With the mass of recent discussion on the exchange rate and the “structure” of the economy (here, here, here, and here) it seems like a good time to discuss exactly how the exchange rate matters insofar as discussing the economy. Luckily for us, Paul Krugman has already done an excellent job of this.
It sounds to me like there is some interest in NZ sbusidising its agricultural industries again (eg here and here).
Now, people may be scratching their head even after looking at those links trying to figure out what I’m talking about here. No-one used the word subsidise after all and NZ has strong cross-party support for free trade.
But excluding agriculture from the ETS is subsidising the industry. Why? New Zealand has taken on a liability based on the carbon it produces. By not charging the carbon producers on this basis the rest of the country is effectively subsidising the agricultural industry – we are being protectionist.
The counter claim is that “other countries aren’t applying charges to their agricultural industries”. This is the same as saying “other countries are being protectionist and as a result so should we”.
This isn’t the attitude we had in the 80’s when we wanted to lead the world in terms of free trade – why do we have that attitude now?
In an interesting piece on Vox, Ethan Ilzetzki, Enrique G. Mendoza, and Carlos A. Vegh discuss their estimates of fiscal multipliers, and some of the reasons they differ between countries. As multipliers are often used to justify the government spending during a recession, it would be useful to note down how their results related to a small open economy like New Zealand.
Latest Dom Post article, any discussion will be found here.
Just realised I was sort of implicitly agreeing with Sen’s capability approach. I didn’t write it with that in mind, but it was probably hanging in the back of my head.
Feel free to discuss – I promise to get back to real blogging some time in the next few weeks 😉
This is a Hand post, but it is actually just the normal authors of the blog. We all had the same idea at the same time 😀
Over at Anti-Dismal, Paul Walker reaches the conclusion that
The moral of the story, markets can deal with asymmetric information
In the case of bad and good banks. He states that banks are able to signal whether they are strong or not, and so government intervention is unnecessary.
However, this doesn’t seem to weigh up properly with the vast amount of literature that points out that bank runs are a concern resulting from asymmetric information (and multiple equilibrium – for economists this is because withdrawal decisions are strategic complements) and that a small amount of government intervention can help prevent said negative outcomes (here and here are seminal pieces).
Now there is a way that we can put both points of view together. Lets look at how the market is overcoming the asymmetric information problem:
At least one major US bank is advertising the fact that it refused TARP funds.
So the market was only able deal with asymmetric information in this case because the government created a mechanism that allowed banks to credibly signal (the TARP program). It is ONLY because the government created this mechanism that the individual banks could signal their “strength” credibly, thereby preventing an inefficient bank run equilibrium.
So I would change the moral of the story slightly to
markets can deal with asymmetric information, when the institutions are in place that allow them to credibly signal quality – an issue government can sometimes help with
There has been a bunch of good stuff written out there about the trade-offs between using GST and a (flat) income tax to raise government revenue. However, there is one point I think has been slightly exaggerated – the mobility argument for a lift in GST. An example of this comes from an excellent article by Vernon Small.
Put simply, since people can leave or go elsewhere – and so can investment dollars – they should be taxed the least.
On the other hand, local consumption – which attracts GST – can by definition only happen here.
Now the first paragraph has a lot of truth in it. But in reality the idea that “people can leave” in the face of tax and the idea that “consumption can leave” in the face of tax are equivalent.
Why? People value their income only insofar as they can buy things with it. As a result, if someone is forced to either stay at home or move overseas then a GST rate of 25% is equivalent to a tax of 20% on labour – as both taxes drive a wedge between what an employer is paying and what real goods and services a employee is receiving. This point was also raised by the Tax working group.
So remember, it is not true that switching a “flat” component of income tax to a GST rate will necessarily lead to fewer New Zealanders going overseas. If it does anything it will change the timing – leading to more New Zealanders staying around to save up income, and then moving overseas to spend it.