Friday, 28 March 2014

Team New Zealand: Sailing in Subsidised Waters

Did you see a government department released a report yesterday informing us that government spending our money supporting Team New Zealand made us all $50 million richer? Yeeha! If only they’d spent even more.

Economic Development Minister Steven Joyce says the $36 million of taxpayers' money pumped into the last America's Cup challenge directly benefited the New Zealand economy to the tune of $87 million.
    Joyce … released two evaluation reports, both an
independent evaluation [sic] of the Government’s investment in Emirates Team New Zealand… and an evaluation of New Zealand Trade and Enterprise’s leveraging programme in San Francisco.
    "The economic benefit from our investment in Team New Zealand is considerable. From a $36 million taxpayer investment,” Joyce said, “the evaluation shows an estimated positive impact of $87 million to the New Zealand economy."

Yeah right.

First: reports prepared for, and and paid for by government departments, are not independent – no matter what their press releases say.

Second: Even if you believe the figures, the “us” that was allegedly made much richer is a different group of folk to the “we” who were plundered on their behalf. But if you think a net gain to Grant Dalton makes up for your net loss, I invite you to knock on his exquisite front door and invite yourself in as if you own the place. You’ll find You’ll find that’s a form of redistribution Mr Dalton et al is unwilling to contemplate.

Fact is, only in government accounts, where (as our sailing-brother’s keeper) all our wealth is measured together, can a forced redistribution from long-suffering taxpayers to high-earning subsidised sailors be measured as a net gain to all of us.

Third: neither the report on subsidised sailing nor the other on corporate welfare, both touted as “cost-benefit” analyses,” properly address the cost to taxpayers. Or to put it in a way the report’s authors wouldn’t, the benefits that might have accrued to taxpayers if the the $36 million of taxpayers' money pumped into subsidising sailors had been left instead in taxpayers’ pockets

It estimates the “value added” by the spending of every one of those $36 million, but estimates not at all the value that might have been added by taxpayers themselves if it hadn’t been taken from them and distributed as high salaries and high-tech yachting equipment.  As if, you know, government subsidy is all benefit, whereas if they’d kept their own money Jack and Jill Taxpayer would have just, like, baked it into pies or something.

The alleged “economic impacts” of sailors’ spending their $36 million building and racing boats, buying houses, and paying restaurant and hotel bills is ramped up in the report by the international sponsorship it attracted and spent here by the even bigger spending in NZ of Oracle and Luna Rossa sailors (every dollar of which it explicitly assumes was only spent here because of every taxpayer dollar), and by a “multiplier effect” that inflates the effect of every dollar spent by the amount of “re-spending” of that dollar – while ignoring whatever “multiplier” might have applied to whatever productive spending you and I might have done with our own dollars if left in our own pockets. 1

That spending on restaurant and hotel bills by the way is significant. Despite the talk of boatbuilding benefits and the like, the report informs taxpayers that “the sector receiving the greatest share of [Team New Zealand]’s domestic operational spend was ‘cultural and recreational services.’” And they don’t mean the cost of Maori concert parties.

Obvious quips about spending and drunken sailors will be eschewed here.

A finger is put in the air to estimate the economic benefits to New Zealand’s marine sector, the source for which estimate was what the report’s authors call “qualitative interviews with the top ten suppliers to [Team New Zealand], Oracle and Luna Rossa.” Not surprisingly, the direct beneficiaries of taxpayer largesse thought qualitatively that the taxpayers’ largesse was a great thing.

A further finger is put in the air by another government department to estimate the advertising effect of the campaign (said to “have an equivalent editorial value of $13m”), and “potential” benefits from tourism and boat building, neither of which sectors are apparently able to stand on their own feet without this sort of manna from government heaven.

Meanwhile, the international “editorial value” of Lorde, Eleanor Catton et al, neither of whom got a cent in subsidy from taxpayers, both of whom have had more international exposure than these subsidised and ultimately unsuccessful sailors, is not mentioned.

That’s just symptomatic of a wider silence.

