On Friday David Cunliffe declared that in government Labour would plan the economy. “Government should back positive Kiwi businesses, not leave it to the wolves of international trade … That also means attracting industry to New Zealand regions that need it most. Industry policy has become a dirty word. It isn’t. Regional development has also fallen by the wayside. Labour will bring it back. We want good jobs in every region of New Zealand.”
The obvious folly in this policy is the wilful misallocation of resources. The regions that………. most “need” government help in attracting investment are those that, for whatever reason, are least attractive to investors.
Investors do not act from feelings of regional malice. If they prefer region A to region B, that is because they think the return on the investment will be higher if made in A than in B. To make them instead invest in B, Mr Cunliffe will have to give them enough taxpayers’ money to compensate them for the loss this entails.
The taxpayers’ money spent on this regional subsidy is then no longer available for other investments or to consume the output of other firms. So, to get the regional distribution of investment that suits his tastes, Mr Cunliffe will reduce aggregate economic output. The less obvious problem with the policy is the explosion of “rent-seeking” or crony-capitalism that this policy will cause.
In a free market, firms must attract capital from willing investors and make profits from sales to willing customers. In Mr Cunliffe’s planned economy they will be able to relieve themselves of this burden provided they can convince government bureaucrats that they will promote regional development or are a “smart green business” or possess some other virtue that willing customers and investors have allegedly overlooked. Then the crony firms can extract their profits from helpless taxpayers. Corporate head offices will start relocating to Wellington. And Courtney Place restaurants will boom on the lobbyists’ expense accou