TVHE

Economist’s View links to a post on the Vox EU site by Hans Gersbach.  At the start of the post Mark Thoma states:

I have argued many times that the Fed should have two roles. It should conduct monetary policy, and it should be the primary regulator of the financial system. However, not everyone agrees. When I was at the What’s Wrong with Modern Macro Conference in Munich recently, I met Hans Gersbach — we were on a panel together — and he passes along his argument that monetary policy and banking regulation should be conducted by separate bodies

So the disagreement here is not about the two instruments for central banks – in fact in the monetary policy community there is a strong degree of agreement regarding these two roles.  The disagreement stems from who should be in charge of the instruments – should we have one authority controlling both, or separate authorities.

This is a fascinating issue, and I have previously said I am on the side of SEPARATING.

My reasoning is that separating “monetary” and “financial stability” issues is essential in order to create transperancy in the public regarding policy movements.  If we can make sure that changes in the Bank’s cash rate are related to “monetary” policy and changes in prudential regulation/settings are related to “financial stability”.  By doing this, the actions/intentions of the individual institutions are more obvious and are more likely to anchor expectations – which is the point.

Of course monetary and financial stability policies, and these instruments (interest rates and prudential policy) are heavily related.  But of course, we know that monetary policy and fiscal policy is as well.  The fact is that in order to signal policy and control expectations we NEED individual instruments to be targeted at individual variables – and having separate institutions helps to clarify this fact.

This is a “sister post” to a discussion on the adult community education market over at the Education Directions blog.  Dave Guerin has substantially more knowledgeable about the industry then I do, and his comments are well worth reading.  I offered to do a small post discussing the “benefits of ACE” which have been bandied about.

Eric Crampton also takes the report to task here.

Read more…

We (the Phoenix) have a home “semi” today.  Now the use of the word semi is strange – if we win, we play the Newcastle Jets.  If we win that we play the loser of the two legged playoff between Sydney and Melbourne.  If we win that, we play the winner of the two legged playoff and are champions.

Anyway, we have a home game today in the finals round.  So get down to Westpac Stadium and support the Phoenix – the game is at 5pm.

That is all.

PS Actually, I think if we win today then we have another home game – spectacular!

David Farrar states that this is how Labour has framed the idea of tax cuts – a $150,000 pay increase for Jack Paul Reynolds, and only a few dollars for the rest of us. David states that we must look at the macroeconomic impact, and that we can’t focus on who gets what, specifically he says:

If the debate becomes one of simply who gets how much, they will have problems

However, I think the debate about who gets what is important.  However, I do not think that it actually falls in Labour’s favour.

Jack Paul has specific skills, he is hard to replace, and is seen to add a lot of value.  The “elasticity of demand” for his service is very very high low.  Furthermore, he has a lot of high paying outside options – he has a good reputation as a CEO.  This means that his “elasticity of supply” is very high (note that I am using quite a discrete margin in this case).

What does this mean?  Well, when he labour income is taxed, the FIRM will pick up the tab – as a result his gross wage is representative of this.  Now this also indicates that, when taxes are lower, the tax payment by the firm will be lower.  As a result, over time his gross wage will adjust DOWN to represent this lower tax rate.

As a result, the direct impact on Jack’s Paul’s pay packet is likely to be very low proportional to both income and what other people receive.  It is Telecom that faces most of the “incidence of tax” in this case – not him.

As a result, a tax cut isn’t a $150,000 pay increase for Jack Paul.  Nowhere near in fact.  National should be using basic economics to debunk these sorts of myths, so that Labour can’t try to pitch it as a class war.

Nick Rowe has a great post on technology and labour.  Fundamentally, it states that, one day, increases technology and improving capital will replace labour, destroying demand for labour.  I was discussing a similar issue with Linuxlover on Twitter (and who blogs here).

Both men seemed to imply that such a situation could be a bad thing.  Linux lover told me of the “legion of unemployed”, while Nick mentioned a book that states:

It describes life in the near-future when technology and machines have destroyed the demand for nearly all human labour, except for the labour of a small, highly-educated minority. The vast majority of the population would be unemployed, but for government make-work projects

However, I am not afraid of such an occurrence per see – in fact I am excited.  Why?  What is wrong with me?

Read more…

I have nothing against the idea of a “financial hub” per see.  We can make an argument for “infant industries” or “positive spillovers” to justify government involvement.  However, the burden of proof is on those making the claims.

That is why the Herald story on this makes me suspicious.

Making New Zealand an international finance centre with “middle and back-office functions” in the funds management industry was one of the recommendations of the Capital Markets Taskforce report last month.

It found the “hub” notion viable but kept the detail of its advice on how to implement the plan out of the report, giving it directly to Mr Key instead.

Usually, people avoid putting things into reports and give them straight to ministers when their analysis is suspect …

Furthermore, look at these claims:

Mr Key says early advice is that between 3000 and 5000 jobs could be created if the plan comes off.

…

The benefit would be the creation of back-room jobs and taxing the fund administrators. The funds themselves would not be taxed.