Government-employed economists measuring the “benefits” of government spending routinely ignore what economists call (mostly in the breech) the displacement effects of taking money from Peter to subsidise Paul – the benefits to Paul are ramped up and highlighted in headlines, graphs and pie charts; the unseen costs to Peter are airbrushed away.

This report however does at least claim that it did look at the displacement effect of taking this money out of our pockets to spend it on sporting jollies. However, a careful reading of Appendix A in which it lays out the report’s assumptions reveals however that the only displacement effect estimated involves government spending this money in a different way. And it admits that many of the benefits that might have accrued from you and I and other NZ business owners spending our own money can’t be quantified, or even known. “It is  likely that a portion of funds diverted to ETNZ from local businesses were drawn from funds aimed at generating exposure overseas,” the report concedes, for example.  “However, this is not known so a more prudent approach was to exclude them completely.”


French economist Frederic Bastiat wrote widely about the economic fallacy of looking at all the benefits of what can be  seen while spending someone else’s money while ignoring the unseen: i.e., what that someone might have done with it themselves if left unmolested.   “There is only one difference between a bad economist and a good one,” he says: “the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

Have you ever heard anyone say: “Taxes are the best investment; they are a life-giving dew. See how many families they keep alive, and follow in imagination their indirect effects on industry; they are infinite, as extensive as life itself.” … The advantages that government officials enjoy in drawing their salaries are what is seen. The benefits that result for their suppliers are also what is seen. They are right under your nose.  
    But the disadvantage that the taxpayers try to free themselves from is what is not seen, and the distress that results from it for the merchants who supply them is something further that is not seen,although it should stand out plainly enough to be seen intellectually.
    When a government official spends on his own behalf one hundred sous more, this implies that a taxpayer spends on his own behalf one hundred sous the less. But the spending of the government official is seen, because it is done; while that of the taxpayer is not seen, because—alas!—he is prevented from doing it.
    You compare the nation to a parched piece of land and the tax to a life-giving rain. So be it. But you should also ask yourself where this rain comes from, and whether it is not precisely the tax that draws the moisture from the soil and dries it up.
    You should ask yourself further whether the soil receives more of this precious water from the rain than it loses by the evaporation?

He continues

Nothing is more natural than that a nation, after making sure that a great enterprise will profit the community, should have such an enterprise carried out with funds collected from the citizenry. But I lose patience completely, I confess,when I hear alleged in support of such a resolution this economic fallacy: 'Besides, it is a way of creating jobs for the workers [for example].' The state opens a road, builds a palace, repairs a street, digs a canal; with these projects it gives jobs to certain workers. That is what is seen. But it deprives certain other labourers of emment. That is what is not seen . . . it is nothing but a ruinous hoax, an impossibility, a contradiction, which makes a great show of the little work that it has stimulated, which is what is seen, and conceals the much larger amount of work that it has precluded, which is what is not seen.

He wrote that in 1848.

This report’s authors never read it.

The bottom line is this: if people with their own money want to enjoy having a team in the Cup,  then all power to them. Great. Put up your own dosh. If businessmen and women think a Team NZ in the America’s Cup will help their business, then all power to them too. Let them put up their own money to help their business out.

And if politicians, like Trevor Mallard and Steven Joyce et al, want a place at the international sporting table, then let the bastards go out and get a real job and earn it.

Don’t employ economists to write bullshit on your behalf justifying your expensive grandstanding.

* * * *

1. True, the report at least recognises that “The use of multipliers has come under increasing scrutiny in the literature in terms of the effects of double counting, especially for complex events or complex policy decisions that
affect a large section of the economy. The use of multipliers is no longer appropriate to model complex events.” True that. “In this study, the flow-on effects are estimated through a different approach….”
    That approach is instead a “multi-sector analysis of final demand,” “the difference being that multipliers are descriptive of the output in the current approach, whereas multipliers drove the process in previous studies.” Got that? “In fact, once the outputs have been calculated, it is possible to estimate what the multiplier would been by dividing the output from each sector by the initial sector shock.”
    The key word here is probably “estimate.”


  1. That's brilliant PC! Thank you.

  2. Is there any sort of subsidy that is worth considering in an ideal free market world?


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