Huzzah, I am writing about tax on Rates Blog. In Part 1 I ask “why do we tax“.
I get onto other issues later – in fact, this will be a five article series. Here all I do is combine the idea of “government spending” and “paying for government spending”, and give a little wink to ideas such as equity and tax incidence. They will play a more central role in the next article, when I discuss tax systems that seem ideal … but that we don’t use for often good reasons.
So we’ve had Labour and the Greens make the cost of energy the first big pillar of their upcoming election campaign. The energy industry is important in a large number of ways, is something people care about, and is definitely policy relevant – so it is a good pick. I’d note I don’t talk on “political levels” (my own failure to be sure), but it is a good area to discuss in terms of the policy society desires.
Now I’ll be honest that given this I was heavily disappointed with the analysis done by the Greens and Labour. There have been two good posts discussing the issues – Lance Wiggs and Seamus Hogan. This isn’t going to be one of those posts. Instead I’m going to complain about something.
I’ve seen lots of people on twitter bang on about “ideology“, “starting a debate”, etc etc … but the fundamental number they provided of an average household saving $230-$330pa is what MOST of the public cares about. I respect the dudes and dudettes that have been saying “hey let’s just discuss energy policy”. But I’ve just spent the last few days listening to a large number of my non-economist friends going on about how they like the idea that Labour is going to give them this money …
And that figure is a load of complete crud.
Ignore the BERL report here. I have no real criticism of them – they were VERY transparent with their assumptions so I knew from the start that:
Yes all these assumptions will in turn increase the size of the result – but none of them are actually too relevant to the claim that Labour and Greens are selling the most, that is will improve the money in your pocket.
Instead I get the feeling that Labour seems willing to ignore capital costs (I’d note the Greens do talk about the LRMC). When looking at the electricity industry, we want to think about long-run marginal costs rather than short-run marginal costs – given that we are talking about an industry with massive fixed costs (huge costs of investment). Kiwiblog suggests that this important point may have been put by the wayside, the use of the Wolak report gives further fuel to this fire, and finally via the Labour site:
Hydroelectric power makes up almost two-thirds of our electricity, and it costs next to nothing to generate because it uses free water and dams that were paid off years ago.
This is what the site says now – when it first came out it said “free water and dams”. The change doesn’t matter though – as you still need to invest in new capacity as demand rises and you need to maintain the current capital stock!
Now, there are things that I would like to see work on (given I’m not an industrial economist, I don’t have the research and evidence in my head that other true industrial economists do).
Given that the electricity industry is probably the second most regulated and researched industry in New Zealand (I’m putting it behind telecommunications – although I may well have them the wrong way around!) the answers are probably out there, and ways to improve current regulation probably exist. As a result of all this, the Labour-Greens decision to pick only a single report, misuse the figures, ignore the criticisms of those figures, and then publish a policy impact that is effectively a LIE is all the more disgusting – frikken ask some of the myriad of experts out there for some help making policy, hell some of them are Labour supporters and will likely to work at a cut price.
Sidenote: National doesn’t get off for free here – socialism, communism, really? In of itself a monopsony buyer is not something you can just rule out due to “ideology”.
Update: This will teach me for commenting on blogs on a Saturday morning. I didn’t mean to use the c word (not the really bad one), I’m trying to cut back on my swearing. I do essentially think that the promised boost to income to people is a lie though – and I mean to use that as a loaded term – so I’ll live.
Education, particularly at the tertiary level, is usually viewed as an investment by economists. It’s a voluntary cost that you pay to get skills and qualifications that will increase your future wealth and prosperity. That metaphor is reflected in the wealth of research into the ‘rate of return’ on university study and the discussions of externalities from the accrual of skills.
Nonetheless, it is a controversial view since the investment metaphor is not a natural choice for most people. Indeed, most people refer to the fun they had at university, the people they met, and the parties they attended. These are the ‘consumption’ elements of university education in the language of economists; the parts that you would pay to enjoy then and there with no expectation of future benefits. Now, via Economic Logic, I see a paper that asks prospective students how they view tertiary education and finds that
…most students do appear to value college consumption amenities, including spending on student activities, sports, and dormitories. While this taste for amenities is broad-based, the taste for academic quality is confined to high-achieving students.
As summarized by the Economic Logician, “except for the top students, high school graduates do not care about academics at all. All they want is excellent “college consumption amenities.” And this likely explains why they learn so little while in college. Their focus is on the university as a consumption good, not an investment good.” The policy-maker’s view of the value of university and the student’s view are very different.
What does this mean for policy, then? Well, if the private value of university is largely in the consumption value then the total value is far higher than most estimates suggest since they are usually based entirely on investment value. That has implications for the level of the subsidy we want to provide to tertiary students. In addition to the efficiency questions we also need to ask whether, as a society, we want to heavily subsidize most students’ on an extended holiday?
