Selling farms, a thought experiment

I agree with Kiwiblog and Anti-Dismal strongly regarding foreign investment.  Kiwiblog is completely right when he says that restricting foreign investment does the following:

1. The current owner of the land is unable to sell the land for as much as they otherwise would have got. This means less wealth in NZ.
2. The foreign owner of the land, as they valued it more highly, may be able to put it to better economic use (as they need higher returns to cover the higher capital) and this can contribute to a more efficient economy.

For someone that doesn’t believe this, and wants to say that “selling our assets means we will send more $$$ overseas” this is not the case – we can illustrate that with a little, massively oversimplified, thought experiment.

Imagine a firm took out a loan to invest in, what they thought was, the best use of the land.  The loan is expected to have an average interest rate of 6%pa, and is borrowed from people with credit overseas.  Over time they find out that the rate of return they get is only 4%pa – so this is a loss of wealth for this person.  Furthermore, if we wanted to talk about the “country” this is a flow of funds overseas.

If we allowed this person to sell the asset, this flow disappears.  The person that purchased it can make their rate of return at 4%, but the 6% being sent overseas is no more.

Ultimately, if we think we are “borrowing too much” from overseas we need to think on the flip side of that – are we spending too much relative to what we earn?  If so, why?  Instead of restricting foreign trade we should be asking how the incentive structure in our economy is working – and then we can see:

1. Whether there is actually any problem
2. If there is a problem, the most direct way of improving outcomes.

And if we think, for some reason, that all of society owns the land – then why not introduce a land tax as a form of “rental”?