Matt Nolan

It’s a hard road, trying to figure out what economists love

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Personally, I love movies about epic historical dramas, or potatoes – but this is hardly representative of economists.

And when it comes to economics two things hold true:

  1. Economists actually agree about a lot more things than people realise.
  2. Many of the things people think we agree upon we don’t.

With this in mind I thought I’d have a quick look at the policies economists love that were put up over on Kiwiblog.

The third one states that economists would love if corporate tax was taken away – because it really is double taxation on an income stream, and an inefficient form of redistribution.  This is true.

However, I wouldn’t say that economists widely agree that we should set corporate taxes at zero – especially since there is some debate about whether we should be taxing investment/interest income.  There is an agreement that we should treat all investment classes the same, but less of a consensus about the level of taxation then there used to be.

On that note comes point four.  Yes, economists generally prefer consumption taxes to incomes taxes – but the way to view this is as a cut in the tax on interest income … as a tax on labour income and consumption are equivalent, implying that an income tax in of itself is a tax on labour and interest income.

This comment in particular is disturbing:

Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

A tax on income and a tax on consumption both reduce real after-tax income – by taxing one instead of the other we don’t “magically” discourage different things … this is confusing partial equilibrium logic with a more general view of the economy which is appropriate for discussing tax.

On top of this, a switch from income to GST taxes is an immediate transfer from savers to borrowers – is this fair?

Five is tax carbon because it’s “bad”.  But is this really the reason?  I was under the impression that in a small open economy like NZ we tax carbon due to raise funds for a potential Kyoto liability – as any “externality tax from global warming” would not do anything because we are so small.  Hence why there needs to be international co-operation.

Six is legalise weed.  There is wide agreement here that something should be done, and a general swing towards legalisation and treatment of addicts as suffering from a mental health issue rather than a criminal one.  There are so many medical benefits that can be obtained from cannabis and to get more information about strawberry cough weed you can check this out. Legalising canabis can be beneficial for many people but I’m pretty sure we could also find many economists that feel that legalising may provide an inappropriate signal that could lead to worse outcomes – after all, it is well known that when you explicitly give something a price people do treat it differently.

Note:  I am pointing out there are issues here – even though many of these policies are central to my own view of what is appropriate.  See, I can attempt to be objective 😉

Matt Nolan

The tyranny of New Zealand’s middle classes

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I expect a lot of abuse for this, so don’t feel that you have to hold back.  Here is my Dom post article (that was supposed to be) from the prior weekend.  It kicks off as follows:

The statement that we are worse off than we were is false, and society’s willingness to believe it is a clear example of the unwarranted victim mentality taken on by the middle classes in New Zealand. In truth, the middle class is better off than it ever has been – due to a mix of economic growth, and by extracting resources from the rich and poor of New Zealand.

Personally, I 100% agree with myself – which doesn’t often happen.

In fact, take this song by Janis Jopin:

Replace lord with government, and you have the attitude of a surprising number of people in New Zealand at present 😉

Eric Crampton explained this phenomenon well in a couple of tweets:

First cut: narratives around deserving and undeserving poor resonate strongly with our moral intuitions.

Left has mushed those two groups together. WFF is classic transfer to “deserving”, hard-left says “unfair”.

Personally I find the distinction between deserving and undeserving poor to be both a poor black and white analogy, and a morally abhorrent way of viewing things.

How can anyone judge who is worthy of a better or worse living standard?  What sort of delusion do we live in if we think we can justify poverty for some, as we demand hand-outs for others who are significantly better off.  I find the entire viewpoint distasteful.

I would also note that this point of view doesn’t imply that I don’t believe there is a case for some redistribution to the middle classes – as I mention in the article.  Instead, I point out that we have had significant redistribution, the middle classes in NZ have done pretty damned well.  Increasing effective taxes on investment to redistribute to the middle classes at this point seems excessive in its costs – and in many cases (eg in terms of transportation and housing) this may merely be leading to higher prices instead of actually improving anyone’s living standards 🙁

Furthermore, the simultaneous demands for further income boosts to the middle classes and income cuts (and harsher criterion) on the poor is a massive step too far – we are going past describing anything that resembles fairness towards inappropriate punitive punishment of solo-mums and people suffering from addictions.

Matt Nolan

We’re five

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As of today, the blog is officially five years old – judging by the first post that was put up.  This was a post by James on banning smoking in public places.  His justification for it boiled down to:

The fact that we’re currently co-ordinated on an equilibrium where people go to smoking pubs rather than non-smoking pubs is an artifact of the historical norm in favour of smoking. Thus, the lack of non-smoking pubs shows that nobody individually has an incentive to deviate. What it doesn’t show is that this outcome is best or even that it is preferred by everybody.

