I have argued many times that the Fed should have two roles. It should conduct monetary policy, and it should be the primary regulator of the financial system. However, not everyone agrees. When I was at the What’s Wrong with Modern Macro Conference in Munich recently, I met Hans Gersbach — we were on a panel together — and he passes along his argument that monetary policy and banking regulation should be conducted by separate bodies

So the disagreement here is not about the two instruments for central banks – in fact in the monetary policy community there is a strong degree of agreement regarding these two roles.  The disagreement stems from who should be in charge of the instruments – should we have one authority controlling both, or separate authorities.

This is a fascinating issue, and I have previously said I am on the side of SEPARATING.

My reasoning is that separating “monetary” and “financial stability” issues is essential in order to create transperancy in the public regarding policy movements.  If we can make sure that changes in the Bank’s cash rate are related to “monetary” policy and changes in prudential regulation/settings are related to “financial stability”.  By doing this, the actions/intentions of the individual institutions are more obvious and are more likely to anchor expectations – which is the point.

Of course monetary and financial stability policies, and these instruments (interest rates and prudential policy) are heavily related.  But of course, we know that monetary policy and fiscal policy is as well.  The fact is that in order to signal policy and control expectations we NEED individual instruments to be targeted at individual variables – and having separate institutions helps to clarify this fact.

Eric Crampton also takes the report to task here.

The post

In a report the is often used to justify ACE spending, the net benefit of adult community education (for 409,000) was stated to be between $4.8bn and $6.3bn annually – giving a total return of $54-$72 per $1 invested (see page 48).  Wow, really – if I could get that sort of return I would be investing in adult community education for sure.

Of course, if we were to view the report in this way would provide the wrong conclusions.

So lets ignore the weaknesses in their survey (self-reported mental health? not clearly defining the “counterfactual” for those they surveyed – some would have had work or other changes in their life without the course), the use of the highest estimates of variables from arbitrary foreign sources to define the possible benefits of this spending, and the fact that they ignore the opportunity cost of GETTING the tax to spend on these schemes in the first place.  Instead of all these weakness (which are still important mind you) I will focus on one issue: what is policy relevant.

Why look at this?  Well the report is often used to justify a high level ACE spending.  The numbers can only be used to justify spending if they are “policy relevant” – namely if they can define true “social costs and benefits” that aren’t taken into account in the market for ACE.

Now the factors that are policy relevant are NOT private benefits – these help determine the market price.  They are benefits that stem from some third party, uninvolved in the transaction, gaining some benefit from the individual taking an adult community course.  And they are not “fiscal externalities” (ht Offsetting Behaviour).  So the policy relevant factors are:

• Increase in direct income:  No
• Savings in government benefits:  No
• Marginal increase in individual income:  No
• Increase in income from self-confidence:  No
• Reduction in family violence:  No
• Savings for health:  No
• Savings from crime reduction:  Potentially, partially
• Increased community involvement by individual:  No
• Higher income taxes:  No

So some part of $171m-$254m can be seen as a positive externality, a pretty indirect one but lets be generous.

Taking the “possibly policy relevant” factors, and accepting the seemingly artificially inflated numbers (they state that it HALVES the chance of these 400,000 odd people being involved in a crime over their lifetime – see page 57), then the average return per dollar invested is about $2.  Furthermore, that is an average not a “marginal” amount (contrary to the claims of the report mind you – see page 5).  The marginal return (the amount of social return we will get if we increase spending by a small amount) is likely to be well below $1 per dollar.

Given what I feel has been a generous interpretation of the marginal social benefit, the suggestion would be that we should cut back on public funding for adult community education.

Conclusion

These numbers should not be used to justify policy, as they don’t provide directly policy relevant information.  Anyone who uses the numbers to justify policy and is aware of these flaws should have nothing to do with policy anymore.

To be fair on the authors, they are asked to provide the “value” that is created, not talk about corresponding costs.  However, the bit where they state “giving a total return of $54-$72 per $1 invested” is misleading for that very reason.

My criticism is not of the report per see, although I have no doubt we could all argue about some variables and valuations.  My criticism is of the use of the above figure to justify policy – it is inappropriate, and we must be very careful.

Anyway, we have a home game today in the finals round.  So get down to Westpac Stadium and support the Phoenix – the game is at 5pm.

