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The virus crisis has led to huge government intervention around the world, particularly in terms of lock-downs and social distancing rules. Is this crisis a negation of free market economics, as many Kiwi commentators are arguing?

A key feature of COVID-19 is that it involves a potentially lethal 'externality' whereby one person can infect another without consequence to the former. A well-known externality much studied in economics is pollution whereby firms may hurt the environment without bearing the cost themselves. In order to align private and social costs, even staunch defenders of free markets largely support carbon taxes, or emissions trading schemes. However, these same folks mostly don't support governments trying to stop pollution using "command & control regulations", like the ban on oil and gas exploration in NZ, which can cause inefficiencies.

When it comes to the virus, however, it's not possible to tax a person who sneezes on another. So government rules, or socially responsible behavior, may be the only way out.

Consequently, the proliferation of virus-related lock-down and distancing rules should not be misinterpreted as suggesting that burdensome regulation by big government is, more generally, a good thing. Rather such rules are the only practical way of trying to improve a bad situation, namely limiting the harm caused by a contagious bug that has put the problem of solving a health-related externality onto the forefront of world headlines.

For an opposing opinion from the NZ Herald, see:

  • Robert MacCulloch

More business subsidy schemes are being rolled out in the lead-up to the election. No wonder public debt is on the cards to rise by nearly $100 billion. Given current policy settings, it will most likely be paid back out of higher taxes.

A Bungy Jump company has just got a $10 million funding package courtesy of the government's "Strategic Tourism Assets Protection Program". According to the Ministry of Business, Innovation and Employment, even firms benefiting from other subsidy schemes, like the Provincial Growth Fund, "are eligible" to apply for this new program. Given that it is for firms deemed "essential" to New Zealand's tourism strategy, then why aren't we, the people, receiving share-holdings in exchange for our money? In other words, why are these firms not being nationalized?

On a related note, back in early May, I wrote an article for the NZ Herald, arguing that the government's business wage subsidy scheme should not have been extended to large firms (like publicly listed companies, which are able to raise capital privately). Aside from the notable exception of Air New Zealand, which IS a strategically important national asset, big business is mostly doing fine. The NZX 50 is 6% higher than it was one year ago.

In the days subsequent to my NZ Herald article shining a light on the wage subsidy scheme, several big law firms in Auckland began returning their multi-million dollar wage subsidies. Why should this issue concern us greatly? Because when big business privatizes profits during boom years, but goes cap-in-hand to government during bust years, then free markets lose their legitimacy.

For the NZ Herald article written by a DownToEarth Kiwi, see:



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Robert MacCulloch