The question is, will the loans be worth €54bn in 10 years’ time? If they are, there is no cost to the taxpayer. If they are not, there will be a cost. If they should turn out to be worth more, the taxpayer will gain. It may not, however, be the most important question.
I don’t get into the mechanics of economics on this blog, because I’m very conservative about how much I actually know about them. But if I take the fire extinguisher to the burning wheelie bins of my mind for a moment and attempt to recall one of the first things I learnt in economics class, the matter of opportunity cost looms rather large reading the above sentences.
A good illustration of opportunity cost comes from this example by libertarian economist Tyler Cowen, of the man who spent one year in the business of trading one red paperclip for a house.
Kyle traded his way up through a fish pen, a Coleman stove, a generator, a snowmobile, a van, one year’s free rent in Phoenix, an afternoon with rock star Alice Cooper, and finally to the house, one year later.
That sounds impressive, but was it worth the time and trouble? The answer is yes, but not for the reasons we might think.
Judging from the local real estate market, Kyle’s house is worth about $50,000. Why didn’t Kyle just go out and buy a house? Surely such a smart and able person could have spent the year working at a good job. Even if Kyle would not have earned much his first year, he would, over time, likely attain a much higher wage. A good floor trader on a commodities exchange can become a millionaire. A good salesman can, on commission, earn more than a company president. The cost of Kyle’s trading is not what he could have earned his first year, but rather what he could have earned in that one missing year from the latter part of his career. I’ll hazard a guess that is more than $100,000, or in other words, more than the value of the house.
So, with regard to NAMA, even if the loans are worth more than €54bn in 10 years’ time, following the logic of opportunity cost, that does not mean that there is no cost to the taxpayer, since the cost to the taxpayer really ought to be measured in terms of what could have been done with that €54bn during the ten year period. I will leave the calculations of how that €54bn could otherwise have been used up to you.
But, with regard to NAMA, why focus on the taxpayer? Joan Burton was on the radio yesterday talking about how the Labour party’s interest was in protecting the taxpayer. It was as though the function of government were that of a private investment agency and the taxpayer’s role that of the investor, which I suppose is not so surprising in a place where the notion of the country as an incorporated enterprise -Ireland Inc- is commonplace among politicians and media. There are lots of problems with this paradigm, not least the fact that there are lots of citizens who would not fall under the rubric of ‘taxpayer’, but who will nonetheless be directly affected by the decision to fork out €54bn on property loans. Most of them are under 18, and a substantial number of them aren’t born yet. Perhaps their economics teachers will point to their dilapidated schools as an illustration of the concept of opportunity cost.