NACT: Going backwards for politics

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1. Tom Mathews 1

   20 May 2009 at 8:22 pm

   Backwards for politics perhaps, but forward for economics. If farmers are crucial to our future, then they will still be regardless of whether we subsidise them. In the overwhelming majority of cases, and sauf positive externalities, subsidising industries makes the majority of society worse off. I think that’s fairly widely accepted, except perhaps by those who are to be subsidised!
   • Lew 1.1

     20 May 2009 at 8:36 pm

     R&D is only really a subsidy when the industry in which the results of that research will be used is capable, equipped and prepared to conduct the research itself. One of the major historical problems with NZ’s primary sector until relatively recently has been a lack of aptitude, facility or willingness to change for the better; this is not only bad for the primary industries, but for the other industries whose export dollars they support. One of the significant reasons why Australia has such a strong primary sector is decades of sustained, targeted blue-sky research and development by the CSIRO in partnership with universities and the private sector, aggressively deployed and commercialised, in bad years and good. The Fast Forward Fund, craply named though it was, represented a start toward that sort of model.

     L
   • Steve Withers 1.2

     20 May 2009 at 10:43 pm

     Tom: The attitude you espouse has seen a long list of industries obliterated in New Zealand in recent years. Your statement appears to assume success is automatic if no one does anything simply because something has been successful in the past. This is despite history being littered with failures following successes for want of investment to support continued success. Farmers could, I suppose, club together and contribute a portion of their earnings to fund research. The reality is they haven’t and don’t support research on the scale required because – like everyone else – there are not enough of them who will make the contributions required.

     The record on investment is very clear: if the government doesn’t do it from taxation as a form of insurance, then in New Zealand that means no one does it. The producer boards have filled some of this role in the past, but they sprang from a collective, co-operative impetus now out of fashion and supposedly bad (despite decades of success in the dairy industry where collectives have been the norm).

     Perhaps it will help you understand it better if you think of it as insurance rather than subsidy. These farmers have paid tax and some of that tax is going toward work that will help them remain globally competitive.

     The record of individual humans taking responsibility for BIG collective issues is very poor. That almost 25% of kiwis still smoke proves how short-sighted and stupid huge numbers among us can be about our own bodies…..never mind the future of our industries 20 and 30 years in the future.

     Government definitely has a role in making sure SOMETHING is done. If that doesn’t square with your ideology then your ideology needs to learn a little history…and gain a better understanding of what people actually do.
2. Tom Mathews 2

   20 May 2009 at 8:51 pm

   Lew –
   Firstly, you slightly confuse the issue by saying it’s not a subsidy – in a economic sense it is definitely a subsidy! But if it has positive externalities as you claim, it would just be a justified subsidy.

   Aside from that, it seems like you’re making two claims.
   First is that farmers were incapable or unwilling to invest in RnD, and because we rely on their exports we should do so for them. I don’t really buy this. If an industry is failing because it isn’t producing quality goods, I think we should let capital naturally migrate to more efficient uses. The people that benefit most from RnD for agriculture are the farmers themselves – if they aren’t investing perhaps we should consider why not!

   The second is the more plausible one that there RnD spending is sometimes a public good. Firstly however, it seems the private sector can take care of short term RnD pretty well. The vast majority of useful innovation comes from profit-seeking in the private sector – for recent examples think cellphones, ipods, etc. The remaining claim is whether there is a public good in ‘blue skies’ or long term funding. Perhaps, but only in limited amounts, and by its nature it is impossible to tell where that is going to be.

   So I think we should be careful about assuming that RnD spending should just be topped up by the Government so that we can keep up with the Joneses across the Tasman.
   • SPC 2.1

     20 May 2009 at 9:53 pm

     R and D is vital to growth in the economy, to improving productivity and to business development (without question).

     R and D is either a tax incentive or it is a subsidy – via funding university research or other institutions doing research (available for local industry) or via public-private partnerships.

