Subsidised jobs make everyone poorer

Rodney Hide

HIDESIGHT

There are many bad arguments for subsidising the Tiwai Pt aluminium smelter.

There are no good ones.

The worst argument is jobs. Its only merit is its propaganda value: journalists have jobs, they can imagine losing them and they figure they wouldn't like it.

So job losses are reported as an economic calamity, the population is alarmed, and politicians must pretend to care.

Phooey.

The number of job losses that have been huffed and puffed about over the last 30 years would see New Zealand entirely unemployed. It's not. There's a reason for that: most people – even those with arts degrees – can figure out something productive they can do to pay the bills.

People made redundant don’t stay jobless for long.

And Joe Bloggs laid off from Telecom but doing better self-employed doesn't make the news. We hear about job losses. We don't hear about job gains.

Besides, we don’t want jobs. We want money. It's just polite to say that it's a job we are after. It doesn’t sound so greedy.

But few of us would turn down money for no work and even fewer would work for no money. It's not jobs that we want but income.

Cost us all
And jobs that don’t generate income cost us all. That's why make-work schemes like subsidising a smelter are dumb. They make us poorer, not richer. They cost us what we actually want: income.

We could all pay each other to dig holes only to fill them in again. We would all have jobs but we would starve. We can readily see the silliness. But that’s the economic logic of subsidies.

To prosper, it's productive jobs we need. Subsidised jobs by definition aren't productive.

The even worse argument is the idea that one job at Tiwai Pt creates four for Southland. So-called economists get paid good money to pretend they can estimate jobs and prosperity radiating out from government spending.

Of course, jobs ripple out across the economy. It’s an interconnected system. But the ripple out is not unique to government spending and subsidy. All government spending does is shift the ripple to less productive parts of the economy.

If the smelter were to close, the 600MW of power generated day in, day out from Manapouri would flow through the national grid, providing extra and cheaper power.

There will be more business and more jobs as a consequence. And these will be real jobs. Jobs that cough up real income, not jobs that soak up taxes. 

If Tiwai closed, the job losses will be obvious and reportable. The jobs and income generated through the extra and cheaper power won’t be. But they will be there. And we will all be better off as a consequence.

The only difficulty is that these jobs won’t be spotted and will go unreported. We don’t know where they are. And we can’t point to them. That’s why the jobs argument – bad as it is – has propaganda value.

That propaganda value is exploited as ruthlessly by big business wanting to suck on government largesse as it is by power-hungry politicians wanting to boss us about. It’s been marvellous to see Meridian stick to its guns in its dealing with Rio Tinto and for government to stay out of it.

It gives hope that politics can achieve economic literacy and raise its head about the clamouring special interest to take into account the best interests of us all.

Bravo!

This article is tagged with the following keywords. Find out more about My Tags

Post Comment

40 Comments & Questions

Commenter icon key: Subscriber Verified

Good god. I just agreed with Rodney Hide. There is indeed hope still for Nth and Sth Korea.

Reply
Share

Subsidised anything makes us all the poorer. Share. Its good.

Reply
Share

I have never read so much garbage as above. Lets get this straight, NZ has not looked after its employment market, it has done its best to keep average workers pay at rock bottom levels while allowing managerial roles to be badly over paid. NZ has allowed its trainee s in all trades to all but vanish & any person over 45 has next to little chance of gaining employment. I left NZ after owning a business and house to my family to get a job when the time came. NZ needs to look at its self and lower its head in shame, you idiot politicians have got it wrong for the past 30years.

Reply
Share

Pat, you are way off the mark spend a little time learning some basic economics before spoutiing off emotive nonsense.

Reply
Share

Too true, I think when referring to those who just want money, not jobs, Rodney Hide should look to himself and his ilk. People working on these terrible wages would love more money, yes, because life is a damn struggle. That is not greed, that is survival with, hopefully, the smallest comforts at the end of the day.
It should not be the weathy who run our country.

Reply
Share

Gee, I have a radical strategy. If you dont like "working on these terrible wages would love more money", how about you invest some time in yourself and upskill. Instead of spending your evenings watching reality TV shows how about you enrol in a night course or correspondence course to increase your own economic value.

Wealthy is relative... It might surpise you to find out that the person living round the corner from you who has absolutely nothing thinks even on your terrible wages that you are a rich pr*ck who should pay more tax to support them.

Reply
Share

You fool. Anonymous can't afford to study.

Reply
Share

Yes, you make some good points but it is all a matter of perception. You could say that through the good work of people who actually work hard and produce useful stuff (dairy workers) you Rodney, are being subsidized to produce a product that a majority of people might not consider to be useful. Sometimes subsidizing is the right or civilized thing to do.

