Matt Nolan

On “the” fiscal stimulus

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Over at Kiwiblog there is discussion of the Democrat loss in Massachusetts.  Reading through the piece David Farrar stated:

Priorities. Obama’s fiscal stimulus did little bar increase the deficit massively, and turn the country into deficit hawks. Unemployment went well beyond his worst forecasts

Now I found this statement unusal in that David’s writing is usually very balanced, and yet I do not find this statement balanced at all.  Why?

  1. We have no idea if Obama’s fiscal stimulus did anything until the data is all finalised.  In a couple of years researchers will be able to look over the data and discuss the design, implementation, and need of the scheme and reach an educated conclusion.  At the moment people can only present an opinion on the basis of ideology.
  2. Personally (going onto my ideology 😉 ), I think the fact that unemployment rose even further than expected was the result of the shock being larger than expected (and areas of the US economy being more fragile).  During the crisis the US government was able to borrow cheaply and use this borrowing to undertake investment when the cost of building this investment was cheap (thanks to the spare capacity in the economy) This sounds like a good thing to me …
  3. Unemployment as high as  10% indicates to me that there was a hole in demand – I do not believe that “structural” economic issues could be sufficient enough to warrant 1/10 people who want a job not being able to get a job.  With the Fed unwilling to soften its monetary stance further the government is in a position to be “consumer of last resort”.  Although I don’t really like the idea of this, in the face of sticky prices and a massive shock to the economy I have to concede that such a role exists in extreme circumstances.

As a result, if I had to guess I would say that the immediate crisis would have been worse if the stimulus hadn’t happened. This appears to be a moderate position among economists, between the “stimulus did nothing” and the “we needed more stimulus” extremes.

Now, we may find that the long run impact of this borrowing will be bad, and we may look back on the evidence and find that the scheme is flawed.  However, the point that “Obama’s fiscal stimulus did little bar increase the deficit massively” is an extreme view (that could potentially turn out to be true) – not an objective fact.

Matt Nolan

Tax working group: The corporate tax rate

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The Tax Working Group has released their report, as you all already know.  The recommendations are as expected, so its not particularly exciting in that sense.

However, there are some issues I would like to discuss – lets start with the idea that we “urgently need to cut the corporate tax rate” if Australia does.

Currently there is talk that, if Aussie cuts the corporate tax rate to 30% we need to do the same immediately.  We are told this as if it is a self-evident truth, and told that if we don’t all investment will head to Australia.  This is a touch over the top.

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Matt Nolan

Filler: The Sweeney posts

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I am still feeling tired from Christmas, but my pre-set posts from before the break are now finished.

I did watch Sweeney Todd last night (the movie) and so will leave you with the two posts I did about the movie and welfare policies here and here.  Be warned, there are spoilers.

Matt Nolan

Land tax and benefits, a point to think on

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Land tax.  It is a popular idea among economists.

However, I have heard some people pushing it based on getting land “in use” (this was mentioned at Kiwiblog for example).  I am not sure if I agree on this point.

Saying that we should tax land so people use it is similar to saying we should cut benefits to get labour “in use”.  Both these arguments involve increasing individual costs to get “activity” going.  This isn’t necessarily welfare optimal.  Remember the goal of policy is not to increase productivity or to get our GDP number as big as possible, it is to ensure that we have a society where net happiness is as high as possible.

Focusing on getting things “in use” by pushing a cost on private individuals does not ensure that net happiness will be higher, and is definitely a violation of the principal for policy we suggested here that:

Any regulation should be based on the idea of avoiding coercion either from the private or the public sector

Arbitrarily adding costs to get people to arbitrarily do other things is coercion, and I don’t know if I can support the actions of any private or public agents that are based solely on coercion.

I like a land tax as a replacement for other taxes given that the elasticities of supply and demand are low – implying that the “deadweight loss” from taxation will be relatively low.  Furthermore, the tax on land is a “fixed cost” of production, implying that the impact on downstream costs should be minimal (depending on how this changes relative land use in the long-run of course).

These reasons are not related to some arbitrary goal of maximising statistics, but instead on the idea that we should be trying to raise any target level of revenue at the lowest possible social cost.

Matt Nolan

F**k being a banker …

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Seriously, so the UK is going to arbitrarily tax bonuses at 50% because they are not “generating real wealth” they are just “rent seeking” (Will Hutton and Paul Krugman feel this way).  Wow.

The decision to pay a wage, or a bonus, is voluntary.  Given that these bankers are creating sufficient value through their work to extract these wages/bonuses why shouldn’t they get their wage/bonus.  They are generating sufficient “wealth” through their activities – or else they would i) get undercut by other labour, ii) not get paid by clients.

Yes the organisations that got bailed out should have to pay back their bailouts.  Yes, we should try to avoid the current moral hazard problem that could exist in the industry (on the basis of the bailouts mind you – which is government intervention). However, shouldn’t the solutions to these issues be focused on the actual issues – rather than arbitrarily attacking bonuses (which will simply be delayed to avoid the tax for those that can afford it).

If we think that the price paid for the financial labour service is out of whack because of some sort of direct market failure then tax it.  If we are trying to work out optimal tax and we find that the supply and demand for these services is perfectly inelastic, potentially shift the tax burden.  But that isn’t what the authors are doing.  They are accusing bankers of being the equivalent of organised crime and then stating that we should punitively attack.  I’m sorry but I find this attitude simply abhorrent.

Seriously, if you have something specifically against bankers, lets apply the logic somewhere else:

UK is going to arbitrarily tax teachers at 50% because they are not “generating real wealth” they are just “rent seeking”

After all, teachers don’t build physical things they just provide a service like the bankers.  If we are going to attack bankers for there being a credit crisis, why don’t we just start taxing teachers more because we “feel like educational standards are too low”.

Update:  Stumbling and mumbling also believes bank bonuses should be hammered.  However, he at least paints his argument out in full and so deserves to be heard.  I don’t agree, but that isn’t really the point 😉

jamesz

Who’s the real villain?

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Keith Ng writes today that the real villain in climate change is not businesses, it’s households! He claims that most growth in emissions and energy consumption is due to household consumption, not businesses. Which is the biggest red herring I’ve seen around climate change in a while.

Here’s a picture that will help: it shows how everything in the economy is actually linked together so considering household and business emissions separately makes no sense.
Circular flow of income

Now that may be a little simplistic but it’s good enough for our purposes here. Household emissions are measured by looking at the emissions generated in the production of goods that the household consumes. So the emissions come from producers, but the final product is consumed by households. Households provide the demand that causes the creation of goods that generate emissions in their production. So households are really responsible for ALL emissions. All emissions??? Yes, ALL of them.

What about businesses emissions? Well, businesses use goods to enable the production of other goods that households end up consuming. If there were no households buying things then there’d be no businesses making things. So this whole distinction between households’ and businesses’ emissions is really rather confusing, and more of a statistical device than a real division: one would not exist without the other.
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