Matt Nolan

Gareth Morgan, housing, and blaming the RBNZ

/10 Comments/in , , /by

Lately I’ve been saying “don’t blame the RBNZ’ for things a lot (here, here).

However, Gareth Morgan’s concern about Bank policy and the housing market IS actually a legitimate area to raise concerns about Bank policy.  His view boils down to this statement:

The problem with demand for property in New Zealand is one that has arisen as a legacy from a long history now of Reserve Bank prudential policy combining with selective tax policy to provide a toxic little no brainer for property investors.

Simply put, he feels that prudential policy overtly favours housing, thereby creating the equivalent of a “tax wedge”.

So it is NOT a criticism of monetary policy and the PTA per se – but of the institutional financial framework set up by the RBNZ, which in turn has led to some type of “inefficiency” or “misallocation of resources”.

I’m not convinced, but I’m leaving my mind open. I have had similar thoughts in the past, but have in the end ruled them out – it would just take some firm evidence to lead me to re-evaluate my priors 😉 .

Update:  As if by magic, the RBNZ has a speech up defending their framework here.  Given this speech has been booked in for some time, it isn’t a direct response.  However, I would note that they point out that risk-weighting in housing is higher here than in a number of other countries (so the capital requirement for a pool of loans on housing is higher in NZ 😉 ).

Risk-weighting are set for the capital adequacy ratio for a reason, and as a result we need to articulate why these are wrong or inappropriate.  Furthermore, it isn’t clear to me that prudential policy has had a “long history” of being pro-housing – instead it has always seemed that retail banks have been pro-housing due to the fact that they see these loans as relatively lower risk, which shows up in relative interest rates and the availability of credit.  As a result, for the argument to be made needs more analysis – the burden of proof is on the analysts making the claim that prudential policy is a “causing too much investment in housing”.  A little bit more analysis in terms of numbers and counterfactual models is in order – and if these show the result and the argument could persuade more people – including the RBNZ 🙂

Note:  His movement from excessive demand for investment in housing as an “investment vehicle” to a complaint about affordability is also tenuous at best – excessive investment demand lead to a larger stock of property (that is how we get the “misallocation of investment”) and lower rents.  The yield on property falls, and ownership becomes more expensive … but the cost of buying “housing services” actually falls.  So does this imply that Bank is making housing services more affordable?  We need to be a bit more careful not to mix up issues here!

 

Matt Nolan

In defence of Mankiw

/31 Comments/in , , /by

When it comes to looking at policy, I started life fairly heavily left wing.  When I started university at the age of 18, my first textbook was by Greg Mankiw.  He was a Republican, while most of my economics reading at the time had been Marxist or a frustrated attempt at reading the General Theory by Keynes.  I was immediately certain that I would hate the textbook, and that it had no value – at that point I was even more immature than I am now 😉

I was utterly and totally wrong – a situation I have become accustomed to.  Mankiw’s first year textbook is clear, to the point, and is honest about what the economic method is and what it achieves.  He “wears his assumptions on his sleeve” which I have learnt is the distinction of the best type of economist.  His textbook, and his papers on macroeconomics and tax, have been insightful for me as a way of not just understanding economic ideas, but of understanding the economic method.

So I see he wrote a paper called “defending the one percent“.  Undeniably it was titled that way to irritate people.  And undeniably it succeeded. (Update:  I’d note Cochrane states it is mistitled – and I believe to an economics auidence it is.  I touch on why I think he gave it that title for his target audience below)
Read more

Matt Nolan

Series on tax: Part 4 – A primer on income taxes

/3 Comments/in , , , /by

Over at Rates Blog they have popped up part 4 of the series on tax I’m popping together.  Here are the blog posts linking to part 1, part 2, part 2b, and part 3.  I would note this will at least be an eight part series, instead of six now, as I’ve split up this specific article.

Originally I wanted to talk about income tax, consumption tax, and ideas of progressivity and implementation all at once.  Now I realise it will have to be 3-4 articles on these issues.

The main trust of this piece was to ask “why is income tax distortionary when a poll tax is not”.  Given this idea, we can talk about the “relative efficiency” of types of income tax (namely labour and capital) and point out the idea of time – and how this impacts on the “accumulation” of capital, and thereby the “stock” of capital.

