Using other peoples money to finance projects of grandeur

 

I am happy so say that after a week of absence (summer vacation), I can resume writing my blog and continue to comment on everyday economic events.

There hasn’t been word of the late “Peljesac” bridge project for some time, so I have decided to touch on this subject for a bit. Browsing through todays online business news, I stumbled upon an article concerning this government project. It was the idea of the previous administration to solve the problem of Croatia’s territorial discontinuity by building a massive bridge that would connect Croatia’s mainland with the Peljesac peninsula, thus enabling Croatians and others to get to Dubrovnik and the rest of the south of the country, and not having to go trough the city of Neum, Bosnia and Hercegovina.

As, the article reads: “HSP Ante Starcevic against the construction of the Peljesac Bridge - The solution for the Peninsula is immersed tunnel”. The HSP Ante Starcevic political party wrote an open letter to the government requesting a tunnel, rather than a bridge, be built to connect the Croatian territory.

Now, I am sure that the political party has good intensions in mind, and they even give the plan a technical feel to it by elaborating that the same practice has been implemented by other nations as well. It would also benefit the domestic construction industry.

Now, not once (at least in the news article) is it mentioned the source of financing for such a venture. How will the government open the bidding for the construction companies is also a mystery, coupled with the fact that, are there sufficient funds in the government coffers to spend on a wasteful project and subsidize the construction industry as well.

I am not going to go into the technical aspects of such a project, since I am not a construction engineer, nor geologist, nor by the look of things (as this political party advocates) a maritime engineer, I am an economist and the economics just don’t work out. Usually, governments build bridges, roads, social infrastructure as a necessity. These projects are placed into the “natural monopoly” category, are deemed as such, because conventional wisdom states that such projects are too large for the private sector to complete.

What is really meant, is that the government can easily and with no trouble expropriate by force (taxation) the funds necessary to build such a project. Why the government doesn’t think that a private contractor and later owner can manage to bridge at a profit, is beyond me.

I do know is that if a study is done on the feasibility of the project, and this usually includes discounting cash flows, finding similar projects that carry proportional risk to arrive at the desired discount rate (delevering asset beta of similar project and relevering project equity), payback periods, WACC estimates and project duration, it will be excepted or rejected. The component leg would include checking for viable materials, natural geological movements which include geological shifts, sea level changes, wind resistance, corrosive elements, and so on.

If massive companies can finance massive constructional endeavors such as the Burj Khalifa, Tokyo International Airport, Wal-Mart, Apple and so on, why such clearly political motivated economic prevail? The largest boondoggle in history must be the interstate highway system built in The US under the auspice of boosting aggregate demand. This system hasn’t been maintained in over forty years. Just in moments of economic recession, the government calls for more public works. It didn’t occur to them that maybe a level of savings had to be generated to maintain such a vast system?

Running a perpetual budget deficit doesn’t really help in such a situation.

An attempt to soak the rich on the global level

 

The United Nations, as reported by Reuters, and rereleased by index.hr, has committed to a massive redistribution plan to “aid” the most poorest countries. It is asking for a global tax on billionaires (some 1226 of them) to pay for this “aid”.

Well, the IMF has given a trillion or so more to sub-Saharan countries in the past decades and nothing much has changed. The only thing that might have changed is the debt level of these countries. How is this money really lent out? Who gets it first and for what endeavors? We may be inclined to ask the simplest of questions: Why are the poor, well, poor?

Even tough this may seem as an easy question which contains an even simpler answer, the mass science of modern “new” economics has dumbfounded analysts, researchers and the rest to explain why such poor performance persists in the presence of such grandiose ventures. Reading von Mises, it is easy to unlock the answer of wealth creation versus wealth destruction. A poor country is one which has a low capital base. I.e., it doesn’t have sufficient savings to bring forth a larger and more roundabout capital structure. The individuals living in some of the remotest areas, are unable to accumulate capital because their time preferences are so high, that they survive by living day by day.

Now, it is true, that some regions of the planet are more abundant in resources, than others and the know-how isn’t capable of delivering sufficient results, but that doesn’t negate the fact that, in order to be wealthy, one has to sacrifice and sustain form present consumption. In the “Third World”, if there is capital formation, there is no real system of private property to ensure a viable and peaceful exchange of goods and services. Europe, nor America weren’t rich in the 1100’s as they are today, but the natural resources were still there, people still lived, technology improved and so forth, but the absence of a cohesive legal and economic structure, the “Third World” can resort to nothing but barbarism.

Taxing the wealthy will just mess up,in the margin,time preferences between their wishes and consumption/investment patterns with one of coercion and anti-entrepreneurialism. If the tax is marginally high, why keep the capital structure intact? Why not consume present goods, as they will bring about a lesser tax burden. Let socialism prevail and all we be well. Not to mention, the ability to  create fake “aid” through inflation and redistribution to the privileged few.

A global tax won’t fix the problem, it will only aggravate current unsound financial positions, wherever they may be located, whether geographically or on an industry basis. Soaking someone with aid, rises the price of those goods at home and creates a disincentive to produce on your own and built up a viable capital structure in the process.

This is however, not the first call, for such a feat. There has been, over the past few years, of a global derivatives tax, dubbed the Tobin tax. Instead of recognizing that the problem of a massive global derivative position, notionally, many times larger than the GDP of planet Earth, is a function of rapid credit expansion and fractional markets in the stages furthest from the initial expansion taking place at the commercial banking level, as well as the negative real interest rate loans provided by the central banks, subsidizing the very originators of fraudulent debt.

If the UN wants to help, it should start by looking itself in the mirror and explaining why their employees are exempt from paying income taxes in their home districts, as well as special subsidies for housing and medical costs…

How the privileged few have access to a massive subsidy

 

Remember, how in life, people say: “it’s the little things that make life great”. In this case, it’s the little things that make life a complete clusterf*ck. If the next picture is so blatantly shown to the public, just what happens behind close doors?

The next list shows bus fares from the city of Zagreb to the town of Novalja on the Adriatic Coast.  The foremost right numbers are the prices represented in the local currency – HRK (1$ = 5,5 HRK). The “J” stands for the price in one way, while the “AR” stands for a return ticket. 202 HRK is a one way ticket to Novalja, while students, the blind pay 134 HRK and small children 104 HRK for one way. 202 HRK, 300 HRK and 241 HRK are paid by children, adults and students and the blind respectively. The bus ticket purchased for a return trip is valid for 180 days.

This is all fine, if not for the yellow bolded part I highlighted. The highlighted part reads: Parliament members pay 6 HRK= 1,2 dollars. And this was decided by the Parliament.

So, I wonder, in the aggregate and in at the margin, how much am I subsidizing these royal individuals? Well, it depends on the average price on the average bus fare for all citizens. And, since its law, all carriers are FORCED to subsidize these passengers. This means an explicit marginal loss for the carrier.

Brilliant.

0     Rezervacija.     6,00
1     Karta za 1 SMJER     202,00
1000     ZASTUPNICI u HRV.SABORU ! ( odluka Sabora )     6,00
1035     J / 35% / STUDENTI, +65 god., SLIJEPE OSOBE!     134,00
1072     J / 50% / DJECA 5-10 g.     104,00
5072     AR / 50% / 60 D/ DJECA 5 -10 g.     202,00
5329     AR / 25% / 60 DANA     300,00
5330     AR / 40% / 60 D/ STUDENTI,+ 65 go.,SLIJEPE OSOBE !     241,00
LEGENDA: J - Jedan smjer, AR - Povratna karta, 180 D - Vrijedi 180 dana, X-ica - Studentska iskaznica