     R and D tax incentives and subsidy assist the government in maintaining and or improving tax revenues – its a form of investment (and more useful than roads for example).

     This is why governments offer R and D tax incentives – the Labour government had them at 15% (will National even sustain that?), much below the Oz rate of 40% and thus they are not competitive. If having competitive company tax rates is a priority, this is the more important area to start because we are the most uncompetitive here.

     We certainly will not match their wage rates until we improve our R and D spending levels (which unsurprisingly have been low while our wage rates fall relative to other OECD nations).

     The idea that R and D risk can best be left to the market … and then the cell phones will come is the economic version of awaiting the second coming. We have been awaiting it since 1984. If we do not build the R and D highway we will still be waiting for cross Tasman parity in a 1000 years time.
   • Luxated 2.2

     20 May 2009 at 10:05 pm

     “The vast majority of useful innovation comes from profit-seeking in the private sector – for recent examples think cellphones, ipods, etc.”

     That is a big claim, would you like to substantiate it with some evidence? If you need counter examples:

     The Internet (DARPA)

     The World Wide Web (Sir Tim Berners Lee, CERN)

     Computing (Alan Turing, National Physical Laboratory)

     Jet Engine (Frank Whittle, as an RAF cadet)

     Plenty more examples lying around if you care to look.

     It is reasonably common for Universities and research institutes to work with private enterprise as a form of outsourcing R&D so the innovation is actually done at a (typically) government funded institute.

     “The remaining claim is whether there is a public good in ‘blue skies’ or long term funding. Perhaps, but only in limited amounts, and by its nature it is impossible to tell where that is going to be.”

     Firstly see above examples. All four had relatively short turn around times into mainstream use in their respective fields (Jet engine less so in part due to unwillingness of the MoD, largely made up for post war). Web adoption is positively, startling invented in 1989, ISPs in NZ in the early 90’s, mainstream adoption in the west in the late 90’s.

     A senior member in the LHC team recently announced that they had developed an all in one MRI and CAT scan (may have been PET) something that was until recently impossible due to the magnets in the MRI.

     Plenty of money is going into the development of high temperature superconductors which have the potential to revolutionise the pretty much anything that has electricity in it.

     All of the above was done with public money do you still suggest ‘blue skies’ research is of little value with no pay off? If so please surrender your computer as it obviously (and the fundamental governing principles behind it e.g. electromagnetism) have no relevance to the public good.
3. MacDoctor 3

   20 May 2009 at 8:59 pm

   Lynn:

   My statement may or may not be stupid, but it is exactly what most businesses will be doing in the recession. This is precisely why they were worried that they would not be able to access government funding, because they can’t afford to fund even half of their research. If you have even been involved in a business, you would know this.
   • SPC 3.1

     20 May 2009 at 9:57 pm

     Successful investors talk about the behaviour of the group and why it is usually wrong.

     It is a truth that those companies which take the risks (invest for the future) make the real money. And while those companies playing it safe are the ones more likely to survive the present recession they subsequently become the more likely to fail to survive the next one. Our non resource sector economy is full of companies of the second type (the way of the hands off free market leaves us reliant on the primary sector so we have little choice but to support their ability to modernise).
   • lprent 3.2

     20 May 2009 at 11:49 pm

     Don’t tell me that you are stupid enough to think that people involved in innovative export private sector always vote ‘right’. They’re not that stupid. That gets left to the bureaucracies like corporates, banks, etc who work based on back-scratching and the local economy. For that matter you probably think that public servants vote left? Simple analysis makes for stupid decisions.

     I’ve always been involved in business – why do you think I went off and did a business degree as well as the science? I’ve always been involved in product and systems development. It is what a programmer or manager (my two main careers) do when you focus on exports. Otherwise you get screwed by overseas innovations.

     It is why I’m saying that you’re being simplistic on this topic – in fact you sound just like an accountant in a business that is about to fail.

