Quote of the day: On NZ property investment
From David Chaplin’s blog on the Herald site:
If New Zealanders have a love affair with property investments, it’s one where government and regulators have acted as pimp.
That is awesome – and very true.
Supersize NZ
I had forgotten about this, but a while back CIS released a booklet with a few essays on “how to supersize NZ” (as in make the economy bigger, not supersize in the McDonalds sense). It was called Supersize New Zealand: A collection of essays on how to improve New Zealand’s public policy.
Of course I’m linking to it because I got to write one of the essays (with the editing help of some other blog authors – thanks Agnitio, Goonix, Rauparaha and CPW).
I wrote on how we shouldn’t forget productivity when looking at social welfare policies – as at the time we had a Labour government in that was determined there was no trade-off between efficiency and equity and therefore determined that we should focus on equity.
However, by the time it was release we had a National government who believe there is no trade-off between equity and efficiency and so we should focus on efficiency. They do this under the catch-cry of productivity, which lead me to write things like this.
There is no contridiction. Ultimately, I just want politicians to face the trade-offs associated with policies and wrote articles that, at the time, illustrated the costs they were missing.
Tax and recovery: Two ways Bill English is correct
Whale Oil is unhappy with Bill English mentioning a capital gains tax. Specifically he says:
In times of recession it isn’t that the government should be looking for more taxes.
But there are two reasons why I think Bill English is correct at the moment.
- Bill English appears to be saying that he wants income to be taxed more broadly to remove the “incentive” to shift income into housing. As a result, he is saying that he wants to broaden the tax base, which implies that they can improve incentives and REDUCE other taxes.
- During a recession we could “stimulate activity” by saying we will increase taxes IN THE FUTURE. This isn’t what he is saying, and I’m not saying it is a good idea, but it is another potential way of viewing things.
Ultimately, there are incentive problems with the tax system and when Bill English says he is interested in a CGT it is because he realises that these problems exist and that they are causing structural imbalances. Good on him for being brave and admiting he is willing to do look at these difficult issues.
Desperate bleg: GST
I need you guys to answer a question for me. Bill English said:
If you want to stop people spending more, put GST up, but of course that has a big impact on people, particularly on lower incomes, so it’s not a straightforward issue.
Now the first bit is a bit dodgy – putting up prices doesn’t really make people use fewer dollars, but I think I can see what he is aiming for.
But my question is “why does an increase in GST hurt low income people more”. Try as many reasons as you can, and then one day we can look at them.
Subsidises and complaints
Over at the Standard they have made an inference I agree with, namely that a subsidy doesn’t just increase consumer surplus, but they have taken it in a way I disagree with. Given I have no time I will just pull my comments out of the blog and put them here 🙂
I agree with Tom here. It is ridiculous to claim that an outcome (note: the fact that the whole surplus hasn’t accrued to consumers) is “bad” based on a counterfactual that can’t happen.
Although Marty does state it can’t happen, he also stated:
“fewer people are taking up the opportunity than otherwise might”
In order to say that this is a bad thing. Now, when the counterfactual isn’t realistic this isn’t a fair claim.
And:
“The Key Government should have seen this coming and set up mechanisms to prevent it, such as the government doing the insulation itself with sub-contracting if need be as a monopolistic buyer”
Two things here:
1) The fact that the surplus is split between consumers and producers isn’t necessarily a bad thing – even in perfect competition the fact that the cost of insulating houses rises in the quantity is sufficient for this result to hold.
2) If the government sub-contracts to a monopolistic buyer the pricing issue will be the same. If the government gave the money to consumers instead of producers the pricing issue would be the same. And finally, if the government decided to make the stuff itself I highly doubt they would do so more efficiently.
I agree with you that the government complaining about the fact that some of the surplus accrued to firms is dumb. However, I don’t really agree that there are alternate structures that would have changed the allocation of the surplus – and if even if there was (like the government taking control of the industry) I don’t think they are preferable.
Make of my comments what you will.
Note: Paul Walker at Anti-Dismal also has some issues.
More on exchange rate targeting
Now in the short term a look at the exchange rate is important for a monetary authority – as it is part of the “inflation targeting” framework. This is because a stronger dollar implies a lower prices level, which may in turn influence expectations of inflation or the credibility of the central bank to maintain a level of price growth.
However, in a wider context the RBNZ has implied, and BERL has stated, that there is some role for exchange rate management. Although I do not agree, some recent academic work has come down on their side (ht Econbrowser).
In the paper they say that an increase in home interest rates (in certain circumstances eg a future increase in productivity) can lead to “excessive consumption” at home relative to what we should experience. Driving this is:
- Incomplete markets (required) and sticky export prices (not required but welfare relevant),
- Leading to a negative “wealth effect” on our trading partners,
- Leading to a suboptimal adjustment in rates (interest rates, and thereby exchange rates) overseas,
- Leading to the “wrong” allocation of consumption goods between countries
Although this is the case, I am not sure how relevant it is in the NZ situation. We are a small portion of trade with our own trading partners, and so an increase in our consumption doesn’t really influence the level or price of consumption in other countries – we are a residual claimant. As a result, the welfare loss for the “rest of the world” is virtually non-existant – there is no “negative spillover” (read negative externality from our monetary policy). Find out more on trading at https://forextrdr.com/forex-signals-uk.
In this case we are left with the fact that we are a small open economy, and we face a world interest rate. If there are medium term allocation issues it will be the result of foreign monetary policy, not our own. And sadly we can’t do anything about that.