Retirement income and the choices of youth

When you get to a certain age, anyone under 35 seems young.

People born after 1984 have different preferences and a different life experience than people born earlier. Their phones are better, their clothes use less cloth, their cars are more fuel efficient, and they probably left home at a later age. They may eat less meat, be more concerned about global warming, and have a longer life expectancy.

Firms design products for these cohorts that are very different to the products they designed for young people a generation or two ago.

Strangely, however, the government obliges these cohorts to use a similar retirement income policy as their parents. Sure, they occasionally argue over small details such as whether the age of entitlement (on young cohorts) will be raised from 65 to 67, but they never ask: is the current system fit for purpose for a new generation?

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Taxing capital incomes – are we doing it the right way?

About fifteen years ago, the new Secretary of the Treasury, Dr Caralee McLeish, was part of a World Bank team that put together a dataset measuring the regulations and taxes that small businesses face in different countries. In conjunction with Price Waterhouse, this group (including an extremely famous Harvard economist) worked out the taxes paid by a standardised 20-person business in its first two years of operation, as well as the taxes its employees pay. 

The authors then used this data to ascertain if there was a consistent relationship between the taxes and regulations that businesses in each country face and the amount of investment taking place in each country. There was: the countries with lower tax rates and less onerous regulations tended to have more investment and more foreign investment. The data were considered so useful that the exercise is now repeated annually. One of the original papers by this group of authors, “The effect of corporate taxes on investment and entrepreneurship” (published in 2010) has been cited more than 750 times. 

New Zealand has low levels of capital for a country of its income level and quite high corporate taxes. 

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Use value, exchange value, and “cost”

When writing this post I found myself a bit uncomfortable with terminology like “use value” and “exchange value” and so steered away from them – well also because a production function approach to the question is just so much damned clearer!  Exchange value was fine, but use value I found a bit confusing – as I always wanted it to be defined either in terms of the buyer (their utility) or the seller, and even in terms of the seller are we talking about the price they sell at or their full economic cost (which includes the opportunity cost).  This especially frustrated me as I know that 13 year old me used these terms all the time.

Now I think I have a clear idea on it all again, so I’m just noting this down so I can look it up in the future!

Use value:  Read this as utility Matt.  It is the value of the person using it.

Exchange value:  Price.

You’ll notice something is missing here when I talked production functions though … the actual supply of goods and services.

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Bleg: Is this due to capitalism?

I hear this sort of thing a lot – and want to hear your views.  I will give a view in the future.

Also we used to just play Sim City 2000 in economics class at high school and I thought it would be cool if the individuals in the city followed rules – something they talked about for the latest Sim City but didn’t really do.  So remember any model we build to explain this is sort of like that, just maybe less entertaining with a dearth of colourful sounds.

“Left Youtube” is overusing the labour theory of value

While I have been MIA over the last four years a lot has changed on the internet and in terms of economic and social discourse.  The weird infatuation of the alt-right with “globalists” and nonsensical economic arguments is particularly upsetting – and I’ll be discussing how the decline in persuasiveness of economists has helped these types of people fill the void in the future.

My concern four years ago was that the non-rationalist identity politics of the left would open this type of negative nationalistic politics on the right – or would at least be used as a foil for it.  The refusal to actually state our assumptions and values is a failure irrespective of the intentions we hold.  In that way, when exploring Youtube I’ve been pleasantly surprised by the leftist video blogs – and their willingness to fully articulate their views.  Key examples of this are Shaun, Contrapoints, and Philosophy Tube.

However, these channels are distinctly “anti-capitalist” in terms of wanting sizable change in the status quo.  I am a mainstream economist that believes in incremental change.  A full discussion of this would be interesting – but give me time.  But to do so we need to get something clear about the labour theory of value that I am hearing them describe – it doesn’t make sense as a justification for anything let alone as a “theory of value”.

Note: The actual labour theory of value has been defined many ways – and the most profitable Marxian interpretation I’ve seen is trying to understand LTV as part of a subsistance wage argument on factor income shares.  That isn’t the focus here.

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Vertical and horizontal equity: What are they?

This post is dry.  But if we want to talk about policy and fairness we gotta do some of the hard work making sure we understand how our ethical principles can be measured.  See it as part of trying to build more measures to help us understand arguments around policy given what Sen raises here.  So with that in mind lets define equity:

Equity.  Is the word economists unjustifiably confuse with fairness in order to pay lip service to distributional concerns

Ok I’m being a bit of a dork – in all fairness equity is a good start in asking these questions, but we have to see these measures as only a start!

At the most basic level, when we think about output/income and its distribution in society we consider the average of the income distribution (the mean) and its dispersion (the variance).  If incomes are rising over time as they have been for 200 years, then the variance also rises so we normalise such measures.  This is where inequality measures like the Gini coefficient come from.

The idea of (income) equity goes a step further than just describing the general distribution of income – it considers what happens when we impose an external policy that changes that distribution.  It measures a couple of principles that we may – or may not – value when applying a policy that changes the distribution of income:

  1. Vertical equity:  Captures the proportionality of the system applied – if we introduce taxes are people with higher initial incomes paying proportionally more, if we introduce transfer payments are people with lower initial incomes receiving proportionally more?
  2. Horizontal equity:  When we have two individuals we see as “equals” does this policy system treat them the same way?

With taxes and transfers these measures involve comparing the way people are treated by the tax-transfer system based on a view on what constitutes “equals”.  Specifically, these two concept can only fit together without conflict when looking at income if equals are defined as people with the same income.

Now in this post I will concentrate only on Vertical Equity – we can do Horizontal Equity another time!  And in line with my desire to be a bit more useful I want to focus on how we might measure these concepts, and what we are assuming when we do.

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