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Another one:
Bankruptcy law and limited liability is essentially a form of “worst case” insurance for those who set up and own businesses. As a result, firms who take on this structure should also have to take on an insurance premium.
I suppose that this was Labour’s alternative budget. They’ve taken the policy documents they’ve put together recently and stuck them together in a blog post. Fair enough, it is a good idea to put together policy documents so why not – I really like the idea of detailed policy documents by the opposition as well, so good work on that!
As a result, I don’t have much to say about it (the monetary policy has been discussed here and here – I should look into the others at some point and do posts), I summed up my view on Twitter:
So @nzlabour targets industrial policy, arbitrary UR projections, and govt debt. So they are the @NZNationalParty with more interventionism.
— TVHE (@TVHE) May 12, 2014
However, there is one bit that gets on my wick a bit, it did for the ACT release as well – this rubbish about targeting an “unemployment rate”. Read more
Labour wants to upgrade monetary policy, preserving inflation targeting but asking the Reserve Bank to reduce persistent external deficits. To help, the Reserve Bank might get to vary contributions to an enhanced Kiwisaver scheme and go a little further with macro-prudential policy. Getting kiwis to save more is probably a good thing. If successful, interest rates would be lower and ease the exchange rate a little. But the evidence-base is weak and there are many leaks since implementation and accountability frameworks are not clear. Better to leave the Reserve Bank to do what they do best – implementing flexible inflation targeting.
Many commentators point out that New Zealand has high real interest rates and that the exchange rate is overvalued relative to an economy less reliant on borrowing from abroad (see below). That makes our exports less competitive and promotes consumption of imported goods over domestically manufactured goods.
The problem: high interest rates and an overvalued exchange rate
Our persistent negative external balance – that nets our borrowing and imports from overseas against exports – largely reflects our savings choices. Of course, an external balance can also reflect imports of capital equipment for investment in the real economy but most likely reducing the external balance would reflect a useful rebalancing of economic conditions for New Zealand.
Read more
As of now I’ve only seen one alternative budget come out prior to Thursday’s Budget – the ACT party’s one (Stuff,NBR). Good on them for releasing an alternative budget, I like to see that sort of thing.
However, I have to admit I was a little more than ‘very disappointed’ with the quality of the content. If your view of the ACT party is fragile, I would suggest not reading this post. Anyway, here we go.
Alex Tabarrok at Marginal Revolution points out that, without the run up in house prices, we do not get Piketty’s trend of rising capital to output ratios in the data. This is very true, and was one of the key reasons why I wasn’t convinced that Piketty’s explanation of his data was the best available.
Now Piketty expressly discusses capital gains in his book – and he points out that he does not view the current increase in the value of capital as a bubble, instead it is the value of capital returning to its “real” level. In that way, he views the idea of saying that we have a bubble as both wrong and beside the point.
Say that we accept the implied assumption he works with – that there isn’t (and hasn’t been) a bubble in housing markets. Given this, it is important at this point to consider the narrative he has for history. He discusses a period (pre-WWI) where governments offered a high risk free rate of return, where wealth was (in some ways) heavily insured by government, and where (as a result) the value of capital was high and the private risk premium was low [best example of this was his discussion of the UK, where government debt offered a high risk free yield for those who could invest in it]. WWI and WWII – with the combination of war and the change in government policies (towards appropriation and direct regulation) changed this – the private risk premium was now a lot higher, and the value of capital dropped as a result. Government protection and regulation is BUILT INTO the price of an asset!
In Piketty’s data we are looking at a situation where government policies have changed, and as a result so has the inherent private risk premium associated with assets, pushing up the price of assets. This description suggests that, if there is a failure, it is due to an “implicit subsidy” by governments to capital owners – it is in essence the same policy failure that those in financial/macroeconomics have been discussing for years now (a quick look on the blog for recent posts gives these 1,2,3,4 – more importantly don’t forget this and suggestions by Cochrane to make the financial system run free and remove this implicit subsidy).
If this is the real cause of the changing capital to output ratios, then it suggests economists have already been investigating the key cause – and that there is no natural tendency for capitalism to head this way. Even if we don’t deal with the inherent injustice, capital/output ratios shouldn’t intensify. And furthermore, this would suggest that there is no need for a capital tax to deal with the perceived injustice – instead we just need to remove an implicit subsidy, and it make investigation into financial regulation even higher on the research agenda!
This is an incredibly important issue to investigate with respect to Piketty’s central thesis – his data set is incredible, but there is a lot of work to be done teasing out what it actually means, let alone defining what correct policy is. Even while I was reading this book, I could not get this alternative hypothesis out of my head – and Tabarrok’s post has just increased my belief that this alternative hypothesis is the correct one.
Via Marginal Revolution I see that there is a paper common confirming the intuition that the minimum wage is a wage of targeting a given view of the “deserving poor”. Essentially, those with a strong taste for leisure are assumed to be the ones that lose their jobs first in the case of a minimum wage (efficient rationing) and as a result the minimum wage gives a way to “target” our income transfers to those we think are most deserving.
I have so far only skimmed the paper, and the Saez 2012 paper that justifies efficient rationing – so take my comments with a grain of salt. However, I have two issues with this:
I want to read these papers in more detail and write about this business. The new minimum wage and optimal tax literature is formalising a lot of topics that we’ve previously used “intuition” on, and that is pretty exciting! Why – well formalisation helps to make assumptions transparent, which is what we really want to do before going around and trying to figure out policy. However, it is going to be a while until I get to this, as I get very busy through the middle of the year – and this year is busier than usual!
If anyone knows the literature, and would like to do a guest post, I would really like it – compensation would involve a beer and a discussion about economics in a Wellington bar 😉