     Currently I’m working on a project that is designed for release in 18 months internationally. I’m also doing some work on a more engineering level project for release mid next year – also internationally. In both cases I’ve started within the last few months. This is when these types of projects get done. In my areas, there are quite a few projects starting up. The only thing that is noticeable is the intensified competition for job positions. That is because of the people getting released from corporates or coming back home. Happens every time at the start of a decent recession. But the number of export based projects seems to be rising as per usual.

     What gets decreased in a recession are the projects designed largely to increasing efficiencies in a tight resource/labour market – in the local economy. So you usually get a substantial chop in internal projects in corporates. Corporates don’t do much innovation in NZ on their product lines and businesses. They tend to pickup ideas and products from offshore. The smaller companies will cheerfully suck up their freed development resources into their own innovative projects within 6 months. Most of those companies are largely privately held and fund development on the basis of future needs, not what the current economy looks like locally.

     What fails during recessions are smaller businesses that fail to innovate on their processes and products. Typically they concentrate too much on cost-cutting and not enough on where they want to be in 5 years. Anyone that innovates their systems and products will out-perform them both during and especially after a recession.

     The problem is that the farming sector is full of small operators with limited abilities to do R&D on a level that is required to cause innovative change for the whole industry. Even the Fonterra’s have limited abilities to do basic research into other uses for their primary feedstock, but do the engineering level stuff, typically inassociation with the government funded people. Basic agricultural research is largely done by government funding in NZ. We are a world leader in our farming techniques in a large part because of that funding. You don’t stop it just because of a recession, you increase it, same as all of the other economies will be doing. To otherwise is commercial suicide a decade or so out, which in this case would also mean economic suicide as well. That is why the FFF was set up when we were heading into a recession to provide that level of continuity for the research for those export-led industries.

     It wasn’t a mistake – it was sensible planning. But I guess that doctors don’t run export based businesses?
4. Chris G 4

   20 May 2009 at 8:59 pm

   Didn’t you know? Righties dont like science. Its a big scary thing run by socialist universities.
5. notreallyalawyer 5

   20 May 2009 at 9:52 pm

   farmers cry poverty, complain about Auckland, win sympathy from the left.

   Aucklanders complain about traffic congestion and poor local governance, win sympathy from the right.

   was that Alice that just wipped by chasing a rabbit?
   • lprent 5.1

     20 May 2009 at 11:22 pm

     It is one of those sad quirks of NZ politics. The right typically ignores agriculture now that MMP has removed those marginal electorates for electoral bribery. There are more voters in Auckland to bribe with white-elephants (like the super-city fiasco or motorways of limited utility – they just fill up).

     However, the left does support farmers – and historically always has done. Without them we don’t make sufficient exports. They just don’t do it stupidly by pandering to the lowest common denominator – that is left to the right. Just look at ACT.
6. Lew 6

   20 May 2009 at 10:33 pm

   Tom,

   I see you’re an economist. I’m likely out of my depth.

   it seems like you’re making two claims.
   First is that farmers were incapable or unwilling to invest in RnD, and because we rely on their exports we should do so for them. … The second is the more plausible one that there RnD spending is sometimes a public good.

   You make my argument a bit more elegantly than I did, but you perhaps miss the distinction of `blue sky’ research being that without direct and immediate tangible benefits to a specific sector. Absent those benefits, few in the private sector will fund such research; and yet it does (when conducted properly, etc) have benefits. Taking the CSIRO again as an example, since it’s what I know: most of their research agenda is to do with the environmental pressures of modern industry and life – into climate change and its effects on everything, weather and crops and crop ecologies; land and water usage; precision agriculture and efficient resource management; alternative energy; disaster preparedness, and so on. Much of this research would not survive in isolation; unless undertaken in a wider research ecology, with easy reference to other parallel projects, such research would likely fail and be abandoned as worthless. Nevertheless, this agenda has profound implications for everyone – not just farmers, miners or whatever, but those trying to outrun bushfires, minimise water usage or deploy electric cars.