This is where the government comes in: they must decide whether it is welfare improving to pass laws that re-organise society around a non-smoking norm. Certainly the non-smokers will be better off, but what about the smokers? They may well be worse off, but not by as much as they would like you to think.

He even starts his commentary on time-inconsistency towards the end of the post.

I even commented on the post, showing a complete disregard for the idea of norms:

Surely, if individuals hated being in bars with smokers so much, non-smoking bars would have appeared. After all if non-smokers value not having smoke around, they would be willing to pay a premium, and the bar would sell a differentiated good. If the non-smoker had a smoking friend they would negotiate. If not smoking was so important, the smoker would sacrifice smoking indoors (and maybe choose a worse alternative for smoking outside) for some compensation (e.g. a drink). As this transaction didn’t take place (which would have been a version of the Coase theorem) I doubt the externality was severe enough to require a solution.

What is amazing is that the sort of things we are talking about, and the justifications, haven’t changed at all.  I’m not sure what that means.

Note:  In truth we are a little over 5 -there was a prior post about a week beforehand that was about the “purpose of the blog” – but it was accidentally deleted as we tried to figure out what we were doing 🙂 .  I also remember it taking a full week before any of us would start posting, because no-one wanted to be the first – so thank you James for breaking the seal.

Matt Nolan

Has inflation fallen below the Bank’s target?

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I’ve heard people suggesting that the RBNZ has failed its mandate on the downside, eg this tweet by Vernon Small.

If inflation is 0.6 excluding excise on fags and the RBNZ looks thru Govt charges then hasn’t it just breached 1-3% band on the downside?

Now, I don’t mean to come out to defend the Bank as they can do it fine on their own – but there are a couple of clear issues with this claim I can comment on.

Firstly, as Eric Crampton suggests, the Bank is supposed to aim for inflation outcomes that settle in this range “in the medium term” – moving outside of this range for a single quarter doesn’t imply that they’ve failed anything.

The logic here is that the relative price of goods and services may change, and “unexpected” things may happen that the Bank did not foresee.  If these things happen, then the RBNZ does not want to look backwards – it wants to tell firms and households clearly that they can expect average price growth in this range in the future.

Now, there are a number of indicators of what is expected for inflation – my favourite is the adjusted Labour Cost Index, as it comes from actual behaviour rather than arbitrary reporting by individual firms and households … so what has that been doing?

So in this sense, things look pretty good – in least in so far as the inflation mandate is being met given the current credibility and policy of the RBNZ.

But even in terms of our measures of what “has happened” with inflation, did inflation actually slip temporarily out of the Banks target band?  As I have mentioned before annual growth in the CPI is a poor measure of what “inflation” really is – we want something like the RBNZ’s dynamic factor model (here).  So what is the sectoral factor model telling us?

Now, there is some end-point bias in this (the nearer periods will change as we get more data), but it doesn’t seem to suggest that inflation feel out the bottom of the band – even with the domestic economy, labour market, and global growth all disappointing heavily.

As a result, this type of criticism of the RBNZ doesn’t seem to be warranted.

jamesz

People don’t understand government support

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It’s very fashionable in some circles to call for reductions in government intervention these days. Let people stand on their own two feet, we are told. An interesting article in the NYT suggests that people don’t fully understand the role of the government in providing benefits. Krugman cites US research showing that:

…44 percent of Social Security recipients, 43 percent of those receiving unemployment benefits, and 40 percent of those on Medicare say that they “have not used a government program.”

I don’t know if the results would be similar for NZ: perhaps it depends on how the benefits are delivered and whether a private firm provides them. However, it seems pertinent at a time when the government is focused on reducing the costs of long-term unemployment, even as our healthcare and superannuation expenses are the major fiscal risks for the government. Do voters really understand the fiscal transfers that are occurring and where the government puts the money?

If you’re interested in who receives what benefit from the government then it’s worth having a look at the latest Treasury work on fiscal incidence.

Matt Nolan

Why stop at mini-apartments … what about public bedrooms?

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Over at Marginal Revolution there is talk of mini-apartments to solve the shortage of accommodation in New York City.

This is all well and good, specifically because it reminds me of this time I was standing outside a public toilet.  It was a very flash public toilet with a person sitting in a little glass office keeping an eye on everything, and I was in one of my “stare deeply and inappropriately at things” moods.  At that moment I thought “if we have public toilets, why don’t we have public beds”.

Is it inconceivable that one day we could have a world with public beds?  One where we work eight hours, do activities for another eight hours, and then wander over to a public bed facility to sleep for another eight hours.  Its a relatively dystopian view of the world, but surely its not inconceivable in areas with high population density.

If the price of housing and transportation climb significantly, and government wants to create equality of opportunity for people within large cities, wouldn’t a movement towards public beds/bedrooms make some sense?