Jump Back From the Debt Crevasse

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Anyone reading news feeds on the global financial crisis is painfully aware that the world as we know it is rapidly destabilizing. Bottomless debt is gaping open in unfamiliar terrain like crevasses in Ruth Glacier near the end of June.

Europe debt woes have pummeled the euro and Asian shares. Eurozone taxpayers are now extremely exposed to high credit risk, leading to a panic in the world markets, as foreign holders of Greek and Portuguese debt have seized on emergency intervention by the European Central Bank to scamper out of their positions. The chief executive of Deutsche Bank said it would require u201Cincredible effortsu201D by Greece for its debt to ever be repaid in full.

Fears are growing that austerity measures facing the troubled eurozone countries will derail recovery and continue to spark social unrest as that which flared in Athens recently. Portugal, Italy, Greece and Spain are lumped as PIGS, heavily weighing the EU down as their sovereign debts balloon past doable deficits. The euro has slid to a four-year low against the dollar, as if the dollar were something to write home about.

Britain, too, is at a crossroads. Its political leaders cannot bear the thought of not spending, so they have stopped thinking about it. They are falsely convinced that any cuts in public spending would destroy the country’s basic public services and stop any economic recovery from ever beginning. Their economists have this backwards. The British population can look forward to ever-increasing taxation under the thumb of a coercive and costly bureaucracy whose monetary policies serve the state, but do not serve people.

America has not dodged this bullet either. The finances of Greece, Portugal, Italy, Spain, and Britain are not unique. Can Americans cast stones at Europe’s glass bubbles when our own national debt has already reached 86% of GDP, nearly on par with that of Spain? The Congressional Budget Office has a gloomy prediction about future years. It calculates that deficits will not fall below four percent of the economy under Obama’s policies and will begin to grow rapidly after 2015. The White House proposed budget would add more than $9.7 trillion to the national debt over the next decade; the CBO says the debt will be higher than that.

Can we avoid such bottomless debt pits?

Can any nation jump back from the edge?

Politicians demand that we spend. Mainstream economists warn that saving would ruin us. Are they right? Has any nation tried not spending? One has. One nation has a well-documented story to tell us. It is just possible that we could listen to her story and learn how to jump away before our tragic tumble.

Each of us crippled by debt has a thing or two hundred to learn from the small country down under that did the impossible — New Zealand trimmed the size of its coercive, regulating, and taxing government and, not only lived to tell about it, but flourished. While we have been fattening into the most engorged leviathan state on the planet, New Zealand slimmed down on a healthy diet of fiscal restraint in the mid-1980s. In short order, New Zealand threw out the parasites and opened the wide door of opportunity for producers and entrepreneurs to create wealth and raise the standard of living for all.

New Zealand actually received hope and change when they demanded it. Leading the rollback was Maurice P. McTigue, former New Zealand cabinet minister. McTigue’s educational lecture is liberally reprinted in parts by permission from Imprimus, the national speech digest of Hillsdale College. This how-to primer is Rolling Back Government: Lessons from New Zealand.

New Zealand’s reform government asked each agency just two vital questions: What are you doing? and What Should You Be Doing? Then it told each agency to eliminate what it should not be doing. Is this too sensible for Americans? Isn’t this precisely what Ron Paulians would do?

Then New Zealand’s reform government told each agency simply to eliminate what it should not be doing. How clear is that? Stop digging the hole you are digging for yourself. Stop spending. Such straightforward focus reduced the number of government employees with the NZ Department of Transportation from 5,600 to 53. The US Department of Transportation had 59,189 public workers on payroll in Fiscal Year 2003 requiring $53.2 Million from taxpayers. The number of parasitic employees with the NZ Forest Service was slashed to 17 from 17,000. The US Forest Service had 28,330 in FY08 spending $5.806 billion.

McTigue himself was the Minister of Works. He ended up being the only employee left when the process was applied to its 28,000 employees. As McTigue says, most of what the Department did was construction and engineering, and there were plenty of people who could do that without government involvement.

