From a front page article in the Press on Thursday:
By new capital spending I assume they mean capital investment in infrastructure and so forth. It’s not terribly important – either way, this paragraph appears to say that despite increased spending, debt is increasing. Well, duh – if you spend money, you can’t use it to pay down debt.
It’s reasonable to argue, but by no means given, that money invested in infrastructure could serve to increase productivity and thus decrease long term debt through increased revenues. So, it’s arguable that spending $1b now on infrastructure could support economic activity exceeding that over the long term. However, economic stimulus based on tax cuts pose a deeply puzzling problem: How does a tax cut of $X lead to increased economic activity of more than $X?
For this to work, consumer spending needs to result in a positive sum game with very high growth – that is, it needs to be the case that $X spent >> $X worth of increased productivity through investment. Furthermore, some will be disappear as it is used to pay down debt, and some will be spent on foreign sourced goods. Of that remaining, only a small quantity will make its way back to NZ public coffers. It seems completely bizarre to expect that economic activity, and thus tax revenues, could increase by even a small fraction of X.
Here’s the best argument I can dream up:
Of the money given to the public, some large fraction (S) will be spent on NZ goods, some fraction (I) of which will be re-invested in NZ companies, leading to increases in productivity (V) over the long term whose value exceeds the adjusted value of the money injected in the first place.
That is, $X invested leads to $(X x S x I x V) of long term value. If $(X x S x I x V) exceeds $X, then, over the long term, the stimulus could be considered useful. If not, its a poor expenditure of money. To be realistic, $(X x S x I x V) would also shrink by some factor reflecting inflation, potential interest and lost flexibility by virtue of the government not having $X to spend as other needs and opportunities arise. But, it seems that it’d be hard enough for $(X x S x I x V) to exceed $X in the first place, so let’s leave that out.
Let’s take a simple example. 1,000,000 New Zealanders are each given $1000, reflecting a total investment of $1b. 70% of that is spent on NZ goods (S = 0.7), and of that money received by NZ companies, 20% is re-invested (I = 0.2). Let’s further assume that money invested returns 400% of its value to the public coffers over the long term. This gives us $560,000,000 of value for $1b spent. Not a good investment. Furthermore, my understanding is that the numbers I’ve used in this example are quite optimistic.
What marginal effects could contribute to make this work? Where is the extra money coming from? Either my understanding of this is completely naive (which it may well be), or this form of economic stimulus is just a shell game.
Back in January, I wrote a short post about Micro-finance, the Grameen Bank, and Kiva, an organisation that also finance micro-loans via micro-investments. Unfortunately, at the time, there was a freeze on investments, so I couldn’t make a small investment on behalf of my sister, as I had planned.
Now, though, things are back in full swing, and so, for Christmas, my sister is getting a small investment to the Than Thol Group, a village bank with 32 members in the village of Sambuor Village in Kandal Province of Cambodia, with which they plan to buy fertilizer for their assorted fields and plantations.
So, if you’re buying gifts for someone who is generally civic minded, why not skip spending lots of money on buying something, and instead give them a gift investment. Maybe with a nice card or something small and personal to go with it, so you don’t lose out on the emotional satisfaction of actually handing them something..
I finally got around to writing this letter to NZ prime minister John Key as part of Morgue’s “Don’t be a Rodney” campaign. It’s probably a bit long, but, well, I had to get that all off my chest, and the key point is summarized at the end.
So far, I’ve only emailed it in, but I might print and send it when I’m back in New Zealand in a week.
Dear Mr Key,
I’m writing with regards the agreement on climate change policy in your party’s confidence and supply agreement with ACT.
From reading this agreement, it seems that the National party supports reasonable policy to meet New Zealand’s Kyoto responsibilities, and perhaps, policy that allows us to reinforce our international image, and allow us more latitude in the implementation of policy by taking some modicum of leadership.
However, it is also abundantly clear that ACT does not support this, and indeed considers it all to be a hoax, perpetrated by some unknown party for unknown or poorly substantiated reasons. From his statements in the house on September 2, it is clear that Rodney Hide, in particular, believes this fiercely. Furthermore, it seems that he was successful in shackling you to what will likely prove to be both a foolish and unpopular policy that, by returning to minority opinions already disgraced in years past, can only undermine you and make New Zealand appear foolish on the international stage.
I respectfully recommend and request that you either act to amend this portion of your agreement with ACT, or, while working within the provisions of that agreement, move swiftly to bypass the Mr Hide’s obsession by enacting the Emissions Trading Scheme as swiftly as possible. In particular, you should move past the ‘scientific review’ stage dictated to you in your agreement as swiftly as possible, and with a resounding acknowledgement of both the existence and magnitude of this problem.
I would like to offer the following arguments for why this would benefit New Zealand, the world, and you personally:
- First, and most obviously, climate change is perhaps the most significant challenge to face humanity. Naive appreciations of the problem in which global warming is thought of as an expensive annoyance are deeply flawed. Changes in climate tie into a web of global problems that, taken together, have the potential to be absolutely catastrophic. Changes in weather patterns could easily (and are most likely to) lead to massive disruptions in the global food supply at a point in time when the world is running low on cheap fertiliser from fossil fuels. Furthermore, small changes in climate now have the potential to (as they have in the past) lead to more catastrophic changes such as those associated with disastrous warming events in the deep past. Controlling our emissions is but one part of combating these possibilities, but one that is extremely important.
- New Zealand holds a great deal of prestige for its ‘clean, green’ image. This prestige factors strongly into our attractiveness as a tourist destination, our national pride, and in our ability to ‘punch above our level’ in international discussions. By arbitrarily back-pedaling at this stage, we stand to look like fools and diminish this prestige, just as the US finally begins to come around to dealing with the problem.
- There is significant economic opportunity in adapting current infrastructure and technology for reduced emissions. By moving swiftly, we open incentives for New Zealand companies to invest in improving our domestic infrastructure and, by doing so, place them and us in a strong position within the emerging global green technology industry. By moving slowly and, worse, by making our country seem backwards on this issue, we both lose opportunities, and increase the likely costs as we play catch up as the rest of the world forces us to control our emissions.
- Leading up to the election, your party participated in the development of the ETS bill. Furthermore, a strong mandate exists for New Zealand to move in this direction. Now, following the election, it seems that you have been emasculated by ACT, and forced to accept policies that do not echo your party’s policy, the mandate of the people, or the opinions of the best minds of our time. You must know how foolish this makes you look. It is emphatically in your best interest that you assert yourself and show us that you can be the leader you said you would be during your campaign.
You campaigned on a platform of making a place we are proud of. I simply cannot see how allowing yourself to be led around by Mr Hide on this issue helps you in that goal. I beseech you to do the right thing for New Zealand, yourself and the world, by moving swiftly to pass the Emissions Trading scheme.