Personally, these things make more sense IMO, and are more closely related to our idea of “transfering goods and services” when we look at output taxes – specifically consumption taxes.  Next time, this is exactly what we do!  Originally I couldn’t bring myself to seperate the income and consumption articles … but at 3k words I sort of had to.  As a result, I’d suggest reading next fortnights article as an extension to this.

Also, I plan a “part 4b” for here.  I can imagine some people may get confused why I view the deadweight loss through the “price wedge” – when if we had perfectly inelastic demand we would “sell” just as much but the price would be higher.  Doesn’t this mean there is no deadweight loss, and that this tax is just like our poll tax?  Well no, but to explain this we need to actually dive into some of the economics they do in first year university.  We will look at indifference curves and budget constraints (we are comparing Marshallian and Hicksian demand) – we will introduce the tax, then assume an income transfer that brings our person to the same level of utility (compensating variation).   The reason we don’t see it in the single good case is that we are not considering the impact on income/wealth from the tax – and what “perfectly inelastic demand” means in terms of income and substitution effects (pro-tip – they must be canceling each other out to leave the quantity demanded at the higher price unchanged!).  Anyway, I’ll leave that to the post.

Matt Nolan

Series on tax: Part 3 – poll taxes, ability taxes, and fairness considerations

/in , , , /by

Over on Rates Blog they’ve popped up part three of the six part thing I’m writing about tax.  Over here, we’ve blogged on part 1 and part 2, and added a part 2b for kicks.

You’ll notice I’m doing sometime pretty specific when I’m loitering around the tax system.  I’m talking about the properties of a tax, and then given we don’t use specific types of tax I’m inferring that there may be some social preference involved such that we’ve chosen not to.  Given that, I’m trying to build up concepts of fairness (read vertical and horizontal equity if you will, but I do mean it a bit more broadly than that) from the way society had evolved.

This may not be the case, but it doesn’t have to be.  It is merely a mechanism I can use to tease out these sorts of principals to try and make them a visible part of the “trade-off” we are discussing.  This series isn’t about saying what tax system we “should” have – it is about describing what different types of tax are, albeit on quite a surface level.  As I stated in the first article, it is actually a lot more complicated (and a damned interesting issue) to figure out exactly how redistribution will work from a given policy!

Of course, if we were to describe the type of tax system we SHOULD have, we would want to actual make subjective judgments about value and potential “social preferences for fairness”.  We require these additional value judgments to actually make a conclusion 😉

Next time I’m talking about income, capital, land, and consumption taxes.  I hope you get ready for me to bring up elasticities again, as we’re going to need them 😉

 

Matt Nolan

Series on tax: Part 2b – let’s experiment with explanations

/6 Comments/in , , , /by

In the second part of my series on taxation I wrote about distortion and burden.  But I’m not sure whether my description about wedges and how people respond to prices was necessarily clear enough for a non-economist audience.  So I’m going to experiment with some other ways of articulating what I mean – ways that are equivalent, but for different people may be clearer.

Note:  I apologise in advance if this is a bit scattered – if you have questions or comments note them down in the comments, you’ll be doing me a favour 🙂

Read more

Matt Nolan

Series on tax: Part 2 – distortions and burden

/6 Comments/in , , /by

Over at Rates Blog I have put up part 2 or a 6 part series on tax (it was going to be 5 but I’ve extended it.  In part 1 we asked “why do we tax“.  In part 2 we are digging deeper into the costs of taxation.

We focus on two specific issues, the way taxes distort behaviour, and the idea of where the burden of tax falls.  As we explained in the first article these issues are really really difficult to actually work out – and the purpose of the second argument is just to give a “flavour” to the argument.  In honesty, if you wanted to figure out the true burden and distortions you’ll have to get yourselve a series of these CGE modeling economists armed with other economists who focus on normative judgments.

Last time I promised to discuss tax systmes that seem idea, that we don’t use.  And why we don’t.  Well, that is now the next article.

Also, thanks to Agnitio who helped me clear up this article.  It is a fairly wonkish one, and he came in at the last minute and helped me clarify what the hang I was doing 😉