Reply
Share

Noel, the only definition of "useful stuff" is that someone is prepared to pay for it with their own money. The good news about being out of Parliament is that I now know I am doing "useful stuff"!!

Reply
Share

Oh my goodness, I never thought I would agree with something Rodney Hide said, but he has some good points.

Reply
Share

It is justifiable, in the short-run, to provide subsidies up to the level of tax that the government receives from the smelter (both directly and indirectly).

Your argument holds in the long run as the new jobs and businesses created would begin to pay tax but this amount is likely to be less than the smelter used to pay. There is a trade off between receiving the new tax income and receiving the old tax income less the subsidy.

There is also a period of receiving no tax from those resources while they are being reallocated. This moves into the political game theory aspect - when is the best time to take the hit if the objective is to stay in power. Subsidize until the next election, receiving slightly lower tax receipts, or take a large drop just before an election.

Reply
Share

I am afraid your mistake is to look at subsidy from the government's point of view -- tax receipts -- rather than people's point of view -- the general welfare.

Even then I don't think you are right. The replacement jobs and businesses will, by definition, be more productive and therefore will pay more tax and won't need subsidies.

Also, subsidies don't tend to be temporary. And the political problem with a subsidy is that when it's taken off it's the politicians that have caused the job losses, not changing economic conditions.

Once government subsidises a business that business becomes a political tar baby.

Reply
Share

Not quite, my argument still holds because the smelter is generating that wealth that is being transferred to government. When looking at the net return of assets from an economic point of view there is the profit to the owners and the taxes to the government (and the premium they are paying for resources above the next highest bidder).

If the employees could be paid more by another employer they would already have left Tiwai. Same argument goes for Meridian.

I am merely pointing out that it is possible that the benefit of the smelter is greater than the alternative uses of those resources, such that a subsidy (that I only view as a reduction in taxes, wealth the smelter is generating but not allowed to include in it's own accounts) can be justified.

The actual numbers may go either way, depending on the actual situation.

True subsidies are bad, no doubt about that. But true subsidies exist only when the net tax (direct and indirect) from the asset is negative.

Reply
Share

Last week you were trumpeting an online auction of the unemployed that factored in a subsidy for employers.

Today you are bagging subsidies for employers.

Reply
Share

Not quite. Last week I was arguing that the subsidy paid to people to do nothing should be applied so it's paid to get people into work and that quite quickly the subsidy could be reduced.

Reply
Share

Still a subsidy, though, right? Ironically, by your own admission you have this week pointed out an inefficiency in your unemployed auction scheme.

Reply
Share

Yes. But the job auction is swapping a subsidy for doing nothing for a subsidy to do something with the subsidy diminishing as people get work.

I don't believe that showing how we can use an existing subsidy to better effect and over time dramatically reduce it is contradicted by arguing that job subsidies are inherently inefficient.

Reply
Share

So you do think subsidies are useful sometime. This is the crux of the issue. Subsidies can be a very useful tool in directing resources to areas of the economy that would suffer without government intervention.

Reply
Share

No!

Reply
Share

Your economic ideolgoy lives in the theoretical. Thats why Act was a failure politically; the theory is not believable. There are many many examples where countries would be far worse off if governments didnt reallocate resources, or protect industries from foreign intrusion for limited periods of time. The issue is governments dont always get it right, not that the answer is to remove goverment influence altogether.

Reply
Share

Socialism as a theory is unbelievable, Anonymous. But people still vote for it.

Reply
Share

No.

Reply
Share

What about subsidies to relatively wealthy investors in failed finance companies? What about the Warner Brothers subsidy? How about subsidies to the last world cup organisers? How about subsidies to polluters via encouraging the pollution with no tax on carbon emmisions or filth in our waterways? Subsidies would not be needed if those with access to land and capital weren't so damned greedy.

Reply
Share

Okay, where is a country that has virtually removed the role of goverment in favour of free market forces? What we can be sure of is if remove regulation you will be left with is more Enrons, Manoffs, Lehmans, Merrills and SCFs.

Reply
Share

I really don't want some uneducated unionist or career politician directing the economy. Half of the Labour Party are either union hacks, dental nurses or student politicians.....and you want them in charge of resource allocation?

Reply
Share

The Tiwai Point issue is not about subsidies but about profit margins. It costs Meridian about $5 / MWhr to produce electricity from Manapouri, yet charges Tiwai about $50 / MWhr. In 2012 the smelter lost $50M whereas Meridian would have made a profit of about $200M.

