Matt Nolan

Drugs and anti-paternalism

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On Saturday I had an article in the Dom ranting about how harm minimisation was a dumb goal – as there are benefits from the consumption of drugs.  This argument has been on the internet a million times (see these two searches for example), so there is no need to rehash it here.

Originally, the article was a little different.  It was a direct attack on the paternalism implicit in the policy making associated with the anti-drug crusade and the policy target of minimising harm.  Fundamentally, this is a critique of what the Law Commission has done – they are an independent body that should critique how the law differs from the target of policy (which they do well IMO) AND critique where policy differs from its practical aim (something they haven’t done).  Often the implementation of laws differs from policy because the policy is bad!

The last three paragraphs from this far more libertarian style article were:

However, why as a society are we determined to stop people hurting themselves?  Part of life is learning to take responsibility when your own choices and actions hurt you – having a government act in a paternalistic way to stop this, and make it harder for people to learn about individual responsibility, seems dangerous to me.

Even if we do have sufficiently little faith in our fellow man, and believe that the government should act like our parents, is this type of policy intervention equivalent to good parenting?  A good parent will set some boundaries, but also give a child the opportunity to learn from their mistakes, and will be there to help if things go wrong – only a bad parent would focus only on potential harm and ignore any benefit to the child when setting boundaries.  In this sense, even the most paternalistic people must agree that solely focusing on harms from any action is a poor way to ensure that we have the happiest society possible.

Ultimately, I’m of the opinion that a truly civilised society must be based on compassion, not control – it should be based on people’s happiness and freedom, not the desire of some policy wonks to create their ideal world.

Comments and criticism of this view welcome.

Update: Relevant points from Eric Crampton (Uni of Canterbury/Offsetting Behaviour) and Luke Malpass (Centre for Independent Studies).

Matt Nolan

One proviso on tax …

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Kiwiblog blogs about to a good sounding report by the Maxim Institute on tax.  I especially like this line:

We need to design the tax system so that it allows the government to take the money it requires, while doing the least amount of damage to the economy and so too our potential prosperity

However, there is a proviso that needs to be taken into account when we say this.  Any redistribution that we as a society deem is appropriate given our value judgments needs to occur through “the money the government requires”.

The tax system that is solely based on efficiency will not be a tool for redistribution.  Depending on our value judgments, we will want a certain level of redistribution, and this has to occur through the level of government spending.  The higher redistribution is, the higher government spending is, and as a result the higher the tax rate will have to be.

Yet, according to this post, the recommendations of the report switch from the design of optimal tax to the equity-efficiency trade-off associated with redistribution:

A 2001 OECD study found that about one half of a percentage point increase in government consumption (the expenditure to GDP ratio) could cause a 0.6 to 0.7% direct reduction in per capita output.

Yes, there is a trade-off.  However, the level of government spending and redistribution should be premised on this trade-off.  By saying something like “If we can limit spending so that over time it is under 30% of GDP” we are making a value judgment regarding the amount of redistribution that is in societies interest – we aren’t discussing the role of optimal taxation.

My main point here is, there are two separate issues:  Firstly, the design of an optimal tax system GIVEN the level of redistribution.  Secondly, the socially preferred level of redistribution.  The first question is easy, even an economist can answer it.  The second question is incredibly difficult.

Matt Nolan

Prior moral hazard and the credit crisis

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Were inextricably linked.  A quote that illustrates this to me strongly came from a Bloomberg article today.  The ECB decided to tell the countries that have high soverign debts to go to hell, and now that they aren’t going to take on the risk themselves private investors aren’t willing to and are selling.

This makes sense, previously people purchased the junk on the basis that someone else would pay for it – high return low risk!  Now that they have to face the real risk profile they are like “f**k that”.  However, Bloomberg (or at least David Kovacs) stated:

The reason the market is horrified now is Trichet said it’s not even being discussed. Smart investors are basically selling risk(y) assets

No s**t.  An asset appeared low risk, and now it is high risk, and the expected return is (at most) unchanged – so the risk adjusted return is lower.  No wonder they want to sell.

Now we are in a crisis, and if there is a run on good quality debt because of concerns we have to do strange things – sure.  But we need to come up with a system that rips this moral hazard out of the system.  It is the moral hazard that helps to drive crisis after crisis ultimately.

goonix

A novel solution to the student loan ‘problem’

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In the 2005 election the Labour Government found itself in a very tight battle to retain power. In order to mobilise the student vote, Labour promised interest free student loans. The bribe assisted Labour in returning to Government for their third consecutive term.

At the time National called the interest free loan scheme “irresponsible”. Since coming to power in 2008, however, they have maintained the policy, presumably for similarly cynical political reasons as led to the policy being introduced in the first instance.

As a result of the policy, students have been encouraged to borrow more and pay back less. Debt has ballooned. There are obviously other factors to take into account, such as increasing student numbers during the economic downturn. Nonetheless, it is clear that when given the option of borrowing interest free money, those with student loans have limited incentive to pay anymore than the minimum from their loan, for which they might as well borrow the maximum.

What is National’s response to the perceived student loan problem? The introduction of a $50 administrative fee that student loan borrowers must pay annually. Note that National have also provided an incentive for students to voluntarily pay back their loans through a 10% discount on their loans.

I propose a rather simpler solution. Abolish the half measures currently in place and start charging interest on student loans again. Only then will the correct incentives be instilled.

Matt Nolan

A note on delaying the ETS

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Over at Kiwiblog and at the Herald, the idea of delaying the implementation of the ETS is raised.

No matter what Aussie is doing, we shouldn’t do this.  Why?  Delaying the ETS doesn’t delay our Kyoto liability – it just means that we will have higher taxes to pay for the pollution caused in industries that produce pollution.  The point of the ETS is to:

  1. Raise the funds to pay our Kyoto liability,
  2. Set the relative price of carbon production such that it incorporates the full social costs incurred (in this case, this is because we have a liability overseas – so the truth of “global warming” is irrelevant).

So although it might upset some businesses if we don’t delay implementation (in the same way it would upset anyone if you taxed them or took a subsidy off them), we have to look at the other side as well – delaying implementation implies higher income taxes.  Lets not ignore this.

Matt Nolan

Universal healthcare and superannuation, and the cost of thinking ahead

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If doing actions that reward a future self is perceived as costly could we justify these actions.  If thinking about our wealth, human capital, or ability to live in 10 years time is inconceivable, will me over consume now?

In essence this sort of discussion is saying that we discount our future selves TOO steeply (compared to whatever the underlying presumption of a “fair discount factor” is).  Is this a fair value judgment to make in policy?  It is not one I would make, but it appears to be the basis of some overaching policies such as universal healthcare and superannuation.

In this case, we don’t need to worry about a “moral hazard problem” even though (empirically) the actions of moral hazard will appear.  Why?  Because the actors aren’t thinking about the future selves and so these “inefficient” outcomes would have occurred in the first place!  Policy helps to correct this by transfering resources to our future selves to improve outcomes relative to the REAL counterfactual (rather than the idealized one where agents choose on the basis of our subjectively fair discount rate).

I think it is important to keep this issue in mind, because it is a closet behavioural assumption behind most policy.  If we buy this value judgment, then we will believe in a larger role for government then if we didn’t.