Experts such as Kamau Bobb may concur that policymakers should take into account the economic, social, and individual dimensions of STEM education when formulating policies related to subsidies, funding, and access to STEM programs.
I was interested to see this article on stuff about Greenpeace arguing for a “green” economy. I even considered taking a peak at the report they have put forward by the “German Aerospace Centre’s Institute of Technical Thermodynamics” until I got to this bit at the end of the article
Where the report stumbles is on the financial side, giving no detail on the level of investment required or the economic tradeoffs, making it impossible to judge if the transformation would be worthwhile or simply a pyrrhic environmental victory.
Argent said this was a deliberate choice, with the aim of the report to spark a discussion rather than getting too bogged down in the numbers.
Which basically means this report tells us nothing….
As a side note, as an economist I would replace “financial side” with “opportunity cost” as it it’s not just “money” trade offs that need to be considered…social, environmental, and any other metric that will be part of the cost need to be considered. You can’t just look at non-monetary gains on the benefit side and ignore them on the cost side.
The Guardian reports that
Some academy schools have been accused of manipulating admissions to improve results and using covert selection methods… A number of academy chains are seemingly more focused on expanding their empires than improving their existing schools.
Should we be surprised, and is it a major problem? On the first question, no, it is exactly what we’d expect. Through manipulating admissions and expanding their empires schools gain prestige and wealth. We may prefer them to do that through improving the attainment of students, but many will naturally attempt to use all possible means. The scope for doing so revolves around how closely the Government can contract for the outcomes it wants. As Hart, Shleifer, and Vishny say in their classic paper
…the case for in-house provision is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant, and when corruption in government procurement is a severe problem. In contrast, the case for privatization is stronger when quality-reducing cost reductions can be controlled through contract or competition, when quality innovations are important, and when patronage and powerful unions are a severe problem inside the government.
So the trade-off when allowing more autonomy to schools is between the benefits of innovation–through either cost reduction or observable quality improvements–and the costs of unobservable reductions in the quality or equity of service delivery. We can never eliminate the costs, although the Academies Commission’s report suggests ways to improve the current monitoring; nonetheless the cost-benefit analysis may still be positive. What the Commission’s report doesn’t address is the other side of the equation: the gains from innovation in education and the benefits to students. Weighing those against the costs to equity will be the real test of the academies. If most of their innovations turn out to be new ways to game the system then they will have failed. If, on the other hand, there are significant increases in the quality or cost-effectiveness of education then the gaming detected in this report may be a side-show. On the second question, the report doesn’t give us answers.
A related point, made by Shleifer, is that we need to be careful about understanding the counterfactual. It may be that some academies are always able to select better students by some means. However, the locally funded school system usually exhibits obvious segregation, too. Even if there is some selection in academies, that needs to be compared to the current system’s level of segregation rather than looking at it in isolation.
John Quiggin has re-opened the fiscal multiplier debate to advocate for fiscal stimulus. Quiggin, along with others such as Krugman, Summers and DeLong, and Blanchard claim that the effect of government spending on production will be greater than the government’s initial injection. The empirical evidence they use tends to rely on cross-country regressions, although some calibrated modelling has been done by NIESR.
An important caveat on these studies is that they rely on the unusual macroeconomic circumstances of the current recession. In ‘normal’ times one would expect that a central bank would lean against fiscal policy, resulting in very small multiplier effects. Scott Sumner has discussed this point extensively. To summarise, he claims that:
It sort of implies ‘the’ multiplier is some sort of stable parameter out there, waited to be discovered. Like the cosmological constant. In fact, it is nothing more than an estimate of central bank incompetence, which will vary from one case to the next.
Obviously the illustrious authors of the multiplier studies aren’t unaware of this problem. The general theme of their arguments is that we are currently in a liquidity trap and monetary policy has little traction in these circumstances. Central banks are thus unable to counteract the effects of fiscal policy, which is only doing what the central bank would do itself if it could: boosting demand. Sumner rejects the idea of a liquidity trap, hence the disagreement.
Obviously, these estimates of fiscal multipliers are entirely contingent on the response of the monetary authority. As discussed on Vox, the characteristics of an economy and monetary policy regime can cause the multiplier to vary between zero and 2, which is basically the difference between being in favour of fiscal stimulus and considering it a complete waste of money. Without estimates for each country individually that means the average multiplier is likely to be a poor guide to the multiplier in an individual country. That doesn’t make the estimates ‘wrong’ but it does mean that cross-country estimates are unreliable as a guide to national, fiscal policy. From a policy perspective then, it’s unclear that these estimates provide much guidance on the extent of fiscal stimulus or austerity; at least not without a lot of investigation of country-specific factors.
Update: FT said much the same thing. Simon Wren-Lewis suggests that the theory on this is obvious and people just got too caught up in the empirics.