jamesz

Bad business decisions by CEO Key

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Asset sales are in the papers again today:

If New Zealand’s Government were a business, it would have no case to sell stakes in its energy generation firms… Sustento director and economist Raf Manji said. It was admirable for the Government to lower debt, but the numbers around selling stakes in energy firms to do so did not add up, he said.
…
No more important public good existed than energy, as it was essential to people and businesses, so it was dangerous to raise the firm’s focus on profits.

Much like Raf, I’m not ideologically opposed to the government selling assets. However, we clearly disagree about the rationale for selling energy assets. He makes two points: it’s a bad business decisions, and energy is a public good so public provision is required.

On the first point, economists have long argued that the country is not a large company and shouldn’t be treated as such. If we wanted governments to be highly leveraged investors to return a profit then they should probably stop taxing high productivity people and giving the money to people with lower productivity. I’d ditch the welfare system, too: a loss-making business if ever I saw one! Obviously the government’s not an investor trying to turn a profit so let’s focus on what can do to improve social welfare and equity. Raf’s second argument seems to implicitly acknowledge that by appealing to the government’s role in providing public goods.

The public goods argument is far stronger because it is widely acknowledged that public goods are under-provided by the public sector. The reason is to be found in the two defining characteristics of public goods:

  • One person’s use doesn’t decrease the quantity available for everyone else. For instance, however much I enjoy clean air in New Zealand, there is no less for you.
  • You can’t stop people from using it, so property rights over it become fairly meaningless. You can’t own clean air here and sell it, so there’s no private incentive to generate it. That’s why we need environmental regulations to deal with pollution.

What’s striking about these two characteristics of public goods is that energy fits neither of them! When I use energy, you can’t use that energy. When I don’t pay my power bill the power company can cut me off. So energy isn’t a public good and the arguments for public provision that apply to public goods don’t apply here.

Update: Matt and I have written about asset sales previously, as have Paul Walker and Seamus Hogan.

Matt Nolan

The government illusion

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Again, I’m hearing increasing talk about managing the economy – specifically, I have people telling me that they don’t think the government is managing growth properly.  Now, anyone reading here knows this statement is patently ridiculous – the government is not a management committee, and John Key is not the nations CEO.

However, this reminded me of a vision that an old work colleague had towards the end of 2010 in this article.  A key point in this vision, which captures the increasing push towards such arbitrary management, is this:

The Glorious Leader displayed a humility belying his greatness when he announced that His Plan has been inspired by patriotic newspaper columnists and internet bloggers.  The Glorious Leader said that these people are not blinded by the failed and discredited dogma of His asinine predecessors.  “The baby and the bathwater both need to be thrown out because the baby grew from devil’s spawn and the bathwater has been poisoned”.  “Shrewd columnists and internet bloggers acknowledge that the nation desperately needs my pragmatic and sensible guidance to allocate the nation’s resources in the right areas” the Glorious Leader said.

Like all good economics, this is an exaggeration, a caricature, of what is actually happening.  But such extreme examples can make key points clear – namely that a determination to “pick winners” and “micromanage” the economy is folly.  As has been shown repeatedly in the past – ultimately, such policies are the result of a mere illusion of control.

Matt Nolan

Is housing affordability the issue?

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The productivity commission has released its final report on “housing affordability”.  Now there are a number of important points in the report, and there are undeniable issues in the New Zealand housing market which have caused a “misallocation” of resources.

However, the justification for their being a housing affordability issue in the report is not fully covered off – something that is surprising given that this is the issue that appears in the title of the report.

Read more

Matt Nolan

On GST and regressivity

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James did an excellent post discussing tax issues recently.  After this, he obtained a copy of the book, and dug out the three ways that Rob Salmond had noted GST was regressive.  It is good to see Rob put some thought into it and found measurable reasons why regressivity exists – but I also need to point out where I disagree.

In essence, of the three reasons for regressivity I believe that only one is regressive (and by less than we may expect), that one is neutral, and that one of the reasons actually makes GST a progressive tax.

The reasons Rob outlines are:

  • Some savings are spent on acquiring multiple properties, which do not attract GST
  • Some savings are spent outside of New Zealand, which also do not attract GST
  • Some people do not spend all their savings before they die. That is, they are lifetime net savers.

