Matt Nolan

Strawman at the centre of the discussion of economics

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In an article in the Herald it is suggested that the separation of economics from moral philosophy is morally abhorrent, and as a result we should ignore what economists say about tax.

I will put the tl;dr up first:  Economic theory is “descriptive” – which in turn allows us to discuss how economic theory is actually a very useful thing for discussing these issues.  In my opinion it is important to make these trade-offs that are described transparent –  and that is all economists are trying to do.  In that context, economists don’t actually seem morally abhorrent 😀 .  Furthermore, by showing a willingness to discuss and identify trade-offs, we can find some issues and facts that seem to get slightly missed in the article 😉

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Matt Nolan

More on the recent labour market data

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Via Twitter, James Shaw informs me of the following critique of my post where I stated the media were misrepresenting the latest wage-price data.

Lies, damn lies & statistics. A friend reckons TVHE is also only painting a partial picture. QES includes merit promotions, so wages have kept up with inflation *if* you got promoted. Promotions are meant to be about getting ahead, not keep…ing up, otherwise how’s the next guy going to feed his family? Moreover, while TVHE strips out tax changes from inflation (a little rough if employers factor this into wage rounds), it ignores that Stats themselves picked out food and electricity as rising by more than the headline 5.3%. The Salvation Army reckons that CPI actually understates how difficult it is for lower income families to afford the basics.

There are a lot of points here – and while they are important things to keep in mind, I’m sticking to my conclusion that the initial headline was misleading.  Let me try to explain myself here.

[Note:  The new headline and first paras of the article I linked to in the initial piece are completely reasonable – as I’ve just gone back to read it again to see if there had been changes.  As a result, I am not criticising the article in its current form – I actually quite like the current one.  However, I am still criticising the initial suggestions that came from the article and other ones like it which will be discussed below … what can I say, there is only so much you can listen to John Campbell talking cr*p before you have to write something about it 😉 ].

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Matt Nolan

Tackling the core

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NZIER raises an important point regarding New Zealand – the core costs of government look set to increase substantially in the next 15 years.

Now I don’t want to overplay the increase in health costs and superannuation – those will occur, but at the same time a smaller proportion of people in the youth category will lead to relatively smaller costs for education and health care for the young.

However, in net-terms the dependency ratio will increase, and the average “cost” of each dependent will rise.  As a society we will undoubtedly want to look after the most vulnerable among us – but if we are truly serious about that we need to keep in mind what we can afford.

In reality, if society is serious about looking after dependents in the future there is a significant liability in the future – and this is a liability we need to fund now.  Although some may say we should do this by increasing taxes, lets not forget that our current rate of government spending as a % of national income is fairly high.  As a result, we may have to cut back on some of our “golden cows” such as the age of eligilibity for super, the degree of funding for health care, our comprehensive ACC system, and our willingness to give families income through Working for Families.

If the US can get downgraded for not facing up to these challenges, NZ can too – it is best for everyone that we face them now, and try to decide where society as a whole is willing to make cuts to fund these future costs.

So I have to ask, given that economists have been walking around trying to get this issue on the agenda for over the past decade how can we actually inform the voting public of how much of a big issue this actually is?

Update:  Bill Kaye-Blake from NZIER adds the following important point on Twitter:

Another thing to think about is the difference between the size of liabilities – because we are all aging – and who pays

So the size of the liability is increasing, but we also need to remember that the pool of people who will be paying for this liability is shrinking (or at least growing at a much smaller rate).  There are a growing number of “dependents” that society needs to cover for each taxpayer – which is why we really need to fund some of this now.

Matt Nolan

In defence of government funded tertiary education

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As a young child I was told repeatedly that education was a right, and that society should pay for it – not just at the primary level, not just at the secondary level, but at the tertiary level as well.  Being an argumentative child I disagreed repeatedly.  In I make a point of still disagreeing whenever I run into my mother.

If I was to boil down my argument I’d say “the individual benefits from their education with higher wages and the satisfaction involved”, I would then go on to say that “we should only fund the public benefit associated with education – which is shown to be lower than the current level of funding”.  This would lead to the reasonable conclusion that we should be cutting funding to tertiary education, not increasing it.

