jamesz

We should never ignore the politics

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An interesting paper by Acemoglu and Robinson, who have long discussed the interaction between economics and politics. The basic point is that economists cannot afford to ignore politics when they make policy prescriptions. It’s well-known that policy prescriptions based on partial equilibrium models can be risky. A&R take that a step further and point out that economic policies can affect political equilibria in unpredictable ways that may end up being counter-productive. For example,

Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the unions’ ability to exercise this monopoly power, and this is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system. Historically, unions have played a key role in the creation of democracy in many parts of the world, particularly in Western Europe; they have founded, funded and supported political parties, such as the Labour Party in Britain or the Social Democratic parties of Scandinavia, which have had large impacts on public policy and on the extent of taxation and income redistribution, often balancing the political power of established business interests and political elites. Because the higher wages that unions generate for their members are one of the main reasons why people join unions, reducing their market power is likely to foster de-unionization. But this may, by further strengthening groups and interests that were already dominant in society, also change the political equilibrium in a direction involving greater efficiency losses. This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its impact on future political equilibria.

Matt Nolan

I guess I’m childish – is that a bad thing?

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I noticed this during my trip down the internet:

New Zealand needs to get out of the “childish mentality” that wide-ranging benefit reforms which come into force today are punitive, Finance Minister Bill English says.

And also this via Kiwiblog:

Work and Income says the results are “some of the best from any case management trial” in recent years, with 6000 of the 10,000 people in the pilot no longer on a benefit. More than half of those people found work, the rest opted out or cancelled benefits for reasons such as no longer meeting eligibility requirements.

Hold up – hold the hang up.  Opted out due in ineligibility?  Don’t we mean they had their benefit canceled because they didn’t fit the new criteria?  Nearly a third of beneficiaries were pushed off the benefit without employment income in other words – ummmm is that really a good result?  Now note, this isn’t actually the case, in truth over that period of time some people would have become ineligible or found work irrespective of the benefit policy – I was just throwing this here to illustrate how they exaggerated the “benefit” of the policy, and how we could do the same thing to exaggerate the “cost”!

Look, all this makes sense if your priors are “the benefit is and hand up, not a hand out” and “get a job you hippies”.  But we have two things other going on:

  1. We still have a weak labour market and high unemployment – it is distinctly difficult to find work.
  2. Do we really view the benefit as a temporary stop gap – or as a minimum income that an individual gets as part of society.

I find it incomprehensible to push people out of benefits in a situation where the labour market is distinctly weak.  Also, in moral terms, I believe that society should offer people an outside option – there is something distinctly perverse about basing someones status and self-worth solely on our view of them as a “labour input”.  Part of the reason for the benefit is to give workers an “outside option” to improve their bargaining position, it cannot be viewed independently of this.

Now a lot of people won’t agree with me on the second point, that’s all gravy I’m not the social planner.  But when we have a very weak labour market these reforms do appear punitive – kicking people off benefits because they have taken drugs, because they are disenfranchised around spending a long time looking for work and being rejected, that is punitive.  Look I 100% agree with some of the reforms – more targeted case management is nice (in line with trying to solve the “matching” problem in labour markets) – but mixing this in with punitive policies doesn’t stop them being punitive policies.  Telling beneficiaries and those who feel uncomfortable with suddenly tightening requirements when the labour market is weak to stop being childish doesn’t change this interpretation either 😉

My views are coloured by the fact that I remember what happened during the early 1990s with benefit reform – I remember how policies were “interpreted” at the branch level, and how much changes in benefit eligibility created hardship in my community.  But more generally I see government as a way society agrees to “co-operate” on some things, and I have an inherently different belief in the ways we should co-operate than some of these policies represent – if that makes me childish then I should spend more time talking to children about their views on the inherent social contract within society!

Matt Nolan

Quote of the day: Eli Dourado on Cowen on Macro

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Via Twitter:

When I told Tyler I was confused in PhD Macro I, he said, “Good, that means you understand.”

