Tuesday, 10 November 2015

Little thought given to Labour’s buy-local lunacy

“In this lies almost the whole difference between good economics and bad. The bad economist
sees only what immediately strikes the eye; the good economist also looks beyond. The bad
economist sees only the direct consequences of a proposed course; the good economist
looks also at the longer and indirect consequences. The bad economist sees only what
the effect of a given policy has been or will be on one particular group; the good economist
inquires also what the effect of the policy will be on all groups.”
~ Henry Hazlitt, ‘One Lesson

Labour leader Andrew Little has achieved rare headlines, for announcing he would require a government he leads to make job creation an objective of government procurement policy.

As Eric Crampton says, this “is a terrible idea.” Little argues:

The government spends $40 billion a year purchasing goods and services.
That’s huge buying power but, currently, government bodies only consider their own bottom line when they make purchasing decisions. Not the country’s bottom line, just their own.
They buy ‘cheaper’ options, often from overseas, regardless of the impact on New Zealand, even if it means Kiwis will lose work.
That’s the kind of dangerously short-sighted thinking that has been behind some of the biggest government botch-ups in the last few years.

Actually, What really is a kind of dangerously short-sighted thinking that has been behind some of the biggest government policy botch-ups in the last few years is the utterly mistaken idea that buying more-expensively from locals is better for all locals than buying more cheaply elsewhere. To understand why, then as Henry Hazlitt advised all good economists should do, you need to look beyond the immediate consequences for one group (workers at Hillside workshops in Dunedin; kiwi businesses “shut out” of the $1.9 billion IRD computer system contract) to the longer-term consequences for all groups (taxpayers; the unemployed).

If you ignore those consequences, what happens is this:

  • Government either spends more to get the same thing, or the same to to get less.
  • If the former, then this raises the cost of government services
  • If the latter, then more has to be spent elsewhere to get the services desired, which raises the cost of government services
  • If the cost of government services go up, them taxpayers have to pay more.

And what do higher taxes do?

Yes, Virginia, they make it harder to pay wages. Which means either fewer would-be wage-earners are earning wages, or wage-earners who are earning wages are earning less—all to help pay for a Labour leader’s desire to help workers in one place that he can see, at the expense of would-be workers elsewhere that he simply ignores.

So in other words, this is simply another shoot-the-workers-in-the-foot policy from a party whose founding principles include advancing the cause of all workers.

Go figure.

(Eric Crampton has more, as he often does.)

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