“More” local investment may lead to less

The National party has announced that it wants more of the Cullen fund to flow into domestic investment projects.

Now it may seem to make sense to “increase investment” at home – but we have to think about what this capital is doing when it moves around.

If capital at home made the highest return, then we wouldn’t need to legislate a 40% investment – as the Cullen Fund would put all its dosh there anyway. As a result, by “forcing” the fund to keep 40% onshore, we are reducing the return on our investment plain and simple.

Someone might say that “we are making job, and we’re making money” but they would be practically illiterate – just like the buy NZ made campaign. “Employment” and “domestic production” are not a positive externality. If we are investing money overseas and getting more goods back in return, then we are effectively getting “something” for “nothing” – what is wrong with that.

Investing our capital overseas does not throw it down a black hole, and if the return overseas is greater, it is the best way to reduce our current account deficit, or increase our wealth, whatever random macroeconomic aggregate our government is targeting.

Update: Kiwiblog discusses here.

12 replies
  1. Eric Crampton
    Eric Crampton says:

    Think about what happens, 20 years from now, if we have a high proportion of superfund investment in domestic stock. We have a lot more retirees in 20 years. If NZ is hit with some adverse stock, the value of the superfund collapses at EXACTLY THE SAME TIME as the government has LEAST capacity to make up the difference for covering retirement obligations. This is an insane policy that has every potential for causing major catastrophe down the line. I’m massively disappointed in National for this.

  2. Matt Nolan
    Matt Nolan says:

    The timing issue shouldn’t be too important as long as New Zealand has access to international credit right – well I guess that isn’t a trivial assumption at the moment 😉

    It just seems like 1 sided thinking to me. You legislate NZer’s to invest “in NZ” with there savings – that doesn’t create new investment it merely crowds out foreign investment.

    The foreign investment was only coming in because it was an area where it could “add value” – as a result, we are chucking that down the toilet, as well as the higher returns that our funds can generate overseas. It seems that everyone forgets that voluntary trade is MUTUALLY BENEFICIAL.

  3. Paul Walker
    Paul Walker says:

    Key’s idea has to win the Most Stupid Idea Yet This Election Award. You are right, it will reduce the return on the funds investments but what will it do to the local market. Will this extra government investment just crowd out private investment?

  4. Matt Nolan
    Matt Nolan says:

    “Will this extra government investment just crowd out private investment?”

    I completely agree with that, you’re right on the money – however I didn’t even think I needed to make that point in order to show how silly the idea was 🙂

    CPW said to me yesterday that this is the capital market equivalent of “buy NZ made” – he’s bang on 😉

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