Matt Nolan

Desperate bleg: GST

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I need you guys to answer a question for me.  Bill English said:

If you want to stop people spending more, put GST up, but of course that has a big impact on people, particularly on lower incomes, so it’s not a straightforward issue.

Now the first bit is a bit dodgy – putting up prices doesn’t really make people use fewer dollars, but I think I can see what he is aiming for.

But my question is “why does an increase in GST hurt low income people more”.  Try as many reasons as you can, and then one day we can look at them.

Matt Nolan

Subsidises and complaints

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Over at the Standard they have made an inference I agree with, namely that a subsidy doesn’t just increase consumer surplus, but they have taken it in a way I disagree with.  Given I have no time I will just pull my comments out of the blog and put them here 🙂

I agree with Tom here. It is ridiculous to claim that an outcome (note: the fact that the whole surplus hasn’t accrued to consumers) is “bad” based on a counterfactual that can’t happen.

Although Marty does state it can’t happen, he also stated:

“fewer people are taking up the opportunity than otherwise might”

In order to say that this is a bad thing. Now, when the counterfactual isn’t realistic this isn’t a fair claim.

And:

“The Key Government should have seen this coming and set up mechanisms to prevent it, such as the government doing the insulation itself with sub-contracting if need be as a monopolistic buyer”

Two things here:

1) The fact that the surplus is split between consumers and producers isn’t necessarily a bad thing – even in perfect competition the fact that the cost of insulating houses rises in the quantity is sufficient for this result to hold.

2) If the government sub-contracts to a monopolistic buyer the pricing issue will be the same. If the government gave the money to consumers instead of producers the pricing issue would be the same. And finally, if the government decided to make the stuff itself I highly doubt they would do so more efficiently.

I agree with you that the government complaining about the fact that some of the surplus accrued to firms is dumb. However, I don’t really agree that there are alternate structures that would have changed the allocation of the surplus – and if even if there was (like the government taking control of the industry) I don’t think they are preferable.

Make of my comments what you will.

Note:  Paul Walker at Anti-Dismal also has some issues.

Matt Nolan

Internalities, mechanisms, and booze

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NZIER has released an “Insight” on internalities – specifically stating that this is one way we could justify some of the costs in the BERL alcohol report as being policy relevant.  Eric Crampton discussed the release here.

What are internalities?  Internalities is the name for the cost associated with not being able to “commit” to the best set of actions over time (time inconsistency).  For example, on a Friday morning you might think about your weekend and decide it would be best if you only drank 2 beers that night.  However, once you started drinking you suddenly decided to have more – something you undoubtably regret the next day.  In this case, the inability to commit to the “optimal plan” has costs – costs that are not external but ARE policy relevant (contrary to my slogan here).

Now, both the people from BERL and NZIER that raised the internality issue are correct, and both sets of economists have far more experience and knowledge in the area of time inconsistency (I am only a macroeconomist after all).  However, there is one important point for me here – internalities matter because of commitment, and so mechanisms to aid commitment can be solutions.

Why is this so important?  Well when we look at the impact of a persons action on themselves it is often easier to develop mechanisms to solve this than in the case of “externalities” (where someones action influences an unrelated party).

In the case of alcohol there are a number of “pre-commitment mechanisms” avaliable to improve outcomes.  If we can figure out what the private cost of establishing these mechanisms is, and we see people not use these mechanisms, then we have an upper bound on the relevant “internality” associated with commitment issue!!!

So lets ask ourselves – how costly is it to commit to not drinking too much?  Some mechanisms are:

  • The instash wallet guide suggests leaving your wallet at home and only bringing in a limited amount of cash (when going to town).
  • Buying smaller portions of alcohol (when staying home).
  • Dressing badly (when going into town).
  • Committing to do something the next day which sufficiently increases the cost of drinking during the “temptation” period.

I have seen all these mechanisms in action.  They are costly, but not that costly.  As a result, my impression is that the policy relevant loss associated with the “internality” will be quite small.

Matt Nolan

Cartoon: Night classes

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An excellent cartoon from Mike Moreu:

The main thing for me is the question of “what is the social benefit”.  In part education increases the human capital of the individual, which is something that the individual should pay for, in another part education can be consumption (which the individual should pay for) and in a final part some types of education also benefit other people – which is where government subsidies come in.

I think there are many night courses we can identify as not having this social benefit – and so the government shouldn’t pay for them.  I don’t know if this is the test the government is applying, but it is the one they should be applying.

Hence, I think Mike’s comic here is spot on – when a course only has private consumption and investment value it should be the individuals choice to do it and responsibility to pay for it.

Matt Nolan

GST: Do we need to compensate “low income people”

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No matter how much I bang on about it, it seems that no-one wants to believe me that GST is a neutral tax and so any increase in GST that is match by a decrease in income tax WITHOUT changing the degree of progressivity will not impact on low income people per see (ht Kiwiblog)

Changing the GST rate hurts people who are currently net savers, and benefits people who are currently net borrowers. If we think that people with low incomes tend to be net borrowers then such a change is actually likely to benefit them.

Now, for a full discussion of this issue (and links to about a million other posts on tax) go here 🙂

Matt Nolan

Against the 10 reasons for Fitch downgrading NZ

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Bernard Hickey posted on the 10 reasons why Fitch should downgrade New Zealand’s credit rating, it is an interesting post that you should run off and read before looking at this 🙂

Now that you have read that I am, for the sake of argument, going to counter each of these points. I cannot provide a “slamdunk” against anything, but I can raise the other side of the argument so that we can really think about the issues that little bit more.

Note that in many ways I agree with Bernard Hickey about our current situation being slightly precarious. However, I feel that going through these factors on the other side is a useful exercise for understand exactly what we need to look at.

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