Ahhh macro.  I think we can all take a lesson from this and recognise the limits of our knowledge – if the specialists that spend their entire lives and focus on hefty amounts of data appreciate their knowledge is limited, I don’t think the rest of us can just magically “intuit” certain knowledge through our “common sense”.  This holds to a lesser degree in all of economics – macro is just especially funktastic.

What does this mean for policy?  It doesn’t mean there is no role for government – we can still view government as a form of social insurance between us all, helping us deal with an uncertain world.  But, it does imply that government micromanagement and fine tuning have to pass a pretty massive burden of proof.  A burden that is hard to pass given that our knowledge is both uncertain and massively conditional.  I’ve heard this points before a few time (here, here, here) … 😉

Matt Nolan

Series on tax: Part 5 – A primer on consumption tax

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Yet more on tax – this is part 5. Here are the blog posts on part 1, part 2, part 2b, part 3, and part 4.

The promised “Part 4b” is still in the pipeline – it’ll appear at some point.

This time we discussed consumption taxes, and the fact that we may not like the idea of taxing consumption differently based on when it occurs.

I avoided talking about commodity taxation and then talking about the result where we don’t want to tax intermediate inputs.  I also avoided going too far into the debate around the Atkinson-Stiglitz paper (Saez here has a great piece(REPEC)).  I feel that when just describing the idea of income, poll, and consumption taxes adding these additional issues would add more confusion and less understanding.  I could have added a bit more at the point where I was talking about Ramsey taxation – especially the point that if people with different ability have different preferences we can use variable consumption taxation as a form of redistribution.  The idea of a progressive consumption tax is interesting.  However, the goal in this article was to make consumption tax relatable to forms of income tax – hopefully that got through 😛

I’m saving a lot of these addition factors for when we introduce the talk on progressivity and the equity-efficiency trade-off for the next article.  Urg.  Let us see if I can manage it in one article!

I have avoided using the term “marginal tax rate”.  I don’t know how I’ve done this.  I suspect it will make an appearence in the next article 😉

 

Matt Nolan

Government, tax, democracy: Careful now

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I note Gareth Morgan is discussing the idea of an independent tax authority.  On paper I don’t disagree, I’ve seen similar sentiments pop up in 2009 and 2011 😉

As mentioned in the 2011 piece though, the idea of what is “democratic” is important.  Recently we touched on this by discussing the appropriate scope for independent monetary policy.

I think the idea of an independent tax authority makes sense for the following:

  • setting a “tax level” given a structure for the tax system that is set by a democratically elected government.  The goal of adjusting the tax level is solely to ensure that the “medium term balance budget” condition is meet … or in other words that the stock of debt to GDP is held at a given target level in the medium-term set by a PTA.

This is fine, this is an operational issue, and implies that if political parties promise to “spend up large” the independent authority will note that this implies the tax burden will have to be higher.  It is transparent, consistent, and neat 🙂

Gareth Morgan is taking things a step too far in my opinion.  He is saying that the authority should set the structure of the tax system itself, rather than leaving it to politicians.  To me, this is an example of a technocrat taking matters too far – it is not up to some tax authority to determine the “optimal level of redistribution”, it is up to society as a whole to push towards this through democratic engagment.  Yes this process is slow and imprecise, but it is preferable to relying on the value judgments of technocrats.

This is not a small distinction.  The idea of having tax levels set to make sure that operational policy is consistent, and parties can’t “lie” is good.  The idea of having the structure of tax policy being set by unelected technocrats who “know best” is not – no matter how many economists belive otherwise 😉

I love economists to the point where I host “sexiest economist” competitions on my blog – but even given this, I don’t believe that a dictatorship of economists is preferable to the democratic ramblings of society as a whole.  And this distinction needs to be made.

Note:  I would even point out that the “technocrats” disagree with each other on issues of tax, adding layers of value judgments makes this even worse – in that sort of environment having technocrats set the structure is even more tenuous.

Matt Nolan

BS from the BIS?