That is all.

PS Actually, I think if we win today then we have another home game – spectacular!

If the debate becomes one of simply who gets how much, they will have problems

However, I think the debate about who gets what is important.  However, I do not think that it actually falls in Labour’s favour.

Jack Paul has specific skills, he is hard to replace, and is seen to add a lot of value.  The “elasticity of demand” for his service is very very high low.  Furthermore, he has a lot of high paying outside options – he has a good reputation as a CEO.  This means that his “elasticity of supply” is very high (note that I am using quite a discrete margin in this case).

What does this mean?  Well, when he labour income is taxed, the FIRM will pick up the tab – as a result his gross wage is representative of this.  Now this also indicates that, when taxes are lower, the tax payment by the firm will be lower.  As a result, over time his gross wage will adjust DOWN to represent this lower tax rate.

As a result, the direct impact on Jack’s Paul’s pay packet is likely to be very low proportional to both income and what other people receive.  It is Telecom that faces most of the “incidence of tax” in this case – not him.

As a result, a tax cut isn’t a $150,000 pay increase for Jack Paul.  Nowhere near in fact.  National should be using basic economics to debunk these sorts of myths, so that Labour can’t try to pitch it as a class war.

Both men seemed to imply that such a situation could be a bad thing.  Linux lover told me of the “legion of unemployed”, while Nick mentioned a book that states:

It describes life in the near-future when technology and machines have destroyed the demand for nearly all human labour, except for the labour of a small, highly-educated minority. The vast majority of the population would be unemployed, but for government make-work projects

However, I am not afraid of such an occurrence per see – in fact I am excited.  Why?  What is wrong with me?

I personally believe that we only get a situation where we have “a legion of unemployed” when scarcity is gone – when technology provides all that we desire so that we don’t need to work anymore.

Now you may say – aha, but if only one person owns this technological stock, and if they can produce enough for everyone, why would they?  I would say that if this is the case we have two different “economies”, a single individual with lots of capital who is completely self-sufficient, and a whole bunch of labour with some other capital.  That “second economy” that is excluded from the first will work to create produce, as they are using their scarce resource of time to make goods to provide for their own needs and wants.

In such a situation it would be preferable if the owner of the capital stock simply produced enough for everyone’s wildest desires – but they don’t, ohh well.  The issue here is the lack of a “price signal” to redistribute income.  Guess who could help us … a government

But things can’t be this rosy?

That is true.  If we had a situation where capital could be used to COERCE actions to ENSLAVE individuals then we will have a problem.  And such a structural issue is the domain of political science, not economics.  However, this is the only situation where we get “a legion of unemployed” rather than “a legion of jobless, but perfectly satiated individuals”.

An environment free of coercion and an economy with “legions of unemployed” just aren’t consistent.  An environment with coercion and “legions of unemployed” would be a dystopia.  An environment free of coercion but with no demand for labour – that my friend is a utopia, and is not something we should fear.

As long as our freedoms remain, the day where labour demand does not exist does not frighten me.  In this case Linuxlover and Nick may justifiably feel differently, because they think a corresponding limiting of our freedoms will occur.

Call me an optimist

Note:  In many ways I would say this is a discussion about the distribution of capital following a increase in capital which reduces the marginal product of most labour.  Very Marxian, very political economy.  Would more than welcome your comments.

That is why the Herald story on this makes me suspicious.

Making New Zealand an international finance centre with “middle and back-office functions” in the funds management industry was one of the recommendations of the Capital Markets Taskforce report last month.

It found the “hub” notion viable but kept the detail of its advice on how to implement the plan out of the report, giving it directly to Mr Key instead.

Usually, people avoid putting things into reports and give them straight to ministers when their analysis is suspect …

Furthermore, look at these claims:

Mr Key says early advice is that between 3000 and 5000 jobs could be created if the plan comes off.

…

The benefit would be the creation of back-room jobs and taxing the fund administrators. The funds themselves would not be taxed.

On the face of it this is fine.  We shouldn’t tax the funds as we are just an intermediatary – we should tax the value added bit.  Cool.  Furthermore, there are jobs, implying that value is being added which creates labour income, cool.

However, HOW do they plan to make us a hub.  This is the important question.  Do these jobs come from subsidising an industry and thereby moving workers from one sector to another.  If so there are opportunity costs – and we better well have some damn good analysis about why market prices aren’t providing the right signal.

