Rescuing defeat from the jaws of recovery

In the thirties they were called "public works projects," massive spending on which dragged resources away from productive enterprises and delayed the necessary recovery for years.  Now it's called "investment in infrastructure," and while the buzzwords have changed, in a time of economic crisis the two big parties have both hung their hats (and our heads) on the same old failed nostrum -- big spending on big public works projects --  to get us out of the economic mire.  Spending that can only be paid for out of ten years of borrowing.

So much failed thinking in just one shared policy. 

Meanwhile, one of only two NZ finance ministers to pull NZ out of a previous economic mire is now going in to bat at this election with a policy to keep growing the state, while cutting the money that pays for it -- meaning the inexorable reek of deficits emanates from this source as well.

So much for radical solutions to real problems.

A while ago I made some excellent points (if I say so myself) that public "investment" in infrastructure:

1. sucks capital away from profitable private investment ; and
2. since real infrastructure investment repays the investment whereas public investment doesn't,  government spending on infrastructure is essentially consumption spending.

To say nothing of what government-borrowing to pay for deficits does to bid real capital away from businessmen and entrepreneurs -- the ones we actually need to grow the economy.

To illustrate this point again, an avid reader (whose initials might be A.B.) has sent me an excerpt from one of the investment papers he analyses for a publicly-owned European rail infrastructure organisation. He says that in such papers there is a note saying that "Net Present Value & Internal Rate of Return analysis is not applicable for Socio-Economic Projects."

Forget the jargon (I did), but do note the package deal: "Socio-Economic Projects," as opposed to actual economic projects.

In other words, when you're analysing real infrastructure investment you should expect it to repay the investment; whereas when you're examining "socio-economic" projects you should expect to see your money poured down a black hole -- but with some really colourful excuses to explain why.

For example, a UK railway line (for which a higher speed main line & a motorway already exist as alternatives) was previously closed -- by a government body -- just for sheer lack of use.  No chance at all then that any "investment" in such line would do anything other than use up the resources "invested" in it.

But that's when you look at real economics.  In the fantasy world of "socio-economics" in which reality has been suspended, an analyst can read the following benefits of "socio-economic investment" in such a line:

• To improve direct access to labour markets in BigCity1 and BigCity2 for people living in Hicksberg and Wopwopsville.
• To stimulate the economic growth of the Hicksberg and Wopwopsville Council areas by improving the connectivity of the area and thus encourage inward investment.
• To assist in the delivery of social inclusion to communities in Hicksberg and Wopwopsville, particularly in the Smalltown to Smallertown corridor.
• To contribute significantly to increasing the number of people using public transport in Central Socialistland and to provide these people with direct access into the national rail system.
• To offer a sustainable public transport alternative to the local motorway that will be attractive to car and other vehicle users and thus reduce the rise in road congestion and subsequent environmental impacts.
• To facilitate connectivity between existing services thereby creating a viable alternative to the BigCity1 - BigCity2 main line route, and consequently alleviating congestion during the peaks.

And the price of delivering all this "social inclusion" and other politically correct benefits? The local currency equivalent of $1.07 billion NZ dollars!

We should take comfort that it at least makes FailRail look cheap (and we can see where Jeanette Fitzsimons and Mike Lee get their "analysis" from). But this is what happens when politicians direct investment instead of entrepreneurs: they chew up real resources that could have been used to make everyone better off.

That's NZ$1.07 billion that entrepreneurs won't get to invest profitably. It will go instead to:

• bid up the prices of public works contractors, bidding them away from profitable work elsewhere
• bid up the price of building supplies companies, bidding these materials away from profitable work elsewhere
• paying large sums to adjacent land owners for access to land worth virtually zero
• paying the exorbitant fees and levies of the local environmental protection agency, the national waterway protection board, the local heritage protection agency (not to be confused with the national historical preservation agency, who will also be consulted); and a host of other consultants my correspondent's employers will retain to represent them in dealing with all those agencies.

And of course, since this project has been publicly announced and touted by politicians, it is work that "must be done" -- without delay! -- and so the amounts of taxpayer money handed over for the aforementioned works, access and consulting will be far above amounts that a private investor would pay.

Now, aren't you glad the Red and Blue Team are going to beef up the RMA to make "work of National importance" easier, and increase public "investment" in infrastructure. The NZ Contractors' Federation sure is ...