On the face of it this is fine.  We shouldn’t tax the funds as we are just an intermediatary – we should tax the value added bit.  Cool.  Furthermore, there are jobs, implying that value is being added which creates labour income, cool.

However, HOW do they plan to make us a hub.  This is the important question.  Do these jobs come from subsidising an industry and thereby moving workers from one sector to another.  If so there are opportunity costs – and we better well have some damn good analysis about why market prices aren’t providing the right signal.

Now, it is trivial to state that a government action COULD have a positive impact – give me a possible policy and I can make up a model that would make it sound like a good thing to do.  In truth, we need details so we can ask if we think it WILL have a positive impact – a situation which is only a small subset of all the “could” situations.

And of course, to do that we would actually have to see some analysis – which we have been told was not put in the report.

Hmmmmmm

Further to our discussion of New Zealand doing a compensated shift of taxes from income to GST (see here, here, here, here, here, here, here) we come to the issue of economic imbalances in NZ.

Ok, so the imbalance has something to do with tradable sector activity flatlining while non-tradable sector activity increased – meaning that we have more non-tradable activity as a % of total activity.  There is a feeling this isn’t sustainable.  In part this might be true, but to be honest we have also had a massive increase in our terms of trade – which implies we can sustain more non-tradable activity for each unit of traded activity.

However, I digress.  If we accept that there is an imbalance, if only for the sake of argument, we can say that the higher exchange rate is a symptom of this imbalance.  Given this, what will GST do?

Now, changing from income tax to GST is likely to bump up the domestic price level immediately.  The increase in the domestic price level will then translate into a lower dollar – however, since this is because of a lift in domestic prices, is will not help competitiveness in any way.  Namely the real exchange rate remains unchanged

However, correct me if I’m wrong, but there is one way that shifting to GST promotes exports and discourages importing.  I believe that GST does not tax the “value-added” from exporting.  This is effectively subsidising exports.

Furthermore, I think that firms do get GST rebates on imports – but if they don’t that implies that the change in the price level, which goes through the exchange rate, does act like a tax on imports.  If this is the case it would discourage importing.

If anyone has any more details on the tax treatment of exports and imports I would like to hear about it – as this is the way that the tax shift could change structure, not through an adjustment in the exchange rate per see.

There is talk that a lower income tax might, at the margin, reduce immigration.  Now when the income tax cut is measured with an increase in consumption taxes, this argument becomes a lot weaker.

By taxing consumption instead of income we increase the price of everything, and thereby lower incomes.  If people HAD to consume in the same place where they worked then this would have no impact on immigration incentives at all!!

If people could decide to save (which we could) then shifting from income tax to consumption tax gives people, at the margin, the incentive to work in New Zealand – but to move away and use this income somewhere else.

When the shift is introduced we are increasing the cost of consumption domestically – so people who have saved will want to move away (at the margin) and people who have borrowed will be more likely to stay in the country.

The net impact on migration is going to be ambiguous, but on the margin we can tell that there will be more incentive to work here and less incentive to spend here.

Of course this ignores one major thing, the dollar will fall to compensate for the change in the price level – implying that an “unexpected” increase in GST could have no impact at all at the margin for those with savings or borrowing (as the lower dollar reduces the value of domestic income overseas and makes consumption here cheaper for those with foreign income – thereby increasing the incentive for people who have saved to move here, and reducing the incentive for those who have borrowed to move here)

So, us New Zealander’s are switching some income tax to consumption tax.  Good for us.  In order to think about whether this is a good thing we need to discuss costs and benefits.

It turns out this switch is also a “transfer” of resources between two groups, relatively speaking.  These groups are people that HAVE borrowed and people that HAVE saved.

When we increase GST and lower income tax we are saying “we will tax future consumption more and future income less”.

If people have borrowed this implies that they purchased consumption when it was relatively “cheaper”, and are now going to be taxed at a lower rate on the income they are making to pay it back – as a result, borrowers win.

If people have saved, this implies that they have deferred consumption when it was cheap – and will buy things when they are more expensive.  As a result, savers lose out from the change in relative taxes.

Since it is “true” that people on low incomes borrow relatively more of their income, then in a static sense this switch could be seen as more “progressive” right?  I don’t really like static definitions, but if people are complaining about the poor and saying that the poor borrow more then it is important to keep this initial transfer in mind …

Personally, I think borrowing and saving  is based more strongly on lifetime income, impatience (which I think is income neutral) and the lumpiness of consumption – as a result, I’m don’t see to much progressivity here.  However, this does tell us that people with a stock of liabilities will benefit and people with a stock of assets will lose.

A famous quote from Keynes:

When the facts change, I change my mind. What do you do, sir?

This is what John Key really needs to say about the “revelation” that he wouldn’t increase GST in 2008.

John Key now knows that increasing GST and reducing income tax is seen as a way to improve economic efficiency – so he is willing to do it.  When he said they wouldn’t do it, it was because the facts he was labouring under were different.

Criticising him on the basis of a speech in 2008, before the impact of the great financial crisis was clear, is petty – shame on the politicians, and other members of society, indulging themselves in this.