   I think that markets are generally pretty good, but I don’t accept the assertion that anything the markets deem unworthy of funding is by definition worthless. That’s the role of government in research – to fill the gaps which markets can’t or won’t fill, and to ensure cooperation between different projects with a common goal in mind.

   L

   [FOURTH time lucky?]
   • Tom Mathews 6.1

     21 May 2009 at 12:07 am

     Well, I’m studying economics, I don’t know if that is quite the same thing!

     I agree that markets don’t always produce efficient outcomes, I think that has been pretty well established recently! What I am saying is that we if are to justify intervention like this we need a very careful explanation as to why it is necessary. Otherwise it’s very easy to fall in to the trap of designing society how you personally want it to look, rather than how the majority of society wants it, as reflected in their consumption decisions. That’s what I mean when I say that we should look at why farmers aren’t investing in RnD as much as we think they should – seeing as they bear the majority of the benefit from it.

     The options are that they simply don’t know what’s good for them (which I don’t believe), that there are benefits to others (externalities) which will lead them to under-invest as they would all the cost but not all the benefit, or that, and this is what I was getting at, we are overrating the importance of this spending.

     I don’t know enough about the agricultural sector to comment about the third option on its own. But I was trying to show that the first two claims seemed shakier than they might first appear, so we should seriously consider the third for that reason.

     Like you I also see benefit in Government funding ‘blue skies’ research programs. To what degree it should fund programs that for the most part just increase private profit is, I think, a slightly different question.
     • lprent 6.1.1

       21 May 2009 at 7:24 am

       The reason why is that farmers are a lot of small individual businesses who are competing with each other. There are limited agribusinesses in NZ and they typically are too small to do much innovation – even the larger coops. Most of their innovation tends to the marketing side rather than the basic research and focused on the competitors rather than growing the whole industry. Thats how businesses operate.

       For the sake of NZ economy which receives the primary benefit of the export income generated from agriculture, the government gets heavily involved in the basic research for optimizing agriculture for our production and for delivering better types of product to our overseas markets.

       It is a system that has worked extremely well since refrigeration, and steadily built up our knowledge base in farming. That benefited farmers, sure. But it benefited the country even more.
       • Tom Mathews 6.1.1.1

         21 May 2009 at 9:13 am

         I’m not sure if you mean to include it as a ‘larger coop’, but Fonterra is a multibillion dollar corporation, I am pretty sure they can afford research.

         I also think that’s a pretty good example of how the farmers themselves can solve this sort of problem and make themselves more competitive. If your dream model is a whole lot of independent farmers running the same latest tech which the Government supplies them then I can see why you would want to subsidise them though.

         Also, I think it’s a pretty big claim to say that society benefits more from the imports than the people that directly profit off them. Certainly there’s a trickle-down, but I highly doubt that it would be bigger than the cost of the subsidy. Certainly nothing I’ve read here has make me think that.
         • SPC 6.1.1.1.1

           21 May 2009 at 5:19 pm

           It really depends on how effective the R and D funding partnership is and how effective the taxation of profits is.

           If the private sector is puting up some of the money (15% tax credit – most of it) or half of it in public private partnerships then I would disagree (the rewards of an investment which generate future revenues to government operate over a longer time frame than for a company).

           Quite apart from this – land and water (and Kyoto) research results in efficiencies to the benefit of the economy as much to the various industries.
     • SPC 6.1.2

       21 May 2009 at 5:36 pm

       Historically the model has been private farmers marketing collectively. They co-operated there.

       The farm sectors ability to finance of R and D is based on having the collective surplus income to do so – but our farming model places upward pressure on land values (any farm income improvement is matched by a rising cost of land). The established farmer benefits from this only when they retire (thus their income is stored in land value and not utilised in R and D funding). The new farmer barely survives the first downturn in prices (and only then if the bank is prepared to finance them through it until the land values recover with the next price upturn). Because the circumstance of farmers is so different, it is hard for such as Fonterra to formulate a way to develop capital reserves for such as R and D. Farmers naturally want to retain control of their co-operative vehicle but they have to committ to finding a way to set aside income in the good years to develop capital reserves.

