Ricardian equivalence – or possibly habit formation. If we felt that people solely followed rules of thumb, and formed habits with their consumption, then a consumption tax may not be the least cost way to reduce the level of consumption.

“Yes I agree. If we blew up half our capital with dynamite, capital productivity would probably increase. is that Labour party policy yet?”

But this policy actual leads to the removal of the least efficient types of capital investment.

Don’t forget that the higher interest rates, and limit on borrowing, will actual lead to greater private savings in order to fund this investment – which will in turn ensure greater domestic ownership of these higher quality assets (especially since New Zealanders are still able to buy overseas assets). In the lower interest rate case, domestic savings was lower – implying that asset accumulation would also be lower.

“Now if I was trying to defend the idea I might head down the “undermines national sovereignty” route… luckily I’m not that masochistic.”

I don’t think I could attempt that route without dieing a little inside 😉

“A consumption tax does not necessarily imply that the value of private consumption will fall if borrowing can be increased.”

Ricardian equivalence? Now you’re getting desperate. But remind me to quote you back at you next time we’re talking about whether externality taxes are a good idea. 😉

“Doesn’t this imply that we are making more productive use of our limited capital?”

Yes I agree. If we blew up half our capital with dynamite, capital productivity would probably increase. is that Labour party policy yet?

Now if I was trying to defend the idea I might head down the “undermines national sovereignty” route… luckily I’m not that masochistic.

Indeed, I’m not in any way pro-capital controls, however I think it is important to sometime try to make your best argument for a policy you don’t like – just to see if you learn anything. So I’ll try to argue the points you’ve raised, even though I agree with them 😉

“I accept that a government might think consumption is too high, but there are much better policies to combat this (consumption tax, savings subsidies)”

A consumption tax does not necessarily imply that the value of private consumption will fall if borrowing can be increased. If our agents are the headless chickens that Dr Cullen believes (or if agents believe that it is a temporary tax) – it is possible that these schemes could just lead to more borrowing. As a result, it might be more effective to just directly limit borrowing by limiting capital inflows.

“adjustment to restricted capital inflows would also come through lower investment”

It would, as we have higher domestic interest rates. However, this policy would just take away the ‘worst investments’ as the cost to capital would be higher – making more rubbish investments not-economical. Doesn’t this imply that we are making more productive use of our limited capital?

“Rodrik’s argument is mainly ass IMHO.”

I’m not going to defend his argument as I don’t really agree with him either – and I’m having enough trouble trying to make my own one 😉

Rodrik’s argument is mainly ass IMHO. It’s another version of “markets lead to bubbles, bubbles are bad, hence markets are bad”. I’m not convinced by either of the first two premises.

The benefits of financial diversification are important. Owning foreigners’ assets, and having them own ours, is positive sum. From that starting point, I’d need a lot of convincing that this policy internvention is beneficial.