Importantly, all of these forms of GST-exempt dispersal of savings are more likely among wealthy people than among poor people.

My response (with a bunch of arbitrary notes thrown in) was:

  1. The construction of a house attracts GST, so it is just the rental and “owner occupied rental” that doesn’t.  As rich households tend to spend a lower proportion of their income on rent this is progressive.  Remember in turn that this “rental” price is also related to the replacement cost of the house … part of the reason for not including rent in GST is the impression that we would be double taxing it!
  • [Note on this first point – I wrote it with regards solely to the ownership of a house, not multiple properties – as that is how I read the initial question.  Even so, it isn’t clear that implied rental expenditure as a % of income rises by decline – I will have to investigate. [Huzzah, investigation done, the share of expenditure on housing of total expenditure falls as the income decile rises.]]
  1. Having GST rather than income tax leads to a one off increase in the price level, which lowers the value of the New Zealand dollar.  This pushes up the cost of goods and services overseas in the near term – given convergence towards the PPP level.  Overall, I still think this will be a regressive element though.
  • [Note:  Looking at the HES data, spending overseas as a % of total spending is surprisingly constant among income declines … making it seem like a pretty neutral impact at present.]
  1. Although more wealthy people will leave proportionally larger bequests, bequests only have value in so far as the next generation buys goods and services – as a result, they will be taxed, and this is neutral.

I would also note that, even if all of these elements were “regressive” we would need to look at representative baskets by income groups to get an idea of how much of an impact that would make – and given that GST exists, this will be exaggerated by the fact that people are choosing volumes to consumer based on the “lower relative price” of anything where the GST burden does not fall.

Comments and discussion welcome – tax is a huge issue, with fascinating equity and efficiency considerations running through it.

jamesz

Private prisons

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The government has decided to commission a new, privately run prison. As Eric has previously discussed, there is a fairly canonical paper on the topic by some Harvard economists, which concludes that:

…a plausible theoretical case can be made against prison privatization. This case is weakened if competition for inmates can be made effective, but strengthened by the relevance of political activism by private contractors. One instance in which the case against prison privatization is stronger is maximum security prisons, where the prevention of violence by prisoners against guards and other prisoners is a crucial goal. In many cases, the principal strategy for preventing such violence is the threat of the use of force by the guards. We have shown that it is diffcult to delineate contractually the permissible circumstances for the use of such force. Moreover, hiring less educated guards and undertraining them–which private prisons have a strong incentive to do–can encourage the unwarranted use of force by the guards. As a result, our arguments suggest that maximum security prisons should not be privatized so long as limiting the use of force against prisoners is an important public objective.

Basically, the case for privatisation is that incentives to hit performance targets encourage innovation. The case against them is that there are plenty of things (like inappropriate violence) that you can’t measure, yet help to make the performance targets you can measure. So the important question isn’t ‘what are the performance measures’, but ‘what can’t you measure’? If you can’t measure important aspects of performance and you give strong incentives to meet targets then there are likely to be unintended, and potentially unsavoury, consequences. That’s not an argument against privatisation but simply a caution that high-powered performance targets should be used with great care. It is particularly salient when we are talking about a contract that affects the physical and mental welfare of so many people.

Matt Nolan

A point on consistency: Finland v NZ

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After saying I thought the general goal of catching other countries was a bit silly I suddenly clicked onto another point – the implied inconsistency of the policies being suggested by Labour.

Look, I don’t want to beat up on Labour specifically – as I think all parties are guilty of this – they just did it right here right now. Labour is saying:

  1. We want more innovative capital investment, in capital intensive technology industries
  2. We want to introduce a capital gains tax

So they want to increase capital investment … when their main policy recommendation so far is reducing the rate of return on investment.  They also suggest investing more in education – which is fascinating when we are a small open economy with an extremely mobile labour market, implying that it is very hard to keep hold of said highly trained labour.

Seriously, lets let the rest of the world bid down the price of manufactured goods and keep pushing forward technology, while we feed them and offer them awesome holiday’s – focus on what we are good at, and we will be better off than if we start trying to gamble on venture capital, or joining into the current highly competitive game of manufacturing/high tech.