Corporate welfare explained

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The Dutch disease for the benefit of #GarethMorgan @stevenljoyce

I am putting in a Official Information Act request to see if anyone advise ministers that a export promotion target results in a matching increase in imports along with a large appreciation in the New Zealand dollar. Did New Zealand dodge the Dutch disease from this foolhardy export promotion policy? The Dutch Disease story is one of sectoral shifts.

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In the 1960s, with fixed exchange rates under the Bretton Woods system, the Netherlands discovered off-shore natural gas. As natural gas was extracted, it increased domestic income and spending. Investment was redirected toward the natural gas sector. Dutch wages and prices began to rise gradually. The Dutch guilder became overvalued in real terms, their industrial products became uncompetitive, and the manufacturing sector shrunk. This phenomenon of de-industrialization in the presence of rich natural resources was called the Dutch disease. They got natural gas but lost manufacturing.

In the late 1970s and early 80s, the UK experienced similar de-industrialization under a floating exchange rate regime. They discovered and exploited the North Sea oil fields. Since the global oil price was rising, the UK was expected to earn a great amount of foreign exchange in the future. But even before these earnings were realized, the British pound appreciated suddenly in both nominal and real terms. This damaged the British manufacturing sector.

Source: MF model – float

If there is an increasing demand for New Zealand exports if the Business Growth Agenda target of increasing New Zealand exports was successful, there is an increase in demand for New Zealand dollars to pay for these exports. This will result in an appreciation of the New Zealand dollar making imports cheaper. This will switch demand for New Zealand competing industries to these imports.

This process of currency appreciation and expenditure switching will continue until export match exports again. There is nothing wrong with an export boom as long as it is based on comparative advantage rather than subsidies.

Yes Prime Minister on a minister of manufacturing @jamespeshaw @julieannegenter

 

Nitpicking @stevenljoyce reply 2 @TaxpayersUnion on corporate welfare @JordNZ

The best the Minister for Economic Development, Steven Joyce, could do in response to my recent report on corporate welfare was nit-picking. Joyce said my definition of corporate welfare was flawed and that spending on R&D will grow the economy. He said

“To brand things like tourism promotion and building cycle-ways as corporate welfare is, I think, creative but not accurate at all.”

Joyce also said my report was

just somebody picking out a whole bunch of government programmes that in many cases don’t involve payments to firms at all…

Those that do involve payments to firms are specifically designed to encourage the development for example of the business R&D industry. Politicians don’t choose them.

Payments in kind are business subsidies. R&D is so important to the economy that the last thing you want is its direction to be biased by funding from government. Bureaucrats have a conservative bias and do not fund oddballs and long shots. The oddballs and hippies in the picture below could only afford the photo because they won a radio competition in Arizona.

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The R&D expenditure that was criticised in my report was commercialisation, not basic research, which was specifically praised. Which research to commercialise is for entrepreneurs.

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There is no reason whatsoever to think bureaucrats administering R&D subsidy budgets set by politicians are any better than private entrepreneurs at picking the next big thing.

If bureaucrats were any good at picking winners, were any good at beating the market, they would go work for a hedge fund on an astronomically better salary package. The salary package of one top hedge fund manager exceeds the entire payroll budget of most New Zealand government departments including those administering R&D subsidies and other hand-outs.

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Government expenditure in vital areas such as innovation should be justified on the basis of cost-benefit ratios and a rationale for why bureaucrats have superior access to information about the entrepreneurial prospects of unproven technologies and product prototypes. 

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Subsidies should not be defended because of their popularity and sexiness as Mr Joyce did for the film industry, tourism promotion and ultra-fast broadband

If they told New Zealanders that in their view tourism promotion should be cancelled, the film industry should close down, that their shouldn’t be any ultra-fast broadband…I don’t think people would be that enamoured with it.

On irrigation funding, Mr. Joyce cited a report by NZIER that found irrigation contributes $2.2 billion to the economy. Irrigation is a private good which can funded by pricing it properly including the recovery of capital costs. There is no case for a subsidy.

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Public goods have spillovers, private goods such as water and irrigation do not. Users can fund the irrigation themselves buying as little or as much water as they are willing to pay out for out their own pockets. The NZIER report noted that it was not about the case for public funding:

… we are not able to quantify the environmental or social impacts if irrigation had never occurred. We also do not attempt to investigate the relative merits of public versus private sector funding of the schemes.

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#Corporatewelfare since 2008 @JordNZ @MatthewHootonNZ @GrantRobertson1 @stevenljoyce

My latest corporate welfare report is out at the Taxpayers Union website. The company tax could be 6 percentage points lower but for this generosity of politicians picking winners.

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Source: New Zealand Budget Papers, various years.

It is not as bad as you think under the last Labour  government budget. $700 million of  those hand-outs to business was seed capital for agricultural research institute. That institute to be run out of the investment income on that $700 million one-off injection which the incoming National Party-led government cancelled.

Another $675 million in that last Labour budget was to KiwiRail and OnTrack. Other than that, the Labour Party ran a pretty tight ship on business subsidies. There are no particular record of picking winners. Labour did buy a real loser in KiwiRail. You heard it here first.

$5.2 billion in rail spending since 2003 budget @JulieAnneGenter @JordNZ

$5.2 billion in rail spending since the 2003 budget! This $5.2 billion does not include any spending on urban rail, commuter train networks or their electrification. The $5.2 billion since the 2003 budget is for the passenger and freight network, not the urban metro contracts

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Source: New Zealand Budget Papers, various years.

Desperately waiting for that dividend the taxpayers lose if any of these assets are privatised. The spending listed below in the two charts includes loans, capital injections and the purchase of the track and of the train operator itself. The latter was purchased for $690 million which was soon written down to zero.

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Source: New Zealand Budget Papers, various years.

There is no table because the table format breaks down when blogged.

At various times, OnTrack and KiwiRail was subsidiaries of the New Zealand Railways Corporation, which was the holding company. Now OnTrack is a division of KiwiRail.

Remember this every time the Left says the government invented the Internet

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Source: US nuclear force still uses floppy disks – BBC News.