       A Fast Forward partnership with government might just have been one way.

       Now we will have to consider a CGT on farm properties – so those leaving the industry finance the raising of the governments share of the partnership along with those still farming (in tough times there are new ways).
     • Lew 6.1.3

       24 May 2009 at 10:35 am

       What I’m driving at has recently been put more clearly than I could, by Barack Obama:

       As Vannevar Bush, who served as scientific advisor to President Franklin Roosevelt, famously said: “Basic scientific research is scientific capital.”
       The fact is an investigation into a particular physical, chemical, or biological process might not pay off for a year, or a decade, or at all. And when it does, the rewards are often broadly shared, enjoyed by those who bore its costs but also by those who did not.
       And that’s why the private sector generally under-invests in basic science, and why the public sector must invest in this kind of research — because while the risks may be large, so are the rewards for our economy and our society.

       That approach got results in the USA in the middle of the last century, and it still is in Australia now; why wouldn’t it here?

       L
7. Steve Withers 7

   20 May 2009 at 10:49 pm

   Farmers who voted for National must be wondering what they were smoking at the time. Instead of “their” government, they got ACT and market forces.
   • Nick C 7.1

     21 May 2009 at 8:28 pm

     Or we could accept the other explanation: Farmers were acting rationally on polling day and quite like the market forces. After all they make their living by selling their produce on the market, and the majority of stuff government does (i.e. indirect/direct taxes, regulations, trade barriers) harms them.

     Theres another thing you guys should consider. Given that Farmers are (as a generalisation) wealthy, and farmers are the primary benefactor from the fast foward fund isnt this really just welfare for the rich that you are promoting?
     • SPC 7.1.1

       21 May 2009 at 9:58 pm

       Are farmers wealthy?

       Some years they do not make a profit and are reliant on loans from the bank for their income.

       If they survive farming for a few decades they become rich, the same way a houseowner becomes rich paying off a mortgage as the value of the property rises (*10 for a farm).

       The problem with becoming wealthy in this way is that they are struggling to pay the farm mortgage and reinvest to maintain the performance of the farm itself and thus cannot easily also finance such things as R and D.

       It is innovation through R and D which will addvalue to our economy.
8. Akldnut 8

   20 May 2009 at 11:22 pm

   However NACT prefers to invest in lower-yielding infrastructural investments like the Waterview connection, the Auckland super-city, and the farcical Fibre-to-the-home project. None are likely to yield as much to the economy as investment in agricultural research.

   You missed a big “Egg” that they’re throwing at us – The Jonkey (bike) Trail
9. sally 9

   21 May 2009 at 8:09 am

   On a much more serious note: stop using f*cking comic sans.
   • Maynard J 9.1

     21 May 2009 at 10:14 am

     Did you go to see ‘Helvetica’ at the Film Festival last year? Bet you did 🙂
10. Chris 10

    21 May 2009 at 8:54 am

    I’m by no means an economist. However, given events of the past twenty years or so I am developing a healthy disdain for economics as a means to ‘explain’ the world. I prefer to dip into Constanza’s works dealing with ecological economics, and support Adbuster’s campaign for real-world economics, not so called classic economics.

    From my perspective, the Fed Farmers aside from techinical industrial publications/knowledge sharing, are good at whining and not much else. It would be unrealistic to expect them to ‘invest’ in RnD, and I don’t expect that suddenly they will see the light and set up an institute. The more ‘rational’ (and productive) behaviour is to whine their way to the government doing it all for them. It’s not called corporate welfare for nothing.

    I was comfortable having the last Govt set up the Fast Forward Fund. Doing so would mitigate the invetiable whining when farmers suddenly realise they need to innovate or die in the face of competition from other quarters. In this sense, the Fund was an insurance, and I’m happy to pay that insurance.
    • Chris 10.1

      21 May 2009 at 9:12 am

      Adbuster’s campaign is here

      http://www.adbusters.org/campaigns/truecosteconomics
      • inpassing 10.1.1

        21 May 2009 at 4:42 pm

        Would this relate to the unmentioned ‘externality’ of global/local environment..?

