James Cameron is going to film the next three instalments of the Avatar franchise in New Zealand. He promises to spend at least NZ$500 million, employ thousands of Kiwis, host at least one red-carpet event, include a NZ promotional featurette in the Avatar DVDs, and will personally serve on a bunch of Film NZ committees, and probably even bring scones, all in return for a 25% rebate on any spending he and his team do in the country (up from a 20% baseline to international film-makers) that is being offered by the New Zealand Government.

The implication that many media reports are running with is that this is a loss to the Australian film industry, that we should be fighting angry, and that we should hit back at this brilliantly cunning move by the Kiwi’s by increasing our film industry rebates, which currently are about 16.5% (these include the producer and location offsets, and the post, digital and visual effects offset) to at very least 30%. These rebates cost tax-payers A$204 million in 2012, which hardly even buys you a car industry these days.

So what are the economics of this sort of industry assistance? Is this something we should be doing a whole lot more of? Was the NZ move to up the rebate especially brilliant? First, note that James Cameron has substantial property interests in New Zealand already, so this probably wasn’t as up for grabs as we might think. But if that’s how the New Zealand taxpayers want to spend their money, that’s up to them. The issue is should we follow suit?

The basic economics of this sort of give-away is the concept of a multiplier, which is the theory that an initial amount of exogenous spending becomes someone else’s income, which then gets spent again, creating more income, and so on, creating jobs and exports and all sorts of “economic benefits” along the way.

People who believe in the efficacy of Keynesian fiscal stimulus also believe in the existence of (>1) multipliers. Consultancy-based “economic impact” reports do their magic by assuming greater-than-one multipliers (or equivalently, a high marginal propensity to consume coupled with lots of dense sectoral linkages). With a multiplier greater than one, all government spending is magically transformed into “investment in Australian jobs”.

So the real question is: are multipliers actually greater-than-one? That’s an empirical question, and the answer is mostly no. (And if you don’t believe my neoliberal bluster, the progressive stylings of Ben Eltham over at Crikey more or less make the same point.)

But to get this you have to do the economics properly, and not just count the positive multipliers, but also account for the loss of investment in other sectors that didn’t take place because it was artificially re-directed into the film sector, which no commissioned impact study ever does.

This is why economists have a very low opinion of economic impact studies, which are to economics what astrology is to physics.

What does make for a good domestic film industry then? Look again at New Zealand, and look beyond the great Weta Studios in Wellington, for Australia and Canada both have world-class production studios and post-production facilities. Look beyond New Zealand’s natural scenery, for Vancouver is an easy match for New Zealand and Australia pretty much defines spectacular.

No, the simple comparison is that New Zealand is about 20% cheaper than Australia and 30% cheaper than Canada. New Zealand has lower taxes, easy employment conditions and relatively light regulations (particularly around insurance and health and safety). It’s just easier to get things done there.

If Australia really wants to boost its film industry, it might look more closely at labour market restrictions (including minimum wages) and regulatory burden and worry less about picking taxpayer pockets and bribing foreigners.