Category Archives: Government Policy

Series on tax: Part 2b – let’s experiment with explanations

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In the second part of my series on taxation I wrote about distortion and burden.  But I’m not sure whether my description about wedges and how people respond to prices was necessarily clear enough for a non-economist audience.  So I’m going to experiment with some other ways of articulating what I mean – ways that are equivalent, but for different people may be clearer.

Note:  I apologise in advance if this is a bit scattered – if you have questions or comments note them down in the comments, you’ll be doing me a favour :)

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Series on tax: Part 2 – distortions and burden

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Over at Rates Blog I have put up part 2 or a 6 part series on tax (it was going to be 5 but I’ve extended it.  In part 1 we asked “why do we tax“.  In part 2 we are digging deeper into the costs of taxation.

We focus on two specific issues, the way taxes distort behaviour, and the idea of where the burden of tax falls.  As we explained in the first article these issues are really really difficult to actually work out – and the purpose of the second argument is just to give a “flavour” to the argument.  In honesty, if you wanted to figure out the true burden and distortions you’ll have to get yourselve a series of these CGE modeling economists armed with other economists who focus on normative judgments.

Last time I promised to discuss tax systmes that seem idea, that we don’t use.  And why we don’t.  Well, that is now the next article.

Also, thanks to Agnitio who helped me clear up this article.  It is a fairly wonkish one, and he came in at the last minute and helped me clarify what the hang I was doing ;)

Series on tax: Part 1 – why?

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Huzzah, I am writing about tax on Rates Blog.  In Part 1 I ask “why do we tax“.

I get onto other issues later – in fact, this will be a five article series.  Here all I do is combine the idea of “government spending” and “paying for government spending”, and give a little wink to ideas such as equity and tax incidence.  They will play a more central role in the next article, when I discuss tax systems that seem ideal … but that we don’t use for often good reasons.

Energy policy as a new policy issue!

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So we’ve had Labour and the Greens make the cost of energy the first big pillar of their upcoming election campaign.  The energy industry is important in a large number of ways, is something people care about, and is definitely policy relevant – so it is a good pick.  I’d note I don’t talk on “political levels” (my own failure to be sure), but it is a good area to discuss in terms of the policy society desires.

Now I’ll be honest that given this I was heavily disappointed with the analysis done by the Greens and Labour. There have been two good posts discussing the issues – Lance Wiggs and Seamus Hogan.  This isn’t going to be one of those posts.  Instead I’m going to complain about something.

I’ve seen lots of people on twitter bang on about “ideology“, “starting a debate”, etc etc … but the fundamental number they provided of an average household saving $230-$330pa is what MOST of the public cares about.  I respect the dudes and dudettes that have been saying “hey let’s just discuss energy policy”.  But I’ve just spent the last few days listening to a large number of my non-economist friends going on about how they like the idea that Labour is going to give them this money …

And that figure is a load of complete crud.

Ignore the BERL report here.  I have no real criticism of them – they were VERY transparent with their assumptions so I knew from the start that:

  1. They had assumed the energy boost was a given – they were told it by Labour and were just running a scenario,
  2. They had excluded government dividends,
  3. They had assumed persistently deficient demand.

Yes all these assumptions will in turn increase the size of the result – but none of them are actually too relevant to the claim that Labour and Greens are selling the most, that is will improve the money in your pocket.

Instead I get the feeling that Labour seems willing to ignore capital costs (I’d note the Greens do talk about the LRMC).  When looking at the electricity industry, we want to think about long-run marginal costs rather than short-run marginal costs – given that we are talking about an industry with massive fixed costs (huge costs of investment).  Kiwiblog suggests that this important point may have been put by the wayside, the use of the Wolak report gives further fuel to this fire, and finally via the Labour site:

Hydroelectric power makes up almost two-thirds of our electricity, and it costs next to nothing to generate because it uses free water and dams that were paid off years ago.

This is what the site says now – when it first came out it said “free water and dams”.  The change doesn’t matter though – as you still need to invest in new capacity as demand rises and you need to maintain the current capital stock!

Now, there are things that I would like to see work on (given I’m not an industrial economist, I don’t have the research and evidence in my head that other true industrial economists do).

  • Why has the relative price of residential power risen so quickly (relative to commercial and residential),
  • Why has investment in the industry seemed patchy at best?

Given that the electricity industry is probably the second most regulated and researched industry in New Zealand (I’m putting it behind telecommunications – although I may well have them the wrong way around!) the answers are probably out there, and ways to improve current regulation probably exist.  As a result of all this, the Labour-Greens decision to pick only a single report, misuse the figures, ignore the criticisms of those figures, and then publish a policy impact that is effectively a LIE is all the more disgusting – frikken ask some of the myriad of experts out there for some help making policy, hell some of them are Labour supporters and will likely to work at a cut price.

Sidenote:  National doesn’t get off for free here – socialism, communism, really?  In of itself a monopsony buyer is not something you can just rule out due to “ideology”.

Update:  This will teach me for commenting on blogs on a Saturday morning.  I didn’t mean to use the c word (not the really bad one), I’m trying to cut back on my swearing.  I do essentially think that the promised boost to income to people is a lie though – and I mean to use that as a loaded term – so I’ll live.

Is education really an investment?

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Education, particularly at the tertiary level, is usually viewed as an investment by economists. It’s a voluntary cost that you pay to get skills and qualifications that will increase your future wealth and prosperity. That metaphor is reflected in the wealth of research into the ‘rate of return’ on university study and the discussions of externalities from the accrual of skills.

Nonetheless, it is a controversial view since the investment metaphor is not a natural choice for most people. Indeed, most people refer to the fun they had at university, the people they met, and the parties they attended. These are the ‘consumption’ elements of university education in the language of economists; the parts that you would pay to enjoy then and there with no expectation of future benefits. Now, via Economic Logic, I see a paper that asks prospective students how they view tertiary education and finds that

…most students do appear to value college consumption amenities, including spending on student activities, sports, and dormitories. While this taste for amenities is broad-based, the taste for academic quality is confined to high-achieving students.

As summarised by the Economic Logician, “except for the top students, high school graduates do not care about academics at all. All they want is excellent “college consumption amenities.” And this likely explains why they learn so little while in college. Their focus is on the university as a consumption good, not an investment good.” The policy-maker’s view of the value of university and the student’s view are very different.

What does this mean for policy, then? Well, if the private value of university is largely in the consumption value then the total value is far higher than most estimates suggest since they are usually based entirely on investment value. That has implications for the level of the subsidy we want to provide to tertiary students. In addition to the efficiency questions we also need to ask whether,as a society, we want to heavily subsidise most students’ on an extended holiday?

Greenpeace enters the economic policy debate…sort of….

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I was interested to see this article on stuff about Greenpeace arguing for  a “green” economy. I even considered taking a peak at the report they have put forward by the  “German Aerospace Centre’s Institute of Technical Thermodynamics” until I got to this bit at the end of the article

Where the report stumbles is on the financial side, giving no detail on the level of investment required or the economic tradeoffs, making it impossible to judge if the transformation would be worthwhile or simply a pyrrhic environmental victory.

Argent said this was a deliberate choice, with the aim of the report to spark a discussion rather than getting too bogged down in the numbers.

Which basically means this report tells us nothing….

As a side note, as an economist I would replace “financial side” with “opportunity cost”  as it it’s not just “money” trade offs that need to be considered…social, environmental, and any other metric that will be part of the cost need to be considered. You can’t just look at non-monetary gains on the benefit side and ignore them on the cost side.