with respect to the taxation of capital income.
Summary
More generally, the scope for public policy to affect growth rates is quite limited. The best pro-growth policies are quite generic: low and non-distorting taxes, limited taxation of capital income, efficient regulation, investment in infrastructure, and openness to the world economy. Efforts to target growth by stimulating particular industries typically fail because the political system is ill-suited to locate efficient investments.”
Perhaps politicians should concentrate on means whereby they can follow the economic advice from their experts: “The best pro-growth policies are quite generic: low and non-distorting taxes, limited taxation of capital income, efficient regulation, investment in infrastructure, and openness to the world economy.”
Anything above and beyond this is counterproductive. Perhaps for politicians “Less is More”.
But, what about business people? Paul Krugman, an Economics Professor, believes that “What people learn from running a business won't help them formulate economic policy. A country is not a big corporation.”
The arguments that economists know to be true seem counterintuitive to businesspeople. For example, executives agree that free trade will result in more exports and therefore more export-related jobs. Economists know, however, that workers who gain jobs from increased exports must gain them at someone else's expense. Also, businesspeople believe that a country that attracts foreign investment will run a trade surplus, but economists know that such a country will necessarily run large deficits.
It's not that economists are smarter than businesspeople. They simply think a different way. Economists deal with the closed system of a national economy, whereas executives live in the open-system world of business. Moreover, economists know that an economy must be run on the basis of general principles, but business people are forever in search of the particular brilliant strategy.
So business people would not be expected to have an intuitive feel for economics and there is no particular reason why they should be naturals on the political front either.
If our aim is to promote prosperity for all citizens as best we can then the way to do it is straight forward:
1. Politicians should follow the best pro-growth economic policies: low and non-distorting taxes, limited taxation of capital income, efficient regulation, investment in infrastructure, and openness to the world economy, and stop trying to start and run businesses,
2. Business people should leave politics to politicians and economics to economists, amd conmcentrate on growing their businesses.
If we can agree that we should all be using our strengths then someone else is covering our weaknesses and in this regime business and the people will flourish and a higher and constant growth rate will just happen as a natural consequence of human desire for a better life.
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