Did all those jobs die? No. What died was government’s taxation of productive citizens. The need for those jobs still existed. Private companies happily employed that skilled labor force. As private workers, each employee earned three times as much and was sixty percent more productive.

Reform freed up the things government was doing that had no reason being done by government. New Zealand’s jump away from debt disaster resulted in one huge going-out-of-public-business sale. Telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, and more were sold off. Productivity rose; costs dropped.

The government roll-back determined that other agencies should be run as profit-making and tax-paying enterprises by government. Reforms made the air traffic control system into a stand-alone company, gave it instructions that it had to make an acceptable rate of return and pay taxes, and told it that it could not get any investment capital from its owner (the government). The accountability reformers did the same thing with about 35 agencies — agencies which had cost producers about one billion dollars per year, now, instead, produced about one billion dollars per year in revenue and taxes.

The institution of high levels of transparency was promised and was actually delivered in New Zealand. Significant consequences for bad management decisions, instead of bailouts, resulted in the following: the size of government was reduced by 66 percent measured by the number of employees; the government’s share of GDP dropped to 27 percent from 44 percent; surpluses were produced; the surpluses were used to pay off debt; the debt dropped to 17 from 63 percent of GDP (recall that ours stands today at 86%); the remainder of the surplus each year was used for tax relief; the income tax was reduced by half and incidental taxes were eliminated.

McTigue writes:

“We need to recognize that the main problem with subsidies is that they make people dependent; and when you make people dependent, they lose their innovation and their creativity, and become even more dependent. Reform took all government support away from the New Zealand sheep farmers. The process changed the farmers’ position from a receipt of about 44 percent of its income from government, to zero subsidies. In 1984, lambs’ market was $12.50 per carcass. By 1989, producing a different product, processing it in a different way, and selling it in different markets delivered $30. By 1991, the product was worth $42; by 1994, it was worth $74; and by 1999, it was worth $115. Rolling back government let the New Zealand sheep industry go to the marketplace to find people who would pay higher prices for its product. Such reform delivered a loss of only three-quarters of one percent of the farming enterprises — and those were people who should not have been in farming. Instead of a turn to corporate farming, family farming expanded. Freedom demonstrated that if you give people no choice but to be creative and innovative, they will find solutions.”

Thinking differently about government, New Zealand eliminated all the Boards of Education in New Zealand. Every single school came under the control of a board of trustees elected by parents of the children at that school, and by nobody else. The new accountability gave the schools a block of money based on the number of students that went to them, with no strings attached. All schools were converted to this system on the same day. Privately-owned schools were funded the same way. All of a sudden, teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs. New Zealand moved from being 15 percent below its international peers to 15 percent above.

New Zealand’s reform government decided that providing social services and changing behaviors do not have any place in a rational system of tax collection. So they selected only two methods for gathering revenue — a lowered tax on income, and a flat tax on consumption. All other forms of taxation were eliminated, period.

Deregulators rewrote the statutes on which all regulations were based. All environmental laws, tax codes, farm acts, occupational safety and health acts — the whole lot, every single one. Laws that were 25 inches thick were reduced to mere hundreds of pages. New statutes repealed all of the old. The goal was only the best possible environment for industry to thrive.

And, thrive it has, or it seems to have. McTigue has not responded to my request for updates on the status of this remarkable transformation, but, I see aggressive ads for New Zealand in many places. u201CNew Zealand is now an entrepreneurial power houseu201D is part of one such invitation for people to invest and live there. Claims that the country is u201Cin a better position to face the global storm,” is u201Cranked first as the least corrupt,” is u201C5th freest economy in the world,” and, is u201Cfirst in the world for protecting investorsu201D all strike a great and jubilant cry of markets and people who have pulled themselves back from the brink.

New Zealand said no to death by debt; couldn’t we?

Floy Lilley [send her mail] is an adjunct faculty member at the Mises Institute. She was formerly with the University of Texas at Austin’s Chair of Free Enterprise, and an attorney-at-law in Texas and Florida.

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