Now, it is trivial to state that a government action COULD have a positive impact – give me a possible policy and I can make up a model that would make it sound like a good thing to do.  In truth, we need details so we can ask if we think it WILL have a positive impact – a situation which is only a small subset of all the “could” situations.

And of course, to do that we would actually have to see some analysis – which we have been told was not put in the report.

Hmmmmmm

Ok, so the imbalance has something to do with tradable sector activity flatlining while non-tradable sector activity increased – meaning that we have more non-tradable activity as a % of total activity.  There is a feeling this isn’t sustainable.  In part this might be true, but to be honest we have also had a massive increase in our terms of trade – which implies we can sustain more non-tradable activity for each unit of traded activity.

However, I digress.  If we accept that there is an imbalance, if only for the sake of argument, we can say that the higher exchange rate is a symptom of this imbalance.  Given this, what will GST do?

Now, changing from income tax to GST is likely to bump up the domestic price level immediately.  The increase in the domestic price level will then translate into a lower dollar – however, since this is because of a lift in domestic prices, is will not help competitiveness in any way.  Namely the real exchange rate remains unchanged

However, correct me if I’m wrong, but there is one way that shifting to GST promotes exports and discourages importing.  I believe that GST does not tax the “value-added” from exporting.  This is effectively subsidising exports.

Furthermore, I think that firms do get GST rebates on imports – but if they don’t that implies that the change in the price level, which goes through the exchange rate, does act like a tax on imports.  If this is the case it would discourage importing.

If anyone has any more details on the tax treatment of exports and imports I would like to hear about it – as this is the way that the tax shift could change structure, not through an adjustment in the exchange rate per see.

By taxing consumption instead of income we increase the price of everything, and thereby lower incomes.  If people HAD to consume in the same place where they worked then this would have no impact on immigration incentives at all!!

If people could decide to save (which we could) then shifting from income tax to consumption tax gives people, at the margin, the incentive to work in New Zealand – but to move away and use this income somewhere else.

When the shift is introduced we are increasing the cost of consumption domestically – so people who have saved will want to move away (at the margin) and people who have borrowed will be more likely to stay in the country.

The net impact on migration is going to be ambiguous, but on the margin we can tell that there will be more incentive to work here and less incentive to spend here.

Of course this ignores one major thing, the dollar will fall to compensate for the change in the price level – implying that an “unexpected” increase in GST could have no impact at all at the margin for those with savings or borrowing (as the lower dollar reduces the value of domestic income overseas and makes consumption here cheaper for those with foreign income – thereby increasing the incentive for people who have saved to move here, and reducing the incentive for those who have borrowed to move here)

It turns out this switch is also a “transfer” of resources between two groups, relatively speaking.  These groups are people that HAVE borrowed and people that HAVE saved.

When we increase GST and lower income tax we are saying “we will tax future consumption more and future income less”.

If people have borrowed this implies that they purchased consumption when it was relatively “cheaper”, and are now going to be taxed at a lower rate on the income they are making to pay it back – as a result, borrowers win.

If people have saved, this implies that they have deferred consumption when it was cheap – and will buy things when they are more expensive.  As a result, savers lose out from the change in relative taxes.

Since it is “true” that people on low incomes borrow relatively more of their income, then in a static sense this switch could be seen as more “progressive” right?  I don’t really like static definitions, but if people are complaining about the poor and saying that the poor borrow more then it is important to keep this initial transfer in mind …

Personally, I think borrowing and saving  is based more strongly on lifetime income, impatience (which I think is income neutral) and the lumpiness of consumption – as a result, I’m don’t see to much progressivity here.  However, this does tell us that people with a stock of liabilities will benefit and people with a stock of assets will lose.

When the facts change, I change my mind. What do you do, sir?

This is what John Key really needs to say about the “revelation” that he wouldn’t increase GST in 2008.

John Key now knows that increasing GST and reducing income tax is seen as a way to improve economic efficiency – so he is willing to do it.  When he said they wouldn’t do it, it was because the facts he was labouring under were different.

Criticising him on the basis of a speech in 2008, before the impact of the great financial crisis was clear, is petty – shame on the politicians, and other members of society, indulging themselves in this.