Economics of Good Government

(And – yes – I can hear you all yelling “oxymoron”.)

Dr Oliver Hartwich was on the Leighton Smith podcast last week. He offered very succinct critique of the state of NZ bureaucracies through the application of the theories around “public choice economics”.

I would hate to over-abbreviate Oliver but this sums up the theory.

“[P]ublic choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests and, more important, that the motivations of people in the political process are no different from those of people in the steak, housing, or car market. They are the same human beings, after all. As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics. (https://www.econlib.org/library/Enc/PublicChoice.html)

NCEA Level 3 economics and the first year of undergrad study tends to have three major components. Micro-economics (markets), macro-economics (employment, inflation, etc) and market-failure. Market failures – poverty, lack of housing, pollution, etc – are then seen as reasons for governments to intervene (as if they need a second invitation).

What is barely looked at is the standards of decision-making (process/cost-benefit) around government intervention, the effect of such interventions (e.g. the crowding out of private sector building through government projects), and then accountability for “intervention-failure” (e.g. Andrew Little – where did that $1.9 billion “investment” in mental health actually go and what was the ROI?)

The government sector is now HUGE in NZ – using IMF measures at present the ratio of government expenditure to GDP is 42.21%. This is general (central and local) government expenditure and acquisitions (https://www.statista.com/statistics/436523/ratio-of-government-expenditure-to-gross-domestic-product-gdp-in-new-zealand/).

In terms of just central government expenditure the trends go up almost as fast our our performance in education and health (among all other things) goes down (https://www.theglobaleconomy.com/New-Zealand/Government_size/)

General government spending as a percentage of GDP over time (NZ).

So if you add in incompetence, and the public sector employment merry-go-round to Public Choice theory it is easy to see just how radical our overhaul needs to be for the provision of truly high quality services. I am fully aware in education that when schools are going well it is despite the Ministry – not because of it.

Who will have the courage to change this? Politicians need to hear again and again (especially the under-qualified Minister of Finance) that when they say: “We are investing in Health …. “. That it is not their money – it is yours – and, as such they need to show a high quality decision making process and genuine returns and not ongoing “intervention failure”.