You also assume that freeing up the electricity will magically create new jobs. Can you please support this by providing media releases from businesses that haven't been able to start up due to lack of electricity in NZ?

The smelter's contribution to NZ's GDP also comes from other countries buying our exports, so are the above jobs going to generate similar export $$ for NZ?

You also appear to be a bit naive about cheaper power being created through shutting the smelter. Supply and demand will mean that generation capacity will drop off and the prices will rebound quickly, as happened when the smelter lost a ~1/3 of it capacity through transformer failure. I seem to remember Max Bradford promising similar things through his electricity reforms, and I'm still waiting for cheaper power.

So while I generally agree with you about subsidies, this isn't the case and until there are viable alternatives (which I have yet to see) for using this power, it's in NZ's best interest to keep the smelter going.

Reply
Share

The issue for Meridian -- and the country --- is not the cost of production of the power but its opportunity cost, i.e. what others will pay for it.

And they will pay a lot more than 1/2 kwh even after transmission costs.

The jobs won't be created by magic. But the power won't go to waste and that means business and jobs -- and using dearer generators less. All good stuff.

We have a floating exchange rate. There's nothing special about an export dollar versus any other dollar earned in the economy. There is no especial premium for export dollars over other dollars.

Once again, if there's power being produced at 0.5c/kwh we shouldn't be subsidising i's use at the smelter but at the very least using it to save on the more expensive plants we have running.

Cheers.

Reply
Share

Actually, an export dollar is slightly different because it has a lower correlation with domestic dollars than other domestic dollars, so it provides a diversification benefit, actually making the country slightly richer (on a risk-adjusted basis).

Reply
Share

Doesn't make us slightly richer, just diversifies our risk.

Reply
Share

Good work on the article, Rodney.

Will we really get rid of the more expensive generators, though? I thought we would have to keep some of them for emergency scenarios - e.g., backing up the cheaper hydroelectric producers in a drought.

Reply
Share

Having spent 30-plus years working overseas, I have observed that the only constant is change. Those of us who can't except change will become stuck in the Waitangi rut.

Reply
Share

Mr Hide is right. When he lost his subsidised job we all became better off.

Reply
Share

Indeed!

Reply
Share

I'm in general agreement on subsidies. However, I feel they are warranted to see a business or industry through a specific problem or period of abnormal circumstances. Say when farmers face drought, for example - or perhaps at a time when ali prices are abnormally depressed.

Reply
Share

On this occasion I have to disagree with Rodney.

The reason is simple. We won't get the cheap power he hopes for.

The generators control the electricity price much of the time. They maximise their profits by keeping us on the edge of a shortage. So they will shut down Huntly and other stations until we are again on the margin and they control the price.

So don't expect a sustained drop in power prices.

Reply
Share

I think Brian the difference is that you believe we should be charging for electricity on the basis of its historic cost of production whereas it is at present correctly charged on its marginal cost. That's what the spot market does.

The price of power is the cost of generating that last kwh, not what the earlier kwhs cost to produce. That's the only way to ensure investment in the new plant that's ultimately needed.

But we do agree that power would be cheaper if we stopped the ETS and global warming farce especially now that global warming has been "paused" for years!

Reply
Share

Rodney I hope you fire up a one-law party. Its the one issue the majority of the country cares about.

Reply
Share

I did. It was called ACT!

Reply
Share

For those needing help with change. Read, "Who Moved My Cheese", a little book with a huge message.
In most bookstores.

Reply
Share

Well done Rodney, you are a breath of fresh air and common sense.

Reply
Share

Post New comment or question

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.

NZ Market Snapshot

Forex

Sym Price Change
USD 0.7875 0.0049 0.63%
AUD 0.9121 0.0018 0.20%
EUR 0.6276 0.0034 0.54%
GBP 0.5019 0.0026 0.52%
HKD 6.1076 0.0394 0.65%
JPY 92.8950 0.3960 0.43%

Commods

Commodity Price Change Time
Gold Index 1193.9 -13.950 2014-11-19T00:
Oil Brent 78.8 0.360 2014-11-19T00:
Oil Nymex 74.5 -0.010 2014-11-19T00:
Silver Index 16.3 0.120 2014-11-19T00:

Indices

Symbol Open High Last %
NZX 50 5522.1 5538.0 5522.1 0.09%
NASDAQ 4655.2 4703.0 4675.7 0.56%
DAX 9460.4 9487.7 9472.8 0.12%
DJI 17685.5 17712.3 17647.8 0.22%
FTSE 6696.6 6696.8 6696.6 -0.26%
HKSE 23401.0 23461.0 23373.3 -0.10%
NI225 17407.7 17407.7 17288.8 0.07%