        Tom wrote of them as “benefits” to one or other party or interest, whereas broad care for the global environment has taken a battering of disregard through the era of deregulated financial economic emphasis.

        Deliberately costed out, as it were, we might well ask of the supposed wisdom in financial wizardry… might well ask well howse about getting back to the benchmark ground of human sustainability.

        I’d guess that in this sense the recession’s less is (planetarily) more. And may well continue for as long as it takes to get our priorities both right and correct.
11. notreallyalawyer 11

    21 May 2009 at 9:30 am

    If you step away from the self-serving false dichotomy (Labour friend of farmers, National enemy of farmers – and black is white), which is merely about partisan politics, the central issue is the govt has limited resources in the peresnt economic climate.

    Everyone recognises the importance of Ag research – the problem is that increasing spending there takes money away form other areas. Other industries are entitled to research money, and there’s very good reasons for us to diversify away from primary produce, and new mothers should have the opportunity to spend time in hospital with their babies – that’s an investment in the future as well.

    But feel free to fall for the farmers Us vs Aucklanders framing. You might not have noticed but they’ve been trying that on for a while now.
    • SPC 11.1

      21 May 2009 at 5:02 pm

      Its not, an either or, there was Labour’s 15% tax credit available for all (which National will probably do way with in the budget) – compared to Oz now at 40%.

      We do not spend enough on R and D and this is vital to the economic growth which affords our spending.
12. coge 12

    21 May 2009 at 9:55 am

    Subsidising R&D, as in the euphemistic fast forward fund, is positively 1970’s styled Muldoonist politics. The fact is returns on such schemes are utterly unmeasurable. There is a good chance such returns (if they were measurable) over time would be less than the grant. The fund does simply not conform to basic modern economic principles.

    Since the seventies the world has become a lot smaller, it’s no longer necessary to do all such R&D in ones backyard shed so to speak. It was pure political expediency from the former Labour govt. Back your academics, & make it appear you are doing farmers a big favour.
    • SPC 12.1

      21 May 2009 at 5:10 pm

      You seem to confuse picking winners of Think Big/artifical subsidy/industry protection with tax credits for R and D or public funding of R and D (it’s hard to identify any country in the OECD or developing world with lower R and D than us – public and private sector – and we wonder why we are falling backwards).

      As for the primary sector, it is a world leader, it’s not an uncompetitive sector being propped up. This is about adding value to product through technological innovation to grow the economy.

      If we do not so the R and D those who do will just buy up raw material and add value to it to their own profit – leaving us as low cost low return providers of the raw material. This will mean our resource sector will not grow as a share of the world economy as the technology advances and we will become relatively impoverished (as is already happening).
13. Bill 13

    21 May 2009 at 12:17 pm

    It seems to me that the profit motive act as a massive disincentive when it comes to privately funded ‘blue sky’ R&D. The only time R&D is undertaken without one eye fixed firmly on future profit is when it is funded from the public purse and even then, unintentional marketable by-products of the process are elevated and privatised.

    Private industry exists to make money and make money fast.So, the crux of the matter is not how much public money goes into it. Nor how much private money goes into it. The real issue would seem to be how to effect good R&D that takes account of all potential negative consequences (environmental, social etc) instead of those factors being over ridden by motives of potential profit and associated costs externalised.

    The fact that R&D is seen as a cost to be externalised in the same way as negative consequences of production is a secondary issue and one that can never be satisfactorily resolved as long as it takes place within a market environment that is inimical to any R&D that does not satisfy narrow market imperatives.

    If we ask whether we want substantive R&D guided by a number of principles or want it to be guided merely by its potential to generate profit for private institutions, then if the latter is the case the debate will bounce endlessly to and fro because the question becomes necessarily limited to one of funding.

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