Gordon Campbell | Parliament TV | Parliament Today | Video | Questions Of the Day | Search

 


Cunliffe's economic confusion

Cunliffe's economic confusion
Jamie Whyte, ACT Party Leader

David Cunliffe today gave a speech to the New Zealand Initiative, an economics think tank. The talk outlines the Labour Party’s economic policy. It displays so much economic confusion that it will take several posts to get through it all. Today I want to identify a fundamental conflict between Labour’s economic goal and its proposed monetary policy.

Mr Cunliffe begins his speech by saying that New Zealand businesses produce too much low value stuff. Labour wants to “support New Zealand business in the journey from volume to value”. He then claimed that “the biggest obstacle to our exporting businesses is the consistently over-valued and volatile exchange rate. Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance”.

A devalued dollar helps exporters sell more overseas by reducing the price foreigners pay for our goods. For example, if the NZ dollar fell from US$0.85 US$ 0.70, what an American pays for a NZ$1,000 widget would fall from US$850 to US$700. So Americans would buy more of those NZ made widgets. But, of course, the value of those widget sales would have fallen. The reduced exchange rate increases the volume of what we sell overseas by decreasing its value – the exact opposite of Mr Cunliffe’s goal.

Such confusion would be funny, if only there weren’t a chance, however small, that these people will get a chance to act on their ideas.


Cunliffe peddles foreign ownership myths

Many on the political Left complain about foreign ownership of New Zealand businesses on the ground that the profits are “sent overseas”. This is a foolish misunderstand of what happens when foreigners buy New Zealand businesses. But not too foolish to be repeated by David Cunliffe in his speech today about Labour’s economic policy: “right now [foreign direct investment] is poorly managed, and it’s Kiwis who are losing out. Overseas investors are buying up land, farms and good companies, then sending the jobs and profits overseas”.

The value of a business depends on its expected future profits. The seller of a company is in effect swapping the profits she would have got over future years for a lump sum she gets today. The lump sum (the purchase price) represents the present value of the future profits.

When a foreigner buys a New Zealand business, all the expected future profits of the business come into the country in the purchase price. When the actual future profits then go out to the new owner overseas, there is no net loss.

In fact, the transaction must involve a net gain for New Zealand. This is because, if the purchase price were exactly equal to the present value of the expected future profits, the Kiwi owner would have gained nothing from the transaction and would not have sold. The Kiwi seller must have valued the purchase price higher than the future earnings. So the transaction creates a net gain to New Zealand.

If Mr Cunliffe does not understand this, then he learnt little from his days at the Boston Consulting Group. If he does understand it but still peddles the popular myth of profits lost overseas, well, that is even worse.


ENDS


© Scoop Media

 
 
 
 
 
Parliament Headlines | Politics Headlines | Regional Headlines

Issue 49: Werewolf Weekender

Philip Matthews: From The Lost Continent
It’s a case of better late than never for Olivier Assayas’ marvellous After May/Apres Mai, which first screened at Venice in 2012, had a couple of North Island screenings last year during the International Film Festival’s “Autumn Events” season, got a theatrical release in Australia – but not here – and only now appears on DVD, after Assayas himself has moved on. More>>

The Complicatist: Blue Eyed & Soulful
For a while in June, the top two singles on the US Billboard charts featured Iggy Azalea, an Australian model turned hip hop performer. To some, this may seem like just the latest chapter in a long saga of whites ripping off black culture, while enriching themselves in the process. Obviously, there’s some truth in the stereotype. Yet it can also obscure the positive collaborations – in jazz, soul music and hip hop – between musicians who treated each other as creative equals, race regardless. More>>

Satire: Carry On Captaining
Oh hello. Scanner Technician Davis. To what do I owe the pleasure?
You think we’re what?
Oh, pish. This vessel has been travelling along smoothly for generations – particularly smoothly in the last few years though I say so myself – and I happen to know we have never once been hit by an asteroid... More>>

 

Parliament Today:

False Electoral Return: John Banks Sentenced To Community Detention, Community Work

“The conviction of John Banks today is another sad chapter for John Banks and the ACT Party”, says Labour candidate for Epsom Michael Wood. More>>

ALSO:

Gordon Campbell: On The Rise Of ISIS And Labour

While global attention got distracted by the fate of MH17 and the atrocities in Gaza, the world’s other mega ‘bad news’ story – the rise of ISIS-led fundamentalism in Iraq – has reached a tipping point. More>>

ALSO:

Rebuild: Christchurch City Council Releases Milestone Report

The Cameron Partners report says the Council may need to find an additional $783 million to $883 million by 2019... Options Cameron Partners proposed include increasing rates, borrowing more, maximising insurance payments, and freeing up capital from its commercial assets. More>>

ALSO:

Parliament Today: Parliament Adjourns

The 50th Parliament has adjourned for the final time. After the completion of the adjournment debate, MPs left for the campaign trail with Parliament to be dissolved on August 14 ahead of the September 20 election. More>>

ALSO:

Novopayout: Government-Owned Company To Take Over School Payroll

After lengthy negotiations, the Ministry of Education and the existing school payroll provider, Talent2, have settled both on the amounts payable by Talent2 towards the costs of remediating the Novopay service and a new operating model for the school payroll system. More>>

ALSO:

Employment: Labour Will Raise Minimum Wage, Restore Work Rights

A Labour government will raise the minimum wage $2 an hour to $16.25 and restore work rights to ensure the benefits of economic growth are shared fairly by all New Zealanders, Labour Leader David Cunliffe says. More>>

ALSO:

Police: Crewe File Review Released

No new evidence has come to light implicating any specific person as being responsible for the murders of Jeannette and Harvey Crewe... The review identifies there is a distinct possibility that Exhibit 350 (the brass .22 cartridge case) may be fabricated evidence, and that if this is the case, that a member of Police would have been responsible. More>>

ALSO:

Werewolf Issue #49: Gordon Campbell Interviews Laila Harre

For 25 years, Labour and National have been in virtual agreement about the basics of economic policy, and differed mainly on how to go about managing its social consequences. More>>

ALSO:

Get More From Scoop

 

LATEST HEADLINES

 
 
 
 
 
 
Parliament
Search Scoop  
 
 
Powered by Vodafone
NZ independent news