Matt Nolan

How one could blame government for inflation

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To put my personal value judgments out initially, I generally DO NOT think that government (through fiscal policy) can be blamed for inflation. However, among many people, and even many economists there is a feeling that government is to blame in some way. Personally, I completely blame monetary policy for the failure to control inflation – and although I think they are behaving in an appropriate way in the current crisis – I think that policy was too weak in the past, which has made things more difficult now.

However, the view that it is “the government fault” is not completely without merit. Iprent at the Standard asked me to link to a discussion of how this COULD happen, and as a result I will write a post and link to it here 🙂

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Matt Nolan

“Twin deficits” and Ricardian equivalence

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A while ago (after the Pre-EFU) Brian Fallow discussed the upcoming “twin deficits” New Zealand is likely to face.

Fundamentally, the private sector in New Zealand has been borrowing a lot from overseas while the public sector has been saving. His fear is that, once the public sector starts borrowing again our debt levels will rise and we’ll be in big trouble.

However, there is a nifty little thing called Ricardian Equivalence which we can call on to state why this may not be such a problem. In the case of Ricardian Equivalence, when households see the government borrowing, they know that the government will have to increase taxes in the future (as they assume that government spending will itself grow at some rate). As a result, private people save a bit more in order to cover there future tax liability. In this case, it is the national level of debt that is the concern – not the idea of “twin deficits”.

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jamesz

Is marriage really the answer?

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Family First and Rochester divorce lawyers have just released a report on the costs of the breakdown of the family unit. I might not have given it a second glance save that it is written by Dr Patrick Nolan, the more qualified sibling of our Dear Leader.

The thrust of the document, as you might expect, is that costs of having fewer intact marriages are very high. The report points to a bunch of private and social costs, such as increased risks of poverty, mental illness and infant mortality, and tries to put a dollar value on them. It ends up suggesting that the fiscal cost of the reduction in the number of marriages is about $1 billion per year.

I don’t have a sociology background or the knowledge to challenge any of the assertions made by the report, and I trust that Dr Nolan has calculated his costs in as objective a fashion as possible. However, it’s what the report doesn’t monetarise that is most concerning. Read more

goonix

Optimal tax theory and ACT’s taxation policy

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Yesterday, the ACT party released their tax policy (further discussion also over at Kiwiblog)

Some key points from ACT’s taxation policy include:

  1. restricting future increases in Government expenditure to inflation and population growth
  2. eventual personal tax rates of 12.5% up to $20,000 and 15% above $20,000
  3. eventual company tax rate of 15%
  4. eventual GST rate of 10%

Tax distorts behaviour. The concept of the ‘excess burden of taxation’ is the economic loss that society suffers as the result of a tax, over and above the revenue it collects. Distortions occur because people or firms change their behaviour in order to reduce the amount of tax they must pay, which results in deadweight loss from taxation.

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Matt Nolan

Growth and resources: Cleaning up a fallacy

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Just quickly, I have to correct this statement by FrogBlog:

In other words if we continue to grow at 3 percent per year every year, as economists would have us do, in 100 years time we will be using and consuming 19 times more than we currently do

No, no we wouldn’t. Remember a little while ago I wrote about technology.

  1. It allows us to create more output with the same input of the resource,
  2. It allows us to access more of the input,
  3. It allows us to speed up the process of creating output from input,
  4. It creates new outputs that can be created with the input,
  5. It creates substitutes for the input.

As a result, even if we assume the worst case scenario that we cannot substitute and that there is no new technology we can discover that will get us access to more resources, technology can help by allowing us to make more with the same level of inputs. Economists target a level of “growth” (when economists have to talk about growth – rather than societies welfare) that they feel relates to growth in resources (such as population) and technology – this does not seem like an unsustainable goal to me.

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Matt Nolan

What is the labour market

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My recent post on universal student allowances was relatively provocative (I thought it might be a little more provocative – maybe it would have been if I said all students and all unemployed people should borrow money instead 😛 ). As a result, it is a good time to briefly go through the way I see the labour market and a few of the things I think are important for analysing it.

The labour market is a difficult thing to analyse given that it is the only input to production where we also value the outcome for the input!  The best way to look at labour in this case is to separate out the person selling the labour and the “labour input” – so when you go to work you are “selling an input” and the price you receive is your compensation for that – the wage.

Fundamentally, the labour market starts with the core bit – actual working labour. There are people who are employed in firms working for those that own capital.

Now, just by looking at employees and capital owners we can’t say anything about the labour market without rabid conjecture an flying euphemisms. In order to get an idea about how the “trade” between the owners of labour and the owners of capital occurs we need to get an idea about the people who do own labour but aren’t selling it.

Note: Very long post – skip to conclusion if you want, I doubt you will lose anything 😉

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