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I see that the Bank for International Settlements has released their latest annual report.  I have not read it, but will place it here to peek at later.

However, if this (great) post from Ryan Avent is to be believed, it sounds like I will not like this report very much.  I’d also note that this report led Lars Christensen to pop this post back up on Twitter (it reminds me of Lords of Finance – the BIS took quite a hammering in that book).

Towards the end of Ryan’s post he quotes this from the report:

Although central banks in many advanced economies may have no choice but to keep monetary policy relatively accommodative for now, they should use every opportunity to raise the pressure for deleveraging, balance sheet repair and structural adjustment by other means.

This is absolutely and totally shocking – I’m having to convince myself it is somehow out of context to prevent an accidental blog rage 😉 .  I was going to write something, but then I realised Ryan said it better than I ever could:

No. They should not. Central banks—small, elite, technocratic groups given as much independence from political pressure as is institutionally possible—should absolutely not use every opportunity to raise the pressure for structural adjustment. Central bankers have been given a phenomenal amount of economic power: relatively untrammeled control over the unit of exchange and, by extension, over the demand side of the economy. Use of that phenomenal power to influence control over other aspects of the economy—including budget decisions, labour-market regulations, and the benefit structure of old-age pensions—is wildly outside the purview of the central bank and sure to prove corrosive to the independence of the central bank and the democratic process.

Part of the parcel of reasons why I’ve been defending central banks against politicians over here suggesting they should do EVERYTHING is because it is wildly inappropriate (lately here and here).  Not only is it outside their mandate, but as I noted on this bubble post, it violates democracy pushing decision making towards a technocratic elite who “know best”.

The point of an independent central bank IS NOT so that technocrats can do fancy things without needing a democratic mandate … it is actually just the way democratically elected governments tie their own hands with regards to monetary policy, just monetary policy.

All these other “structural” policies in the broad economy, they should be determined by our democratically elected government.

If technocrats/economists are not able to “persuade the public” about risks, this is not a reason to use public office to “force” the public to accept this – it is instead a call to try to make your argument more compelling, and to learn to accept that sometime society may not agree!  I’m not a political scientist, but a situation where unelected technocrats punish us if we don’t do what they think is right doesn’t sound like the right way forward …

And here is something I would note.  By trying to force technocrats to impose these structural policy, taxes, costs, and adjustments a democratically elected government would be merely trying to hide the fault for (provide misinformation about) introducing unpopular policies – in itself, a move that seems undemocratic.

Update:  Lars Christensen discusses these ideas with regard to accountability and the “number of targets“.  I completely agree – this combined with the benefit to communication is why I am a fan of clear concise and separate targets for different authorities.  The idea of “why” we give independence and the level of accountability are things we should be discussing – and an area which the Greens have opened up for debate.  After NZAE I intend to start blogging some of the literature discussing this and trade-offs 🙂 … I see NZIER decided to kick that off in any case!

Update 2:  Brennan McDonald raises his concerns about Basel.  I have sympathy for this view – these actions in the name of “financial stability” do have an allocative impact, an issue that is important to try and understand.

Update 3:   Economist’s View points out a bunch of posts – good posts – also frustrated at the BIS report.  I am not sure whether I should read this report anymore 😉 – jks, read everything especially when it disagrees with your priors!

Update 4:  James sent me an Economist article disagreeing with the RA one here.  It stated:

Countries that misallocated resources to the sectors that boomed before the crisis, such as construction and finance, are being held back from the necessary adjustments by rigidities in labour and product markets. Supply-side reforms are needed to break down these barriers but loose monetary policy reduces the pressure to force through these painful changes.

I decided to pop in a response in my email to James:

I’ll link to that, but this is one of the reasons why I still favour flexible inflation targeting – if it is true that the government has munted the supply side, expected inflationary pressures will rise before we hit our prior trend, and a demand focused central bank will start lifting interest rates.  It is still demand management, and the governments choice to f the supply side was theirs.  Furthermore, it is the government, and societies, choice to cut potential output … not technocrats.