Now this was all well and good when I was a young impulsive lad, but as I’ve grown older I’ve become unhappy with the idea of reaching conclusions.  As a result, I find it a bit uncomfortable that I would find this solution “obvious” – and with a few seconds of thought I’ve realised why.

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Matt Nolan

Quake levy and timing

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Kiwiblog states that he disagrees with the Herald on a tax levy being introduced now.  I think his points on it slowing the economic recovery are valid – increasing taxes to pay for investment when the government can borrow the money at a lower rate of interest AND many consumers are actually locked out of credit markets AND incomes are well below what the economy can achieve is bad policy for economists of all political stripes (ceteris paribus).

But lets say that we currently have spending and taxes balanced over their lifetime IGNORING one-off events.  As a result, we want to pay off one off events with a temporary levy.  Ok, I’ve assumed that.  Now assume that we want two other characteristics of the levy:

  • The current generation wants to pay for the rebuild – even though it is their capital stock that got smashed.  As a result, it must be a relatively short-term levy.
  • We are concerned about the economic recovery, and would prefer to not delay it if possible.

Ok, so I’ve made a bunch of huge assumptions that point to us, at some point, HAVING to have a temporary earthquake levy.

However, even with these big assumptions there is no reason to put in such a levy right now.  We should say “we will introduce the levy on consumption goods from December 2013 till blah which is the period when we think the economy is back at its “potential” level”.  Advantages are:

  1. The impact on economic activity is indeterminate instead of negative.  Future wealth for this generation is lower, however the relative price of consumption now is lower.  As a result, the net impact on spending could go either way – when we have insufficient aggregate demand having an indeterminate impact is better than having a negative impact.
  2. This is a relatively short time horizon, so the current generation is paying for it.
  3. We make the levy money.

So if we have to have a levy, why don’t we do it when the economy is on an even keel – rather than during a point in time when we are in a historically potent recession.  Unless the people claiming that we need a levy don’t actually think the recession is particularly large … in which case a lot of other things that have been said about NZ’s economic performance by these people would be inconsistent 😉

Update:  Eric Crampton covers the issue more widely here.

Matt Nolan

Crisis and policy: A couple of notes on NZ policy

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Christchurch has had an earthquake, and this has lead to the discussion of a couple of policy issues.  Lets discuss.

RBNZ will likely cut the OCR.  However, I can see them waiting till their meeting – so they can fully explain what is going on.  The reason this matters is:

  • They will want to cut to help restore confidence – the demand element of the shock, not the supply/capacity element.  As a result, they will want to explain how they will reverse policy, and why they are doing this (in order to avoid overreaction).
  • They may want to manage expectations with regards to the exchange rate and other nominal variables – a sudden cut, without a full set of forecasts, may not be the best way for the Bank to say “hey, we are cutting rates now but will reverse this emergency cut once consumer confidence has stabilised”.  With their MPS so close, they must have decided to wait – or perhaps they have decided that the impact on confidence will not be sufficient to justify a cut.  We will have to wait and see.

“Rebalancing policies can be poorly timed too”.  On Twitter Alex tweeted “the basic issues on imbalances nz faces are as relevant today as last week key says”.  However is this really true?

In part it is, we are still in a position of deficient demand and so it is still a poor time to be instituting these sorts of structural issues.

What do I mean?  Well, the point of “rebalancing” is shifting NZ away from consumption towards exports and some types of investment.  I don’t really agree with everything that has been said, but if I did there is an issue – why are we aiming to knock down consumption when we already have weak domestic demand and elevated unemployment.  Even if the structural change is right in the long-term the transition path matters – and ignoring it will merely lead to a repeat of the mistakes of the late 1980 and early 1990s.

Why do I say mistakes – well because many of the policies instituted during this period were technically “right” but the timing was poor.  When unemployment is near normal levels, and economic activity is back towards trend, THEN we can think about structural change – introducing such change now will simply exacerbate a cyclical slump.