• How to Make the Regional Development Fund An Even Better Idea

    Our new government will have surprised some people with its confident start, and not least with one of its better ideas – the establishment of a Regional Development Fund.  We now know enough about this proposal to recognise just how valuable it will be, not just to the regions but to the whole country.

    That it will deliver a boost to those parts of the country whose economy has been languishing cannot be doubted.  The focus on communications and transport alone, with the special emphasis on rail, will help to bring far-flung areas of the country back into the mainstream, able to share better in the prosperity to which we have all contributed.  And better rail communications will not only keep trucks off our roads but will benefit enterprises such as the Port of Tauranga.

    But it is not just economic activity and output that will benefit.  It will be local employment as well – and more jobs will provide a shot in the arm to retailing, construction, new investment – a veritable virtuous circle.

    And even beyond those considerations will be the benefits to the environment that are clearly being targeted.  Tree-planting on a large scale will boost forestry but will also help us to meet our greenhouse gas target.  The shift in transport policy away from building more roads in favour of updating our rail network will do likewise, as well as reducing the road toll and opening up new development.

    The one fly in the ointment, perhaps – especially for those conditioned by years of being told that cutting government spending is the top priority – is the cost of these measures.  Funding all these initiatives from one dedicated new fund is a good idea, but the money for the fund still has to come from somewhere, doesn’t it?

    Even though it may be clear that the rewards and returns from making this kind of investment in our regions would satisfy even the hardest-headed private investor, the question as to where the money to be invested comes from in the first place will still be asked.

    Well, not necessarily.  You may be surprised to hear that the one thing that governments are never short of is money.  How do we know that?  Because governments all around the world have been creating large quantities of new money for the past ten years or more.  They haven’t called it “creating new money” but have preferred to call it something like “quantitative easing”, but creating new money is what it is.

    When governments have created new money over recent years, however, their aim was usually the limited one of providing money to the commercial banks so that, after the Global Financial Crisis, they could re-build their balance sheets.  But new money created by governments does not have to go on such limited purposes – indeed, creating it to invest in the productive economy so as to produce an immediate return to the country as a whole makes a good deal more sense than just helping out the banks.

    And experience in earlier times and in other countries, has shown just that.  Many countries have in the past created new money to fund increases in output – whether it was Japan re-building its industry after its defeat in the Second World War (and they are doing so again today) or President Roosevelt building American industrial capacity in preparation for that same conflict.  What those countries both realised was that the need and the capacity to increase output both existed, and that it was ridiculous that such an effort should be frustrated for the lack of money, when the government could create all the money that was needed.

    Our own history offers us one of the most important instances of this being done.  In the 1930s, in the middle of the Great Depression, the great Michael Joseph Savage authorised the creation of new money so that thousands of new state houses could be built, thereby providing jobs for the unemployed and homes for the homeless and – incidentally – an income-producing asset for the government.

    As the economist Ann Pettifor (who recently visited New Zealand) remarked, “We can afford what we can do” – in other words, the real constraint is not the lack of money but a lack of productive capacity, and  that constraint, for those who believe in a market economy, is easily overcome.  If the money is there, the capacity will come.  Money is merely a facilitator or enabler and it makes no sense for a government that is ready to create new money for other purposes to decline to do so for productive purposes, if the need is there and the capacity can be built.

    The great economist, John Maynard Keynes was very clear.  Given that the banks create new money every day of the week for their own profit-making purposes, why shouldn’t governments do likewise for the purpose of investing in our productive capacity?  Creating money by the government cannot be inflationary, said Keynes, if it is matched by increased output – and isn’t increasing output exactly what the Fund is designed to do and will achieve?  Why shouldn’t the government use all of its powers to support such a worthwhile goal?

    Bryan Gould

    25 February 2018