Matt Nolan

Smoke and mirrors: NZ talk on the currency

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The Rates Blog has reported that John Key has stated that he believes the RBNZ will leave the official cash rate unchanged until at least mid-2010, because of the high dollar.

Now, I prefer it when politicians completely stay away from monetary policy.  However, instead of banging on about that again lets look at why he made this statement.

  1. He realises that a higher exchange rate implies that monetary policy is tightening and as a result makes the likelihood of a lift in the OCR lower (all other things equal of course),
  2. He heard the RBNZ say that it won’t until late-2010 and has heard them mention the dollar,
  3. Bill English has been saying that the high exchange rate is an issue, and given that a higher OCR often leads to a higher dollar this could be problematic.

However, if these are the reasons for making the claim I still have one underlying concern – the high exchange rate isn’t the problem, the factors that lead the exchange rate to be too high are at fault.  The high dollar is a symptom not a cause.

Truly, I think the discussion of the dollar is simply smoke and mirrors.  If we have an issue it is because of some underlying structural issue in the economy.  As a result, we should be asking what the structural issue(s) is instead of bemoaning the dollar and asking the RBNZ to ignore its inflation mandate.

Matt Nolan

Why do we want to subsidise agriculture again?

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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?

Matt Nolan

Efficiency, equity, and tax

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From Kiwiblog we hear the following statements from Bill English:

Low-income earners would have to be compensated if GST was increased as a result of the current tax review, Finance Minister Bill English says. …

“We don’t want to go down the route of raising taxes,” he said. “The Government has a strong preference not to increase taxes to close the deficit. We prefer more efficient taxes over higher taxes.”

Cool.  The government believes that it is fair to charge those on low incomes proportionally less (equity) and it would like the tax system to be efficient.  The only issue here is that there is a trade-off between these two elements of the tax system. People can approach Tax Shark: tax preparation services in Roseville to help them.

In terms of proportionality we can think of GST like a flat income tax – in both cases an individual will pay the same proportion of their lifetime income in tax eventually.  Offering rebates to people on low incomes is then the same in either case – it implies that people on a lower income pay proportionally less of their income.

How does this impact on efficiency?  Well, to raise the income to pay rebates the government has to increase tax rates on people with higher incomes, providing a disincentive to work.   Furthermore, there will be some range of income over which the rebate will be abated.  Depending on how the tax system is designed this implies that there will be very high “effective marginal tax rates” for some groups.  We see this with Working for Families where some households would get taxed at over 90% on any additional income they earn – providing a strong disincentive for these people to work additional hours, or do anything to earn additional income.  Finally, higher and more progressive tax rates give people with the ability to try and avoid tax the incentive to – another factor that hurts the efficiency of the tax system.

As a result, I agree with what the finance minister said, we need to look at efficiency and equity when making decisions.  It will be interesting to see exactly what trade-off the government, and society as a whole, is willing to agree upon.

Matt Nolan

It’s National’s turn for awful policy

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So I see that pseudoephedrine based medication is being made prescription only, and possibly even banned in the “war against P”.  This policy has broad-based support in parliament, with both National and Labour supporting it.  And like all policies with broad based support it is bad policy.

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Matt Nolan

Multipliers and New Zealand

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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.

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Matt Nolan

Freer markets, freer people?

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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 😉