Matt Nolan

Are New Zealand’s inflationary pressures contained: The nominal wage evidence

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Greg Mankiw has an interesting post on what would make a good inflation target (ht CPW). According to work by Ricardo Reis and himself, aiming at the nominal wage is a good way of ensuring the highest degree of price stability – according to models calibrated to recent US data (paper here *).

Using this conclusion he shows a graph of private hourly compensation growth and states that inflationary pressures in the US are not as much of a threat as some analysts are positing.

If the same implication held in New Zealand (which there is no assurance of), how would we be looking:

Source, QES wage data Statistics New Zealand (*)

Not so good it seems 😛

Matt Nolan

In defense of Ricardian equivalence – sort of

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On his blog, Dr Mankiw titled a post “so much for Ricardian equivalence” after noticing that US retail recovered following the government rebates. This off the cuff statement comes from the fact that the government rebate also had no reduction in the long-term level of spending, and so “in theory” consumers will have saved all the tax rebate, realising that they will have to pay this tax later anyway.

The excellent division of labour blog then takes this claim to task stating that the income tax rebate mainly went to low-middle class families, causing a common pool problem with the income tax – as the rebate is temporary, but it is not clear what form the future funding of government spending would take (although I’m not sure if this is actually a common pool problem, it just seems to be to do with giving a progressive rebate and then placing the future spending burden evenly across society, effectively increasing the net tax income of the poor who are liquidity constrained – as long as the amount the poor spends does not impact on the future need for tax income).

However, I don’t see why either side has to be wrong. Read more

Matt Nolan

The overestimation of Pigovian taxes

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Over at Anti-dismal Paul Walker points at a paper on Pigovian taxes by John VC Nye from George Mason university. In this paper Dr Nye makes the following point:

A claim about the optimal Pigou tax is a joint claim about the size of the externality and about the optimality of observed outcomes, not just the externality. Measuring the size of the observed Pigovian externality – even if done perfectly — is not a reliable guide to the proper level of the Pigovian tax because in a world of efficient transfers we will still observe some externalities

Now this is very true – if we sit in the world of partial equilibrium analysis (which a lot of Pigovian analysis is based on) for too long we can forgot the fact that markets do not act independently, and this is bound to colour our view on the correct level of the Pigovian tax.  At some level this is a critque of Dr Mankiw’s Pigou Club.

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Matt Nolan

Fiscal responsibility in taxes

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With the actions of the finance minister and the RBNZ both contradicting what I have learned about sound economic management it is time for me to take to task some of the more aggressive issues I have avoided up until now.

Today, my aim is to discuss the (lack) fiscal responsibility associated with Dr Cullen’s nine years in charge of taxes.

Now, there are two ways people have stated that his tax policy is a success:

  1. Through Keynesian economic management,
  2. By increasing progressiveness.

However, if either of these were his goals – the means he has used to achieve them has not be satisfactory. Let me explain.

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Matt Nolan

Kiwisaver and savings types

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So far we have described that there is some belief that we have some problems in our capital market, this has lead to the statement that we have a “savings problem” and to solve it the government introduced Kiwisaver – which may not even increase national savings (infact it might reduce it). These articles have put us at a point now where we can ask – even if Kiwisaver does not increase national savings, could it do any good.

As mentioned in this post, our “savings problem” may not stem from insufficient savings per see, but from distributional issues surrounding our savings. As Dismal Soyanz suggests, other government policies (or insitutionalised rules of thumb) may have created a situation where savers have a bias towards relatively “unproductive” forms of investment, such as housing – furthermore, households underestimate the risk of certain assets and overestimate the risk of others. These are all behavioural biases that may exist in reality – as a result of the bounded rationality of individuals.

As a result, the purpose of Kiwisaver may be to shift the composition of New Zealand’s savings – not increase the level. Now if this is what Kiwisaver is meant to achieve we have to ask about two things – firstly, is there a better alternative. I can’t think of too many alternatives off the top of my head, so I’m going to cover this by asking, how does Kiwisaver compare to a straight income tax, where some % of the money is put aside?

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Matt Nolan

Interesting critiques from LAANTA

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Over at the excellent LAANTA blog, Terence has written a couple of posts discussing issues I have raised here.

The first post covers our discussions on Utilitarianism. Fundamentally I think we have reached a point where our only disagreement stems from value judgments (specifically what we view as the fundamental measure of value, something I plan to write about separately another time) – which implies that his post is a good place for us to leave it.

The second post argues that goods and services taxes are infact regressive, contrary to my own musings. This is something I will discuss in this post.

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