Is the ‘Chicago Plan’ the way forward?

David Grimmond writes about the old Chicago Plan, written up following the Great Depression (Infometrics link).  Given the way it is described by the IMF he believe it:

There are many other examples of low lying fruit in the policy domain where a combination of entrenched interests and innate conservatism inhibits movements to welfare enhancing changes (eg a flat tax/guaranteed minimum income tax benefit system, redesigning GST on a origins basis, and global free trade).

The claimed benefits of adopting the Chicago Plan are truly profound, and if true would have a larger impact on the welfare of New Zealanders than most other issues that dominate political debate.

It would seem to be a good use of government resources to have this issue investigated thoroughly to, either put to bed the claims if they are illusory or to begin implementing a change if they are indeed genuine.

The potential benefits David notes are:

1. Having to obtain outside funding rather than being able to create it themselves would reduce the ability of banks to cause business cycles due to potentially capricious changes in their attitude towards credit risk.

2. Having fully reserve-backed bank deposits would completely eliminate bank runs, thereby increasing financial stability and allowing banks to concentrate on their core lending function without worrying about instabilities from the liabilities side of their balance sheet.

3. Allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances.

4. Allowing a reduction in private debt levels as money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets.

5. It generates long term output gains from a lower interest rate profile, lower tax rates (as the government can earn more from seigniorage), and lower credit monitoring costs for banks.

6. It can allow steady state inflation to drop to zero without posing problems on the conduct of monetary policy. A critical underpinning to this result is the greater ability to avoid liquidity traps as the quantity of broad money would be directly controlled by policy makers and not dependent on bank’s willingness to lend, and because the interest on Treasury credit would not be an opportunity cost of money for asset investors, but rather a borrowing rate for a credit facility that is only accessible to banks for the specific purpose of funding physical investment projects, it could become negative without any practical problems.

This does sound to good to be true.  Hence why, as always, there are trade-offs.

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Are we reaching “peak Jetstar”?

Benje Patternson has been keeping an eye on the air travel statistics, and found that Jetstar’s share of the New Zealand domestic market in the December year was down on the year to June.  This raises the question, have we reached peak Jetstar and what does this mean (Infometrics link)?  After noting that there is only so much we can read into the change, especially after the phenomenal growth of recent years, Benje notes it is more important to think about these issues with regard to the domestic economy as a whole:

Regardless of whether you are an Air New Zealand loyalist, or just choose whichever airline is cheapest, it is to be hoped that Jetstar’s recent set back is not the beginning of a slow decline for the airline.  After all, for consumers and businesses alike, the competition between these two airlines is vital for keeping domestic air travel prices low and regional air connectivity high.  Even in regional centres where Jetstar does not fly, a lid is still kept on Air New Zealand pricing by factors such as the proximity of main-trunk airports with low-cost connections and even the threat of Jetstar investing in its own regional turboprop capacity.

Taxing: Choice and policy consistency

Offsetting recently posted about a tweet by Gareth Morgan on eating and control, including a reply I popped up.  Essentially, Gareth’s tweet implied that the way individuals make choices indicates we have no choice over how much they eat.  I disagreed talking about precommitment – he stated I assumed perfect information, which is both a touch untrue and (surprisingly to many) irrelevant.

It did get me thinking though.  The two of us actually have almost exactly the same model of choice in our heads for this issue, and as a result any differences of view of on the appropriateness of policy that we might have are not due to differences in the underlying model. Read more

Does the “Best Start” policy make sense?

According to a recent Colmar Brunton poll child poverty and education (which is another policy around the opportunities of the child) are major issues of interest to the public.  Recognition of this had led Labour to announce their Best Start policy a few weeks ago.  But does the policy make much sense?  Gareth Kiernan has his reservations (Infometrics link):

Best Start is a typical case of a policy solution being developed to an inadequately defined problem, mixed up with a dose of admirable sentiments and a sizable helping of realpolitik.  We don’t have a robust definition of poverty, and for children who are not being adequately provided for, it is difficult to arrive at a fair apportionment of responsibility between the family and society.

What are your thoughts?



Mismeasurement and income inequality

Update:  Anyone that is waiting for this, I’m sorry but I am massively swamped with work.  I will do this – I need to look at this for other work of my own – however, a post may not appear until mid-March.

Just as a pointer, I see that there were some measurement errors in the income data used by Treasury, Stats NZ, and MSD.  That implies that some of the work mentioned at the start of this post (the recent stuff, not the longer term research papers) will be off. (ht Rates Blog).  MSD goes through matters here, I will read through what they said on the weekend.

Given how much discussion there is about these issues at the moment, this is a touchy subject – understandably.  A couple of points I’ll make are that:

  1. Given how careful these departments are, this will be upsetting for them.  I respect the fact they’ve owned up and not made any excuses.  Maybe it is my recent dealings with Vodafone, where they just kept blaming other people for the fact I have to repeatedly cancel an order I made six weeks ago, but it is nice to see organisations owning up and not making any excuses.
  2. It is important we all try to figure out what these error mean for our understanding of the issues, and policy trade-offs.

I will try to have a post up discussing what is going on next week – and what it means for some of the things I have discussed on the blog over the past year.